Nouveau don de 160 000 $ de la Fondation Jeanniot

Pierre Jeanniot, accompagné de Magda Fusaro, rectrice de l'UQAM et Pierre Bélanger, Directeur Général de la Fondation de l’UQAM

Pierre Jeanniot, accompagné de Magda Fusaro, rectrice de l’UQAM et Pierre Bélanger, Directeur Général de la Fondation de l’UQAM

Le 20 décembre dernier, la rectrice de l’UQAM, Magda Fusaro, et le directeur général de la Fondation de l’UQAM, Pierre Bélanger, ont accueilli Pierre J. Jeanniot à l’occasion de l’annonce d’un don de 160 000 $ de la Fondation Jeanniot. Cette somme permettra de bonifier le Fonds Pierre J. Jeanniot, qui octroie des bourses à des étudiantes et étudiants de baccalauréat et de maîtrise en arts, en sciences de l’éducation, en sciences et en sciences de la gestion.

« Anticiper le futur est essentiel – mais ce qui est encore plus important c’est de participer à le bâtir », a déclaré Pierre J. Jeanniot, président de la Fondation pour expliquer son geste. Pierre Bélanger s’est réjoui de cette nouvelle contribution : « Ce don, qui s’ajoute à de multiples contributions précédentes de monsieur Jeanniot, témoigne, encore une fois, des liens étroits qui lient ce grand philanthrope à notre Université et notre Fondation. Je l’en remercie de tout cœur ».

Un homme engagé en faveur de l’enseignement supérieur au Québec
Rappelons que Pierre J. Jeanniot a été étroitement lié à création du réseau de l’Université du Québec, à laquelle il consacre une année complète, ayant obtenu un congé sans solde d’Air Canada. Le réseau de l’UQ, créé en 1969, compte alors cinq constituantes. Suivra une longue période d’engagement envers l’Université du Québec à Montréal, où il siège comme membre du conseil d’administration de 1971 à 1982, période au cours de laquelle sont inaugurés de nouveaux champs d’études, notamment en sciences de l’environnement, en urbanisme et en sexologie. Pierre J. Jeanniot en assume la présidence de 1972 à 1978. En reconnaissance de son engagement indéfectible, il reçoit une Médaille de l’UQAM en 1984 et un doctorat honorifique en 1988. En 1995, il est le premier à occuper le poste honorifique de Chancelier de l’Université, fonction qu’il exerce jusqu’en 2008.

Un autre engagement majeur de monsieur Jeanniot est son rôle dans la création de la Fondation de l’UQAM, dont il préside le conseil d’administration de 1979 à 1992. En sa qualité de président fondateur, il y organise les deux premières campagnes de financement. « En participant à la création de la Fondation, monsieur Jeanniot a permis à l’UQAM de se projeter dans l’avenir en finançant ses projets ambitieux, a souligné Magda Fusaro. C’est un grand honneur de pouvoir compter sur l’engagement et la générosité de ce grand ami de notre Université. »

Rappelons que monsieur Jeanniot a mené une carrière brillante chez Air Canada, où il œuvre à divers titres de 1955 à 1990, occupant le poste de président-directeur général pour les sept dernières années de sa carrière. Ce leader du transport aérien et inventeur de la boîte noire est ensuite élu directeur général de l’IATA (International air Transport Association – dont le siège social est à Montréal), poste qu’il occupe de 1993 à 2002. Citoyen engagé, il a reçu de nombreux prix et distinctions, dont trois doctorats honorifiques d’universités montréalaises, et devient Chevalier de l’Ordre national du Québec en 2002.

Son don s’inscrit dans la campagne majeure de financement 100 millions d’idées, qui vise à récolter 100 millions de dollars dont le tiers sera destiné au programme de bourses d’études de la Fondation de l’UQAM.

IATA’s IOSA – 15th Anniversary

Board Member, Argo Consulting Inc.

Board Member, Argo Consulting Inc.

An international “operations improvement” consulting firm based in the U.S. which specializes in transportation (notably air and rail), oil and gas, industrial manufacturing, natural resources, and chemical processing industries. Argo also serves numerous Private Equity firms in their pre-acquisition and due diligence processes.

https://www.argoconsulting.com/

Embrace Change or Perish! – Privatization of Air Canada


LECTURE BY PIERRE JEANNIOT TO McGILL INTERNATIONAL BUSINESS CLASS
Montreal, 3 April 2018

 

Change affects every walk of life … every business … every profession.
Looking back at history … we can observe that “change” is relentless … but the pace is not linear.
The invention of “agriculture” gave mankind more time to be creative; … more time to think …
There have been periods of great change … for example the Renaissance … the industrial revolution … and now the technological age!

