4PA3 Case Analysis - Canadian Airlines

4PA3 Case Analysis S1: summary  Contemplating 2 initiatives for CA - Canadian Airlines o Plan A: Improve the airline's cost position by 14% per available seat mile, approx. $325M annual  implications: improve profitability and cashflow, renew fleet, expand into international markets, ward off competitors, employment stability  Using a lower cost base to increase market share in key domestic markets  Pursue growth on its profitable routes (international, transcontinental, trans-border routes)  Challenges: to achieve $325M in savings, $125M in concessions would be taken from union members o Plan B: Downsize and restructure, focus operations on profitable routes  implications: exiting markets, major layoffs,  exiting unprofitable routes  restructure: to maximize fleet utilization, domestic fleet will be simplified to 1 wide-body aircraft, selling off non-core airline components, contracting out heavy maintenance  challenge: risk of losing security on domestic feed for CA's international flights, significant write-offs with selling equipment & space  outcome: downsize to a fraction of CA's current size o Stall tactic: hybrid plan  start with plan A and eventually resort to Plan B  Players involved o CA: The strategic planning steering committee: joint management-labour group, created growth vs downsize scenarios, decide strategic options and direction o Canadian Airlines  1989: purchased Wardair  1990s: considered merger proposal from AC due to weakened state and almost bankruptcy  1992: launched a $1B lawsuit against AC for alleged damages - driving up capacity  1992: lost $500M  CA was approached by AMR for strategic alliance, AC offered $250M in cash and taking $800M in obligation, CA refused AC's deal and proceeded with AMR  1993: competition tribunal granted CA release from Gemini joint venture o Air Canada  1988 - announced IPO of treasury common shares ~$234M  1989 - Full privatization, govt offered 57% of its interest for $474M  1992 - proposed merger to CA - Intense rivalry due to AC flooding the market with excess capacity, driving down fares and load factors

 o Pacific Western Airlines  History of airline industry o 2 federal government policies  Government ownership: govt formed Trans Canada Airlines as a crown corp for the development of a domestic and international air transport infrastructure - AC's predecessor  Government regulation : established agencies that had the authority to approve licences for new routes, exit from established routes, fares, schedules, M&A. o 3 tiered airline structured - before deregulation in 1983  National  2 major carriers: Air Canada and Canadian Pacific Air Lines  Regional  Operate in cooperation with national carriers  Constrained from expansion due to their small jets and regulation  1985 - Pacific Western Airlines and AC purchased equal equity positions in Air Ontario  Commuter  1984 - 700 smaller Canadian carriers that operate 1 propeller on short, remote routes  Uneconomic to fly large jet aircraft and low traffic routes of <250km  8% of passengers flown  Charter  Carried vacations to international tourist destinations  Wardair had reputation for fine service  Domestic traffic: 19,700 passengers in 1989 to 789,000 in 1993 S2 - organizational performance  AC: was the dominant operator of domestic and international services. Is strong in the East. Govt policy 'division of skies' allocated regions Europe, US, and Caribbean to AC o Had the most modern and efficient fleet of planes in the world o Has an increasing trend on stock price  CA: had thin national network due to constrains by regulations. Is strong in the West. Govt allocated regions Pacific and South America to CP Air o Strategically position to be an international carrier due to key routes to the Pacific rim and Latin America - the fastest growing regions in the world o Alliance with American Airlines - one of the largest carriers in the world (gave CA more opportunities to obtain foreign markets) o Had weak financial position: aimed to raise load factors and yields o Stock price on market was hit -

S3- Organizational health - - CA: introduction of strategic planning steering committee o join labor and management together to help reduce costs, improve productivity, expand customer loyalty, and establish a viable future for the airline o helps employee engagement o employees were concerned about proposed plan A, and had strained management-union relations S6 - Goals - The airlines were repositioning themselves to: build market position, respond to cost pressures, and rehabilitate their balance sheets - CA Plan A: broadened employee involvement in decision making process o Reduce the airline's cost by 14% per available seat mile ($325M annually) S7 - Matrix on Product/Market - AC o Market development: Open new international routes to Hong Kong, Madrid, Israel o Product development (new): buy new aircraft, existing: improve airport facilities E10 - Porter's 1. Threat of new entrants a. High barriers to entry - high fixed costs cost, major operating costs (wages and fuels), competition, govt policies b. Govt policies c. Brand loyalty: most people trust Air Canada 2. Bargaining power of buyers a. High power: are price sensitive, large # of customers b. International traffic grew at 5.6%/year, domestic traffic at 4.7%/year 3. Threat of substitute products a. Low: not that many substitute products for taking a flight apart from road, sea, and train tracks 4. Bargaining power of suppliers a. Med to High: less suppliers and thus have higher bargaining power b. Supplier's products are not that unique, they are generally the same 5. Rivalry among existing competitors a. High: few number of competitors, quality differences aren't that large b. Domestic charter competitors i. Provided the lowest priced service ii. AC & CA were challenged with raising fares and managing capacity