Entrepreneurial Flair: Canada’s domestic duopoly disruptor

Avatar for Frederick K. LarkinBy Frederick K. Larkin | August 17, 2021

Estimated reading time 17 minutes, seconds.

The ultra low-cost carrier (ULCC) business model features a la carte pricing. A customer pays only for a seat on a given flight. Additional charges for food, drink, luggage (checked and carry-on), in-flight entertainment, and advanced seat selection create ancillary revenues for the airline. ULCCs around the globe have been successful in attracting budget-minded consumers, who would otherwise use surface transportation or not travel at all.

Until recently, Canada has not had a stand-alone ULCC that targets visiting friends and relatives (VFR) traffic, as well as cost-conscious companies. Flair Airlines Ltd. of Edmonton, Alberta, is aggressively going after that market in an effort to become Canada’s leading discount carrier. Before examining its current operations and future prospects, it is worth briefly reviewing its history.

Flair Boeing 737 Max 8. Frederick K. Larkin Photo

Founded by J.N. (Jim) Rogers, Flair began operations in August 2005 with a 168-seat Boeing 727-200 out of Kelowna, British Columbia. A 727-200F freighter was soon added. The company targeted charter work for leisure travel, cargo, corporations, and provided ACMI (aircraft, crew, maintenance and insurance) services for other airlines. 

With the growing requirement for workers from across the country for oil sands production, Flair added a 156-seat Boeing 737-400 in early 2008. Two others replaced the 727s in 2009. During its first decade, the company developed an impressive list of customers across a range of industries that included leisure travel, natural resources, government, sports, and other airlines (Canadian North, Cubana).

In April 2015, NewLeaf Travel Company Inc. of Winnipeg, Manitoba, was created to bring low-fare air travel to the Canadian market. NewLeaf selected Flair to provide the flight operations, while it managed the marketing and sales efforts. NewLeaf flights began on July 25, 2016, however, its plan to serve 13 Canadian destinations proved to be too ambitious. 

Flair ended up purchasing NewLeaf’s assets, and the NewLeaf brand was replaced with that of Flair Airlines on July 27, 2017. By the end of 2017, it had a fleet of seven 737-400s. If it was to become a true ULCC, more efficient aircraft would be required. 

On Jan. 16, 2018, the company announced that Jim Rogers had sold his controlling interest to a new group of investors led by Jerry Presley, a successful entrepreneur from Delta, British Columbia, and Jim Scott, who became president and CEO. While the route network was expanded, the fleet was modernized with the addition of three 189-seat Boeing 737-800s and the head office shifted from Kelowna to Edmonton. 

A significant step in the company’s history took place on April 1, 2019, when 777 Partners LLC of Miami, Florida, took a 25 percent interest in the carrier. Steve Pasko, a co-founder and managing partner of that investment company, stated, “Despite having a strong market for ULCCs, Canada lags behind the rest of the world in this space.” As the COVID-19 pandemic wreaked havoc on the travel industry, the fleet was downsized to the trio of 737-800s. By September 2020, only Vancouver, Calgary, Edmonton, and Toronto were being served.

On Oct. 13, 2020, Flair announced that Jim Scott was retiring and that its new president and CEO would be Stephen Jones. Having been Air New Zealand’s chief network strategist and most recently the Deputy CEO of European ULCC Wizz Air, Jones was ideally suited to develop Flair into Canada’s leading discount airline. Two months later, Garth Lund arrived from Wizz Air to be Flair’s CCO.   

Flair started 2021 with a bang. On Jan. 27 it announced that it would be leasing 13 new Boeing 737 Max 8s from 777 Partners. The following month, Flair announced that it would be serving 20 Canadian destinations by August with 11 aircraft, including eight Max 8s. The fleet is expected to expand to 16 aircraft by mid-2022, with the arrival of five more Max 8s. In early July, Flair announced that it would begin service to the U.S. on Oct. 31.

This Is Today…

When Skies asked Jones about Flair’s growth potential, he said he believes the company “can build a significant business here.” Flair’s business plan is nicknamed “F50,” because it envisions 50 Boeing 737s in service within five years. That fleet could potentially generate annual revenues of $1.5 billion and produce impressive profits with strict adherence to the ULCC model. 

The key reason behind any ULCC’s success is its low cost strategy. Asked how the carrier expects to achieve an enviable and sustainable operating (EBIT) margin, Joe Lee (Flair’s CFO) told Skies: “New planes with maximum fuel efficiency, a relentless process of evaluating suppliers, fast turn times at airports, and low airfares that enhance load factors will all contribute to keeping costs low.”

When taking into account lease costs, fuel burn, and maintenance requirements, a 737 Max 8 is approximately eight percent less expensive than a similarly configured 189-seat 737-800. The company is looking to get an average daily utilization of 12.5 hours per aircraft, and is targeting a 30 minute turnaround time at the gate. Both of these metrics will likely require some time to achieve, as any carrier attempting such a steep growth trajectory tends to experience minor operational issues.

Another key feature of the ULCC model is the use of less expensive secondary airports near major markets. For Flair, the Abbotsford International Airport is an excellent example. That city’s 180,000 inhabitants are just 40 miles (65 kilometers) southeast of Vancouver. Its airport has proven to be a low cost operation and has attracted like-minded carriers. Flair will be basing two aircraft at YXX and operating non-stop service to/from Calgary, Edmonton, Montreal, Ottawa, and Toronto.

