A Strategic Analysis Of The Canadian Airline Industry

  • Category: Business
  • Words: 8785
  • Grade: 85
The following report will analyze the Canadian airline industry and address the issues affecting the competitors within this industry. The scope of the report is limited to the Canadian domestic commercial airlines. This includes those commercial airlines that operate flights for passengers within Canada. In completing this analysis, a wide range of factors must be considered and the changing desires of clients must be assessed.
The Canadian airline industry has experienced considerable change in recent years. Evolving government regulations and increased competition coupled with a changing operating environment has presented a significant challenge for industry competitors in establishing corporate strategies. Furthermore, the terrorist attacks in the United States on September 11th, 2001 have changed the way commercial air travel will be conducted forever. The impacts of the economic slowdown together with the implications of this disaster have created an era in which only competitors with a strong corporate strategy and the necessary financial resources can survive.
In completing a thorough analysis of this industry, this report will assess the competition within this industry as well as the suitability of substitutes available to consumers. Both opportunities and threats relevant to the key players in the industry will be analyzed. The key success factors for the airlines will also be established.
Finally, a set of recommendations will be formed for Air Canada, the nation's "˜flag carrier'. These recommendations will help ensure that Air Canada is at least competent, but preferably allow it to excel in all of the key success factors. Ultimately, the recommendations will attempt to ensure that Air Canada continues its present position as the dominant airline in Canada for the years to come.
Competitive Forces                                                         
        Within the competitive forces section the major determinates of competition are analyzed to assess the overall attractiveness of the industry.
Barriers to Entry
The creation of entry barriers to new competitors is favorable for the current players in the industry. An important factor to consider is the economies of scales. The largest player of the Canadian domestic commercial airlines is Air Canada, as it is the "˜dominant carrier' in the country. Air Canada does realize economies of scale that result from cost savings in many areas including baggage handling, food and beverage from its supplier (Cara Foods) and costs of issuing and distributing tickets. The other participants in the industry are Canada 3000 and WestJet. These airlines have smaller, more specialized operations and do realize economies of scale but not nearly to the extent of Air Canada. Thus, as economies of scale are present with all players, especially the industry heavyweight, a barrier to entry is created.
The main product being offered is not highly differentiated, that is air travel for customers from point A to point B. The product differentiation comes into play when taking costs and customer desires into consideration. The various players in the industry target customers through offering either lower cost travel that is convenient with few on-board services and limited travel options as apposed to a company may charge higher prices for increasing traveling comfort and customer services. For example, an investment made by Air Canada to increase their customer value was to implement the Express Check-in option and place themselves at a higher competitive advantage than other industry players. This resulted in a barrier to entry. With customers having to choose among only three industry competitors, it is difficult for a new competitor to enter with profitable operations. This is exemplified through the short-lived existence of the Eastern Canada based CanJet. As product differences are presented through quality and comfort of in-flight services and through convenience for travelers, the successful competitors are able to establish strong brand identity and reputation. This creates another barrier to entry, as it is difficult for new entrants to position themselves ahead of the "˜no frills' and discount prices offered by WestJet and the prestige, comfort and strong, proven safety record of Air Canada.
When considering a customer that is switching from a charter carrier to Air Canada, they would likely pay a higher ticket price. However, in return, the customer would gain intangible benefits like professional hosts/hostesses and quality of in-flight services. When switching from a carrier like Air Canada to a charter carrier, the customer would forgo any extra in-flight service and the convenience that Air Canada provides. The magnitude of switching costs to customers is dependent on personal preferences of each individual and is therefore less significant in determining the influence on creating an entry barrier in the domestic airline industry. Some regional areas are only serviced by Air Canada and switching from the main carrier to a private charter or another mode of transportation would likely be more time consuming and costly.
The Canadian airline industry is highly capital intensive. All of the current competitors have a high capital requirement, which they service through a variety of methods including private financing, government subsidies, debt offerings and public equity offerings. This high capital requirement creates a considerable barrier to entry. The high capital requirement to start-up and maintain an airline is a considerable investment and must be effectively distributed to customers. In order to compete on the same level as the three current competitors a new entrant would have to set-up up to par on-line booking capabilities, distribute tickets to travel agents and gain airport check-in counters and gates. This requires additional financial investment and makes it relatively difficult for new carriers to enter the industry without intensively penetrating the channels in such a way to effectively create an organized and satisfactory distribution system.
There are absolute cost advantages present in the airline industry making it difficult for new entrants to penetrate the market. These include steep learning curves that require logistical expertise that current industry players have already achieved. It would take a considerable time and financial commitment to achieve the same level of understanding of the industry. The access to the necessary inputs for a new competitor is relatively easy to come by. The purchase of inputs such as, fuel, flight crews, ground services and other office resources are for the most part readily available but will still come at a high price. The quantities of the inputs required are varied among competitors but there is reasonable availability of them, thereby increasing competitiveness among the industry players.
The proprietary low-cost product design simplifies the process of introducing new products and services to already existing operations and product scope. Be it through quality improvement or additional connections and service areas the current industry players already have a leg up on new entrants thereby creating a fierce competitive environment. Existing in the industry are strict government regulations, policies and procedures making it very difficult to establish a new airline. Especially in the scope of safety, Canadian regulations are strict and require a high compliance rate meeting all specifications. This once again raises the stakes for new entrants.
The expected retaliation of the current industry competitors to a new entrant can be illustrated through current measures being taken in the industry to maintain competitive advantage. For instance, Air Canada has established a new discount air service Tango to compete with Canada 3000 and they are planning to go head-to-head with WestJet in order to maintain a competitive edge and dominate the industry. With these plans exhibiting the stern nature of the industry it remains relatively unattractive to new entrants but reasonable for the three current players. By and large, the competitive nature of the Canadian domestic airline industry exhibits a positive force on the attractiveness of the industry as a whole through high barrier to entry and the threat of new competitors remaining low.

