Air Canada - Strategic Objectives, Value Addition and Competitive Advantage, Competitive Situation - Example

Integrative Assignment Phase One Name: Tutor: Course: Date: Executive Summary Air Canada is a competitive airline based in Canada and operates both passenger and cargo transportation. The company has registered huge profits in the past two years signaling a tremendous growth in revenues. In the first section, the company revisits and reviews its mission, vision and values to merge with strategic objectives that are likely to deliver the company into a cost leader. The second section looks into the competitive advantage and value addition in which the company has set about to achieve. This includes improving customer service, raising the level of performance from its employees and purchasing new fleet of modern aircrafts. The third section undertakes the environmental analysis by underscoring the company’s internal strengths and weakness. The company also rides on the prevailing opportunities and threats which need to be critically identified. The analysis also considers strategic adaptation by exploring the cost leadership model. The final section looks into the current structure, formal design and the strategic adaptations to allow Air Canada meet the obligation of its shareholders and employees. Table of Contents 1.1 Mission, vision and corporate values 4 1.2 Strategic Objectives 4 1.3 Value addition and Competitive advantage 5 2.0 Current Competitive situation analysis 6 2.1 SWOT Analysis 6 2.2 Competitive Landscape: Adopting the Cost Leadership Model 8 Figure 1: Executive first in-flight meal 8 2.3 Structure and Design 9 2.3.1. Corporate structure 9 Figure 2: Corporate affiliation of Air Canada 10 Figure 3: Executive First Suites on the 767 (Project XM) 10 2.3.2 Formal Design 11 Figure 3: Air Canada Boeing 777-300ER 12 2.4 Strategic Adaptations 12 References 13 List of Figures Figure 1: Executive first in-flight meal 8 Figure 2: Corporate affiliation of Air Canada 10 Figure 3: Executive First Suites on the 767 (Project XM) 10 Figure 3: Air Canada Boeing 777-300ER 12 1.0 Introduction Air Canada is one of the major passenger and cargo carriers based in Montreal, Canada. The airline was founded in 1936 to serve more than one hundred and seventy eight destinations. The company operates in the transport industry and also provides additional services, for instance, urgent delivery of parcels (Gillen, 2008). It was ranked the seventh largest airline for passengers by fleet size, and a founding member of star alliance that has twenty eight airlines. The airline is positioned as one of the most secure and safe airline since its entire fleet is equipped with fixed oxygen systems employing the principle of re-breathing bag, for flight crew and passengers. Air Canada acquired its main rival in the year 2001 and later filed for bankruptcy protection (Hunger & Wheelen, 2004). In 2004, it emerged and restructured under the holding company ACE Aviation Holdings Inc. In 2012, the company made its first post tax profit after five years. The current air Canada fleet consists of one hundred and ninety four aircrafts and all the classes are fitted with individual video displays. 1.1 Mission, vision and corporate values Air Canada’s mission is to connect Canada and the world. Its vision is to build loyalty through innovation and passion while the values are in underpinning its vision and mission serving as touchstones to guide vision (Milton, 2004). Safety is taken as 100 percent priority all the time. All customers are made to feel valued with actions, words, services and products. The company works together with customers, colleagues and community. Its reigning values are integrity, accountability, trust and open communication. Employees are also valued, listened to, and respected. The drive for excellence is personal and corporate with a desire to attain quality and service in the next level of innovation (McArthur, 2004). 1.2 Strategic Objectives Air Canada in the last couple of years has been positioned as great in creation of value and excellent service to stakeholders. It has also transformed its corporate culture to embrace accountability, entrepreneurship and leadership among employees. The airline has taken aggressive, concrete and targeted actions to lower the overall risk profile and improve its earnings (Tretheway, 2000). To achieve this, it has executed strategic initiatives that are meant to improve the balance sheet, lower its cost structure, improve market leading customer service programs, increase invested capital returns and de-risk its pension plans. This is geared to creation of a more positive and stable environment to employees (McArthur, 2004). Some of the key strategic objectives are; To drive a 15 percent reduction in costs and improve revenues by 25 percent in the next five years To introduce high-density (458 seats) Boeing 777 Aircrafts and fuel efficient Boeing 787 Aircrafts for the three cabin configuration to selected markets with 21 percent lower costs in the next one year. To make entry into a renewal program for the narrow body fleet including certain purchase rights, options and firm orders hence lowering costs by 20 percent in the next four years. To expand Regional Airline diversification so as to reduce balance sheet risks by 11 percent in the next two years. 