Competition is in the air along B.C.’s northern megaproject frontier. And it’s heating up considerably.
The regional airline fight for market share is backdropped with the promise of multibillions generated by everything from new mines and pipeline projects to liquefied natural gas exports.
As the quickest way to deliver the people needed to survey, kick-start and develop northern megaprojects, aircraft in B.C. are a key transportation link.
But long-standing regional carriers are increasingly feeling the competitive heat from Canada’s two major airlines.
Smaller newcomers are also looking north, and the megaproject billions bonanza outlook has suffered from recent oil price volatility and the drop in the value of the Canadian dollar compared with its U.S. counterpart.
The sum total for Hawkair president Jay Dilley: “the most intense competition the region has ever been through in the airline industry.”
Dilley is an old hand at northern-style Canadian regional airline competition.
Prior to joining Terrace-based Hawkair in July 2013, Dilley spent eight years in Yellowknife, Northwest Territories, working for Summit Air and Arctic Sunwest Charters.
Hawkair’s business bread and butter is 37- to 50-passenger turboprop plane service linking such northern centres as Prince Rupert, Smithers and Dawson Creek.
About 30% of its business is charter work, much of which is focused on flying engineers and other workers in and out of remote areas.
Despite the north’s volatile economy, Hawkair’s full-time equivalent staff has grown to 100 from 77 over the past five years.
But competition continues to intensify, especially in the Terrace-Kitimat area as the domestic battle for market share escalates between Air Canada (TSX:AC) and WestJet (TSX:WJA).
What makes economic sense on a Vancouver-to-Terrace route for national carriers doesn’t always add up for their regional counterparts, especially when, as Dilley pointed out, between $50 and $60 of the ticket price for a Hawkair flight goes to cover airport, security and assorted government agency fees and levies.
“So if you’re charging $100 on a ticket, that leaves you only $50 to $40, and now you’ve got to cover off fuel, your insurance, pay for the aircraft … pay for maintenance,” he said.
That fiscal reality, he said, is hollowing out the market for local airlines.
“In terms of competitive expectations, we expect to see this area being saturated and returning subnormal profits over the next 18 to 24 months.”
Terrace’s Northwest Regional Airport (YXT) is in the heart of the northern transportation boom for local airlines.
According to YXT manager Carman Hendry, annual passenger count has jumped 50% per year over the past three years. It totalled 253,000 in the last 12 months.
Much of that increase, Hendry said, has been driven by mining construction, BC Hydro’s $750 million Northwest Transmission Line, site work for proposed LNG plants and gas pipelines, Rio Tinto Alcan’s (NYSE:RTP) $4 billion Kitimat aluminum smelter modernization project and the recently approved $8.8 billion Site C dam.
Terrace is not alone in reaping northern megaproject benefits.
In 2009, Prince George International Airport(YXS) lost approximately $350,000 on operating revenue of roughly $4.6 million; its passenger count following the 2008 U.S. housing market collapse dropped to 376,000 from 417,000 the previous year. Numbers for its most recent fiscal year have yet to be finalized, but Prince George Airport Authority president John Gibson said the north-central region’s biggest airport is expected to be $800,000 ahead of the game on projected revenue of $7.2 million and a passenger count of 446,000.
“In northern B.C. we rise and fall on the [resource] economy,” Gibson said. “We are super heavily reliant on the forest industry, and when the U.S. housing market went south, so did our traffic.”
This year, in addition to megaproject activity, YXS had a significant business boost from Prince George hosting the Canada Winter Games during the last two weeks of February.
Pacific Coastal Airlines (PCA) is another regional player. In January, the Richmond-headquartered company added new scheduled flights between Kelowna and Trail and between Victoria (YYJ) and Prince George.
With a fleet of 25 aircraft ranging from five-passenger float planes up to 30-passenger Saab 340s, PCA now flies to more than 65 destinations in B.C., said Spencer Smith, the company’s vice-president of commercial services.
Over the past five years, it has added approximately 60 employees to a roster that now totals 310.
Smith said that much of PCA’s charter work has shifted from summer servicing of fly-in sport fishing lodges along B.C.’s coast to corporate charter work related to the resource sector.
But regional flyers like PCA are in tough against the big boys, especially when it comes to marketing and brand leverage.
“In the smaller communities we service people know who we are, [but] we don’t have the type of marketing dollars that others might have to make our name front and centre. … In markets like Vancouver and Victoria, it’s hard to be recognized.”
WestJet’s Encore and Air Canada’s Jazz services focusing on smaller 74- and 78-seat aircraft are increasing their presence in regional markets formerly dominated by local airlines.
