An External, Internal and Financial Analysis of Air Canada

Strategic Management | BUS 800 - 021

Submitted by:

Group Members: Arman Mohammadi Sharlene Morgan Steven Palazzo

Neeraj Saini Abiman Sureskumar

Submitted to:

Professor Timothy Pervin

Submitted on:

December 9th, 2016

Ted Rogers School of Management

Ryerson University

Air Canada – External Analysis

Airline and Aviation Industry

1.0 PESTEL Analysis 1.1 Political Environment

o Transnational Companies - the airline industry is a mature industry with big players. Apart from the two major players, Air Canada and WestJet; the other players are companies with head offices outside of Canada and as such compete on numerous routes. These foreign- owned companies are big enough to subsidize routes and recoup in other areas. They also can spread their overhead cost to numerous departments (economies of scope). o Transfer Pricing - most foreign invested companies use transfer pricing as a means to ensure that most of the profits are realized favorably. Unfortunately, the Canadian government takes issue with the companies who decide to transfer their profits to another country if the profits are realized in Canada. It believes that these profits should be taxed in Canada and not in a host country where tax benefits can be taken advantage of. o Taxes - the airline industry is heavily taxed. The taxation is for normal custom taxes up to environmental taxes for air pollution. All these taxes are passed to consumers and reflected in a higher priced fare.

Implications on Air Canada - Air Canada’s head office is in Canada, unlike other international airlines and so it has to pay higher taxes and fees. This will impact their profits and their capacity to expand beyond the domestic market. In addition, Air Canada’s main route has been its domestic market, therefore if seat capacity should decrease, either the company has to expand to other markets or feel the pressure in its gorged profits. It added baggage prices to a mix of non-standard prices to offset the taxes it pays to the government. However, this is being met with mixed feelings by customers. 1.2 Economic Environment

o Cloud Services - due to technological changes, most airlines have moved from physical flight bookings and check-in services to online bookings and check-ins. This has saved them on operational costs. In addition, electronic communication using messaging systems to solve customer problems has become standard across the industry. o Impact of Fuel Prices - the economic downturn in 2008 and the fluctuating prices of fuel has caused a tightening in the airline industry leaving the major airlines fighting for passenger seat capacity and using alliances and partnerships to ensure capacity. To this end, many carriers went belly-up in the market (Zip and Zoom Airlines). The low cost of fuel has really assisted many carriers with lower operational costs and thus more profits.

Implications on Air Canada - Air Canada has to compete with companies on certain routes that can provide bargain prices without the hassle of higher overhead due to higher taxes and environmental fees. With new entrants using secondary airports, they cut into the profits of the bigger players in the market. Air Canada has benefitted from low fuel prices that have increased profits. However, with the new Organization of the Petroleum Exporting Countries (OPEC) deal, the crude oil prices are set to rise. The coloration between crude and fuel is already established as an increase in crude oil normally means an increase in fuel prices which raises operational costs.

1.3 Social Environment o Safety - safety is highly regulated under aviation regulation. The Canadian Transport

Agency (CTA) is the regulator that monitors closely the safety measures put in place. This is a huge factor in transportation services and in the airline industry in particular. There are strict regulations in Canada on safety from arrival to the airport to destination. Many airlines try to differentiate themselves with this feature. Planes are routinely checked at the airport after every flight. This impacts the bottom-line as planes need to be physically fit to fly and also ensure the safety of their passengers. o Shift in Customer Demand - customer demand has shifted towards faster service and quick response. The introduction of online sales, third party seat sales, and mobile services, have greatly improved the way customers interact with air transportation. Customers purchase their own tickets instead of going through an agent, pay for baggage fees and check-in online before entering the airport.

Implications on Air Canada - Air Canada has to pass through tough regulations in safety standards to compete with other carriers. It is these standards that help Air Canada to differentiate itself from its competitors to be named in the top 2% in North America. In addition, Air Canada has already established online and mobile presence for booking, check-in and monitoring of flights although WestJet also has a significant presence in these areas as well. 1.4 Technological Environment

o Rapid Change - the Airline industry has to keep up with new aerodynamic technology to get passengers to their destinations in a timely manner. This means that airlines are important investments. These airlines compete for the most recent technologically advanced planes from the airplane manufacturers. In addition, many companies have infused technology into their processes such as booking and check-in services. They have also adapted to mobile services providing customers to interact on the go.

Implications on Air Canada – Air Canada has included aerodynamic technology to differentiate itself in the market. Boeing, an airplane manufacturer, has designed and built Boeing 787 planes that Air Canada has configured to include more economy passengers than first class ones. This vastly increases the number of seat sales as most customers buy economy instead of first class. Air Canada has also infused technology within their internal systems to meet customer demands. 1.5 Ecological Environment

o Weather Patterns - the industry is dependent on good weather to make profits. Therefore, weather monitoring is imperative to ensure that the staff and passengers are safe. o Environmental Sustainability - airlines produce pollutants in the air when used in transportation. Due to this fact, the Canadian government charges an environmental tax on all flights. This environmental tax is passed on to customers.

Implications on Air Canada – the environmental tax impacts Air Canada as the fares are not competitive with other North American companies. The overall cost of the airfare to customers is higher than some of its rivals (Delta and American) and thus affects its bottom line.

