Table of Content
TOC \o “1-3″ \h \z 1 Executive Summary
2 Introduction
3 Air Canada
3.1 Introduction
3.1.1 Fleet
3.1.2 Route Network
3.1.3 Service
3.1.4 Air Canada’s Subsidiaries
3.2 Operating Performance and Financial Status
3.2.1 Canada Domestic
3.2.2 Canada-U.S. Trans-border
3.2.3 Other International
3.2.4 Cargo
4 Environment
4.1 Market
4.2 Profitability
4.3 Industry Outlook
5 SWOT Analyses
5.1 Strength
5.1.1 Network
5.1.2 National Carrier
5.2 Weakness
5.2.1 High Personnel Cost
5.2.2 Fleet Arrangement and Aircraft Dispatch
5.2.3 Geographic Location
5.3 Opportunity
5.3.1 Asia-Pacific Region
5.3.2 Cargo
5.3.3 Low Price No-Frill Market
5.4 Threat
5.4.1 Competition
5.4.2 High Cost
5.4.3 Fleet Arrangement
5.4.4 Oversized Organization
6 Three Year Strategic Plan
6.1 Marketing Planning
6.1.1 North American Market
6.1.2 International Market
6.1.3 Cargo
6.2 Cost Reduction
6.3 Organization Restructuring
7 Conclusion
8 Reference
1 Executive Summary
According to IATA’s (International Air Transport Association) report the total numbers of distance flown, passengers carried, freight tons carried and the revenue of world airlines have steadily increased in the past decade yet the yields have a trend of shrink since 2001. It may be the reasons of the macro economy of the world and the impact of 911 to whole aviation industry. No matter whatever the reason might be, it obviously demonstrates what worldwide airlines facing now: competition, uncertainty and shrinking profit.
The emergences of low cost, no-frills airlines and their successes point out a possible course to airline operators; such as Easy Jet in Europe, West Jet in Canada and Southwest Airlines in the U.S. for instance. These low cost airlines and their marketing strategies have successfully competed with their rivals in intense competitions and achieved admirable financial reports.
Low cost, no-frills type operations will be a new model to airline business, especially in those areas with high competition, de-regulatory environment and anti-trust implications like North America and West Europe markets for example. Full service airlines with a broad range of service span and higher expenses are getting more difficulties to survive in those markets. SARS, 911, economic slump have worsen the situation even more but made low-cost airlines more striking. Elements in airline marketing are seen and well practiced in low cost operations. Networking, pricing, product and distribution are four major pillars of low-cost type operators. Aviation macro-environment, low cost operations will be discussed and a 3-year marketing plan will be depicted based on the environmental influences and low-cost concepts.
2 Introduction
This is an application report assignment of AERO2174 Airline Marketing. Air Canada is the research object in this report. The market environment, airline performance, market forecast are the main areas to look at and a SWOT (strength, weakness, opportunity, threat) analysis is used to summarize this topic. A 3-year market plan is constructed based on the analysis for Air Canada as its future marketing strategy and an action plan is designed to carry it out; measures and benchmarks are included to check the achievement of the plan.
3 Air Canada 3.1 Introduction
Air Canada was established in 1937 under the name of Trans-Canada Airlines (TCA). By 1964 TCA had become Canada’s largest and national airline and changed its name to Air Canada (AC). Air Canada was fully privatized in 1989; and it merged Canadian Airlines International, the second largest airline in Canada. AC employs approximately 40,000 people worldwide and is a full service, top tier carrier and the 10th largest airline in the world today.
3.1.1 Fleet
AC has 330 aircraft in service now. The aircraft type and number are shown as table 1 below.
Wide-body jets
Narrow-body jets
6
Boeing 747s
47
Airbus A319s
47
Boeing 767s
51
Airbus A320s
9
Airbus A340-300s
13
Airbus A321s
8
Airbus A330-300s
24
Boeing 737s
25
Canadair Regional Jets
70
Total
160
Total
* Including the Air Canada Jazz fleet of 100 aircraft.
