Jetsgo BDO Dunwoody/Chamber Weekly CEO/Business Leader Poll by COMPAS in the Financial Post for Publication March 21, 2005 COMPAS Inc. Public Opinion and Customer Research March 15, 2005
1.0 Introduction Canada s business leaders see Jetsgo s failure as primarily the result of poor management on the part of its President and director s and officers and to some extent the fault of the Federal Government and its agencies for levying high tax and airport fees on carriers. Concerned about the impact of multiple bankruptcies among Canadian carriers over the past decade on consumers and industry, business leaders favour a number of regulatory and other changes to the industry, including: Making all safety reports about each carrier public, Allowing private competitors to compete in the airport industry, Requiring advance tickets sales to be put in trust towards providing future flights to prevent airlines from using future dollars to pay for current bills, Requiring new entrants to show proof of having capital cover six months worth of operating expenses (current rules require proof for three months), and Allowing foreign airline competition In terms of those Jetsgo s clients who bought tickets which were never used as a result of the bankruptcy, nearly three quarters of respondents favour the federal Government refunding the tax portion of those tickets. These are the key findings of this week s web panel of Canada s CEOs and business leaders for publication in the Financial Post under the sponsorship of BDO Dunwoody and the Canadian Chamber of Commerce. 2.0 Poor Management largely to Blame for Bankruptcy; Federal Government also Contributed to Collapse through High Fees and Taxes Levied on Carriers As shown in table 2.1, 89% of Canada s business leaders say Jetsgo s President Michel Leblanc is responsible for the airline s collapse because of his 2
poor management, as exemplified by his track record with previous bankrupt airlines including Intair and Canada 3000. 86% of respondents similarly attribute the carrier s collapse to its directors and officers for poor management. As some respondents said: The Jetsgo disaster is only an example of what occurs in the [airline] industry. LeBlanc should be held accountable for this. Jetsgo's demise stems from a questionable business model. When the best thing you can offer is low fares and ridiculously cheap flights, your customers will only fly with you for that reason. It was unsustainable without extraordinary cost controls that were not achieved, and could possibly never be achieved in this industry. WestJet has it right and Jetsgo was a cheap knock-off imitator that did not have the business acumen or discipline to compete. Southwest airlines and WestJet are two carriers that have proven that success in the air industry is possible...what is wrong with everyone else? Jetsgo went under because they sold their product for less than cost. As the WestJet CEO said [Jetsgo had] a very unusual business model. Jetsgo kept prices of competitors low for some time. However, giving flights for $1 should not have been allowed. This certainly led to some of the problems. What Jetsgo did was disgusting and its Corporate Officers should be in court on charges of fraud. The federal Government is not without blame for Jetsgo s collapse, according to respondents. 55% of respondents say the Federal Government and its agencies (inc. Airport Authorities) are responsible because they impose taxes, fees and rent on airlines and travelers that some reports indicate can constitute almost half of a total ticket price. Respondents were equally eloquent with their comments in this regard: 3
The tax burden in the cost of air travel is a huge detriment to business in many sectors, and completely unjustified when compared against land-based travel (i.e. travel via roads and rail). Federal government taxation and regulation is what is hurting the airline industry. Our Government s dithering on this and other matters makes me feel that we just plain leaderless. Airports are Taj Mahals, some of which is necessary for safety but parts of which just create additional costs passed onto the consumer. The government should control this in some fashion. The taxes and fees imposed by the Government on air travel are crippling the industry. As long as airlines charge a heavy premium for last minute flight bookings, they will continue to run with empty seats. They are discouraging spontaneous travel, to their detriment. This is particularly true of Air Canada and I continue to question their long term viability, new uniforms notwithstanding. Table 2.1: (Q1) There s been talk in the media about the recent bankruptcy of Jetsgo Airlines. Using a 7 point scale where 7 means very responsible and 1, the opposite, to what extent are each of the following responsible for Jetsgo s bankruptcy? [RANDOMIZE] 4
Jetsgo President Michel Leblanc for poor management, as exemplified by his track record with previous bankrupt airlines including Intair and Canada 3000 Jetsgo s directors and officers for poor management The Federal Government and its agencies (inc. Airport Authorities) for imposing taxes, fees and rent on airlines and travelers that some reports indicate can constitute almost half of a total ticket price The competitive pricing practices of other airlines like Air Canada and West Jet Uncontrollable market forces that created reduced demand for airline travel and increased price sensitivity 6.0 41 36 12 4 1 1 2 2 5.9 37 30 19 7 1 2 1 4 4.5 13 18 24 19 11 9 6 1 3.7 6 7 24 21 15 12 15 1 3.5 2 5 22 22 17 18 12 1 5