1.6 Legal Environment o Environmental Regulation Act - all airlines in Canada are charged an environmental tax

and must adhere to all regulations. Many companies self-monitor and use their governance and Corporate Social Responsibility (CSR) structure to lower their carbon footprint. o Canadian Aviation Act - this regulation governs the parts, service of aircraft, licensing of aircraft, licensing and training of airline staff, operations of the air as well as airworthiness. Another newly added piece of legislation is the opening up of the airline industry to accept foreign airlines to compete with the Canadian airlines in the Canadian market. Foreign airline ownership has now increased from 25% to 49%.

Implications on Air Canada - the Act and regulatory oversight body make it expensive to operate an air carrier in Canada as there are heavy start-up costs. In addition, Air Canada has to compete with new discount carriers planning to enter the market (such as Southwest Airlines) due to favorable increase in acquisition shares. 2.0 Industry Economic Traits 2.1 Implications for Air Canada 3.0 Porter’s Five Forces of Competition 3.1 Industry Rivalry

o Concentrated Competition – the competition between the businesses in the airline and aviation industry is very focused and concentrated. This can be attributed to the fact that the competition from cheaper airlines on traditional carriers is enormous. There are also higher cost carriers who serve as competition in a different way as their primary point of differentiation is through their superiority in customer service. Furthermore, more traditional businesses in this industry will have more variety with regards to where consumers can fly to and depart from. Therefore, although the traditional carriers possess most of the market share in this industry; there is no doubt that the smaller carriers are closing the gap through offering flights of lower costs and concentrating on popular flights in the market. This variable is a huge detractor to the attractiveness of the airline and aviation industry because of the fact that the high number of smaller carriers in the industry who are entering the industry with aggressively low prices are making the competitive rivalry in the industry very high.

3.2 Threat of Substitutes o Smaller Airline Carriers – as stated above, there are numerous airline carriers within the

airline and aviation industry that are entering the industry by using a penetrative pricing model where they look to attract consumers with low prices. Consumer trends today in the airline and aviation industry also have began to focus more on finding cheaper flights than comfort due to the high prices that most traditional carriers display. The smaller airline carriers have strictly aligned themselves with the most popular consumer trend which is cheaper airline flights and together; it is changing the attractiveness of the industry. This variable has a negative impact on the industry because consumers are becoming more cost

sensitive which lends proof to the idea that the smaller airlines have a higher chance of success when going up against the larger, more traditional airlines in the industry. o Other Modes of Transportation – substitutes that consist of other modes of transportation such as cars, boats, trains are also less favourable transportation methods that consumers look to use depending on the distance to their destination, the time it would take to arrive at their destination and the cost of reaching their destination by car, boat or train. However, there exists no mode of transportation unlike air travel. Air travel will always be most popular choice of transportation because it is the fastest mode of transportation and the most comfortable. This variable would not hinder the attractiveness of the airline and aviation industry due to these reasons. This variable actually shows that the industry is very attractive because air travel is the most popular mode of transportation. The impact of this variable is low because most people prefer flight as their preferred mode of transportation for mid to long travel times.

3.3 Threat of Entry o Government Restrictions and Legislations – within the airline and aviation industry, there

exists a plethora of government rules, regulations, restrictions and legislations that decreases the impact of new entrants to the industry. For example, in Canada, there exists the Canadian Aviation Act that governs the parts, service of aircraft, licensing of aircraft, licensing and training of airline staff, operations of the air as well as airworthiness. Another newly added piece of legislation is the opening up of the airline industry to accept foreign airlines to compete with the Canadian airlines in the Canadian market. Foreign airline ownership has now increased from 25% to 49%. Furthermore, Canada also has their Environmental Regulation Act where all airlines are charged an environmental tax and so firms in the industry are always conscious of the importance of lowering their carbon footprint. Therefore, this variable makes the industry somewhat attractive because although there are strict legislations firms must follow in certain countries; the threat of new entrants is moderate for the same reason. o Capital Commitments – any firm entering the airline and aviation industry; a huge capital comment is required to be a successful player in the industry because of the extremely high costs of purchasing aircrafts, paying overhead costs and salaries. Therefore, this makes entering this industry less attractive due to the massive capital commitment that would be required for any firm thinking of joining the industry.

3.4 Supplier Power o Aircraft Costs, Fuel Costs and Labour Costs – the three main inputs that firms are at

competition for with each other in the airline and aviation industry are aircraft, fuel and labour. The price of fuel is linked to the fluctuations in the global market for oil which can be an extremely volatile market as oil is a commodity. Labour costs are associated with the relationship between firms and the union. Unions attempt to collectively bargain and receive benefits and other concessions from airline companies which can drive up costs for a firm in the industry. Finally, firms within the industry obviously need aircrafts and are bought as a sales transaction or on a lease basis. The two biggest suppliers of aircraft requirements are Airbus and Boeing. The power of the suppliers is very high with regards to aircraft, fuel and labour costs. This does not bode well for the attractiveness for the

industry as these inputs are all costly and require massive commitments from firms in order to be successful in the industry.