Internal Competitive Rivalry

The level of internal competitiveness within the industry must be determined in order to identify a strategy that will effectively position a company in the industry for current and future success. The airline industry has been in existence for numerous years allowing for those older companies to establish healthy sized fleets and a good reputation among consumers. The mature stage of the product life cycle enables companies to exploit their established position in the industry and focus on raising the bars of competition through production efficiency and technological development, as mentioned in the propriety low-cost product design. The maturity stage of the product life cycle is becoming apparent through the reduction in cash flow of Air Canada's operating revenue. Air Canada's reduced cash flow and the need for government assistance has recently become a problem and has worsened since the events of September 11th. With less people willing to travel, this industry mega player is suffering due to high fixed costs and the lack of traveling customers to fill the cash flow gap. On the other hand, the mature industry stage works in favor of large competitors, in that they have acquired a significant amount of capital and dominate an industry that holds high barriers to entry. As well, competitive edge is gained over smaller competitors that are not always recognized internationally and nationwide. For example, WestJet is only well known to those who travel between western points of Canada. Meanwhile Air Canada is the first company that comes to mind when Canadian travelers are thinking of travel within Canada and on international routes. This is an advantage for larger companies as they can exploit their established position in the industry. Competition at this stage in the industry is generally high as airlines are establishing themselves as a low-cost carrier or a high quality comfortable travel carrier. Another concept that has recently been introduced is the idea of discount carriers that offer regular charter routes this enables large competitors to drastically cut prices in attempt to capture the majority of the regularly flying customers.
Fixed Costs for airline companies is high due to the nature of the product offered. There is a large amount of money required to maintain smooth daily operations and continually meet safety regulations before flight takes place. Take for example the cost of maintaining a Boeing 747 and then consider the losses if maximum passenger capacity is never achieved. The value-added of each dollar invested into daily operations and in-flight benefits is low, making it difficult for airlines to differentiate themselves without investing large amounts of money. The costs of intermittent overcapacity are substantial to absorb and will often result in lost operating revenue. The concept of limited seat availability often results in the company having to route another flight or delaying some travelers until seats are available. The costs associated with doing either are relatively high because to create an additional flight route on demand has high associated costs, especially when the second flight may not be filled. Or if a customer is dissatisfied with the service they may choose not to fly with the carrier again or choose alternative methods of travel. The fixed costs associated with capacity are high, as the airline has to maintain equipment such as planes, terminals and service levels for continued success in operations. In the case of fixed costs it doesn't matter is the plane is at capacity or if there are only five passengers the costs will remain the same.
In general, the service being offered is said to be generic in nature. It is how the service of air travel is being delivered that possesses differentiation. Depending on the air carrier, as previously mentioned, the level of service will vary among competitors. In-flight service on a carrier like Air Canada can include movies, meals, additional flight attendants and first class options. Whereas a discount charter, which exists primarily for travel from point A to point B, the same level of on-flight service is not available. The cost of differentiation is reflected in the price of tickets and creates a high level of competitiveness in the industry. The way in which the competitors differentiate themselves from each other helps them to establish and build strong brand identity and reputation. The low number of competitors in the industry helps to simplify the task of creating image and awareness among customers. Though it is easy to become recognized as an option for air travel it is more difficult to build brand reputation. Air Canada has invested a significant amount of money into training its staff with a focus on customer service and the differences are remarkably noticeable when traveling on different airlines.
As an industry that is highly competitive in nature, knowledge of competitors is straightforward due to the goals and missions of the three companies. The current companies create a competitive environment lacking diversity in competitors and the airlines have established themselves effectively and are dedicated to maintaining and increasing their market shares accordingly. The equality amongst competitors is lowered due to the size of the market and one dominant player in the industry. Air Canada has absolute advantage over the other two carriers in that it services more regions in Canada, it is recognized as the "˜national-flag' carrier and it is professional in nature. All these determinants help to produce a positive environment for competitors, as they are able to maintain awareness of each other and develop strategies to successfully target untapped areas and satisfy demands of travelers.
Current industry players have invested a lot of time and money into continued success within the industry. When deciding on daily operations, it is essential to ensure smooth operations as each cancelled flight costs hundreds of thousands of dollars. Grounded planes translate into lost revenues and thus there are high costs and risks associated with daily operational schedules. Furthermore, there are other risks relating to operations. The risks associated with the purchase of Canadian Airlines by Air Canada were extremely high. The acquisition has been described as "gulping down a booby-trapped candy bar riddled with razor blades" (Air Canada Needs help but how much does it deserve?), as it resulted in large unforeseen financial losses. These losses result in high barriers to exit due to the difficulty in liquidation procedures and the need to comply with various government regulations. Overall the internal competitive environment is fierce and is therefore unfavorable producing a negative force on the industry.

