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After Montie

President John F. Kennedy cautioned against career generals who fought a current war relying on tactics deployed in the previous skirmish. In its executive floor shakeup, Air Canada has done just that. Brought back two capable warhorses from its earlier campaign for survival.


May 20, 2009
By David Carr

Topics

President John F. Kennedy cautioned against career generals who fought a current war relying on tactics deployed in the previous skirmish. In its executive floor shakeup, Air Canada has done just that. Brought back two capable warhorses from its earlier campaign for survival. Calin Rovinescu, a numbers guy who was at the centre of the last restructuring, replaces Montie Brewer – an operations man – as chief executive officer.

Joining Rovinescu as chief operating officer is Duncan Dee, a former executive vice-president who departed the airline just last November. Dee’s return is seen as a signal that Air Canada wants to avoid seeking creditor protection for the second time in six years.

Ben Cherniavsky, an analyst with Raymond James in Vancouver, put the odds of avoiding creditor protection at 50/50. Others have touched down on either side of the ratio. What is clear is that the challenges facing Air Canada differ from those in 2003, and that Rovinescu and Dee have to retool rather than rebuild the business model as well as repair its lousy customer service image at home.

Under Brewer’s watch, Air Canada became an industry pioneer in simplifying its fare structure and offering economy passengers the chance to build their own in-flight experience online through a menu of service-for-a-fee add-ons, including seat selection and meals on domestic and transborder routes. It was an approach applauded in this space, although taken too far by nickel and diming for blankets and pillows, and not far enough with its limited food offerings.

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Air Canada has received international awards for its in-flight product, and its reputation for poor customer service at home is largely undeserved and greatly exaggerated. Still, the company did itself no favours with public relations blunders such as “customer service insurance” in case a flight is grounded. (While reinventing themselves legacy carriers have sometimes forgotten they are in the service business.)

What is not exaggerated is that Air Canada is losing market share to WestJet across Canada and niche carrier Porter Airlines in the critical Toronto market. The competitive burden on Air Canada is going to get heavier, especially internationally where WestJet is building seamless alliances with airlines such as Air France / KLM and Southwest. Likewise, Emirates is maximizing its three landing slots at Toronto’s Pearson International Airport by bringing the first Airbus A380 to Canada, a novelty that is certain to grab a greater share of the lucrative international transfer market when Air Canada cannot afford to lose a passenger.

Passengers have recently shown they have a breaking point. Air Canada has PR tools at its disposal such as scaling back fees and simplifying fares further by rolling charges such as taxes and user fees into the upfront price of the ticket. 

That is tinkering. For 2009, Rovinescu’s more pressing to-do list includes keeping airplanes flying with limited cash flow, coping with a $3.2 billion hole in the company pension plan and expiring union contracts. At the same time, he will have to inoculate the company against the inevitable post-recession spike in fuel prices that nearly crippled air transport in 2008.

The airline is reported to have about $1 billion in cash and another $640 million in available credit. Its pension woes are shared by corporate Canada and will require assistance from Ottawa to resolve. Labour contracts may be the toughest challenge. Union leaders are skeptical of Rovinescu’s return and another hit to employee morale similar to 2003 will undermine what Air Canada must do to fix the customer service side of its business at a time when WestJet is preparing to tear into its competitor’s huge Aeroplan advantage with its own loyalty program.

A further cash infusion may also be enough to rescue Air Canada from creditor protection. Stephen Harper’s government recently doubled the cap on foreign ownership of Canadian airlines from 25 to 49 per cent, while a new bilateral agreement with Europe sets the stage for airlines to own domestic carriers in one another’s markets. Canada is Europe’s second largest market after the United States, and Star Alliance partner Lufthansa has been on a buying binge as of late, snapping up equity positions in Jet Blue Airways, Swiss International Air Lines, Austrian Airlines, bmi (80 per cent) and others. Lufthansa and United loaned Air Canada US$730 million during its first restructuring and if not already overextended, the German airline is favoured for an ownership position this time around.

The generals have returned, but the rules of engagement have clearly changed.