The Decibel - Why discount airlines keep going bust in Canada

Episode Date: July 19, 2024

In late Februrary, Calgary-based discount airline Lynx Air, which launched a mere two years prior, ceased operations. For customers, that meant they’re likely weren't getting refunds and would have to find alternate and possibly more expensive tickets to their destinations.This is a familiar story in Canada. Discount airlines have come and gone with only a few years of operation under their belt. The Globe’s transportation reporter, Eric Atkins is on the show to explain why discount airlines keep failing in Canada and what that means for flyers looking for a deal.This episode originally aired on February 29, 2024.Questions? Comments? Ideas? Email us at [e-mail]

Hi, it's Manika. This summer on Fridays, we're re-airing some of our best and most listened to episodes of the year. Hope you enjoy it, and we'll be back on Monday with a new episode. In Canada, discount airlines have a tough time. There have been a few that have come and gone. Independent airlines and discount airlines in Canada don't have a great track record. Eric Atkins is the Globe's transportation reporter. And recently, he's been reporting on discount airline Lynx Air.

The Calgary-based company tried to succeed where others failed. It started in one form or another in 2006. It was founded as Enerjet by a former WestJet executive, Tim Morgan. Enerjet's business plan was to fly energy workers in and around the oil patch in Alberta. That didn't really work. They retrenched. They had various other names and various other plans that never came to be. Jet Naked, Fly 2. And then they finally started as Lynx less than two years ago in 2022. Lynx Air operated nine planes and offered cheap flights. But then, last week, things took a turn.

Late Thursday night, they put out a note saying they had been granted creditor protection in Alberta court and they were going to stop flying on Sunday night, mountain time. That would be the end of it. So they were going to wind up operations, bring all their planes back to Alberta and cease flying. Over the weekend they cancelled several flights. They wanted to bring their aircraft home but what that meant is people who were in Cancun, Las Vegas, other places that they, you know, were dropped off by Lynx, had to find their own way home. Lynx Air, like so many others, went bust. Today, Eric will talk about what happened with Lynx Air, why discount airlines in Canada keep failing, and where this all leaves customers.

I'm Mainika Raman-Wilms, and this is The Decibel from The Globe and Mail. Eric, thank you so much for being here. Thanks for having me. So Lynx Air is what we call a discount airline. So what distinguishes a discount airline from something like an Air Canada or a WestJet? A discount airline sells you the seat and nothing else. Your baggage check-in, even your carry-on baggage is extra. The food and drink, if they offer it at all, are extra. Although on Lynx, you got a free bottle of water, but Lynx didn't even sell food. And they often, a low-cost carrier will fly into a secondary market where costs are lower. Competition for Gates, among other airlines,

is less. Lynx was unusual for a low-cost carrier in that they did fly into Toronto, Montreal, Calgary. They went into the big markets. But that also meant they were going head to head with the established carriers, WestJet, Air Canada, and Porter. Okay. And what about their staff? Like if you're working for a Lynx versus an Air Canada, are you getting paid similar amounts? No, you're generally getting paid less. Lynx's staff had just certified with unions. They were becoming unionized. I don't think they had ever negotiated their first contract. That would have driven up expenses for them even further. But they run their airplanes more often than a typical airline would.

They turn it more quickly. They sweat the assets, as they say. and they also run one kind of aircraft, which standardizes your maintenance, your training, your usage across your fleet. Lynx had one type, which was nine Boeing 737 Maxes. Okay. So your replacement parts are the same. Your pilots only have to train on one aircraft. That's the benefit. Exactly. Okay. So it sounds like really a discount airline, the main difference here is that the prices that they're offering customers for flying on these flights. So in the case of Lynx, Eric, what kind of prices were they offering for a seat? Well, from Calgary to Montreal, last I checked, you could fly for less than $100 on Lynx versus,

you know, depending on the day and the class, it could be several hundred dollars on WestJet or Air Canada. You touched on this a little bit, but let's talk about it directly. Like when we talk about the place in the Canadian market that Lynx was trying to fill. Yeah. What exactly was that hole that they were trying to fill? The low-cost carriers say they're not trying to compete head-on with the established carriers. They're not trying to compete for the people who fly, certainly for business or, you know, even for leisure. They're trying to stimulate new

entrants, new customers in the market. Stimulate is their word. You know, people who ordinarily would take the car or take a bus or maybe not fly at all. Students, you know, people with families who cannot afford to buy tickets for four people. Flying is an expensive proposition, and the low-cost carriers would target people who ordinarily could not or would not be able to afford airfare. And I know you actually got to see court documents that Lynx filed. What did you learn as to why they decided to end their operations on Sunday? They blamed their demise on a few things. The first thing was their delayed startup due to

the grounding of the global grounding of the Boeing 737 MAX. This is because of the two crashes that happened? Yeah, in Ethiopia and Indonesia. It had nothing to do with lynx or any other canadian airline but for safety reasons aviation authorities around the world ground at every single max until boeing could come up with a fix for the problem so that delayed their start by a couple years when they finally did get going jet fuel had increased exponentially in the midst of the pandemic. And the pandemic itself reduced the number of passengers who are willing to travel. It's returned now, but in 2022, it was still coming in fits and starts. Okay. So that's what Link said is kind of the reasons behind it. They also owed some money here. Can we talk about that? Sure. They owe about $600 million to a very long list

of suppliers, including CBSA, which is the security service of the federal government. They owe about $25 million there. They owe $25 million to taxpayers, the federal government, for importing airplanes. Even though they lease the planes, they don't buy them. They still owe 5% GST on the import of their aircraft. They owe a $2.4 million to the operator of, uh, Toronto Pearson airport for landing rights and other things. Um, the list goes on and on. And so why did they then decide to end operations on Sunday? Like what was it that, you know, made them basically shut down? Well, they said they faced enforcement action from various suppliers. In other words, they faced the possibility of having aircraft seized, of being shut out of Toronto Pearson, where they, you know, they got 30% of their business from that airport. And they warned

that it would have been a chaotic and haphazard end to the company. Instead, they went to a judge and said, we need 10 days to be protected from creditors so we can wind down the business in an orderly fashion. According to the court filings, they have about $2.5 million in cash, $53 million in assets, but they owe about $600 million in total. And $126 million of that is in short-term liabilities. So now the court will decide how much each of those creditors get, and it'll typically be cents on the dollar. And what does that all mean, though, for their customers? People who were going to fly links who had bought tickets, can people get their money back? Probably not from links.

When it announced it was shutting down, the airline told passengers to seek a refund from their credit card company. And, you know, depending on whether or not you have travel insurance, credit card insurance, if you bought your ticket from a travel agent, depending on the province you live in, various provinces, some provinces, including Ontario, have a fund that you can apply to that covers failed airlines and cancelled flights. But it remains to be seen, as they say. The Canadian Transportation Agency has put a halt to all complaints related to the airline. And they told me earlier this week that they're not optimistic that passengers will get any kind of satisfaction from the airline itself. Eric, have you talked to anyone affected by this? I talked to one man who called his credit card provider, like Lynx told him to, and

his credit card company said, basically, we don't cover this. We don't cover bankrupt airlines. I talked to another woman whose two university-aged daughters are in Cancun, possibly still. They flew down last week on their flight. They were due to return on Thursday of this week. And they were trying to find a flight home. Unfortunately, all the other airlines are charging, you know, $2,000 for two tickets to return to Toronto. And she wasn't sure where they were going to stay as of late last week. Wow.

So yeah, it's actually putting a lot of people in kind of a difficult situation then. Yeah. They canceled a lot of return flights over the weekend to bring the aircraft home, but not the people. We'll be right back. This is not the first time a discount airline has failed in Canada. Can you just jog our memory a little bit, Eric? What are some of the other discount airlines that have operated here? There's been a fairly long list of discount and independent smaller airlines that have come and gone. Canada 3000, CanJet, JetsGo, WestJet Swoop, which was WestJet's discount brand.