1.3 Value addition and Competitive advantage The company became the first major air carrier to embrace the technology of turbine on its fleet for higher productivity at a lower maintenance rate. With the help of the DC-8 equipment, it introduced the jet freighter service. The company has invested in technology like fitting video displays in individual seats, customized service to every passenger, quality in-flight meals and luggage protection (Tretheway, 2000). To compete in the growing leisure travel sector, the company launched the Air Canada Rouge in 2013 to reach Major European and Caribbean destinations. The company retired Boeing 767-300ERs and Airbus A319s from the mainline business. It partners with Air Canada Vacations to leverage the strengths in frequent flyer rewards, operational expertise and extensive network. The Canadian flag carrier will aggressively compete with WestJet vacations, Sunwing and Transat AT which are low cost competitors. The company is working on a major expansion in its 75-year history hence seizing the opportunities of the Pacific Century. The Asia expansion has witnessed the purchase of 14 wide body aircraft valued at more than $2 billion. Manufacturing process aviation and technological change are the industry’s driving forces. The landscape has been dramatically altered by advances in technology in production of better and new services/products hence opening up new transport frontiers at lower costs. The use of Boeing 787Dreamliner jets has decreased operating costs and increases efficiency hence edging Porter and WestJet airlines (Western Transportation Advisory Council, 2008).. The jets fuel efficient, weigh less and uses less metal saving 20 percent fuel compared to 767 jets. Air Canada bought 37 Boeing 787 Dreamliners each carrying 290 passengers. They will start offering non-stop services to India and China. It also has strong fleet capabilities that competitors will incur huge costs to match. 2.0 Current Competitive situation analysis 2.1 SWOT Analysis Strengths: Air Canada has leveraged in its future IMC strategy. It is the dominant in the domestic market, and globally the eighth largest airline. In Canada, the brand boasts the highest recognition rates and operation excellence internationally. The workforce is more experienced alongside a more established infrastructure. The company has a network with excellent capacity, offers from many locations wide range of domestic flights and maximizes profitability owing to adequate historical data that optimizes its capacity on different routes. It has huge customer revenue of CA$12.39 billion by 2013. Its operating divisions are Air Canada Cargo and Air Canada Jetz with their subsidiary (Air Canada Vacations) providing vacation packages to more than ninety destinations and over 1,530 flights daily. It is an easy process to purchase tickets from Air Canada by way of agency network, web site or telephone operators. Weaknesses: Brand value and affinity than expected owing to lower low satisfaction levels and customer service reputation. Many legacy aircraft still operational are less fuel-efficient delivering lower level of customer satisfaction compared to newer planes. The company also lacks design, technologies and modern amenities (Tretheway, 2000). Many customers have negative online testimonials and experiences of poor customer service. Information passed from employee to employee remains inadequate to deal with issues. Employees also lack accountability. The company tends to focus on the high-profit clientele leaving the rest of economy customers disgruntled. The company ignores brand communication and customer service and instead settles for cost-cutting measures such as airfare price points, redemption of Aeroplan frequent flyer points, employing nonunion staff, eliminating complimentary meals, and charges for transporting secure weapons (Tretheway, 2000). The company rather than differentiating itself from its competitors is making a strategic error by differentiating a product in the market. The current brand image is likely to hamper the relevance of new products in the market during adoption or consumption. Air Canada was at a disadvantage compared to WestJet on unionized labor force. Opportunities: Enhanced productivity and improved customer service arise from automation initiatives. These are electronic and internet booking of flights, check out and check in flight status that has increased efficiencies in the industry. New models of airplanes have provided larger capacities and better fuel efficiency (Stogdill, 2004). The invention of high speed supersonic aircrafts and efficient fuel has in the recent years