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Rebecca Webster, a Toronto music publicist, flies about a dozen times a year—partly to visit family, partly for fun, and often for her job. “I work in a field where everyone around me is travelling all the time,” she says. After living in London in 2000, Webster developed a much more adventurous attitude toward air travel than most Canadians have, along with the savvy to do it on the ultra-cheap. The European Union’s airline industry was in the midst of a deep-discount revolution at the time, touched off by deregulation, and upstarts such as Britain’s EasyJet and Dublin-based Ryanair—ultra-low-cost carriers (ULCCs), in industry lingo—were wreaking financial havoc on established carriers.

These days, whenever Webster flies through the United Kingdom on a Friday, she finds airports jammed with travellers jetting off to Ireland or Spain’s Costa del Sol for the weekend for £20 one way—and sometimes even less. Many carry only a small backpack, because the ULCCs charge extra for just about everything: a checked bags, assigned seats, snacks, even carry-on luggage.

Canada got its first taste of the discounting frenzy in 2016, when Iceland's Wow Air caused a sensation by introducing $248 one-way flights to and from Europe with a stopover in Reykjavik.

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Webster has flown to Europe twice via Iceland—to England in 2017 for her sister's wedding and to Oslo this past February—and each time saved $200 to $300 off the $800 or higher round-trip airfare full-service airlines charge.

So, like many Canadian globetrotters, Webster was excited when two marquee European ULCCs revealed this past winter they would be launching direct service to and from Canada: Norwegian Air and Level, the discount unit of giant International Airlines Group (IAG), which also owns British Airways, Spain's Iberia and several other carriers.

“I was in Oslo when this was announced, and I thought, ‘This is going to change things a lot,’” says Webster. “Canada just hasn’t had a real discount airline.” Level began flying between Paris and Montreal in July, and Norwegian plans to launch service between Dublin and Hamilton, Ontario—about an hour’s drive from downtown Toronto—in March.

Competition is heating up within Canada as well. In June, Flair Airlines, an upstart based in Edmonton that primarily serves Western Canada, more than doubled its flights per week, to 188, and said it would introduce service to Las Vegas this fall and Phoenix this winter. With new rivals on both domestic and cross-border flights popping up, Calgary-based WestJet has fired back by launching its own ULCC, Swoop, in June. “Why would you sit back and let someone else eat your breakfast?” says WestJet CEO Ed Sims.

You can’t blame Canadian travellers for greeting this new burst of discounting with a weary “It’s about time.” Canada is the last G7 country without a thriving ULCC market. Industry executives and analysts estimate there are about 10 million people the new discounters can go after.

Veteran airline consultant Robert Kokonis, who heads Toronto-based AirTrav Inc., says the arrival of the ULCCs is part of “the Walmartization of air travel.” Like disruption in other businesses, it’s being driven by new technology and business models that address Canadian consumers' long-held grievance with airlines: high prices in a market insulated from strong competition. “Why does it cost me less to fly to Europe in July [on a foreign airline] than it does to fly to Vancouver?” asks Webster.

Of course, many airline startups have tried to tackle this challenge in the past—including Greyhound Air, Canada 3000, Jetsgo and Roots Air—and they all failed. As was the case with Canadian mobile phone service, domestic giants fought them off and retained a profitable oligopoly. What’s different this time around?

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New planes, lower costs

Boeing 747-400

71 metres

Length

Seats

416

Fuel burn

per seat

(litres/100km)*

3.2

Fuel consumed

per seat on a

5,000-km trip

(litres/100km)*

160 litres

Airbus 330-200

59 metres

Length

314

Seats

Fuel burn

per seat

(litres/100km)*

2.5

*On flights between 3,240 and 6,300 kilometeres

Fuel consumed

per seat on a

5,000-km trip

(litres/100km)*

127 litres

New planes, lower costs

Boeing 747-400

71 metres

Length

Seats

416

Fuel burn

per seat

(litres/100km)*

3.2

Fuel consumed

per seat on a

5,000-km trip

(litres/100km)*

160 litres

Airbus 330-200

59 metres

Length

314

Seats

Fuel burn

per seat

(litres/100km)*

2.5

*On flights between 3,240 and 6,300 kilometeres

Fuel consumed

per seat on a

5,000-km trip

(litres/100km)*

127 litres

New planes, lower costs

Boeing 747-400

Airbus 330-200

71 metres

59 metres

Length

416

Seats

314

Fuel burn per seat

(litres/100km)*

3.2

2.5

Fuel

consumed

per seat

on a

5,000-km trip

(litres/100km)*

160 litres

127 litres

*On flights between 3,240 and 6,300 kilometeres

Just as retail had Sam Walton, so the airline industry had its own visionary who realized there was a vast underserved market below the mainstream. Herb Kelleher, a chain-smoking San Antonio, Texas, lawyer, launched Southwest Airlines in 1971 based on a triangle of routes connecting three Texas cities: Dallas, San Antonio and Houston. The company offered one-way fares for $20 (U.S.)—the equivalent of $120 (U.S.) now, though some Southwest tickets are less than half that today.

