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Airline Insider-July/August 04

AIR CANADA TO ZAP ZIP? , WITH FINANCING IN PLACE, THE HEAVY LIFTING BEGINS.


October 1, 2007
By Brian Dunn

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219-zip
AIR CANADA TO ZAP ZIP?

As Wings went to
press the future of Zip was looking less certain following the
successful completion of Air Canada’s wage negotiations with flight
attendants and a corporate decision by the mainline carrier to shuffle
president Steven Smith out of the discount airline and into head
office. A decision to replace Zip’s brightly painted Boeing fleet with
newer Airbus A319s has also been shelved according to several sources.

Air
Canada acknowledges that a re-evaluation of Zip is underway. Few are
betting on the airline surviving past November 1st, when the revised
collective agreement with flight attendants comes into effect, erasing
the salary differential between new mainline hires and the lower wages
paid by Zip.

At least one analyst believes winding down Zip
makes sense. “Zip has no future. They’re using old and inefficient
737-200 aircraft and an unpopular lower labour structure,” said Nick
Morton, an airline analyst with RBC Group. Morton sees Air Canada
focusing on putting a fresh face on Jazz with a new fleet of Bombardier
and Embraer regional jets. Should Zip be rolled into the mainline
carrier, it would spell the end of Air Canada’s multi-brand discount
strategy. “The whole branding exercise has been a mistake,” Morton
added. “Even Tango has been rolled back into the flag carrier. You can
still get Tango fares, but on a regular Air Canada flight.”

WITH FINANCING IN PLACE, THE HEAVY LIFTING BEGINS.
After
painful negotiations, Air Canada succeeded in getting all its unions to
sign off on a number of cost reductions worth $200 million demanded by
its key financiers, Deutsche Bank and GE Capital Aviation Services, as
part of their $2.65 billion in financing. But there’s still a lot of
work ahead for the flagship carrier if it hopes to stay in business.

“It’s
looking a lot better than it did a few weeks ago,” says McGill
University airline analyst Carl Moore. “Air Canada is still looking for
an additional $250-million equity investment which is important,
because they want that person to be a long-term investor, someone more
committed to the airline.” But Air Canada is still not cost competitive
with either WestJet or Jetsgo, said Moore, and must continue to close
the cost gap. “They need to create a new business model to compete with
its two major competitors in the domestic market. They will also have
to improve employee morale, because if employees are unhappy, it’s
communicated to customers.”

Air Canada needs to deal with two
fundamental issues, said Tae Oum, an independent airline analyst in
Vancouver. “It must continue to be a fullservice airline to maintain
its business clientele and frequent-flyer base. Business passengers
still want to fly Air Canada because of their frequent-flyer program
and they want to use their lounges during long layovers. But it also
must implement more drastic cost-cutting, not only to compete against
WestJet, but with (American low-cost carrier) JetBlue that plans to
begin transborder service.”

Oum said Air Canada must follow
other airlines and dismantle its round-trip fee structure and offer
low-cost one-way fares. Otherwise it will continue to lose market share
to WestJet and Jetsgo. “They also need to share more information with
their unions to gain their confidence and motivate employees.”


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