But just four months after establishing twice-daily service between Montreal/Dorval and Washington/Dulles in mid-March, the carrier got out of the market. It had fallen victim to a weak Canadian dollar, high customs and immigration fees, new taxes and, most importantly, a dearth in passenger traffic, especially from French-speaking Canada. A weekend service, going from the US on Fridays and returning on Sundays, does not make a profitable route, ValuJet officials determined. 'Whether we were affected by cultural, currency or language differences, we clearly were not able to generate enough business to operate profitably in this market,' says ValuJet president and COO Lewis Jordan.
The ValuJet experience points towards the hidden side of the 'great open skies experiment' between the US and Canada. Customs and immigration charges for carriers from both sides of the border - along with state, provincial and two sets of federal taxes - have pushed up costs and 'made our low fare not such a low fare', complains a ValuJet executive. Yields have dropped, capacity has increased and a measure of cultural difference has yet to make crossborder travel akin to intercity travel in the US or Canada - in other words comparatively easy and uncomplicated. Any airline immediately hoping to turn the long-regulated markets between the two countries into revenue machines could well be disappointed.
But, clearly, not all are soured by the start of open skies. There is, in fact, considerable agreement on both sides of the border that the accord will be beneficial to most players. 'There's no doubt that transborder yields will come down,' says consultant Jon Ash of Washington-based Global Aviation Associates. 'But on balance it is a good deal.'
Certainly, it is better than it used to be. In its former, much excoriated form, the bilateral was one of the world's most restrictive, regulating air carriers route-by-route on price, frequency and capacity. Of all the aberrations that this caused, one of the most striking was the inability of an airline to fly directly between the two countries' capital cities, Washington and Ottawa.
The goal of the new bilateral is unfettered access, at least after a three year phase-in period limiting US carrier access to Toronto, the epicentre of Canadian aviation, and a similar two-year period for Vancouver and Montreal. Now, for the first time, Air Canada's maple leaf-adorned tails are being seen at Washington/Dulles as they arrive from Ottawa, and at Washington/National as they arrive from Toronto.
In the first six months of open skies, things appear to have gone for the most part as intended: carriers from both sides have increased their service levels, though US carrier growth is being shadowed by the Canadian side. According to Global Aviation, weekly transborder frequencies from Toronto's Pearson International airport have increased by a total of 21 per cent. However, from February to August, the Canadian carriers - primarily Air Canada but also Canadian International - far outpaced US players with capacity growth of 31 per cent versus 13 per cent. Ash estimates that in the next two years Canada-US traffic will grow by 25 per cent, from its pre-open skies 1.7 per cent annual growth rate.
On the US side, the growth involves most of the players. Northwest Airlines, in a strong position to serve traffic coming and going to Canada, has introduced service to five new Canadian cities from its Minneapolis and Detroit hubs, doubling the number of points it served north of the border. USAir has increased its services from Pittsburgh, Washington and Philadelphia. Delta Air Lines, formerly with an estimated 17 per cent of the US-Canada market, is experiencing new competition from such cities as Boston and Miami, but has compensated for lost revenue with new services to Canada from Atlanta. American Airlines, meanwhile, is strongly emphasising its codesharing relationship with Canadian Airlines International to gain more access north of the border.
Access does not guarantee profitability, however. Ironically, the free access allowed to Canadian carriers may well hurt Air Canada, at least at the outset. The airline has suddenly found itself serving a plethora of new US markets, an expansion that has been somewhat unwieldy and has adversely impacted yields in markets like Montreal-New York.
Though sources say Ottawa is performing well for Air Canada, this is by virtue of the fact that the airline is facing no competition on the route and is using only 50-seater Canadair Regional Jets. Compared to Delta, which faces a controlled rate of growth, Air Canada's expansion into markets as diverse as Toronto-Denver, Vancouver-San Francisco and Toronto-St Louis is a broad, widespread undertaking. 'Although Delta was hurt in some markets, overall additional revenue is offsetting [this],' says an analyst familiar with Canada-US open skies. 'But for Air Canada, which is in at least 16 new markets, their revenue is not meeting operating costs.'
But Air Canada officials say this was supposed to happen. Limiting US access to Canada was a way of allowing the smaller, weaker Canadian players to establish themselves in the market. The by-product has been a steep rise in services between the two. Obviously, yields will be impacted.
Jacques Kavafian, a research analyst with Montreal stockbrokers Levesque Beaubien Geoffrion, is one of the few dissenters to voice his view that US carriers have nothing to gain and a lot to lose from open skies. Pointing to ValuJet's experience, he believes overcapacity means that 'there will be others'. Already, he says, there are signs of timidity at some US carriers: 'Northwest has cut back on some frequencies and so has Delta, which I feel will be the biggest loser. Before open skies, it had a 17 per cent share of the Canada-US market which I predict will drop to 8 per cent.' On the other hand, Kavafian adds, 'Air Canada is the biggest open skies winner, because it was restricted to eight US routes and now it is unlimited.'
