“Canada’s Airlines at the Dawn of a New Era”
Speech to the Canadian Airports Council
Calin Rovinescu
President & CEO
AIR CANADA
Thursday, April 11, 2013
Mesdames et Messieurs, bonjour. J’aimerais saluer particulièrement ceux parmi vous qui
sont venu de l’extérieur de la ville pour assister à la conférence et vous souhaiter un
agréable séjour à Montréal ou est situé notre siège social.
Also thank you Howard for that kind introduction. I should also welcome you back to
Canada and say how pleased we are that you are bringing the experience you have
acquired over the years in Hong Kong to Canada. Thank you also for continuing the great
work of Lloyd McCoomb in making Pearson more competitive – particularly on costs.
We and the rest of the industry look forward to your ongoing contribution in this regard.
I have to say I was pleased to see the topic for today’s talk – The Dawn of Another Era.
As those who have followed us over the last years are witnessing, this new era requires
some new moves. In fact, as I like to say, we’ve had to go gangnam at the risk of being
perceived as the old uncle at the wedding still doing the twist to the great amusement of
the younger crowd.
More seriously, this new era can be exciting if we, as a developed economy, can embrace
some of what is going on in the aviation industry in the emerging markets.
Context
While the majority of you are very familiar with Air Canada I would still like to briefly
update you on where we are at. As most of you no doubt saw, 2012 was a pretty good
year for our company.
First off, we were profitable. We posted a full year net profit of $131 million in 2012 – a
bottom line improvement of $380 million from the prior year. While it is the clearest sign
yet Air Canada is turning around, it is also an indicator that we still have work to do.
After all, $131 million represents a razor thin net profit margin and ironically is only 13%
of the $992 million we spent on airport and navigation fees in 2012.
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We generated record operating revenues of $12.1 billion, an increase of $508 million
over 2011. We carried nearly 35 million customers and had a record average load factor
of 82.7 per cent – something I like to note we did without increasing our fleet meaning
we were flying more passengers by being more efficient. Traffic growth surpassed
capacity increases in every major market.
Our strong performance was reflected in other important metrics too.
Despite some very tough negotiations over the past two years, we now have long term
collective agreements with all of our Canadian unions, which provide for greater
flexibility and better work rules.
We ended the year with cash and investments exceeding $2 billion, or 17 per cent of
annual operating revenue. Over the year we also reduced our adjusted net debt by close to
$300 million.
Our pension fund performance was top quartile for pension funds with similar investment
portfolios in Canada – indeed I believe top decile – and delivered a 14% total return.
This had the effect of reducing our pension deficit from $4.2 billion at the end of 2011 to
an estimated $3.7 billion at the end of 2012. And – pending final regulatory approval –
we expect another $1.1 billion reduction in the deficit through the changes we made to
our new collective agreements. And while the balance still remains significant, due to the
historically low discount rates, we will tackle it in a sustainable manner due to the
extension to our deficit payment arrangements recently agreed to with the federal
government, and supported by our labour groups
Air Canada also won numerous service awards and accolades in 2012. These included,
for the third consecutive year, Skytrax naming Air Canada the Best International Airline
in North America in its World Airline Awards. We were also the favoured airline of
nearly 80 per cent of respondents in the annual Ipsos Reid survey of Canadian business
travelers – the fourth year in a row our rating increased in this survey.
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In early 2013, Air Canada was granted four-star status in the Skytrax Airline Star
Ranking – the only North American network carrier to earn this distinction.
Most importantly, we carried our customers safely during 2012. In fact, our relentless
focus on safety was underscored by a result of “no findings” in our biannual IATA
Operational Safety Audit. This puts Air Canada among the top two per cent of world
airlines.
Taken together our financial results and numerous service awards reveal a vibrant airline
that is nimble and able to respond to industry dynamics despite celebrating our 75th. We
are indeed mastering the latest dance steps – no more twisting the night away at
weddings.
So as we have stabilized Air Canada, our focus has now shifted to moving the carrier
forward to make it sustainably profitable. To do this, we will stick with the same game
plan that has brought us this far, a game plan centered on pursuing four basic and easy to
understand priorities. And these are:
1. Leveraging our global network to build an international powerhouse
2. Transforming the business by maximizing revenue opportunities and reducing costs
3. Engaging our customers; and 4) Culture change
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Average is Over
Our priorities and transformation initiatives are about much more than just short-term
survival in this tough business. Thomas Friedman, the well-regarded NY Times journalist
and author of the “World is Flat”, has co-written a brilliant book entitled ‘’That Used to
Be Us’’ in which he argues that in the US “Average isn’t good enough anymore” Because of the Web, because of the immediacy of data, because of access to developing
economies and highly skilled labour, because of intense competition for higher education,
etc.
