Air Canada Gets Competition

<B>Air Canada Gets Competition</B>

By David Jonas

A new full-service airline takes to Canada's skies today, representing another challenge to dominant Air Canada. As the world's 12th-largest carrier wrangles with the likes of the new RootsAir and other smaller players over regulatory issues, its U.S. sales force is bringing a new focus to corporate accounts seeking transborder and global flight options.

That team now is split into three regions with area sales managers reporting to regional managers in the eastern, central and western United States. It will emphasize transborder service for business travelers, including hundreds of airport kiosks, interlined e-ticketing with Star Alliance partner United Airlines, a new concierge service and a renowned business class.

According to Patrick Khoury, Air Canada's senior director of United States sales, "Air Canada has agreements with many large corporations throughout the United States. But on the other hand, many small and medium-size businesses in the United States tend to be overlooked, so we are actively talking to them as well." Indeed, the carrier has picked up additional transborder revenue and corporate clients as a result of the Canadian Airlines merger, despite "vigorous" competition from large U.S. carriers, and now offers 300 daily flights connecting 54 U.S. cities.

Nevertheless, Air Canada is impressing upon corporations the largely unrecognized size and scope of its global network. "We are more than a transborder airline," Khoury said. "Overlay the network of our Star Alliance partners and we can get you just about anywhere you need to go." Indeed, Air Canada's own network encompasses 2,000 daily flights to 150 destinations in 28 countries.

The network is expanding further with the introduction of new routes and codeshare flights with its Star Alliance buddies. San Jose-Ottawa service launched earlier this month, new codeshare flights with All Nippon Airways on the Vancouver-Nagoya route began yesterday, while codeshares with Austrian Airlines between Toronto and Vienna will start next month. Air Canada also will launch Montreal-Manchester, N.H., and Montreal-Albany, N.Y., on April 9, followed by San Jose-Calgary on June 29. The carrier on Oct. 19 will start four weekly nonstop flights between Vancouver and New Delhi, marking its first polar route and, according to Air Canada, the only nonstop flight between North America and India.

While Air Canada does develop global contracts in conjunction with immunized partners Lufthansa and United, Khoury said that truly alliancewide contracting is a "complex, evolving process."

Meanwhile, a proposed codeshare arrangement with Delta Air Lines has yet to get off the ground. Air Canada would not comment, but a Delta spokesman said, "We're still working on those opportunities."

In leveraging its reach, and three strong hubs, Air Canada is advocating nontraditional routings for U.S. corporations. For example, connections from smaller American cities through Montreal and Toronto and onto Europe can be cheaper than connections through gateways in the eastern United States. And connecting flights to Asia via Vancouver can be shorter than options offered by U.S. carriers.

Khoury said Air Canada remains committed to tailoring mutually beneficial contracts for each client, not necessarily favoring market share targets over volume or net fares over traditional commissionable fares. "We are never looking at one-size-fits-all agreements."

While Air Canada has not necessarily abused its dominant market position when dealing with corporate clients--a widespread fear held by many last year (BTN, Jan. 10, 2000)--some corporations still have had a tougher time. "And that comes in all forms, such as definitively lower discounts, especially on domestic routes," said Samir Andraos, president of Toronto-based consultancy AIM International. "But also, Air Canada is looking for longer contracts and bigger market share commitments."

Meanwhile, Air Canada also is working to develop new corporate options, such as direct bookings of negotiated fares and extranet connectivity. "Clearly, technology plays a lead role in providing new options to our customers," Khoury said, but did not indicate any developmental timetable for such functionalities.

However, several new conveniences already are available. Aside from e-ticket interlining and airport kiosks, a new concierge service began in January. Top-tier frequent flyers benefit from a dedicated reservations desk, expedited baggage handling and customs clearance and other personal services. Concierge agents are available in major Canadian airports, as well as at Chicago O'Hare, Los Angeles and New York LaGuardia. Inflight e-mail and Internet access, however, still are in the testing phase.

Despite its global reach and near-monopoly position in its home market, Air Canada, like its U.S. counterparts, is facing several difficulties. It suffered a fourth-quarter net loss of C$274 million (US$184 million) and full-year 2000 net loss of C$82 million (US$55 million). The carrier said fuel costs "more than canceled out the financial synergies" of the Canadian Airlines merger.

"It would be an understatement to say that we ended last year with mixed results," said Air Canada chief Robert Milton in a speech last month to the Canadian Club of Toronto. "The slow economy means fewer people are flying, so we need to adjust capacity accordingly. That means reducing our former growth plans to zero."