But Michael Goldman, a Washington-based aviation lawyer, disagrees. 'The Canadian carriers don't have the resources to service all the major centres in the US, whereas [a carrier like] Northwest, with its hub to six or seven Canadian centres, will become a major player in the Canadian market.' Goldman also notes that US carriers have opened more routes into Canada than Air Canada in the US since the agreement went into effect. He feels that, besides Northwest, some of the biggest beneficiaries of open skies will be American and Continental, while the agreement will eventually allow smaller players such as Reno Air, America West and Alaska Air to enter the Canadian market. 'Air Canada will hold its own, because it was prepared for open skies with its purchase of RJs and its marketing alliances with Continental and United. Canadian [Airlines International] essentially entered the two previously restricted markets of Chicago and New York. Apart from that they're relying on their codesharing with American where they'll benefit with American putting passengers on Canadian flights to Asia.'
Canadian has very little room to manoeuvre while it continues to struggle with its own internal problems. The airline reported a C$13.5 million (US$9.72 million) second quarter loss and now expects to lose C$35.4 million this year instead of a projected profit of C$52 million. Despite the financial setback, Canadian is confident it will be an aggressive player in the deregulated market. 'What we're trying to build under open skies is a North American network with American, flying anywhere in Canada to anywhere in the US, and not just point-to-point,' explains Don Casey, vice president of capacity planning at Canadian. 'One network, two airlines.'
That philosophy is strongly supported by partner American Airlines which is 'very optimistic' about the alliance's potential, according to Robert Britton, managing director of international planning at American. 'On June 19 we rolled out two city pairs. Now we're up to a dozen trans-border markets, we've begun to put the CP [Canadian International] code beyond US gateways, and we're pleased with the initial traffic growth.' Britton goes on to add that at the outset some trans-border routes will be serviced by American Eagle to stimulate traffic. These include Montreal-New York, Halifax-New York and Ottawa-New York.
Canadian was restricted to Los Angeles and San Francisco before open skies and has a lot of catching up to do. But Casey points out the airline will greatly benefit from its codesharing agreement with American. It has also added routes from Toronto to New York and Chicago, and from Vancouver to Chicago, and beginning in November, will offer nine flights a day between Toronto and Florida in conjunction with American. 'Our priorities are large markets with high points of sales used primarily by business travellers. The name of the game is a powerful North American network. Canada will be the main beneficiary of open skies, because with the cheaper Canadian dollar, we'll be able to attract more outbound US conventions,' he says.
While Canadian stands to gain, Casey claims Air Canada will be the big loser. 'Air Canada had 26 per cent of the Canada-US market and now faces competition in all its city pairs. Competition tends to go after the leader.' Naturally, Air Canada disagrees with that assessment, arguing that the US carriers will continue to build on their hubs, while it bypasses the hubs with better yields. 'When the US airline industry was deregulated, they couldn't add destinations fast enough and everyone joined in like it was the flavour of the month until there were a few casualties and some carriers decided to pull back,' points out Robert Milton, senior vice president of marketing and in-flight services.
He says Air Canada will not try to 'duke it out' with the much larger US carriers, but will 'out finesse' them by going after routes that are underserved. 'For example, Toronto-Atlanta was the biggest city pair in North America not previously served by non-stop service. That particular route is doing extremely well for us. We'll go into hubs if the O&D is big enough. We're going to St Louis and Minneapolis as a result.'
Air Canada is also planning to introduce service on smaller city pairs using commuter aircraft to stimulate growth. For example, it is using the Dash 8 between Ottawa and Newark and may eventually use the RJ and possibly a DC-9. It plans to use the RJ initially between Ottawa-Chicago, most likely switching later to the DC-9 or A320, and also sees the the RJ as an 'introductory' aircraft for new markets like Toronto-Minneapolis, which will begin in October. The new A319, with deliveries starting in December 1996, could later replace the RJ in such markets.
Even with new capacity outstripping demand, few are expecting a major fare war to ensue. What may happen instead is that different carriers will enter and exit the market during the first year until yields settle down. 'Apart from some introductory seat sales, there hasn't been a blood bath,' says John Wood, general manager British Airways/vice president USAir in Canada. 'I don't think you want to see carriers losing money on these new routes, because they'll begin to reduce service,' he adds. Besides, fares for travel between Canada and the US are already cheaper than US domestic fares, according to analyst Jacques Kavafian. 'Chicago to Atlanta is 50 per cent more expensive than Toronto to New York. And the price per mile between Boston and New York is C$1.03 compared to 55 Canadian cents between Toronto and New York.'
While Canadian carriers appear to be holding their own against their American counterparts, it will be two to three years before the definite winners and losers emerge. Meanwhile, overcapacity and low yields can be expected to continue for some time to come.
Source: Airline Business