The phrase “average is over” is particularly pertinent to us and the transformation that we
are undertaking to secure Air Canada’s place as one of the world’s pre-eminent
international carriers. We have the geography.
Our country is ideally situated between the major regions of the world including Europe,
Asia, South America and the U.S. Flying times between Canada and parts of Asia, for
example, are shorter than for those through U.S. hubs like Chicago or New York – and
our skies are less congested.
We are convinced we can leverage this advantageous position to further build on our
global brand if we are to be able to continue moving forward with courage and avoid the
many outside forces that seek to keep us average. So how can airports partner with us to
ensure ongoing success with our transformation to our mutual advantage? Well, we have
already made great strides with our first priority which is to build Air Canada into an
international powerhouse. Already, Air Canada is the 15th largest carrier in the world and
we intend to leverage our global brand to grow even more.
We clearly have mutual interests. Since 2009 we have increased sixth freedom traffic
through our Canadian hubs by almost 120% with a 150% increase at Toronto Pearson
alone.
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In 2012 we announced a new route to Istanbul and a new Toronto-Seoul service. We also
upgraded our Calgary-Tokyo service to daily and said we would bolster our Asia-Pacific
presence by adding seven flights a week to Beijing. In fact, this summer we will have 11
daily departures to Asia or more than 43,000 seats a week crossing the Pacific. Edinburgh
and Venice will be added to the network this summer with the launch of Air Canada
rouge.
To support our international strategy, with its focus on high-growth economies and
popular leisure destinations, last year we undertook our largest wide-body expansion in a
decade by firming orders for five Boeing 777-300ER aircraft. The first will arrive in July
with the rest to be delivered by the end of 2014.
Moreover, our membership in Star Alliance strengthens our presence in Central America,
Europe, the Middle East, Africa and India. Additionally, our joint venture with our
partners United Airlines and Lufthansa is creating greater revenue opportunities across
the Atlantic. And regulatory approval in 2012 of our transborder joint venture with
United Airlines holds out new possibilities in the U.S.
But to grow we need strong Canadian airports that can act as hubs or support the feed
traffic essential to filling international flights and making them viable. This requires good
connection processes and the removal of any barrier to the easy flow of customers. We
need our airport partners to be ready to contend with IROPS and recover quickly. It will
not help, for example, if Canada gets a reputation as a place to avoid connections in
winter, because we have unforgiving winters
Additionally, since so much of our international traffic is now connecting traffic,
particularly to the US, we need airports to work with us to ensure USCBP processes are
as smooth as possible. Streamlining of baggage handling for U.S.-bound connecting
customers at several key hub airports is a great example of this and will help position
these airports as the prime gateways for North America, with the easiest transit and, for
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many international customers, among the fastest elapsed travel times. I urge other airports
to focus on implementing such measures for their U.S.-bound customers.
Becoming an international powerhouse in aviation, however, requires that Air Canada be
competitive not only on service levels but also that we be cost competitive and maximize
revenue opportunities, which is our second priority.
Over three years starting in 2010, we managed to wring well in excess of our $530
million target of annual benefits from our Cost Transformation Program.
We continue to seek savings company-wide through changes in such diverse areas as fuel
consumption, credit card processing fees and a renewed focus on On-Time Performance.
As an aside, I’m pleased to say that this concerted effort on OTP is already yielding
positive results. For example, our arrivals-at-14 performance rose 11 percentage
points during the first quarter and year-over-year for March alone, despite much more
severe weather in 2013, was up 17 percentage points. As I’ve said, average is over – and
that includes with respect to OTP.
More fundamentally, we have implemented fleet changes in response to new competition,
notably by deploying Q-400 aircraft in Western Canada and shifting the smallest aircraft
in the mainline fleet, the Embraer 175, to a lower cost regional operator.
The recent announcement of Premium Economy and higher seat density on our new
Boeing 777s is another step we have taken to improve efficiency.
Labour agreements now in place with our Canadian unions provide for important other
savings too, both through more efficient use of manpower and through new pension plan
arrangements. Other significant savings are anticipated from new third party maintenance
contracts following Aveos’s closure last year, resulting from both lower contract rates
and better turn around times..
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As I said earlier, in 2012, Air Canada spent $992 million on airport and navigation fees
making this a significant expense item and making us your largest customer. While there
is no doubt we get a great deal of value for this expenditure, airports must be at least as
vigilant about containing and reducing costs for airline users as we are. Airports must
continue to seek additional money through non-aeronautical revenue, especially retail
revenue, and I know that many of you have important initiatives in this respect..
Moreover, we must continue to press together for relief from government taxes and fees.
