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Report on Business Startup airlines say consolidation will mean higher prices

The head of a Vancouver-based startup airline says the proposed takeovers in the Canadian aviation industry will bolster the country’s two dominant players and drive up ticket prices for travellers.

Javier Suarez, chief executive officer of Canada Jetlines, said Air Canada’s $520-million friendly offer to buy Transat A.T. Inc., and Onex Corp.’s $3.5-billion deal to take over WestJet Airlines Ltd. will make the two big carriers better positioned to shut out new competitors, while making it hard for smaller companies such as his to raise money from investors.

Air Canada and Transat have said they expect to come to a merger agreement near the end of June, even as Montreal’s Group Mach offered a higher price for Transat. WestJet shareholders are expected to vote in July on the Onex offer to take the Calgary-based airline private.

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Both deals are subject to approvals by shareholders, securities regulators and the federal government, which will take into consideration reports from the Competition Commissioner.

Between them, Air Canada and WestJet control 90 per cent of the domestic scheduled market, according to OAG Aviation Worldwide Ltd., while Air Canada and Transat account for about 60 per cent of transatlantic fares to Europe, in addition to much of the Montreal air-travel business.

Mr. Suarez said the entrance of new potential investors in the industry is a welcome sign of stable profits, but travellers should worry about an increase to fares that are already among the world’s highest.

“Customers should be concerned because that’s too much control,” he said. “It is good news for Air Canada but it means further consolidation in an already very consolidated market. So it is terrible news for Canadians since this will lead to higher flight fares, especially in Quebec.”

Canada Jetlines plans to begin flying passengers in its two leased Airbus A320s on Dec. 17, after delaying its launch while reaching deals with investors in Europe and South Korea.

“[We] are asking investors for money to invest in our airline and they know we are going to be deploying our aircraft in a market where the existing competitors are very strong,” said Mr. Suarez, formerly of Mexican airline VivaAerobus, by phone from Vancouver. “They don’t like that. You don’t want to be competing with two monsters.”

There are two other upstarts in the low-cost sector – Flair Airlines, which became a scheduled carrier a year ago with seven Boeing 737s, and Enerjet, a former oil-patch charter airline that will fly under a yet-to-be announced name, possibly starting in December. The airline is run by WestJet co-founder Tim Morgan, with investments from Indigo Partners of the U.S. and Stephen Bronfman’s Claridge Inc.

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Dean McKenzie, a spokesman for Enerjet, said it is not clear how the two takeovers will affect the airline’s prospects. “We don’t know whether it will help us or hurt us,” he said.

He noted Onex has a history of maximizing asset values by cutting costs and selling companies piece by piece, and he speculated WestJet’s discount wing Swoop could be sold or merged with a U.S. airline. WestJet launched in 1996 as a Western-based low-cost carrier with one model of plane, the Boeing 737. It has gradually come to resemble larger rival Air Canada by adding a range of airplanes and international routes, a strategy that has not gone smoothly. Onex has said it plans no changes to WestJet’s plan, but there are questions about how the airline’s fortunes could improve otherwise.

“The enemy of success in the airline industry is complexity,” said David Tait, the executive chairman of Flair.

Mr. Tait, a former executive at Virgin Atlantic, Laker Airways and Air Canada, said he has never seen airline brands within brands succeed, and he also thinks WestJet’s Swoop could be shed if Onex refashions WestJet as a bigger competitor with Air Canada on international routes.

The Canadian market is unusual because it has just two dominant domestic carriers, and no established low-cost airline, said David Tyerman, a consultant for Canada JetLines and a former airline stock analyst. Mr. Tyerman said this is due to the vigour with which Air Canada and WestJet defend their routes against new competitors.

Canada Jetlines declined to say what routes the airline will fly, sharing only that it will begin flying out of Vancouver. “We have not shared our final network because the last time we did, Swoop pretty much cloned our network, so we are going to keep it to ourselves for now,” Mr. Suarez said.

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Mr. Suarez said the government should continue to take steps to facilitate the entrance of new airlines, including enforcing the Competition Act.

Canada’s Competition Commissioner is investigating WestJet and its Swoop subsidiary after a complaint from Flair last year that the bigger airline was pricing some routes at well below cost in an alleged effort to eliminate competition.

The Competition Bureau does not discuss its investigations with the public or media, but a court filing related to the probe brought it to light. “Based on the commissioner’s inquiry to date, the commissioner has reason to believe that [WestJet and Swoop] have engaged in conduct that constitutes an abuse of dominant position,” the competition watchdog said in the filing.

WestJet did not immediately respond to a request for comment.

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