*****

In terms of its impact on our civilization … the invention of the “internet” is perhaps … comparable to the invention of the “printing press” … in 1440.
It had a major impact … on the dissemination of knowledge …
Created new products … book production flourished … and newspapers were born!
Likewise … the internet … has given rise to tremendous innovations … including … of course … “social media”.
“Social media” deals with the ideas economy. It deals with intellectual property … and collects rent rather then selling goods!

*****

Sometimes … change occurs too fast … questioning our ability to adapt … or to feel comfortable with its consequences.

*****

Change affects every walk of life … every business … every profession.
We have been … and continue to be … in an era of constant innovation …
Some current examples

  • The internet of things
  • The expansion of robotics
  • Drones for package delivery
  • Self-driving … autonomous ground transportation
  • The printing of parts … or 3D printing … or “additive printing”!
  • Not to mention … artificial intelligence.

*****

Innovation can destroy existing companies … and it can create new ones … (creative destruction).
Walmart … and Apple … did not exist 50 years ago.

  • Today they are listed in the top 10 of Fortune Magazine.

The pressure is on to continue to innovate … or perish.

  • Apple says … that it needs to refresh or re-invent its consumer products … every four years … or it will lose leadership. …
  • Think of Blackberry! … At one time an industry leader … today barely surviving.

*****

We are witnessing the start of exciting new ventures … for example …
The commercialization of space …

  • The beginning of “space tourism”
  • The commercial launching of smaller satellites … at a much lower price than today
  • Major developments in air transportation … using electricity as the prime … if not the only … source of energy.
  • Regional electric airplanes … 50 passengers maximum? … a possibility within 10 years? … Maybe hybrids to start with

We are well down the road towards achieving

  • Driverless/autonomous transportation …
  • And the use of drones … first for carrying freight … and for urban transportation. … Experiments in the Emirates … and Singapore.

In short … new technologies have … and will continue to affect the way that we work … and what we do.

*****

The various factors of change can have an impact on the products available …
Change can challenge the relevance of certain firms and institutions … and threaten their very existence.
Such conditions … can be technological … such as the impact of IT … or market changes … or a change in products … such as the availability of electricity … which made other forms of lighting … obsolete
Consumers’ expectations and needs change … for example

  • People are increasingly eating at restaurants.

*****

For any firm … whose existence is threatened … for one reason … or another …
It is essential to define what changes are required … to ensure that the firm responds to evolving needs … or environment … and continues to fulfill an appropriate role … to be in business … and to be relevant.

*****

We are now going to discuss a “real” case.
The following example deals with the transformation undertaken by a company

  • To ensure that it met evolving market requirements
  • And societal expectations.

More particularly … I will discuss briefly the nature of that change …
How it was managed … to ensure that the corporation was transformed …
And achieved the relevance required … to justify its continued survival.
Specifically … as we look ahead … we will review the changes that were required to ensure the survival of Air Canada … and how they were accomplished.
As it would be for all such cases … it is important to understand

  • The strengths … and weaknesses … of the company
  • The forces that are at play … threatening its survival
  • The transformation which is required … to ensure that it will thrive in the next timeframe …
  • And the kinds of programs required to achieve that objective.

If one is going to dramatically change the purpose … or the direction … the nature of the firm … or anything else … it is also important

  • To know where you come from! … and what you are starting from … and what was the original culture.

*****

The predecessor of Air Canada … Trans Canada Airlines … T.C.A. … was created in 1937 by C.D. Howe … nicknamed “Minister of Everything”
(P.M. MacKenzie King and Louis St. Laurent)

  • It was a time of nation building
  • Mandate: … To help unite the country: Atlantic to Pacific … coast to coast … similar to railroad.
  • Shortened the time to cross the country … at the time 5-6 days.

It needed to pioneer radio navigation across the country.
Offer Canadians the best service … at the most affordable cost … i.e. provide them service with a break-even mandate.
Public service mentality
The advice of a Transport Minister was
“If you are profitable … lower the price …
But stay away from deficit … and we will stay away from your business.”

*****

Renamed Air Canada in the 60’s … to reflect an international role.

