Discount airlines fight red tape to get off the ground in Canada

Canada's airline industryhas a historyof chewing up discount airlines and spitting them out, which begs the question:What's gettingbetween Canadianair travellers and their cheap seats?

A number of discount airlines have come and gone in Canada, and at least three Jetlines, Jet Naked and NewLeaf Travel have beentrying to get off the ground for several years.

NewLeaf Travel appeared to have won the race to the skies last week when it started selling tickets for February flights.But the fledgling companycancelled its wintertakeoff planslastTuesday amid a review of its licensingrequirements, grounding NewLeaf indefintely.

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The budget airline model in whichcompanies offercheapintroductory fares and chargeextra for things likecheckedluggage and early boarding hasproven lucrative in other countries. Successful companies includeIreland-based Ryanair,U.S.-basedSpirit Airlines,Iceland-basedWOW Air and Malaysia-basedAirAsia.

So why is it so hard for Canadian companiesto follow suit?

It's all about cash on hand

"A large part of it has to do with financing,"Barry Prentice, a transportation economist from the University of Manitoba'sAsperSchool of Business, told CBC News.

"You do have to have a fair amount of capital lined up before you start anairline because,amongst other things,you have to prove to the government that you actually can live up to your obligations or repay people for tickets booked in advance.And that's not a small amount of money."

In order to secure a carrier licence from theCanadian Transportation Agency, a companymust show it hasenough funding to operate for 90 days without turninga profit.

"It's just a matter of securing funding," said Tim Morgan, CEO of Calgary-based charter airlineEnerjet, which plans to launch its own budget airline under the brandJet Naked.

Hehopes to have Jet Nakedup and running by the spring, but makes no promises.

Jetlines is also aiming to take off later this year. CEO Jim Scottsaid slumping oil prices have hampered its efforts to secure funds.

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"Initially we went out in 2014, we had good responses. As soon as the oil prices went down, we found the major institutions were in a contraction of investing and that lasted throughout 2015," he said, adding he's more optimistic now that investors are starting to adjust to "the new norm."

And it's got to be Canadian cash

"To tell you the truth, I do have the funding available to me right now. All of it," Morgan said. "Where the problem lies is it's money out of the U.S.A."

Those greenbacks are no good to Morgan.The Canada Transportation Act requires at least 75 per centof an airline's voting shares be owned and controlled by Canadians.

BenCherniavsky, anairline analyst for financial services firmRaymond James, said the foreign ownership requirement is the biggest impediment to starting a new airline in Canada.

"This severely limits the pool of capital for a new venture," he told CBC News in an email.

Morgan called the regulation "archaic" and said it was designed to protect established airlines rather than Canadian consumers.

"I can tell you this right now, our airline would have been flying a year ago if we could have found our way to make that happen," Morgan said."All need to do is convince the Canadian government to allow me to bring this money in."

Taking on the big dogs

Canada's established airlines namelyAir Canada and WestJet are a force to be reckoned with in more ways than one.

"The twoare such juggernauts, it makes things difficult,"NewLeaf CEO Jim Young said.

WhenNewLeafwas planning to fly inFebruary,WestJetresponded by undercutting the newcomeron many competingroutes.

It's not easy to compete in the long term with companies that operate on such a massive scale and are continually expanding, Prentice said. Both Air Canada and WestJetare adding new destinations this year.

"You have to be able to get to that critical size to be able to offer that competitive service, and that growth is never easy," Prentice said.

Taking a shortcut

NewLeaf tried to circumvent some of these obstacles by operating asan indirect service provider.Rather applying fora carrier licence of its own, itpartnered with the already-licensedB.C. charter airline Flair, leasing itsplanes, crew and maintenance.

That caused passenger rights advocate Gbor Lukcsto sound the alarm bells about what he saw as a direct violation of the Canada Transportation Act, which requires any air service to have its own licence.

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Lukacs has filed a court challenge of theCTA proposal that airlines be able to operate with an indirect licence, saying it saying that "allowing an air service to run on a shoestring budget exposes the public to significant risks."

Greyhound Air once attempted a similar business model in Canada,but theCTA would not allow it. In NewLeaf's case, theCTA gave it the green light to sell tickets while the agencyconducts consultations into the regulations.

ButNewLeaf announced suddenly this weekthat it would suspend operations until the review was complete.

"Our beef is really not with the CTA at all. In fact, we want them to do their work. The challenge is you've got a number of naysayers who are throwing out fear, uncertainty, doubt and every other thingthey can throw out to actually try to prevent NewLeaf from flying," Young said.

Lukcscalled NewLeaf'sannouncement"afullvictory," telling CBC News: "The rule of law prevails over the narrow and private interests of the owners ofNewLeaf."