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Sky Regional Airlines Inc. will shut down its commercial flight operations on March 31 after losing its Air Canada Express contract, becoming the first mid-sized Canadian airline to fall victim to the pandemic.

Toronto-based Sky Regional, which employs about 650 people, flies 25 Embraer E175 planes branded as Air Canada Express.

Air Canada said on Monday it will make Jazz Aviation LP the lone operator of Air Canada Express flights, and transfer the planes to Jazz. The move means the union that represents about 300 Sky Regional pilots will begin negotiations to transfer members to Jazz, amid a pandemic in which thousands of airline employees have been laid off.

“Sadly, as a result, we will be forced to shut down our operations, despite our many adjustments in the face of the various travel restrictions imposed by governments, thus far without any sector-specific support,” said Russell Payson, founder and chief executive officer of Sky Regional. “I am extremely proud of Sky Regional’s record, and its outstanding, innovative and dedicated team; and it is hard to reconcile the tragedy of today’s announcement given the strength and success of our organization.”

The transfer of the pilots to Jazz, a subsidiary of Chorus Aviation, is subject to negotiations between the Air Line Pilots Association and Jazz.

“Further to the termination of the [Air Canada agreement] between Air Canada and Sky Regional, Sky Regional will cease its operations and business, which includes, except for the pilots, the termination of employment for all its employees on March 31, 2021,” Sky Regional told employees in a memo, a copy of which was obtained by The Globe and Mail.

The pilots’ union said no one was available to comment.

Sky Regional employed 800 before the pandemic began a year ago. The planes, labelled Air Canada Express, flew out of Toronto to destinations in Canada and the United States.

“That’s big news,” John Gradek, who teaches aviation leadership at McGill University in Montreal, said of Sky Regional’s shutdown.

He said Michael Rousseau, Air Canada’s new CEO, is “flexing his muscles” with contractors and slashing costs to better position the airline for the eventual return to prepandemic levels of demand. “Rousseau is very much a cost accountant,” Mr. Gradek said. “He knows that to survive Air Canada is going to cut its costs significantly.”

Air Canada said on Monday it is “consolidating” its regional flights with Halifax-based Jazz Aviation to save $400-million over the 15 years of the agreement.

“Air Canada is consolidating its regional flying with Jazz in response to the ongoing devastating impact of COVID-19 upon the airline industry,” Air Canada said in a statement on Monday. “This necessary realignment of our regional services will help Air Canada achieve efficiencies and reduce operating costs and cash burn by consolidating its regional operations with one provider. Moreover, by streamlining the regional fleet, this agreement will also position Air Canada to operate more competitively with a single provider as traffic returns following the pandemic.”

Mr. Payson, a pilot, founded Sky Regional in 2011. The business began with five Bombardier Q400 planes flying from Toronto’s Billy Bishop Airport. He also founded Skyservice, an aircraft charter, management and maintenance company with locations in Montreal, Toronto, Ottawa and Calgary.

In a statement to The Globe, Mr. Payson called Sky Regional a “Canadian success story.”

“The company was on a solid growth trajectory,” he said. “Over the past decade, we have operated with outstanding service, an impeccable safety record and excellent cost management, which benefited not only our client [Air Canada], but Canadian travellers.”

Canada’s airlines have laid off thousands of employees – more than 20,000 at Air Canada alone – and reduced capacity by as much as 90 per cent as the pandemic persists. Porter Airlines, Sunwing Airlines and Air Transat have suspended normal operations. Air Canada has suspended several routes and pulled out of some airports in smaller cities, many of which were served on its behalf by Sky Regional and Jazz Aviation.

The government has imposed travel restrictions and quarantines, and requires people entering Canada to be tested for COVID-19 and isolate in hotels.

The aviation industry has called for a system of eased travel restrictions in tandem with negative COVID-19 tests. The industry has repeatedly called for sector-specific aid, warning the domestic industry will be unable to restart and compete with global rivals when demand for air travel returns.

In an e-mail, Allison St-Jean, spokeswoman for Transport Minister Omar Alghabra, reiterated the government’s position that aid being prepared for airlines will come with conditions that regional routes be maintained and customers get ticket refunds for flights cancelled during the pandemic.

“The COVID-19 pandemic has had significant impacts across the economy, including in the aviation sector. Air carriers have taken measures to improve the viability of their operations,” Ms. St-Jean said. “The decision to terminate the contract with Sky Regional Air was a decision made between Air Canada and Sky Regional Air.”

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