Duncan Dee is a former chief operating officer at Air Canada who was appointed as the air transportation lead on the panel that reviewed the Canada Transportation Act in 2016.
It would be easy to dismiss Lynx Air’s demise as just another interment in the crowded Canadian airline graveyard. After all, that cemetery is full of failed airlines like Greyhound Air, Roots Air and Zoom. Canada, unfortunately, is infertile ground for airline startups, especially low-cost and ultralow-cost carriers (ULCC). With Lynx’s demise, Canada continues to be the land that the global ULCC phenomenon largely ignores.
But Lynx Air was no run-of-the-mill Canadian airline startup. Lynx grew out of Enerjet, founded in 2006 by experienced airline managers, including Tim Morgan, a WestJet founder. Enerjet initially focused on charters ferrying workers to the oil patch. By 2018, Enerjet caught the attention of the renowned American investor Bill Franke and Indigo Partners, who are no strangers to the airline game: Their airline investments include Frontier and Spirit Airlines in the U.S., Hungary’s Wizz Air, Mexico’s Volaris and Chile’s JetSmart. In short, the team behind Lynx were not a collection of wide-eyed aviation enthusiasts attracted to the romance of airplanes. They are serious players who have long histories building ULCCs worldwide.
The death of an airline is usually a traumatic affair. Images of stranded travellers, airport flight screens screaming “cancelled” and grounded aircraft make for dramatic visuals. In Canada, that trauma is often followed by laments about the lack of competition, high airfares and poor service.
So why do so many Canadian airlines fail and, in particular, how could Lynx Air, with its impressive pedigree, fail so abruptly after just two years in business?
Two key reasons, both of them structural, come to mind.
The first is Canada’s foreign ownership and control restrictions, which greatly limit an airline’s ability to raise capital. In a highly seasonal aviation market like Canada’s, most airlines, but especially startups, thrive during the peak travel periods such as the summer (from June to Labour Day), Christmas (for around five weeks in December and January), and spring break (from the end of February to the beginning of April). Outside those periods, many airlines, especially startups, focus on surviving until the next peak arrives. In a market where the peaks are very short while the troughs are very long, access to operating capital is key.
In 2018, the federal government did increase foreign ownership limits from 25 per cent to 49 per cent for Canadian airlines. But, in a remarkably Canadian poison pill, it maintained a 25-per-cent individual foreign ownership cap – meaning that no single owner or group of affiliated owners can own more than 25 per cent of an airline.
In addition to those hard limits, the government also imposes an additional test of Canadian “control in fact.” That test doesn’t just require an airline to be majority-owned by Canadians – it also effectively means that no foreign owners can exert their influence on any key decisions over the objections of Canadian shareholders or managers. Other countries have less onerous regimes, and in an age of global airline alliances, restrictions such as these do little to maintain Canadian sovereignty while artificially limiting access to capital.
The second reason is the collection of taxes, fees and charges that the federal government imposes as part of its “user pay” model for aviation. While the rationale that those who fly should exclusively pay the full costs of aviation is laudable, successive Canadian governments continue to ignore the tremendous economic benefits that a dynamic aviation sector creates. While other countries choose to invest in the infrastructure that keeps airplanes flying, Canada passes the bulk of those costs and more onto air travellers directly.
According to a recent Montreal Economic Institute study, the result is that an average of 35 per cent of the cost of a Canadian air ticket consists of charges such as airport-improvement, air-navigation and security fees. While the fees affect all airlines negatively, the perverse impact of these charges is that the lower the base airline fare, the higher the percentage these fixed fees represent. For ULCCs like Lynx, these fees leave them unable to stimulate new traffic using bargain-basement fares, a hallmark of ULCCs worldwide. So instead of attracting new fliers or infrequent fliers as ULCCs do elsewhere, Canadian ULCCs are forced to compete almost exclusively against the established incumbent carriers with their deeper pockets, more extensive route networks, addictive frequent flier programs and credit-card tie-ins.
Lynx’s demise should serve as a reminder that the competitive and operating landscape in Canadian aviation is dictated by government policies. Whether intentionally or not, Canada has priced itself out of low-cost air travel. Until those policies change, ULCCs will continue to fly past Canada.