Since late May, Flair has added eight Boeing Max 8s to its fleet of three of 737-800s. Those 11 aircraft have required a substantial increase in the number of people to operate and maintain them. Last January, Flair opened an online portal for the recruitment of pilots. Within three weeks, some 900 had applied. Approximately half of its new pilots were employed by other Canadian carriers before the pandemic. The other half is comprised of Canadians who have returned home after spending years flying with major Asian and Middle Eastern airlines. As well, Flair’s cabin crew roster grew tenfold from April to August.  

Any successful enterprise has a corporate culture that allows the company to attract and retain talented people. “Culture is incredibly important to me,” said Jones. He believes that having the right people on the team and getting them to work together effectively is paramount to achieving success. Jones looks for individuals who are smart, have good interpersonal skills, are passionate about the company’s mission, and have a track record of accomplishments. In order to inform his team about the company’s latest developments, he produces a weekly newsletter that contains stories about what has been going right and, sometimes, what has being going wrong. A positive culture is necessary to be successful in the airline business. He noted, “We’re taking on some well resourced personnel, so it’s about having relentless energy for being up for the fight.”

Frederick K. Larkin Photo

An attribute of many successful enterprises is the ability of employees at all levels to participate in the company’s success. To that end, an employee share ownership program (ESOP) is being created. Jones believes that “hard working people should share in the value that is created.”

Business Model Review

Since Flair is a private company, its financial statements are not public. Such key metrics as RASM, CASM, cash flow — as well as debt and rental coverage and Enterprise Value/EBITDAR ratios — can’t be calculated by outside observers. While quantitative analysis can’t be performed, qualitative analysis can be, using the S.W.O.T. technique. Doing so with Flair provides the following insights:

Strengths:

Seasoned Management. Senior members of Flair’s team have successful careers within the ULCC environment. The president and the CCO both held senior titles at Wizz Air, one of the world’s most successful ULCCs.

Attractive Fleet. The Boeing 737 Max 8 is an efficient aircraft. The company has reportedly accessed its examples at very attractive lease rates, thanks to the pandemic and the resolved regulatory and operational issues that had kept the type grounded worldwide for 20 months. 

Timing. In order to survive the pandemic’s impact on travel demand, major Canadian airlines significantly reduced their seat capacity by grounding and retiring aircraft, reducing frequencies on routes and dropping destinations from their schedules. With the recovery of the economy, demand for capacity is expected to return.  Flair is moving to fill some of that space by significantly increasing the size of its footprint, in terms of seat capacity, routes, and frequencies. 

Weaknesses:

Low Profile. Being the newest entry in an extremely competitive market, the company is not yet well known. That is expected to change as its marketing programs on social media gain momentum. 

Financial Resources. As a private company, it does not have the same ready access to debt, equity, or leases as some of its longer established competitors do. This could be an important factor as the company works to meet its growth targets over the next several years. 

Human Resources. As the airline industry spools up, employees on furlough will be recalled. There will also be increased demand for skilled flight crew and operational managers. Attracting and retaining talented personnel might prove to be a challenge, if a healthy corporate culture is not cultivated and maintained.

Opportunities:

Domestic Market Penetration. Canada has had an airline duopoly for 60 years. First it was Air Canada vs. Canadian Pacific, then Air Canada vs. Canadian Airlines, and now it is Air Canada vs. WestJet. Others have been talking about creating a domestic ULCC to capture VFR traffic, but Flair has been the first independent carrier to do so.    

Rebounding Demand. As the pandemic fears subside with increased vaccination rates and reduced travel restrictions, demand for leisure travel is expected to rebound smartly. As the pie increases, there will be an opportunity for all carriers to generate traffic growth. Starting from a small base, Flair should be able to achieve impressive numbers.    

International Markets. As foreign travel restrictions are lifted, demand for attractively-priced flights to the U.S., Mexico, and the Caribbean is expected to increase significantly.          

Threats:

Domestic Duopoly. The two major carriers can be expected to protect their respective market shares with discounted pricing, especially WestJet with its Swoop subsidiary. Given its low fares, Flair is going after consumers that have not travelled much in the past or have used ground transportation such as automobiles, buses, and trains. The company believes that a large market of new travelers has been waiting for the opportunity to fly at an affordable price. 

Economic Cycle. Leisure travel is a discretionary expense for most individuals. Weaker economic conditions tend to dampen the public’s desire to travel. 

Foreign Exchange Rate. Given that aircraft, their components/rotables, and lease rates are priced in U.S. currency, a significantly weaker Canadian dollar (less than US$0.70) could meaningfully impact financial performance. 

Final Words

While the Covid-19 pandemic has damaged the global airline industry, it has provided opportunities for Flair. The availability of talented employees, brand new efficient aircraft, and access to key airports would have been limited during normal conditions. The company’s “F50” business plan represents the boldest entrepreneurial effort within the Canadian airline industry in over a decade. With its growing fleet, expanding route map, operationally savvy leadership, and competitive domestic seat capacity down significantly from pre-pandemic levels, Flair Airlines’ timing looks to be propitious with air traffic starting to recover.

Bill Hardy, Flair’s chairman, summed up the situation succinctly when he told Skies, “We have positioned Flair to continue with success after success. We have already shown that we have the ability to survive. Now we have the people, tools, and opportunity to thrive.”

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