July 18, 2008
Earth to Air Canada
In the United States, rising fuel costs have forced airline carriers like Delta and American Airlines to cut both routes and jobs—with executives happily playing the victim by reinforcing the myth of speculation causing higher oil prices. (Speculation actually decreases volatility and the blame for surging prices sits squarely on that boring old idea of supply and demand.) In Canada, two airlines will be cutting jobs: Jazz Air by 270 and its parent company Air Canada by 2,000.
The story's interesting, especially compared to how the other carriers are performing. Westjet remains profitable and may expand routes now that it has entered into a venture with the U.S.-based Southwest Airlines to share customers. Smaller companies such as Bearskin and Porter are also holding on and have yet to trim jobs or flights. In fact, Porter’s flights to New York have improved on revenue estimates by 80%, and commutes to Montreal have increased more than 200% over a year.
The success of other carriers underlines the problem with Air Canada. The company has been unfocused since its merger with Canadian Airlines, as its bloated size makes it unable to adapt to the changing Canadian market. Although being the oldest airline currently in play in Canada should bring it experience and wisdom, it has also saddled Air Canada with the oldest—and potentially least fuel efficient—fleet. In addition to old equipment, the people in charge are fairly creaky as well: managers in monster companies often are slower to react (and less willing to), afraid that rocking the boat could cost them their jobs. For exhibit B, see the similar clunkiness in the American auto makers.
In an roundabout way, the dwindling economy may be the best thing to happen to Air Canada. The company will be forced into becoming smarter, hungrier for success, and more efficient—or face a path to irrelevancy. Already, the stock market has punished Air Canada, slashing the share price in the company by over 70% year-to-date. (Subsidiary Jazz Air is down 40%, while Westjet is down 20%.) Just as General Motors is gearing up the Volt as a last-ditch effort to stay relevant in the market, Air Canada must find its own spark of ingenuity.
Photo by News46 from the Torontoist Flickr Pool.
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I don't think you can really compare Porter's struggles with fuel costs to that of Air Canada.
They're a regional operator and run planes that are super fuel efficient. Most of the passengers are business travelers, which means less cargo as well.
As you can probably imagine, it takes quite a bit more fuel to take a fully-loaded 767 halfway across the world.
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You're right in that the two companies have different scopes, but how about Jazz Air and Porter? Or Westjet and Air Canada?
And if it's true that international destinations are the problem, the big question is: Does Air Canada have a solution? Since it can't handle regional or national flights as well as Porter or Westjet, how much hope can we place in the company in finding profitability flying internationally?
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Maybe higher oil prices (temporary falls notwithstanding) signal the end of the era of cheap & easy international air travel?
Maybe, in addition to becoming smarter and more efficient, international carriers like AC just have to become smaller. Fewer planes, fewer flights, fewer destinations.
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It's very unfortunate,,,,, that you are allowed to report a story,, without having the facts you need to be accurate.
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Maybe they could stop flying to Kingston (7 times a day each way) and London (10x) and codeshare with a train company instead, as Air France is doing.
http://www.iht.com/articles/2008/07/15/business/15talks.php
Naw, way too radical for Canada.
Maybe they could have bought winglets for the 767-300ER fleet as American Airlines did which at $130/bbl oil would likely have saved money even by the time the 787s arrive (late).
http://www.airliners.net/aviation-forums/general_aviation/read.main/4063360/
The comparison to Porter is unapt though - a single aircraft type carrier with no legacy pension costs etc.
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Didn't we, the people bail out Air Canada a number of years ago, to the tune of billions of dollars?
If they go belly-up do we get that back?
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Air Canada's a private company. Most assume that it's a crown corporation, which it's not. They also have very old equipment, and, especially on long-haul international, second/third-rate service compared with other carriers. One of the worst flights I have ever had was Narita-Toronto, non-stop. I say, let the market decide.
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I think there's a real supply and demand issue in the oil markets (I've was a peal oil afficianado before it was cool) but there's no doubt that speculation is playing a role in driving up prices as well.
I followed the link to the Macleans' article and had to laugh at the entertainingly fatuous comment from the the tobacco/oil company shills at the American Enterprise Institute that speculators are a stabilizing influence. Speculators have been behind every lunatic pricing bubble in history from tulips to dot-coms to Silicon Valley real estate, and it would be utterly astonishing if they didn't have some hand in doubling the price of a commodity in under a year.
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WestJet must be struggling. After putting in the fuel surcharge they've started going crazy with sales, even to the point that it's actually less to fly now than before the surcharge was implemented.
A slightly OT rant: The concept of a fuel surcharge is galling. Are they going to have a pilot surcharge, too? WTF does a plane ticket buy? I thought fuel was included in the deal.
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Wow...that's a really insightful arguement. Managers who have been at companies a long time are "creaky" and that is the source of the airline's struggles.
Reductions in capacity is a prudent response to a slowing economy and increased costs of operating the flights. Even the lowest of the low-cost carriers (Ryanair) is reducing service to deal with the drop in demand. Very few airlines anywhere in the world are planning expansion of service at this point in time; the ones that choose to do so are depending on significant capital infusions to fund such efforts, and even that is no guarantee of success - see Virgin America's slowing of their growth plans.
I'm not saying that Air Canada has the best plan in place for weathering the storm, but other carriers have not been particularly successful lately, so claiming that others are better positioned is a a specious argument at best.