3.5 Buyer Power o Price Sensitivity – within the airline and aviation industry, there is a substantial market

segment that isn’t divided by any demographic. As in, the consumer market for this industry consists of people of all ages and all nationalities that can afford a flight. Therefore, the large consumer segment decreases buyer power due to the fact that the effect of losing one customer to any airline company is marginal. The consumers in this industry are highly price sensitive as their main priority is securing flights for the lowest possible price or for the best deals that include lodging, food, etc. Therefore, buyer power is at a moderate level within this industry. However, this does not bode well for the attractiveness of the industry at least for the larger firms because of the fact that there are numerous smaller airlines entering the market offering competitively low prices which means that the larger and more reputable firms are taking a hit.

3.6 Conclusion o To conclude, the airline and aviation industry can be classified as somewhat to not very

attractive to firms who wish to enter the market. This is due to the plethora of reasons outlined in the five forces analysis outlined above. There is a high supplier power which means suppliers have leverage over firms in the airline and aviation industry. Furthermore, the buyers in this industry also have leverage over the firms because they can constantly compare prices and look for the best deals that are tailored towards their personal needs. There are huge barriers to entry into the market with the numerous legislations that airlines are subjected to. Furthermore, firms in the industry also require huge capital investments to enter. There is a high degree of threats by substitute firms who are entering the market with competitively low prices. This has also resulted in a higher intensity of competitive rivalry between firms in the industry.

4.0 Driving Forces o Technology Advancements - the advent of new aviation and information technologies has

impacted the airline industry in a positive way. Airline companies are using these technologies to control their fuel, and operating costs, thus improving their financials. The creation of online travel websites such as expedia.org, and Travelocity have increased publicity for airplane companies. o Oil Prices - fluctuation in oil prices influences the industry’s operations. Jet Fuel is a valuable commodity for all airline companies and fluctuations in its price may affect the company’s financial performance (i.e. bottom line) positively or negatively depending on the direction of the change. Increase in oil prices would increase expenses, and reduce profits for the airline companies, and increase airfare for passengers. Decrease in oil prices would have the opposite effect; that is, it would reduce expenses, and increase profits for the airline companies, and reduce airfare costs for passengers. Given the heavy reliance on fossil fuels, oil market has impacted the airline industry for decades, and will continue to affect the industry until better, cheaper fuel efficient technologies are available. o Environmental Concerns - many consumers are becoming more conscious about the environment. This trend has forced companies in the airline industry to find ways to reduce

their carbon footprint, as well to invest in corporate social responsibility programs. Such programs are becoming popular in many industries. The green trend is also putting a financial burden on the airline industry due to the large amount of environmental tax imposed on the airline companies. To avoid paying large amounts of tax, airline companies are making their planes fuel efficient by installing fuel efficient engines. Some wealthy companies are disposing their old planes, and using the money to purchase new fleet of planes that consume less fuel. The environmental regulations are driving the industry towards green alternatives. o Customer Needs and Wants - customers are searching for companies that offer tickets for a cheaper price. This is creating more competition among airline companies in the economy class, which is driving industry growth. Changes in population and customer travel activities are also affecting the growth in sales for airline companies.

Implications on Air Canada - Air Canada needs to ensure that it has prepared mechanisms to handle the above factors. The company has included aerodynamic technology to differentiate itself in the market. The company ordered 787 custom planes from Boeing which were configured to include more economy passengers than first class ones. This vastly increases the number of seat sales as most customers buy economy instead of first class. Air Canada has also infused technology within their internal systems to meet customer demands. These planes will not doubt give company an advantage over its competitors. In regards to environmental concerns, the company’s new fleet of planes ordered by Boeing are more fuel efficient. These planes will consume less fuel and will reduce the operating costs for the company in the long term. 5.0 Strategic Group Map

o With the introduction of Air Canada’s most advanced line of airline carriers known as Rouge, the company has furthered distanced themselves from the competition. o The company’s own advanced network, frequent flyer program, world class operational expertise, and most importantly, their long-term agreement with Bombardier has Air Canada sitting at the top of the airline and aviation industry within Canada. o Their competitive advantages have enabled the company to achieve superior cost efficiency

and to be able to offer their customers the best selection of available services. However, the company is known for a quite poor overall customer service record. This potentially can be contributed to the company’s aggressive push toward international expansion. o Air Canada has developed an action plan to expand into new international hub routes and have also added 21 new locations since the summer of 2016. The company has admitted that their strategy for international expansion has hurt their overall financials, and ultimately led to quite a large deficit being observed in the equity section of the company’s financial report. This is why Air Canada received a lower ranking on overall customer satisfaction because of their loss of focus toward customer service during the aggressive targeting of the international market.

Implications on Air Canada o To contrast, Porter Airlines is regarded as being one of the most customer friendly aviation

companies within Canada, which is why they are positioned much higher on this ranking. However, they are still quite small, and do not come close to having as much market share within the airline and aviation industry in Canada compared to Air Canada and WestJet. o WestJet neither lacks nor excels in either cost efficiency or customer satisfaction. Their customer service records are estimated to be only moderately better than Air Canada, but they currently lack definitive strategy on how to increase their market share within Canada. They do not possess key competitive advantage that differentiates them from Air Canada. WestJet primarily focuses on price when competing with Air Canada, which is not a sustainable strategy in the long-term.

