Why discount airlines keep going bust in Canada

Primary Topic

This episode examines the recurring failures of discount airlines in Canada, focusing on the recent shutdown of Lynx Air.

Episode Summary

In this revealing episode, "The Decibel" explores why discount airlines consistently struggle in Canada, using Lynx Air as a case study. The discussion is led by Eric Atkins, the transportation reporter for The Globe and Mail, who delves into Lynx Air's business model, operational challenges, and the broader issues plaguing low-cost carriers in Canada. The narrative outlines Lynx Air's journey from its inception as Enerjet in 2006, through multiple rebrandings and business plans, to its final days under creditor protection in 2024. The episode provides a comprehensive analysis of the factors leading to Lynx Air's collapse, including high operational costs, competitive disadvantages, and regulatory challenges that create a hostile environment for discount airlines in Canada.

Main Takeaways

  1. Discount airlines in Canada struggle due to high operational costs and strict regulations.
  2. Lynx Air's failure was accelerated by its high debt, operational mismanagement, and the competitive pressures from major carriers.
  3. The Canadian aviation market's structure, with high fees and limited competition, significantly disadvantages discount carriers.
  4. Consumer impacts are significant, as passengers often bear the cost of airline failures through lost fares and disrupted travel plans.
  5. Despite repeated failures, the allure of filling a market gap keeps new discount airlines emerging, though success remains elusive.

Episode Chapters

1. Introduction to Lynx Air

An overview of Lynx Air's history, business model, and the reasons behind its operational shutdown. Key points include the airline's strategy and its struggle to maintain financial stability.

  • Eric Atkins: "Lynx started as Enerjet, aimed at servicing the Alberta oil patch, which didn't pan out."

2. The Challenges of Discount Airlines

Discusses the structural challenges faced by discount airlines in Canada, including regulatory burdens and competition.

  • Eric Atkins: "Discount airlines are disadvantaged by high fees and taxes in Canada compared to other countries."

3. The Collapse of Lynx Air

Details the immediate circumstances leading to Lynx Air's request for creditor protection and the subsequent impact on passengers and operations.

  • Eric Atkins: "They had to cease operations abruptly, leaving many passengers stranded and facing high costs to return home."

4. Consumer Impact and Regulatory Environment

Explores how Lynx Air's shutdown affected consumers and reflects on the regulatory environment that affects all airlines in Canada.

  • Eric Atkins: "Passengers often have little recourse and end up paying out of pocket when airlines like Lynx fail."

Actionable Advice

  1. Always consider travel insurance when booking with discount carriers to mitigate potential losses.
  2. Keep informed about the financial health of airlines, especially smaller or discount ones, before booking.
  3. Explore alternative transportation options when planning travel within Canada to avoid dependency on a single airline.
  4. Advocate for regulatory reforms that could lower operational costs for airlines, potentially leading to more stable ticket prices and services.
  5. Stay updated on airline news to make informed decisions about travel plans and avoid potential disruptions.

About This Episode

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.

People

Eric Atkins, Meinika Ramon Wilms

Companies

Lynx Air, WestJet, Air Canada, Porter Airlines

Books

None

Guest Name(s):

None

Content Warnings:

None

Transcript

Vas Bednar
Welcome to lately a new Globe and Mail podcast. I'm Vas Bednar and every Friday I'm going to be having a conversation about big defining trends in business and technology that are reshaping our everyday find lately. Wherever you get your podcasts.

Meinika Ramon Wilms
Hi, it's Meinika. 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.

Eric Atkins
There have been a few that have come and gone. Independent airlines and discount airlines in Canada don't have a great track record.

Meinika Ramon Wilms
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.

Eric Atkins
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 two. And then they finally started as links. Less than two years ago, in 2022.

Meinika Ramon Wilms
Lynx Air operated nine planes and offered cheap flights. But then last week, things took a turn.

Eric Atkins
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 canceled 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 were dropped off by Lynx had to find their own way home.

Meinika Ramon Wilms
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 Mainneke Ramon Wilms and this is the decibel from the Globe and Mail.

Eric, thank you so much for being here.

Eric Atkins
Thanks for having me.

Meinika Ramon Wilms
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?

Eric Atkins
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.

Meinika Ramon Wilms
Okay, and what about their staff? Like, if you're working for a Lynx versus an Air Canada, are you getting paid similar amounts?

Eric Atkins
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.

Meinika Ramon Wilms
Okay, so your replacement parts are the same. Your pilots only have to train on one aircraft. That's the benefit.

Eric Atkins
Exactly.

Meinika Ramon Wilms
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?

Eric Atkins
Well, from Calgary to Montreal, last I checked, you could fly for less than $100 on Lynx versus depending on the day and the class, it could be several hundred dollars on WestJet or Air Canada.

Meinika Ramon Wilms
You touched on this a little bit, but let's talk about it directly. When we talk about the place in the canadian market that Lynx was trying to fill, what exactly was that hole that they were trying to fill?

Eric Atkins
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 even for leisure. They're trying to stimulate new entrants, new customers in the market. Stimulate is their word.

People who ordinarily would take the car or take a bus or maybe not fly at all. Students, 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.

Meinika Ramon Wilms
Okay. 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?

Eric Atkins
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.

Meinika Ramon Wilms
This is because of the two crashes that happened?

Eric Atkins
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 of 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 were willing to travel.

It's returned now, but in 2022, it was still coming in fits and starts.

Meinika Ramon Wilms
Okay, so that's what Lynx said is kind of the reasons behind it.

They also owed some money here. Can we talk about that?

Eric Atkins
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 $2.4 million to the operator of Toronto Pearson airport for landing rights and other things.