Threat of Substitutes

The distance between major Canadian cities and other regional destinations make it difficult for many substitutes to take significant market share from conventional commercial air travel. However, recent changes in the remote environment conditions have made these substitutes more favorable than ever before. With Canada experiencing an economic slowdown and through the development of relevant technologies, the importance of various substitutes has become more apparent. Additionally, the terrorist attacks on the United States and subsequent changes in air transportation regulations have made many substitutes to air travel more appealing than ever before.
        Rail transportation has always been one of the best substitutes. While not as fast as air travel, Via Rail passenger service offers safe transportation, often traveling faster than other land based alternatives. Given the delays at airports, it may be just as fast for travelers on short routes within the corridor (from Windsor, Ontario to Quebec City, Quebec) to choose the railway as their mode of transportation. Additionally the use of personal vehicles offers an inexpensive substitute for those who can afford the additional travel time. The alternative of personal vehicle road travel can be viewed as more efficient than rail travel for many destinations (such as from Halifax, Nova Scotia to Toronto, Ontario) due to the shorter travel time and less scheduled stops along the way. There are also disadvantages to this alternative, which include the depreciation of the personal vehicle; fuel prices and time spent driving (opportunity cost).
The corporate sector has access to a number of other substitutes that are typically unavailable to the public, which is due in part to their access of necessary financial resources to adopt alternatives. In considering corporate travel it is often reasonable for a company with available funding to own and operate their own private jet if they are frequent users of air travel. The charter jet services industry, as well as fractional ownership deals in which a company or an individual buys a portion of a plane and therefore doesn't carry the high costs associated with full ownership are growing rapidly. This alternative is still relatively expensive but ensures the safe and quick arrival of executives and business class passengers to their destinations without the hassles of commercial air transportation. It may be considered opportunistic for Air Canada to further develop a business class sector for business travelers when small upscale jets can be rented and shared by large corporations to allow for quick and easy travel throughout the country. Corporate jets would enable business travelers to skip the lines, unforeseen delays and comfortable travel environment.
In addition to these mentioned transportation substitutes, travelers are finding other means of communication through the use of various telecommunications applications to replace the need for travel all together. The notion of multimedia applications being used to cut down on travel costs is highly applicable to business customers and corporations looking to reduce expenses and maximize effective time management among employees. Developments in telephone and Internet conferencing have advanced exponentially in recent years, making virtual multi-party meetings possible and very effective. While not the same as genuine person-to-person contact, these alternatives make a very respectable substitute to air travel by facilitating long distance business meetings. Given the economic slowdown and the terrorist attacks on the US, more businesses may choose telecommunications alternatives as a cost effective substitute. When the many uses of these systems are fully realized, they may serve to replace a substantial portion of business travel over the long term.
The advanced technological substitutes, such as videoconferencing, provide significant cost savings to the user. For this reason, the relative price performance of substitutes has a high competitiveness rating. The switching costs of customers to substitutes is very low, as customers have no financial obligation to choose commercial air travel and can choose from a number of cheaper alternatives if they desire. For this reason, this determinant deserves a high competitiveness rating.
A benefit for firms in this industry is that customers have no reasonable substitute for air travel for long distance trips. Individuals or business people without the use of corporate jets have no other way to get to their destination except through the use of Canadian commercial airlines. For this reason, large portions of travelers have no substitutes at all. With this in mind, the buyer's propensity to substitute holds a low competitiveness rating.
The analysis of these determinants concludes a high competitive rating, resulting in yet another negative competitive force. Overall this is unattractive to the Canadian airline industry.
Supplier Power
        The suppliers of the airline industry are primarily grouped into four categories: aircraft suppliers, fuel, food & beverage providers and employees. Fuel and aircraft costs are a considerably larger expense than food and employee costs and should therefore be weighted accordingly.
A firm wishing to purchase an aircraft has minimal choice. Used airplanes are usually only available for purchase from other airlines. Furthermore, there are a limited number of new aircraft manufacturers around the world. This can be attributed to several factors including, the level of experience required to produce aircrafts and high operating costs of manufacturing.
Fuel is a constant factor of the industry with no differentiation. As a commodity, price fluctuates with the market, giving airlines no cost control other than the amount of fuel consumed. It is a necessary expense that every airline must incur. "Fuel costs can fluctuate greatly and are a cost component over which the Corporation has limited control." (Annual Information Form 2001, 29). The threat of forward and backward integration between the airlines and fuel suppliers is virtually nonexistent due to the nature of the two industries.
Overall, the food and beverage suppliers have a minimal presence in the industry. Not all the Canadian carriers offer food and beverages as part of their on-flight service. However, there are a limited number of firms who currently possess the experience and the resources available to meet the needs of the airline industry. Therefore, there is little differentiation among the food and beverage inputs.
Differentiation of employee inputs is low across the board. The employees that the airlines hire come from the same pool. The level of training and education required for each employee is consistent among all the airlines. This holds true for all types of employees ranging from pilots to baggage handlers. Overall, the differentiation of inputs from the four supplier groups is low.
The switching costs are much higher for firms within the industry then they are for suppliers. For all four of the input groups, the Canadian airlines would incur considerable cost to move from one supplier to another. For example, if an airline decided to purchase planes from another manufacturer, it would have to retrain all its flight staff and airplane mechanics to the attributes of the new aircraft. In order for an airline to switch its labor staff, it would have to offer compensation packages to its current employees and train the new personnel. There are minimal switching costs for the suppliers as in fact; most of the suppliers already service more than one airline in the industry.
There are few substitutes to the four primary input groups and suppliers. This increases competition among the airlines and increases the power of the supplier. Furthermore, as already indicated, supplier concentration for the key inputs is quite high. Finally, inputs are a primary factor in an airline's costs and to what extent they differentiate their product. This increases the competitiveness among the current industry players, thereby creating a negative force for the industry.
There is a minimal threat of forward or backward integration within the industry. The act of a group of employees assuming control of an airline is not perceived as a threat, but more as an alternative to insolvency. There is a greater threat posed from the airlines integrating backward (such as acquiring the food suppliers) relative to the suppliers integrating forward. Furthermore, there is substantial importance of volume to the supplier. Whether or not an airline orders one or ten planes from manufacturer will have a serious impact on the supplier's performance.
For the aforementioned reasons supplier power is high, creating extensive competitiveness within the industry. This negative force proves to be unattractive.

