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Entries in Air Canada's international powerhouse strategy (1)

Wednesday
May042011

Air Canada: Hypocrisy and Competition at the Same Time

In Tuesday’s Wall Street Journal there was a story titled:  Air Canada Tries New Path.  [Note to self: I will be interested]  But it was the subtitle that truly piqued my interest:  Carrier Is Pushing Toronto, Other Hubs as Transfer Points for U.S. Travelers.  Then I broke into laughter.

Not long ago I was writing about how the Canadian government was in a trade dispute of sorts with the United Arab Emirates and the efforts of Emirates, Ethiad and Qatar to expand services into Canada.  The rhetoric grew louder, with large doses of protectionism for Canada’s flag carrier.

"What Emirates wants to do is flood the Canadian market with capacity,” said Air Canada’s CEO Calin Rovinescu. “Its strategy is to scoop up travelers going elsewhere in the world and funnel them through Dubai, further strengthening Dubai as a global flow hub." 

Rovinescu also said Emirates' strategy will “constrain the growth of Canadian airports by turning them from hubs into stubs at the end of a spoke that leads only to Emirates' hub in Dubai." Just in case he didn’t make his point, Rovinescu added, "Sure, you will still be able to get to anywhere from Vancouver. But you will have to get there through Dubai."

In Tuesday’s WSJ, Caroline Van Hasslet writes:  “Air Canada is relying on the proximity of its domestic hubs to the giant American market, what Mr. Rovinescu calls his ‘international powerhouse’ strategy.  He [Rovinescu] identified Toronto as the carrier’s key hub in the push but also uses Montreal and Vancouver to attract American flyers traveling to Europe or Asia.  He hopes to double Air Canada’s transshipment traffic this year . . .”.

According to Van Hasslet, “Air Canada hopes to capitalize on its recent capacity increases, especially to Asia,” noting that the carrier is also betting that its relatively young planes will be a primary attraction for American business travelers.”

That sounds very much like the strategy playing out in the Middle East, where new planes, a young workforce and geography are the primary structural advantages for carriers calling the region home.

Simply, as networks increase in scope, carriers can justify more and more service into secondary and tertiary markets as the connecting possibilities increase exponentially.  Rovinescu says he wants to move passengers from one country, through a so-called gateway nation, to a third country.  With the exception of Toronto, other Canadian cities would be secondary to Emirates just as Air Canada calls Boston, Pittsburgh and Cleveland secondary.

But those secondary markets are critical in filling airplanes destined for Europe and Asia. The U.S. cities mentioned by the Air Canada CEO are just as important to American Airlines, Delta Air Lines as well as their STAR alliance partners, United-Continental and US Airways.  What to make of this strategy that will certainly transform Air Canada overnight into a global juggernaut?  Don’t buy the line.

As I touched on in the previous blog, Air Canada was trying to negotiate compensation and work rules with it pilots doing domestic flying versus international flying.  This points to the simple fact that network carrier legacy rules will not work long-term in either the Canadian or the U.S. market.  But, unlike the U.S., Canada faces a true structural conundrum.   Nearly two-thirds of the country’s traffic can be found in just eight metropolitan markets.   So Air Canada sees the need to raid U.S. markets to fill those big, new airplanes destined for Asia, all along potentially turning U.S. hubs into stubs on the global map.

But Wait – Let’s Talk Competition Too

Yes I am calling out Air Canada for the duplicity of its words and intended actions.  The question is what it means to all the naysayers who claim that it is global alliances that are driving up cross-Atlantic airfares.

Rarely do they mention the role of rising fuel prices and airlines passing on the cost to the consumer which makes percent changes from recent history even more dramatic.

Rarely do they mention that the architecture of the Middle East carrier’s networks is being designed to mount the ultimate challenge to the Big 3 global alliances. 

To suggest that there is no inter-alliance competition; one has to look no further than Air Canada’s “international powerhouse” strategy.  What I think is going to be interesting is what to make of the intra-alliance competition for the same traffic and revenue.  Yes joint ventures work to address some of the concern.  But …..

Now is the time to think about cross border ownership.  Maybe it is also time for U.S. carriers to act and make the rest of the world react.  Air Canada is the poster child for cross border ownership because the Canadian market cannot support two carriers.  And borrowing traffic and revenue from the U.S. is yet another Band Aid solution to problems that underlie the carrier’s long-term sustainability. 

Air Canada certainly knows this to be the truth as well.