Southwest grew to become the third-largest U.S. airline by pioneering most of the techniques discount carriers use to this day. To spread the fixed cost of each jet over more flights and passengers, ULCCs keep planes aloft as much as possible—close to 12 hours a day. They also tend to fly point to point rather than relying on the often more costly hub-and-spoke system used by mainstream airlines—flying passengers into vast central airports, then transferring them to other planes and flying them out again.

To save on landing fees and airport charges, discounters look for secondary airports near major cities, such as London’s Stansted, which is roughly twice as far from the city centre as Heathrow (and far less connected). And they try to avoid highly competitive routes—Southwest, for example, stayed away from New York City for years—while keeping distances short so fuel costs don’t jack up the ticket price too much.

For passengers, rock-bottom fares mean no frills: no assigned seats, no business class, no free meals or drinks. Back in the early 1970s, Southwest even made its customers schlep their own luggage to the plane. But with flight attendants dressed in orange hot pants and pulling light-hearted pranks on passengers, the airline tried to make scrimping fun—a tactic many imitators adopted.

Following deregulation in the late 1970s, dozens of new low-cost carriers entered the U.S. market. The resulting tsunami of price competition killed off many established giants, including Eastern Air Lines, Pan American World Airways and Trans World Airlines. Eventually, three discounters emerged as strong rivals to Southwest: Spirit, a ULCC founded in Florida in 1983; Frontier Airlines, which was launched in Colorado in 1994; and New York-based JetBlue. All three are among the 10 largest airlines in the U.S., and all try to keep posted fares low and gather so-called “ancillary revenue” by charging for anything extra—seat selection, blankets and pillows, even printed tickets.

In Europe, the free-for-all after deregulation in the 1990s was even more intense. European Union airlines could fly between any destinations among member countries. Greater population density than in the United States, and shorter distances between major cities and tourist meccas, made it easy for upstarts to jump in and charge startlingly low fares. Search for any top European ULCC and one of the first words you’ll see is “cheap.” Four of Europe’s 10 largest airlines by passengers flown are now ULCCs: Ryanair, EasyJet, Norwegian and Hungary’s Wizz Air.

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Canada deregulated its domestic airline market in 1987, but unlike the United States and the EU, there was no discount travel revolution. Instead, the industry consolidated: Small, regional and independent airlines were taken over by bigger rivals or simply disappeared, and the domestic market quickly became a duopoly run by Air Canada and Canadian Airlines International Ltd. Despite this advantage, both carriers soon flew into severe financial trouble. Following a 2001 merger, Air Canada emerged with more than 90% market share on domestic routes, yet still continued to stagger from one crisis to another.

New competitors emerged over the years, but somehow, they failed to successfully exploit the incumbents' problems. Charter carrier Canada 3000 grew rapidly in the 1990s, but went bankrupt in 2001. Montreal-based Jetsgo lasted from 2002 to 2005, controlling about 10% of the domestic market at its peak. In both cases, analysts said management incompetence was a factor.

Not surprisingly, Canadian fares remained high by world standards. According to a widely cited price index compiled by global travel agency kiwi.com, Canada ranked 65th out of 80 countries in 2017, with an average ticket price of $23.90 (U.S.) per 100 kilometres for foreign and domestic flights—more than double the $11.06 (U.S.) average for the United Kingdom and $11.50 (U.S.) for the United States.

In fairness, airlines in Canada face several fundamental challenges. The country has low population density, few large cities and vast geography. The longer the flight, the more airlines have to pay for pilots, flight attendants and fuel. Leasing or buying planes is expensive, so startups have to be well capitalized—particularly if they get into price competition on popular routes. “It’s a cash-burning business,” says Kokonis. Taxes and airport fees are also high here. According to an International Air Transport Association ranking of OECD nations by the competitiveness of their fees and taxes, Canada ranks No. 31 out of 32 countries.

“Those things are unavoidable, regardless of your business model,” says Joseph Adamo, chief distribution officer at Transat A.T. Inc., which operates Canada’s third-largest airline, Air Transat. “It has made it very difficult for alternative business models to take hold.” How has Transat managed to succeed? Like Sunwing Vacations, which runs fourth-ranked Sunwing Airlines, the company is a holiday packager and an airline.