6.0 Key Success Factors o Cost Management – as stated in the Five Forces Analysis, there are three main inputs that

will drive up total expenses for firms within the airline and aviation industry. Aircraft, fuel and labour costs are the three main inputs for firms in this industry. Maximizing revenue by implementing competitive pricing structures is made even more crucial with smaller airlines entering the industry offering competitively low flight prices. For example, WOW Air recently introduced flights to Iceland for $99. Therefore, sustaining a profitable customer segment is a crucial factor for firms within the industry. In terms of cost management of the three main inputs, focusing on price hedging during volatile times and maintaining fuel procurement can be beneficial in the long-run. o Strategic Alliances – strategic alliances are a huge success factor for firms within the industry because successful, large airline companies have little trouble ensuring a dominant market share within their own local markets. Establishing a global presence can be difficult because gaining a market share in other major regional markets where customer loyalty lies with other companies can be difficult. Therefore, the value of strategic alliances in other markets outside your own can help open up a totally new customer base. Strategic alliances can also help build competitive advantages over other firms in the industry. o Service Promotions – service promotions can ensure existing customers stay loyal to your business. Service promotions can be a way to enhance the experiences of loyal flyers and can be focused on keeping regular customers as well. Services such as ease of booking, flight type, seating type, class of service offerings can ensure continued customer loyalty between high-revenue customers and a firm in the airline and aviation industry. Simple services can go a long way in being a major critical success factor.

6.1 Industry Strategic Impact o It is difficult to have positive cost management within this industry because of the fact that

fuel costs are fluctuating with the outside oil commodity market. Furthermore, labour costs are compounded by the fact there is a union to collectively bargain with. Finally, aircraft cost and maintaining aircrafts is a costly ordeal as well and so cost management can prove to be difficult for firms in this industry. These costs have a huge impact on the industry and can be the difference between success and failure for airline companies within the industry. o Strategic alliances are a huge positive for firms within this industry because it makes entering global markets easier. This can hold true especially for airline companies in diverse countries such as Canada where there are people from all over the world who would

love the opportunity to fly to the respective places where they were born. Countries whose population consists of a high number of immigrants will find flights to countries such as Japan, China, and India very popular. o Finally, service promotions can help in keeping customer loyalty to your brand or business. This is even more imperative in the fact that are numerous smaller airlines coming into the market offering aggressively low prices in an attempt to attract customers. Therefore, the importance of service promotions can help a firm in the airline and aviation industry build customer loyalty and build a great reputation for their brand.

7.0 Industry Life Cycle o The airline and aviation industry is entering the maturity phase of the industry life cycle.

In this stage, creating competitive advantages is primarily through cost efficiency. Cost efficiency through economies of scale, lower wages and lower overhead costs are key success factors for firms within this industry. It is clear that the airline and aviation industry is entering the maturity phase of the industry life cycle. This is because in this industry there is an increase in focus of the leading firms on the mass market which creates a new phase of entry as new firms enter the market creating niche positions for themselves within the industry. This is clearly evident in the airline and aviation industry as new airline companies such as WOW Air are entering the market using low prices as their niche and trying to attract consumers with their penetrative pricing style which has them entering the market offering artificially low prices to attract customers and then reacting to the market in the long-term. Furthermore, the airline and aviation industry is clearly in the maturity phase when you look at the fact there is a mass market leading to replacement buying with more options in the market. Customers in this industry are also knowledgeable and price sensitive so they look for the best deals and compare airlines. These are some of the strategic implications of the airline and aviation industry being in the maturity phase of the industry life cycle.

8.0 Company Outlook The airline and aviation industry is constantly growing and expanding. Within Canada,

there are quite a few key players, such as Air Canada, WestJet and Porter Airlines. All of these companies within the airline and aviation industry contribute to the Canadian airline market place. Air Canada is the strongest player within this market and faces high levels of competition from Porter than it does from WestJet. Air Canada has focused on international expansion and establishing their brand as a rising key player internationally. However, they have also created their Air Canada Rouge line to directly target the Canadian marketplace.

Porter Airlines and WestJet are both taking steps to position themselves higher up in an

attempt to challenge Air Canada in hopes of becoming Canada’s main provider for airline services. Nevertheless, both companies face a stiff uphill battle because of how well Air Canada has been able to establish their brand as Canada’s top choice for airline services. Air Canada maintains a select few of key competitive advantages over their domestic competition, which includes the contracts they have negotiated and arranged with the major airports across Canada which provides them with the most premier landing time slots and faster and easier access to the passenger terminals. To further distance themselves from the competition, Air Canada formed a key partnership with Boeing, a company that is regarded around the world the premier manufacturer

of airplanes and aviation equipment. Technology is constantly changing, and new disruptive technology can either be very successful or cause significant limitations for any company, no matter what their market share may be. Air Canada’s partnership with Boeing signified how Air Canada as a company is aware of how disruptive new technology can be, especially within the airline and aviation industry. Air Canada was included new aerodynamic technology, with the assistance of Boeing, to differentiate themselves in the market, and has also implemented the 787’s series of airlines Boeing developed into their line of airplanes. These 787 planes provide more economy seats than traditional airplanes do, which serves as an advantage for Air Canada, since the majority of customers fly on economy class compared to first class within Canada.