Buyer Power

Bargaining Power

The buying leverage of the current competing airlines is significantly raised due to the ratio of travelers versus the number of commercial airlines in the industry. With only three carriers to choose from nationwide, one of which only serves the Western half of Canada, buyers are left with little choice when seeking air transportation solutions. The competitors as previously mentioned are Air Canada, Canada 3000 and WestJet. In Western Canada travelers have more options and are granted the convenience of air travel at discount prices through WestJet and since the in-flight duration between Western points in Canada is relatively short it would be a favorable choice for consumers to choose a method of transportation forgoing the in-flight extras. The volume of buyers in Canada is very large considering nearly every resident of Canada a potential customer for air travel. This creates a market of approximately 30 million customers for the Canadian airline industry. Taking this into consideration, air travel is often a necessity and renders the buyer volume extremely high but their bargaining leverage remains low. They have the choice to choose between a discount carrier (WestJet), a mid-priced airline (Canada 3000) or a full-service airline (Air Canada) that services every major and some minor regions of Canada. Air Canada is reluctant to change their significantly higher prices due to the fact that no matter what they ask for they will be able to fill their seats illustrating the notion that buyer bargaining power is relatively low despite the large volume.
        When comparing buyer switching costs and firm switching costs it is determined that it is an overall negative determinant for the industry analysis. The only costs to the customer would be a monetary absorption to upgrade to a full-service carrier or to sacrifice in-flight services. With the advancements in technology and information systems it is possible for customers to simply log onto the Internet and find destinations, times and prices of any particular airline and its competitors. They are able to comparison shop given this large amount of information. Therefore, overall, the customer is given a strong bargaining leverage in increasing their choice between the existing airlines.
        Various transportation modes present substitutes for the buyers in the industry. Air travel is definitely the fastest, most convenient and most expensive but it is also the most desirable for the majority of travelers. There is no other mode of transportation available to get customers from point A to B that is comparable to that of air travel. Based on the buyers' personal preference and time constraints, a mode of travel will be determined. The overall availability of substitute products that are comparable in monetary and intangible benefits is relatively low thereby not permitting buyers to bargain on pricing.
The marketing strategy used by the airline competitors is generally pull-through in nature, trying to attract quantity in order to satisfy capacity requirements and make every flight a profitable one. Airlines are competing on the basis of offering the best traveling alternatives for the best price (or what is perceived as the best price in the mind of the consumer). Through offering travel rewards such as Aeroplan miles and discount gifts from on-flight boutiques and overall convenience of travel, airlines are attempting to pull customers through the channel and attract them to their service offerings. This gives the consumer a large amount of bargaining leverage when choosing what they want from their air service provider.
Price Sensitivity

More purchasing power is given to the buyer through a wide range of product differences thereby creating a high level of price sensitivity. As earlier mentioned with Air Canada you are paying a larger dollar amount because you are receiving more value added services with your ticket purchase such as meals, increased travel assistance and pre-boarding lounges. On the other hand, when dealing with discount airlines it is important to keep in mind that although you are paying less for the ticket you are receiving minimal services aside from safe air travel. Buyers are extremely sensitive to the price of value added services subjecting the existing airlines to close evaluation and scrutiny.
Brand identity within the industry is very apparent to the customer. For instance the traveler will generally know that if they choose Air Canada, ticket prices will generally be significantly higher than those prices offered by Canada 3000 or WestJet. Ticket prices also reflect the quality and performance of each individual airline once again increasing the consumer's sensitivity to the price of airline tickets. One factor worth mentioning that exhibits a positive force on the industry is the notion of buyer profits. These "˜profits' can be viewed as loyalty programs where frequent flyer miles (such as Aeroplan points) and other incentives are offered by airlines to retain the maximum number of customers possible. These points or miles may be redeemed to aid in the purchase of tickets and other merchandise offered through air travel catalogues and airport boutiques thereby giving them a monetary value to the customer. This decreases buyer power enticing the buyer to continue purchases with a particular airline in order to build rewards.
        Due to the fact that bargaining leverage to the buyer is low and that price sensitivity to the buyer is high, it is concluded that competitiveness within the industry is high. This equates to a negative force on the industry making it seemingly unattractive.