The list goes on and on.

Meinika Ramon Wilms
And so why did they then decide to end operations on Sunday? Like, what was it that made them basically shut down?

Eric Atkins
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 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 ten days to be protected from creditors so it 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 will typically be cents on the dollar.

Meinika Ramon Wilms
And what does that all mean, though, for their customers? Like people who were going to fly links, who had bought tickets? Can people get their money back?

Eric Atkins
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, you know, failed airlines and canceled 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.

Meinika Ramon Wilms
Eric, have you talked to anyone affected by this?

Eric Atkins
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 age daughters are in Cancun, possibly still. They flew down last week and 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 $2,000 for two tickets to return to Toronto, and she wasn't sure whether they were going to stay as of late last week.

Meinika Ramon Wilms
Wow. So, yeah, it's actually putting a lot of people in kind of a difficult situation then.

Eric Atkins
Yeah, they canceled a lot of return flights over the weekend to bring the aircraft home, but not the people.

Meinika Ramon Wilms
We'll be right back.

Vas Bednar
Welcome to lately a new Globe and Mail podcast that's all about navigating life in the new economy. I'm your host, bass Bettinar.

Every Friday I'm going to be having a conversation, maybe even a raucous one, about big defining trends in business and technology that are reshaping our everyday. It's about the innovations that are changing our world, whether you've noticed them yet or not. Join us for the latest on lately, wherever you get your podcasts.

Meinika Ramon Wilms
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?

Eric Atkins
There's been a fairly long list of discount and independent smaller airlines that have come and gone. Canada 3000.

Can jet jets go?

Westjet swoop, which was Westjets discount brand.

They folded that airline into its own bigger brand.

And then there is sunwing as well. WestJet purchased Sunwing a couple of 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.

Meinika Ramon Wilms
And so now that lynx is gone, how many discount airlines do we actually have left, really?

Eric Atkins
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.

Meinika Ramon Wilms
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.

Eric Atkins
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 the Toronto island.

Meinika Ramon Wilms
Yeah.

Eric Atkins
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.

Meinika Ramon Wilms
Okay, so that's the situation in Canada. But what about outside of Canada? Do discount airlines tend to succeed outside of Canada?

Eric Atkins
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 can fly across the country in 6 hours, where you can get to across Europe in that same time.

Meinika Ramon Wilms
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. 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?

Eric Atkins
Well, the airlines will tell you they 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 this 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 seven 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 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 of, or the federal government.

And taxes are generally less. Fuel is certainly less in the US. 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. Can make improvements is by taking on debt or waiting for the odd government grant.

Meinika Ramon Wilms
What is the model then we have in Canada then? Like, how does it work here? Why are we paying all these additional fees every time we fly?

Eric Atkins
In the nineties, the federal government hived off the airport authorities into nonprofit independent companies.

Transport Canada owns the airports, and they're operated by these nonprofit 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.

Meinika Ramon Wilms
Okay, so in Canada, you only kind of pay those fees if you're actually using the airport, then 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 difference between what someone in Canada would pay for that and what someone leaving out of a us airport would.

Eric Atkins
Pay for that in Canada? Well, for Pearson, it's dollar 35 for every departing passenger.

In the US, it's about 450 us. So it's substantial, and 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.

Meinika Ramon Wilms
Wow. What do airports say about these fees and the fact that these are passed on to the customer?

Eric Atkins
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, you know, they're trying to deal with it.

Meinika Ramon Wilms
Ok, 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 links Air in Canada.

What exactly does that mean?

Eric Atkins
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.

Meinika Ramon Wilms
So it has to be majority canadian.

Eric Atkins
Owned, 51% canadian owned. And no foreign entity can by itself can own more than 25% of a certain airline.

Meinika Ramon Wilms
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.

Eric Atkins
Yes.

Meinika Ramon Wilms
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?

Eric Atkins
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 fee, they have a hub system where you buy a ticket and you can, you know, end up all over the world by buying one. Air Canada ticket. The discount carriers don't do that. They offer out and back to one thing, and then you have to buy another ticket if you want to get anywhere else.

So it really is a duopoly. 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.

But now that porter is trying to go nationally, are they trying to get three airlines out 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, WestJet and Air Canada, they were forced to compete.

However, the other companies are so small that nobody is expecting the demise of links to have any major impact on the overall price of airfares in Canada.

Meinika Ramon Wilms
So this is actually what I wanted to ask you as we're kind of rounding out this conversation, Eric. So now that we're in the situation with links, links demise. So this doesn't necessarily mean higher costs for Canadians.

Eric Atkins
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.

Meinika Ramon Wilms
And links, 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?

Eric Atkins
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, its 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 links sought creditor protection, all the talks have stopped and. But Lynx says in the court documents its goal is to sell itself to flair or another buyer when this is all over.

Meinika Ramon Wilms
So, Eric, from all the factors that weve talked about here, is Canada just a market that is unattractive for discount airlines and for people to start this kind of company here?

Eric Atkins
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.

Southwest spirit, allegiant whiz, they 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, 1 hour drive from their home.

Meinika Ramon Wilms
I mean, this is kind of like the conversation we often have with, 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, other places in the states and Europe do.

Eric Atkins
Yeah. Less competition always leads to higher prices.

Meinika Ramon Wilms
Eric, thank you so much for being here today.

Eric Atkins
Thanks for having me.

Meinika Ramon Wilms
That's it for today. I'm Mainika Ramon Willms.

Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy McLaughlin. David Crosby edits the show. Adrian Chung is our senior producer, and Angela Pacenza is our executive editor. Thanks so much for listening, and I'll talk to you tomorrow.