Table 1: Air Canada’s fleet. Source: Air Canada website
3.1.2 Route Network
AC has direct service to 22 domestic cities, 33 U.S. destinations and 51 cities in Europe, Asia, Australia, Caribbean region and South America. AC is also a member of Star Alliance, an airline alliance consisting of Lufthansa, SAS, Thai Airways International, United Airlines, VARIG, Air New Zealand, All Nippon Airways, Austrian Airlines Group, Singapore Airlines, Mexicana, bmi british midland, Asiana Airlines and Spanair, provides extensive global network and aggrandized services to 700 airports in 128 countries. Following 3 figures illustrate AC’s global, U.S. and domestic network.
Figure 1: Air Canada’s Worldwide Network. Source: Air Canada website
Figure 2: Air Canada’s U.S. Network. Source: Air Canada website
Figure 3: Air Canada’s Domestic Network. Source: Air Canada website
3.1.3 Service
Air Canada has been recognized as a global leader in air transportation and ranked as the safest airline in the world. In 2002, AC was voted the best airline in North America and its best frequent flyer program, Aeroplan, the best in the world.
AC provides a newly designed first class service, International Executive Class, comfort, elegance and consideration with business price.
AC is a full service, top tier airline. It offers add-value services such as:
W Personalized Concierge service to Executive First and Aeroplan Super Elite customers.
W Maple Leaf Lounge available to Executive First and Executive Class ticket holders, Aeroplan Super Elite and Elite members, Star Alliance Gold cardholders and Diners/enRoute Maple Leaf Club cardholders. The lounges offer a selection of newspapers, magazines as well as complimentary beverages. State-of-the-art business centers offer a complete range of leading-edge business equipment and computers, modern furnishings and high-speed Internet accessibility etc.
W Freshing-up facility in London and Vancouver airports for passengers after long flight. These lounges have private shower rooms, valet services for clothes pressing and shoe cleaning, business centers, dining areas for continental breakfast and quiet, private rest areas.
W Aeroplan, the most popular, 6 million members, frequent flyer program in Canada. Members can earn miles from AC flight service, its regional and worldwide partners and Star Alliance carriers. Aeroplan members can also earn miles through extensive networks of car rentals, hotels, telephone and credit card companies.
3.1.4 Air Canada’s Subsidiaries
Airlines
Air Canada Cargo, Tango, Zip, Air Canada Jazz, Air Canada Jetz
Internet Travel Services
Destina.ca
Travel Agent
Maintenance Service
Air Canada Technical Services
Tour Company
Air Canada Vacations
Table 2: Air Canada Family. Source: Air Canada website
Table 2 above shows a variety of business and service subsidiaries of Air Canada like airlines, travel agents, technical service and IT service companies.
3.2 Operating Performance and Financial Status
AC’s operating performance will be viewed into 3 categories: domestic, Canada-U.S. Trans-border and other international.
3.2.1 Canada Domestic
Before 2001 AC enjoyed continuous and progressive growths in domestic sector. However, after the 911 event AC suffered, like all other rivals in North America, a loss of passengers due to the fears of flying. The weak economy and war in Iraq also delayed the recovery.
Figure 4: Domestic Passenger Revenue. Source: AC website
Figure 4 above shows a flat increase in AC’s domestic operation.
3.2.2 Canada-U.S. Trans-border
Likewise, AC’s Canada-U.S. trans-border was affected more severely from the 911 event. It has been declined 8% from 2001 as shown in figure 5 below. Increased competition and harsh environment make this sector harder to recover and back to before 2001 level.
Figure 5: Canada-U.S. Trans-border Passenger Revenue. Source: AC website
3.2.3 Other International
Other international routes comprising trans-Atlantic, trans-Pacific and Caribbean enjoyed strong growth because of demand and yield increasing even with the same disadvantageous factors in other two sectors.
Figure 6: Other International Passenger Revenue. Source: AC website
Figure 6 above points out the strong growth of other international destinations in spite of the slump of North America market.
3.2.4 Cargo
Cargo operation and revenue seemed not affected by 911 and economic difficulties at all. It enjoyed strong growth in 2001, especially in the Asia-Pacific region notwithstanding a slight decline in the domestic market. Figure 7 below illustrates the cargo operations of 2000 and 2001.
Figure 7: Cargo Revenue. Source: AC website
To summarize all, AC’s recovery in some specific region is not powerful enough to offset the loss in others. Shrinking revenues and expanding costs, mainly due to the rising insurance fee and fuel price, made Air Canada lost 1,315 and 828 millions in 2001 and 2002 respectively. Figure 8 below demonstrates the income (loss) of AC from 1998 to 2002.
