Entrants Seek To Threaten Air Canada Monopoly

<B>Entrants Seek To Threaten Air Canada Monopoly</B>

By David Jonas

Looking for a strategic position in a Canadian market now nearly monopolized by Air Canada, several smaller carriers are expanding services in an attempt to offer lower fares and appeal to business travelers.

Meanwhile, Air Canada still has been active in its corporate sales efforts, giving accounts the option of new deals with the combined carrier or maintaining existing agreements. Plus, a higher level of competition on international routes still means some level of negotiating leverage for certain buyers. Other buyers with intra-Canada needs only are not as lucky.

"We strongly recommend that companies in Canada look at other alternatives, which happily are evolving and adapting to the situation," said Samir Andraos, president of Montreal-based AIM International. "I would be surprised if they do not attract and steal a good chunk of domestic market share, especially for small and medium-size corporations who never could get a deal with Air Canada."

WestJet has been the most visible, while charter carriers, such as Canada 3000, Royal and the recently announced RootsAir from Skyservice, are trying their hand at scheduled service. Furthermore, sources indicated that these carriers are seeking codeshare ties with larger carriers and even alliance groupings.

RootsAir is an offshoot of Skyservice Airlines, a Toronto-based charter airline, jointly branded with Roots Canada, a chain of 140 clothing and accessories stores. The initial route network, to kick in this fall using four Airbus 320s and 330s, includes daily service to Calgary, Edmonton, Halifax, Los Angeles, Montreal, Ottawa, Toronto and Winnipeg. Additional U.S. destinations will be announced soon. By 2003, RootsAir expects to have a fleet of 18 aircraft in operation.

Russell Payson, chairman and CEO of Skyservice Airlines, said, "Canada's airline industry needs a new model that allows the market to be properly served." Mr. Payson added that he is seeking agreements with U.S. airlines to allow "seamless" ticketing that would allow travelers to connect to any U.S. destination through the new airline. However, no specific codeshare or alliance links were announced

Calgary-based WestJet is another low-fare alternative that has been quite active since Air Canada's acquisition. The carrier has been steadily expanding from its base in western Canada into larger eastern markets, including a new hub in Hamilton in March, Ottawa this month and Montreal later this fall. The carrier has yet to make inroads with business travelers because of limited frequencies on many routes. An infusion of at least 20 new Boeing 737s, with scores more on option, should help alleviate the problem.

"WestJet is an interesting alternative to Air Canada, but they have not approached corporates or even tried to make themselves appealing to corporates," said Alain Legault, manager of travel and conference for Canada Post Corp. in Ottawa. "Flexibility and availability, two big words that do not fit in with the low- cost carriers here. Maybe the individual business traveler who is paying out of his own pocket would opt for WestJet, but we'll see how Corporate Canada reacts now that it's also about time and not just cost."

Also looking to cut into Air Canada's 80 percent market share, Canada 3000 and Royal Airlines, traditionally charter operations, now are shifting toward scheduled service. "Royal definitely is interested in the corporate market," Legault said. "They are aggressively going after the business and are offering [Air Canada frequent flyer] points."

The Dorval-based carrier, which began scheduled service in 1998, now offers flights to six destinations across Canada as well as six daily roundtrip flights in the heavily traveled Toronto-Montreal corridor. In October, it opened its own reservations system to enable corporations to book directly, made its flights available in the GDSs and began reorganizing its schedule to meet the needs of business travelers.

A pillar of Royal's corporate focus is its PassExpress bulk buying option. The program provides flexible traveling coupons at reduced rates, enabling travelers to book flights at anytime with few restrictions. Current pricing, based on a purchase of 10 roundtrip flights, includes Toronto-Montreal and Toronto-Halifax each for C$239 (US$162), and Toronto-Ottawa at C$219. BTN found those prices compared quite favorably with Air Canada's fares. On Air Canada, those same roundtrip routes--lowest available and advanced purchase without a Saturday night stay--cost C$760.33, C$1,550.55 and C$739.66, respectively.

"When Air Canada is charging you C$800 for a roundtrip between Montreal and Toronto, and C$4 for beer or wine, and someone like Royal charges C$350 or less for the roundtrip with complimentary French wine, people will start taking notice," Andraos said.

Meanwhile, Toronto-based Canada 3000 also is preparing for expansion. The carrier, presently offering 65 percent scheduled service, is adding another five Airbus aircraft to its fleet of 14 Airbus jets. Aside from intra-Canadian flights to 12 of the largest cities, the carrier currently offers scheduled service on 38 transborder city pairs--including flights to Las Vegas, Los Angeles, Newark and Orlando--and to several European destinations, including Berlin, Hamburg, London, Munich and Paris. Services to many of the major destinations will increase with the influx of new planes.

"As we increase frequencies, we increase our appeal exponentially within the marketplace and I expect a larger number of business travel managers will use us to move their staff around," said Canada 3000 president Angus Kinnear. Kinnear also said that many carriers have considered Canada 3000 as a codeshare partner and a viable domestic feeder, but many have overlapping route structures. A more likely partner would be based in the Middle East or Europe.