Overall Assessment
        Upon completion of Michael Porter's five forces analysis, it is determined that the Canadian airline industry is unattractive. The bargaining power of buyers and suppliers joined with strong industry competition and high substitution threats are all coupled to outweigh the positive force of new entrants. This, taken into account with today's current events, has resulted in an extremely unstable industry and is due cause for the current strategic realignment of industry players.

Industry Players                                                                                

Air Canada is the country's largest airline and is often labeled the "˜dominant carrier'. Air Canada was formerly a federal Crown corporation until it was privatized in 1989. Air Canada is the country's only full service airline as it offers a variety of services and it travels to both cities and regional destinations. It is a member of Star Alliance, an international coalition of other global airlines operating around the world.
The airline had revenues of $9.3 billion in 2000 and it currently carries approximately $11 billion in debt (2000 Annual Report http://www.aircanada.com). In 1999, Air Canada announced that it had acquired its main competitor, Canadian Airlines. When the takeover actually took place in the summer of 2000, Air Canada increased its market share to 82% but since then, Air Canada's market share has declined to 68% (Trains, Planes and Autonomy). Furthermore, since the acquisition, the airline has been unable to produce a profit. As a result, Air Canada will scale back its workforce to 35,000 from a peak of 47,000 at the time of the merger (Air Canada Cuts Management Jobs).
The airline currently operates a fleet of 243 planes. It has recently announced that it will cut capacity by canceling several international routes and grounding dozens of planes. Another recent development is that the airline has sold five aircraft, which it will lease back from an undisclosed investor (Air Canada shares jump on plane sale, pay cuts). Air Canada has also been at the center of new government involvement in the industry. The government will remove the 15% ownership limit on Air Canada's voting shares and Air Canada will receive the bulk of the $170 million government support package for the airline industry. Finally, Air Canada has announced two, widely perceived as bold new initiatives, which are to launch its own online travel agency and discount airline.

The airline has recently announced that it will launch its own on-line travel agency called destina.ca. The primary incentive for the creation of the travel agency is to reduce costs associated with ticket sales. Air Canada currently pays a premium of up to 10% of the ticket sale to traditional travel agencies. Travel agencies sold approximately 85% of the company's tickets in 2000 (Annual Information Form, 2001). The launch of destina.ca is considered a risky endeavor given the current financial situation of the airline. However, Air Canada believes that destina.ca will be successful as "the Canadian online travel industry is expected to increase from $600 million in 2000, to $4.5 billion in 2005" (Air Canada's Destina).

Air Canada will launch a new discount airline at the beginning of November. This airline will "serve major cities in Canada as well as tourist destinations in Florida" (Layoffs won't fly, Air Canada told). Tango will use 13 planes from the Air Canada fleet that will be repainted. The airline will also employ existing Air Canada staff. Therefore, there will be "a continuation of the same high overhead and union contracts that have crippled the airline during the economic downturn" (Tango Likely to Encounter Turbulence). The airline will operate much like WestJet in that it will offer short-haul, low-fare service.

        Canada 3000 was founded in 1988, and is Canada's second largest scheduled airline after its acquisitions of CanJet and Royal Airlines. The airline has the mission to provide reliable, affordable air travel (http://www.canada3000.com). Canada 3000 now carries more than 3 million passengers annually. The airline focuses on a low cost strategy, while offering many more services than WestJet, such as a new Club C3 business class similar to Air Canada's business class.
Much like the other players in the industry, Canada 3000 is experiencing financial problems during this time of economic slowdown. The challenges of the turbulent Canadian economy and the events of September 11th have been increased by the challenge of integrating Canjet and Royal Airlines into their corporate structure. The merger has increased Canada 3000's fixed costs, although the synergistic benefits of the merger are expected by many to be reflected in the firm's financial statements within the next few quarters.
Given their financial problems, Canada 3000 received aid from the federal government in the form of a $75-million loan guarantee for up to 12 months (effective October 25, 2001). The loan was granted after providing the government with a detailed restructuring plan outlining their strategies to survive the economic slowdown. Various cost cutting measures are being implemented including the reduction of the frequency of operations on many short haul routes by one third. The airline has recently announced that it will have to reduce its staff accordingly. It is also considering a number of ways to raise capital including a new share issue or a rights offering.
        Despite the recent poor financial results, Canada 3000 has performed well in recent years as they have increased Canadian market share from 4% in 1999 to 9% in 2001 (www.tc.gc.ca/pol/en/Air/report2/airline_restructuring_table_of_contents.htm). If their corporate strategy effectively pulls them through the challenges of the industry at this time they will be in a good position to further increase market share when conditions stabilize in the years to come.

