Two of Canada’s aspiring no-frills carriers say an offer to provide foreign investors a larger stake within the country’s airlines could mean the main difference between their success and failure.
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A sweeping review of the Canada Transportation Act, tabled in Parliament recently, included a recommendation that Ottawa increase foreign ownership limits for commercial airlines to 49 per cent.
The current limit of 25 per cent acts as a “barrier to entry” for new airlines, said David Emerson, the former cabinet minister who authored the report.
“There is room to improve competitiveness, as evidenced through the high load factors and the record profits of these two largest carriers, as well as the proven fact that Canada may be the only major air market without an ultra-low-cost carrier,” Emerson wrote.
“In contrast to larger markets like the U.S., there might not be enough capital in Canada to invest in 75 per cent of a new national carrier.”
This is a wall that executives have run up against at Canada Jetlines Ltd., a fledgling ultra-low-cost carrier that has yet to obtain off the floor, according to CEO Jim Scott.
“Canada isn’t known for having lots of risk capital,” Scott said within an interview.
“We notice that when we go into the Usa and talk to institutions, they’re more concerned about the potential upside, whereas the Canadian institutions tend to worry about how you are going to mitigate risk.”
The Canadian aviation industry is full of failed startups, and allowing more foreign risk capital in to the market can often mean the difference between launching and not launching for Jetlines, Scott said.
“We believe that in order to launch an ultra-low-cost carrier in Canada it takes risk capital, and there is risk capital both in the United States and Europe that is around the sidelines at this time because they do not like the current ownership (model),” he said.
“Forty-nine per cent will be a lot more palatable for them and we feel it might increase our chances of getting funding.”
At Enerjet, a Calgary-based charter airline that’s evaluating the potential of launching its own no-frills carrier, the feeling would be that the proposal is really a part of the best direction but could go even further. (Enerjet has renamed its potential low-cost airline FlyToo, ditching the previous moniker of Jet Naked.)
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Darcy Morgan, chief commercial officer at Enerjet, said he really wants to see Canada change the way it determines who actually controls an airline, referred to as “control in fact.” Control actually should be held by Canadians, and is defined as all those who have “substantial ownership and efficient control,” a somewhat vague definition that’s susceptible to the whims of the government, Morgan said.
He’d like to see Canada adopt the Australian model, that allows as much as 100 percent foreign ownership as long as the airline is incorporated and operated in Australia.
“The the fact is that control actually is as powerful or more powerful a deterrent to foreign investors than the raw percentage number,” said Morgan.
“(They worry) when we’d a general change in government and the new government was anti-foreign investment, the investor could have the rug pulled out from under them due to this subjective resolution of control in fact.”
Like Jetlines, Morgan said changes to foreign ownership limits and the meaning of control in fact could determine whether FlyToo ever makes existence.
Neither airline has given a timeline for his or her launch. Enerjet won’t move ahead with FlyToo “unless we are sufficiently believing that it will likely be successful,” Morgan said.
Last month, Jetlines announced that intends to list on the TSX Venture Exchange via a reserve takeover of Jet Metal Corp. a junior mining company. Jet Metal brings $7 million in assets to the deal and can raise as much as $6 million through a private placement.
NewLeaf Travel Co. Inc., a third ultra-low-cost carrier, began selling tickets in January with intends to launch in February, but needed to suspend those plans while the Canada Transportation Agency reviews its licensing requirements. That review is ongoing.
Financial Post
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