Proceedings of the Standing Senate Committee on
Transport and Communications
Issue 1 - Evidence, October 5, 2011
OTTAWA, Wednesday, October 5, 2011
The Standing Senate Committee on Transport and Communications is met this day at 6:48 p.m. to study emerging issues related to the Canadian airline industry.
Senator Dennis Dawson (Chair) in the chair.
[Translation]
The Chair: Welcome to the Standing Senate Committee on Transport and Communications and thank you for being here.
[English]
This evening, we are continuing our study on the airline industry. Appearing before us on behalf of WestJet is Dr. Hugh Dunleavy, Executive Vice-President, Strategy and Planning. Dr. Dunleavy, you have the floor. Following your presentation, we will proceed with questions.
Just to give you background, the house is sitting at eight o'clock. We will try to be brief, but if the committee feels that there are questions that have to be continued, we can continue after eight o'clock. I also want to remind senators that we have to adopt our budgets tonight because they have to be submitted to the subcommittee for Friday.
Dr. Dunleavy, the floor is yours.
Hugh Dunleavy, Executive Vice-President, Strategy and Planning, WestJet: Thank you for this opportunity to appear before you this evening. Bearing in mind the time constraints, I will try to be as brief as possible.
As mentioned, I am the Executive Vice-President of Strategy and Planning at WestJet, and that role comprises network planning and scheduling, pricing and revenue management, airline partnerships and, of course, government regulatory and environmental affairs.
I have been in the airline industry for just over 30 years, and I have worked for both legacy and low-cost carriers in both Europe and North America.
I will give a brief background on WestJet. We began 15 years ago with 300 employees and two aircraft. Today, we employ 8,500 WestJetters, and through our employee share purchase plan, which is our version of a pension program, we spend approximately $55 million annually to employees to match their share purchases. In addition, we also have a profit share program, which is paid out twice a year. In the history of WestJet, we have paid out an approximate $210 million in profit share to our staff over that period of time.
Our fleet will soon reach 100 Boeing 737 Next Generation aircraft, with an average age of five years, and over the next several years, we have a further 38 aircraft on order. We currently fly throughout Canada, the United States, Mexico and the Caribbean. To date, we have signed code-share or interline agreements with such carriers as El Al, American Airlines, KLM Air France, Cathay Pacific and British Airways. We have further agreements under development. In fact, we plan to implement approximately one interline agreement per month and one code-share every three months for the next several years.
The study of emerging issues impacting the aviation industry, and by extension, the competitiveness of the Canadian aviation industry, is a timely topic for discussion. It is not being overly dramatic to say that if the world economy continues to slow down and a double-dip recession occurs, the aviation sector globally will be heavily impacted and weaker carriers may struggle to survive.
The industry is already struggling with aggressive cost drivers. Of particular note, a barrel of oil is now approximately $85, and to the average consumer, this may appear to be relatively good news since the economy may be spared the $120 plus barrel that wreaks havoc with national economies.
However, while a barrel of oil may be $85, the average price for a barrel of jet fuel in September was approximately $126 per barrel. Jet fuel has to be processed and requires additional refining. This comes at an additional cost. Thus, there is a price differential between the cost of a barrel of oil and the cost of a barrel of jet fuel. Even though at WestJet we have invested billions of dollars upgrading our fleet and today operate one of the youngest and most fuel-efficient fleets anywhere in the world, for every $1 increase in the price of a barrel of oil, our fuel will increase by approximately $6 million annually. Given its elevated cost by the end of Q2, jet fuel represented approximately 32 per cent of WestJet's operating costs, up from 29 per cent the year before.
I recognize, of course, that government policy can do little about the global price of jet fuel. However, I wanted to bring the issue of fuel cost to your attention simply to demonstrate that in this environment of economic uncertainty, the work of this committee is all the more important in terms of trying to identify public policy questions and changes to support the competitiveness of the sector. To this end, the principle public policy issue impacting Canadian aviation competitiveness, and by extension the ability of Canadian consumers to access low fares and frequent service, is the cost of aviation infrastructure in Canada.
To demonstrate the cost of doing business in Canada, previous witnesses have already discussed the phenomenon of Canadians driving across the border to a U.S. airport in order to fly to a U.S. destination instead of flying from a Canadian airport. The committee has already heard how U.S. border airports and air carriers are aggressively pursuing Canadian consumers.
Instead of repeating those stories about this transborder leakage, I will take a slightly different perspective and look at the competitive challenge facing the industry by examining the differences between a domestic Canadian flight and a domestic U.S. flight of a similar distance.
On November 18 last year — we chose this as a representative date — WestJet offered a fare of $39 from Toronto to Montreal. On that same day, JetBlue, an equivalent airline to WestJet, offered a fare of $38 from New York to Boston. Both flights were of roughly equal distance, each was between two major economic centres and each was between major airports.
