Yahoo Finance Competition Bureau's airline study won't lead to 'radical changes': Analyst
While the possible recommendations stemming from the Competition Bureau’s investigation into airline competition in Canada could impact the country’s airlines, one analyst says “we do not believe that the government will make radical changes” to the industry.
Canada’s Competition Bureau announced last month that it will conduct a market study of airline competition in Canada, as “recent events have raised questions about the state of competition in the industry.” It comes a few months after low-cost carrier Lynx Air shut down operations and filed for creditor protection, less than two years after launching, citing increasing airport charges as well as a difficult economic and regulatory environment.
The regulator says the domestic air travel market is concentrated with two major airlines, and new carriers appear to face challenges entering the market, and that domestic fares “appear to be relatively high” while Canadians are filing more complaints about air travel.
In a research report released on Tuesday, National Bank analyst Cameron Doerksen assessed potential recommendations the Competition Bureau may make in its market study and what it could mean for Canadian airlines, specifically Air Canada (AC.TO), the country’s largest carrier and a publicly traded company. He says that “at least some of the Competition Bureau’s underlying assumptions are incorrect.”
“Although Canada’s airline sector is undoubtedly concentrated, we posit that this is mostly a function of systemic characteristics of the market,” Doerksen wrote, noting that Canadian airlines have to grapple with a geographically widely dispersed population that is concentrated in a handful of large cities.
“Because of this concentration, there is a more limited number of city-pair routes that can support significant frequency and multiple competing airlines. We believe this is one of the primary reasons why Canada has historically only been able to support two large network airlines and why airlines that have attempted to go head-to-head with the two large carriers on some of the busiest routes (with all their large network advantages) have typically failed (see Jetsgo in the early 2000s and more recently Lynx Air).”
Doerksen also notes that “the timing of the Bureau’s study is also somewhat perplexing because competition in the domestic Canadian market today is more intense than it has been in years.” While Lynx has exited the market, Porter Airlines is in the midst of an aggressive growth strategy, and ultra-low-cost carrier Flair Airlines has also grown.
Still, the Canadian market is dominated by Air Canada and WestJet, although Doerksen says their portion of domestic seat capacity has shrunk in the last five years. According to National Bank, Air Canada has 41 per cent of domestic seats and WestJet has 30 per cent, down from Air Canada’s 48 per cent in 2019 and WestJet’s 34 per cent.
Fostering competition in the sector
The Competition Bureau, which stopped taking public feedback for the investigation on Monday, says the airline market study “will examine how to make it easier for new businesses to compete and easier for consumers to make informed choices.”
“Since the Canadian population is spread out over vast distances, other modes of transportation may not be feasible replacements for air travel. More competition in the industry will mean lower prices, better services, and improved productivity,” Competition Bureau commissioner Matthew Boswell said in a statement in May.
While the investigation is ongoing, Doerksen analyzed possible recommendations that the Competition Bureau may make, including eliminating foreign ownership restrictions, allowing foreign carriers to operate between destinations within Canada, and airport access changes.
The government revised foreign ownership limits in 2016, lifting them to 49 per cent. Doerksen says whether fully eliminating foreign ownership restrictions will lead to more investment in the Canadian airline industry “is questionable.” He cites the example of Australia, which has no foreign ownership limits, but still has only two carriers.
Cabotage, which is when foreign carriers can operate between two points in Canada, might also be recommended by the Competition Bureau, Doerksen speculates. But he notes that it may put Canadian airlines at a “major disadvantage”, unless it’s reciprocal. Foreign-owned airlines would also likely target only the most popular domestic routes, such as between Toronto and Vancouver, which “would only serve to hurt Canada’s incumbent airlines and would do nothing to enhance competition and lower prices on thinner routes.”
While Doerksen says the possible recommendations could be negative for airline investing sentiment, “we do not believe that the government will make radical changes such as cabotage or forced disposition of airport slots.”
The market study report is expected to be published in June next year.
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
Download the Yahoo Finance app, available for Apple and Android.
