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July 17 2024 / 12:50 PM
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Travelweek
Lynx Air joins list of failed Canadian budget airlines

It took less than two years for Lynx Air to fold, becoming the latest in a long line of budget airlines to launch – and then fail – on Canadian soil.

Like Roots Air, Canada 3000, Jetsgo, Greyhound Air, Harmony Airways and CanJet before it, Lynx Air (formerly known as Enerjet) started off strong, launching in April 2022 with brand new Boeing 737 aircraft that flew coast to coast across Canada, from Victoria to St. John’s. The ultra-low-cost carrier quickly expanded to the U.S. in early 2023, with flights to Orlando, Phoenix, Los Angeles and Las Vegas. It had experience and clout behind it, founded by an investor group headed by Tim Morgan, a former senior executive at WestJet Airlines Ltd., and led by CEO Merren McArthur, the former CEO of Tigerair Australia, Virgin Australia Regional Airlines and Virgin Australia Cargo.

But economic headwinds, compounded by a global pandemic, proved too much for the startup. Citing “compounding financial pressures associated with inflation, fuel costs, exchange rates, cost of capital, regulatory costs and competitive tension in the Canadian market” as the main contributing factors to its demise, Lynx announced that it would be folding last month, with its official shutdown timestamped for 12:01 a.m. on Feb. 26.

Did this come as a shock to industry experts? Perhaps. But the warning signs were definitely there. First, it was announced in June 2023 that McArthur would be stepping down as CEO for personal reasons. And then came reports last month of a potential merger with rival Flair Airlines, the proceeds of which would have gone towards Lynx’s $124.3 million debt to Indigo Partners, the U.S. private equity firm that owns one-quarter of the airline. All signs pointed to a done deal between the two airlines, with the Toronto Star anticipating an announcement to be made on Feb. 15. But the day passed with no further news — that is, until Lynx’s announcement of its closure a week later, which despite early alarm bells, still came as a shock to many.

So what happened? Why didn’t the merger pan out? And what is it about Canada’s landscape that puts ultra-low-cost and low-cost airlines at an immediate disadvantage? Travelweek asked John Gradek, Faculty Lecturer and Academic Program Coordinator, Supply Networks and Aviation Management, School of Continuing Studies, McGill University, for his take.

 

Were you surprised at all that Lynx went under?

Lynx’s failure was not a great surprise to me. The first sign of concern was the resignation of Merren McArthur in late June 2023, and the subsequent lack of a permanent CEO replacement. The low-key announcement of the COO as acting CEO was a stop-gap measure, but with over seven months without a permanent CEO, it surely was a warning sign.

“Plans to increase the Lynx fleet towards its initial stated goal of 50 aircraft was slow, with only nine aircraft in place after over 18 months of service.

“And lastly, the aircraft of choice of Indigo Partners for its ULCC airlines around the globe – Wizz, Frontier and Valaris – has been the Airbus 320 family. Lynx’s aircraft choice of Boeing 737MAXs did not fit the Indigo profile, a further sign of an outlier in Indigo’s overall strategy.

 

Why do you think the Lynx-Flair merger didn’t work out?

From reading the documentation submitted in Lynx’s application under CCAA (Companies’ Creditors Arrangement Act), negotiations with Flair had been underway since mid-January 2024, with several conversations highlighting Lynx’s specific need to reduce the level of Indigo’s debt, estimated at over $125 million. While negotiations continued, I would be highly suspicious of Flair’s ability to raise that amount of funds in a merger scenario. And the ability of Flair’s principal U.S. investor, 777 Partners, to raise such a capital infusion into Flair, or even obtaining debt financing, was problematic. At the end of the day, Indigo Partners most likely did not see much of an ability to get their debt addressed and saw no alternative but to take the CCAA route.

 

How will the void left by Lynx impact Canada’s aviation industry? Will airfares go up as a result?

“Canadians have been enjoying a recent boon in low airfares with the intensity of competition between Flair and Lynx. Air Canada and WestJet became more competitive with these ULCC fares, commencing the fall of 2023, resulting in a further lowering of ULCC fares to maintain their price edge in the marketplace. The end result was a deterioration of the financial state of both Flair and Lynx, resulting in Lynx’s shutdown in February. The recent pricing activity since Lynx’s demise has seen Flair’s pricing on key domestic services increased, along with those fares offered by Air Canada and WestJet. Airfares for customers looking for comparable airfares to those in place in recent months will be disappointed with these increases.”

 

Who do you see benefitting the most from Lynx’s shutdown?

There will always be interest in establishing discount carriers in Canada, especially when airfares are trending upwards, as they surely will with the demise of Lynx. The higher the established carriers’ fares, the greater the opportunity for a discount carrier to attempt to take advantage of a lower cost structure to establish a Canadian beachhead with a ‘unique’ marketing initiative, hoping to capture either new demand or attract the competitions’ traffic. This scenario has repeated itself several times in recent years, all having succumbed to the behaviours of Canada’s established carriers. We will see this scenario repeat itself again and again until structural and regulatory change become reality.

 

Why do you think it’s so hard for low-cost carriers (LCCs) and ultra-low-cost carriers (ULCCs) to succeed in Canada?

A couple of ideas come to mind as potential fixes to this ‘merry-go-round.’ Commercial licencing requirements need to be changed to ensure a sufficient amount of working capital to sustain operations. Current requirements are for 90 days of operation – this needs to be changed to a full year. And more frequent audits of cash positioning and financial performance need to be put in place for ULCCs. A major issue with ULCCs is their inability to cover their cost of operations, given their pricing strategies. There is a need to provide oversight on the fare levels put in place by ULCCs to ensure a ‘floor’ price, fare levels that maintain a compensatory level. Concurrently, there is a need to establish a fare ‘gap’ between ULCCs and established carriers, one that ensures the value of a ULCC fare and mitigates pricing action taken by established carriers reacting to ULCC fares. One will surely complain of interference in commercial actions, but recent history does confirm the need to address the aggressive behaviour of Canada’s established carriers.

 

If history has shown that budget carriers can’t succeed in Canada, does this mean that there’s simply no market for them here?

Going forward, and notwithstanding how Flair’s financial performance allows it to survive, the future of LCCs and ULCCs in Canada is bright. A key element of their future success is the acceptance that Canadian air transportation has evolved a user-pay structure rather than a publicly-funded one like those that exist in other ULCC markets outside of Canada. While US$19 and €12 airfares can exist in such publicly-funded markets, such cannot exist in Canada’s current structure.

“If the key to success as deemed by LCC and ULCC operators is their need to offer such fare levels, there is no hope for their success in Canada. Canadians have to accept a change in the funding structure of Canada’s aviation infrastructure (airports, air navigation, security services) to one funded by Canadian taxpayers. Are Canadians ready to accept such an additional tax burden? Does Canada’s aviation infrastructure sustain itself in a user-pay environment? These questions need to be asked and addressed sooner than later.

Mar 15, 2024

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