The final cost to the U.S. consumer for the JetBlue flight was $51 — an approximate additional $13 in taxes and fees were added to the price of the ticket. The final cost to the Canadian consumer for the WestJet flight was $100 — an additional $61 in taxes and fees were added to the price of the ticket.
The ability of airlines to generate sufficient revenue, which in turn allows carriers to provide more flights and more service to a wider array of communities, is directly impacted by a carrier's ability to stimulate demand through low fares.
We now have an infrastructure cost in Canada that adds approximately $60 of additional charges onto a $39 fare. This clearly impacts the ability of the industry to stimulate demand. More importantly, it raises questions about the longer term competitiveness of the Canadian industry, given that these fees and charges are ostensibly on an ever- increasing trajectory.
The difference in taxes and fees between the U.S. and Canada can in part be explained by the economies of scale that exist in the U.S. marketplace, as well as the fact that the U.S. aviation infrastructure is highly subsidized from general tax revenue. Canadian government policy cannot completely overcome these two facts. However, this differential does underscore the size of the competitive challenge facing us and the need to start looking at different ways of doing aviation business in Canada.
It is often forgotten that the airline industry is a volume-based business. Money is made by selling lots of seats to fill our aircraft. While I agree there are certain routes and various fare classes that can generate a lot of revenue through high fares, for the most part, the industry makes its money on volume.
WestJet is fortunate to consistently operate profitably. We are also one of the better performing air carriers in North America from an operating margin perspective. That being said, through to the end of Q2 2011, our net income per guest was $9.40.
We need to keep this $9.40 in perspective. That is our per-guest net income in a ferociously capital-intensive industry in which a single asset — in our case, a Boeing 737 — can cost $45 million, an industry with sizable fixed costs, a great deal of regulation, and if the weather gets really bad, it is sometimes difficult to operate with on-time performance.
It is when you look at the per-guest net income that you get a better appreciation for the impact on demand of the tax and fee structure in Canada. It is when you look at the per-guest net income that you realize why airlines get considerably upset when we hear public officials state that a given increase in a particular fee is only $4 or $5. That amount represents almost 50 per cent of the net income the airline receives for that guest.
In order to address the cost of doing aviation business in Canada, the reality is that there is no single magic policy decision that can lower costs or magically shrink the gap between U.S. and Canadian taxes and fees. There is no single "bad guy" government agency or policy in Ottawa that is solely responsible for the fact that taxes and fees in Canada are almost five times higher than a comparative flight in the United States. It is precisely because there is no single entity responsible that a series of recommendations made in April this year by the Future of Aviation Advisory Committee, struck in 2010 by the U.S. Secretary of Transport, are worth highlighting.
In its final report, the committee raised a variety of questions for U.S. policy-makers including, number one, how do federal taxes imposed on the aviation industry compare to those of other modes of transportation?
Two, does the federal government efficiently and effectively levy the existing level of aviation taxes and fees for the services it provides?
Three, are there more efficient ways to collect and administer existing aviation taxes and fees that would save taxpayer and aviation industry dollars?
The committee also asked a simple question: Would regular consultation between those departments and agencies that administer aviation taxes and fees prior to implementing any changes to tax rates and policies result in a more efficient and rational aviation tax system?
While these questions were drafted in the U.S. context, I do recommend that they be considered by this committee as part of your deliberations and potentially included in your final report as recommendations to the government on areas requiring further analysis.
An additional issue worth considering is recommending that the federal government carry out economic modeling to determine what the potential impact would be on Canadian aviation and consumers if tax and fee structures were potentially reduced. How much additional tax revenue could potentially be generated if various charges were to be reduced and the industry given a greater ability to stimulate demand?
Certainly looking at the JetBlue versus WestJet domestic flights, you can clearly see the potential to increase demand, increase service and increase government and airport revenue. While such a modeling exercise would be complex, the exercise itself would also be useful in bringing various stakeholders to the table that currently impose their respective fees in a vacuum, without any discussion about the overall total impact the fee structure has on the industry and consumers.
Through our industry association, the National Airlines Council of Canada, WestJet, Air Canada, Transat and Jazz have commissioned an economic impact study. It was completed last year and is now being updated with new figures. It looks at the tax revenue and economic generation that can be created by lowering various charges such as rent and the fuel excise tax. The NACC will be happy to send the updated report to the committee shortly. This study can certainly serve to inform any potential government analysis should the committee recommend that such an analysis be undertaken by the federal government in conjunction with impacted stakeholders.
In addition to the above, there are other broader policy areas that I believe are worth considering. I would also recommend that it is time to examine other modes of governance for Canada's airports, in particular the potential for full privatization of airport facilities. Under the current not-for-profit, non-share capital National Airports Policy, airports must finance their infrastructure build through debt and not equity. While airports and airlines will disagree over the amount of infrastructure required, there is no denying that airports have been required to take on heavy debt in order to finance infrastructure upgrades.
With respect to the top airports in Canada, representing approximately 95 per cent of passenger traffic, the total capital accumulated from 2001 to 2010 was $12.1 billion, while their total debt accumulated during that same period was $11.9 billion. For these same eight airports, the total amount of debt per enplaned passenger has increased from approximately $120 to $250 per guest.
