New budget airlines to keep WestJet, Air Canada on their toes

[UPDATE: As of 3:30 p.m. ET Monday, NewLeafTravel is"temporarily postponing" sales of tickets for flights originally scheduled to start running on Feb. 12., pending aCanadian Transportation Agency (CTA) review of licensing regulations for Indirect Air Service Providers.

NewLeaf, rather than applying fora carrier licence, has partnered with the alreadylicencedB.C.-basedcharter airline Flaire, which has agreed to provideplanes, crew and maintenance.The CTA is decidingwhether companies who bulk purchase all seats on planes and resell those seats to the publicshould be required to hold a licence.

NewLeafsays itaims to start selling tickets again by the spring.]

NewLeaf Travel and other discountairlines are shaking up Canada's air travel industry, and that's good news for all passengers, analysts say.

NewLeaf, which bills itself asan"ultra low-cost airline," had announced it wouldstart Flying between seven "underserved" Canadian citieson Feb. 12 withtickets as cheap as $79.

Icelandic carrierWOW Air willbeginoffering $99flights to Iceland and $149 flights toEuropean destinations from Toronto and Montreal in May.

Two other budget airlines Jetlinesand Jet Naked are also hoping to get off the ground this year.

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This proliferation of cheap flights has the potential to rattle an industry long dominatedby Air Canada andWestJet, two companies that have developeda "cozy relationship" with similar prices and fees, says transportation economistBarry Prentice.

"Themere fact that we do have somebody coming in means that the airlines do have to recognize there is a credible threat there, and I think that's very good for consumers," Prentice, aprofessor at the University of Manitoba's Asper School of Business,told CBC News.

Price war

WestJet has already responded by lowering its ticket prices to undercutNewLeaf on many competingroutes.

"We will vigorously defend our low fare leadership position in the market. Our success over the past 20years demonstrates that Canadians love our unique combination of low fares and remarkable guest experience," WestJet spokeswoman Lauren Stewartsaid in an email.

Air Canada hasn't said yet whether it will follow suit, but spokesmanPeter Fitzpatrick told CBC News:"We welcome competition and offer competitive pricing in every market we serve."

The newlow-cost carriers in Canada are copying thebusiness models ofsuccessful budget airlines south of the border byoffering cheap introductory fares and charging extra for things like printing a ticket, bringing aboard a carry-on or checking luggage.

"By unbundling the entire service, you get to choose what you want," NewLeaf CEO Jim Young said when he announced the airline's routes. "Ultra low-cost carriers are some of the most financially successful airlines in the world today."

Tickets are selling

It's too early to say whether Canadians will embrace this model,but they seem to be taking interest.

WOW spokeswomanSvanaFridriksdottirsaiditssales in Canadahave been "a great success." She wouldn't give specific numbers,but saysthey've surpassed the booking rates of WOW'sU.S. offerings,which had a load factor of 85 per cent throughout2015.

Air travellers in Winnipeg, where NewTravel will be based,told CBC News they're eager to check it out.

Vancouver-based Jetlines and Calgary-basedJet Naked haven't started selling tickets yet, but both hope to begin operations this year Jetlineswithin six months, and Jet Naked byspring.

Still, Prentice doesn't think these newcomers pose a serious threat to Canada'sestablishedairlines.BothAir CanadaandWestjethave posted soaring profits and announced international expansions in recent months.

Through itssubsidiaryRouge, AirCanada added a slew of sun internationaldestinationsin recent months,includingBarbados,Nassauand Hawaii.

In 2016, Air Canada will add flights to Prague, Glasgow,Casablanca, Budapest, Warsawand more than a dozen U.S, cities.WestJetis also expanding, andhas added flights toHawaii, whileboth airlines have added flights toGatwick Airport near London.

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NewLeaf, meanwhile, has only four planes flyingbetween seven cities, none of which are major travel hubs.

"The more flights you have, the more places you go, the more attractive you are as an airline, which iswhy there'srealbenefitto being bigger,"Prentice said.

Where others have failed

NewLeaf and itscounterparts aren't the first to launch discount airlines in Canada.JetsGo, Canada 3000, Greyhound Air,Zoom Airlines all came and went.

Still,Prentice saidthese new airlinescould succeed where others have failed.

"Fuel prices are low, which helps. And with the low Canadian dollar we may well see more people having staycations within Canada," he said, so they might be interested in low-priced domestic trips.

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Others are less optimistic.

Transportation analysis firm Raymond Jamesdescribed NewLeaf's entrance to the marketas a "rather inauspicious opportunity with history stacking the odds against its long-term success."

In a research note to investors, Edward Gudewill and Ben Cherniavsky of Raymond James questioned the wisdom ofopening a new airline amid a turbulent economy with a weak loonie and slumping oil prices.

"To the unemployed,it doesn't matter how low fares are," they wrote.

They also took issue withNewLeaf'swinter launch and travel destinations.

"Launching a domestic-only operation in themiddle of February seems like a tenuous proposition. Presumably cash will be very tight for a startup operation like this, which means it could be financially vulnerable for the first three months until seasonal demand picks up in Canada," they wrote.

"And as far as the strategy of flying to small, secondary markets is concerned, we remind investors that these are 'small'and 'secondary'for a reason."

Nevertheless, they predict savings across the board fortravellers.

"Regardless of New Leaf's long-term success, a new entrant into the market will at the very least mess with the incumbents' pricing power, which has already been under considerablepressure."