Nunatsiaq News
EDITORIAL: Nunavut August 01, 2018 - 2:30 pm

Nunavut’s failing airlines

"There is no one who matters less to northern airlines than the individual air traveller who uses his or her own money to pay"

JIM BELL
Nunavut is too small a market to support two competing airlines. But, to protect consumers, a single, dominant carrier should be accompanied by a credible system of price regulation. (FILE PHOTO)
Nunavut is too small a market to support two competing airlines. But, to protect consumers, a single, dominant carrier should be accompanied by a credible system of price regulation. (FILE PHOTO)

This editorial was originally published in November 2016. We’ve decided to share it with our readers once again, in light of the new merger talks between First Air and Canadian North.

There’s no doubt about it. The people of Nunavut hate their airlines with a venomous passion.

With the possible exception of the two territorial retail chains, no business group generates more resentment and hostility. In Nunavut, the people love their airlines about as well as a lake trout loves a lamprey eel.

This animosity existed long before Canadian North and First Air began fumbling their way in and out of talks in 2014 aimed at merging their money-losing operations, a process that would—in effect—have created an unregulated airline monopoly throughout most of Nunavut and much of the Northwest Territories.

But that, and the real monopoly they created in 2015 through a series of codeshare agreements that included Calm Air, intensified public distrust. Their executives pretended codeshare wasn’t simply another way of creating the monopoly they failed to create by merging, but they fooled no one.

The ensuing furor, inflamed by tales of stranded medical travel patients and botched air cargo shipments, spilled into Iqaluit City Council, onto the agendas of Nunavut’s regional Inuit associations and onto the floor of the Nunavut legislature.

Those complaints, to no one’s surprise, have now ended up at the federal Competition Bureau. And to everyone’s delight, the Competition Bureau has deemed those complaints credible enough to warrant an investigation.

When this made the news earlier this month, First Air and Canadian North suddenly found their respective brands associated with such septic terms as “predatory pricing” and “alleged anti-competitive conduct.” With big contracts coming up for renewal, such as medical travel, that’s not good for business.

So it’s not such a great surprise that First Air chose to stick a knife into Canadian North’s back last week: a unilateral withdrawal from codeshare, a move in which First Air has summarily booted its erstwhile buddy back into the dark cold night.

Consider, for a moment, the veiled insult that First Air boss Brock Friesen threw at Canadian North within the company’s announcement: “our customers have told us that they strongly prefer to fly First Air on its own.” In other words, First Air believes Canadian North needs codeshare far more than First Air needs it.

So will this purported return to competition create some relief for Nunavut’s unhappy air travellers and air freight customers?

We’re not experts, but as far as we can tell, that’s unlikely. There is no one who matters less to northern airlines than the individual air traveller who uses his or her own money to pay for plane tickets or air freight shipments.

In Nunavut, when airlines “compete,” it’s not the individual consumer’s business they’re competing for. The customers who matter most to them are governments and large businesses.

One of the biggest contracts they compete for is medical travel, under which the Government of Nunavut’s health department buys tickets for more than 30,000 medical trips each year.

That’s the contract most likely to determine how many planes fly in and out of each community and how often. Other big contracts include the freight deals that each airline negotiates with companies like North West Co. and Arctic Co-ops Ltd., whose food freight costs, are, of course, partially subsidized by Nutrition North Canada.

These big players—government and business—have learned how to play the two airlines against each other, striking good prices for themselves that have left the airlines with shrinking revenues and balance sheets written mostly in red ink. In the case of medical travel, contract requirements force airlines, in many cases, to fly in and out of communities at a loss.

This form of competition may deliver benefits to government and large business in the form of cost savings—but it doesn’t do much to reduce costs for you. And right now, none of the players, including government, care much about that.

The airlines, however, did get one thing right and that’s the idea that only a monopoly can survive financially in northern Canada’s small, fragile airline market.

Nunavut, even combined with adjacent regions in northern Canada, is too small a market to support two competing airlines. Although we’ll never get access to their privately-held financial statements, Canadian North and First Air, by their own admission, have lost money, year after year after year. For them, forming a monopoly was the right answer.