Privatization is, of course, not a panacea, and a privatization policy would raise various additional policy issues. Care would have to be taken, for example to develop an appropriate means to oversee rate and fee increases in the same way that for-profit utility company fee charges can be reviewed by an oversight body. In addition, it should be up to each airport authority whether or not it would pursue privatization if such a policy did become available.
These points aside, I do believe this committee should recommend that Canada's National Airports Policy be reviewed and the potential benefits and drawbacks of full privatization of airports be examined, taking into consideration the practice in other jurisdictions such as the U.K.
Directly related to the issue of airport governance is the issue of airport ground rent. The committee has heard from previous witnesses about the rent issue. It is difficult for government to give up a source of revenue in good economic times let alone when a downturn is possible. While I would like to see rents removed, perhaps a middle-ground approach is to examine the possibility of directing all or a portion of rent revenue toward aviation infrastructure costs. Thus, for example, a portion of ground rent could be applied against the operating costs of CATSA or NAV CANADA, thus enabling a corresponding reduction in user charges, or a portion of ground rent collected at an airport could be used to fund security or operational infrastructure improvements at that same airport. Either way, by taking this approach the rent paid for by the travelling public would actually directly benefit the travelling public, instead of ending up in the Consolidated Revenue Fund. A similar approach could be recommended by this committee with respect to other aviation taxes, such as the excise tax on aviation jet fuel. Direct the revenue from this tax toward aviation infrastructure costs.
I will conclude my comments by stressing that, when we look at the current system, WestJet is not advocating that services be provided for free. We are arguing for a concerted effort to be made to try to strike a balance between the $13 added to a U.S. flight and the $60 currently added to a Canadian flight.
I thank you for the opportunity to appear before you today. I welcome your questions.
The Chair: Thank you, Mr. Dunleavy. I will introduce you to the members of the committee. Senator Greene from Nova Scotia; Senator Cochrane from Newfoundland and Labrador; Senator Martin from Vancouver; Senator Boisvenu from Quebec; Senator Verner from Quebec; Senator Zimmer from Manitoba; Senator MacDonald from Nova Scotia; and Senator Eaton from Ontario.
Senator Eaton: You seem very conciliatory about excise tax, ground rent, airport improvement tax, security tax, et cetera. We know that two million Canadians go to border airports, which is a huge loss to the Canadian economy. Would it substantially reduce your ticket price if Minister Flaherty waved a magic wand and said "no more ground rent and no more fuel excise tax?" Would you be able to bring some of those two million passengers back to fly out of Canada?
Mr. Dunleavy: When we take those savings, we spread them over the individual number of guests we transport. From a WestJet perspective, we transport approximately 16 million passengers per year. Changes in the ground rent would assist us in keeping the fares down, the extent to which would probably be a small amount. The issue for us is really the others. Those fees that we are talking about are already included in the landing fees that we pay at airports, et cetera. Yes, there would be an impact. However, the $60 example we used are the additional fees that we collect on behalf of the government. Reducing those fees as such will not impact the bottom line of WestJet because we simply transfer those fees directly to the government.
Senator Eaton: Will it make a difference?
Mr. Dunleavy: We look at all of those issues to try to drive fares lower. From our perspective, WestJet has been successful not by putting in higher fares but by driving fares lower. To do that, the lower the costs that we have in our infrastructure, the lower our fares would be.
Senator Eaton: I am a bit slow. The $60 fee is the fuel excise tax and the airport improvement tax. What else is included?
Mr. Dunleavy: The airport improvement fee is a big component of that.
Senator Eaton: What about security?
Mr. Dunleavy: Yes. When those are totalled up, that is where you get the $60 example. Things such as ground rent are already built into the landing fees that the airlines pay. Reducing those fees would allow us to reduce the airfares but the other fees are simply a pass through to the government, so that would not help us.
Senator Eaton: No. Would it make our airports more competitive if our landing fees were lower?
Mr. Dunleavy: Yes, it would. There is another component. When the consumer sees a ticket price of $39, but the total price is $100. Bringing that total price down to Canadian consumers would encourage flying from Canada. It would mean that the ability of more Canadians to travel would be improved. You would get a greater volume of people flying on our airlines. It would also help the government in terms of greater tax revenues because, although the amounts went down on a per passenger basis, by stimulating more consumers to fly the overall tax base would improve.
Senator Eaton: I have one more quick question: I am asking you the same question I asked your Air Canada counterpart. Of the four or five major airports across the country, would you like a seat at the board table?
Mr. Dunleavy: I am aware of the response you received. The challenge that we face is that on those top four or five airports, we would have maybe one seat at the board and the board might constitute 12 people. Would it really have a big impact on our ability to influence decision making by having only one seat on the board. I do not believe it would have. The challenge for us would be: Do you have the right regulatory oversight to know that when people are coming up with fees and structures or when organizations such as the airports are deciding on investment plans, how that is tied to how it will stimulate the community and how it will increase the extra flow of traffic into those markets.
