dogfight over whitehorse why we should care about air north

Let's skip the tired Second World War dogfight metaphors and get straight to the point about air travel in the Yukon: it is critical to our wallets, lifestyles and economy.

Let’s skip the tired Second World War dogfight metaphors and get straight to the point about air travel in the Yukon: it is critical to our wallets, lifestyles and economy.

Remember the bad old days when Air Canada had a monopoly on the Whitehorse-Vancouver run? Management consultants call that kind of route a “profit haven” for a reason.

Expensive airfares hurt. When I was a kid, a trip to Vancouver was a rare treat. Now, people go for the weekend. We all love the Yukon, but it’s even easier to love when you can go Outside when it’s minus 40. For our kids, sporting events and cultural exchanges are so much more accessible. The 10-hour bus ride to the hockey tournament in Cassiar is now just a yarn to frighten the children with.

Cheap airfares are also important to our economy. Air North president Joe Sparling estimated last year that traffic nearly doubled from 2001 to 2011, as Air North’s entry to the Vancouver market drove prices down from around $310 per leg to around $220. Some will say that Sparling has an interest here, and he does, but the boom in traffic he describes has been observed on many city pairs when low-price airlines like Southwest or Ryanair started flying.

If you are a tourism operator and business has seemed a bit flat, imagine how bad it would be if only half as many people were getting off the plane at Erik Nielsen International. How about the extra costs businesses would incur flying staff in and out of the territory? Would you have to bump up salaries or benefits if your staff had to endure monopoly ticket prices? How would more costly air travel affect the economics of fly-in/fly-out mining companies?

It’s hard to quantify, but higher air prices have a pervasive negative effect on economic activity: jobs, profits, investment and overall economic activity. This is why the entry of Air North a decade ago has been so good to the Yukon.

So what about WestJet’s announcement that it will be the third player on the Vancouver run, starting May 17th?

A third airline will put more downward pressure on prices, at least at first. But, adding a second discount airline to a city pair does not generally cut prices or spur traffic nearly as much as the first one did.

In the longer term, the big question is whether we will end up with two or more airlines. Or will one force the others to pull out?

We never want to end up with just one airline. That would be as silly as letting your phone company buy your cable TV network, and then wondering why your Internet charges were so high.

Air Canada, WestJet and Air North are in a high-stakes game. Traditionally, big legacy airlines like Air Canada use their superior scale and cash to outlast pesky competitors. They cut prices until the competition dies, then jack them up again. But this time may be different. WestJet is dramatically more efficient than Air Canada.

In the third quarter, WestJet’s cost per available seat mile was 13.2 cents while Air Canada’s was 15.8 cents. Even if Air Canada cuts prices so low it starts to bleed, WestJet still makes money. In fact, WestJet is in even stronger shape because its costs include employee profit sharing, which goes down automatically when the airline faces tough competition. Air Canada’s pension costs, union troubles and bloated cost base don’t. To make matters even worse for Air Canada, it loses money most quarters, its share price is down from $20 in 2007 to a buck and change today and its balance sheet probably can’t support a long, brutal price war.

Air North is a private company and we don’t know its economics in as much detail. It seems to be doing fine against Air Canada at today’s price levels and traffic levels.

The big question is what Air Canada’s Vancouver run and Air North look like if WestJet siphons off passengers and drives prices even lower. Full planes are very important to airline economics and airline bosses face tough choices between a convenient schedule and cutting capacity to boost load factors.

We shall see if the market can support three airlines and, if it can’t, who stops flying to Whitehorse.

Which raises the second question: How much should we care that one of the surviving airlines be our local friends at Air North? Cynics might say that they don’t care who flies them to Vancouver as long as it’s cheap.

But there is more at play. Here are just a few things to think about. Air North says it employs 168 people, mostly in the Yukon. How many other private-sector organizations employ as many people here? Not many. When mining promoters announce projects with this many jobs, the government issues self-congratulatory press releases.

An out-of-town airline might employ just a dozen or so people to turn its planes around.

Another factor is that literally hundreds of Yukoners are shareholders in Air North, either directly or via Vuntut Development Corp. These people all took their chances when they invested, but it would hit a lot of Yukoners hard to lose their investments.

Another interesting angle is the fact that having an airline hub in Whitehorse means that we get more charters to interesting places. Air North recently ran a special flight to Las Vegas, presumably with a plane that was sitting in Whitehorse not doing anything. Other airlines would have to fly the plane here first, an unlikely prospect.

Still, cynics might discount all of this. They don’t work for Air North. They didn’t buy shares. And they don’t like Las Vegas.

But the main reason this columnist is hoping that Air North is one of the survivors is that I don’t really trust the two Outside airlines to battle to keep prices low on the Whitehorse run. If Air North is in business, I can be pretty confident they will be competing hard on that route.

It is easy to say that we want both competitive prices and a local airline. How to achieve that is another question, and one I’ll try to answer in next week’s column.

(Full disclosure: I have no investments in Air North, but may have small holdings in Air Canada or WestJet via mutual funds whose managers were foolish enough to invest their clients’ money in the airline industry).

Keith Halliday is a Yukon economist and author of the Aurore of the Yukon series of historical children’s adventure novels.