MIAMI — There is a new ultra-low cost carrier (ULCC) on the block up in Canada. Based out of Winnipeg, NewLeaf Travel joins Canada Jetlines and Jet Naked (in some sense a spiritual successor to Spirit’s brashness given the origin of certain members of its management team) among the competing players aiming to find a niche as the primary ULCC competitor to Air Canada, WestJet, and (to some extent) Porter in the concentrated Canadian air travel market.

The NewLeaf strategy is (unfortunately) reminiscent of PEOPLExpress


Several key elements of NewLeaf’s strategy bear an uncanny resemblance to PEOPLExpress, the American ULCC startup that thought, for some inexplicable reason, that basing an airline in Newport News, Virginia was a good idea.

From the flights operated by a third party carrier (charter airline Flair Airlines in NewLeaf’s case) to the less-than-optimal choice of base (Hamilton Airport), NewLeaf appears to be making many initial strategic mistakes that PEOPLExpress did.

The key difference is that NewLeaf is launching into an environment where oil costs ~$35/barrel. Meanwhile, PEOPLExpress launched when oil costs were nearly $100/barrel. That makes NewLeaf’s initial fleet of aged Boeing 737-400s much more tenable, and gives NewLeaf some runway to use a trial-and-error approach to find the route network. While they may initially look like the next PEOPLExpress, the forgiving operating environment in aviation right now might just enable them to become the Canadian analog to Allegiant Air instead.

The Canadian market is in desperate need of some competition


Like global aerospace, the Canadian air travel market is a duopoly. Former flag carrier Air Canada is an international behemoth with a hub or focus city at pretty much every major airport across the country. Their largest competitor, WestJet, began its life as a plucky ULCC in the western part of the country focused exclusively on leisure passengers. But WestJet, just like Southwest and JetBlue in the U.S., has evolved into a hybrid between a legacy and low cost carrier (LCC) with a nationwide route network and a product that caters to business travelers.According to a CAPA analysis from June, both carriers have a staggering 92% share of domestic capacity, and that has translated into some of the highest costs for air travel in the world.

Part of Air Canada's widebody fleet at Vancouver. (Credits: Air Canada)
Part of Air Canada’s widebody fleet at Vancouver. (Credits: Air Canada)

Toronto City-based Porter Airlines is kind of an oddball among large Canadian carriers with its fleet of Q400 turboprops and privileged position at a close in airport for Toronto’s largest metropolitan area creating a (literal and figurative economic) moat that drives sustainability.

Outside of the big two and Porter, the only other Canadian airlines of any scale are Air Transat and Sunwing Airlines, blended charter and scheduled airlines that primarily operate flights to seasonal vacation destinations in the United States, the Caribbean, and Europe. While both of these carriers bring some degree of affordability to vacation packages, they don’t contribute much in terms of viable domestic competition.

There are a also a variety of small carriers such as Air Inuit or Canadian North that provide service in niche regions or with divergent business models. The net result of all of this is that air fares in Canada are very expensive. In fact, fares actually rose in the first quarter of 2015 despite the drop in oil prices. Theoretically, that would make Canada a market ripe for competition from the ULCC business model.

The three new ULCC entrants are facing an uphill battle


However, in practice, it will be hard for any of the three prospective ULCCs to really make a dent. Due to its high cost of operation (not at all helped by the excessive taxation heaped onto aviation), Canada is a market that requires a heavy degree of capitalization before launch. In fact funding requirements have delayed the formal launch of both Canada Jetlines, which is seeking  CAD$50 million (equivalent to USD$38.5 million) in funding, while Jet Naked, is also in need of CAD30-50 million (USD$23.9-38.5 million) to get off the ground.

Once the three carriers make it into the air, they will face a dogged fight with both Air Canada and WestJet. As recent events south of the border have shown, the latest technology and the falling price of oil have created an environment where legacy and network carriers can compete successfully with ULCCs through the creation of stripped down fare classes such as Delta’s Basic Economy. WestJet and Air Canada can be expected to do the same, and as a result these new carriers will all have little margin for error in their operations and business model, that is if they make it into the skies at all.