Senator Eaton: I find it very strange because, as you know, Air Canada said the same thing. It is almost as if you did not want the responsibility of sitting on the boards of those airports at Toronto, Montreal or Vancouver, and being part of the decision-making process to either expand runways or to look after passengers. It is almost as if you do not want to be part of running an airport.
Mr. Dunleavy: I do not think that is the case. If I am going to take on accountability in that area, then I would like to have a sufficient level of influence in those decisions. One airline representative position on the board will certainly not allow us to do that. Yes, you will get accountability but you will not have the authority to influence decisions. If you want to have us accountable, let us also have the ability to influence those decisions.
Senator Eaton: You are not ambitious enough. You should ask for two or three seats.
Senator Greene: I would like to ask a supplementary question in relation to Senator Eaton's questions. In answer to one of her questions, you said that if the $60 you pass through to the government were decreased, it would not affect WestJet in any way.
If it would add to your volume, that is, if it would enable Canadians to take your planes from here rather than other planes from Plattsburg, that would add to your volume, which would drive down your unit costs. Would that have a dramatic impact on WestJet?
Mr. Dunleavy: Thank you for that clarification. I thought I had addressed that.
Yes, if nothing happens to consumer demands and we simply reduce those fees, there is no impact to the airline because it is simply a pass-through. However, because we have lowered the overall cost to the Canadian consumers and therefore a greater proportion of the Canadian public now fall into that region where economically they can afford to travel, more people will travel, so that would definitely be in our interest. By making the Canadian airports more competitive in that sense, it would obviously discourage more people from driving across the border so the drive-fly syndrome would be reduced. That would drive more volume through the Canadian airlines as well. That would be in our benefit.
Senator Zimmer: Senator Eaton asked my question about the fees and taxes, et cetera. Is it a straight bypass through? What I mean is you collect it and you pass it on. Do any of those fees stay with your company?
Mr. Dunleavy: Not at WestJet, no.
Senator Zimmer: In addition, we hear all about the new airports and the infrastructures, and they are nice and they are beautiful. We are doing one in Winnipeg, as you know. It is state of the art and I am very proud of that, as that is where I come from. However, there is also the issue of necessary versus nice. In your opinion, all of these airports, almost like Taj Mahals, are they necessary or are they nice?
Mr. Dunleavy: Thank you for that question. Obviously, from an airline perspective, if you think about the overall business, we have incredibly high fixed costs and relatively low variable costs. Adding that extra guest on the plane is a relatively small incremental cost to the airline, but overall, very high fixed costs.
From an airline perspective, when we are looking at airport investment programs, we do raise some challenging questions such as, yes, you need a new runway, or you need a new terminal facility. Well, then, economically, have you looked at and investigated all the alternatives before you invest in a massive construction program of one form versus the other?
The question is whether the constraints on our system are limited by the policies around how we operate into and out of those airports, the utilitization and throughput of the runways and facility, et cetera. When airport authorities come to us and say, "We need to do the following," we ask the question, "Okay, is your airport infrastructure currently overwhelmed?" "Well, no, but it is going to get there in the next few years, and we need to plan ahead to address the issues now."
What I would always say to the airport authority is, okay, if you think you are so heavily stretched with your infrastructure today, we do not have very many, if any, slot-constrained or facility-constrained airports in Canada. I believe the Canadian aviation infrastructure is very well built, more so than you would see in most other jurisdictions. That may be a credit to us and sort of a commentary on other jurisdictions. However, when I look at airports that want to build these big programs, I go back and say the following: Have you looked at other aviation infrastructures in other countries? Have you looked at other airports? What is the throughput at those airports compared to the throughput that we have at ours? Can you prove to me that the throughput that you are receiving here in Canada is equal to the best in the industry — not just Canadian — but in the world? If you can say we are now running with the best most efficient airports in the world, then it is time to look at improving that infrastructure. If you are not at that level, then I believe there are other things that we should be investigating from a cost efficiency perspective before we start investing in new buildings.
Senator Zimmer: A very good friend of mine who travels a lot flies a lot on your airline. On four of the flights in last year, you have lost his luggage. Three have never been found. In one of them, he had a very expensive coat. He called me, and I called one of your vice-presidents and asked if he could work it out. In the end, I know they can insure up to $1,500 or something — there has to be a limit — but he lost a coat that was almost triple that. Is there any recourse that he has?
Mr. Dunleavy: We try not to lose people's bags. I know it does happen, and it is a complexity of the business when people transit through multiple airports, and it gets even more complex when airlines transit from one airline to a partner airline. Making sure that all the processes line up and the bags transit themselves safely and securely has been a challenge.
We believe WestJet has one of the best baggage rates in the industry in terms of the lost rates. We still do lose some bags, but we also have a guest service function that takes itself very seriously in terms of addressing those needs.
