Friday, February 16, 2007

Come Fly with Me = I Think Not..

The standard joke about Air Canada is this: “What’s the new Air Canada vision statement? Simple – “we’re not happy till you’re not happy!”. It would be funny if it were not true.

Air Canada went into bankruptcy protection for a variety of reasons. The key was poor management, more specifically an unwillingness to engage in a real competitive market and fundamentally re-engineer the business. While the airline industry is a complex and very capital intensive, Air Canada had built a strong reputation for service, quality and performance. It lost this by not nurturing its staff, not managing its costs and not engaging its customers in its future.

To get out of bankruptcy, it has done three things. First, forced its staff to reduce their incomes and, by doing so, reduced morale. Second, they have transferred resources from the company to investors – one estimate is that they will have transferred some $2 billion by the time current labour agreements expire in 2009. Second, they have reduced service levels and service quality in a variety of ways, including route changes such as the recent cancellation of their daily flights to India and by no longer serving economy meals as part of the fare on medium haul flights. While Air Canada has been voted North America’s best airline, this is nothing in particular to be proud of. Most North American airlines are poor – being the best of a bad lot is nothing much to be proud of. Third, they have restructured the company so that it can focus on managing assets rather than managing service – it is essentially a leasing, capacity management company that “happens” to fly cargo and people.

All of this will come home to roost in 2009. By this time, the airline will continue to be struggling to secure profitability and return for shareholders, union agreements will be in negotiation and competition from West Jet, Porter and others will have grown on some routes. In addition, there will be additional costs due to the various climate change initiatives various governments around the world will impose on airlines. It will get tougher, not easier, to run the airline.

What might change this picture? The key is competition. Canada needs to create stronger opportunities for others to enter and stay in this market and for others to see this market as an opportunity. This may include making it easier to increase levels of foreign ownership and foreign competition, creating incentives for a more competitive market and phasing in “climate change” costs rather than hitting the airlines hard upfront.

Second, there needs to be a commitment to rebuilding staff morale. The most reliable and strongest predictor of profitability in any service business is staff morale. A variety of studies show that an improvement of 5% in staff morale will increase profitability by 1% in less than three months. According to the staff I speak to, morale is at an all time low. This shows itself in a variety of ways, not least in terms of basic service. Some staff already are outstanding, but the rewards and recognition are not there for the majority. It shows.

Third – on some routes, become more like a European low cost airline than a behemoth. For example, I am flying from London to Pisa (Italy) in June for $150 return – including taxes. They do this as a reward for people who plan their travel in advance – the normal fare on this route is $470. On some flights on some days, you fly by just paying the taxes. In contrast, I am flying Edmonton to Lethbridge in March and the cost is $408. Both are three hour flights. I have heard all sorts of reasons as to why Air Canada and Jazz cannot use Ryanair as a model, but I don’t buy the argument. Ryanair posted record half-year profits of €329 ($500) million for the six months ending 30 September 2006. Over the same period passenger traffic grew by more than a fifth to 22.1m passengers and revenues rose by a third to €1.256 ($1.921) billion. Ryanair even made an unsuccessful bid to buy Aer Lingus. Though frequently voted the world’s “least favourite” airline, its continued route expansion and its modern fleet are all part of its attraction. Despite complaining, passenger volumes on this airline grow an average of 10% a year and have done so for a decade. Air Canada (excluding the regional Jazz airline) said its operating loss for the fourth quarter of its fiscal year was $5 million, an improvement from the $91 million it lost in the same quarter a year earlier.

Will Air Canada improve? Not until after the current leadership team leaves, which is likely before the next round of union negotiations. Will anyone care – the staff do. They care a lot about their airline, but know that it is pointless to challenge – no one is listening. Passengers care too – we pay for poor service, late arrivals, cancellations and poor morale. Eventually, investors will care when the airline again finds itself struggling to make ends meet.

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