9 AIR TRANSPORTATION

INDUSTRY STRUCTURE

Key Players

Air Canada and Subsidiaries

Air Canada, together with its subsidiaries, remained Canada's largest airline in 2002, with $9.8 billion in revenues. It provided domestic service to 66 points in Canada, 55 in the United States and 30 international destinations in 23 countries. It is a founding member of Star Alliance, a consortium of 14 airlines that serve 729 destinations in 124 countries. Air Canada also has three wholly owned subsidiaries: Jazz operates less busy domestic and transborder routes, particularly to small communities; Zip began service on September 22, 2002, providing frequent low-fare service on domestic routes; and Air Canada Vacations offers tour packages to popular destinations. In addition to its subsidiaries, Air Canada offers no-frills service under the brand name Tango to the most popular destinations in Canada and the United States. Jetz, an internal division of Air Canada, offers premium charter service to sports teams and businesses. In addition, there are four independent local service operators (Air Creebec, Air Georgian, Air Labrador and Central Mountain Air) that offer regional services on behalf of Air Canada.

Low-Cost Carriers

Domestically, and on some transborder routes, Canada has seen the entry and growth of a number of low-cost, no-frills carriers in recent years. In fact, these carriers have been the source of most traffic growth, a trend that can be seen in Canada and around the world. Calgary-based WestJet is now Canada's second-largest domestic airline in terms of passengers carried. It serves 21 cities with 36 aircraft and in 2002 had revenues of $594 million. CanJet, based in Halifax, restarted service in June 2002 following a 14-month absence after its earlier acquisition by Canada 3000, which subsequently went bankrupt in 2001. By year-end, CanJet was operating five aircraft to seven Canadian cities. Montreal-based Jetsgo by year-end was serving six Canadian destinations with three aircraft.

Charter Air Services

Canada has a number of charter airlines that provide service both domestically and internationally. Their focus is point-to-point transportation serving leisure destinations, often as part of a vacation package. Their markets are typically served with low frequencies (sometimes only one or two flights a week) and are highly seasonal, with summer service mainly to Europe or within Canada and winter service to the south. The major players in this segment of the industry are Air Transat and SkyService Airlines. Montreal-based Air Transat is Canada's second-largest airline in terms of revenues ($801 million in 2001) and has a fleet of 17 aircraft. SkyService is based in Mississauga and serves nine domestic points on behalf of Conquest Vacations. It has announced a plan to expand its fleet from 5 to 11 aircraft by the spring of 2003.

The market has also seen two recent entrants: Vancouver-based HMY Airways began international charter service to Mexico, Manchester, Las Vegas and Los Angeles with two aircraft in November; and Ottawa-based Zoom Airlines began service to southern vacation destinations in December 2002 in conjunction with Go Travel Direct Vacations.

Foreign Airlines

Twelve U.S. airlines serve 17 Canadian cities, while 30 foreign airlines provide service from Canada (primarily from Montreal, Toronto and Vancouver) to 39 international destinations in 28 countries. For a list of foreign airlines serving Canada on a scheduled basis, see Table A9-5 in the Addendum.

Northern Airlines

A number of airlines provide year-round service, both scheduled and charter, across northern Canada with combination passenger and cargo aircraft. The major participants are First Air, Canadian North (incorporated as Air NorTerra) and Air North, each of which is partially or wholly owned by Aboriginal groups. Air North is the most recent entrant, having started service in June 2002. Canadian North extended its service to more remote communities in 2002 with new code-sharing relationships with Kenn Borek Air and North-Wright Airways.

Local Service Airlines

Smaller local airlines also provide service across Canada, particularly to remote communities, in niche markets (e.g. Bearskin Airlines' service from Ottawa to Toronto/Buttonville, and floatplane and helicopter services in British Columbia), and as alternative services in some regional markets (e.g. Hawkair in British Columbia and Provincial Airlines in eastern Canada). For a list of the largest of these airlines and their major areas of operation, see Table A9-6 in the Addendum.