Everyone recognizes the harmful effects of these but no one seems committed to do
anything about them. Many countries of the world have very high direct and indirect
taxation of aviation, but Canada is among the worst. As each of you painfully know,
Airport improvement fees, airport rent, security surcharges, navigation fees – and the list
goes on – all serve to make airline tickets in Canada more expensive and now help drive
5 million Canadians a year to U.S. border airports. We estimate that Air Canada’s higher
taxes and fees represent about $1 billion more than if we operated as a U.S. carrier with
the same volume. And that is as compared to the U.S – let alone comparing us to airlines
in emerging markets.
Our final two priorities are engaging our customers and culture change. That we are
succeeding in these is attested to not only by our many customer-oriented awards but also
by the fact premium traffic grew 2.7 per cent in 2012, exceeding the rate of overall traffic
growth.
Clearly, however, the extent to which we can hope to succeed is in great part dependent
on airports, who are obviously essential partners.
A huge aspect of customer satisfaction is the airport experience. During the time they
spend at the airport our customers are also your customers. For this reason, airports must
ensure they are easy to use from arrival to departure. This includes ample parking or easy
connections, lots of kiosks, good way finding, high through-put, smart infrastructure,
reliable baggage handling, ready gate availability and efficient de-icing facilities and
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recovery procedures, especially with the many weather-related IROPs we experience
with Canadian climate conditions.
Hub Airports
As my main theme today is international, as you look around the world, there are a
number of hub airports that to my mind have got it right and they are reaping the benefits
in the form of traffic growth.
One of these is Amsterdam Schiphol. Despite being a country that is a fraction the size of
Canada with less than half the population, its major airport has become an international
hub with 51 million passengers last year – 40 per cent of that being transfer traffic.
Key to its success has been the creation of a retail offering that not only improves the
overall airport experience for customers but is also a major revenue generator. To
continue building its reputation as a world-class hub, Schiphol has strategically invested
in baggage systems to automate the movement of transfer baggage, making it much more
efficient.
Another airport to consider is Munich, whose passenger volume has increased 60 per cent
in ten years – again largely by growing connection traffic to 40 per cent of its overall
volume.
Munich has succeeded because it has partnered with its hub carrier to consolidate its
operation in Terminal 2 along with other Star Alliance Carriers. As a result, Munich’s
terminal infrastructure delivers amazing minimum connection times of 30 minutes. This
collaboration between airlines and the airport has given Munich an enviable reputation as
a preferred airport for customers to connect.
Finally, there is Dubai Airport, which has been growing fantastically and is now planning
a further expansion to increase annual capacity to 90 million from 60 million a year.
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Dubai is an example of what can happen when airlines, airports and governments work
together. Development of Terminal 3 provides a textbook study of how a terminal can be
designed to provide a hub carrier with the capability to efficiently integrate its network.
While all three of these airports have common elements, to be clear I am not advocating
more infrastructure spending, rather let’s focus on how they can define success .
They have concentrated on capturing a significant share of the highly-coveted global
connection passenger market by partnering with their home carriers to leverage
their international air service networks.
This is further enhanced by investing in premium services for frequent business travelers
and creating seamless transfer processes for both passengers and their baggage.
Further, they have worked with their government policy makers to create a landscape
that facilitates transit through their country’s hub airports. “Transit Without Visa” is
critical to attracting traffic and is one area where Canada must become significantly more
competitive. A case in point is that of Brazilians who do not require a visa to transit
through London, Paris, Dubai, Doha, Frankfurt, Zurich, Amsterdam, Rome
or Madrid. How can Canada’s air carriers and airports hope to compete for this market
sector when our visa requirements put us on an uncompetitive footing? And of course this
is one of numerous South America and Central America countries, plus Mexico, where
this is a serious problem.
Canada, its airports and its international air carriers have an opportunity to emulate these
leading international airports and be more competitive, but it will take cooperation
and unwavering determination on all our parts. To allow us to collectively capitalize
upon Canada’s natural geo-political advantages.
The rewards for doing this successfully go beyond just busier airports. As you are well
aware, good air connections are both a pre-condition and a catalyst for economic growth
in our globalizing world that translate into more business opportunities, more investment,
more jobs and even, dare I say, more tax revenue for governments. Certainly, the
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potential for economic growth is taken to heart by the three examples mentioned and by
many other global hubs as well.
According to recent studies, the total economic impact of the Canadian air transportation
industry is estimated at approximately $35 billion in GDP. Air Canada’s own
contribution is estimated at slightly more than 50 percent of all aviation activity in
Canada, including that of foreign airlines operating here.
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Non-hub airports
So, I think the potential for hub airports is pretty clear.
But non-hub airports are also benefiting from our aspiration to become an international
powerhouse as we endeavour to provide international access wherever feasible from
larger non-hub cities.– Thus we provide cities such as Halifax, St-John’s and Edmonton
with non-stop access to London, England while we serve both London and Frankfurt,
non-stop from Ottawa.