  • Linking Canada to Europe and the U.S.A. … as well as the Caribbean … for example
    • U.K. … France … Germany
    • New York … Chicago … etc.

*****

Crown Corporation – Constraints
Sometimes … the Government mandated service to small cities … e.g. Sault Sainte Marie and Corner Brooks (by Minister of Transport)
Or promoting Canadian goods … e.g. wine
A Crown Corporation was required to appear every year at various Parliamentary Committees … for instance
Employment equity … languages … Transport Committee
Anecdote for Parliamentary Committee … concerning the Minister of Agriculture … attending Transport Committee … Eugene Whelan (Niagra)

  • Requiring more Canadian wines during the hearing
  • Adjourned to Parliamentary Restaurant
  • No Canadian wines available at the restaurant
  • Reconvenes afternoon sessions … no more questions on wines!

*****

Backtracking for a moment … we should recall …
That in the 1970’s … major changes were taking place.
Technology was changing productivity (jetliners and jet engines

  • Boeing 747 … 350 passengers
  • An increase of more than 4-fold

Increasing consumer pressure in North America.
Then In 1979 … the U.S. government decided to introduce the Domestic Airline Deregulation Act … under the Carter Administration.

*****

We saw the emergence of low costs

  • New York Air … Peoples’ Express (new airlines)

Some traditional airlines could not cope! … Consolidation

  • Eastern Airlines … Continental

Other low costs

  • Laker’s Sky Train … Wardair … originally a charter … then a regular airline.

Interestingly … “Southwest Airlines” is the only one of the original “low costs” surviving today … most new low costs did not survive.
In Canada … we witnessed the emergence of Affinity Charters …
A form of low cost operation …

  • Shortly after … the requirement for Affinity was dropped.

Given the proximity of the U.S. … Canada felt the need for progressive deregulation.
1984 “Freedom to Move” – The Canadian Deregulation Act

  • Any airline can fly anywhere in Canada
  • Freedom of frequency and pricing

The relevance of Air Canada was challenged.
For Air Canada … it was change … or perish!
We decided to develop a privatization plan.

*****

Privatization Plan:

  • New mandate
  • Creating a new vision
  • Defining change elements
  • Managing the transformation

Convincing ourselves of the necessity.

  • Freedom to move … meant increased competition
  • As a crown corporation … Air Canada was unable to move quickly (government controlled) … constraints

Alternative was potential demise
Believe that you can change and that it is feasible.
Developing a new vision … shared by all
We needed to convince everyone of the need for

  • A national … commercial … international airline
  • Profitable
  • Customer-oriented

There was a lot of resistance to change!
We needed to obtain support of:

  • Government
  • Employees
  • Communities
  • Opinion makers

*****

We needed to define a change program
Major elements

  • Improved productivity … efficiency
  • Routes network … optimum fleet
  • Change culture … customer orientation
  • Community expectations
  • Financial community … achieve profitability

Setting goals for each change element … for example … improved profitability

  • Renegotiate contracts – with no government involvement
  • Outsource when appropriate
  • Create a cost/effective network
  • Develop a new fleet plan

*****

Reviewing the network and the current fleet

  • Review service required at small stations.
    • Requirement for different fleet
    • Correct infrastructure/overhead excessive

Solution was to have 12 small stations … served by different aircraft … and less heavy infrastructure.

  • Create regional airlines e.g. Air Ontario, Air B.C. etc,
  • Operate small aircraft – DH-8 100/200
  • More frequent services

But communities losing jet service (DC-9) in return for several flights a day by DH-8 turbo props … had to be convinced.
Air Canada needed to avoid a majority interest … for labor reasons.

*****

To accomplish … extensive communications had to be carried out with …

  • Communities … loss of jet vs turboprop
  • Local and Federal representatives
  • Unions and employees … loss of civil status
  • Local consumers … service vs profit?

*****

Improving the productivity of the employees

  • Convincing the pilots to support change … without work interruption
  • Improving the productivity of
    • In-flight/cabin groups (5-week work interruption)
    • Mechanics group (IAM) (3-week interruption)
    • Counter/reservations people (2-week interruption)

All of which allowed changes in work rules and in some cases … outsourcing.
[Anecdote about walking in to a union meeting in Toronto … discussing strike action.]

 

*****

Developing a new … and more ambitious … international route plan.

  • Untapped potential – 5th Freedom from U.K.
  • Fully exploiting existing rights to the U.S. … and to overseas destinations (Asia).