While Air Canada has developed a very strong brand reputation and implemented some of

the newest aviation technology and equipment into their airline services, they are not excluded from having problems. The financials of the company appear to be one of the major weaknesses of the company. In fiscal 2014, a large deficit was reported in the equity section. This deficit was due to the fact that total liabilities of the company exceeded total assets at the end of the fiscal year. This deficit resulted in a number of significant accounts, such as total shareholders’ equity and return on equity, ending with negative values for the end of fiscal 2014. Additionally, the return of capital and employed and the debt-to-equity ratios also had negative values because of the deficit. In addition to this, the next major weakness that is hurting the company’s iron grip over the airline and aviation industry within Canada is their recent pattern of poor customer service records. Air Canada has received an alarming rate of customer complaints over the past decade, which has resulted in a loss of trust in the brand and their loyalty toward their customers. The most important thing for Air Canada is that they do not rest on their laurels and assume that they will always be at the head of the pack for airline services within Canada. They must continue to improve upon their current competitive advantages and strengths, and also constantly consider new strategies and tactics to maintain their profitability, and especially, their strong brand reputation. They must correct the major weaknesses that are hindering the company’s potential growth by developing suitable strategies that will address these issues, and implement a solution on how to properly remedy the problems at hand.

Air Canada – Internal Analysis 9.0 Present Strategy

o International Expansion - Air Canada employee engagement and have taken steps to expand into new international transportation hub routes and have added twenty-one new locations since summer 2016. They have admitted that it has hit their bottom line but has met expectations. In terms of whether this strategy is working or not; although these routes

enable them to provide continuous service from Canadian based airports, it would also increase operational expenses to their overhead. One such expense is landing fees. In addition, they would be competing against those national airlines for premier times slots, terminals and route domination. If the Air Canada Management team can ensure that forecasting measures and the benefits of revenue per seat weighs favorably against the operational cost per flight, it could work. By way of caution, Air Canada has to first address its debt issues if it needs additional capital to embark on this expansion. o Customer Engagement - Air Canada has stated that they have improved on-time performance, introduced frequent flyer rewards (Air Canada Altitude), implemented a customer relationship management system, improved onboard service and increased premium agent services and lounges at airports. In terms of whether this strategy is working or not; although the above is currently in place, there needs to be a process makeover to ensure that “before-sales” to after “sales service” are superb. There is still a disconnect especially with after–service care. Hence, deliverables should be tied to employee performance and lead times measured against benchmarks. This is necessary to examine improvements. There needs to be a sense of customer–focused attitude from employees throughout the organization so that the process flow becomes seamless. Employees should be trained on the overall vision and specific customer service process areas needed. In addition, due to the fact that there are great current retention levels for employees, the learning curve will not be vast. o Culture Change - Air Canada has measured its culture through employee surveys, stable union agreements, employee stock options, and Canada best employer status. They feel that the company is improving and a change is currently occurring at the company. In terms of whether this strategy is working or not, the answer is a resounding no. The above are good methods to begin the conversation. However, measurements in customer service surveys in key areas are also important. One such area of critical importance is in baggage services. Customers want to know that their belongings have arrived safely. With expanded service, this problem will be compounded if not addressed. In contrast, WestJet, its main competitor prides itself on being customer – focused. Employees have such a strong sense of identity with the company that there are mutual adjustment teams in their customer service department and not a traditional hierarchical structure (WestJet 2015 annual report). o Cost Reduction and Revenue Generation - Air Canada believes its Rouge line of carriers are competing successfully in the domestic market due to the new technologically advanced fleet, its access to Air Canada network, frequent flyer program and operational expertise. The projection is that it will outstrip the main Air Canada plane by a 25% reduction in Cost Per Available Seat Mile (CASM). They have implemented a revenue management system which changes the basic requirements of fare pricing. In addition, they have a long-term agreement with bombardier that has staggered termination dates to aid cash flow. In terms of whether this strategy is working or not, the answer is a definite yes. The management capabilities are evident in the deals brokered with Bombardier, the diversification of the fleet and the procurements and union agreements reached. On the other hand, internal process flows need improvement in order to ensure that from deliverables to tasks, customer-centred approaches are used. Therefore, employee engagement and culture change are imperative to their growth strategy.

10.0 SWOT Analysis

Strengths o Brand recognition. o Good customer base. o Strong alliances. o Top in safety. o Advanced technology. o Human Resources.

Weaknesses o Susceptible to fuel fluctuations. o Poor customer service. o Company culture: bureaucratic system. o Subjected to unusual weather patterns. o Human Resources. o Unhealthy financial state.

Opportunities o New markets. o Grow customer base. o Customer service improvement. o Culture change.

Threats o New low fare private airlines launched:

Inner Jet and Jet line. o More competition as government increased foreign investment ownership in the industry (from 25% to 49%).