Clearly, we will still lose bags. It is an inevitably when you are transporting 16 million guests. On average, at least 50 per cent of them carry a bag of one sort or another, so that is 8 million bags per year that we are transiting through our systems. We take it seriously and do our best, and, as you know, there is a compensation program that we stick to as well. We just work hard to make that as good as possible. Things do happen and we have to remember that. I am not trying to shift blame, but we own a certain part of that supply chain; we do not necessarily own 100 per cent of it. Therefore, when it passes through the check-in counters and it goes below the terminal, that may not be ours. In fact, in most airports it is not. We do not control that. Having said that, I do not want that to sound like a defensive statement. You are our guest, they are the bags you gave to us, and, regardless of who lost it or where, we will take accountability for that.
Senator Zimmer: Thank you for your candour.
[Translation]
Senator Boisvenu: Welcome and thank you for the brief, which I find very educational. I am new to the committee, but I am learning at every meeting, and I will surely learn more from you through our discussion.
You are right, the biggest surprise we get when travelling is the difference between the advertised ticket price and the price we actually end up paying. The difference always comes as a surprise. I think you may even say that the tariff barrier between Canada and the United States has become what I would call a natural barrier preventing American companies from setting up here.
Yesterday, we were told that the difference between the U.S. and Canadian taxes and fees was 226 per cent. However, do we actually have 226 per cent more services in Canada?
[English]
Mr. Dunleavy: That is an excellent question. Thank you for that.
[Translation]
Senator Boisvenu: Or are our services better here? Do you get more out of insurance here than in the United States?
[English]
Mr. Dunleavy: I do not believe so. I think if we look at a lot of the infrastructure costs, support costs, security fees, and navigation fees, those relate to the services that, I believe, are competitive across the United States and Canada. I cannot comment on the other jurisdictions out there.
Whether that matches the 226 per cent increase in the fee structure is an excellent question. In many ways, the way that the airline industry works is you attempt to standardize as much as possible. That does not mean we standardize in terms of guest service and how we interact with our guests. That is one of the cornerstones we believe differentiates WestJet from other airlines, namely, the way we focus on guest service.
However, the way we interact in terms of airport infrastructure, security, baggage handling, how we issue boarding passes and how we transfer one guest from our airline on to a neighbouring airline, the way to make those things work as seamlessly as possible is to follow standards. If every airline did it its own way, it would be a complete shambles out there.
Having said that, I recognize that there are still some disconnects in terms of lost packages, et cetera, and we do try to ensure those things are as standardized as possible because once they are standardized they become repeatable, and repeatability is key to consistency and service and delivering that cost effectively.
Yes, while there is a continuing drive to do that, the fee structures do not necessarily reflect that level of standardization. The cost for security domestically in Canada is one fee, but the minute you are going to go transborder, it is a different fee. However, the processes are identical. The resources we apply to them are identical.
[Translation]
Senator Boisvenu: In your brief, you recommend that taxes and fees be lowered so that more travellers can fly. Do you feel that such a reduction is as beneficial to the government as it is to the industry?
As you know, when the government lowers taxes, it must recover that money elsewhere. So, is the impact of those reductions, in terms of increasing the customer base, as beneficial to the government as it is to private companies, or would we be losing out in the whole thing?
[English]
Mr. Dunleavy: The study that we have undertaken with the NACC here in Canada indicates that the answer is yes, we would do so, but it is a challenge. Any time you do these types of economic models, the outputs depend on the assumptions you use.
Would my economist be more optimistic than the government's? Would we use a different set of assumptions? We would have to go in and work closely, which is why we are saying if we do undertake such a study, we would like to be involved to at least give you our perspective.
I will give you a context that may give you some insights of why WestJet's perspective might be different from another airline's. Of all airlines that start up in this industry, 98 per cent are dead within two years. The failure rate is enormous.
WestJet has been around for 15 years. We have been one of the success stories of the industry, along with probably Southwest Airlines, Ryan Air and one or two others. Literally, you can probably count on one hand the number of success stories you can talk about.
We have been very proactive in terms of driving costs down and reflecting that in lower fares. By driving lower fares, we have been able to stimulate demand. Over the last 15 years, WestJet has added approximately 100 Boeing 737s to our fleet. Our competitors probably have not shrunk significantly in all that time. In other words, their fleet size has remained fairly constant.
Where did all that consumer demand come from? It came from our ability to stimulate consumer demand by lower fares. Yes, we have had a negative impact on our competitors because they have had to lower their fares to match our fare structures. They probably maintained the same level of traffic they had before WestJet existed, but we have been able to fill our 100 aircraft as well — and we have been able do it profitably. Therefore, yes, I do believe you can stimulate demand significantly.
If you look at many of the markets we have entered, we are now the largest international airline flying into Las Vegas. It is a very price-sensitive market, and if we charged high fares people would not go there, so we stimulate those markets. We have done the same into Hawaii, Mexico and many other sun destinations in the United States. You can stimulate, but you have to put in the right fares for that particular marketplace.