*****

Communications program.
Carried out an extensive communications program … to reach each individual employee.

  • Joining coffee breaks at various locations in a relaxed “townhall” format
    • Answering questions
    • Talking about the future
    • Enlisting their support
    • Proposing employee partial ownership

Carrying out extensive communication program with the provincial … municipal … various opinion makers … across the country.

  • Explaining the service proposed
  • The need for a major international airline
  • The social and economic advantages

*****

Set up an overall cultural change program

  • Involving each employee
  • Emphasizing team building
  • Customer-oriented
  • Pride of ownership

*****

Improve the debt/equity ratio by … (find hidden values)

  • Monetizing hidden values in the current fleet
    • Sale and lease back of the DC-9 fleet
    • Sale of the Boeing 737 fleet to FedEx … obtain contract to convert to freighter
    • Sell part of investment in Guinness Peat leasing

which generated more than $150 million.
[Anecdote: Bank of Nova Scotia deciding to sell its headquarters for $400 million Canadian [they are not in the brick business].

*****

  • Develop a new fleet plan
    • To acquire/order long range aircraft to support the international expansion program … B767-200/300
    • To replace the domestic fleet A-320/A-321 options
    • To provide new aircraft for the regional operation – 50 DH-8 100 & 200

*****

By 1987-1988 … we achieved

  • Improved productivity
  • Improved profitability – adequate R.O.I.
  • Better debt/equity ratio
  • New regional services (airline and fleet)
  • New proposed Air Canada Act
  • Government-free contracts for suppliers

*****

Proposed partial privatization to the Federal Government … as a first step …

  • Enabled Air Canada to sell $300 million of new equity for 49% of the airline
  • Shares sold for $8.00 each

The Government was able to sell its participation in the airline in 1989 for 500 million CAD

  • 51% of its shares … at $12 CAD a share

*****

Air Canada was then free to operate as a private enterprise with some constraints:

  • Headquarters to remain in Montreal
  • Continue to have technical centres in Montreal, Winnipeg and Toronto
  • Foreign ownership of shares limited at 25%

The financial community was comfortable with Air Canada.

  • Efficient regional services created (JAZZ)
  • International expansion strategy
  • Optimising aircraft fleet
  • Positive change in product – more market-oriented
  • Improved debt/equity ratio
  • Supported by reasonable/acceptable profit plan

*****

To summarize … and recap …

  • Freedom to Move … issued in 1984
  • Program started … Transform airlines to make it “privatizable” e.g. debt/equity ratio …
  • Increase profitability

Partial privatization (1987-1988)

  • Dilution of government ownership to 51% … $300 million raised. … First shares sold at 8 CAD a share
  • New “Air Canada” Act
  • Arms length agreement
  • Limit on foreign ownership … less than 25%

Total privatization … 1988-1989

  • Sale of government 51% share ownership … raised $500 million. … Shares had increased to 12 CAD a share!
  • New fleet acquired
  • Executive management re-appointed for 2 years

*****

Lessons:
Need to make a sober assessment of my/our situation

  • Carrying out a “swot” analysis
  • Strengths … weaknesses … opportunities … threats … challenges

Develop strategy
What are the possible scenarios for tomorrow?

  • Seeing “around the corner” … How is the industry evolving?

Review where we came from

  • Evolution of current culture and expectations

Understand that the keys for success yesterday … are often not the keys to success tomorrow.
Set up and manage a change implementation program with

  • Program managers
  • Milestones and periodic reviews

Follow up … and celebrate … success
In a changing world … embrace change – and prosper!

Thanks … and good luck!

Guest Lecturer, McGill University School of Business

AIRLINE MODELS
Lecture to McGill University School of Management
Pierre J Jeanniot, O.C., C.Q., FRAeS
Montreal, 1 March 2018

 

Commercial aviation started in the Western countries …. in the 1920’s and 1930’s.  … It served some elitist passenger markets … and also some cargo markets and postal services … which enabled goods and information to be transported fairly quickly … compared to the more conventional ground systems that existed at that time.

The volumes were very small … and during World War Two the demand for commercial air transport virtually disappeared … and was dominated completely by the needs of aviation military applications.

At the end of the Second World War …interest in commercial aviation transportation revived fairly quickly … and some of the technical developments which had been made for war purposes were rapidly adapted to civil aviation … mainly passenger travel.

As commercial aviation was likely to grow rapidly … the various governments decided it was necessary to develop rules to regulate … how flights would take place between countries.