I should add that we would not be able to sustain these services for long if Canadian
bilateral agreements facilitated cannibalisation from opportunistic high growth carriers
from other countries who do not otherwise have an adequate home market.
We are often asked about our plans for Air Canada rouge, which in my view represents
an incredible opportunity both for our company and Canada’s airports. While rouge will
initially fly from Toronto and Montreal, our aim is to expand across the country. This
means that for airports that are not global gateways, there are still opportunities to attract
new international flights operated by rouge if the business case supports it.
While Air Canada rouge will have its own operating certificate it will be wholly-owned
by Air Canada and benefit from the Air Canada distribution network and loyalty
programs. Rouge is set to begin operating in July to Europe and the Caribbean using two
Boeing 767 and two Airbus A319 aircraft.
Our collective agreements permit rouge to grow to 50 aircraft and we aim to spool it up
quickly to have a fleet of ten rouge aircraft by yearend, 32 at the end of 2014 and 42 by
the end of 2015.
Rouge will give us the right cost structure on routes that our mainline aircraft cannot
serve efficiently enough. This will include new routes – such as Edinburgh and Venice
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this summer – as well as existing routes, including Athens and sun destinations like Punta
Cana, Kingston-Jamaica, or Liberia in Costa Rica. These are well-defined markets where
we have had a long-time presence and our brand is relatively well integrated.
Rouge is fundamentally different than earlier experiments in that its cost structure will be
lower primarily due to more flexible work rules embedded in our new labour contracts
and a substantially higher-density aircraft configuration.
For example, a rouge A319 will have 142 seats while our current mainline A319 with
business class has 120 seats.
To give you some idea of the on-board product, rouge will offer different levels of
service, with rouge and rouge plus on the narrow bodies and premium rouge on
international wide body flights. In-flight entertainment will be provided by wireless
streaming to customers’ personal devices.
Moreover, rouge will have an additional advantage over its predecessors because we
have combined Air Canada Vacations with rouge to create a much more compelling
integrated leisure group. This will give it a much higher profile and more heft in the
leisure market. We anticipate it will become a market leader where we have recently
lagged due to our mainline cost disadvantages. So, needless to say, I am very excited by
what we are targeting with rouge and the marketplace has been extremely receptive so
far.
Regional airports
Finally I should also note that we are sharpening our pencils to compete more effectively in
regional markets across Canada both from a customer service perspective and cost basis. For
example, this spring and summer we are increasing capacity on key regional routes in B.C.,
Alberta and the Northwest Territories. We are doing this by adding flights and also
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introducing larger Bombardier Q400 aircraft in these markets. In addition to increased
service, we are committed to providing extraordinary access by connecting these regional
markets and your airports to the rest of the world through our own network and that of Star
Alliance.
Conclusion
In conclusion, we are listening to our customers and working hard to engage them and
meet their expectations.
While our Skytrax Best North America International Airline and our IPSOS Reid
preferred airline for Canadian business travellers recognitions are gratifying, more
importantly they speak to the hard work and dedication of our leadership team, as well as
our other 27,000 employees. As an organization, we have made it clear that we will not
accept mediocrity. That, for us, using Thomas Friedman’s terminology “average is
indeed officially over”. We have strived to improve all aspects of our business over the
last several years, ranging from our aircraft refurbishment program, which made us the
first North American network carrier to offer lie-flat suites fleet wide, to a host of airport
and customer service and technology innovations. We have invested heavily in new
aircraft, new routes, a stronger network, a better airport experience, a leading premium
product. We will not permit legacy work rules, poor OTP or inadequate baggage, snow /
ice removal or customs processes to drag us back to “average”. The airlines of
Singapore, Malaysia and Beijing know that average is “over” as do the airports of
Amsterdam, Munich and Dubai. So should we. So should you. As pretty much our
collective successes are both intertwined and interdependent as partners.
Over two-and-half years ago, I gave a speech at the Banff Global Business Forum about
Air Canada’s aspiration to be a Global Champion, a leader in the world of aviation.
Whether or not we actually achieve that aspiration is frankly secondary. Rather, it is the
very aspiration to become one that really matters as well as the unbridled ability and
courage to operate in Beta – in test mode – all the time. Whether the testing is for a new
product for our leisure carrier, improved OTP or a new dance move – we will try it!
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In 2012, I was sincerely proud of the progress we made towards this goal and I fully
expect that we will continue to challenge and reinvent ourselves well into the future. And
if we don’t get the reinvention right the first time, by whatever is the highest standard, I
promise we’ll try again. And again.
Thank you for your attention and interest
Merci beaucoup de votre attention et je vous souhaite que cette conférence soit un grand
succès.
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