Transport Minister Jean Lapierre for not making public the reports on the airline s safety problems early on so as to encourage the Airline to revise its business practices Transport Minister Jean Lapierre for not stepping in to provide financial assistance to the airline 3.2 9 5 14 12 14 21 24 1 1.8 3 0 1 5 9 19 61 1 3.0 Changes Needed to Stabilize Industry Respondents were asked to rate a battery of possible regulatory changes to the airline industry using a 7 point scale where 7 means the respondent definitely agrees with the proposed change and 1, the opposite. At the top of the list for most respondents is making public all safety reports about each carrier, earning a mean score of 5.7 and 80% favouring this change. 63% favour allowing private competitors to compete in the airport industry as a means to reducing airport fees, assigning a mean score of 5.2. This option receives somewhat more support than creating an independent market regulator to regulate the amount airports can charge airlines in fees and rent, which earned a mean score of 4.1. In terms of deferred revenue, 68% of business leaders say carriers deferred revenue or advanced ticket sales should be put in trust towards providing future flights to prevent airlines from using future dollars to pay for current bills, with a mean score of 5.2. With respect to new entrants to the industry, 60% say they should be required to show proof of having capital cover six months worth of operating expenses, as opposed to the current three months. 6
Table 3.1: (Q3) The bankruptcy of Jetsgo has raised a variety of questions about how airlines should be regulated. Using a 7 point scale where 7 means definitely agree and 1, the opposite, to what extent do you agree with each of the following? [RANDOMIZE] Make public all safety reports about each carrier Allow private competitors to compete in the airport industry Require advance tickets sales to be put in trust towards providing future flights to prevent airlines from using future dollars to pay for current bills Require new entrants to show proof of having capital cover six months worth of operating expenses Require new entrants into the industry to hold in trust money to cover three months worth of operating expenses Create an independent market regulator to regulate the amount airports can charge airlines in fees and rent 5.7 37 25 18 6 4 2 4 4 5.2 34 19 14 9 9 5 7 4 5.2 30 21 17 9 8 5 5 5 4.8 17 24 19 12 7 7 9 5 4.4 16 14 18 19 8 7 12 7 4.1 14 17 16 14 7 9 19 4 7
Require privately held carriers to make public audited financial statements so consumers can make better informed decisions about the stability of the airline and purchasing tickets in advance Prevent those who have been in a C-Level position of a bankrupted airline from working in the industry again 3.9 12 12 16 17 10 10 19 4 3.4 7 5 14 17 14 16 19 8 8
Canada s business leaders say a priority needs to be given to allowing foreign airline competition to help the industry, seeing this need as greater than other domestic airline options, as illustrated in table 4.2 Table 3.2: (Q5) Using a 7 point scale where 7 means definitely needs and 1, the opposite, to what extent does Canada need [RANDOMIZE] Mean 7 6 5 4 3 2 1 DNK Foreign competition in the airline industry 5.0 30 19 14 12 7 7 9 3 More regional carriers 4.5 12 14 28 17 7 11 6 6 Another national discount carrier 4.1 12 13 17 17 10 14 11 6 Another national full price carrier 3.0 6 4 14 11 14 19 28 5 4.0 Strong Support for the Government Refunding the Tax Portion of Unused Jetsgo Tickets If a business had bad debt it would be able to write off the GST portion as a credit, therefore the government should give back the taxes to the consumer from the bad ticket sales, sums up the perspective of the majority this business panel. As shown in table 4.1, 73% of respondents say the federal government should refund the tax portion of the un-used tickets bought by Jetsgo customers. Those who disagree with this position say, Consumers need to take some responsibility for their own decisions and protection instead of whining for government regulation at every failure," and With respect to the customers, they were buying a lottery ticket and they knew it - the hints were all over the place and now that they have lost they want taxpayers to subsidize them. 9
Table 4.1: (Q4) Should the federal Government refund the tax portion of the un-used tickets bought by Jetsgo customers? [ROTATE POLES] % Definitely 60 Probably 13 Probably Not 14 Definitely Not 11 Don t know/ Refused 2 5.0 Airline Industry Instability a concern for Customers and Industry According to respondents, the impact of airline instability is real and affects consumer confidence, consumer s wallet books through unused tickets, Canadian business travel and the markets, as shown in table 5.1 Table 5.1: (Q2) A number of airlines in Canada have gone bankrupt or stopped operating over the past 12 years and Canada s largest airline emerged from bankruptcy protection late last year. Using a 7 point scale where 7 means very serious and 1, the opposite, how serious is the effect of [RANDOMIZE] Airline instability on consumer confidence of the industry The cost of unfulfilled airline tickets to consumers 4.7 12 27 19 14 14 10 3 1 4.5 22 10 18 15 9 14 6 6 10
Airline instability on Canadian business operations Airline instability on the markets 4.3 9 14 26 17 16 11 6 1 4.1 9 12 19 22 16 14 7 2 5.0 Methodology The National Post/COMPAS web-survey of CEOs and leaders of small, medium, and large corporations and among executives of the local and national Chambers of Commerce was conducted March 16-18, 2005. Respondents constitute an essentially hand-picked panel with a higher numerical representation of small and medium-sized firms. Because of the small population of CEOs and business leaders from which the sample was drawn, the study can be considered more accurate than comparably sized general public studies. In studies of the general public, surveys of 139 are deemed accurate to within approximately 8.3 percentage points 19 times out of 20. The principal and co-investigator on this study are Conrad Winn, Ph.D and Tamara Gottlieb. 11