Why do so many discount airlines fold? Lynx Air is latest in a line of failures

By Christopher Reynolds, The Canadian Press

Lynx Air ceased to fly this week, the latest in a long line of discount carriers to bite the departures dust — brought down in part by stiff competition, high fees and Canada’s vast geography.

Lynx, which filed for creditor protection Thursday, marks at least the eighth budget airline to take off and then fizzle out since 2000, joining the ranks of Roots Air, CanJet and Swoop.

Most failed to clear the same barriers that have blocked the runway for decades.

Despite increased competition, Air Canada and WestJet continue to dominate the marketplace with more than three-quarters of seat capacity among national airlines. The veterans have deeper pockets than young upstarts, allowing them to more easily match ticket prices in a race to the bottom.

“There’s a fundamental issue with how the dynamics of competition work in the Canadian marketplace,” said John Gradek, who teaches aviation management at McGill University.

“The duopoly that we have in Canada is allowed to take on these discount carriers aggressively and use their competitive power to basically drive these carriers into bankruptcy.”

Other industry observers have suggested the Canadian market has trouble supporting more than two large national carriers, though Porter Airlines aims to become an exception as it undergoes a rapid expansion from regional player to continental airline. The Toronto-based company aims to grow its fleet to 79 planes — nearly two-thirds of them jetliners — by 2025, up from 29 turboprops in 2022.

“If you look at history for the past 30 years, other than WestJet, there have not been that many successful ventures,” noted Jacques Roy, a professor of transport management at HEC Montreal business school.

High fees and incumbent perks at large airports can work against newer airlines. Lynx, which launched its first flight in April 2022, pointed to rising costs and airport charges as among the culprits behind its demise.

Canada has high “airport improvement fees” relative to other countries, though that’s partly because airports are non-profit entities that receive much less federal funding than those in the U.S., for example. Indeed, Ottawa took in more than $400 million in “ground rent” for airports’ use of federal land in 2022-23, basing the annual tally on their revenues.

The fees, which are the same for both big and small airlines, raise the base price of a ticket, potentially deterring fliers with less disposable income — a key customer pool for discount carriers.

“They don’t rely on their business model to steal traffic from WestJet or Air Canada,” said Robert Kokonis, president of consulting firm AirTrav Inc. “They bring affordable travel to the folks that either never travel by air or who perhaps would like to travel more frequently if the price were were right.

“But when your starting point to stimulate the market is already so much higher because of the sum of all these taxes, fees and charges, it’s very, very difficult to offer a price point that targets and fits the needs of that demographic,” he said.

In Toronto, Pearson’s airport improvement fee on a no-frills, one-way Flair Airlines flight booked this week between Toronto and Vancouver for March amounts to $35, or 25 per cent of the $139 ticket (most U.S. airports charge US$4.50). Taxes make up another $16 of that total, on top of a $7 security charge.

However, Canadian Airports Council president Monette Pasher said the improvement fees are comparable to large European airports such as Frankfurt in Germany and Heathrow in London that also operate under a user-pay regime. She called on the government to try “tweaking the model” by reinvesting the ground rent it collects in airport infrastructure.

The seasonal nature of air travel in Canada also results in a financial roller-coaster where new companies with less free cash flow struggle to hold on.

“The old saying is that if you want to become a millionaire, you start by becoming a billionaire — then you buy an airline,” said Roy.

A lack of big, secondary airports in large cities can also force smaller airlines to bid for higher-priced slots at Pearson and Montreal’s Trudeau airport. Executives have long complained about amounts charged for gate and apron use and landing fees as well as federal agency expenses such as security screening and air navigation.

However, airports’ “aeronautical fees” are largely in line with global rates, said Pasher. And they have fallen by 10 per cent in real terms since 2007, rather than keeping pace with inflation.

“Canadian Airports Council research has found that even taken together, these fees (including airport improvement fees) represent just 12 per cent of the average Canadian airfare – less than most of the fees ultra-low-cost carriers and other airlines charge for the most basic provision of services, such as check-in, seat selection and baggage charges,” Pasher said in an email.

That still leaves the age-old problem of a vast, sparsely populated geography that creates unique challenges for all carriers in Canada, but especially those struggling to get off the ground.

“The original model — Southwest or JetBlue in the U.S. — you basically offer point to point services between relatively large cities and markets and over relatively short distances,” Roy said. The goal is to squeeze more revenue out of each plane with multiple trips per day and lower fuel costs, with customers able to endure the tight quarters due to the quicker trips.

“But in Canada, there’s only a small number of such original destination pairs. And it’s a market that is already occupied by major players like Air Canada and WestJet,” Roy said.

“Even if you have deep pockets, how much are prepared to lose? How fast are you prepared to become a millionaire?”

This report by The Canadian Press was first published Feb. 27, 2024.

Companies in this story: (TSX:AC)

Christopher Reynolds, The Canadian Press

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