NewLeaf Travel Company, the first of a new wave of ultra-low-cost airlines, which launched last week, is within legal bounds in operating without a domestic service license, regulators confirm. And the company maintains that it is not taking any chances by not having one — although, the government agency that oversees the airline industry may decide the company will need one after the conclusion of a regulatory review.
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Citing “rapidly evolving” business models in the airline space, the Canadian Transportation Agency (CTA) is consulting with the public to determine what changes need to be made, if any, to the criteria used to evaluate licence requirements.
Specifically, the agency is focusing on companies like NewLeaf that “bulk purchase all seats on planes and then resell those seats to the public, but do not operate any aircraft.” NewLeaf sells tickets, but its flights, which begin in February, will be run initially by private charter company Flair Airlines Ltd., which provides aircraft, crew and the plane’s maintenance and insurance — known as a “wet lease.”
While the review is underway, the CTA said it would not require NewLeaf to obtain a licence. Under current rules, an “indirect air service provider” like NewLeaf, which contracts out the full operation of the aircraft, does not need a licence.
“I’ve never understood that to be in contravention of CTA’s regulation,” said airline industry consultant Robert Kokonis of the wet lease arrangement. “I think that it’s ludicrous that (NewLeaf) would be required to hold a licence.”
In an interview from Winnipeg, NewLeaf president and CEO Jim Young said a wet lease is ideal for a startup like his. “It’s the easiest way to apportion costs. If you did anything more complicated, it’s difficult to understand what it’s costing me to fly the airplane from A to B.”
Young said NewLeaf would apply for a licence if the CTA determines that it needs one.
There is no firm timeline for the CTA to make a decision. The agency said it depends on what kind of feedback it gets from the consultation, which ends on January 22, and the volume of responses.
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Tim Morgan, CEO of Enerjet who is also backing another planned ultra-low-cost competitor, Jet Naked, does not believe NewLeaf can call itself an airline, although he said he would not file a challenge to the CTA about the licence.
“I don’t think I need to,” Morgan wrote in an e-mail. “This is no different than Greyhound.”
What Morgan is referring to is a precedent that casts a shadow over indirect service providers. In 1996, Westjet Ltd. filed a licencing complaint that ultimately grounded Greyhound Air.
WestJet accused Greyhound Lines of Canada Ltd., owned by the U.S.-based Dial Corp., and Kelowna Flightcraft Air Charter Ltd., which operated aircraft on Greyhound’s behalf, of “circumventing” the law by skirting foreign ownership restrictions.
WestJet also contended that Greyhound was piggy-backing on Kelowna’s licence and because Greyhound had commercial control of the operations, with no market risk to Kelowna, it bore the onus of getting licensed. The National Transport Agency, the CTA’s predecessor, sided with WestJet.
“This set a clear precedent that licensing requirement cannot be side-stepped,” Jim Scott, chief executive of Canada Jetlines Ltd., the other Canadian upstart with plans to launch, wrote in a letter to shareholders.
Scott argues that it’s unfair that Jetlines is going through the licensing process to prove its “financial fitness,” something he said NewLeaf was not required to do. While he has not filed a complaint with the CTA, Scott said he’s “considering all options.”
An important issue that the CTA will face is how adequately consumers are protected if an airline that contracts out flights cannot provide service due to escalating costs and needs to reimburse passengers. Young said NewLeaf has taken that into consideration.
“The money is all protected such that if we were unable to operate a flight, we’re not spending any of that money before the flight is operated, so we would be able to return it to the customers,” said Young.
Kokonis, co-founder of AirTrav Inc., doubts the CTA will stand in NewLeaf’s way, if the company sticks to its current model, but he said the CTA may choose to reassess NewLeaf if it decided to lease its own planes, or enter into a dry lease scenario, whereby Flair only provides the aircraft.
From an operational standpoint, Kokonis said it makes sense for an upstart to use wet leases to reduce capital costs until there’s enough cash to grow organically. “I think it’s a really smart way to go and it enables NewLeaf to get off the ground relatively quickly.”