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Air North News

President's Message - June 2009

To describe current economic conditions as a downturn is, at best, an understatement. Economic uncertainty has created many challenges, including finalizing our 2009 summer schedule. This task was a bit more complicated this year as our competitor introduced some irrationality into the market by adding 33% to their summer capacity at a time when market traffic was dropping by 5% to 10%. At the same time, they are often choosing to sell their seats for less than what it costs to provide them. From a business standpoint, this is a dangerous and reckless combination of tactics.

This is a good time for airline consumers as there are lots of choices out there and prices are lower than ever. We always match market pricing, but consumers should remember that if something seems too good to be true, then it is likely not true. It is simply not realistic to expect six daily flights to Whitehorse this summer at fares of less than $150. The combination of undisciplined capacity management and below-cost pricing cannot sustain itself, and if it persists on a system-wide basis, then it can only lead to a return to bankruptcy protection for Air Canada (and a spot in the queue for a bailout). Our competitor lost more than $1 billion during 2008, and they will likely continue to lose money during 2009. Air North was profitable during 2008 and expects to be profitable during 2009, as well.

Yukon consumers might be interested to learn a bit more about airline economics and how they apply to our market. The relationship between Air Canada and Jazz creates an interesting and unique market situation. Jazz provides service to Whitehorse under a capacity purchase agreement whereby Air Canada buys seats from Jazz at a price that recovers all costs and provides a profit for Jazz. During 2008, Jazz costs were $.265/available seat mile (ASM). Their fleet is composed of CRJ regional jets and DHC-8 turboprops. Although Jazz does not publish the relative operating costs of the two types, industry knowledge would give a ballpark allocation of around $.21/ASM for the RJ type and $.39/ASM for the DHC-8 type. It is the RJ type that currently flies to Whitehorse, so using a cost of $.21/ASM, a return on sales of 8%, and a 965 mile approximate average distance between Whitehorse and its gateway cities, would lead one to conclude that Air Canada is paying Jazz about $220 for every seat that flies to and from Whitehorse. With an 80% load factor, that means Air Canada needs to sell each seat at an average price of about $275 just to break even. If they put too much capacity into the market and their load factor drops to 60%, then their break-even average pricing increases to more than $360.

Now, what about six daily flights during the summer season? This represents 600 seats/day for Jazz and 480 seats/day for Air North, for a total of 1,080 seats/day. The busiest month on record at the Whitehorse International Airport was July 2008, when southern-market traffic produced an average of just under 750 passengers/day during the peak month. If, by some miracle, the Whitehorse market is able to achieve record-setting passenger volumes each month this summer, the increased market capacity will reduce market average load factors to just over 69%. (Air Canada's system-wide average load factor in February 2009 was almost 81%.) At a 69% load factor, break-even pricing for Air Canada will be about $320. That means for each seat they sold at $109 this spring, they will have to sell another seat at $531 just to achieve their break-even average for the two seats.

While I would like to be able to say that we do not care what our competitor does in the market, the simple reality is that what they do has an impact on us. When they flood the market with seats, both of our loads are diluted, and when they price below cost, we must match them and so our yields become diluted and our profitability is impacted as well. Fortunately, our costs are less than theirs and our assets are paid for, so the impact of their actions on us is minimized.

With particular respect to pricing, our original business plan in 2001 was predicated upon average one-way fares of $250 and an average load factor of 65%. At that time, the average one-way fare in this market with our competitor was more than $300. Today, because improved load factors have offset cost increases, our target average yield is still around $250 each way. I think that this represents a fair price and exceptionally good value for the product provided. Our pricing philosophy is to charge a fair price for our product each and every day. We do not like to price below our cost nor do we try to take advantage of our customers. As an example, when you look on our website, on average our lowest one-way fare to Vancouver is $193 and our highest fare is $447. This represents a fairly narrow band around our target average. By way of comparison, with our competitors you can sometimes find fares as low as $109 each way (this spring), and as high as $1,106 each way. Even though we find that we must follow the competition down when they price below cost, we do not follow the competition up, even when the opportunity is there. We live here and would have a tough time explaining that to our local customers and shareholders.

I think the irrationality we are currently seeing in this market is possibly a result of a vicious, competitive battle that is taking place across the country between Air Canada and WestJet. Air Canada has, in general, reduced capacity in many markets in response to a declining economy. WestJet has taken some competitive advantage of this by increasing capacity to gain market share. WestJet has, in general, added less seats than Air Canada has removed, so the net effect has been improved load factors for both carriers and improved market share for WestJet at the expense of Air Canada. I think that the new Air Canada routes, which were all out of Calgary, as well as the spring seat sales, may have been designed to get the attention of WestJet.

At Air North, Yukon's Airline, we are comfortable with our role in the Yukon aviation market. We have long recognized the value of having our airline headquartered here. From a local economic-development perspective, the difference between being headquartered here rather than outside the Yukon is that cash flows into the region rather than the other way around.

During 2008 Air North employed more than 225 individuals (180 FTEs) and generated an annual payroll of almost $10 million. Only 57 employees (25% of the total number, representing 16% of the total dollars) are not Yukon residents. By way of comparison, where the company headquartered in, say, Vancouver, only about 54 employees, or 24% of the workforce, and about $1.5 million (only 15% of the dollars) in payroll would be in the Yukon.

Additionally, when a Yukon resident buys a ticket on Air North, his or her travel dollars stay in the Yukon rather than flowing out of the territory. Furthermore, when a non-Yukon resident buys a ticket on Air North, his or her travel purchase benefits the Yukon economy immediately by bringing cash into the territory in advance of their arrival. Travel purchases by non-residents made with a non-resident air carrier provide less overall economic benefit to the Yukon and no economic benefit for the territory until the visitor actually arrives here.

Today in Canada, there are just six airlines providing year-round scheduled domestic air service with jet equipment, and three of those airlines are northern carriers with a major aboriginal-ownership component. Air North, Yukon's Airline, is the only carrier with its headquarters, infrastructure, and most of its employees based in the North. Furthermore, Air North can also boast the broadest local-ownership base, with more than one in fifteen Yukon residents holding an equity stake in the company.

When we say that we are Yukon's Airline, we really mean it.

Joseph Sparling, President
Air North, Yukon's Airline

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