WestJet, which is committed to buying 15 Q400 NextGen 80-passenger aircraft from Bombardier (TSX:BBD.A) between 2015 and 2016, started its Encore services to Terrace and Fort St. John in 2013. Company spokesman Robert Palmersaid that WestJet will launch a new Calgary-to-Terrace link in May to service demand from workers commuting to the north.
Meanwhile Air Canada, according to the airline’s senior vice-president of regional markets, has increased its northern B.C. capacity by more than 30% overall and more than 50% on its Fort St. John, Prince George and Terrace routes between 2011 and 2014.
Kevin Howlett said Air Canada will add a new daily, year-round Air Canada Express service between Terrace/Kitimat and Calgary on June 1 “due to the growing business market.”
For regional carriers like Hawkair, battling with a competitor like WestJet that’s 100 times its size is a major challenge.
“They’re causing, let’s call it, ‘a disruption’ for the smaller guys … where Terrace was pretty much locked up by Hawkair and Central Mountain Air (CMA), so there is a little damage there,” Gibson said
Dilley added that he’s big on competition and open markets, but the contribution to local economies from smaller regional airlines is often overlooked.
“If you’re looking to build a sustainable balanced economy, there should be some consideration given to the local benefits that an airline like ourselves or any other sort of industry might play in the long-term economic health of a region because we have been there, we are going to stay there, we are headquartered in the region, we employ an absolute ton of people in the north.”
Palmer said WestJet’s entry into markets, especially those serviced by a single carrier, “traditionally lowers airfares by between 30% and 50% and raises passenger traffic by as much as 70%.”
But he added, “We don’t slice the pie into smaller pieces; rather, we have proven time and again over our 19-year history that we stimulate markets and increase traffic.”
Other smaller players are also heading north.
For example, Richmond-based Canada Jetlines Ltd. announced plans in late 2013 to launch a low-cost, no-frills airline servicing Western Canada and offering fares that on average would be 40% to 50% lower than those charged by Air Canada.
Company president David Solloway estimated that Canada Jetlines still needs another $50 million to get its initial fleet of eight Boeing (Nasdaq:BA) 737 jets off the ground. He added, however, that it remains on track to begin service in the summer.
Solloway declined to provide specifics on which cities the company’s direct flight service would target first, but he said opportunities abound in Canada for a low-fare point-to-point airline because so many airports in the country are “completely unserved or underserved.”
“Prince George, for example, there are no jets there anymore. It’s all turboprop or propeller [service].”
Other underserved northern B.C. airports, according to Solloway, include Prince Rupert and Fort St. John.
“And with the potential megaboom in B.C., which looks to us very positive, there is another huge opportunity.”
Other factors threatening regional airspace buoyancy include oil’s steep per-barrel price drop over the past seven months from US$107 to less than US$50, and the parallel erosion of the Canadian dollar versus its U.S. counterpart.
The former could further delay or permanently mothball LNG projects and intensify the battle for market share in northern B.C.
While lower oil prices provide some operational relief for airlines in the form of cheaper fuel, the corresponding drop in the value of the Canadian dollar more than offsets any savings on that front.
“There’s an inverse relationship between oil prices and the Canada-U.S. exchange rate,” Dilley said. “As the [oil] price goes down, we’ve also got our Canadian dollar going down. All of our aircraft leases are paid in U.S. dollars; our maintenance reserves – paying for [aircraft] parts, etc. – that’s all in U.S. dollars, so you get a bit of a bump on one side, but you really get hammered on the U.S. dollar side.”
Richmond-based Helijet, best known for its Vancouver/ Victoria harbour-to-harbour commuter helicopter service, proposed a year-round heliport facility for Kitimat late last year to service LNG developments and other area megaprojects. A final decision on the Kitimat heliport has yet to be made.
Company president and CEO Danny Sitnam said in an email that Helijet continues to assess the business merits and economics of the year-round heliport as the company awaits final investment decision announcements from the main LNG project proponents.
Not all regional airlines are seeing significant business upticks.
“There’s lots of hype out there,” said Central Mountain Air owner Douglas McCrea, “but at the end of the day it hasn’t translated into actual growth on our side of the coin.”
CMA’s 17-plane fleet of 18- to 50-seat aircraft provides scheduled and charter work throughout northern B.C. and Alberta. Most of the Smithers-based airline’s charter work services Alberta’s oil and gas industry.
The recent downturn in the oilpatch is having a knock-on effect for companies that service that sector. McCrea’s outlook is therefore tempered with northern skepticism.
“I don’t think there has ever been a for-sure [on the projects]; we’re pretty used to that up here in the north. We’ll believe it when we see it.”