WestJet airlines is a low-fare airline providing scheduled short haul passenger jet airline service in Canada. The airline commenced operations on February 29, 1996 flying to a handful of major western Canadian cities. The airline completed its Initial Public Offering of 2.5 million common shares in July 1999. Since that time, the company has continued to expand, servicing more western cities. In March 2000, WestJet began to incorporate Eastern service using Hamilton, as it's eastern hub. The airline now services 17 Canadian cities.
        WestJet has seen excellent growth since 1999. In addition to expanding their routes, they have seen greatly increased revenues and earnings per share. In August 2001, WestJet announced that its net second quarter earnings for 2001 were $8.2 million. This represents an increase of 10.8% over the earnings reported for the same period in 2000 (http://www.westjet.com). This illustrates that WestJet continues to have strong growth despite an economic slowdown affecting most industries, including Canadian airlines. As of August 2001, WestJet has seen 17 consecutive quarters of profitability.
        Using a strategy based strictly on offering low cost flights, WestJet has performed very well compared to the industry. Analysts have forecasted an increased earnings per share for 2002 and earnings growth estimates for this quarter are13%, compared to -642.7% for the industry (http://dir.yahoo.com/Business_and_Economy/Finance_and_Investment/).
        WestJet has seen success since inception as a result of their low cost corporate strategy. This strategy puts WestJet in a good position relative to their competitors to survive the economic slowdown in Canada and maintain good financial growth in the future.


        The current outlook on the airline industry is not favorable. There are however, a few opportunities available to the industry players. The federal government has recently introduced legislation that will remove the 15% ownership cap on the dominant carrier, Air Canada. This opens up the opportunity for investment and will potentially cause an infusion of funds from private investors. Complimenting this opportunity is the currently low share price of the airline firms. Combined, these two events give the airlines the potential to undergo a necessary restructuring.
With the current market conditions, there also exists the opportunity for airlines to implement various cost savings measures. This window to implement cost savings measures would not normally appear, as cost savings are a political and contentious issue. Downsizing routes and the number of flights available will considerably cut costs. In addition, layoffs can occur, reducing one of an airlines largest expenditures. Any restructuring efforts and cost savings measures will help improve the immediate financial performance of the airlines, however these efforts are long-term in nature.
Another opportunity for the airlines is to gain increased financing support from the federal government. The government is now accepting loan applications from the airlines in an effort to keep them afloat. The Bank of Canada has also cut interest rates reducing the cost of borrowing to a forty year low. This presents the opportunity for more affordable debt restructuring. Overall, the opportunities for the industry arise from a broadening of potential investors and the greater latitude for restructuring. However, technology provides an additional opportunity to reduce costs by means of electronic ticketing, web-based purchases and check-in kiosks. It should also be noted that due to the downsizing of airline firms, supplier power could potentially decrease due to the economics of demand and supply. This could present the opportunity for price reductions of all inputs with the exemption of fuel.


        As previously mentioned, the threats upon the airline industry are large. Most obvious is the recent tragic events of September 11th. These events have damaged the industry to a level not yet realized, effecting the cost and convenience of air travel. Although passenger volatility has persistently been an issue, the current situation has drastically decreased the number of people taking to the airways. This threat cannot yet be measured, as it is impossible to predict when consumer confidence will resume. Recent technological advancements, such as videoconferencing, will likely also pose an increased threat. Another threat arises from the current economic downturn. This is primarily due to the positive correlation between air traffic growth and the general level of economic activity.
Terrorism has become an increased threat; increasing the cost of security and travel time, while decreasing the number of flyers and flyer satisfaction. Threats also arise from government regulation. The government currently restricts the combined foreign ownership of an airline at 25%. However beneficial in retaining Canadian owned and operated airlines, this regulation significantly reduces possible foreign investment, effectively cutting off 98% of the global financial markets. A final threat to the current industry players is it is predictable that competition will increase in the foreseeable future. This is due to the decreasing available market share with respect to the over capacity and subsequent saturation of the market.

Key Success Factors                                                                         

We have identified the following Key Success Factors for the participants in the industry.

·        The airline must be able to retain customer loyalty

It will be imperative for the three airlines to maintain their market share (customer base). In the past, significant financial resources and efforts have been devoted to the very costly approach of trying to "˜win back' customers who switched to a competitor. This was especially apparent with Air Canada. Retaining customer loyalty can be achieved with delivering consistent service to the consumer. Furthermore, the consumer must be provided with reasonable expectations of future ticket prices and flight availability. There will obviously always be uncertainties in the industry, such as the terrorist attacks of September 11th, unpredictable weather conditions, and fluctuations in fuel costs. However, customers will be more forgiving in trying times if they are adequately treated during normal operating conditions.

·        The airline must have an operating platform that permits it to respond to changes in the operating environment

The ability to react to changes in the operating environment is essential for all three airlines to remain in existence. This would include having a cost base that is increasingly variable. If economic conditions deteriorate, the airline must be able to reduce labor costs, and cut capacity resulting in fewer flights offered and a reduced fleet of planes. An operating platform that includes non-unionized workers and leased planes would allow an airline to respond to changes in the market place.