Some critics argue that Ottawa deserves much of the blame for the lack of real competition in air travel. So-called open skies agreements Canada signed with the United States in the 1990s and the European Union in 2009 only freed up cross-border routes; foreign airlines still can’t fly between Canadian cities. The federal government also has long maintained foreign ownership restrictions on Canadian airlines. The maximum voting stake one shareholder could hold was 25% until this past May, when new legislation came into effect that raised the limit to 49%.

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Foreign-ownership barriers and route restrictions lower the quality of competition in the Canadian skies, argues Gábor Lukács, a part-time Dalhousie University mathematics professor and founder of Air Passenger Rights, a prominent advocacy group. Canadian airlines like Canada 3000 and Jetsgo just didn’t have the capital or the expertise that big foreign carriers have. “Why don’t we go for companies with a track record, rather than startups?” he asks.

WestJet managed to overcome the pitfalls that tripped up other newcomers by being nimble. It launched in 1996 as a discounter with a regional base in Alberta, following the Southwest model by keeping costs and fares down, projecting a fun image and growing opportunistically. But as bigger rivals disappeared and Air Canada struggled, WestJet expanded from its discount roots into the higher end of the market—adding premium economy seating, a loyalty program and other trappings of a full-service airline. It now has 36% market share in Canada, versus 53% for Air Canada. It’s part of the airline establishment. So, is it any surprise that the newest catalysts for innovation are foreigners and outsiders?

Skúli Mogensen dropped out of the University of Iceland to found a mobile communications software company in Montreal, where he lived for a decade. Three years after selling it to Nokia, he launched Wow Air in Reykjavik in 2011. After acquiring a small rival that flew to Europe and North America, Wow created a splash in 2015 by offering $99 (U.S.) flights from Boston and Baltimore to Reykjavik, then an additional $149 (U.S.) to other European destinations. This allowed the airline to fly two medium-haul routes more frequently, rather than one long one. It had the added benefit of turning Iceland into an accessible tourist destination for North Americans who got a taste of the capital on a stopover.

In May 2016, Wow became the first ULCC to target Canadians, with a $149 one-way fare between Europe and Toronto or Montreal. Despite only a small backpack allowance and everything else costing extra, 180,000 passengers flew Wow during the service's first 12 months. That's not a big number—Air Canada flies several million passengers between Canada and Europe each year—but it was enough to make other European ULCCs take notice.

This past winter, three ULCCs disclosed that they would begin flying to and from Canada in July: Norwegian, Level and tiny Primera Air of Latvia. Norwegian’s chief commercial officer, Thomas Ramdahl, says executives started looking at Canada soon after the airline entered the U.S. in 2013. They saw an overpriced market with a largely untapped vein of potential deep-discount travellers and no competing ULCCs. About five million Canadians a year drive to and from U.S. border airports such as Plattsburgh and Buffalo, in New York state, and Bellingham, Washington, to save 30% or more per ticket, and there are another five million who don’t fly much (or at all) due to costs. “We’re trying to grow the market rather than steal traffic,” Ramdahl says. “We don’t see any other carrier as the main competition.”

Another key factor in Norwegian’s decision was the introduction of planes that make it possible to fly transatlantic routes profitably. The latest-model Boeing 737s and Airbus A321s are about 15% more fuel-efficient than planes two decades ago. In 2012, as Norwegian prepared to enter the North American market, it placed the two biggest plane orders in European history, totalling more than 220 aircraft. (Primera and Level are also using new planes on their routes to Canada.)

But the long-awaited invasion of cheap overseas flights has hit some turbulence. Delays in the deliveries of new planes caused Norwegian and Primera to scale back their plans. Norwegian announced in June it wouldn’t start flying between Hamilton and Dublin until next March. Once it has the new hardware, however, Ramdahl hints it will likely expand routes.

Level began service between Paris and Montreal in July, but quickly ran into embarrassing problems. The airline abruptly cancelled several flights and stranded more than 800 passengers in Montreal for days. Level blamed “operational reasons” for the bungled launch. Hugo Trac, the company’s communications and marketing manager, apologized, and says the new route is now “performing exceptionally well.”

For the most part, analysts see these early miscues as mere hiccups. Chris Murray, an airline analyst at AltaCorp Capital in Toronto, says Canada’s untapped ULCC market will require carriers to deploy 50 737-sized aircraft to fully exploit it, and so far, the European discounters only have a handful of planes flying transatlantic routes, leaving lots of room for expansion. What’s more, unlike poorly capitalized domestic upstarts in the past, both IAG (Level’s parent) and Norwegian are large carriers that have already expanded deliberately and successfully in the U.S. and elsewhere. “It is a radically different model,” Murray says, and one that poses competitive challenges for Canada’s two established carriers.

How low can they go?

Flair Air & Swoop

Edmonton, AB

Abbotsford, B.C.