But there’s one big problem. Since the early 1990s, Canada’s system for regulating airlines hasn’t offered much price protection to consumers. It’s a system built on the assumption that competition, not regulation, is enough to protect consumers.

In northern Canada, this deregulated system has failed. Without effective, trustworthy price regulation, such as that imposed on cable TV, telecom providers and power utilities, northern consumers will never accept an airline monopoly.

This means a new policy solution for northern Canada. First, encourage the emergence of a single dominant carrier. Second, ensure it operates under a credible system of price regulation.

Once that’s done, the federal government can then ponder a type of policy that’s common in many other places, including Alaska, Australia and Europe, but not practiced in Canada: subsidies for high-cost, low volume airline routes in remote regions.

In today’s climate, none of this is likely to happen. Are there better ideas? We don’t know. But one thing’s certain. The status quo is a failed option. JB

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(14) Comments:

#1. Posted by August Igloo on August 01, 2018

What can you do except fine the airlines. 

Keep in mind that true competition is not possible, because of vigorous airline rules. 

People have to think on long term basis.  Many people bring up dollar store junk that will be worthy of keep for 5 yrs.  Add to this bad behaviour, the trade wars that are coming on.  Some things are going to cost more for sure. 

We are thankful that the competition bureau is taking its’ responsibility serious, but for the northerners it will remain the dark and stormy night for many more years.

#2. Posted by Chris Top on August 01, 2018

Did you know the current cost for a return ticket from
Yellowknife to Ulukhaktok (Holman Island, NWT)
is…..-+$4300.00

#3. Posted by Mike in YK on August 02, 2018

#2, one airline on that route eh? That same airline was charging $1000 return YK-HayRiver, (122 miles) as the sole airline on that route until a small local airline announced service with a small 9 seat King Air. 3 days later the big airline dropped their return fare to $500.

#4. Posted by Putuguk on August 02, 2018

We need more accidents, hamburger disease, TB, whatever ailment of any kind. More food insecurity too.

More patients, more imported food and booze - will mean better routes, more flights, more revenue, higher budgets - lead to stable, profitable airlines in Nunavut.

Based on government contracting practices, having healthy and independent people well served by airlines is a contradictory statement.

If we cannot have roads, people migrating towards centers of real economic activity, high paying jobs paying full cost fares, this is what it will take.

Unhealthy dependence is our industry. The government and airlines are fully invested in this line of thinking. Our transportation system reflects this.

Calling for additional airline subsidies just belabor these points.

#5. Posted by Flyer on August 02, 2018

I am really not looking forward to the monopoly, it was so bad the last time with codeshare, I can’t imagine how crappy it will be when they become one company.

#6. Posted by The Old Trapper Pt 1 on August 02, 2018

Jim your main points are valid;
The north is too small for a competitive airline market, and the GN has exacerbated this problem through contracts (medical & business travel) that often require airlines to operate some (many) markets at a loss. This is also true of the two large freight users (Northern & ACL) who pit one airline against the other. Other businesses do this as well, and the RIAs are not innocent in this either.

Add in that air service is an essential service for all communities and it is no wonder that we are where we are now, with only one airline on the horizon.

The answer is not an unregulated monopoly (no accountability) , or re-regulation of the northern market, but you are correct that the answer is to go to one airline.

It’s clear that the federal government will not re-regulate the market, and the GN is part of the problem, when it should be looking for solutions.

So what is the answer?

....2

#7. Posted by The Old Trapper Pt 2 on August 02, 2018

Part 2

It’s clear that one airline is the only sensible solution as it would give rational service levels, “fair” pricing, and a reliable return on investment allowing for modernization in a capital intensive business.

How to get there from here. First Air and Canadian North should merge, this brings Makivik and IDC together. The 3 RIAs need to take a stake in the merged entity. The merged airline needs to approach Exchange Income and acquire Calm Air. This would bring about one airline large enough to get economies of scale, rationalize service levels, reduce waste, and prevent cherry picking of the few profitable routes.

The GN needs to get on board with the idea and understand that it is responsible for paying for the majority of airline services used.

The merged airline would operate as a quasi utility, giving a return to shareholders through its owners; IDC, Makivik, and the 3 Nunavut RIAs. Service levels would be set based on need, not based on GN whim.