·        The airline must attempt to keep the various stakeholders on-board

All the primary stakeholders in the industry must be considered during the decision-making. These stakeholders include, employees, customers, the government and shareholders. It is not feasible, nor within an airline's mandate to always attempt to accommodate all the stakeholders. However, the stakeholder's cannot be ignored and their interests must always be carefully assessed. Furthermore, if a stakeholder is going to be affected by a key decision, the airline should (wherever possible) attempt to consult with the stakeholder beforehand. This will assist in having the stakeholder work with the airline, rather than against it.

·        The airlines must have a clearly defined "˜flight-plan' (strategic focus) for the future

The airlines will have to develop a clear mandate for the future and carryout the objectives that they establish. It is not realistic for any business in any industry to be everything to everyone. The airlines must determine what customer market they are going to serve (target). All the attributes of the product including ticket prices, on-flight service, related services and geographic regions served must be in-line with the target market.


        After completing our analysis of the Canadian airline industry, we have the following recommendations for the dominant carrier, Air Canada. These recommendations will attempt to ensure that Air Canada is at least competent, but preferably allow it to excel in as many of the key success factors. Furthermore, we have made a short-term recommendation for the airline to "˜weather the storm' of the current deteriorating economic conditions.
Our first recommendation is that Air Canada increase lobbying efforts to have the current 25% foreign ownership cap removed. Allowing more foreign owners means there are more investors eligible to put money into Air Canada. This is an attainable proposal and it would likely benefit the federal government as attracting new investment from equity markets could limit the amount of government funding requested by Air Canada to protect the airline from bankruptcy.
Next, Air Canada must strive to reduce its fixed costs. Because of the size of the airline, the number of services it offers, and the union agreements it works under, Air Canada is a very expensive airline to operate. The Airline industry is hit especially hard in these times because of the high fixed costs tied up in airplanes and equipment and the inability to inventory unsold product. With the current deteriorating economic conditions, fewer people are traveling therefore airlines lose money by having empty seats on many of their flights.
To reduce these fixed costs Air Canada must implement new labor arrangements allowing the airline to easily vary the number of employees as economic conditions dictate. Furthermore, pertaining to their aircraft, the airline should look for improved methods to finance their fleet of aircraft more effectively. By selling their aircraft to another party and re-acquiring them through leasing agreements they free up substantial capital to be used in other areas.
Air Canada must also work hard to retain customer loyalty. It is much more costly to attempt to win back a customer or gain a new one than it is to keep an existing customer. In times where all firms in the industry are reducing costs, Air Canada must maintain the high level of service that their returning customers have come to expect. By continuing to offer their service, ticket prices, availability and scheduling with greater consistency than their competitors, customers will realize the value of Air Canada's reliability and ideally continue with Air Canada as their primary air travel provider.
Another recommendation is that Air Canada must make a greater effort of keeping the various stakeholders "˜on-board' with their activities. The primary stakeholders are the shareholder's and their interests will be considered first and foremost. However, the airline cannot be insensitive to the needs of the other interest groups. Through past experience, the airline has already discovered that maintaining public and government support is essential. Furthermore, formulating a corporate culture that keeps employees in tune with management objectives will improve efficiency and staff morale. Therefore, it is recommended that Air Canada attempt to inform and seek feedback from the various interest groups wherever possible.
        The previous recommendations are aimed at ensuring that Air Canada continues its dominant position for years to come. However, the airline must be able to improve its current financial position or else it will not survive beyond a limited term horizon. The airline is currently losing over a million dollars a day (Tango likely to encounter some turbulence). To improve its cash flow position, we recommend that the airline continue to seek additional financing from the government in the short term. Furthermore, Air Canada should take advantage of the removal of the individual ownership cap. The airline now has the opportunity to seek greater financial support from Canadian investors. Combined, these recommendations will give the airline a broadened "˜flight plan' that should enable Air Canada be the nation's dominant carrier in the years to come.


Our examination of the Canadian airline industry has revealed that overall; the industry is relatively unattractive on most fronts. Based on our analysis, we have identified the issues faced by the three industry players and what Canada's dominant airline should do to overcome their challenges.
        The overall attractiveness of the industry will continue to remain negative for the short term due to the current poor economic conditions. Furthermore, the tragic events in the United States on September 11th, 2001 have changed the way commercial air travel will be conducted, forever. The current market conditions have resulted in a very challenging business era in which firms in all industries including the Canadian Airline industry must offer very competitive pricing and service to survive. Returning to profitability in this industry will hinge on an airline's ability to reduce its fixed costs. In turn, this will give the airlines greater flexibility to respond to changes in the surrounding economic climate. While the current economic downturn will pass, the strategies implemented in these difficult times are long term and thus, will be in existence when the economy is more prosperous.
Although primarily out of the scope of the individual firms control, a major factor in determining the future of this industry lies in the hands of the Canadian government. The level of funding the government provides to firms in the industry will determine their ability to survive the loss of business due to the events of September 11th. Additionally, changes in government regulation pertaining to ownership of the firms could allow for new sources of financing to further assist the firms. It will also be important for the airlines to focus on maintaining customer loyalty. By providing a reliable and consistent service, customers will develop brand loyalty to the airline that best suits their budgetary and service requirements.
The Canadian airline industry is under a great deal of pressures from various factors. By implementing key measures to cut unnecessary costs and provide reliable service to customers, the airlines will be in a better position to improve their financial condition when passengers regain confidence in air travel and the Canadian economy improves.