Figure 8: AC’s Income 1998-2002. Source: AC website
Air Canada obtained an order from the “Ontario Superior Court of Justice” on Apr. 1st 2003, which providing creditor protection under the “Companies’ Creditors Agreement Act” (CCAA). Under current situation, Air Canada’s future and outlook will be depending and determined by the CCAA and the restructuring plan. At this crucial moment, the success or failure of AC transforming to a leaner, lower cost, more efficient airline will decide AC’s tomorrow.
4 Environment 4.1 Market
According to IATA (International Air Transport Association) statistics the worldwide passenger traffic and airline industry had a consistent growth of approximately 6 to 8 percent over the last three decades regardless economic cycles. The booming markets in Asia and the Middle East have been the leaders of international airline business even after the turmoil of 911 and SARS. These two regions are also forecasted to maintain high growth in the future 10 years. Figure 9 below demonstrates the average growth of the past and figure 10 illustrates the traffic trend categorized by regions.
Figure 9: Passenger Traffic Growth Source: ICAO website
Figure 10: Market Trend By Region, 2002 Source:IATA
Contrastingly, regions like Europe and North America however suffered a business decline from 2001, and these two areas are not forecasted to revive very soon due to strong competition and the shadow of war and dispute.
4.2 Profitability
Figure 11 and figure 12 below show a tendency of shrinking profit and increasing cost observed from IATA’s analyses too. Again it is because of the increased competition and insurance expenses after 911 and the uncertainty of its repercussions. Airlines are becoming more sensitive to international affairs and geopolitical events, which augments the difficulty of planning and lessening yields.
Figure 11: Airlines’ Profitability Source: IATA website
Figure 12: Airlines’ Profitability Source: IATA
4.3 Industry Outlook
Since 2001, airline industry has suffered from weak economy, excess capacity, less demand and lower fares from competition. Increasing security measures, insurance fees and high fuel prices etc. lead to inevitable costs augmentation as well. The future of airline industry remains uncertain resulting from the concerns over security and international conflicts and disputes. Several major North American airlines commenced bankruptcy protection in 2002. To the North American market, adverse conditions and unexpected events are still looming in the future.
5 SWOT Analyses
SWOT (Strength, Weakness, Opportunity and Threat) model is an analytic tool for strategic-planning and decision-making. It helps managers to review current environment where organizations existing and self-conditions thus outside opportunities or threats can be identified and internal characteristics can be examined. We would use SWOT model to analyze Air Canada’s case as the following.
5.1 Strength
Air Canada’s strength would be focused on the domestic market and the majority of Canadian public traveling in and out of Canada. AC is the national carrier and it would be Canadians’ first choice provided other considerations are same. Flying the aircraft carrying a logo of maple leaf, Canada’s national icon, and national flag would make all Canadians feel proud and home alike.
In addition, the domestic market is dominated by AC as well due to its scale and almost monopolized routes structure in Canada. Canada’s small population scattering over such vast continent makes airlines hard to survive and new joiners higher financial entry qualifications to compete. This will prevent new airlines from entering into Canada’s relatively small market. AC’s strong points include:
5.1.1 Network
Compared with other competitors, AC’s service network may be the most valuable and powerful strength over other rivals. AC has a full service network to Canada domestic and international destinations. Besides, AC has many regional partners or subsidiary airlines in the domestic market to form an integrated service network. Plus the membership of Star Alliance, AC can provide a worldwide network to passengers through other alliance members.
5.1.2 National Carrier
To be the biggest, longest and full-scale-service airline in Canada, AC has become Canada’s national symbol. It would be Canadians’ first selection to fly with if fairs are reasonable. This would make AC more advantageous over other foreign competitors.
5.2 Weakness 5.2.1 High Personnel Cost
Perhaps AC’s weakness comes from too much support from the government, which makes AC rigid, inefficient, over sized and less competitive. From figure 13 below we can see that personnel cost (salaries, wages and benefits) counts up to 31% of AC’s total cost. It is a huge portion!
Figure 13: AC’s Cost Source: AC website
Unionized employees such as pilots, flight attendants and mechanics make AC bearing heavy personnel burdens of salaries, wages, benefits and pensions. High personnel expenses compel AC a high cost airline, which would be a serious problem from now on.
