<B>Air Canada On Top</B>
<I>Monopoly Brings About New Buying Tactics</I>
By David Jonas
After months of offers, counteroffers and political rhetoric, Air Canada last month gained control of rival Canadian Airlines and said it will operate the carrier as a wholly owned subsidiary. In doing so, Air Canada reached a deal with American Airlines parent AMR Corp. to resolve AMR's ownership stake in its longtime partner Canadian. Though it is too early to determine exactly how corporate buyers will be affected, the change in ownership immediately transforms the dynamic of Canada's domestic and transborder travel, and reverberates through two of the world's largest airline alliances (see story, page 1).
Under the deal, Air Canada repurchased AMR's shares for about CAD$60 million (US$40 million), while American maintains a 10-year codeshare and frequent flyer relationship with Canadian. Should Canadian be completely absorbed, other provisions would kick in to ensure American's marketing presence in Canada. Air Canada also can choose to select Sabre to handle information technology for the combined network, but is not obligated to do so. Air Canada already has purchased Canadian's slots at Tokyo Narita, and said it will "streamline and revamp" the combined network. Details include various new transborder routes, new nonstop domestic services and additional international flights.
The agreement, which still will be subjected to new regulatory oversight, leaves corporate buyers with the daunting task of negotiating with Air Canada in a virtual monopolistic environment. However, it is not yet time to sound the alarm and, for the time being, both carriers said they will continue to honor--or even fine tune--corporate deals.
Moving forward, many see plenty of leverage for corporations to negotiate successfully. "Because most Canadian corporations have a huge transborder volume, we firmly believe those that manage their T&E effectively and show they can move market share will negotiate even better with Air Canada as U.S. carriers become even more aggressive in their deals," said Samir Andraos, president of Quebec-based AIM International. "Buyers can say, 'If you don't give me X on domestic, then we won't give you Y on transborder.' It puts corporations into a much stronger position."
Meanwhile, buyers with international needs also have a bargaining chip. Those interviewed by BTN said Air Canada, in exchange for domestic market share, would be very willing to offer lucrative discounts on international routes in an all-encompassing package.
Furthermore, if new competitors enter the market, or boost current service, buyers likely would benefit. Andraos, for example, said that if Virgin Atlantic were to begin flying from Toronto and Montreal to London, the result would be "sweeter deals from Air Canada." Virgin said Canada is not the most immediate priority, but the market conditions there are appealing, adding that "Richard Branson likes to break up monopolies and duopolies."
However, Canadian corporations with mainly domestic travel may be forced to seek out alternatives, particularly if Air Canada turns Canadian into a low-cost carrier to develop feeder routes and squeeze other low-fare and charter airlines. And U.S. carriers are unlikely to target smaller Canadian markets where there is insufficient business to generate revenues.
Alain Legault, manager of travel and conference for Canada Post Corp. in Ottawa, said his company has been using Canadian Airlines to cover 85 percent of its market share, mainly on domestic routes, and now will "look at secondary carriers that are getting in line to cover some domestic transportation needs." He suggested regional carrier WestJet, as well as two charter carriers, Canada 3000 and Royal, which could begin scheduled service and offer some type of corporate agreements. "Maybe those corporate deals wouldn't be as rich, but since fares are much lower, it would balance out," he said.
On cue, in the days following Air Canada's successful takeover, WestJet announced its intentions to expand its route network into Eastern Canada by adding more aircraft in 2000.
Meanwhile, to shield his travel program from any negative implications from the changing environment, Doug Stuewe, director of corporate acquisitions and negotiations at the Canadian Broadcasting Corp., took preventative measures "as soon as this fiasco began," and forged a new five-year global agreement with Air Canada. "We went out and had extensive discussions with both carriers, and their partners, and had one of the most interesting negotiations I have ever been involved in," he said. CBC's net fare deal is designed to protect against any changes in the first few years and included a clause "to deal with any structural change on the outside chance of a white knight deal from Oneworld."
Stuewe added that the deal gives him strong positioning on transborder routes "because Air Canada knows that's what U.S. carriers will go after first," and includes integrated pricing and discounting with other Star Alliance members (see story, page 1).
Though Canada's competition bureau gave initial clearance late last month, the situation likely will change when the government hands down new rules in February. For example, if it opts to permit cabotage--a foreign airline transporting passengers from one city to another within the domestic market--new opportunities will be available for U.S. carriers.
Despite any new regulations from the government and leverage in certain situations, many buyers still are facing a difficult road ahead. "Logic would have it that in a few months if you don't have a deal with Air Canada, on what will you be negotiating?" Legault asked, adding that an advocacy group for Canada's corporate travel industry would help matters.
Kevin Mitchell, chairman of the Business Travel Coalition and a long-time advocate of group corporate travel purchasing in the United States, agreed that Canadian corporations need to band together. "They need to start somewhere to get their voice included in discussions for future developments," he said. "We started late in this country and now we are paying the price. And now, Canadian companies will pay for it.