Roots Air, the upstart airline that promised posh perks and stylish service, will make its final flight Friday night after less than six weeks in the air. In a deal that drew fire from competition advocates, Air Canada surprised the industry Thursday with news it is buying 85 per cent of Skyservice Airlines Inc., the company behind Roots Air.
Roots Air's high-end service, aimed at the lucrative business travel market, will be grounded Saturday. That will allow Skyservice to re-position the airline as a discount carrier capable of taking on WestJet Airlines Ltd. and Canada 3000 Inc.
Roots Air passengers will be re-booked on Air Canada flights. It is not yet clear if the discount airline will retain the Roots Air name.
Skyservice launched Roots Air on March 26 with the stated goal of providing superior service to Air Canada at lower prices. Clothing company Roots Canada Ltd., one of Canada's best known brands, lent its name to the airline and bought a small equity stake. Staff wore stylish burgundy-and-black Roots uniforms, and travellers were treated to lounges decorated with Roots furniture. It promised superior food and an enticing frequent-flyer program.
With its planes half full, Roots Air's bookings were ahead of plan.
But intense domestic competition - especially from Canada 3000, which is about to launch its own business-class service - made Skyservice rethink its long-term strategy.
"The bottom line for Roots Air was that while we were winning a number of battles on a number of fronts, the war was going to be too costly for us," Skyservice chairman and chief executive officer Russell Payson said.
Mr. Payson approached Air Canada just over a week ago with the proposal that Air Canada become a shareholder in Skyservice, while it transforms Roots Air into a no-frills carrier. The new carrier could launch as early as July, Mr. Payson said.
Douglas Reid of Queen's University School of Business in Kingston, Ont., was more blunt about the carrier's precipitous demise.
"It's astonishing that [Roots]pulled out this quickly - it must have had a dreadful first month," he said. "And Air Canada needed an entry point into the low end of the market, and that seems to be what's happened."
Other business experts said the ill-fated airline was just too small to make the concept work.
"They would have had to offer a very large number of frequencies on selected major business routes," said Fred Lazar, a professor at York University. "They would have had to provide top-rate service, and fares that were at least 40 to 50 per cent below Air Canada."
The deal presents Air Canada with the chance to get into the discount sector, where it has been having trouble competing with WestJet.
"My key interest is in giving our shareholders the chance to participate in one of the fastest-growing, most-profitable segments of the passenger air market," Robert Milton, Air Canada's president and chief executive officer, said. He said the investment in Skyservice is "below $15 million."
Mr. Milton called the partnership a win for customers, staff and shareholders.
But the news drew immediate criticism from Air Canada's pilots, who say it violates their contract, and from competition advocates, who renewed calls for foreign competition to mitigate Air Canada's dominance.
"Air Canada's going to own all the upscale market plus they're going to own a big competitive slice of the low-cost, downscale market," Jennifer Hillard, vice-president of the Consumers Association of Canada, said. "Are we just moving towards Air Canada owning everything again, but running two different services?"
The deal will likely require the approval of the federal Competition Bureau and Transport Minister David Collenette.
Konrad von Finckenstein, Canada's Commissioner of Competition, said it is too early to comment on the specifics of the proposal.
But he said the deal - which follows Canada 3000's acquisition of two small competitors - highlights the need for Mr. Collenette to open Canadian skies to foreign competition.
"You've seen three carriers disappear in the last few weeks - Roots Air, Royal [Airlines]and CanJet [Airlines]- and I don't think they disappeared for no reason. It's very difficult to compete when you've got a giant like Air Canada as a competitor."
But Mr. Collenette said competition is alive and well in Canada, despite the disappearance of three airlines in recent weeks. He pointed out that Air Canada says its market share has fallen to 73 per cent from the 80-per-cent share it held at the time of its merger with Canadian Airlines International Ltd.
"I take issue with the commissioner if he thinks competition is defined by the multiplicity of airlines operating," Mr. Collenette said. "If you look at what's happened with CanJet or Royal, the consolidation now into Canada 3000, the expansion of WestJet, the expansion of a lot of smaller carriers across the country ... I think competition is really coming on," he said. "This is one example where it didn't work."
Air Canada's 85-per-cent investment in Skyservice Airlines represents a 50- per-cent voting interest in the company. But Mr. Milton took great pains Thursday to emphasize that the airline will be run by Skyservice's current management. The current shareholders, which include Roots Canada Ltd., will retain 50 per cent of the voting shares, even though they will only own 15 per cent of the company.
Air Canada will spin out a 35-per-cent, non-voting stake to its shareholders in an initial public offering next year. It is also taking a 30-per-cent interest in Skyservice Aviation, a related company that operates corporate jets.
Clive Beddoe, WestJet's chairman and chief executive officer, called the deal "another disaster in the making."
He said other full-service airlines that have tried to expand into the discount market regularly lose money.
"How do you justify having an Air Canada Lite, on the one hand, charging $69 from Calgary to Vancouver, and an Air Canada Proper trying to charge $400? I think it just will be a very, very difficult model to work."
With files from David Parkinson in Calgary, Mark MacKinnon in Ottawa and Canadian Press