Deregulation Countdown — The Canadian Experience

Delays and the increase in the number of passengers have created havoc inside the terminals, too, which were not designed to accommodate so many people. Terminals in the larger centres are constantly undergoing improvements of one form or another, making the situation in the short term even worse. Indeed, the wise traveler avoids Toronto’s Lester B Pearson International Airport between 7:00am and 9:00am and 4:00pm and 7:00pm, if at all possible.

The costs and revenue losses resulting from the delays are costing the airlines more than $C100 million a year, according to Richard H Barton, chairman of the Air Transport Association of Canada, the airlines’ lobby group, and president of Time Air, Inc. What confounds Canadians is the fact that we had seven years to observe the evolution of the US airline system after it was deregulated in 1978. In addition, deregulation here occurred more gradually than it did with our southern neighbour. In 1985, the government of the day issued its blueprint for deregulation called “Freedom To Move”. From that point onwards, the then Canadian Transport Commission (now the National Transportation Agency) rendered its decisions as though deregulation had already taken effect. It was all designed to pave the way for the formal launch of deregulation on January 1, 1988. When that came, everyone save the government was ready.

The air traffic controller shortage was, ironically, set in motion atthe same time the government was ensuring growth in the system. A massive government cost cutting exercise was undertaken in 1985, one result of which was a freeze on controller hiring. We’re now paying the penalty. The government has been forced to hire a numberof US controllers — who were fired by US President Ronald Reagan during the US controllers’ strike in 1981 — until more Canadians can be trained.

The moral here seems to be a simple one: a government that introduces airline deregulation would be wise to ensure that it can keep pace with the resulting demands on its airways and airports system. (This is happening in Australia via ongoing ATC and airport upgrades, Sydney being the only fly in the ointment. Ed) During the three year introductory period, the airline industry went through a massive restructuring through acquisitions, mergers and alliances as it prepared for the anticipated Golden Goose.

What emerged were three airline groups headed by Air Canada with about 53% of the market, Canadian Airlines International with 37% and Wardair Canada with about eight per cent. By the end of 1988, Air Canada — then wholly owned by the federal government but now a private company — had set up a feeder network of Air Canada ‘Connector’ airlines in which it had amajority financial interest in all but one, the network consisting of AirBC in western Canada, Northwest Territorial Airways in the western Arctic, Air Ontario and Air Toronto in that province, Air Alliance in the Province of Quebec, and Air Nova in the Atlantic provinces.

Canadian Airlines International had been formed under the corporate umbrella of PWA Corp, which was organized when Pacific Western Airlines, previously a regional airline, acquired Canadian Pacific Airlines. CP itself had earlier bought regional carriers Eastern Provincial Airways, Quebecair, Nordair and Transair. By the end of 1988, the Canadian Airlines International affiliated network, called “Canadian Partner” carriers, consisted of Air Atlantic in the eastern Provinces, Inter-Canadien in Quebec, Ontario Express in Ontario, Calm Air in the Prairie provinces and Time Air in the west. In Canadian Airlines’ case, however, it holds only a minority financial interest in all of its Partners. This flurry of activity had left Wardair Canada as the odd man out. Originally a charter airline named after its founder, Maxwell W Ward, the carrier gained a worldwide reputation for punctuality and inflight service. With deregulation, however, Ward decided to aggressively enter the domestic scheduled market and introduced the Airbus Industrie A310-300 on primary routes with fares about 16% below those of Air Canada and Canadian Airlines. However, Wardair could not lure business traffic away from the other airlines and lost $C57. 7 million in 1988. Lacking the financial depth to keep fighting, Max Ward sold his airline to Canadian Airlines in 1989.

Airline industry observers believe the main reason Wardair failed was because it lacked a network of smaller carriers to feed it traffic at its hubs. Wardair did have 24 Fokker 100s and 16 McDonnell Douglas MD-80s on order but couldn’t stay in business long enough to take delivery and the new owner, Canadian, quickly cancelled the orders. Thus, Wardair became the first victim of Canadian airline deregulation and the one with the highest profile however, that is what deregulation is all about: the strong survive and the weak perish in a free market system. And it is tough to survive in a competitive market that needs discounted fares to keep the airplane seats filled.

Since 1985, regular domestic fares in Canada have increased by eight per cent in real terms, after subtracting the rate of inflation. In the same period, discount fares have fallen by 15%. In 1985, discount fares were about 30% below regular fares; in 1988 they were almost 50% lower.

In 1983, about 44% of passengers travelled on discount fares. That jumped to 60% in 1986, fell off to 55% in 1987 and rose again to 62% in the final quarter of 1988.

