Cablegate: Embassy Ottawa

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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

OTTAWA 00002388 002 OF 002

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

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