Final Report
PREPARED BY DEBRA WARD
Independent Transition Observer on
Airline Restructuring
September 2002
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Introduction
Two years ago, airline restructuring looked relatively straightforward. Once Air Canada acquired Canadian Airlines Corporation, could Air Canada successfully merge Canadian Airlines into its operations? What did that mean for people affected by the airline sector: communities, agents, businesses, and airline employees? A rosy economy led to the hope that after some upheaval, Canada would have an equally rosy airline industry: Air Canada as our strong, international carrier, moving Canadians around the world and into the heart of our communities. Niche carriers providing lower fare options for vacationers and people visiting friends and relatives. Then it changed.
Amid the aftershocks of the events of 2001 - the murderous September 11th attacks, the high-tech meltdown, plunging stock values - we remain unsettled and unsure of exactly where we go from here, and what the world will look like once we arrive.
The airline sector, rather than continuing its expected glorious growth of the mid and late 1990s, was one of the hardest-hit. Travel plummeted. High-yield customers melted away, leaving full-service airlines' pricing and scheduling strategies, keyed to the coveted "front of the plane" traveller, in shambles, along with their revenue projections.
Air travel security, previously a necessary evil positioned between the passenger and the aircraft has become a first line of defence against real evil. The cost of protecting our country from the use of civil aircraft as weapons of mass destruction has fallen on passengers.
Air Canada has had to reinvent itself. Old strategies have been abandoned in favour of a new business template: new brands, new subsidiaries and an attempt to appeal to the previously undervalued low-fare traveller. This radical approach seems to be working.
WestJet rode high on turmoil and change. Growing numbers of consumers chose its low-fare service that got them to their destination pleasantly and with a minimum of fuss. WestJet showed a profit throughout the most difficult of times, including $12 million for its most recent quarter and was named 2nd top performing "median" airline (i.e. with revenues less than $4 billion) in the world by the trade publication, Aviation Week & Space Technology.
Air Canada has dropped some capacity between 2000 and 2002, which has been picked up by other carriers, especially low-fare jet airlines. As a result, there is more competition on domestic long-haul routes, and more low-fare options. However, it also appears that capacity on short or medium-haul routes has not been replaced, but has been redeployed on longer-haul routes (based on a three per cent decline in "seats" flown, but a five per cent increase in "seat-kilometres" flown).
Airlines started up and failed (Roots Air), expanded too quickly and failed (Canada 3000) and started up (Jetsgo, CanJet). Air Canada announced a $30 million profit in its second quarter (the only full-service carrier in North America to show a profit) but the company still carries a debt and liability burden of about $10 billion. While parts of our current economy are stunning, others are just stunned, shattered by the flight from stocks, the high-tech washout and corporate malfeasance, and misfeasance. The U.S. economy and its carriers are not anywhere near a recovery. Not only is there no light at the end of the tunnel yet, we don't know how long it is, how winding or how deep.
We do not yet know what our airline industry could be in the future. There are too many uncertainties. However, this does not prevent us from determining what the airline industry should be, and what we must do to get there.
There are two ways to examine the airline sector. One is to look at the immediate, short-term changes: how much competition there is; on which routes; the state of carriers' financials, and so forth. The second is to look at the fundamental, framing policy that sets the "rules of the game". The latter impacts not only today's airlines, but tomorrow's as well.
This report, the final of four, recommends actions for both the short and long term. Short term, I have considered the Air Canada acquisition of Canadian Airlines Corporation, and its direct impact on stakeholder groups. The government framework that I have used to create short-term recommendations is Bill C-26, the Air Canada undertakings and other provisions such as the Official Languages Act.
For the longer term, I have examined some of the key policies that affect the airline industry in elemental ways that go beyond immediate concerns and exigencies. Recommendations for long-term action use the government's own objectives as their starting point, which are:
...for Canada to have an efficient and viable airline industry with strong domestic and international competitors and which is affordable, responsive to users and their communities and overall, satisfies the needs of all Canadians"1
The recommendations suggest new approaches for governments, airlines and stakeholder groups, and provide views on what each can contribute to ensure a resilient and competitive airline industry that serves Canadians over the short and long term. The recommendations also deal with the issues of Canadian ownership of carriers, the role of air access in economic development, particularly in remote or rural communities, and the participation of federal government departments and other levels of government to achieve solutions.
1 2002-2003 Estimates - A Report on Plans and Priorities, Transport Canada
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