10.1 Strengths

o Brand Recognition - Air Canada is one of the fifty top known brands around the world and the premier brand in Canada. Although it is the recognized domestic brand, there are not a lot of competition in the domestic market. The main choices currently are Air Canada and WestJet. They also have premier landing time slots and terminals at the major airports in this market. Air Canada can capitalize on this for its expansion plans as a connector to major arteries in Canada. o Good Customer Base - Air Canada has a healthy customer base in North America. This is mainly through the increase in their on-time service performance and increased destination services. As a result, Air Canada was the recipient of the Skytrax four-star rating and remains the only four–star carrier in North America (Audited Financials - AC 2015). However, they need to improve their customer service to retain and gain new customers. o Strong Alliances - Air Canada has made strategic alliances with other airlines for connecting passengers to their destination. Air Canada is part of the Star Alliance network since May 1997. This network provides connectivity, collaborative and coordination serves between member airlines to ensure that passengers have a smooth transportation experience. This is a positive for Air Canada as this alliance membership enables its clients to have connectivity to any major destination in the world. Another advantage of this alliance is that Air Canada can leverage its membership using connector tactic to receive customers from other airlines to connect in their expanded destinations. o Safety Standard - Air Canada meets the IATA and IOSA safety standards for over seven years and is currently ranked in the top 2% for safety in North America (Audited Financials – AC 2015). Air Canada can use this as an advertising tool to gain new customers. o Advanced Technology - New Fleet: Air Canada has received Boeing 787 airbuses with more economy capacity configuration. These planes are technologically advanced with TV’s on the backs of seats for in-flight entertainment and travel tracking. The new technology that results in increasing travel times and convenience for customers is also a good selling point for the carrier.

o Advanced Technology - Process Technology: Air Canada has implemented customer relationship management systems to assist and interact with customers regarding reservations, check-in, flight monitoring and easy switch options. This easily available online and on mobile devices. Another technology introduced is the revenue management system that configures fares based on origin and destination rather than individual flights. The investment in these technologies are good as it demonstrates the commitment and improvement that Air Canada is making to implement their growth strategy and diversify streams of income to their profit structure. A third feature of Air Canada’s use of technology is offering free Wi-Fi service to its customers on certain routes. This is an additional bonus that demonstrates that Air Canada recognises the need for customers to communicate and connect during flights. o Human Resources - Air Canada is a unionized company with an average ten year commitment from unions. Hence there is a low turnover rate of employees and tenure of employees are normally over a long term period. With long term employees, plan and process flow should be easily streamlined. It may be difficult, however, to change culture and infuse new processes.

10.2 Weaknesses o Fuel Fluctuations - the price of crude oil and fuel prices coincide in price. When oil prices

are low, so are fuel costs and it lowers the cost of operational expenses, which enhances profits. However, the opposite is true. With the recent OPEC freeze in production, and therefore increase prices for oil, the fuel prices will then increase and thus increase operational expenses for Air Canada. o Poor Customer Service - there are numerous customer complaints about Air Canada customer service especially due to lost baggage and other senior services. The main complaint is that customers are led on a wild goose chase across departments without answers leading to frustrated customers and unwanted media coverage. Air Canada needs to address this promptly. This will have a huge impact on the brand reputation, sales and ultimately profits. o Unionized Human Resources - this means that Air Canada pays more for wages than its counterparts. This is an issue for the company as it affects profits. Secondly, with a unionized system, there is a seniority hierarchical structure that stifles star performers and resists change. This hurts the brand as employees are promoted by their age and not by performance. If employees are promoted based on ability instead of seniority, employees with talent would promote the brand and ultimately increase the profits of the company. o Company Culture - Air Canada has a functional structure with high level of central control by CEO and management team. This normally causes bureaucracy in departments, normally classified as inward looking and does not function as a whole to assist external clients. Coordination and cooperation becomes a problem, there is little to no cross functional integration. The CEO and Management team has to lead in the new culture of integration, cooperation and coordination in order to differentiate themselves successfully in the international market under their global expansion plan. o Unhealthy Financial Outlook - Although Air Canada’s revenues have increased over 2014, there is still a huge increase in liabilities on the books. The debt to equity ratio is -9.81. This means that Air Canada does not have enough leverage and cannot safely use its debt as a source for its financial needs. Shareholder equity is also very small. Air

Canada can still operate as they have cash flow but need to lower their debt in order to attract new investment (see financials).

10.3 Opportunities o New Markets - Air Canada can expand into new markets such as India, China and Japan

as there are large populations of these nationalities present in Canada. However, Air Canada would now be competing with other major airline for premier landing areas in these airports. In addition, the operational costs would increase as Air Canada has to pay landing fees into all these major routes. If the CASM and Revenue per Available Seat Mile (RASM) works out to be greater than the landing fees charged, it will be beneficial for Air Canada. o Grow Customer Base - with the new routes and connections to the regular Canadian routes, Air Canada can expand their customer base through connecting traffic. This will enable Air Canada to diversify their core capacity from mainly capacity seating on planes to traffic connection capacity. It would also reduce their operational fuel cost per flight as the costs would be spread over longer distances. o Customer Service Improvement - Air Canada needs to set targets and organize their customer service processes. Priority needs to be placed on customer interaction and after sales support. This needs to be monitored and tied to performance measurements and job roles. Air Canada needs to ensure that their departments from sales to after sales service is customer focused. o Corporate Culture Change - there needs to be a culture change within the organization from hierarchical to a leaner organization. This is particularly difficult to overcome in a unionized environment. However, if the management team initiate this as a collaborative approach with the union, new measures may be introduced and targets set to achieve a turnaround within the company.