paved way for major technological development. Threats: Broad economic conditions and global economy have witnessed a rise in fuel and oil prices. These include labor, maintenance and fuel costs. There has been a sharp increase from $44 billion consumption of jet fuel in 2003 to $178 billion in 2011 globally (Hayes, 2008). There was a decline in revenues by 12 percent in 2001 with a reflection of poor performance in 2008/09 during the global recession. Global demand has declined for air travel due to security costs and higher insurance. Low bargaining power, high prices of new planes and fuel costs is a major threat in the airline industry (Olsen et al. 2008). Industry-wide, the continued movement in the price of jet fuel, pressure on international and domestic routes continues to pose significant threats to market dominance of Air Canada. 2.2 Competitive Landscape: Adopting the Cost Leadership Model Airline industry is very competitive since its de-regulation in the 70s. Eastern and Pan American airlines closed shop and gave way for Southwest and Midwest Express. Where it became expensive to land large jets, the small capacity, low cost commuter planes secured healthy profits. The low cost airlines later offered cheaper fares that had no-frill service during its expansion (McArthur, 2004). WestJet offered good customer relationships and cheap air tickets. In the recent past, Air Canada has boosted capacity by increasing utilization of existing planes through reduction of turnaround time at the airports by 15 minutes hence freeing up equivalent space of two airplanes (Milton, 2004). The company is yet to adopt the low cost carrier model which is working for All Nippon Airways, Singapore Airlines and Qantas. Competitive advantages includes adoption of strategies such as focused low-cost, cost leadership, differentiation and focused differentiation. Figure 1: Executive first in-flight meal Air Canada adopted differentiation and integrated cost leadership strategy by simultaneously attaining different ions and low costs such as on-time flight, safety, customer strategy and good catering. It has to outweigh the market occupied by WestJet which pursues differentiation and low-cost strategies. It is recognized by low customer complaints and high passenger satisfaction levels. Johnson and Scholes (2008) note that traditional models like differentiation or low cost model achieved less on the desired growth. The company has concentrated on lowering costs on booking, catering, airport handling and maintenance. There is an opportunity to increase the loading factor which is the aircraft seat occupancy and economies of scale (McArthur, 2004). Formation of strategic alliance with other airlines while offering quality service keeps Air Canada a strong position. The company needs to dread carefully to avoid price wars likely to trigger worst scenario bankruptcy and low profit margin. With a shift in the effectiveness of their IMC strategy Air Canada could make a significant difference in customer loyalty and brand value (Stogdill, 2004). Fuel costs have fallen from their record highs in 2005 making Air travel in Canada to enjoy moderate growth in the previous year. Limited competition has continued to provide the domestic Air Canada with opportunities to further dominate this less profitable but stable market. Legislation any time soon may not change the competition level in Canada. The very real threat that Westjet poses Air Canada remains un-mitigated. On Air Canada’s system, Westjet is able to undercut their pricing and “cherry pick” the most profitable routes hence capturing the market. Westjet in 2004 used confidential data allegedly from an ex-Air Canada employee to target their routes (Milton, 2004). It also has irreverent, light and appealing marketing campaigns. They also have a powerful but simple web booking system, a fuel-efficient airplane fleet, and a continuously growing market share. 2.3 Structure and Design 2.3.1. Corporate structure Air Canada is a founder member of Star Alliance which is a network of 28 member airlines and able to offer customers more than 1330 destinations covering more than 195 countries. It is in a joint venture with Deustch Lufthansa AG and United Airlines with a common revenue share structure. Figure 2: Corporate affiliation of Air Canada Air Canada has demonstrated ability to have a cross-border joint venture with United Airlines. The company is headquartered in Saint-Laurent, Quebec and represented online at aircanada.com. The structure has been identified by mergers with regional affiliates, vertical integration into computer reservation services and forging alliances with international carriers (Gillen et al. 2008). This also includes airline cost structures, fare determination and air networks. The carrier is affiliated to by ownership of specialized local or regional carriers. It carries cargo and passengers on charter and scheduled flights both international and domestic by through affiliation with Air Nova, Air