5.2.2 Fleet Arrangement and Aircraft Dispatch
Many of AC’s airplanes are wide-body ones. These wide-body airplanes play a major role in domestic and North American markets. With the horrible business depression after 911, war and SARS adverseness load factors have been decreased to a record low. Many seats are empty and operating performance deteriorated further as passengers scare of flight; thus the revenue becomes less notwithstanding the operating cost remains the same. It turns into negative numbers on the financial report eventually. Nevertheless, costs and losses could be minimized and mitigated if flights are consolidated on some low load factor routes, or a better usage and management of smaller, narrow-body airplanes. However, this cannot be done immediately. It needs a deliberated plan for future airplane purchase and fleet designs. Current fleet and airplane types in AC may not be suitable when business goes down or any similar crises encountered.
5.2.3 Geographic Location
Canada shares the longest peaceable border in the world with her neighbour in the south-U.S.A. Yet Canada’s population, economic scale and business energy are not comparable with the U.S. Locating so closely to the world’s super power means advantageous as well as threatened. More or less, Canada’s importance and role to the world is diluted by the existence of the U.S. from the south. In addition, any economic chills or industrial occurrences will affect Canada’s performance too. 911’s impact is the best example, which explains the effects of the close tie between Canada and the U.S. and the harm of over-dependence. The unilateralism and new conservatism emerge in U.S. foreign policies towards the world would, and have, drawn unpredictable outcomes to U.S. itself socially, economically and psychologically and surely hammer Canada too.
5.3 Opportunity
There still are some opportunities although the environment is not friendly for airline industry, especially the North American market. Yet other international markets still have positive growths. Asia-Pacific, West Europe, South America and Caribbean regions experienced strong revenue growth in 2002. Figure 10 above reveals the potential markets waiting to be explored, in which Asia-Pacific, Latin America and Middle East would be most possible opportunities to AC.
Figure 14: Passenger Revenue Change By Region. Source: AC website
Figure 14 above shows the passenger revenue changes classified by region. Non-U.S. international market revenues bounced the highest number from 2001. It is worth to give it a shot!
5.3.1 Asia-Pacific Region
IATA has forecasted that the Asia-Pacific region would be the fastest growing market in the next 15 to 20 years. Areas like Mainland China, India and South East Asia are future’s locomotives of world economy. Canada just happens to receive huge numbers of immigrants from these areas. The economic ties, passenger traffic and cargo transportation between Canada and these areas are promising opportunities to Air Canada. The biggest west coast city, Vancouver, would become the transportation hub to the Asia-Pacific region and the demand increasing would be foreseen as well.
5.3.2 Cargo
Cargo operation has always been lucrative and stable relatively regardless of external interferences. AC still had cargo revenue growths in 2001 and 2002 in spite of passenger business drop then, for example. IATA also predicts the world’s freight traffic average growth of 5.3% from 2002 to 2006 as figure 15 shows. The highest rate of growth was forecasted to be within Asia and on Trans-Pacific routes. Again, it points out potential market and opportunities to Air Canada.
Figure 15: IATA’s Freight Forecast. Source: IATA
5.3.3 Low Price No-Frill Market
Low fare, no-frill operations may be another option for Air Canada. There are several successful examples of this kind of operation around the world, for instance, Easy Jet in Europe, VirginBlue in Australia, Southwest Air in the U.S. and WestJet in Canada. The secret of the success is very low cost, compared to full-service, top-tier airlines. By the utilizations of IT, Internet technology, spoke-to-spoke hub operation, appropriate airplane type (usually narrow-body, short to medium range aircraft), flexible revenue and price management and slim organization make this type of airlines profitable, pliable and very competitive in regional markets. They can lower the ticket prices to a level that full-service airlines cannot possibly offer. North America’s vast continent and scattered metropolises in Canada and the U.S., with ranges vary from 2 to 6 flight hours, is suitable for this type of operation.
5.4 Threat
Air Canada is facing imminent threats under present conditions, both from internal financial pressure and externally industrial environment.
