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CEO Interview - Moving With the Times

C. Rovinescu, CEO, Air Canada

Calin Rovinescu, Air Canada President and CEO, says airlines must respond to a rapidly changing market.

The financial crisis has taken its toll on airlines across the world. But is the worst over for Air Canada?

I became CEO of Air Canada in 2009, when the airline was in a very difficult situation. For Air Canada to thrive and prosper it needed to tackle four major areas at the same time. To begin with, we needed enough liquidity for whatever lies ahead in this dynamic market. We’ve managed that. We have $2 billion in cash as of the end of the last quarter, which is about 20% of revenues.

The second thing that we needed to improve was the customer experience. We had to engage with our customers in a meaningful fashion, especially our top tier customers. The proof that we succeeded in doing this is in what other people are saying about us. We have received numerous industry awards over the past two years, including designation as Best North American Carrier by SkyTrax and Best North America Airline for International Travel by Business Traveler. This shows that the soft aspect of the customer experience complements an excellent hard product that resulted from investments in new aircraft, lie-flat seats in business, and on-demand entertainment in all cabins.

We also had to achieve a culture change within our organization. That’s tough to do overnight when you’re 75 years old—as Air Canada will be next year. But we had to be more entrepreneurial and focused on results. I wanted us to behave more like the new boys on the block than an old legacy carrier. This is a continuous process and we will continue working to instill a new culture. Training is ongoing at the frontline and management level. Our employees are much more engaged and we are transitioning our managers into ambassadors for the airline. When you’re a 75-year-old trying to run with 15-year-olds—which is roughly the age of some of our competitors—you have to be in shape.

The fourth thing we needed was to strengthen our global franchise—to make Air Canada a champion for our country. We have to realize the potential of all the traffic flowing through our hubs.

When you put these four drivers together, you get favorable financial results. In 2010, we delivered $1.4 billion in EBITDAR earnings, an all time record. Our net income was $107 million, the first profit since 2007. We also operated 3,700 more flights and moved 400,000 more passengers in 2010 without adding a single aircraft to overall fleet numbers. So we’re far more efficient and have a good foundation on which to build.

Fuel price can ruin the best laid plans. How has it affected you?

Based on our estimates for this year, the increase in fuel prices will add an extra $800 million in costs. That will wipe out 60% of our 2010 EBITDAR earnings.

We’re hedging as much as we can. We are about 35% hedged for the next 12 months. We’ve also been working hard on incremental revenue and we’ve benefited from the exchange rate of the Canadian dollar. It’s still not enough though, and it will be challenging to meet last year’s results.

We have some very specific initiatives aimed at cutting fuel costs. As part of our environmental initiatives, we have a specific focus on reducing fuel consumption. The new aircraft are 22% more efficient than previous models. And flight operations have been improved to reduce CO2 emissions by 63,000 tons relative to 2008. This was achieved through a series of measures including improved engine washes, lighter containers, plastic pallets, and so on. However, the magnitude of the fuel price is such that you feel as if you’re always chasing your tail.

Is it better to have a fuel surcharge or to just adjust the fare to cover costs?

There is no doubt that it would be better to have a single fare that encompasses everything. But this is a challenge when you are operating across different jurisdictions with varying laws on how fares can be advertised. The fuel surcharge keeps us competitive in those jurisdictions where separating the surcharge from the fare is allowed. In this instance those who advertise a combined fare would be at a massive competitive disadvantage. But I also believe that showing all of these various components of the price of the ticket has helped to educate the public on the amount of third party involvement in the price of travel. So, in addition to fuel, there is transparency on the rates and charges which also continue to be a major drag on the industry.

Do you have the same aggressive cost-cutting programs in other areas of the airline?

We have a Cost Transformation Program (CTP), which was a priority I identified to turn the company around. It’s a company-wide initiative that has every single department looking at doing its job differently. It’s not a hypothetical exercise. Real cost is being taken out and real revenue added. We have about 125 specific initiatives and the aim is to make a sustainable $530 million difference annually, either through reduced cost or added revenue.

The CTP has been underway for about two-and-a-half years and we’re $475 million better off. The savings consist of non-labor cost improvements. The projects involve technology to replace manual processes with automation. We’re now concentrating on complex inter-branch processes within Air Canada so that we can all work together to cut out any inefficiency.

We’re also promoting the use of self-service tools and our customers broadly accept this. We have about 65% direct bookings through our website. And at one point during a brief strike by our ticketing agents in June, utilization of self-service tools to check in and make changes to pre-existing bookings increased to 90%. This shows that self service is an area of real opportunity to deliver better service and manage costs.

