KAREN WALKER / OTTAWAA novel brand strategy has helped Air Canada prosper ahead of its North American rivals
If the 2003 new year resolutions of most North American major carriers seem to consist of cost and capacity cuts, and building low-fares, sub-brand carriers, then it must be with some satisfaction that Air Canada can count itself well ahead of the pack.
So ahead, in fact, that Air Canada's Montreal headquarters has become a popular spot for visiting international carriers looking for ideas about how to get their own low-fare units off the ground.
"In this industry, in this economy, you have to move quickly," observes Air Canada's head of operations, Robert Giguere. Few airlines have been as nimble as Air Canada, which has dramatically adapted to an entirely new market environment.
In three years, Air Canada has acquired and merged with what had been Canada's second largest carrier and its main rival; launched two sub-brand carriers and a low-cost independent subsidiary; and emerged as one of only two North American majors - the other being Southwest Airlines - to enjoy a profitable 2002.Transformation
A key to Air Canada's success has been the speed with which it has changed. Less than two months after 11 September, Air Canada launched Tango, a low-fare, no-frills sub-brand. Swiftly on Tango's heels came Jazz - a rebranding of Air Canada's regional feeders - and then Zip, a low-fare, low-cost subsidiary carrier based in Calgary. By autumn 2002, Air Canada had three sub-brand carriers up and running, its mainline Air Canada capacity was trimmed, unit costs cut 5% year-on-year, productivity was up 10%, and products were in place to target the low-fare market boom.
In the USA, meanwhile, there is much talk among network carriers about stemming the horrific fiscal bleeding and of fighting back with low-fare sub-brands, but most of the details remain on marketing whiteboards. Air Canada, therefore, is a step ahead of its US rivals, including Star Alliance partner United Airlines, which, having tumbled into Chapter 11 bankruptcy protection, is now considering launching a low-fare sub-brand carrier on the US West Coast during 2003.
Air Canada is also dominant in its home market. This is unsurprising, since it was granted Canadian government permission to acquire its ailing main rival Canadian Airlines in 2000, to become the world's 10th largest airline with a domestic market share of almost 75%. But Air Canada's success has not been achieved without pain.
"The integration with Canadian was a challenge," admits Giguere. "On top of that we had the recession and 11 September. But while some saw Canadian as a liability, I viewed it as an asset. Both airlines were known for their high safety and customer service standards, so the challenge was a technical one. We shared some operational similarities, but there were also differences. We have Pratt & Whitney engines, they have General Electric. We both had Airbus aircraft, thank goodness."
Merging of the two carriers forced a focus on efficiencies and cost-cutting at a time when most US network carriers were more concerned with adding capacity. Then came 11 September and everyone became cost-focused. What was already in the pipeline at Air Canada was speeded up. "I was challenged with shrinking our operations," says Giguere. "So we got rid of our McDonnell Douglas DC-9s, then we shrank our Boeing 737 fleet, and then we put the squeeze on everything else. We knew we had to get the efficiencies in because the market was changing rapidly."
Air Canada's rapid response was Tango, which was launched on 1 November 2001 and offers no-frills services to several Canadian cities as well as some US destinations such as Fort Lauderdale and Orlando in Florida, and Las Vegas. Tango operates eight Airbus A320s and four 737s, offering an "all extras optional" service. Passengers can purchase refreshments and headphones for in-flight entertainment.Regional carriers
Air Canada also grouped together all of its regional carriers - formerly AirBC, Canadian Regional Airlines, Air Ontario and Air Nova/Air Alliance - under the single brand of Jazz, which acts as a feeder to Air Canada mainline, while Tango does not.
The real break from tradition, however, is Zip. Launched in autumn 2002, Calgary- based Zip is a separate subsidiary company with its own operating structure and labour agreements that are focused on low costs and short-haul point-to-point markets within Canada. During 2003, Zip's fleet will be expanded to up to 20 Boeing 737s and will move into Canada's east coast markets. Giguere says transborder routes into the USA "have not been ruled out".
"It is key to keep each brand separate from Air Canada," explains Giguere. "We now have different branded products to meet the needs of each customer segment."
Air Canada chief executive Robert Milton has described the carrier's change in direction as "the most dramatic transformation of a full-service carrier in the history of any airline" and is not fazed by accusations that the carrier may have too many brands. "Our customers no longer fit into marketing pigeonholes. We believe there is no longer such a thing as a premium traveller or a discount traveller. Consumers choose different products at different times for different reasons and if they're buying what we're selling, then we must be doing something right," says Milton.
Other carriers seem to think Milton has a point. In 2002 Air Canada was visited by managers from, among others, Air New Zealand, Delta Air Lines, BMI British Midland and Scandinavian Airlines, all wanting to learn more about low-fare sub-brands.
Air Canada is not alone in the low-fare Canadian market, however. According to Transport Canada's figures for summer 2002, the overall low-fare market in Canada grew to 36% from 16% in 2000. While Tango was a significant factor in this growth, west coast-based WestJet has more than held its own and increased its share of the domestic market to 14.2% in 2002 from 4.5% in 1999. The Canadian government's keenness to see competition preserved after Air Canada's take-over of Canadian has also encouraged a rash of would-be start-up activity, with some efforts potentially set to succeed and others probably doomed for the history books (see box).
Air Canada, meanwhile, is focused on the future and on continuing to challenge ideas about how international network carriers are run. "Tango is our template for a radical change in thinking," says Milton.
Giguere, an almost 30-year veteran with Air Canada, is keen to embrace the transformation. "We pulled a lot of cost out after 11 September, but we've been successful in working with our suppliers so that we can redeploy services such as food at a fraction of the original cost."Fleet expansion
The carrier will grow its Airbus fleet next year and expects to end 2003 with 113 A319/A320/A321 family narrowbodies. It will also take two Airbus A340-500s in April. The aircraft should have been delivered in November 2002, but were delayed by what Giguere describes as manufacturer "technical difficulties". A decision on how these very-long-range aircraft will be used has yet to be made. "We're ready to go operationally and we will almost certainly start with current destinations in our network, but beginning non-stop services," says Giguere. He cites eastern Canada to Asia as an obvious A340-500 market, with non-stop city pairs such as Toronto-Hong Kong. But he points out that Vancouver-Singapore or Vancouver-Sydney also would be feasible, as would possible new routes such as Toronto-Johannesburg.
In 2004, three A340-600s are scheduled to join the Airbus widebody fleet. Giguere stresses, however, that the carrier's 50 Boeing 767s will remain the workhorse of Air Canada's widebody fleet. "The 767 has a very important role in our fleet. Airbus does not really have anything in the 767-300 niche and the 767 benefits are very important to us," he says, adding that one of the carrier's six Boeing 747s will be retired this winter and overall capacity will be pulled down in the winter quarters.
Giguere is not overly bullish about Air Canada's prospects; he is cautiously optimistic that 2002's profitability will continue in 2003, but makes no promises. However, he is confident that the airline is in a better position than most to weather new storms.
"There are huge hurdles ahead of us. Everyone is nervous about airlines at the moment," he points out. "But we have our fundamentals right now and we have a great fleet and the best people in the business. We are extremely flexible for growth or shrink. In my view, flexibility is the most important thing for an airline."
Source: Flight International