Sustainability in Canada’s Domestic Aviation Sector in the face of COVID-19

8 December 2020 
Joseph Sparling, President & CEO
 
Executive Summary

With most airlines incurring record losses, it is pretty clear that COVID-19 is wreaking havoc on the airline industry. As we find ourselves entering a second wave of the pandemic, which is shaping up to be worse than the first, it is clear that the industry is in serious trouble.

In the longer term, airlines will return to sustainability when people begin to travel again. In the short term, governments have provided financial assistance, for which this airline is most thankful. In the medium term, which is likely to be years rather than months, if governments choose to continue to provide assistance to help airlines survive, then we believe that the burden on taxpayers of providing financial aid could be minimized by attaching strategic conditions to that aid. The logic behind this is simply that much of the aid dollars to date have effectively funded excess capacity or empty seats with the result being that the aid has been somewhat ineffective in stemming record industry losses.

To illustrate, in our operation this year we incurred a pre-subsidy loss in Q2 and Q3 of $8.6 million on $21.1 million revenue and we flew with a 38% load factor. This compares with a $7.3 million profit on $51 million revenue and a 68% load factor during the same period last year. We received $6.6 million in Canada Emergency Wage Subsidy (CEWS) and Northern Essential Air Services (NEAS) subsidy in Q2 and Q3, but the cost of flying at a reduced load factor was $2.9 million, or more than 40% of the subsidy received. The illustration is even more glaring using Air Canada’s published Q2 and Q3 results, which showed a $2.8 billion pre-subsidy loss on $1.3 billion revenue with a 40% load factor and $492 million in CEWS relief. We estimate that their cost of excess capacity was $379 million or 77% of subsidy received.

With excess capacity approaching 50% it should be easy to see that taxpayers should not be paying airlines to burn jet fuel and wear out airplanes flying empty seats around. It would be far more productive to use subsidy efforts to help all airlines undergo a very necessary temporary contraction so as to ensure that they can operate sustainably with reduced traffic and flying volumes while maintaining essential services and affordable pricing. In general, this means that the overall objective of an airline subsidy program should be to offset overhead expenses which cannot be met or reasonably shed as a result of reduced flying volumes. While a program like this might be regarded as ideal because it would benefit carriers who are flying as well as those whose operations are curtailed, it would likely be challenging to implement because it would need to be administered on a carrier by carrier basis and would, of course, require full disclosure of financial information, which we would have no objection to.

 

continue reading