Deregulation and the Airline Industry

Introduction:

I received a call at about 10:15 this morning informing me that there was some very important news that was going to be taking place shortly with regard to our guest of honour, and so I have shortened my introduction so that he will have more time to give his important announcement.

I do, however, want to do him justice and say that it is always a pleasure to have a fellow Edmontonian at the head table. l was in Edmonton at the same time for a while. And he, along with people like Pop Ivy, Jackie Parker and Rollie Miles, was a very famous and well known citizen of that great city.

He was born there and, in 1940, joined the RCAF, served as a commissioned flight instructor at various Canadian bases during the Second World War and, in 1946, organized his own company, Polaris Charter Company, based in Yellowknife. He started with one two-passenger singleengine aircraft. He carried supplies and passengers throughout the subArctic.

In 1953, Wardair was launched into commercial service. Mr. Ward had acquired a single-engine Otter. It appeared on wheels, skiis, or floats and was duly licensed by the Canadian Transport Commission.

The Otter revolutionized bush-air transport, opening up the entire Arctic to Wardair. Wardair expanded steadily. Its fleet of Otters grew;

Beaver aircraft were added. When deHavilland built the Twin Otter and the four-engine Dash 7, Wardair was the first to operate them in Canada. In 1962 international charter services were launched in Western Canada and the U.K. In 1967 Wardair bought the first Boeing aircraft ever sold in Canada, a Boeing 727. Later two 707s and, of course, 747s came along as quickly as you could say:

"Big oaks from little acorns grow."

Max Ward has more than a number of honours. In his list of accomplishments, and I won't take the time to mention them all, the fact that he is an Officer of the Order of Canada is an indication of how well regarded he is in all his endeavours.

Wardair is recognized as Canada's largest international chartered aircarrier and the third largest scheduled airline. With much traffic and confusion on our roads these days, there is no less turbulence in the sky, especially around Pearson International Airport.

In May, 1988, this Chief Executive Officer told his shareholders something that was going to be very important. He said that the airline could compete as Canada's third largest airline only if it was to get much bigger. And today we are going to hear about this because rumours, announcements and press releases are rampant.

Wardair has embarked on a massive expansion plan. It has been a scheduled airline for two years. Wardair is Canada's fastest growing airline. Mr. Ward has spent a lot of time in the sky, courting the clouds, but his feet are planted firmly on the ground. We are particularly proud to have him with us on this important, if somewhat bittersweet, day in the history of his company and the airline industry in Canada.

Max Ward:

During my 43 years in the commercial airline business, there have been many changes. I would suggest airline deregulation has effected the largest single change in the industry since the introduction of the jet aircraft into commercial airline service.

The jet airliner gave aircraft the productivity to become a major transportation mode. Airline deregulation has, in turn, expanded the productivity of the aircraft operator.

It was assumed by government and the marketplace that new airline interests would make airline deregulation a success. But, contrary to expectations, it is the incumbent airlines vying for market share that has made airline deregulation a success. Public access to air transport services is what airline deregulation is all about, and no one can deny the public is flying in unprecedented numbers, both in the United States and in Canada. The pundits are further forecasting world airline traffic will double by the turn of the century.

During their deregulation period between 1978 and 1988, the United States market has increased from 240 million trips to 455 million trips completed in 1988. The average ticket price in revenue passenger miles and in inflation adjusted dollars is lower today than it was in 1978. The U.S. airline industry grew from 30 carriers in 1978 to 200 carriers. Now the number of carriers is shrinking fast.

Regardless of the number of carriers serving the U.S. marketplace, eight mega carrier entities carry 95 per cent of U.S. traffic. Canadian scheduled airlines moved an estimated 11.5 million passengers in domestic service in 1988, whereas U.S. airlines moved 245 million domestic passengers during the first eight months of 1988. Compared with our friends to the south, we, in Canada, are pretty small potatoes in the world of airline commerce.

In Canada, two airlines moved 91 per cent of domestic scheduled traffic during 1988. The largest U.S. domestic airline, United Airlines, carried 19 per cent of domestic U.S. traffic measured in revenue passenger miles. American Airlines was next at 18.1 per cent, then Delta at 15.3 per cent and so on.

By comparison, the largest Canadian carrier transported 52 per cent of domestic revenue passenger miles. The fleet size of American Airlines alone is more than twice that of Air Canada, Canadian International and Wardair combined.

U.S. carriers ordered a whopping $36 billion in new aircraft during 1988 while taking delivery of a prodigious number of previously ordered aircraft. Today one is a "Piker" ordering less than 20 aircraft at a time, and orders for 100 aircraft are not uncommon. The rate of expansion of the airline industry at this time boggles the imagination of an old bush pilot. Wardair raised a lot of eyebrows when, under airline deregulation, we decided to become a scheduled carrier - as seemingly we were successful in the charter airline business, why jump into the scheduled competitive fire? There are sound reasons for this decision. The airline business was quite a different entity when we flew our first charters in 1962. We entered the jet aircraft business in 1966, and the jumbo jet business in 1972.

In 1972, we purchased a new Boeing 747 for $25 million U.S. when the Canadian dollar was nearly at par with the U.S. dollar. A replacement 747-400 today costs $125 million U.S. or five times as much, and you know what the Canadian U.S. dollar differential is.

A new 747 carries a few more passengers, roughly 30, but when the count gets to 456 seats, who needs 30 more seats. The new machine has the same wing, thus does not fly any faster than the 1972 model. In the intervening years between the old and new aircraft, charter fares haven't even doubled, moving from the five cent per revenue seat mile to, at best, nine or 9.5 cents today.

In order to survive in the charter airline business, one must be good at buying and selling aircraft to keep ownership costs low. Charter airfares must be less than scheduled airline discount airfares to be competitive. Scheduled airline discount airfares are a byproduct of standard scheduled airfares, thus, can be established to suppress charter airfare levels to, in effect, regulate charter participation in the marketplace. Conversely, charter airfares exert a downward pressure on scheduled discount airfares.

Scheduled economy airfare yields are fundamental to airline operations and a generous sprinkling of economy and business class airfares are essential in the passenger mix for a given flight to be profitable.

Transforming a charter airline into a scheduled airline, both national and international in scope, requires a fundamentally different fleet of aircraft, and a fundamentally different operating philosophy. A carrier with 36 years of commercial airline experience, of which 26 years is in international service, can make that transition, if it has enough money to fund the transition, but Wardair does not.

Acquiring a mix of small, medium and large aircraft, with capacities tailored to meet different route expectations, has become very slow in an aircraft manufacturing industry swamped with orders, and delay eats up money.

Computer passenger reservations networks are slow to build and are even more expensive than aircraft. Again, time is money.

This is the age of the mega carrier. Airline deregulation has come far too late in the development of the airline industry for entrants to build themselves into airlines of mega carrier status capable of competing in world markets.

Canada, with its relatively small population and relatively small GNP, would be better served with two strong competitive airlines rather than with three carriers inhibiting progress of the Canadian industry as a whole.

Wardair suspended trading of its stock today, as did Canadian Airlines International.

The appreciation of the meeting was expressed by Catherine R. Charlton, President, the Charlton Group, and a past President of the Empire Club.