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"Enabling Innovation: Air Canada's Winning Business Strategy", Alice Keung, Nov. 21, 2002, 11:10 a.m.
Alice Keung, CIO and VP of Air Canada, at "Strategy on the Edge: Charting the course in turbulent times", Strategic Leadership Forum, at the Design Exchange, Toronto, Nov. 21, 2002, 11:10 a.m.
These participant's notes were created in real-time during the meeting, based on the speaker's presentation(s) and comments from the audience. These should not be viewed as official transcripts of the meeting, but only as an interpretation by a single individual. Lapses, grammatical errors, and typing mistakes may not have been corrected. Questions about content should be directed to the originator. These notes have been contributed by David Ing (firstname.lastname@example.org) at the IBM Advanced Business Institute ( http://www.ibm.com/abi).
Introduction by Halya Rudiak, IBM
A case study, airline industry hit by 9/11.
Air Canada is a bright star
Alice Keung, CIO and VP of Air Canada
Challenges of the airline industry, and how Air Canada is charting its course
Airline industry is suffering, as never before
Reuters: How many uglier can the airline industry get? Calling in the plastic surgeons, better than undertaker.
$8B loss in U.S., with $5B government fund injection.
No revenues, costs up, no margin
United Airline losses
American Airlines losses, admit business model doesn't work
Delta Airlines losses, layoffs.
Higher airline insurance premiums will cost $4B alone
$2B loss in passenger revenues, from losses
Closing maintenance, cutting capacity, seeking more government aid.
Don't stay up nights charting a course.
Air Canada has brought in a surgeon
The most dramatic transformation in Air Canada history
New brands: Tango, Zip, Jazz
Changing everything: prices, markets, costs, technology
Have driven $100M of cost out
The only international carrier to return to profitability in 2 quarters
Faster, but someone unconventional through branding and process reengineering
Have done this with a 65-year history, unlike Jet Blue which doesn't have a legacy.
The full-service airline doesn't work any more.
Unions and government
Fare structures don't work, only serving to frustrate travellers.
Computer reservations and travel agents are largely redundant.
Interlining is seen as unnecessary by leisure passengers, who don't need the frequencies and use the lounges of business passengers.
Like Eatons, customers changed.
The airline industry sees these new practices
In late 2000, knew changes needed.
Started to take reengineering the airline into a different enterprise.
By senior executives, under CEO Robert Milton
Away from silos
Needed to make the transformation immediately.
Didn't have the luxury of waiting several years.
Needed a more flexible approach to strategic planning.
To transform the Air Canada business model, need a combination of entrepreneurism, technology, ...
Four prong strategy:
Technology and distribution
Market segmentation and branding
Exploitation of auxiliary business
Dramatic cost reduction and redesign
Internet lowers costs immensely
Not just product planning, from marketing to sales with IT
Cross-functional teams designed Tango
Developed over 7 weeks
Dealing with customers over the Internet
Better service, higher loyalty.
Moved Air Canada from 7% to 18%, with Tango booking online over 80%
Consumer doesn't want one-size-fits-all.
Customers move to what they want: lower fares, no frills, fewer fare fences.
Need to recognize, and move to this reality.
Self-service, where customer wants self-service.
Lounges, frequency, where it's required.
This isn't a new idea
A brief tour of the brands and the markets they serve.
Full-service Air Canada, two classes, serves medium and long-haul routes
Air Canada Jetz -- premium service for rock groups, sports teams.
Five regional airlines combined under Air Canada Jazz
An airline within an airline
Uses low-cost approach of a no-frills
Online booking, simple booking
No interlining, even within Air Canada
Since it's started booking, it's been increasing popular,
Over 80% of fares are economy, no advance stay, done over the Internet.
Means unit costs are down 25%
One month ago, launched Zip
More options in low cost
Own management in Calgary, separate labour agreement
Short-haul routes, Edmonton and Calgary
Will grow to serve additional markets
Third prong is exploitation of ancillary businesses
Aeroplan, and Air Canada Services are undervalued
Want to create them as standalone businesses
Aeroplan has over 6M members, 1/5 of the country's business
Positioned to become independent
Pursuing an aggressive growth strategy, in travel, entertaining and credit card segments
Expanding into new consumer categories and e-commerce.
Air Canada Technical Services has also been transformed into a standalone profit center.
Destina.ca -- an answer to Orbitz, etc.
Already has attracted more than 1M visitors
Offers low air fares, and 53,000 hotels and 52 car rental companies, with Aeroplan miles
Will leverage customer base.
Fourth component was dramatic cost reduction and innovation, through technology
As CIO, job is to maintain IT as a part of strategy.
IT at the design phase, not just at implementation.
To ensure the right investments,
Have outsourced IT spending to IBM, to optimize on innovations
Mobile agent for express check-in
Electronic toolbox for line mechanics
Both of above using wireless technology
Will understand the business case of new technologies without plunging into them.
Have had a 10% improvement in employee productivity.
Express check-in now process up to 50% of traffic at check-in time.
Most people use electronic ticketing, reducing costs.
Ultimately, want to see customers returning to the skies
But Air Canada can't wait for the economic upturn, and ride along.
Following the transformation, believe will be a more durable airline.
Four strategies are yielding encouraging results
No frills airlines operate at 25% of cost of traditional airlines. Tango operates 25% below, so there's a 50% gap.
There's still a lot of opportunity for productivity.
Tango has reduced costs, even with the same unions.
Change in distribution costs has been significant.
Inspiration for the direction to go Tango? What was the signal? Where did it originate?
Tango was obvious to senior executive, that the full service model doesn't work.
Robert Milton has said that there's a Wal-Mart-ization of the industry.
Decided to just do it.
Needed to offer what JetBlue and Southwest are doing.
Given the Air Canada infrastructure, what could we do quickly?
Decided to launch quickly, and learn from mistakes.
It was important to get it done.
Internet technologies are learning experiments.
How has culture changed over the past 18 months?
It all comes down to people.
Have been having a rough ride.
In 2000, acquired CP, turbulence in combining cultures.
There's a lot of goodwill
There's a lot of employees, but they try to run it like a small company.
Take the ball and run, don't just point at it.
Destina as a conflict with travel agents?
There's a firm belief that you should work with customers.
Quoting a director in IATA: There's something wrong if one side is losing their shirts, and the other is counting their money.
So there's a problem in airlines to be losing money, and travel agents are making money.
Air Canada values travel agents.
Travel agents can get onto Tango, and book.
However, Tango isn't accessible on the worldwide booking system, which is too expensive.
Long-term, have been discussing short-term. What about business customers? Cannibalization?
Are in the mode of experimentation. Tango is an experiment.
A handful of aircraft, reconfigured and painted.
This summer, went up to 100 flights per day, 20% of total travel.
Happy with this, but are using it as an experiment.
Similarly with Zip.
This is all about experimentation -- watch and learn.
From Good to Great -- need to be consistent, focused, measure objectively.
U.S. market. Where do you expect growth in the U.S. market?
In setting up seperate business units, MRO and maintenance work is all being done for foreign carriers.
There are some businesses outside of the core airline business, where there is penetration to the U.S.
Brand equity from Canadian or Canadian Pacific?
What measuring of loyalty is happening with brands?
Share and revenue.
External groups for customer satisfaction.
Perceived value issue -- want customers to feel value from a brand.
"Wonderful travel experience", recommendation to other brands.
Ask these questions, and make changes over time.
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