Ontario and Air Alliance (McMurray et al. 2004). Figure 3: Executive First Suites on the 767 (Project XM) The airline industry employs more than 53,000 people generating $ 8 billion in operating revenues. It also carries 900 million kilograms of cargo and more than 80 million passengers on international and domestic flights. The industry is highly fragmented and regulated on national lines characterized by private enterprise and trade liberalization (Malhotra et al. 2006). Air Canada has more opportunities for growth as a result of opening up of international and cross-border markets, integration of air route networks and overall restructuring of the industry. Evans et al. (2003) suggests that achieving and maintaining a competitive corporate profile is the only constraint at the moment. The prosperity strategy is increasing its market presence in Southeast Asia and Japan. The company first priority is in route acquisition by indirect or direct purchase or by foreign airline alliances. These alliances are with Air Jamaica, Sabena, Finnair, LOT Polish Airlines and Austrian Airlines (Gillen et al. 2008). The cost structure has been contributed by increased fees, high transportation costs and added taxes. In 2013, Canada’s airports paid more than $3 million in rent to the federal government. Canadian Airlines was acquired by Air Canada in 2001 by pursuing an expedited merger strategy. However, the integration caused luggage problems, flight delays and frustrations. Posting back to back losses, increased competition and the global aviation market downturn confronted the airlines (Ireland et al. 2009). 2.3.2 Formal Design The Boeing 747 series made its last flight from Toronto to Frankfurt in 2004 and replaced by a fleet of Airbus A340. New uniforms and aircraft color schemes were bought. Air Canada in 2005 renewed the wide body fleet by purchasing 16 Boeing 777s (Gillen et al. 2008). It announced an exercise for half of its options for the Boeing 787 Dreamliner in 2007 (White, 2004). In 2006, the airline started interior replacement which is a $300 million project hence delivering the Boeing 777 with new cabin factory installations. The features will have flat executive first suites, new entertainment options, personal touch screen LCD in Economy class and larger ones in Executive First suites. It also has interactive games at Economy and executive seats and USB ports to recharge electronic devices alongside game controllers (Morrison et al. 2004). The airline flies 81 international destinations and 15 domestic destinations. Along with regional partners, the carrier operates 39 countries serving 171 destinations. The airline has codeshare agreements with 22 international airlines. As at 2013, the average fleet age is 10.5 years. The airline has two service classes namely economy and business. With the exception of the three Boeing 767-300ER aircraft, the business class product is available on all widebody aircraft. Premier economy features have greater reclines and larger seats compared to economy class. Cabin crews have had their uniforms changed to midnight blue color from dark green to help rebrand the new solvent airline (Kenny et al. 2007). Maple leaf lounges were established for the executive class, elite, gold members and Aeroplan executive members. In those departure airports without direct connections to Europe, the airline pursued the American based business travelers. The company has 37 Airbus A319-100 with 132 passengers on layout 35 and 142 passengers on layout 2 (Ireland et al. 2009). It has 41 Airbus A320-200 aircrafts (146 passengers, 10 Airbus A321-200 (174 passengers) and 8 Airbus A330-300 (265 passengers). The new orders for Boeing 777-3000ER are 5 on layout 12 and 37 Boeing 787-8. Air Canada rouge operates these are low-cost flights. Figure 3: Air Canada Boeing 777-300ER 2.4 Strategic Adaptations Air Canada is attuned to making consideration on the changing business environment by review of new routes and their profitability. The strategic level is tasked with joint ventures with United Airlines and diversification. The business level employs good customer service and safety of the aircrafts. The business has enough funds for expansion and purchase the Boeing 767 and 787 series. The business level strategies are valuable to Air Canada if it is to outweigh competitors and secure a greater market share of more than 35 percent (Ireland et al. 2009). References Evans, S., Campbell, D. & Stonehouse, G. (2003). Strategic Management. Oxford. Butterworth Heinemann Gillen, D.W., W.T. Stanbury M. & Tretheway. W. (2008). Duopoly in Canada's Airline Industry: Consequences and Policy Issues. Canadian Public Policy, Vol. XIV, p. 15-31. Hayes, B. (2008). Measuring customer satisfaction and loyalty: survey design, use, and statistical analysis methods. ASQ Quality Press. Hunger, D. & Wheelen, T.L. (2004). Strategic Management and Business Policy. 9th edition, Pearson, Prentice Hall, New Jersey. 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