10.4 Threats o New Entrants - with the new change in ownership legislation passed in November 2016,

foreign investors now have the opportunity to invest in new airline in the domestic market. The foreign ownership threshold has been increased from 25% to 49%. Jetline and Inner Jet, smaller domestic airlines have been granted special privileges to launch. They are the first recipients of the new foreign investment. With new entrants, there is the competitive price wars that serve to suppress the newcomers and keep dominance. Air Canada already has a discount airline Rouge that competes against Porter, another private discount carrier. o Competition - smaller airlines entering or competing in the market will compete for domestic passenger transportation, using smaller airports and low fare deals to drive down passenger fares. Although Air Canada has its rouge discount airlines, it will still face higher cost for landing fees at Canada’s premier airports compared to smaller operational fees for the discount carriers. Moreover, with expanded markets, there are also greater competition from indigenous airlines on fares and premier landing slots and times.

11.0 Competitive Strength Assessment

o This competitive strength assessment shows that Air Canada has the highest score of 4.0 when compared to its main competitors. Porter has the second highest score at 3.0 and WestJet is last with a score of 2.3. o With regards to its long-term strategy, Air Canada has placed a large emphasis on international expansion, cost reduction and revenue growth. They’re currently doing a lot to differentiate from WestJet and Porter because these two companies are relatively lower in those two key resources. o Air Canada has a higher rating than both competitors in culture change but the main source of competition lies in the customer engagement section. On a scale of 1-5, Air Canada and Porter have ratings of 0.6 and WestJet has a rating of 0.4 in that section. o To conclude, Air Canada when compared to WestJet and Porter does not have to do much to differentiate and is largely ahead of its two main competitors with regards to competitive advantages against them. o WestJet is the weakest competitor to Air Canada according to the competitive strength analysis conducted because although it ranks as a top airline within Canada; its main competitive advantage lies in its “Care-Antee” policy, whereas Air Canada and Porter can mitigate that loss by their own competitive advantages. o WestJet is an underdog in the industry because they depend on its policy to boost their growth potential which is something that they aren’t heavily involved in currently. o Porter has established themselves as a key player within Eastern Canada and major cities within Ontario. They rely on cost efficiency to gain more customers with high service. o Porter’s success has come from their marketing and positioning (Billy Bishop Airport) for instance provides potential customers with access to affordable and high service airline in Toronto. This is how Porter has managed to become a key competitor to Air Canada. o However, Air Canada is able to deal with Porter because of their Rouge airline that is cost-competitive and offers service advantages as well. o To conclude, Air Canada compares very favourably against WestJet and Porter.

Air Canada – Financial Analysis

12.0 Financial Analysis The analysis below was conducted using consolidated statements of financial position, and operations for the fiscal periods from 2014 to 2015.

Conclusions o Total current assets have increased by $647 million from last year. A large reason for this

increase is due to improvements in: cash & cash equivalents, short term investments, restricted cash and promissory notes receivables. Many of these assets can be used by the company to implement new systems that will help the company achieve its objectives.

o The excess of current assets over current liabilities can be noticed in the table above (please refer to working capital figure).

o Cash and cash equivalents, and short-term investments account for twenty percent of the total assets. The amount increased by $397 million from the previous year which is a positive sign. The increase was due to the acquisition of short-term investments. Such investments can be liquidated to raise cash for investment and can also be used to pay off existing liabilities.

o Overall total assets have increased more than liabilities, although the increase is small. o Under liabilities section, the company needs to focus on its long-term liabilities, especially

those arising from debt and finance leases. Please refer to the items highlighted in red in the consolidated statement of financial position. The amount recorded in total liabilities needs to be reduced. This is because in 2014, the amount exceeded total assets. The excess was recorded as a deficit.

o The deficit decreased total shareholder’s equity account for both 2014 and 2015-year end. The reduction impacted the company’s D/E Ratio, return on capital employed, and return on equity ratios. D/E Ratio was very small in 2014 because of smaller shareholders’ equity and larger in 2015 because of larger total liabilities.

Areas of Concern o Liabilities need to be reduced to minimize deficit. o Shareholders’ equity needs to increase to improve D/E and ROE ratios.

o Although net margins have increased each year, they still represent a small percentage of total revenues. The reason they are small is because of the large operating, and non-operating expenses. Please see the red markings below. To improve this figure, the costs mentioned above need to be controlled.

Conclusions o Revenues have increased in a linear pattern over the three years. It has increased by an

average of 5.84% each year. This amount was calculated by taking the average of the two growth rates mentioned in the table disclosing the ratios [(7.19% + 4.49% / 2) = 5.84%].

o Of the total operating expenses, aircraft fuel, and wages, salaries, and benefits constitute almost 50% of total revenues. Please refer to the numbers bolded in red.

o Total operating expense account for at least 90% of the total revenues earned each year, leaving a small percentage for income. These costs need to be controlled if the company wants to improve its financial performance.

o Net income has accounted for less than three percent of total revenues. This means for every dollar of revenue; Air Canada keeps a small number of pennies. This is an area of concern.

Areas of Concern o Operating Expenses - aircraft Fuel, and wages, salaries, and benefits needs to be controlled o Non-operating Expenses - interest expense needs be controlled, along with fuel and other

derivatives, and net financing expenses concerning employee benefits. These costs are reducing income to a small amount.

Observations

o Upward trend in assets. This is a good sign. o Upwards trend in liabilities. This is not a good sign. o Upwards trend in equity. Although the amount of equity reported in 2015 is small, it is still

bigger than the negative amounts reported in the previous two years.