....3

#8. Posted by The Old Trapper Pt 3 on August 02, 2018

Part 3

The airlines have very good traffic analysts, I am willing to bet that right now they have draft schedules that would reduce costs of a merged airline by millions while improving overall service levels. Add in the millions saved by getting rid of duplication (in every area) and you have a merged airline which can lower prices, while still making a profit (needed for modernization).

What assurance is there for lower prices? Well if you are owned by groups directly responsible to the users (IDC, Makivik, the Nunavut RIAs) the airline will lower prices.

It really is not rocket science. One airline, operated as a utility (essential service), owned by the regions, providing fair and rational service at a fair price. Governments pay the most for their premium service levels, businesses pay a “fair” rate, and individuals can still get their beneficiary and seat sales.

Or does this make too much sense?

#9. Posted by Why not try optimism? on August 02, 2018

@Putuguk What you’re alluding to, and what the subtitle of this piece points to, is the fact that the whole industry is oriented towards government contracts. Discretionary travel doesn’t even register. These facts are central to the reason it is so expensive. From the perspective of the economy as a whole and extracting value from business, government is a lousy customer, or at least a lousy anchor customer. (from the perspective of the monopolist airline, government is a GREAT customer!)

If we can imagine a world where consumers have more clout relatively - let’s say there are more jobs somehow and government decides to moderate its use of air travel - in that world the airlines will find the wherewithal to offer much more affordable flights.

#10. Posted by I don't believe it on August 02, 2018

If the airlines were really losing money for their owner/managers, I’m sure they would not remain in business. All that is happening is that the profit is being siphoned elsewhere. 

It is often referred to as transfer pricing.  The profits are “transferred” elsewhere. 

It could be done through “management fees”, or through “licensing”, or “reservation system charges”, or any of a hundred other ways.

Unless they open their books, the real ones, we do not know what is happening.

#11. Posted by Essential Air Service program on August 03, 2018

FYI: U.S. Essential Air Service program

https://en.wikipedia.org/wiki/Essential_Air_Service

#12. Posted by The Old Trapper on August 03, 2018

#10, I imagine you are somewhat correct on management fees, but in some cases it’s just repayment of operating loans. If you are not making money the parent company, Makivik or IDC may “loan” the airline capital - you can’t or may not want to go to a bank again and again.

As far as reservations, there are no transfer fees there, both airlines use a 3rd party Sabre out of Dallas, and it’s not cheap. That goes for their online booking system as well. Both airlines pay monthly minimums, and if they merged I would estimate savings of at least a million a year based on the merged airline paying a revenue pax boarded rate instead of a minimum for a lot of the reservations and online programs.

Also FYI Nunasi sold their share of Norterra/Canadian North just because they had to continually put money into the company. Owners don’t have to do that if you are making a profit.

#13. Posted by Native on August 07, 2018

Jim Bell I understand that this is an editorial and it is by definition an opinion piece, but it is extremely bias on your part. Almost sound like you maybe getting something out of it in my opinion.

Not all people in Nunavut hate the airlines, some people I am sure love the airlines like people that work for them allowing them to pay there rent, or other business owners that depend on them for supplies.

Also saying things like the airlines fumbling their way in is very untrue statement even if it is your opinion.

“First Air chose to stick a knife into Canadian North’s back” is also such a wrong, untrue and bias statement. Codeshare was horrible to the airlines customers and First Air listened to their customers and left the agreement to try and better serve there customers (which they do so much better then Canadian North in my experience).

Merging is not the right answer even though you for some reason think so. Your are right when you say that the status quo is not an option.

#14. Posted by Native on August 07, 2018

Jim Bell Continued….........

Let the natural business practice take place one airline will be force to fold if they are loosing that much money. Then we will get the one airline they say we need and that airline will not have a huge debt to pay for merging with the other airline which would only translate to higher prices to the customer.

Jim Bell Nunatsaiq is a fairly trusted local news source for the people on Nunavut. Please try to give us the truth and we will be smart enough to make our own opinions, don’t undermine your readers by tell them what to think because it your opinion even if this is an editorial.

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