They folded that airline into its own bigger brand. And then there is Sunwing as well. WestJet purchased Sunwing a couple years ago and they're folding that company into its own brand. Sunwing wasn't a discount carrier, it's a leisure sun carrier, but nevertheless, it is also going away. People have long said, we have too many airlines in Canada and the market seems to be taking care of that. And so now that Lynx is gone, how many discount airlines do we actually have left? Really, we only have Flair left, which is based in Alberta as well. It flies 19 737 Maxes. It flies within Canada. It flies to the US and a couple sun destinations as well. It does fly to secondary markets like Kitchener, Ontario,

and it does offer cut rate fares with no frills. Okay. So our options basically in Canada, we've got Air Canada, WestJet, we've still got Flair, and we've also got like Air Transat and Porter, but those two aren't actually discount airlines then? No, they're not. Air Transat is primarily a leisure carrier. They're big flying sunseekers to Europe and the Caribbean. Leisure primarily go to the holiday spots as opposed to domestic out and back destinations. They recently started offering cross Canada flights, but we're not sure how well that is going to go. Porter, which everybody in Ontario knows, operates out of the island, but it recently bought a whole bunch of- That's the Toronto Island, yeah. Yes. The small airport right by the downtown. But it recently added a whole bunch of jets, bigger jets.

It's flying out of Pearson, Montreal, all the bigger airports. And it's trying to make a go of the cross-country domestic market. But it's not a discounter. They'll tell you that. They kind of fall in between the discounters and the more established carriers price-wise. Okay. So that's the situation in Canada, but what about outside of Canada? Do discount airlines tend to succeed outside of Canada? They're well-established in the US and Europe. And there's a reason they're well- entrenched and successful in those countries is those countries have lower fees charged by the airports and various governments.

The countries are more dense, so they don't have to fly, you know, Calgary to Toronto to sell a fare. They can do shorter hops, especially in Europe and parts of the US, where flights are certainly cheaper than they are here. It's a bigger market. There are just more people in those countries. Canada is, as we all know, it's very dispersed. We have a lot of geography here. It's a big place with not a whole lot of people spread out over a massive country. You know, you can fly across the country in six hours where you can get to, you know,

across Europe in that same time. Okay, so let's talk about some of the reasons why Lynx and the other discount airlines that came before, why they can't seem to make it in Canada then. So I want to ask you about three factors here, Eric. And the first one is fees and taxes charged by Canadian airports, because they are higher than in other countries. So how much higher are they and how big of a factor is this? Well, the airlines will tell you there are a big factor. I'm looking at an Air Canada ticket that itemizes all the fees that Canadians are charged when they buy a ticket from Air Canada. And every airline, frankly, would pay the same amount and pass it on to the passengers.

There's taxes of, you know, 13 or 15%. There's an airport improvement fee of $35 for every departing flight. That's from Toronto, but most airports in Canada charge, you know, almost as much if not a little bit more. There's a air traveler security charge. You're paying $7 to $25 to have your, you know, take off your belt, have your bag searched, that sort of thing. And then there are, you know, fees for, that the airline itself pays, landing rights, gate fees, the airports themselves charge, are charged rent by the federal government. So all those things come out of the customer's ticket. In the US, by contrast, the airports do not pay rent to the federal government. They're owned by the government. They're either owned by the municipality,

the state, or the federal government. And taxes are generally less. Fuel is certainly less in the U.S. In Europe, they have kind of a different model again, whereas the airports are allowed to have private investors. Large pension funds, including some Canadian ones, are investors in European airports. They're allowed to make a profit, but it also helps them pay for improvements. Whereas in Canada, the only way airports can make improvements is by taking on debt or waiting for the odd government grant. What is the model that we have in Canada then? How does it work here? Why are we paying all these additional fees every time we fly? In the 90s, the federal government hived off the airport authorities into non-profit independent companies. Transport Canada owns the airports,

and they're operated by these non-profit entities, the Greater Toronto Airport Authority, for instance. And they pay rent to the federal government. They pay a lot of rent, in fact, about $6 billion since they were created toward taxpayers. So in Canada, we have a user pay system. So the airports are funded by the airline customer. In the US, the airports are funded by the general tax base. Okay. So in Canada, you only kind of pay those fees if you're actually using the airport.

Yes. And just to kind of hammer this point home, Eric, so if we're looking at Canada versus the US, like for example, the airport improvement fee, what is the you pay it on the way home as well. So if you go from Toronto to Montreal, you pay $35 when you leave and you pay, I forget what Montreal's is, but you pay, you know, another $30 or $40 when you depart Montreal on the way home. So if you're flying a family of four, you know, it quickly adds up to a few hundred dollars on top of your ticket. Wow. What do airports say about these fees and the fact that these are passed on to the customer? They say it's a user pay system. And if you don't fly, you know, you don't bear the cost. They say it makes sense. What the airports don't want to do is pay rent to the federal government. They say they want to be able to invest the money they pay

as rent into improvements in the airports themselves so they don't have to take on debt. Because the user pay system in the pandemic basically failed. All the users went away. The airports were left trying to, you know, you still have to maintain your runway, operate, you know, things to a certain degree. And without users, they had no money to do that. So the airports, all of them, have taken on a tremendous amount of debt since the pandemic. And now they're trying to deal with it. Okay, so that's the first element.