[Translation]
Senator Boisvenu: I have done a lot of travelling in Europe, and I have noticed that tax and fee structures have really been integrated over there. European skies are completely open, and people travel by plane a lot. Do you think it would be possible, in the near future, to integrate fee regulation in order to open up North and South American skies to as many travellers as possible?
[English]
Mr. Dunleavy: The question really is do we see a potential for unification in terms of the rates and fee structures? I do not believe so. Maybe I am being a little bit cynical there, but I think the motivations for the different jurisdictions can be very different. They may have similar objectives, but how they get there and also the priorities that they assign to different fee structures will be very different.
If we are talking about discussions with the United States and security issues, their focus will be highly different because of the potential threats that they perceive to the U.S. mainland, as opposed to what we might see here in Canada.
The united states of Europe, which is primarily the European Union, has worked very well. It has opened up the borders, you do not need the passports and you can travel relatively freely between those countries. That has worked well to stimulate the traffic. Of course, having a population base of 460 million people helps the economies of scale work very well there.
It also works in the sense that those are relatively small geographic regions. You can operate high frequency, point- to-point operations between large population centres. The greater London area has approximately 30 million people, pretty close to the entire population of Canada. It is similar in Paris. When you have those types of differences, the way you might structure a business model to work in that environment probably does not translate too well into the Canadian environment.
I will give you another classic example because it was coming up consistently, which said WestJet uses basically a very similar business model to Southwest Airlines. Maybe, in the sense that we like to have lower fares because that stimulates demand. That is probably the limit of the similarity between WestJet's business model and Southwest. Yet every time we would try and do something a little different, all the experts and pundits would say WestJet is moving away from the Southwest model; therefore, by definition, you must be wrong.
My argument to that has been you cannot take a business model that works very well in Texas, in that type of a climate and environment, transport that to Calgary, with a different geography and a different climate and all the other issues that differ, and say that I must follow someone else's model. No; every airline, I does not care which it is and which geographic region it operates in, has to come up with its own business model that operates effectively for it.
In that context, when WestJet moved into airline partnerships and doing interline and co-share agreements with other airlines, we were criticized because Southwest did not do it. One of the first airlines that wanted to do an interline and co-share deal with WestJet was Southwest Airlines because they realized they were reaching the stagnation point in their domestic market.
They have been around for 36 years and they have achieved 17 per cent market share in the United States' market. We have been around 15 years and we have 35 per cent market share in Canada. I am proud of how successful WestJet has been, but it has been accomplished not just by the status quo but also by challenging existing theories on how businesses should run and driving a business model that is focused on lower cost, lower fares and driving consumer demand.
Senator MacDonald: We all have certain airports we use more than others. As a Nova Scotian, my airport of convenience is the Halifax one. Unlike many of the airports in the country, there is not really an option of going across the border for better fares; it is one the few that does not have that option.
I look at fares and at flights that come out of the airports all the time. There has been great growth in WestJet, but I cannot help but notice out of Halifax airport that you can get an early flight about 6:30 in the morning direct to Ottawa, but for any other flight in the rest of the day, you have to go through Toronto or Montreal. Both Porter and Air Canada have numerous flights all day to the national capital from Halifax. I have always been curious why there is that lack of direct service out of WestJet.
Mr. Dunleavy: I can address that question. The issue is can we utilize our equipment with sufficient frequencies into that market and capture a sufficient consumer demand to make those flights profitable? We have undertaken a number of experiments in that area and have determined that the population base that uses WestJet today is primarily a leisure- based, price-discretionary traveler. For us to try to penetrate the business market in Canada — corporate Canada, the government market — we need to do more work to improve the quality of our schedules into those markets, but we also have to penetrate the corporate Canada market.
We are up against a competitor that has been around for over 60 years, has a well-established client base in that area, for which they have also a lot of incentives that encourage people to be somewhat sticky in terms of they like to stick to what they know. Aeroplan is a good example. It has worked very well for Air Canada and it has worked very well for Aeroplan.
For us, one of our long-term strategies will be that we need to improve the business schedule that we operate, but it takes more than one event. It is not something that if I put it in the schedule, the consumers will come. They do not; not in those types of business markets. You have to have a business-type product, which is why we have invested in airline partnerships and in the frequent flyer program. We have made investments to improve the quality of our schedule, particularly here in the Eastern Triangle. A natural extension of that would be into other markets.
However, as a profitable airline, when we make decisions to invest in markets because we believe that there is a long- term benefit to that, we will not go in and say we will invest in a certain number of markets because that is what we think is appropriate. Rather, how many markets will I choose to invest in at any given instant in time? I will strictly control that because of my responsibility to my WestJetters and to our shareholders. Whilst I am willing to invest, I will not do it at the expense of the company.
Senator MacDonald: I have one follow-up question. Since you have one direct flight a day, I am curious; there must be a reason why you choose the first one of the day, at 6:30 in the morning.
