AMERICAN LOW COST CARRIERS SERVICE TO CANADA SET TO INCREASE

UNCLAS SECTION 01 OF 02 OTTAWA 002388



SIPDIS



SIPDIS



WHA/CAN, EB/TRA



DOT FOR INTERNATIONAL AFFAIRS (CARAZZO)



FAA FOR INTERNATIONAL AFFAIRS (FRANCESCHI)



DHS/TSA FOR SUSAN WILLIAMS



E.O. 12958: N/A

TAGS: EAIR, CA

SUBJ: American Low Cost Carriers service to Canada set to increase





1. (U) Summary: On May 25, Frontier Airlines became the first

American Low Cost Carrier (LCC) in over a decade to fly scheduled

passenger service between U.S. and Canadian destinations. Recent

developments in aviation technology coupled with the seven (soon to

be eight) CBP preclearance sites in Canada have created increased

economic desirability of some transborder routes for LCCs.

Frontier's route start-up may be the beginning of a trend as other

LCCs will soon contemplate transborder routes or are in the process

of converting from domestic to international air carriers. End

summary.



2. (U) Under the 1995 Air Transport Agreement between Canada and the

United States, as amended last November, there are no government

imposed restrictions preventing U.S./Canada routes by any U.S. or

Canadian passenger carrier; carriers are limited only by the

economic viability of the routes. Canadian LCCs such as WestJet and

CanJet have recently begun transborder flights, but the absence of

American LCCs from any transborder routes for the past 10 years

indicates the economics of such routes has been questionable from

their perspective, until now.



3. (U) On May 25, Frontier Airlines began flying a route between

Denver and Calgary, becoming the first American LCC to fly a

transborder route between the U.S. and Canada since ValuJet Airlines

flew from U.S. cities to Montreal in the mid-90s. Frontier now

flies two non-stops per day between the two cities through its

JetExpress service on 70 seat regional jets operated by Horizon Air.

Alaska Airlines also flies to Canada mostly through similar

regional jets operated by Horizon Air, though it is debatable

whether the air carrier should be actually classified as a LCC. In

either case, even with the new transborder flights, there are

relatively few LCC flights operating between the U.S. and Canada

versus those to Mexico and the Caribbean. If Alaska Airlines is

included, then two separate American LCCs fly to Canada, serving six

Canadian destinations. By contrast, U.S./Mexico transborder routes

are served by five American LCCs and include flights from U.S.

cities to 14 Mexican airports. Likewise, the Caribbean region is

served by five American LCCs, flying between U.S. cities and 16

destinations.



4. (U) Factors contributing to the relative lack of US LCC

transborder activity in Canada include additional taxes and fees

relative to domestic operations (e.g. International Departure and

Arrivals taxes, Customs Inspection fees and so on) and the

difficulty of starting new service at the major hubs of Montreal,

Toronto and Vancouver to successfully compete with entrenched legacy

carriers. But it is the availability of U.S. CBP staff that appears

to be the overriding "limiting factor." Though LCCs can travel to

any Canadian airport, return flights require customs inspections for

customers and aircraft when coming back in the US. Such inspections

can double the time a plane is on the ground between flights, and

also limits routes to designated "international airports." For an

LCC with a "time is everything" business strategy the lost time is

lost money. LCCs' traditionally prefer to use secondary airports

with lower overhead, but which may not be a designated international

airport and therefore have no or limited availability of CBP. Thus

CBP preclearance at the Canadian airport is a key factor in the

QCBP preclearance at the Canadian airport is a key factor in the

business decision to undertake service. In talking to

representatives of Frontier, and another American LCC, Airtran, both

noted that the presence of preclearance sites was a "prerequisite"

to even considering a route to a Canadian airport. Airtran

specifically commented that they had considered Hamilton, Ontario

but had dropped the plan in large part because of the absence of CBP

personnel there.



5. (U) The use of Regional Jets (RJs) coupled with the expansive

array of Canadian CBP preclearance sites in Vancouver, Calgary,

Edmonton, Winnipeg, Toronto, Ottawa, Montreal, and beginning in

October 2006, Halifax may have made more routes economically viable

for American LCCs. Both legacy carriers and LCCs have been

increasingly using 50- or 70-seat RJs as an alternative to larger

jets. The advantages of these RJs, many of which are produced by

Canadian-based Bombardier, are two-fold. The operating cost per

hour of use for RJs is significantly less than the LCCs' more

traditional jets like the Boeing 737 and Airbus A320. Secondly,

smaller jets can adjust for a smaller potential volume of

passengers, thus keeping costs down by flying full RJs rather than

half-filled larger jets. With lower costs, American LCCs are now

finding additional incentive to fly to Canadian cities with CBP

preclearance sites than under previous conditions.



6. (U) Comment: Since the Air Transport Agreement of 1995, there



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has been very few impediments to American passenger carrier

operations in Canada and vice versa. The remaining impediments will

be remedied by the recent amendment to the 1995 Agreement (expected

to come into force in the fall of 2006); however, the changes to the

1995 Agreement will have negligible impact on LCC decisions to enter

the transborder passenger marketplace. Rather, economic viability

of service is the sole factor - and the key elements for viability

are CBP preclearance coupled with RJ operations. Indeed, Frontier's

new Denver-Calgary route was made economically viable through the

use of regional jets and the ability to fly a route to a smaller

airport sufficiently large to have CBP preclearance facilities. This

suggests that we may see more American LCC operations into Canada's

secondary airports such as Calgary, Edmonton, Winnipeg, Ottawa and

Halifax, rather than into the three major international hubs.

Frontier's venture into transborder travel should be looked at in

the bigger LCC picture. In its May Directors Meeting, Southwest

Airlines addressed this issue. Southwest management concluded that

transborder routes were a definite possibility as soon as the

carrier changes over from domestic to international carrier status.

Southwest estimated this would be done by 2008. ATA (please note

this LCC has no affiliation with the similarly named Airtran

Airways) will be investigating transborder routes during mid-2007.

And then there are a number of Canadian LCCs, including WestJet and

CanJet, showing the economic viability of many routes by opening up

over a dozen transborder routes in the past three years alone. All

these indications suggest that there is potential growth of U.S. LCC

operations on transborder routes. End comment.



Wilkins