1.03%7.87%

13.55%

6.16% 7.15%

Air Canada(2013-2015) Westjet(2013-2015) DeltaAirlines Inc.(2013-2015)AmericanAirlines(2013-2015)

Average

Net Profit Margin

Conclusions o Air Canada has not performed well when compared to its competitors WestJet, Delta

Airlines Inc., and American Airlines Group. o Air Canada’s gross profit, and net profit margins are below average. Large operating and

non-operating expenses are the primary causes of this. Questions to be Addressed Can the Company Pay its Bills?

o The company has sufficient cash & cash equivalents and short-term investments, and other current assets to pay its liabilities. Short term investments can be liquidated to raise cash for investment, and can also be used to pay off existing liabilities.

o From the analysis mentioned above, Air Canada has monetary resources to pay its existing bills.

Does the Company Have Capacity to Raise Capital? o Given that the amount of liabilities exceeds equity in both years, it is not possible for the

company to raise capital from debt. The reason is because of the large debt to equity ratio. Lenders will be reluctant to loan money to a firm that has a high D/E ratio.

o The company should consider raising capital via equity. Raising capital from equity will improve the company’s debt to equity ratio, and give it access to resources which could be invested in projects to expand the company’s operations internationally.

Do the Financials Provide a Competitive Advantage? How? o Air Canada has large amounts of current and non-current assets that can be liquidated to

generate cash which can be used to invest in projects. Assets can also be disposed off to third parties when the company is experiencing financial difficulties and needs cash immediately to satisfy its short-term obligations. Having control and ownership over such a large amount of resources gives the company a competitive advantage over its rivals.

o Although the company owns and controls many assets, it is unable to reap full benefits from their usage because of the large expenses. These expenses have reduced the company’s earnings, asset turnover ratio, as well as gross profit, and net profit margins. From a financial perspective, the large operating and non-operating expenses do not provide a competitive advantage to the company.

o Overall, the company’s financials do not provide a competitive advantage. The potential benefits of the company from owning and controlling large amounts of assets is being overshadowed by the low turnover and profitability ratios.

What are the Implications of the Financials for Future Strategy & for the Execution of Strategy? o Need help with this.

How Does the Company Perform Compared to its Competitors? o Air Canada’s gross profit and net profit margins are below average; expenses could be the

reason. The company’s margins ranked last when compared to its competitors: WestJet, Delta Airlines Inc., and American Airlines Group. Although the competitive strength assessment shows that Air Canada has the highest score when compared to its competitors, the ratios do not support this score. If we were to focus on the ratios alone, we may conclude that the company has not performed well. The reason could be due to the fluctuations in equity and expense amounts. These amounts are distorting the operating/ efficiency and profitability ratios of the company.

o Although net margins have increased each year, they still represent a small percentage of total revenues. The reason they are small is because of the large operating and non-operating expenses. To improve this figure, resources need to be devoted developing efficient systems.

What is Increasing - Revenue, Costs, Debt? What is Decreasing? What are the Implications? o Revenues, costs, and gross profits have increased each year. This is a good sign because it

tells us that the company’s services are popular amongst people around the world. Revenues from passenger tickets have increased by an average of 6.16% over the three years, cargo services have increased by 3.35%, and other services by 3.21% over the three years. Together, revenues have grown by an average of 5.84% each year.

o Costs have also increased in proportion to revenues. Operating costs have increased by an average of 2.6%, which is less than the percentage increase in revenues. However, non-operating expenses on the other hand have increased by an average of 41.20% over the three years [(15.07% increase from 2013-2014 + 67.32% increase from 2014-2015) / 2]. Overall, expenses have increased by an average of 21.9% [(2.6% average increase in operating expenses + 41.20% average increase in non-operating expenses) / 2]. These expenses need to be reduced.

o Despite the increase in revenues and expenses, net income has increased in a linear pattern over the three years. If the expenses can be minimized, there is potential for the company to earn even more profits.

o Total assets and liabilities have also increased from 2014 to 2015, with assets increasing more than liabilities. The difference between assets and liabilities is not large however.

o Under liabilities section, the company needs to focus on reducing its long-term liabilities, especially those arising from debt and finance leases. Please refer to the items highlighted in red in the consolidated statement of financial position. The amounts recorded in total liabilities need to be reduced, given in the year 2014 the amount exceeded total assets. The excess was recorded as a deficit.

o The deficit decreased total shareholder’s equity account for both 2014 and 2015-year end. The reduction impacted the company’s D/E Ratio, return on capital employed, and Return on Equity ratios. D/E Ratio was very small in 2014 because of small shareholders’ Equity, and large in 2015 because of large total liabilities. Air Canada needs to find a way to balance debt and equity so it does not affect the company’s ratios.

Is the Company in a Healthy or Unhealthy Position? Implications? o Despite the rising costs, and liabilities Air Canada is still reporting positive earnings each

year. The company is in a somewhat healthy position to achieve their long-term strategy of expanding operations internationally; managing costs, and creating more revenue streams. The number of assets owned by the company can be used to trade with suppliers. As was mentioned above, Air Canada has a competitive advantage when it comes to owning assets. These assets need to be utilized better so they can generate a large return for the company.

o The company needs to find a way to control their expenses, and liabilities if they want to continue to earn positive earnings in future.

13.0 Issue Identification o Unhealthy Financial State - