Business Politics

Captive market: Understanding Nunavut’s complex airline industry

nunavut-travel-blog-post

The territory of Nunavut is vast expanse of beautiful, unspoiled nature. It has a population of 34,000 and is roughly the size of Europe. Compared to other places, it’s a lot of space for very few people.

With no roads or railways connecting any of the communities, transportation is a very important issue.

The capital, Iqaluit, is about 2,500 kilometres north of Ottawa. It’s three hours away by flight, making it very isolated from the rest of Canada. It’s an expensive place to live, too. Sealift cargo is limited to a few months a year, so most things – and people, too – have to be flown to Nunavut. Naturally, airfare has an important impact on the cost of living.

Growing up in Iqaluit, I’ve always been painfully aware of how expensive travel in Nunavut is – not just for me, but for my family, friends, sports teams, business associates, etc. As an avid traveller, I was curious to see how the launch of a new airline could affect the price of travel for the consumer.

It’s extremely difficult to determine how much of the current airline industry is subsidized, cross subsidized, or otherwise affected by private and government influences.

In this article, I plan to present the research I’ve done into the current state of Nunavut’s airline industry, the problems it faces, and possible solutions moving forward.

Travel to Iqaluit

Today, if you want to get to Nunavut, a return ticket from “the south” – Halifax, Ottawa, Montreal, or Edmonton – typically costs around $2,500, depending on the destination and time of year. There are two main airlines to choose from – First Air and Canadian North – and their prices are virtually identical.

First Air is based in Ottawa, and is a subsidiary of the Makivik Corporation, the legal representative of Quebec’s Inuit. Canadian North is based in Calgary, and is owned by NorTerra, a private holding company, owned by the Inuvialuit Development Corp. in the Western Arctic.

The history of the airlines’ ownership is long and complex. For example, several Nunavut organizations – including Qikiqtaaluk Corp. (QC) and Sakku Investment Corp. – once had ties to the airlines. But to make a long story short: no Nunavut-based organizations currently hold any sizeable stake in either airline.

Both First Air and Canadian North have a long history in Nunavut. They’ve long provided essential services and supported many local charities, causes, and businesses.

Lately, the choice between the two major service providers has become hazy, and many have begun questioning whether the two providers offer enough competition for the growing market.

Travel to communities

Smaller airlines also operate outside the popular Ottawa–Iqaluit route. The biggest of these is Manitoba-based Calm Air, which flies to Nunavut via Winnipeg, and with whom Canadian North is a partner.

When traveling to Nunavut’s 24 other communities, there is not much more choice. Smaller airlines do offer competition, but with so few travelers in the region, there’s usually only one airline provider on a particular route. These flights are often chartered by the government or corporations, or hired as subcontractors for the bigger airlines.

Airfare is very expensive between the communities. A return trip for two, from Iqaluit to Grise Fiord, can cost more than $14,000 – and that’s not including the trip to Iqaluit. These prices often make community travel unfeasible for private consumers.

Freight

A very important aspect of Nunavut’s travel industry is freight. Even though the profit margins for airlines are healthier with passengers, freight plays a vital role in the viability of the Northern travel industry.

The cost-benefit analysis of passengers-to-freight ratios are extremely complex and difficult to understand. Airlines use formulas for determining the “load factor” and cost-per-seat-per-mile-ratios of all routes.

Adding to the complexity is the fact that airlines normally carry much more freight north than south. Their southbound flights are often filled with ballast, and therefore do not generate profit.

Cross subsidization

Even if some routes don’t generate profit, the financial losses of one flight may be compensated for by the profitability and/or subsidization of another.

For example, if the route between Iqaluit and Ottawa creates the biggest revenue for the airlines, then these profits may be used to offset the costs of a less profitable flight – say, the less-travelled route between Gjoa Haven and Taloyoak.

This method, known as cross subsidization, and is a complicated economic tool airlines use to make their services most cost-effective.

Government subsidization

Official government subsidies are also made available, and their pros and cons add to the complexity of the industry.

Nutrition North, Pivut, and Medevac are made available in an attempt to ensure that Nunavummiut have access to affordable food, that Nunavut Land Claim beneficiaries get subsidized airfare, and that Nunavut residents have access to medical services, respectively.

Another factor to consider is that the Government of Nunavut (GN) offers a corporate rate for its employees. With the GN being the airline’s biggest customer, its discounted rate is an important aspect of the pricing ecosystem.

It’s extremely difficult to determine how much of the current airline industry is subsidized, cross subsidized, or otherwise affected by private and government influences. It would require a financial expert with full access to the airline’s books to fully understand it. But the airlines are private companies, and as such, have no obligation to share their finances.

Codeshare

In 2014, in an effort to cut costs, First Air and Canadian North considered a potential merger. The idea proved controversial, and was quickly called off.