This was accomplished by the Chicago Convention in December 1944 … which created ICAO … the International Civil Aviation Organization … an organization of the United Nations … which established a set of rules … or Freedom Rights.

It was followed by the creation of IATA … the International Air Transport Association …  in April 1945 to provide a framework … and rules on how to operate/manage airlines.

From the start …  air transportation was viewed as an exchange of commercial opportunities … and the regulations developed to facilitate travel between countries consisted of a number of rights … such as air rights to fly to a country … rights to pick up passengers from that country … rights to fly over a country … rights to link a country beyond the two countries in question … and so on.

The exchange of commercial operating rights between countries requesting access to markets … required equal opportunities on each side.

The exchange of access to markets … was covered by an international treaty called … an air bilateral agreement. …

This covered an exchange of rights between each country …and regulated how … flights of passengers and cargo … should take place between those countries.

Essentially … this was an international treaty … to permit the exploitation of commercial opportunities in each county.

These agreements originally dealt with a rather elitist market.

The costs of flying were very high … and only the upper class of the population could afford them.

In addition to high quality leisure traffic … there was a need for travel for business … and political reasons.

There was a need to fly between different countries … to ensure that there were adequate … and rapid connections between those countries.

With the exception of two airlines in the U.S. … namely Pan American and TWA … the airlines of every other country were government … owned … and operated according to the rights that had been negotiated by their respective countries.

Most countries wanted an airline for “political reasons” … to establish control over their airspace … and to acquire an international presence.  Hence the term … “National Flag Carrier”.
Two things essentially governed commercial aviation:

  • The exchange of commercial rights to exploit the markets between two countries;
  • And second … also very important …, was the need for a safe operation to the extent possible … which required increased regulation … and the enforcement of safe practices by each of the operating airlines.

In the years following the Second World War … the number of flights … the size of the airplane … the exchange of rights between countries … were growing fairly rapidly.

Every nation regulated very closely the development of aviation within its respective country and … of course … the development of civil aviation between each country … was regulated by international air bilateral agreements … under the auspices of ICAO.

IATA was to provide rules … and processes … for the actual operation and management … e.g. tariff coordination … standardized procedures for ticketing … cargo … etc.

The concept … or model of national flag carrier … still exists today …   although even those airlines … which are still owned totally … or partially … by a government … have had to become more business-like … and to be guided by commercial considerations.

Any operator within its own country … was under the jurisdiction of its own Air Regulation Bureau … and its international flights would be governed by the Air Bilateral Treaties … its government would have negotiated.

For instance … Air Canada was created to provide fast transportation from one end of the country to the other. This initial role was in many ways … similar to the creation … decades previously … of the trans continental railways.

The original name of “Trans-Canada Airlines” reflected that role … but it was changed to Air Canada when it developed an international network … originally to Britain … then France … Germany and Switzerland.

The mandate was largely to provide fast service at break-even cost.

One Minister of Transport was fond of saying “Stay away from the tax payers purse … and we will stay away from your business.”

But that was not always so!

For instance … when I was head of the company … while it was still a Crown Corporation …  I was prevented from starting a Frequent Flyer program for the best part of a year … by the government … which originally had considered that this was not part of its mandate!

As a crown corporation … Air Canada was required to appear annually …  in front of various committees … where any parliamentary elected individual could appear … and ask questions.

The following anecdote is fairly typical of the kind of cross-examination which could routinely take place.

“The quantity of Canadian wine on board of Air Canada airplanes … being pushed by the Minister representing a southern Ontario riding. – (typical anecdote)

*****

As one can see … sometimes … narrow political motives can become a factor … without any commercial considerations.

A decreasing number of national carriers still largely operate with non-commercial constraints … but generally will still require financial subsidies.

Or … have been allowed to disappear … e.g. Sabena.

*****

Later in the 1960’s … a number of technical developments increased … the productivity of operations.

Most important were the jet engine … and the jet-liner.

It was now possible to transport twice the number of passengers … at twice the speed … on any transatlantic flight.

These new airplanes increased the productivity by 4:1.

Some entrepreneurs understood … that if one could increase the seating density … and achieve a higher degree of seat occupancy … say around 90% … one could operate a flight profitably … while setting a price at less than 50% of what a regular flight was charging.

In some ways … that was the first type of “low cost model”.

They were called … Affinity charters”.

Theoretically … one had to belong to a group … which occupied the entire flight … and required that almost every seat on that flight had been sold.

