Friday, January 9, 2015

New Canadian ULCC Jetlines to launch in mid-2015

New Canadian ultra-low cost carrier (ULCC) Jetlines remains on track to launch in mid-2015 with two used Boeing 737 Classic aircraft flying short-haul routes from Vancouver International Airport, according to a recently released prospectus. 
In the filing, Jetlines compares itself to UK budget carrier easyJet and Florida-based Spirit Airlines and notes Canada lacks ULCCs. But unlike Spirit, which often operates the same routes as legacy airlines and undercuts the competition on price, Jetlines says it will avoid direct competition with network carriers, including Air Canada and WestJet Airlines. In many cases, Jetlines plans to serve secondary and outlying airports. In the prospectus, it gave several examples of destinations from Vancouver, including Regina, Saskatchewan and Fort McMurray, Alberta. 

Jetlines, which is now trying to raise $50 million Canadian ($42.4 million) as part of an initial public offering, believes it can stimulate the market by attracting travelers who do not regularly fly because of high airfares, or because legacy airlines do not serve their home airports. It also believes it can capture passengers who now drive from British Columbia to Bellingham, Washington, citing a 2012 study that found more than 950,000 Canadians fled Vancouver’s airport annually for Bellingham.
“Jetlines anticipates this new market of passengers to be comprised of price sensitive travelers, which could include budget conscious leisure travelers, students, families and business travelers seeking to contain costs,” the airline said in its newest prospectus dated Dec. 19. 

Next, predictably, Jetlines will expand into the US, Mexico and the Caribbean. By 2024, it believes it can “establish a new market of approximately 10 million additional passengers,” even as it avoids competing with legacy carriers on popular Canadian routes, such as Vancouver to Toronto.
In December, Jetlines said had reached an agreement with Boeing for five firm orders and 16 options for 737 MAX 7 aircraft. The first aircraft will be delivered in 2021. The deal gives Jetlines some conversion rights to the 737 MAX 8. 

But Jetlines will start operations with much older aircraft, saying it plans to begin with leased 737-300s, 400s, or 500s, according to the prospectus. The reason is cost, with Jetlines saying the fee to lease a 737 Classic is about one-quarter as much to lease as a next-generation aircraft, such as a Boeing 737-800. The older, smaller jets also require a smaller upfront payment to the leasing company.

After beginning operations with older aircraft, Jetlines plans to slowly add next generation 737s. Within three years, it wants to have seven Classic and nine next generation 737s. The older aircraft would fly shorter routes within Canada, while the newer ones would fly longer range missions. 

Though Calgary-based WestJet could be a strong competitor, Jetlines believes its ULCC business model will allow it to undercut WestJet. In the prospectus, Jetlines notes that WestJet, which plans to add widebodies to its fleet later this year, looks more like a global network carrier and less like a low-cost airline.

“WestJet has been increasing its base airfares and frequently has published airfares comparable to Air Canada on the same routes,” Jetlines stated in the filing. Jetlines acknowledges WestJet’s original prospectus, in 1999, positioned the carrier as more of an ULCC, but it argues that both WestJet and Air Canada have created a duopoly in most of Canada, giving both carriers unusually strong pricing power.

“Jetlines’ management believes that this market dominance is a key contributor to the fact that, on average, the price of domestic airline tickets in Canada is higher than the same stage length of air travel in other Western countries,” the carrier said. 

The prospectus includes some predictions about 2016 service, when the airline plans to have eight 737s. Jetlines expects an average stage length of between 650 and 750 miles with a load factor between 65% and 75%. It is predicting a relatively low load factor because it expects considerable competition from established airlines.

 But Jetlines believes it can sustain operations because it will have lower costs than legacies. It expects to have costs per available seat mile of about 20% to 30% lower than established carriers and plans to offer fares 30% to 40% below legacy airlines.

Not surprisingly, Jetlines expects to recoup revenue by aggressively charging for what it calls a la carte items, such as seat selection and bags. Jetlines, however, is planning to offer 30-in. pitch, or two inches more than many ULCCs. It believes the extra two inches will insulate it against what it calls “passenger burn,” which happens “...when passengers use a ULCC service once and do not return as a repeat customer.”

It said, “In the larger population centers of the United States and Europe passenger burn may be acceptable, but Jetlines believes that in the lower population based routes in Canada, repeat passengers are crucial to obtaining profitable passenger load factors.” 

(Brian Sumers - ATWOnline News)

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