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Air North News

President's Message - September 2010

On June 24, Air North, Yukon's Airline, held its 2009 Annual General Meeting in Whitehorse at our Boeing maintenance hangar. As usual, the meeting was very well attended by more than one hundred of our shareholders as well as some guests and employees. We had our new Boeing 737-400 aircraft on display outside the hangar, and I think that most of those at the meeting took the time to come onboard for a tour.

At the meeting, I was pleased to announce that we have reached an agreement to purchase a Boeing 737-500 aircraft. We expect to have this aircraft in service by early December, and with this addition, we will be able to operate almost all of our south route scheduled service with newer generation Boeing 737 classic equipment. These aircraft will offer improved fuel economy, lower maintenance costs, and improved passenger comfort. We expect that these aircraft will help us to reduce our unit costs to a level that is very close to those achieved by industry leaders.

At the same time, with the completion of improvements to the airports in Old Crow and Dawson City, we will be able to use our gravel capable B737-200 aircraft on our north route. The introduction of jet service on our north route will represent a significant product improvement and it will help to keep travel costs down. Traffic volumes on the north route will not warrant jet service on all flights without a big reduction in frequency, but I would expect that during the summer we will have enough traffic for the jet on two or perhaps even three of our six flights each week, and during the winter we will likely utilize the jet during the seasonal Dempster Highway closures when freight volumes require more capacity. As with our existing turboprop service, cargo is a necessary and valuable component of every flight as it is the combination of passengers and cargo that permit the operation of a large aircraft with maximum frequency and the lowest costs for both passengers and cargo.

The acquisition of our new aircraft represents a major milestone for Air North, Yukon's Airline, and it underscores our commitment to the Yukon market. Our new aircraft represent the largest capital project ever undertaken by this company, and with an increased capital investment in our Yukon infrastructure and with more seats to sell on the larger Boeing 737-400 aircraft, we need to rely on local market purchasing support now, more than ever before.

We are doing all that we can to make it easier for Yukoners and visitors to travel with us. Our Summer Solstice Air Pass, our Student Flex Air Pass, our Gateway Getaways, our Corporate Program, and other products are all designed to make travel with Air North easy and affordable. The new schedule that we launched in the summer of 2009 gives plenty of flight choices in 2010 as well.

I recognize that when you are travelling beyond one of our gateway cities, it is not always convenient to collect your luggage before you check in for your next flight. Eventually we hope to negotiate an ability to interline luggage with one or both of the mainline carriers, but in the meantime we are providing $20 gift certificates to those passengers who connect to another carrier from Air North and vice versa. This is offered as compensation for the time and inconvenience of collecting your luggage between flights. See our website, flyairnorth.com, for details.

One of the topics that I devoted some time to at the AGM was the unique relationship that Air North, Yukon's Airline, has with its customers. Although Air North, Yukon's Airline, has much in common with other northern carriers, in many respects circumstances in the Yukon market are quite different from those in the other northern markets. Here in the Yukon, it was Air North that brought low fares to the market, and as a result, domestic travel has grown by more than 60 percent since we started our jet service, in 2002. Airfares in and out of the Yukon compare very well with those found in comparable southern markets, and we deserve full credit for that. Furthermore, we have 75 percent of our employees located in and 85 percent of our payroll dollars earned in the Yukon. The launch of our jet service generated close to a two percent increase in private-sector jobs in the Yukon, and our employees still represent two percent of the private-sector Yukon workforce. We are 100 percent locally owned, with more than one in 15 Yukoners holding an equity stake in the airline. Clearly, the success of Air North, Yukon's Airline, benefits many Yukoners, and it is perhaps this characteristic, more than anything else, that distinguishes us from any other business that I can think of.

Our number-two corporate priority, second only to safety, is to respect the interests of our stakeholders, namely our customers, our employees, and our shareholders/partners, in that order. We firmly believe that in order to ensure our long-term success, we need to share our short-term success with all those who contribute to it. This creates a win-win-win situation for all of our stakeholders, and we go to great lengths to make sure that we are very open and transparent in this process.

To anyone who might doubt our sincerity with respect to our commitment to share success with our stakeholders, I would refer to the following statistics, which speak for themselves.

The foregoing data shows that our customers have been the biggest beneficiaries of our success since 2002. By bringing the cost of travel down by more than 25 percent, Yukoners have had more money in their pockets to spend on other goods and services, and visitors have arrived in the Yukon with more money to spend on goods and services while they are here. Customer benefits have amounted to just under $50 million during the period. Our employees received almost $1.4 million in profit sharing bonuses, representing, on average, an additional 2.7 percent on their earnings. Our Class C and D shareholders have received more than $6.6 million in cash and flight dividends since 2002, while our Class A and B shareholders/partners have received almost $1.4 million in profit distributions during the same period. In addition to the aforementioned benefits, the Yukon economy has seen a two percent increase in jobs, almost $45 million in new payroll, and more than $200 million in travel dollars in our economy that otherwise would have left the Yukon or bypassed us entirely. These benefits are significant and indisputable and they clearly illustrate the economic advantages to the Yukon and to Yukoners when the air transportation hub is in the Yukon rather than elsewhere.

At the AGM, I also discussed the importance of us maintaining a strong position in this market. An airline requires a significant amount of infrastructure, over and above the aircraft, in order to operate, and we have established most of our infrastructure right here in the Yukon. In order to be competitive, we need to be able to amortize our infrastructure-related and other fixed costs over as many ASM's (available seat miles) as possible, and, since our entire route structure relates to the Yukon, that means that we need to have a big share of this market. In a way, the fact that we have established a transportation hub in the Yukon really puts a limit on how many carriers that this market will support. The Yukon could be a spoke service for perhaps as many as four different carriers operating from four different hubs, but if that were the case, our Yukon hub, and all of the jobs and other benefits that go along with it, would not be sustainable. More competition does not always guarantee lower pricing, and in fact it could mean just the opposite. If we had two electrical companies here, each with their own power generation, transmission, and distribution facilities, and each competing for a share of the Yukon market, it is easy to see that likely neither would be efficient and power rates would likely go up. If one looks at our fare survey in the October 2009 issue of Yukon, North of Ordinary it can be seen that there are many Canadian communities, served by both Air Canada and WestJet, where airfares are much higher than in the Whitehorse market.

If I were to ask our readers what they thought might happen to airfares in and out of the Yukon if we stopped our jet service, most would probably respond by saying that they would expect to see airfares rise, at least until another competitor entered the market. If I were to ask our readers what they thought might happen to airfares in and out of the Yukon if Air Canada pulled out and we had the market to ourselves, while I suspect that there might be a few who would feel that we might increase airfares, I think that most would probably feel that we would keep our airfares where they are in the hope of keeping a new competitor out of the market. In fact, I can tell you that if we had a larger share of this market, it would allow us and even cause us to provide lower airfares to our customers. Now, I am pretty sure that there are at least a few who would be skeptical and suspicious of such a statement, but it is quite true. More market share for us means better utilization of our infrastructure, lower unit costs, higher load factors, and increased margins. The unique relationship between this company and its shareholders and customers puts a very real limit on the margins that we can expect to achieve, and so it requires that we share increased success with our stakeholders. The previous data shows that during the past eight years, we have done just that.

Thank you for flying with Air North, Yukon's Airline. We appreciate your business.

Joseph Sparling, President
Air North, Yukon's Airline

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