Affinity charters thus made air transportation available … to less affluent people.

These charters could benefit from the higher level of seating occupation … and therefore this made it possible to operate and sell tickets at lower prices.

The requirement to belong to a group … was subsequently removed.

An airline model that emerged … at that time and featured lower prices … was Laker Airways … called “Sky Train”.

Laker was able to create a new product … which did not require most of the overheads…  of the established airlines.

The airline did not have a reservations system – it was simply walk on … walk off.

Laker Airways operated routinely between major markets … such as London/New York.

The model was dependent on little overhead … and high density seating and occupation.

A rather similar affinity charter format existed in Canada … and met the needs of the low-cost market.

That was the charter airline operated by Wardair.

Wardair operated a series of programme of seasonal frequencies.

It depended on high occupancy … and offered fares which were much cheaper … than those offered by the regular airlines.

Those successful operations encouraged the growth of consumerism …  leading to a demand … for the wide availability of lower cost air transportation.

*****

The Air Regulation Act was passed by the U.S.A. in 1978 to remove Federal control over routes … pricing … frequencies etc. and to allow total “domestic” competition.

All commercial constraints were to be removed … but naturally the U.S.A. maintained all regulations on safety.

Shortly after … the U.S. abolished the CAB (the Civil Authority Board) … which was a rigid …  bureaucratic mechanism … and had become redundant.

This created a climate of total … unrestricted … commercial competition within the U.S. territory.

The U.S.A. domestic air transport deregulation was sudden … and virtually instantaneous.

From that moment on … the U.S. airlines were allowed to fly anywhere they wished within the U.S. … with any flight frequency … any seating arrangements … for any price.

The only remaining regulations concerned safety … and associated air worthiness regulation.

Proving they met the safety requirements … some dozen and a half new airlines emerged fairly quickly.

These were the first U.S. low-cost airlines.

Invariably … these low costs were based on the same model … essentially

  • Very low fixed costs/and overheads
  • Single airplane type fleet
  • Higher density seating configuration
  • Single class
  • High aircraft daily utilization/fast turnaround
  • Focussing their operation on relatively large markets … e.g. Chicago-New York.

Pricing was designed … to significantly undercut existing airlines … on the targeted routes …

And hopefully attract new flyers … In other words … expand the market.

Employees at counters … and flight attendants … would be young … enthusiastic … and relatively low paid.

Typical of those airlines were “Peoples’ Express … the “New York Air” … the “Southwest Airlines”.

A number of traditional U.S. airlines were unable to cope … with the new degree of competition … which was being introduced.

A number of airlines disappeared … or consolidated … such as Eastern and Continental.

Of those new low-cost airlines … some 10 years later … only Southwest Airlines survived. …  The other low-costs were unable to achieve a profitable operation … in a sustainable fashion.

A good question would be …

Why were all the new low-cost airlines unable to survive … short of Southwest?

Apart from managerial know-how … the major difference lay in their choice of markets … and their aircraft scheduling strategies.

The survivor … Southwest … avoided head-on competition … and specialized in smaller markets where there was less competition.

They also decided to serve point-to-point markets … where customers were being inconvenienced … by the hub strategy being followed by the legacy/larger airlines.

Clearly … many passengers may prefer a direct flight … to a connection … if the timing is suitable.

It is also fair to say that Southwest was able to sustain enthusiasm … within its young group of flight attendants and airport employees.

The vast majority of new “low-costs” … chose to go head-to-head with established airlines on major markets.

They were unable to sustain their operation … to gain a sufficient presence … and achieve a minimum profit.

The difficult financial situation … faced by most businesses in the 1980’s … also contributed to their failures.

Given the proximity of the U.S.A. … Canada felt the need …  for progressive deregulation … of the commercial Canadian aviation market.

The Canadian government introduced …  a Domestic Commercial Aviation Deregulation Act … which progressively provided total domestic freedom.

The 1984 “Freedom to Move” Act permitted … progressively …

  • Any airline to fly anywhere in Canada
  • Total freedom on frequency and pricing

But … of course … the Act maintained all safety-related regulations.

Air Canada … was government-controlled and was faced with the choice of becoming a private enterprise … or eventually disappearing …. since it would not be able to compete on the open market … as a number of important decisions needed government approval.

The new Act forced Air Canada to privatise … encouraged new low costs to emerge … and caused some of the existing airlines to merge … particularly PWA acquiring CPAir … then Wardair.

