Opinion: In Canada’s airline industry, real competition means fewer competitors. Get used to it

A Sunwing Airlines aircraft parked at the Montréal–Trudeau International Airport.

By Fred Lazar

On Fathers’ Day, CBC asked me for an interview on “the loss of airlines in Canada in light of WestJet’s plans to wind down Sunwing .” I surmised they were concerned the loss of a competitor would lead to even higher prices for air travel .

I wasn’t able to do the interview. But if I had, this is what I would have said:

First, I would have pointed out that concern about losing airlines runs counter to CBC’s root-and-branch support for climate policies and a rapid transition to net zero. Adamant believers in climate change should be pleased with airline efforts to reduce capacity, increase prices and curtail the future growth of the industry. The more blood on the floor in the airline industry, the better for the environment — though not for consumers and the economy!

The industry supposedly is committed to developing alternative, sustainable fuels. But a non-carbon substitute for jet fuel is still a long way off. Hence, the demise of Sunwing, combined with the possible loss in the near future of one or more recent entrants, and the very slow post-COVID recovery by Air Canada and WestJet, means airfares will continue to rise and eventually these higher prices will curb demand. What could be more welcome for climate-believers? But maybe CBC has begun to realize the critical importance of the airline industry for both the Canadian and global economies — and of course for the union brothers and sisters who work in it.

Moving on from the public broadcaster’s confusion over what exactly it supports, I would have commented on competition, costs and prices in the airline industry. More entry just isn’t on. More total airline capacity likely would outstrip demand and reduce load factors. Lower load factors mean higher costs per revenue passenger as the fixed costs per flight are spread over fewer passengers. Thus, either fares would increase further, or one or more airlines would fail, or both.

How can an airline reduce its costs? There’s not much it can do to reduce ownership and aircraft maintenance costs, although maintenance companies may eventually use big data and AI to become a lot more efficient. And higher interest rates have increased the costs of ownership of aircraft.

Management costs are riper for the picking. Air Canada and WestJet could reduce their management levels and costs by at least 25 per cent and probably operate more effectively with better service for passengers. Airlines would like to go from two pilot crews to one pilot and a robot though regulations currently prevent them from doing so. The same goes for flight attendants. The airlines would also love to eliminate the costs of seniority, maybe by firing everybody and re-hiring them on fixed five-year contracts. One source of lower costs for new entrants has been the absence of seniority built into their labour costs. No need to comment on what CBC and CBC types think of that!

Ground handling costs could be reduced with more use of technology and common ownership of all ground handling equipment at each airport. Costs could also be cut — a lot — if airlines no longer accepted checked bags, though this would require vigorous enforcement of very strict limits on carry-ons.

Governments could help out by reducing taxes on jet fuel, and airlines could bring in competent people to develop hedging strategies against changing fuel costs. In the past, they have lost billions of dollars on their fuel hedges when fuel prices actually declined.

The federal government could reduce security taxes, navigation fees and so-called ground rents. And it could privatize airports and subject the fees they charge airlines to some form of regulation. Jean Chrétien, when he became prime minister, abandoned privatization solely because Brian Mulroney, his predecessor, had favoured it. As a result, Pearson Airport was stuck with around $800 million in debt to pay off the then-owners of Terminal 3 and fulfill Chrétien’s “vision.” The Liberals created not-for-profits instead, though several have in fact been very profitable.

Finally, I would have addressed the implicit concern about competition. Just over 40 years ago, I attended a meeting with the minister of transport to discuss deregulation. My position was simple: Go ahead and deregulate, but don’t expect any increase in the number of surviving airlines. I was the only one in the meeting who made this prediction. I had made similar predictions for the U.S. and Australia, and the evolution of the industry has proved me right. Given the the small size of the Canadian market and the critical importance of hub-and-spoke networks, there will never be room for many airlines.

I would have ended my interview with CBC by reminding them of the words of Mick Jagger and Keith Richards: “You can’t always get what you want.”

Fred Lazar is associate professor of economics at the Schulich School of Business, York University.