Oh, and the fuel surcharge is a fleecing of corporate contracts and miles rdemptions. Otherwise they would just include it in the fare. This way they get more money from everyone, not just the folks buying regular tix.
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While it is true that the high oil prices have hit most airlines pretty hard, the comments about Air Canada are not true. Air Canada has one of the most modern fleets of all legacy carriers; it has been replacing its less fuel efficient airplanes for years - it no longer flies 747s and have phased out the Airbus A340. It's replacing the 767s with brand new 777 (there are quite a few operating already, including between Toronto and Montreal) and was one of the first to order a slew of 787s, the much talked-about fuel-efficient plane by Boeing.
When Air Canada went under bankruptcy protection a few years ago, it went through a complete re-organization, adopting one of the leanest business models among legacy carriers. While most North American carriers were still struggling last year, Air Canada reported profits.
But it can't be compared to low-cost airlines or new companies like Westjet. It's a legacy carrier, which means it has much higher operation costs, particularly with employees, who have acquired many costly benefits during the golden years of the airline industry.
Another problem Air Canada needs to face that no other airline in Canada faces, is government meddling on its business. No other airline is forced by the government to fly non-lucrative routes just to maintain the connection to more remote locations in the country.
Its management has not been idling by, resisting change. We must remember that this was one of the first airlines to ban smoking in all its flights, to automate its scheduling system, and the airline who invented the black box. Despite having been a crown corporation, its management is very progressive today and Air Canada executives are much sought after as consultants by other airlines worldwide.
But it is a large airline, and every 1$ increase per barrel of oil means an extra 26 million dollars of cost. So cuts need to be made somewhere and that usually result in jobs & less lucrative flights.
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GreenSulfur,
"The concept of a fuel surcharge is galling. Are they going to have a pilot surcharge, too? WTF does a plane ticket buy? I thought fuel was included in the deal."
Cheap fares are not realistic and do not cover the real cost of flying an airplane. Companies that can charge very cheap fares either have very simple organizations and specialize in short flights, or are subsidized by a parent company with another lucrative business. Otherwise they don't last very long.
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Peregrina, thanks for your comment.
The comment on the fleet isn't meant to insult Air Canada's planes. In fact, Air Canada went through an expensive and extensive modernization after coming out of bankruptcy, as I am sure that you know. My comment on an aging fleet was to note that, unlike newer carriers, part of Air Canada's costs have been replacing older planes. I was attempting to present one of a few possible reasons for Air Canada following behind. (Even if we compare Air Canada to larger airlines like Delta and United, both American airlines have had to merge to survive. Who will Air Canada merge with? Will cutting jobs and raising surcharges be enough of a tactic to survive?)
The technological advancements that you mentioned are absolutely admirable. However, there are other things aside that allude to the need for management to work even harder. When a company makes consumers frustrated at getting nickel-and-dimed on surcharges, swings to a $288M Q1 loss (and wipes out shareholder value), and presents a picture of customer service that leads to Maclean's noting that "Flying is Hell", there is more to be done, no?
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Jaime,
You hit the nail on the head. "When a company makes consumers frustrated at getting nickel-and-dimed on surcharges" - the problem here is that is what the consumers want. The unfortunate reality is that flying is expensive but customers don't want to pay much, so airlines are forced to offer cheap fares which don't cover the cost of flying or the services provided. Solution? Make some of the services optional so you can charge for those who want it (e.g. food) and make a surcharge of those services deemed essential (fuel, security taxes, etc.). In normal circumstances, if fuel went up it would be a simple matter of raising fare prices. Unfortunately, customers don't want to pay higher fares. Solution? Advertise a lower fare and add a surcharge. Annoying? Definitely. But it's the way the market works these days.
Air Canada was actually doing very well before the attempted hostile take over by ONEX corp some years ago. It had saved enough money to weather possible market collapses in the future but all of that was gone in fighting the hostile take-over by Onex and Canadian airlines. In the end, Canadian airlines was in such dire straits that the government forced Air Canada to take it over to save at least some of the jobs. The merger cost the company a huge deal and then came 9-11, SARS, now high oil prices. I'm amazed the company is still standing as it is. I don't think any other airline has had to deal with quite so many crises in the past 10 years.
Trust me, Air Canada's management have been working around the clock, under a lot of pressure and stress, to weather the current crisis. The airline industry is not a fun place to be these days.
Unfortunately, and I'm not saying this is what you did, the media always reports anything related to Air Canada in a negative light while other airlines can do no wrong.
Cheers!
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Wow, what a poorly researched piece of "journalism".
Air Canada would be doing fine if it wasn't for the fact that its largest single expense, fuel, wouldn't have doubled in the past year. This has wiped out literally billions of dollars in potential profits.
Air Canada's accomplishments over the past few years have been to renovate the entire fleet with widescreen PTVs at every seat; purchase new 777, 787 and Embraer aircraft to allow them to retire older, less efficient aircraft; move to a new revenue model that allows leg-based pricing (ie. if you want to fly open-jaw, you can do that to basically any domestic, transborder or transatlantic route) while adding shareholder value; and has managed to do this while remaining profitable until the recent fuel crisis. Now, they're making the tough decisions to cut unprofitable pricing and get their house in order.
Westjet has done very well as they have lower labour costs, including lower pension costs; one fleet type; and most importantly right now, they fly to shorter haul destinations that require less fuel. This is where Air Canada is getting hammered right now.
It's easy to take a swipe at Air Canada but lets do a little research before putting it in print.
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precisely, kidF...