Globe and Mail

Alphonso, Caroline. Air Canada plan draws fire. September 11, 2001: B1.
Blackwell, Richard. Airline crisis deepens as layoffs near 100,000. September 20, 2001: B1.
Chase, Steven and Keith McArthur. Air Canada ownership cap axed. October 24, 2001: B1.
A more available airline. October 25, 2001: A18.
Chase, Steven. Airline Rivalry Growing: report. September 11, 2001: B1.
Chase, Steven and Keith McArthur. Canada 3000 thrown $75 million lifeline. October 26, 2001: A1.
Chase, Steven. Ottawa holds out on Air Canada Aid. October 27, 2001: B1.
Chase, Steven, McArthur, Keith and Shawn McCarthy. Minister reserved about airline bailout. September 21, 2001: A9.
Church, Elizabeth. Business rethinks need to fly. September 19, 2001: B4.
Finlay, Richard J. Air Canada's rescue plan isn't ready for takeoff. October 26, 2001: A17.
Goold, Douglas. If there is any justice, Air Canada's Robert Milton will soon be looking for a new job. October 26, 2001: A14.
Hargrove, Buzz. Airlines face a financial crash. September 21, 2001: A13.
Howlett, Karen. Ottawa to rate impact before aiding airlines. September 17, 2001: B1.
Ingram, Mathew. Air Canada needs help, but how much does it deserve? September 19, 2001.
Ingram, Mathew. Why airlines? Bailouts for everyone, or bailouts for none. September 20, 2001: B11.
McArthur, Keith. Air Canada chops flights, warns of loss in quarter. September 19, 2001: B1.
McArthur, Keith. Air Canada could easily undo Tango. October 20, 2001: B1.
McArthur, Keith and Steven Chase. Air Canada hires financial advisers. October 26, 2001: B1.
McArthur, Keith and Steven Chase. Air Canada may need court protection. September 21, 2001: A1.
McArthur, Keith. Air Canada plans two discount brands. October 11, 2001: B1.
McArthur, Keith. Air Canada shares jump on plane sale, pay cuts. October 23, 2001: B1.
McArthur, Keith. Canada 3000 posts quarterly loss. September 20, 2001: B1.
McArthur, Keith. Carrier asks Ottawa for relief. September 18, 2001: B1.
McArthur, Keith and Steven Chase. Control shakeup seen possible at Air Canada. October 25, 2001: B1.
McArthur, Keith. Lifeline boosts Canada 3000 but tough flight still ahead. October 27, 2001: B1.
McKenna, Barrie. Meanwhile, global airlines want bailout. September 18, 2001: B1.
Partridge, John. Banks little exposed to airlines, analysts say. September 20, 2001: B5.
Reid, Douglas. Flying the flag just doesn't work in airline industry. October 9, 2001: B16.
Reguly, Eric. Air Canada's peculiarities elude American bosses. October 9, 2001: B16.
Reguly, Eric. Once Air Canada's gutted, then Mr. Milton can beg. September 22: B8
Reguly, Eric. Streamlined air industry will take off after shakeup. October 6, 2001: B8.
Tuck, Simon. Air Canada shares hit low; job cuts predicted. September 14, 2001: B1.
Winsor, Hugh. Take a little bow, Mr. Collenette. October 26, 2001: A19.


Air Canada cuts management jobs. October 16, 2001.
Chase, Steven and Keith McArthur. Airline warns big cuts coming: union. October 17, 2001.
Ingram, Mathew. Canada 3000's woes are largely its own fault. October 17, 2001.
Ingram, Mathew. Ottawa waits in vain for Air Canada white knight. October 24, 2001.
Grandmont, Charles. Canada 3000 may soon run out of cash "“ chairman. October 15, 2001.
McArthur, Keith. Air Canada wins delay of anti-competitive hearings. October 16, 2001.
McArthur, Keith. Airline seeks to thwart Tango. October 23, 2001.
McArthur, Keith. Analyst, agency raise red flag over Air Canada stock, debt. October 12, 2001.
McArthur, Keith. Canada 3000 could run out of cash. October 16, 2001.
McArthur, Keith. Layoffs won't fly, Air Canada told. October 11, 2001.
McFarland, Janet. Tango likely to encounter some turbulence. October 13, 2001.


Air Canada. Annual Information Form. May 14, 2001
Air Canada. Annual Information Form. May 16, 2000
Verburg, Peter. Dogfight. Canadian Business. September 17, 2001: 23.
Ott, James. Ax Falls Hard at Air Canada. Aviation Week & Space Technology. August 6, 2001: 46-47.
McMurdy, Deirdre. Trains, planes and autonomy. Canadian Business. August 20, 2001: 19.
Brooke, James. Air Canada Plays Tough with Competitors. New York Times. April 22, 2001: 5.3.
Fiorino, Frances. Air Canada's Destina. Aviation Week & Space Technology. September 17, 2001: 27.


ad 4
Copyright 2011 EssayTrader.net All Rights Reserved