A new low-cost was successfully launched … “WestJet” … which wisely followed the same successful model … as Southwest Airlines … e.g. one airplane type … high seat density and one class.

WestJet originally …  avoided head to head competition … and also recruited some young and enthusiastic employees.

A number of regional airlines merged … or disappeared … and some of the more traditional charters … survived … generally as a component or holiday/destination package … example Air Transat.

The U.S. Domestic Deregulation Act … had allowed full freedom to the airlines to alter their schedules.

To increase their efficiency in serving the market … the surviving traditional airlines decided to build around a major hub … sometimes called “Fortress Hubs”.

For example … Atlanta became the major hub of Delta …. Dallas for American Airlines … and Chicago for United Airlines.

This enabled each major airline to concentrate traffic … increase the efficiency of airplane utilization … as well as ground services.

The hub strategy provided for more frequent services to the “spoke” cities … but required passengers to transit through the hubs.

This “fortress hub” strategy …  enabled the major airlines to dominate the market of their major hubs.

The passengers had a joke …

“With this system … when I die and I wish to go to heaven … I will have to go through Atlanta … Dallas … or Chicago.”

Hubs were also developed for air freight.

The strategy of the domestic cargo hub in Memphis … enabled FedEx to offer an efficient package delivery service … throughout North America … daily.

On the international side … KLM … was probably the first airline to build an international hub in Schiphol (Amsterdam).

Exploiting its strategic geographic position in Europe … and the proximity of relatively underserved markets … KLM was quite successful at growing its traffic … well beyond its own base.

KLM became a 6th Freedom specialist … handling traffic flows from other countries … to other countries through Amsterdam.

With a relatively small “home market” … Singapore … an island state … exploited the same strategy … driving traffic flows from Southeast Asia to Europe … through Changi Airport.

*****

During the 1990’s … the European Community decided to deregulate progressively the air travel market.

The creation of a European Common Air Market enabled:

“Any current regular European airline to have unlimited freedom to operate within the Common Market … any location … frequency … price …etc.

The emergence of new carriers … essentially low-costs … with the ability to operate anywhere within the Common Market.”

The model of the new European low-costs … was similar …  to the original group of low-cost airlines in the U.S. … with the following differences:

The new European low-costs:

  • Avoided head to head competition
  • Operated from secondary/low cost airports
  • Attempted to avoid unions
  • Emphasises ancillary revenues
  • Located their corporate H.Q. … in countries with the lowest corporate tax (e.g. Ireland).

These features enabled a number of new low-costs to grow rapidly … e.g. Ryanair … EasyJet etc.

As expected … the European deregulation forced regular … or legacy … airlines to attempt to adjust … to the increased competition.

Some were allowed to fail … e.g. Sabena … and many consolidated.

Eventually … three major groups emerged … one led by British Airways … the International Airline Group … (IAG) … which included BA … Iberia … and Vueling … a low-cost airline.

The second group was led by Lufthansa … which acquired Swiss … (formerly Swissair) … Austrian Airlines … Brussels Airline … (replaced Sabena) … and low-cost airlines Eurowings … and German Wings.

The third group … of Air France/KLM … operating Transavia … originally created by KLM … Air France is also starting another low-cost … Joon.

The acquisition … or development … of a low-cost airline by the three major European groups … is a recognition of the significant success of the new European low-cost … and an attempt to participate in this expanding market.

The strategy followed by these three major groups … is to concentrate their traditional operations … on the long-haul markets … and to expect their low -cost subsidiaries … to regain a reasonable market presence … on the short to medium routes in Europe.

This assumes … that the long-haul market … will not be seriously threatened … by new low-cost airlines attempting to achieve a profitable operation on the long-haul market.

Long haul/low cost airlines … first began operating in Asia.

“Long-haul” market is defined here … as any operation of more than 4,500 kms.

One of the contenders … in the long-haul low-cost market is Air Asia X … which was originally targeting long-haul markets from Kuala Lumpur in Malaysia … to Sydney Australia … and from Kuala Lumpur … to London England.

The key features of the Air Asia X Business Plan are:

  • Single aircraft type operation … (wide-body) A-330 …

B-767-300 etc.

  • Daily aircraft hours utilization of 16 hours/day +
  • High density seating … and assigned seating

[to help boarding]

  • Discretionary income generated by all frills … (food … drinks … entertainment … baggage … certain seats etc.)
  • Connections offered … for a fee … but no hub and spoke.
  • The L.C.C. terminal at Kuala Lumpur Airport … and Gatwick in London.

