Yukonomist: You don’t know what you’ve got ‘til it’s gone

Yukonomist Keith Halliday

When I was a kid, CP Air had a monopoly on flights to Vancouver. The big orange bird, as my dad called it, was not cheap. You were lucky if you got to Vancouver once a year.

This will shock millennials and people who moved here since Air North bought its first 737, but, back in the day, most Yukoners actually spent the entire winter here. Watching the Love Boat on TV was as close as you got to a beach vacation. A hockey trip meant the bus to Faro. Grandma went alone to see her specialist in Vancouver. And your relatives were as likely to fly to see you as if you lived in Yamal.

In 2001, only a national airline flew Whitehorse-Vancouver. It carried 110,000 passengers and the average fare was $462 (in today’s money).

The next year, Air North acquired jets and started competing, backed by investments from the Vuntut Gwitchin First Nation.

Fifteen years later, Air North charged $204 on average (also today’s money). Low prices stimulated more travel. Air North alone carried 195,000 passengers and overall travel tripled.

The economic benefits are big too. My hypothesis is that Air North has done more for Yukon tourism than all government tourism programs combined. The growth of our tech sector owes a lot to cheap airfares. They can easily fly Outside to pitch their services, and it’s easier to attract footloose coders to a place with cheap and convenient connections.

In August 2019 Air North employed 375 workers, mostly in the Yukon. Compare that to 2001, when only a few cents on your airfare dollar stayed in town to support local jobs.

COVID-19 upended all this good news. In a letter to customers, Air North President Joe Sparling said the airline cut weekly flights from 30 to five. It laid off almost 150 people by August 2020, or about 40 percent of staff. It cut overhead costs by a third.

Despite this, the financial impacts were severe. Year-to-date losses were $5.3 million, as of the end of July. Without various government support programs, this would have been $10.1 million.

As travel slowly recovers, there are now 13 flights a week to Vancouver and five to Dawson and Old Crow.

However, don’t be fooled by this rebound. Air North isn’t out of the woods financially.

The key economics concept here is fixed costs. Consider the electric company. The cost of you using one more kilowatt-hour is low. Most of your bill goes to cover fixed costs such as the network, computers or head-office staff. If such a business loses a lot of customers, it’s profit doesn’t just fall; it suffers catastrophic losses since those fixed costs don’t go away.

Sparling gives the example of a single 120-passenger flight to Vancouver. It takes 35 passengers to cover direct costs, such as fuel and pilots. It takes another 40 passengers to cover fixed costs.

In August, the national carrier and Air North competed with four flights a day in total. The planes were so empty that the passengers would have fit on just two planes.

Fall traffic declined about 10 percent, and the national carrier pulled one of its flights.

Now the second COVID-19 wave is sweeping the country at the same time as winter is coming. Further travel declines will mean both airlines, if they stay running, will be flying money-losing flights.

This is where economists turn to game theory. With just two competitors, the usual rules of market competition don’t apply. Should the biggest player use its bigger balance sheet to wait out its smaller competitor, until the latter runs out of cash, and then enjoy monopoly pricing? Can the smaller player somehow convince the bigger one that it has the cash and low operating costs to make such a strategy too painful to be worth it? What can the bigger player do to convince potential financial backers of the smaller outfit to back off? And so on.

Other industries with this kind of dynamic are regulated. For example, Yukon Energy has to let smaller generators connect to its grid, under specified conditions. Ice Wireless clients from Inuvik can use their phones on competitor networks Outside. Large internet companies are required to share their networks with smaller ones.

Air North is proposing just such arrangements, so far to little effect in Ottawa.

In the first six months of the pandemic, it made sense for governments to quickly roll out emergency support programs for airlines and offer them equally to all players. Risk-averse politicians worried about the response of national carriers avoided doing too much special for northern airlines, in the hope that things would get better.

However, it’s now clear that COVID-19’s impact on air travel will last well into 2021, if not longer. It’s not sustainable to have a strategic Yukon company like Air North running through its cash until it fails. At that point, the Yukon government will be deluged in calls from the Vuntut Gwitchin, the tourism industry, plus hundreds of local workers and shareholders. It’s hard to imagine them not bailing out Air North at that point, even though by then successive rounds of cuts may have permanently crippled the company.

Far better to intervene aggressively now. Government employees flying to Vancouver should be required to fly Air North. Many still fly the national competitor. Government grants to non-governmental organizations should include vouchers for Air North travel. Medical specialists coming north should fly on Air North. And so on. These policy options are available to the territorial government now.

If it really wanted to send the market a strong signal, the Yukon government would use some of its economic development budget to help Air North buy those new and more efficient planes it was thinking about pre-COVID. National competitors would know Air North could last longer in a price war with more efficient planes. Even better, it’s green. Aviation is seven percent of the Yukon’s carbon emissions and next-generation planes burn a quarter as much fuel per seat or better.

It may seem like interfering in the private sector. It is. That’s the point. We do it already for electricity, phones and the internet. Air travel is also important and subject to dominance by the biggest player.

This may be too bold for the Yukon government.

That leaves the rest of us. If you are flying, you should fly Air North. If your friends or business associates are flying, you should encourage them to fly Air North.

If not, the days of cheap and plentiful Air North flights to Vancouver may be history. To quote famous non-economist Joni Mitchell, sometimes you don’t know what you’ve got ‘til it’s gone.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. He is a Ma Murray award-winner for best columnist and received the bronze for Outstanding Columnist in the 2019 Canadian Community Newspaper Awards.

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