760 km

$48

Swoop

Hamilton, ON

Abbotsford, B.C.

3,300 km

$288

Swoop

Hamilton, ON

Orlando

1,673 km

$186

Primera Air

Toronto, ON

London

5,800 km

$444

Level

Montreal, QC

Paris

5,580 km

$587

Norwegian Air

Hamilton, ON

Dublin

5,340 km

$568

How low can they go?

Flair Air & Swoop

Edmonton, AB

Abbotsford, B.C.

760 km

$48

Swoop

Hamilton, ON

Abbotsford, B.C.

3,300 km

$288

Swoop

Hamilton, ON

Orlando

1,673 km

$186

Primera Air

Toronto, ON

London

5,800 km

$444

Level

Montreal, QC

Paris

5,580 km

$587

Norwegian Air

Hamilton, ON

Dublin

5,340 km

$568

How low can they go?

Level

$587

Swoop

$288

Norwegian Air

$568

(April, 2019)

Primera Air

$444

Flair Air &

Swoop

$48

Swoop

$186

760 km

Edmonton, AB

Abbotsford, B.C.

3,300 km

Hamilton, ON

Abbotsford, B.C.

1,673 km

Hamilton, ON

Orlando

5,800 km

Toronton, ON

London

5,580 km

Montreal, QC

Paris

5,340 km

Hamilton, ON

Dublin

Ed Sims at WestJet is taking the threat very seriously—he’s seen what the arrival of ULCCs can to do to a regional airline market. Before joining WestJet as executive vice-president of commercial aviation last year, he spent 32 years in the travel industry split between the U.K. and New Zealand. He saw Richard Branson invade the Australian market in 2000 with his low-cost carrier, Virgin Blue (now called Virgin Australia), which quickly become the second-largest airline in the country. He also watched Qantas’s counter-punch: In 2003, the company created low-cost subsidiary Jetstar Airways, successfully establishing a two-brand strategy. Jetstar is now the country’s No. 3 airline, with almost 20% of the market, while full-service Qantas remains No. 1, with Virgin Australia sandwiched in between.

Sims sees many parallels between Canada and Australia. “There, you’ve got 80% of the population along the east coast, and here you have 80% along the border with the United States,” he says. “People said Australia is a large country with a sparse population, and would always be a high-airfare environment. Jetstar proved that not to be the case.”

So when it became apparent last year that more European ULCCs would be arriving in Canadian airports soon and domestic discount upstart Flair planned to expand, Sims decided a big move was needed. In June, the company launched Swoop. It’s an absolutely no-frills operation: no loyalty program, all tickets sold online, no in-flight freebies, travel from point to point with no connections. “People have to get used to serving themselves,” Sims says. But he adds that, unlike customers of a startup, “they have the comfort of knowing that in the event of a severe disruption, we have our WestJet fleet to rescue passengers.”

Like the competing ULCCs, Swoop started small, with just two fuel-efficient planes serving five Canadian cities (it plans to have six planes by year-end). Sims was on the airline’s first flight in July—from Hamilton to Abbotsford, British Columbia. He sat next to a couple who hadn’t seen their son since he moved to Vancouver five years ago. “They picked up two $89 tickets, and they said, ‘We’ve got no reason not to travel,’” he says.

This winter, Swoop will add U.S. snowbird destinations: Las Vegas, Phoenix, Orlando, Tampa Bay and Fort Lauderdale. Sims says Swoop may eventually offer flights to the Caribbean and Latin America, but not overseas to Asia and Europe—the economics still aren't favourable.

The big uncertainty is how Air Canada will respond to the new competition. Its Rouge discount division is far from a ULCC, AltaCorp’s Murray says. Among other things, it has several fare classes, offers some free food and drinks, and is tied to Air Canada’s loyalty program. Air Canada declined to comment for this story but in a conference call with financial analysts in April, CEO Calin Rovinescu said, “We are equipping ourselves with additional tools, such as our new suite of economy fares and increased access to Rouge, to compete more effectively, including [against] the new low-cost entrants.”

Murray, for one, believes the airline isn’t much concerned with the discount market, and will continue focusing on business and international travellers. “Do not expect Air Canada to enter the ULCC space,” he says.

But as more foreign ULCCs with deep pockets barge in, it seems big discounts for Canadian flyers may be here to stay. They have already triggered deep fare reductions. In a survey of round-trip economy airfares this past summer, the Canadian division of travel search engine Kayak found the median to be the lowest in three summers. Based on searches for the fall, the median fare for Winnipeg is down 25% from fall of 2017, 36% for Hamilton and 56% for Abbotsford. Compared with the launches of past low-cost entrants, says Steve Sintra, Kayak’s country manager for Canada, “it really does feel different this time around.”

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