Mr. Dunleavy: There is. The issue is that I have a fixed fleet of aircraft. They cannot all operate from every city at the optimal time of day. It is just how we happen to be able to flow the network. It is really about where I choose to fly those aircraft.
The other thing I would remind people of is that we do not have aircraft sitting on the ground not flying. If those aircraft may not be at your city at the preferred time of day, it is not because they are parked; it is because they are operating somewhere else and where we are driving a profit margin from those operations.
The question for us, if I were to move one of those aircraft from my preferred time of day somewhere else, and move it to Halifax, as an example, it has to drive a profit that is at least equal to where we are currently deploying it, or preferably an even better profit, because that is what it is about.
Senator MacDonald: Yes. We are glad you are flying and that you are making a profit, but we would like to have better service in Halifax.
Mr. Dunleavy: I will take that away.
The Chair: We have three members from Halifax on our committee, so you might be getting a second question on that subject from Senator Mercer.
Senator Mercer: I will not ask about the service to or from Halifax. I do want to say that WestJet is one of the few airlines that have never lost my luggage.
Last week you announced a partnership with Emirates Airline.
Mr. Dunleavy: That is correct.
Senator Mercer: I am interested in this because Emirates, of course, has been trying to increase their landing rights in Canada. Your competitor has been quite open in their opposition to that and says that it would damage their business.
How do you see this new relationship with Emirates increasing WestJet's ability to compete internationally?
Mr. Dunleavy: Thank you for that. Airline partnerships has been a long-term strategy. In fact, we started working on that strategy five or six years ago. At the time, we did not have an appropriate reservation system that could handle that type of relationship, so we had to invest in a project, which was to put in a new reservation system for WestJet. That was implemented a couple of years ago, and from that time we have been able to deploy more partnerships with multiple airlines.
Currently we have 15 airline partnerships in production and we have 3 code-share agreements in place. We try to establish a rate of about one new interline agreement per month. We do not do it every month of the year, mainly because in the December period, or periods like that, there are too many things going on. If there is a code-share going in that month, we certainly will not do an interline the same month. We end up with something like nine interlines and three or four code-shares per year.
Emirates is one of those airlines that has been on our list. It was announced a few weeks ago. For us, it is an opportunity. They are flying into Canada. Whether it is the current three times a week or their desired number of flights, when they do come in, we can connect them to our network, which works very well, and we can flow that traffic on to WestJet. It is an additional source of revenue for us. Vice versa; we can flow traffic from WestJet into Toronto, and then from Toronto on to the Middle East.
Senator Mercer: You were not burdened, as Air Canada is, with the requirement or the need to fly into what many would call marginal marketplaces in the country. By using only 737s, you can exclude yourself from some of those because of the size of the aircraft. If you are truly going to be a national airline, you will have to start thinking in a national sense, and that national sense is not just landing in Halifax but landing in Sydney, Saint John, New Brunswick, et cetera, in places where you may not be landing now.
Is there a business plan for WestJet to start looking at those other markets? If so, does that mean you will break the mould of only using 737s?
Mr. Dunleavy: Thank you for that question. I am not prepared to answer all of those questions, but what I will tell you —
Senator Mercer: Air Canada is not listening.
Mr. Dunleavy: Of course not. Neither is Porter.
Although the WestJet fleet of 737 aircraft is a single fleet, consistent with the low-cost model, we have three different sizes of those aircraft. We have an 119-seater; a 136-seater, which is the backbone of the fleet; and a 166-seater, which is the largest version of the 737 that we operate. For shorter-haul, higher-frequency markets, we may use the 600-series aircraft, which has 119 seats. For long-haul, sun destinations, tour operators, WestJet Vacations type of activities, we will use the larger-capacity aircraft. It comes down to a per-seat cost, and the per-seat cost decreases the more seats we put on that aircraft.
Having said that, we do not put the same number of seats on our aircraft that Ryanair might put on in Europe. For the same size aircraft, they may have 189 seats and we may have 166. The reason for that is that what you are prepared to put up with on a one-hour flight in an intra-European environment is not the same for a four- or six-hour flight here in Canada to Mexico or Hawaii, et cetera. We are careful about that.
However, that 737 fleet currently addresses 63 per cent of the Canadian population. I would say on a yearly basis we are continually asked by our board: You have a single fleet model. It has worked very well for you, but there are these other communities that your model simply does not address.
Some of these markets are never big enough to support a daily operation. Actually, a daily operation is enough. If you want to serve a market, you need at least a flight in the morning and a flight in the evening. For some of those markets, they are also highly seasonal. You will find that WestJet will operate into those markets on a seasonal basis. We have heard complaints that say: WestJet, you cherry-pick. You only come in for that peak season and then you pull out. Are you doing something inappropriate there?
I would argue that the question is this: Here in Ottawa, does the bus service run 24 hours a day? It may do. I really do not know. However, I doubt it runs at the same frequency at midnight to six o'clock in the morning. The reason they do not operate with the same frequency throughout the day is because the demand changes as a function of time of day.
