Why are so many airlines going bankrupt? (YouTube video and opinion)
“This video shows that competition continues to kill off weak players in the European aviation market, but it also makes Canadians ask, where is the domestic competition here in Canada?”
Canada 3000, JetsGo, SkyService, Zip, Zoom Airlines. What do these companies have in common? They are former Canadian airlines that went out of business for one reason or another. The airline industry is capital intensive which causes many start-up airlines to fail, especially in Canada, where there are further barriers to success.
One of my favourite Youtubers, Wendover Productions, released a fascinating video on the recent demise of airlines, including Thomas Cook, Air Berlin and WOW Air.
This video outlines the demise of these airlines and explains why airlines frequently fail in September and October, including 8 of the 9 airlines discussed in the video.
Airline passengers per month - Europe (pink) vs NorthAmerica (green) (Wendover Productions 2019)
As you can see in this graph, European airlines (monthly passengers in pink) has a large amount of seasonality to it, passenger loads are 50% higher in the summer. This makes sense, for example, Sweden and France have weeks in the summer where the country is effectively “shut down” In North American, airlines (monthly passengers in green) have less seasonality as there is more business travel and less holiday time for workers.
Wendover’s theory is that the airlines shut down in the autumn because their capital heavy companies (they need a lot of cash to pay employees, pay for airline fuel etc.) don’t have as many people buying tickets during this time, therefore they’re more likely to run out of cash.
So how does the theory stand up for Canadian airlines?
Zoom Airlines - August 28th 2008
Zip Airlines - September 8th 2004
Sky Service - March 31, 2010
JetsGo - March 11th, 2005
Canada 3000 - November 8th, 2001
Interestingly enough, two airlines went out of business at the end of summer, and two airlines went out of business after collecting cash from the popular March break/spring break travel period in Canada. Canada 3000 also went out of business in the fall, but that also relates to the tremendous volatility that occurred after the September 11th Terrorist attacks.
Airlines Struggles in Canada
This leads me to a discussion about why there are so few successful airlines in Canada. In the past 20 years, only Porter Airlines has been successful starting up in their niche Toronto market. There are three main reasons why Canadian airlines struggle to get off the ground and our airfares cost more than many other countries:
Geography - Canada is a large country with the population spread out over a horizontal line near the US border. This long and skinny population means that demand is less than places like the US and costs to travel several hours in the air cause prices to rise. It’s much cheaper to fly in Australia, but over 80 percent of the population lives on the East coast and over 50% live in the urban areas of Brisbane, Melbourne and Sydney which are no more than a 2 hour flight between each other, while also too far to drive to one another.
Ownership - Prior to 2019 Canadian airlines must at least 75% owned by Canadians (Note: 75% of voting interests). Although recent rules amended this to only 51% Canadian ownership, new Canadian airlines are limited to raise most of their financial capital in Canada, which makes it harder to build airlines quickly as their is a limited capital base. Domestic airlines in Australia have no foriegn ownership limits, allowing more capital to flow into the market. Smaller countries, like Costa Rica and Chile have opened up their borders to foriegn capital which has allowed their airline industry to flurish.
Airport Taxes - Canadian airports have significant fees which hold back low cost carriers and bite into potential profits. This Air Canada round trip flight from Toronto to Montreal flight in the middle of winter is $276, of which, over $100 goes to taxes, including $55 to airport improvement fees.
A similar flight booked well in advance between Melbourne and Sydney consists of only $35 dollars of taxes, considerably adding to the carriers bottom line and reducing overall flight costs.
Bottom Line.
This video shows that competition continues to kill off weak players in the European aviation market, but it also makes Canadians ask, where is the domestic competition here in Canada?
What do you think about this video and Canadian aviation?