5.4.1 Competition
North America is a totally deregulated, liberalized and free competitive market. Canada and the U.S. also impose anti-trust regulations on enterprises to protect consumers’ interests. Airlines cannot practice any forms of associated, consolidated or pre-agreed behaviour to manipulate, control or monopolize the market. Therefore, competition is fierce in this free market as well as those areas and countries with similar “open sky” agreements and regulations. AC has difficulties to compete with those lower cost airlines from Asia, Europe and the U.S. to win the market shares.
5.4.2 High Cost
AC’s operating cost is high, especially expenses in salaries, benefits and pensions. Unionized work force makes AC strenuous to downsize the organization and reduce personnel expenses. For example, employee benefits expenses rose million or 15%, and future benefits rose million in 2001 due to higher pensions and increased health care costs. Workers’ compensation liability rose million in 2002 as well. With lessening revenues but increasing cost, AC is encountering tremendous challenges ahead.
5.4.3 Fleet Arrangement
As mentioned before, AC needs to adjust its fleet and aircraft type in order to meet the requirements of load factor and efficient aircraft usages. Fly a wide-body airplane to the less-demanded routes will not do any good to the company but decreases the load factor and economic efficiency instead under recent turbulence. However, most AC’s fleets are wide-body airplanes excluding its subsidiary airlines. This would put AC into an adverse position during demand and business downed.
5.4.4 Oversized Organization
The organization has been expanded and oversized after Air Canada acquired Canadian Airlines International in 2000. Yet the operating performance has not been multiplied after the merge. Moreover, AC either had to pay extra compensations to layoff Canadian Air employees or kept their positions preserved to prevent labour disputes. This causes AC overweight and carrying heavy cost loads.
6 Three Year Strategic Plan
To cope with the business crisis and save Air Canada from bankruptcy, a strategic plan is needed to deal with:
W Market Planning
W Cost Reduction
W Organization Restructuring
These three elements are actually aiming at the same target and strive for the same goal: redefine the airline market after those strikes and reduce operating costs to compete.
6.1 Marketing Planning
Airline business has been totally changed after Sep 11, 2001. Passengers become suspicious to take air travel, depressed economy makes passengers more sensitive to prices and reduces business travellers, and, minute and complicated security measures are time and patience consuming to passengers. Airlines cannot do much about the security examination procedures because governments have managed most examination and check jobs since 911. Therefore, airlines can only lower their fairs and initiate market incentives and stimulants to attract more passengers, and persuade general public that airplane still is the safest, fastest and most comfortable vehicle for transportation.
Low –cost and no-frill airlines have been popular among the public, especially during market recession periods. This type of airline is fitting in deregulated, liberalized and high competition markets such as North America and Europe. The operating cost is at least 1/3 lower than full-service airlines. Low-cost airlines can use flexible and low fair pricing strategies to fill up every seat. They also encourage passengers utilize direct Internet access for seat booking, ticket purchasing and other services requests. Hub-to-hub, spoke-to-spoke type routing structures provide airlines better airplane usage and enhance dispatch efficiency. All these operating features can reduce the costs further thus ticket prices can be lowered more.
6.1.1 North American Market
At this crucial moment, Air Canada should transform its market targets to and focus on low-cost, no-frill sector to vie the market share particularly in the North America. Actually Air Canada has noticed the popularity of low-cost airlines and launched no-frill subsidiary ones like Tango, Jazz, Air Canada Jets, and Zip. Air Canada should continue to enhance this low-cost airline operations and work on prices reducing.
6.1.2 International Market
Air Canada should grasp the growth opportunity and explore the Asian market, and introduce more flights and services to the booming areas such as China, South East Asia, Japan, India and Korea. AC also can take the advantages of the large number of Asian immigrants and their ties in the region to expand its business.
6.1.3 Cargo
Cargo operations can be gradually shifted from the weak North American area to the promising Asia region. Based on previous statistics and future forecasts from IATA, Asia has the highest demands and growth rate in the world. This giant economic plate must not be ignored at all.
6.2 Cost Reduction 6.3 Organization Restructuring 7 Conclusion 8 Reference
Air Canada, <http://www.aircanada.ca/>, July 2002 Accessed
Airline Business Magazine, <http://www.airlinebusiness.com/>, July 2003 Accessed
ICAO, <http://www.icao.int/>, Aug 2003 Accessed
IATA, <http://www.iata.org/index.htm>, Aug 2003 Accessed
Credit:ivythesis.typepad.com
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