By Brent Jang | September 5, 2014 Estimated reading time 6 minutes, 51 seconds.
Jet Naked wants to wade into the ultra low-cost carrier market, believing that two ULCCs won’t be a crowd when it comes to luring budget-minded travellers in Canada.
Calgary-based Jet Naked, headed by WestJet Airlines Ltd. co-founder Tim Morgan, is aiming to join Canada Jetlines Ltd. in offering discount fares to Canadians.
Morgan is the founder of charter airline Enerjet, which specializes in flying employees to and from Alberta’s oil patch. He is serving as Jet Naked’s executive chairman.
While Vancouver-based Jetlines has set its sights on launching in the spring of 2015, Jet Naked will be doing its best to start operations just before its fledgling rival does.
According to a Jet Naked document sent by Octagon Capital Corp. to prospective investors, “Enerjet is a fully Transport Canada-certified airline, giving the Jet Naked team an excellent platform to establish first-mover advantage in the Canadian ULCC market.”
Launching won’t be an easy task for either budding ULCC. Jetlines, which originally sought to sell tickets for the summer of 2014, has already delayed its planned first commercial flight by roughly nine months. In early September, Inovent Capital Inc. announced that Jetlines had successfully completed its bridge financing, raising gross proceeds of $896,194.
Jet Naked and Jetlines are determined to avoid the missteps of failed carriers in the past. In the case of Jetsgo Corp., the Montreal-based discount carrier tried to go head-to-head on major routes against Air Canada and WestJet.
But Jetsgo relied on a fleet of aging 100-seat Fokker 100s and 160-seat Boeing MD-83s, which meant having higher fuel and maintenance bills than carriers with newer planes.
Jetsgo, whose marketing campaign told consumers to “pay a little, fly a lot,” grew a decade ago to temporarily become Canada’s third-largest airline with 29 jets. The company abruptly halted operations in 2005 as it racked up millions of dollars in liabilities and couldn’t generate enough revenue from ticket sales.
By contrast, Jet Naked and Jetlines intend to order planes that are newer than Jetsgo ever had in its fleet. Jet Naked plans to deploy relatively recent Boeing 737s, building on Enerjet’s three Boeing 737-700NGs. Jetlines expects to line up Airbus A319s and A320s that are less than a decade old.
Both upstarts say they have learned from the past and will concentrate on point-to-point flying on overlooked or underserved routes, avoiding the stranglehold enjoyed by Air Canada and WestJet on major city pairs such as Calgary-Toronto. The goal of the Canadian ULCCs will be to focus initially on the domestic market, but their no-frills offerings will include transborder flights to vacation destinations in the United States and Mexico during the winter flying season.
Jet Naked argues that there is an opening for a smartly run ULCC because Air Canada and WestJet have become too comfortable with their national duopoly.
“The high-fare environment in Canada leaves room for market stimulation and profitable growth by a lower-cost competitor,” according to the Octagon document sent to prospective Jet Naked investors. “Jet Naked will focus on online ticket sales to customers through its website and fee-based call centre.”
Industry experts note that Canada presents challenges to any newcomer because the country only has a limited number of major cities, and those centres are geographically far apart.
Morgan toyed with the idea of starting a tour operator back in 2007, targeting “secondary airports” located in smaller communities. But through Enerjet, he ended up focusing instead on flights that cater to the energy sector.
WestJet has been expanding regional service for consumers, notably through its Encore division that was launched in 2013 with Bombardier Q400 turboprops. Air Canada also has been stepping up regional flights, including those operated by affiliates such as Jazz.
Chris Murray, an analyst at AltaCorp Capital, said he wonders whether it will be much of an advantage, if any, for the new entrants to operate jets instead of turboprops, especially on short-haul flights.
“The ultra low-cost carriers will have a difficult time penetrating anything significant in the Canadian market,” he said in an interview. “Canada’s aviation market is still staying fairly rational and the consumer demand is good.”
Jet Naked’s strategy is to steadily ramp up so that it has 24 planes in its fleet three years after launching, while Jetlines’ goal is to have 16 planes by the spring of 2017.
Obtaining working capital to keep expansion plans on track will be a challenge, Murray cautioned.
“You need working capital and you have to write cheques for the fuel and make leasing payments and pay other bills,” he said.
WestJet won over customers when it launched in 1996 with Boeing 737 jets, luring passengers away from Air Canada and Canadian Airlines International Ltd. As it turned out, WestJet positioned itself shrewdly as Canadian Airlines faltered financially, merging with Air Canada in 2000.
Jet Naked is touting Morgan’s experience as a WestJet co-founder as one of its advantages. Other key executives at Jet Naked include former Spirit Airlines chief financial officer David Lancelot and former Pinnacle Airlines CFO Curt Berchtold.
Rick Erickson, managing director of aviation consulting firm RP Erickson & Associates, said any new entrant must quickly attain critical mass to stand any chance of success. So far, it appears that Jet Naked and Jetlines will begin slowly and gradually build up; but the go-slow approach will be risky, he said.
“For an ultra low-cost carrier to be successful, in my view, it should be a big bang and the entrant would need at least 12 to 15 planes and start almost everything all at once,” commented Erickson.