"They are focused on international growth," Andraos noted, adding that many Canada 3000 destinations also are major international destinations for Air Canada and part of the reason it went after Canadian Airlines in the first place. Sample Canada 3000 domestic fares are C$149 roundtrip between Toronto and Montreal and C$349 roundtrip between Toronto and Vancouver.

<B>Negotiating with Air Canada</B>

Nevertheless, an 80 percent market domination means most corporations must deal with Air Canada, at least in some capacity (<I>BTN</I>, Jan 10). Corporate clients have been given the choice of maintaining current agreements or reworking the deal with the combined carrier. Marc Rosenberg, Air Canada's vice president of sales and product distribution, said a "very high percentage" of accounts opted for a new deal, "driven by the realization that the combined carrier offers a greatly expanded network."

Those corporations with a Canadian Airlines deal negotiated prior to the acquisition, however, had the option of a new deal with the combined carrier or no agreement at all. Because they jointly included former ally American Airlines, existing Canadian Airlines contracts became invalid. However, American quickly reacted by giving many of those clients the opportunity to renew its portion of those agreements. Canadian Airlines's codesharing agreement with AA will expire by Oct. 1.

The situation is trickier for corporations looking for entirely new deals, particularly if they bring little or no international traffic to the table. "It's a tough negotiating environment and we can kiss goodbye the very rich deals that were out there when Canadian was doing their fire sales," Legault said. "But Air Canada is out there talking to corporate accounts, and the buyers with more international traffic can alleviate the pressures on domestic deals."

Rosenberg acknowledged the difficulty in negotiating Canada-only deals. Citing government emphasis on domestic competition, he said, "Our focus need not be on domestic Canada and that complicates our ability to do the kind of deals we had in the past in a two-carrier market."

For buyers, that could translate to a future with smaller or no corporate discounts and more attention to smaller players, both as travel alternatives and as the only bargaining chips at the negotiating table. In fact, Rosenberg called WestJet "a competitor of sorts" in western Canada.

Meanwhile, Air Canada will continue transitioning to net fares for corporations that "have a substantial volume to warrant that approach," and will seek new opportunities as the airline expands transborder and international services.

In fact, Air Canada's transborder efforts shifted into high gear last month when it announced a codesharing agreement with Delta Air Lines. The agreement, proposed to start this fall, calls for codesharing between gateways in Canada and Delta's domestic hubs--Atlanta, Cincinnati, Dallas/Ft. Worth and Salt Lake City. Some domestic codesharing on both sides of the border also is possible.

Air Canada, which already has a U.S. partner in United Airlines, said Delta cooperation complements Star Alliance participation. Rosenberg said he knows of no corporate deals that encompass all Star Alliance airlines, but multi-airline agreements have been progressing "on an account-by-account basis determined by the global needs of the corporation."

Meanwhile, Air Canada has faced staunch public disapproval as it integrates Canadian Airlines. The carrier has faced criticism on its service disruptions, baggage handling and other customer service areas. Technological incompatibilities between the two carriers have caused computer reservations system disconnections, logistical difficulties stemming from accelerated network integration and labor unions unhappiness.

"It's a huge integration and passengers paying full fare don't have any tolerance for service lapses," Canada Post's Legault said. "But Air Canada is trying hard. We shouldn't put them on the cross yet. Give them a few more months."

Indeed, Jack Wallis, the carrier's director of corporate sales, said, "Any transition of this magnitude has minor detours, and like anyone else, we need to manage them. Many of our corporate accounts also are going through integration and understand the difficulties involved."

Despite the well-publicized service problems, the carrier has made some progress in getting its now-larger ship in order. The two technology platforms are scheduled to merge this fall and all operations of both airlines at Toronto's Pearson Airport finally were combined last month. Also, schedule and network integration is leading two more focused hub operations in both Toronto and Vancouver. "Those airports are becoming viable entry points into North America for U.S.-based clients, and we are looking forward to offering that on an expanded basis," Wallis said.

New flights already have been added from Toronto to Mexico City, Munich and Tokyo, new service to Amsterdam and other destinations will follow.

"Finally, Canada can optimize its bilateral rights," Rosenberg said. Meanwhile, the Canadian government is mulling the idea of allowing foreign airlines to fly intra-Canadian routes. Air Canada currently handles 40 percent of the country's international service.

Still, things are murky for Canada's corporate buyers. "If you want service frequency and flexibility, frequent flyer points and all the other glossy stuff, you will pay for it," Legault said. "But if you want a more straightforward, lower service approach with less amenities, you can find cheaper fares."

Andraos said buyers should commit to the smaller alternatives, and not just use them as leverage to get a better deal with Air Canada. "It is fundamental that corporations not get bullied by Air Canada." He said. "Otherwise, carriers like WestJet will get killed the way Canadian did and Air Canada will grow that much stronger.