In the airline business, this changes as a function of time of day and seasons of the year. We will go in and service those markets. I will tell you that those airport authorities come to us and ask us: Can you extend the season? We would like to extend the season because it gives us better utilization of the fleet. However, if there are only 10 people on the aircraft, then, first, as a community, why are you complaining if only 10 people are on our aircraft and that is not enough to justify it; and if we have to charge economic rates to cover the cost of that aircraft for 10, 20 or 30 people, it does not make sense.
You are right. I would say on an annual basis we are tasked with looking at whether anything else has changed in the marketplace. Is it time to look at a different fleet type? That could be a smaller regional aircraft or it could be a larger, long-haul, wide-bodied aircraft. We look at that, but we are always careful about not only what the opportunity is but what the current world environment is looking like. As we know, in the world economy, it can be very risky out there.
The Chair: I will ask you to wrap up. We are in the situation right now where the whips are calling us to be back at eight o'clock. I have four more questioners, which we will not have time to deal with.
We do have to adopt our budget and activities. The clerk has prepared for us one motion. The budget was submitted to the steering committee. The steering committee is submitting that activity one would be a trip to Toronto, Hamilton, Buffalo; and activity two would be a trip to Montreal and Plattsburgh.
We can free the witness if you want. Unless there is controversy, we can adopt the budget and we can continue on for a few questions.
There is a proposition by my charming vice-president and steering committee member that the budget be adopted. Are the other charming members in agreement?
Hon. Senators: Agreed.
The Chair: It is agreed that the following special budget application for the fiscal year ending March 31, 2012, be approved for submission to the Standing Committee on Internal Economy, Budgets and Administration.
We have a few more minutes. If you do not mind, Senator Mercer, I will ask Senator Martin, Senator Cochrane and Senator Verner to each ask a short question, and I will ask Mr. Dunleavy to respond.
Senator Martin: I found your presentation extremely clear, and also quite relevant to what we are doing. Thank you for the insights that you have provided. The key message I take away today is about how competition does breed a certain level of excellence.
As a competitor, what about more competition? Is there enough competition in Canada and would another competitor also stimulate and perhaps be able to proactively tap into further markets and generate more passengers? Is there enough competition, or do you think that there is room for more? I know in a way you are answering as a competitor, but what about the emergence of others?
Mr. Dunleavy: It actually is a great question because, from a self-serving perspective, it is easy to say no, there is sufficient competition. The truth is, we did not orchestrate the creation of Porter Airlines, as an example, and they have brought in, through the operations at the island airport, a fleet now of some 20-odd aircraft and are actively competing with us in many markets, and also obviously competing with Air Canada as well.
The issue, from a policy perspective is, is there a certain critical mass that an airline must have so they can get the economies of scale and have a business model that is robust against the ups and downs in the world economy or even your local country's economy? That is one first important question.
If you look at airlines around the world, go to Europe, how many airlines exist in France? Primarily it is Air France, right? Holland is a little bit different because there is no domestic network, it is almost like Singapore: It is a city state. The U.K., yes, we have British Midlands, British Airways and now Ryanair. Ryanair has been able to maintain its existence through those extremely low fares that have stimulated incredible amounts of extra traffic out there.
I would have said, up until the emergence of these ultra-low-cost carriers, that it takes approximately 50 million to 60 million people to maintain an airline. Here in Canada, with 32 million people, you have two strong competitors with WestJet and Air Canada, and we have the emergence of Porter as a strong competitor as well. I think the competition is strong.
Senator Cochrane: My question is similar to Senator Mercer's. Being a Canadian company, do you have any commitment to offer services to smaller areas year round?
[Translation]
Senator Verner: Along the same lines, what about the smaller destinations? I am from Quebec City. WestJet has had a counter at the Quebec City airport for about three years, to our great pleasure. However, unfortunately, only flights to Toronto are currently available. Quebec City is the capital of Quebec, and Ottawa is the capital of Canada. We would certainly like to have return flights between the two cities.
[English]
Even if it is the first flight in the morning, I am an early bird and I am okay with that.
[Translation]
WestJet would be welcome, especially in Eastern Quebec and Canada.
[English]
Mr. Dunleavy: It comes down to economics. We will fly where we have sufficient traffic to support our operations. If they are not making money — and every aircraft is a $45-million asset — we have to move them to places where they make money. We are working hard to build up our corporate presence, our business markets and our loyalty programs, all of which will come together with our airline partnerships. We think a combination of those will allow us to operate more frequently into those destinations, and it is certainly our plan to expand our presence in Eastern Canada.
The Chair: The answer would apply to both questions. Sorry to have been so brusque. We have to go back to the chamber.
Mr. Dunleavy, you made an excellent presentation. I want to say to you, as I have said to other witnesses, if along the way you observe our deliberations, or someone is observing them for you, and you think that this committee should be informed of a correction or improvement in information, feel free to submit, via the clerk of the committee, that information. It will be shared with the membership. Thank you very much.
(The committee adjourned.)