The second hurdle I want to talk about is investment. Eric, you've reported that there's really a shallow pool of investment capital for airlines like Lynx Air in Canada. What exactly does that mean? Well, there are foreign ownership restrictions on airlines, which means the airlines can only tap, you know, a limited number of funds and investors to invest in them. A Canadian airline can't be owned more than 49% by foreign money. So it has to be majority Canadian owned. 51% Canadian owned. And no foreign entity can, by itself, can own more than 25% of a certain airline.

Okay. So basically because you can't, it has to be majority Canadian owned, it kind of restricts then who can invest in an airlines and maybe makes it not as attractive to invest in, I guess. Yes. All right. So we've got fees and taxes, we've got investment. The third point I want to ask you about, Eric, is the lack of competition in Canada. How does that fit in? Well, Air Canada and WestJet, between them, own about 70, 75% of the Canadian market, simply because they're so huge.

They both have hundreds of planes. They go just about everywhere. They have a hub system where you buy a ticket and you can end up all over the world by buying one Air Canada ticket. The discount carriers don't do that. They offer, you know, out and back to one, one thing, and then you have to buy another ticket if you want to get anywhere else. Um, so it really is a duopoly. Um, I've been told by people in the industry, Canada is big enough to support two and a half airlines. So you've got WestJet Air Canada and what is the other half airline? In Eastern Canada, it was Porter. But now that Porter is trying to go nationally, are they trying to get three airlines? At West, we've got Flair and

formerly Lynx. Maybe they were the other half airline in Western Canada. But it is harder for the smaller people, the smaller airlines to compete with the established carriers. To some degree, you know, WestJet and Air Canada, you know, they were forced to compete. However, the other companies are so small that nobody is expecting the demise of Lynx to have any, you know, major impact on the overall price of airfares in Canada. So this is actually what I wanted to ask you as we're kind of, you know, rounding out this conversation, Eric. So now that we're in the situation with Lynx's demise, so this doesn't necessarily mean higher costs for Canadians now? It's hard to say on certain routes, you know, a discounted ticket has gone away. I guess we'll see if Flair wants to step into those markets or if the other airlines

will as well, but they have higher cost bases and they're not able in a lot of cases to offer for any sustained length of time, a lower fare. And Lynx, when it said it was shutting down, it said it was trying to stabilize. Does that mean, is there a chance that it could come back? No, they say we're done. We're winding down the business. However, in the court documents, they said they had an agreement, a term sheet with Flair Airlines. It's Alberta discount rival. There had been rumors that they were in takeover talks. By Flair? By Flair, yeah. Flair is not in great financial shape itself, so we're not sure how that would work. Flair told me yesterday that when Lynx sought creditor protection, all the

talks have stopped. But Lynx says in the court documents, its goal is to sell itself to Flair or another buyer when this is all over. So Eric, from all the factors that we've talked about here, I mean, is Canada just a market that is unattractive for, for discount airlines and for people to start this kind of company here? I mean, airline entrepreneurs seem to never give up, but all you have to do is look at the list of us discount airlines that refuse to fly into Canada because of the high fees. You know, Southwest, Spirit, Allegiant, Wizz, Frontier, they don't come to Canada. They often fly to the US border towns, Buffalo, Burlington, Vermont, Watertown, USA, Bellingham, Washington.

And when I talk to people at those airports, a big part of their business is Canadians crossing the border and getting on a discount airline, you know, one hour drive from their home. I mean, this is kind of like the conversation we often have with cell phone companies. We just, we seem to have less options sometimes than other places. Like we're just kind of in Canada, we're in a situation where we're kind of left with not really having access to a discount airline where other places in the States and Europe do. Yeah. Less competition always leads to higher prices. Eric, thank you so much for being here today.

Thanks for having me. That's it for today. I'm Maina Karaman-Wilms. Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show. Adrienne Chung is our senior producer, and Angela Pachenza is our executive editor. Thanks so much for listening, and I'll talk to you tomorrow.