Air Canada has grown seat numbers 50 percent since 2009 and serves some 200 airports on six continents. This includes 63 domestic destinations, more than 50 flights to the US and about 90 scheduled services to the rest of the world. It is among the 20 largest carriers in the world, flying close to 40 million people every year.
Size isn’t everything, however, and for a number of years Air Canada struggled, beset by the myriad problems faced by most legacy carriers in an increasingly fast-paced market. Labour disputes were a particular thorn in the side.
Recent developments have finally put an end to this problem and given Air Canada the freedom to fully exploit an expansive strategy. The airline has successfully concluded five new labour deals, including 10-year deals with its pilots and flight attendants. Deals for engineers and baggage agents are awaiting ratification.
Klaus Goersch, EVP and COO, Air Canada, says he is “proud of the Air Canada team and the union leadership for this achievement”. More importantly, though, with the long-term deals in place, Goersch says the airline’s network expansion, part of a clearly defined strategy for the future, can pick up pace, adding: “Having long-term labour agreements will allow us to focus on running the business without labour distractions,” he says. “It also allows us to accurately forecast portions of our cost structure and build a business model around that.”
That business model calls for significant fleet expansion. By 2018, Air Canada will operate 34 Boeing 787s. These will be used for new routes and to replace the airline’s Boeing 767s, many of which will be pushed to low-cost subsidiary, rouge. Thanks to a different financial set up, rouge can operate Boeing 767s at 30 per cent less cost than the parent company. A couple of new Boeing 777s will also join the fleet and Air Canada will reconfigure the composition of its regional aircraft too.
Goersch believes the Boeing 787 is the perfect aircraft for the airline’s expansion, which will see it reach for new international destinations. “It allows us to fly to markets that didn’t make sense for us with the Boeing 767 or the 777,” he says. “It has the fuel efficiency we need and it has the range and flexibility we require.” In fact, operating the 787 rather than the 767 will reduce Air Canada’s costs by as much as 31 percent.
As an active Boeing 787 pilot, Goersch knows more about the aircraft than most and says its operational benefits cannot be understated. “The 787 has tremendous mission flexibility that we did not have before,” he notes. “From an efficiency standpoint, the 787 flies higher and faster than anything else out there in its class. This makes for reduced travel due to speed and more efficient air traffic control routings.
“The aircraft is a pleasure to fly,” he continues. “The interior design is simply gorgeous. The large windows create a very spacious feeling. The lower cabin pressure, coupled with higher humidity in the cabin makes the journey much less fatiguing compared with other aircraft. And my favourite part as a pilot? Flying faster and higher, passing everyone else.”
The revamp of the fleet will affect Air Canada in several ways. For a start, the aircraft utilisation rate will increase from 11.5 hours per day today to 12.5 hours by 2018. Combined with a redesign of aircraft interiors to allow more seats, this will greatly reduce the seat unit cost. Moreover, the extra aircraft will help Air Canada to serve some 3-5 million extra customers by 2018.
The carrier’s network is undergoing a similar paradigm shift – from a US focus, where Air Canada is the largest foreign carrier – to the global arena. “We are focusing on growing our sixth freedom traffic both to and from Asia and Europe with a lot of focus on Toronto,” says Goersch. “Our wide-body fleet expansion is the backbone of our global powerhouse strategy.”
In Asia, China is likely to be a key market. Air Canada has entered into a joint venture with Air China that has already brought extra services between the two countries and will likely be exploited further as new aircraft arrive.
Air Canada is additionally making the most of the unique characteristics of its three hubs to define its international strategy. Toronto Pearson remains the main global hub and will continue to leverage the opportunities provided by its extensive US connections to drive transfer traffic to destinations worldwide.
Montreal Trudeau will also connect globally, but with an emphasis on French-speaking destinations. The aim is to avoid duplicating the Toronto network as much as possible, although some crossover is inevitable – even desirable – given the enormous appeal of some major cities, such as Paris.
Vancouver International, on Canada’s west coast, will meanwhile utilise its geographical position to the full. As Canada’s closest point to Asia, transpacific routes are an obvious focus.
All three hubs offer something different and in general perform quite well. The fact that international connecting traffic grew 23 percent in 2014 and final numbers look set to confirm a similar increase in 2015 bear testimony to this.
Goersch is adamant, however, that Canadian infrastructure “could be improved”. He notes that Canada has one of the most expensive aviation systems in the world and the cost of this system is ultimately borne by its end user, the customer. It is a head-on conflict with Air Canada’s aim to become a global brand, as well as its customer-focused strategy and drive to reduce costs.
“The government levies heavy fees and taxes on aviation in Canada, driving up the operating cost of Canadian carriers,” Goersch explains. “The government needs to work on ways to reduce this burden and improve infrastructure to provide a more competitive field with our neighbour carriers in the US.”
Since the inception of the Greater Toronto Airports Authority in 1996, the organisation has paid billions of dollars in “crown rents” to the government for Toronto Pearson alone, and the airport has had the dubious distinction of being among the most expensive in the world.
Aside from its own intensive cost reduction programme, which brought about some $100 million in savings in 2015, Air Canada has hit on several other innovative solutions to combat cost while also pursuing a business model that calls for expansive growth.
Most obviously, it is a main partner in Star Alliance. The other 28 partners in the alliance combine to offer 1,330 destinations across 192 countries, meaning Air Canada customers can pretty much fly to anywhere in the world and get rewarded for their loyalty.
Then there is leisure subsidiary rouge, which flies to 60 leisure destinations across the globe, including South America, Asia, Europe and Africa. Although it is supported by its mainline parent in many areas – such as airport handling, dispatch, maintenance and so forth – it is technically a separate entity with its own management team and employees.
“Air Canada rouge is a unique product and a unique culture, which provides our customer with a unique experience,” Goersch says. “We wanted to create a product that is different from Air Canada, with a strong leisure focus but still benefits from the Air Canada network breadth,” he adds. “Certain leisure markets that were difficult to sustain for Air Canada or difficult to enter are perfectly suited to rouge.”
Air Canada is looking to add capacity in other ways too. It has a capacity agreement with regional player Jazz, for example. The deal is estimated to be worth more than $500 million to Air Canada over the next six years. Capacity-enhancing agreements are in place with other airlines too.
All in all, Goersch is confident that the transformation at Air Canada is proceeding well. It is hard to deny, given that the share value has gone up 1,600 percent since 2009. But he accepts that this is only the beginning.
“I still would want us to be even more nimble, more open-minded to new things,” he says. “We are still an organisation with a legacy hangover. Sometimes I still find myself in meetings where discussions are moving down the track of why we cannot do something versus why we could or should do something.”
Flexibility, Goersch concludes, must become part of the Air Canada DNA and culture. “But we are in a really good place today and setting a new standard for the industry,” he says.
(This article first appeared in Routes News – Issue 1, 2016)