Canadian Airlines
Reservations about Its Future
Suggested Study Questions
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1. What is Canada’s position in the
airline industry?
2. What are core IT issues facing the
two airlines?
3. How important is a good reservation
system?
4. Do you agree with the Ottawa court?
Why Choose the Canadian Airlines Case?
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No industry has provided so clear and public
an example of evolving strategic use of IT
as the international airline industry.
FIVE COMPETITIVE FORCES MODEL
NEW
MARKET
ENTRANTS
THE FIRM
SUPPLIERS
SUBSTITUTE
PRODUCTS
& SERVICES
Threats
TRADITIONAL
COMPETITORS
Bargaining power
CUSTOMERS
N
A. How important is the reservation system
to the airline industry and what is its
impact to shape competition? (Appendix for
its pre-background)
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Frontier had to fight to have their flights displayed on
the UA reservation system. Only legal action allowed
them to prevail. The denial of the co-host status
meant on Frontier’s connections were not included in
the system.
Monopoly prices are charged by UA to Frontier.
Screen bias problems exist where Frontier flights are
displayed less favorably than US.
Frontier Case (cont.)
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UA has instant insight on loading data on Frontier
flights, which travel agents will favor Frontier, etc.
Ninety-five percent rule forces travel agents to use a
single reservation system so the screen bias in Apollo
would be widely effective.
Special value added features like printing boarding
passes only work for UA flights.
UA controls and delays the timing of communicating
Frontier fares to travel agents.
UA incorrectly signals that Frontier flights are sold out
when in fact they are not.
B. Discuss potential problems of Electronic
Commerce and why disinterested
information providers have a real
advantage.
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The following factors softened the impact on using
CRS (res) as weapons:
– public pressure
– competition from other reservations systems
– threat of law suits
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It is too costly to develop its own system and to
include global flight data.
AA has a $150 million a year profit from selling
SABRE services to its customers.
C. Discuss the current state of play in
the Canadian Airline industry.
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1. What is Canada’s position in the
airline industry?
2. What are core IT issues facing the
two airlines?
3. How important is a good reservation
system?
4. Do you agree with the Ottawa court?
Airlines Organization Chart and their
Airline Reservation Systems (CRS/res)
Gemini
PWA
Canadian Air
Air Canada
Covia
AMR
UA
AA
APOLLO
SABRE
1. What is Canada’s position in the airline
industry?
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It handles only 2% of the world’s passengers.
It is an East/West airline with perhaps 12 profitable
cities in the southern part of Canada.
It faces intense U.S.A. competition where U.S.A.
airlines have a huge advantage because of their hubs
where they can, for example, easily transfer
somebody from Calgary to San Francisco while
staying on the same airline. The Canadian Airline
obviously do not have this connection facility.
What is Canada’s position in the airline
industry? (Cont.)
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The industry has shrunk from 7 airlines (1985) to 2
airlines. By 1992 both were under extreme profit
pressures with Canadian Airlines having lost more
than a billion dollars in the last three years. Their
financial viability was genuinely in doubt.
Canadian authorities’ key objective is to preserve
competition inside Canada and, therefore, want two
Canadian airlines to exist. It is clear, however, that
this competition needs not exist on international
routes where, in fact, the two airlines do not compete.
2. What are core IT issues facing the two
airlines?
Two major players
 SABRE
– 109 global terminals handling 60,000 transactions
per day
– achieve 50% market share in Toronto and much
less in the rest of the country
– has not evolved to handle bilingual interactions,
i.e., English and French
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Gemini
– uses United Airlines’ Apollo software
– operates largest private telecommunications network in
Canada and employs 700 people
– co-owned by Canadian Airlines and Air Canada
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Therefore, it represents a formidable barrier to
American’s expansion inside Canada.
In order to get significant revenue growth out of
Canada, American Airlines needs to find a way to
disarm Gemini.
Canadian Airlines Specific Situations:
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Employees fearing for the very survival of the airline
and thus, their jobs, are willing to give significant
wage concessions.
Gemini, fearing for its very survival, doesn’t want to
surrender Canadian Air to American Air
Reasonably aggressively price, moving from Gemini
to SABRE, would save Canadian Air $25 million per
year
Merger with Air Canada is not a possibility because
of the Federal Government
The Bottom is ...
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Canadian Air wanting to survive, would be happy to
sign a favorable contract to American Airlines
combined with the significant American cash infusion
and an employee wage cut.
Air Canada, neutralized by the government, can do
nothing but swallow hard and maintain their
relationship with Gemini.
The real losers in all of this, of course, are
– the staff at Gemini who must operate under a small scope
FIVE COMPETITIVE FORCES MODEL
NEW
MARKET
ENTRANTS
THE FIRM
SUPPLIERS
SUBSTITUTE
PRODUCTS
& SERVICES
Threats
TRADITIONAL
COMPETITORS
Bargaining power
CUSTOMERS
N
3. How important is a good reservation
system?
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Outsourcing vs. strategic weapon
–
–
–
–
–
–
–
–
Competition (competitor) vs. cooperation (partner)
airlines reservation system
crew scheduling
hotel reservation system
car rental
restaurant
shopping
its internal IS such as accounting, data processing,
communication services, operations planning, pricing, and
management capability
– and more ...
4. Do you agree with the Ottawa court?
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YES/ NO
Conclusions
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The competition between AA and UA is very helpful in
keeping the worst of the Frontier abuses from
happening in Canada.
This is a different kind of outsourcing case where two
mid-sized firms have completely given up the
capacity to innovate through systems.
As opposed to the Internet and the world of Emarkets, this is an intriguing case about how AA and
UA starting with their own international reservations,
have now turned them into major profit centers which
in reality need not be associated with their founding
airlines.
Conclusions (cont.)
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Canadian spends $20-$25 million less to run its
business now that AMR will be handling its IT.
Savings from the services were not the driving force
behind the deal, explained a spokesman for PWA,
“We are able to ride on American’s coat tails in
development.”
From AA perspective, the deal allowed American to
expand into the information services market; for
Canadian, it was a question of survival. The deal has
ensured its future at least for the next two or three
years.
Worldwide Airlines Reservation Systems
and Foretelling Gemini’s Future
Galileo Intl.
Galileo
PWA
AA expects to receive
about C$120 million
annually for the duration
of 20 year contract
Gemini
Air Canada
Canadian Air
Canadian Air receives
C$246 million through
the AMR deal plus
other services
Covia
AMR
UA
AA
APOLLO
SABRE
Turbulence in the Domestic Market
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Jean-Jacques Bourgeault, Air Canada’s COO:
– “air Canada’s position remains that Canada should have
only one flag carrier abroad, but two competing domestic
airlines.”
– “The merger option is not off. We haven’t given up. Anyone
who knows about the airline industry - unless you’re an
executive at Canadian or a politician, tends to agree that
there is no room for two international airlines in this country.
Even if the AMR-PWA deal works out, eventually we’ll be
back to tackling the problem. When” In two years? In three.?
In five.? As long as Canada remains Canada, there’s one
airline too many and we’re going to keep fighting until one of
us loses, and I don’t think that’s (going to be) Air Canada.