By KRYSTLE CHOW
Published in the Ottawa Business Journal newspaper and website.
April 18, 2011 (April 21 on OBJ.ca)

Click here to view this article on OBJ.ca.

Northern airline continues to battle competition in tight market

It’s been almost a year since Air Canada launched its Ottawa-Iqaluit route, putting the country’s national carrier in direct competition with two northern airlines, including locally headquartered First Air.

While fares were immediately forced down, and have yet to fully recover, the aftermath hasn’t been as bad as some had expected.

“We lost minimal market share,” said Christopher Ferris, First Air’s vice-president of sales and marketing. Passenger revenues are down by a “single-digit percentage,” and yield is now back to virtually where it was before Air Canada launched service, he said.

The lower fares have encouraged northern passengers to fly south more, observed independent aviation analyst Rick Erickson, although the carriers aren’t making anywhere near as much as they used to on the routes.

Fares fell sharply following the introduction of Air Canada’s Ottawa-to-Iqaluit flight, and while the numbers are not perfectly comparable due to the difference in travelling season, it appears that prices have stayed low since a year earlier.

For flights on and around June 16, a search last week indicated one-way fares starting at $729 before taxes and surcharges for both Air Canada and First Air, as well as Yellowknife-based competitor Canadian North.

A year earlier, all three offered base fares of $719 for travel after March 28, the day Air Canada launched its service. That was down from $895, the base fare for trips before March 15 on First Air and Canadian North.

“The marketplace has probably grown … (the lower prices have) stimulated demand in the north, but I don’t think it has for Canadians in the south, which was one of the arguments made by the mainline carriers,” Mr. Erickson said, noting that the infrastructure in the north, such as hotels and rental cars, is fairly thin and easily overwhelmed, which means it likely can’t take many more southern visitors.

However, while Yellowknife-based competitor Canadian North agrees the cheaper fares can have an effect on demand, the overcapacity in the marketplace is “too great.”

“While we cannot share specific numbers, we can confirm that we have suffered a revenue decline since Air Canada began serving (the Ottawa-Iqaluit) market, in spite of the passenger numbers in the market escalating,” Canadian North spokesperson Lisa Hicks wrote in an e-mail to OBJ.

The airline noted it’s seen a similar decline for the Edmonton-Yellowknife route, which saw the entry of WestJet in May 2009.

Ms. Hicks added that the situation will continue until there is an adjustment to capacity, which generally means an increase in fares.

Air Canada declined to comment on its performance on the route, citing competitive reasons.

To counteract the effect of the jump in the number of players, both Canadian North and First Air are turning to traditional options that Air Canada does not employ, such as cargo shipments, as well as new opportunities afforded by their established northern connections.

“Part of the biggest thing we’ve done is partnerships with regional associations and agreements with the largest users of travel,” said Mr. Ferris, pointing to deals with groups such as the Kivalliq Inuit Association.

Codesharing programs and joint venture airlines are also among the measures the two carriers have taken. In February, First Air forged a joint venture with Qikiqtaaluk Corp. to operate a new airline, a similar deal to one made in November 2010 with Sakku Investments Corp. And just last week Canadian North announced that it’s expanded its relationship with Calm Air.

Meanwhile, cargo and mail delivery continues to be an important component of the northern airlines’ revenues, with First Air’s Mr. Ferris noting that it makes up about 50 per cent of the carrier’s numbers.

First Air has added two of the larger ATR 72 “combi” planes, which can be quickly reconfigured to have fewer passenger seats to accommodate more cargo pallets, and have double the capacity of its previous ATR 42 combi aircraft.

And Canadian North – which gets 20 per cent of its revenues from cargo – is seeing increased cargo demand due to its contract with a northern food retailer and changes to the Nutrition North Canada program that gives isolated northern communities more access to fresh food, its spokesperson wrote.

“It’s a function of doing business in the north; in the entire route network of 30-some stations, only about four have road access, and others only have limited sea shipping function, so if you take people, their food and the beds they sleep on, that hasn’t changed,” said Mr. Ferris.

“That’s a segment Air Canada has largely ignored.”