Nunavummiut – politicians, businesses, and private citizens – have long been calling for more competition in the Northern airline industry.

Instead, in 2015, the two major airlines, along with Calm Air, began code-sharing flights in order “improve the sustainability” of their airlines. This meant customers could be switched from seats on one airline to the other, keeping flights full and lowering costs.

Although the move was meant to keep costs down – ultimately passing the savings on to customers – many Nunavummiut feared that the agreement would mean higher fees and fewer flights.

In January 2016, the territorial government called the CEOs of the three major airlines in for a meeting to ask why codesharing had monopolized and eliminated certain routes, and why it had not brought prices down as promised.

The airlines said the codeshare was one of many moves made to keep the airlines competitive, after the government’s decision to, among other things, split its medical travel contract.

That same month, First Air asked the federal government for a “financial contribution of $42 million to update its fleet and remain profitable. As one executive put it: “Unfortunately, we don’t provide a social service.”

In general, the relationship appeared strained, with the airlines unanimous in their belief in the necessity of the codeshare program, and the government unable to understand the efficacy of its subsidies.

Local competition

On January 28, GoSarvaq, a new Iqaluit-based travel company, launched in Nunavut.

Working with Flair Air, the company announced sustainable, affordable flights from Ottawa and Halifax to Iqaluit twice a week. Their introductory rate was $499, one way.

After their initial announcement, the company had some difficulty getting off the ground, and due to legal, regulatory, political, and technical issues. The sale of tickets was pushed back by two weeks.

Price war

On April 18, when online ticket sales finally began for GoSarvaq, the two major airlines launched a “seat sale.” These sales are rare, unscheduled periods of time where the price of tickets are drastically reduced, resulting in thousands of dollars worth of savings.

The price of the seats, one way, was $399 at first, and then $269, undercutting GoSarvaq’s prices by more than $200. These prices were previously unheard of.

Typically, a seat sale lasts a few days. But this particular seat sale was scheduled for the day of GoSarvaq’s first scheduled flight in May until August 2016 – the bulk of the busy summer travel season.

Failure to launch

It would be difficult for any airline to compete with established airlines like First Air and Canadian North – especially a start-up business like GoSarvaq.

Access to travel is vital for Nunavut’s growth and prosperity – in business, trade, education, culture, and tourism.

On May 6, GoSarvaq announced its exit from the market, citing the sudden drop in competitors’ ticket prices as the main cause of its failure to launch. Soon after the announcement, the seat sale by the other airlines ended.

The reaction of many Nunavummiut was one of great disappointment and anger. Many people were extremely skeptical of fair play on part of the major airlines, and a petition to the complaint section of the Competition Bureau went viral (at least, in Northern terms) on social media.

The incident proved that if the major airlines were to strategically coordinate their pricing and timing – an illegal business practice known as collusion – they could bleed-out new competition. In the future, they could regain their losses by raising prices afterwards. GoSarvaq shared a video to this effect in its exit announcement.

The sudden change in pricing had many people on social media wondering how the major airlines were able to drastically lower prices, while simultaneously cutting routes and asking the government for $42 million.

GoSarvaq said it is reviewing legal options and speaking with the Competition Bureau about whether or not unfair business practices were used. A similar situation was said to have occurred in 2011 when Air Canada tried to enter the market.

Competition warranted?

Nunavummiut – politicians, businesses, and private citizens – have long been calling for more competition in the Northern airline industry. But the effects of competition on an industry as complex as Nunavut’s is difficult to predict.

Competition may well be warranted, but with the unique market impacted by government and cross subsidization, it’s truly difficult to gauge. Having three major airlines servicing Iqaluit – a community of 7,500 people – would be extraordinary and possibly too much for the relatively small market.

But with the premature exit of GoSarvaq, it will likely be a long time before Nunavut knows the answer.

On the whole, creating a competitive airline industry for the small Nunavut population of 34,000 over an area the size of Europe is a daunting task. Will GoSarvaq’s unsuccessful attempt to enter the market discourage other airlines from trying?

And if another company does succeed, how will it affect consumers long term?

Conclusion

The state of the industry is complex and, in short, we don’t have the data we need to know what actions could be taken to improve the situation.

But one thing is clear: In a globalized world, travel is more important than ever for Nunavummiut. With Iqaluit’s new international airport, Nunavut is set to become an international hub, connecting flights and bringing the rest of the world to the Arctic.

Access to travel is vital for Nunavut’s growth and prosperity – in business, trade, education, culture, and tourism. All players need to cooperate to find a solution that benefits tourists, businesses, and most importantly, the people of Nunavut.◉


Photo credit: Thor Simonsen

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  • Lloyd H

    Timely, Informative; well written.