Air Asia X has set as an objective … to achieve operating costs of 50% less than the competition … which is a very challenging objective.

The other major low-cost … long-haul contender … is Norwegian International … which is hoping to use more narrow-body aircraft on Atlantic routes … such as Boeing 737 Max … to connect Ireland and Scotland … with secondary airports in the U.S.

But adopting the European model to a long-haul operation has been challenging … and Norwegian’s long-haul operation is running lean. … [difficult to replace aircraft if mechanical] … (poor on-time performance)

While it was able to register its aircraft in Ireland … to benefit from lower corporate tax … Norwegian was not able to circumvent labour law by hiring Thai crew.

Ryanair had been able to sign up its flying personnel … to an individual contract … in Singapore  (now threatened).

In spite of all these efforts … in both Asia and Europe … long-haul low-cost operation has yet to demonstrate clearly … that this model … ensures sustained financial viability.

The growth of low-cost carriers … particularly Ryanair and EasyJet … has been nothing short of spectacular.

Today … Ryanair is the largest European airline … in terms of passengers carried annually.

Perhaps feeling that the low-cost market is becoming saturated … some low-costs have now decided … to attract a portion of the business traveller … by offering a “modest” business product and thus enjoying better yields.

This has given rise to a “hybrid” model for some low-costs.

Their “Business Plus” product includes:

  • Travel flexibility (ability to change flights)
  • Reserved seat priority
  • Booking priority
  • Baggage allowance, and
  • Dedicated Business check-in at airports

Typical of those are WestJet and Southwest in North America … and EasyJet as well as Ryanair on some European routes.

Some of those low-costs are also offering connection services … which had not been available previously.

*****

In the extreme case of the Ultra-low-costs … every possible feature … such as choice of seats … baggage … any food or entertainment etc. … is the subject of additional price.

A number of ultra low-cost airlines … in the U.S.A. … are leading the way.

Typical of those are “Spirit Airlines” and “Frontier”.

The traditional Ryanair is still the true low-cost … and “no frills” champion … but for these ultra low-cost airlines … ancillary revenues account for an increasing part of their profits.

Internet … and fare search engines … have strongly increased the transparency of pricing … and the face value of tickets … has become the main driver … for customer purchasing behaviour.

Promoting the idea that customers will only be charged … for the services they chose.

For the airlines … ancillary fees represent a high revenue potential … with a large profit margin.

At the centre of the strategy … of those ultra low-cost airlines … lies the need to be a low fare leader in the market.

They aim at operating at fares … at least 25% lower than charged by the competition.

These airlines are planning average daily utilization … of more than 12 hours/day

… and an average load factor of over 85% or more.

New flights to small airports … is also a component of their strategy.

Finally … ancillary revenues have the advantage of being less seasonal … for example … fares move up and down … but baggage fees stay the same.

Three new ultra low-cost airlines are presently being planned in Canada.

“SWOOP” … the new WestJet airline’s … ultra low-cost … will begin domestic flights …. In June … with flights between Abbotsford in B.C. … and Hamilton and Halifax.

While fares will be at rock-bottom levels … SWOOP passengers … will similarly pay for everything beyond the seat itself.

In some cases … ancillary fees may exceed the cost of the fare.

Jetlines … and FlyToo … are still hoping to start operating in the next timeframe … hopefully in 2018.

Required financing is said to be mostly in place … and their plan is said to follow the same successful ultra low-cost model.

We wish them the best.

*****

There are several important topics … which given time constraints … we have not been able to explore … such as:

  • The nature and impact of airline alliances
  • The “Open Sky” air bilateral … originally promoted by the U.S.A. … to guide aviation rights bilateral negotiations … which increased international competition.
  • and the controversy surrounding the definition of “fairness” in the implementation … of Open Sky Air Bilaterals between Gulf Airlines … and the European and U.S. legacy airlines.

Those subjects … and others … have an impact on the evolution of airline markets … and would require further discussion.

 

Prof. John Saba, McGill University (right) and Mr. Hector Ramirez, Honduras Representative to ICAO

Guest Lecturer, McGill University

Prof. John Saba, McGill University (right) and Mr. Hector Ramirez, Honduras Representative to ICAO

Prof. John Saba, McGill University (right) and Mr. Hector Ramirez, Honduras Representative to ICAO

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