You’re exploring the possibility of launching a low-cost carrier (LCC). What will be different this time around given that many of the LCCs launched by the majors about a decade ago weren’t very successful?

Air Canada had a couple of experiments in the low-cost carrier area. Early in the decade—ahead of other legacy carriers—we introduced the concept of charging a base fare with the opportunity for the customer to add other service elements as an incremental process. This was the Air Canada Tango product, which operated on major long-haul domestic routes as well as to some holiday destinations in the United States. It worked well and we eventually integrated the concept as an Air Canada fare product on aircanada.com. Even today you can buy a Tango fare or a Tango-plus fare. These give you different benefits, including levels of Aeroplan mileage accumulation or different charges for change fees.

While Tango did not have a separate operating certificate, another experiment, Zip, did. Launched in 2002, it operated up to 12 Boeing 737s in the domestic market. In 2004, during the airline’s restructuring it was decided to wrap-up Zip over the next two years as the 737s were removed from our operations. We learned a couple of valuable lessons from Zip. You must have a critical mass of aircraft and you truly need to be sustainably low cost. That means having a low-cost business structure that can remain low cost and a workforce that embraces that culture.

Today, there are key leisure markets, including sun and secondary destinations in which an Air Canada cost structure would not be competitive. And I don’t want to offer an inferior product that would be inconsistent with the premium brand. So the solution we are exploring is an LCC.

Sounds like a response to Air Transat-type competition?

This is not a response to one carrier. There is competition all around. WestJet is a competitor in the domestic market.

We are also seeing competition from Asian carriers with lower cost structures. We are looking to serve proven markets that we should compete in, but which we cannot profitably serve as Air Canada. There are plenty of other carriers, such as Singapore Airlines, ANA, and QANTAS, doing or looking at doing something very similar. We have a great franchise and a strong customer base and we should have a greater presence in the leisure market. But you need the right cost structure and the right culture. So the LCC will be completely separate with its own management
and culture.

Alliances and partnerships have proven very successful for many airlines. But the competition authorities are not happy with the Air Canada-United deal for trans-border traffic. What is the way forward for the industry?

Anti-Trust Immunity is an issue that needs to be debated by the courts as well as experts within the industry.

This is a very competitive business. Even with record profits, the industry had a 3.2% profit margin last year. Aviation needs to build sustainable businesses and so some form of consolidation would be desirable. But there are political restrictions based on borders. We’ve seen some consolidation domestically within the United States and trans-border in Europe. We are working with Lufthansa and United in A++ to generate efficiencies in the transatlantic market.

This kind of partnership is good for the industry because it is an opportunity to make real margins. But it also creates more efficiency and more service that benefits consumers. And competition is still there—with Air France-KLM and Delta and many others.

We want to achieve similar efficiencies in a trans-border joint venture with United. While the US authorities are comfortable, the Canadian authorities are challenging it. We’re making our views known, which is that this is a proper step in the context of the industry’s development. It will provide lower fares, better connection times, and more route choices and is entirely appropriate within the US-Canada Open Skies agreement. And of course, there is massive competition in the market from American, Delta and others.

Is Anti-Trust Immunity (ATI) a second-best solution to real consolidation?

Aviation has always been a hybrid between being a driver of national economic policy and a privatized business. A level playing field across borders is desirable but it is complicated because of state ownership of some airlines, which gives those carriers different objectives. As long as that is the case, the playing field is not level. But it is a worthy aspiration. In the meantime, we need to concentrate on partnership structures that could deliver similar benefits.

Technology is also a big driver of efficiency. Are there any areas left where it hasn’t yet made its mark?
There are certainly enormous possibilities provided by technology. I’m a big believer in IATA’s Checkpoint of the Future. That has the potential to marry technology with new processes. And the paperwork side of the technology question shouldn’t be ignored. There would be a massive technology cost if you just concentrated on screening and detection equipment at airports, for example. So I would hope that we can move forward by making much better use of passenger information through trusted traveler programs as a focus.

Looking ahead, what are your hopes for the airline?

We are among the oldest airlines in North America. That means that we’ve managed to survive. The question now is can we go from survival to sustainable prosperity? I think we can but first we have to shake off some of the legacy shackles. That doesn’t mean we abandon the legacy image. We’re a great airline because of our legacy. But we can’t operate the same way for another 75 years.

For more information visit: www.aircanada.com

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