All-Cargo Airlines

A number of all-cargo airlines provide jet service on behalf of Canada Post, courier companies, freight forwarders, consolidators and shippers. They include All-Canada Express, Cargojet Canada and ICC Canada, all based in Mississauga, Kelowna Flightcraft of British Columbia, and Morningstar Air Express of Edmonton. Cargojet Canada is the newest entrant in the market, having previously purchased Canada 3000 Cargo Inc. More recently, it also acquired shares of Winnport Logistics of Winnipeg.

General Aviation

General aviation represents about half of all aircraft movements at controlled airports in Canada, although much of the activity in 2002 was at non-controlled airports.

Commercial Aviation

The actual number of airlines operating in Canada is much larger than the previous section implies. At the end of 2002, the Canadian Transportation Agency reported that more than 2,000 licences were active. Table A9-7 in the Addendum shows the number of licences held as of December 31, 2002.

The number of personnel licences issued by Transport Canada confirms the importance of the commercial sector. The number of commercial licences held in 2002 is roughly equal to the number of air transport licences. Table A9-8 in the Addendum summarizes the number of personnel licences issued, while Table A9-9 gives a provincial breakdown of the licences.

Specialty air services are those services that use aircraft but do not involve the movement of passengers or cargo between two points. They include such diverse services as flight training, parachute jumping, glider towing, aerial forest fire management and fire fighting, aerial inspection and construction, aerial photography and surveying, advertising, weather sounding, crop spraying and heli-logging, as well as hovercraft services. While some large companies (e.g. Canadian Helicopters) are represented in this sector, many of the companies are very small operators serving local markets.

Business Aviation

Business aviation continued to grow in 2002 due to fractional ownership, which allows individuals or businesses that would not otherwise be permitted to own aircraft on their own to share in an aircraft's use by purchasing units of flight time. This type of aircraft ownership is regulated in Canada as a commercial air service.

Recreational Aviation

Recreational flying in its various forms represented the bulk of general aviation activity. It accounts for about two thirds of Canada's pilots and three quarters of all aircraft registered in Canada in 2002. It is also the largest segment of Canadian civil aviation activity. While most recreational aircraft are standard planes, this segment also includes all other types of recreational aircraft such as ultra-lights, gliders and balloons, among others. For further detail on the types of aircraft operated, see Table A9-10 in the Addendum.

Price, Productivity and Financial Performance

In 2001, the total revenue generated in the air transport industry dropped for the first time since 1993, by 8.4 per cent. Decreases were observed in most passenger markets as well as freight services. Although the prices of air services dropped by 3.6 per cent, this was not enough to stimulate the overall demand, which decreased by five per cent; this pattern has not been observed since the end of the 1970s. Canadian air carrier passenger traffic is expected to have fallen again in 2002, a result of the higher costs of air travel.

Continued industry restructuring yielded productivity gains of 5.2 per cent, a recovery from the 2000 decline. These gains, however, were offset by large factor price increases, most notably labour. In the end, unit costs rose by 1.5 per cent in 2001. Since 1991, productivity gains have been limited to 0.9 per cent per year, i.e. half the gains recorded by the combined rail freight, air transport and trucking industries. Factor prices, which are mostly beyond the control of the industry, increased by 4.2 per cent, 2.6 times faster than general inflation. As a result, unit costs increased by 3.3 per cent per year from 1996 to 2001.

The airline industry had a difficult year in 2001. Air Canada reported a total loss of $1.3 billion, Canada 3000 ceased operation, and Air Transat restructured its operations. Bucking the trend, WestJet reported a profit of $37 million. In 2002, although the situation improved, the industry continued to experience difficulty. Despite $9.8 billion in revenues, Air Canada reported a loss of $428 million. WestJet reported profits of $51.8 million and Air Transat's parent, Transat A.T. Inc., returned to profitability with $7.8 million in net income.

For more information on price, productivity and financial performance of the air transport industry, see Tables A2-61 to A2-64 of the Addendum.

Major Events in 2002

Infrastructure

Industry Structure

Freight Transportation

Passenger Transportation