Discount fares help fill seats, of course, but they don’t do much for airline yields. In 1984, the year before the “Freedom To Move” incentive, the average yield per passenger was nine cents on an average domestic fare of $C122 and international fare of $C258. In the final quarter of 1988, the average fares had increased to $C149 domestic and $C315 international but the yield had increased to only 9. 5 cents.

That led in 1988 to an average rate of return on operating revenues of 1. 8% which, according to Air Transport Association of Canada president Gordon M Sinclair, “is a far cry from the minimum target of 7% that this industry should produce, and needs to produce, to sustain the planned investment in new airplanes. ” Canada’s airlines plan to have 75% of their fleets comprised of Stage 3 aircraft by January 1, 1994 and are obligated to spend $C8. 6 billion to do so.

Capacity will roughly keep pace with the number of passengers. The mainline fleet should expand to around 40,000 seats by 1995, up from 30,000 in 1987. In 1984, the last year before “Freedom To Move”, the airlines carried 27. 7 million passengers. In 1988, they carried 36 million.

Another result of deregulation has been the withdrawal of jet service from most smaller centres and its replacement by turboprop aircraft of the regional airlines, primarily Boeing/de Havilland Dash 8s, British Aerospace Jetstreams and Aerospatiale/Aeritalia ATR42s. Smaller communities now have greater frequency while some are seeing scheduled services for the first time, the regional airliners dwarfing the small general aviation aircraft which used to have exclusive use of the facility.

These second level carriers have increased their market share from 5. 4% in 1984 to 19% in 1988, while the mainline carriers have dropped theirs from 86% to 73%. For these regional carriers to be viable, they must carry a significant number of passengers who are not connecting to a mainline carrier because joint fare agreements are such that the smaller carrier’s share of the revenues are not enough to cover all of the costs. Since most of the local traffic is on business trips, aircraft utilisation during the weekend is poor. While a jet carrier can switch to weekend charters to increase aircraft utilisation, turboprops simply don’t lend themselves to charters. Some regionals do use jets on their high volume routes. AirBC and Air Nova operate British Aerospace 146s, while Intair operates Fokker 100s.

Intair is one of only two regional carriers not aligned with a mainline carrier. It began as the Canadian Airlines “Partner” Inter-Canadien to feed the mother airline at Montreal from smaller Quebec communities but broke away to pursue its own objectives, which consist of competing with both Canadian and Air Canada between Montreal, Quebec City and Toronto and westward to Winnipeg. The other independent is First Air. It flies Boeing 727s between Ottawa and Goose Bay in Labrador, and Boston and Newark in the US Northeast. It also flies from Ottawa north to Iqaluit on Baffin Island.

Canada’s North — our Outback, if you will – has yet to be touched by deregulation. Ninety five per cent of Canada’s population is strung out along a 200 mile wide swath along the border with the US. The sparsely populated North was, in fact, exempt from deregulation because routes were considered to be too thin to support competition and air services were essential. There are few highways and no railroads in Canada’s North.

In the South, deregulation means that any carrier can operate over any route at will as long as it is “fit, willing and able. ” In the North, however, there is “reverse onus”. An existing carrier and he communities it serves have an opportunity to prove that competition will prove harmful rather than beneficial to both. After all, there is not much sense in having competition if both airlines go broke, leaving communities stranded without any transportation services. Still, of 293 applications for new services in the North in 1988, the National Transportation Agency approved all but one.

In the eastern Arctic, First Air flies its Boeing 727s on mainline routes and British Aerospace 748s on thinner routes. In the west, Air Canada owned Northwest Territorial Air operates Boeing 737s. The North is linked by excellent jet services south to Vancouver, Edmonton, Winnipeg, Montreal and Ottawa and trans Arctic jet service linking Yellowknife, Rankin Inlet and Iqaluit.

Thus, only purely local service routes in the North remain to be developed. For the most part, these routes are still being flown with vintage aircraft such as Twin Otters which will ultimately have to be replaced. Most likely, development of these routes will be fostered by mainline carriers’ investment in regional operations, similar to what has happened in southern Canada. US and Canadian deregulation also has led to increased services between the two countries, especially by regional carriers. Aircraft of fewer than 60 seats can fly between centres not specified in the Canada-US Bilateral Air Agreement, hence there are now non-stop flights between the smaller communities in the two countries where there were none before deregulation. This market could expand greatly with the emergence of the 50 seat Regional Jet from 1992 onwards. Despite deregulation’s market success, there is a note of caution. While the US entered deregulation just at the beginning of a severe recession, Canada entered during a period of peak economic stability. With a recession either here or only months away — it depends whom one talks to — it remains to be seen how the airline industry weathers the storm.

(Hugh Whittington is Editor ofAviation Canada Magazine)