Milton added that Air Canada is "being challenged by a new generation of airlines that didn't even exist a year ago."

Those challenges include formal complaints lodged by several smaller carriers to Canada's Competition Bureau regarding alleged anticompetitive behavior. Earlier this month, low-cost carriers WestJet and CanJet, and start-up RootsAir, complained that Air Canada had drastically lowered fares on some of their new routes, which would force them to abandon those markets. The Bureau sent a request to Canada's Competition Tribunal for an order prohibiting Air Canada from setting fares that do not cover its avoidable costs.

Air Canada dismissed the accusations, stating its need to remain price-competitive, particularly in a slowing economy. It also asked the Competition Tribunal for expedited clarification of certain pricing rules, particularly a clear definition of "avoidable costs."

Recent claims of predatory behavior follow a report released last month by Canadian Transport Minister David Collenette. The interim report, compiled by the Independent Observer on Airline Restructuring, is the first in a series of studies and is based on anecdotal reports and perceptions of all parties affected by the Air Canada-Canadian Airlines merger. Such perceptions included discomfort at the level of reliance on Air Canada in urban centers, a call for greater government oversight to ensure fair pricing, travel agents' views that they are being "squeezed to the point that it is becoming unviable" and numerous customer service complaints.

The report also found that the current level of competition does not provide Canada-wide access to frequent flyer points or business-class services.

RootsAir, based in Mississauga, Ontario, takes flight today on select intra-Canadian routes and addresses both deficiencies. The full-service carrier created by Skyservice Airlines Inc. said it, "intends to create a niche airline for business travelers," by offering three classes of service, airport lounge access and a frequent flyer program. That loyalty program will be administered by Alaska Airlines under a marketing arrangement. As a result, Roots-Air passengers can earn and burn mileage on all of Alaska's partners. Transborder flights, starting with Toronto-Los Angeles, are slated for June.

RootsAir national sales manager Phil Egan said the carrier's 12-strong sales force "came out with guns blazing," and made immediate inroads in the agency market, thanks to an uncapped 8 percent commission structure. Air Canada's domestic commissions are capped at C$60 (US$38). "That has translated into a very attentive audience," Egan said. "We are providing more, as lots of other carriers are cutting back."

Thus far, RootsAir has been designated a preferred carrier by Giants, an 800-member agency consortium that includes Travel Plus, a subset of 140 corporate travel agents, as well as a few other smaller consortia, despite a no-override policy. The carrier, however, will not be offering discounts to individual corporate clients, though net fares will be explored.

Andraos said some of AIM International's corporate clients are skeptical of RootsAir's staying power. "Business-class service at almost half the price? How can that be economically viable?" he asked. "It sounds just too fabulous."

Meanwhile, Toronto-based Canada 3000 and Royal Airlines plan to merge and form the country's second-largest passenger carrier. Both boards already gave the go-ahead for the former to acquire the latter and Royal's shareholders last week approved the takeover bid.

Should the merger get the green light from regulators, the combined entity would grow its fleet to 44 aircraft and offer at least 100 destinations by the end of the summer.

A spokeswoman said corporate sales efforts likely would follow initial integration. "We have noticed in the past year that more business travelers have chosen Canada 3000 because we fit nicely between the very low-fare carriers and the full service of Air Canada," she said. "As a merged company, we will offer more destinations and more frequencies."

Canada 3000's latest financial results, though still showing a loss for the most recent quarter, overall showed substantial growth in revenue, net income and revenue passenger miles. Andraos said a combined entity would be a strong competitor to Air Canada.

Underscoring Air Canada's view that its smaller competitors are financially sound and, therefore, certain complaints unfounded, WestJet late last month reported quarterly earnings of C$8.2 million (US$5.2 million), up from C$4.7 million (US$3 million) a year earlier. Yearly net earnings grew 91 percent. Yield grew marginally, to C22.9 cents. February revenue passenger miles grew 53.1 percent, year over year, on 61.3 percent capacity growth. New B737-700s began arriving this month and will enable the low-fare carrier to add destinations and frequencies to its route network now covering 17 Canadian cities.

Still, one travel manager at a large Air Canada corporate client said smaller carriers are challenged with less equipment and staff, and a lower level of service than that to which business travelers are accustomed. "And their pricing on many routes is not sustainable," he said. Nevertheless, that corporation is aiming to move 20 percent of its domestic traffic to Air Canada's competitors.

Andraos added that AIM is encouraging corporations to seriously consider all alternatives. "If they don't, there will be no alternatives and there will be no competition," he said. "Based on the past, Air Canada will react to these other players and defend its turf.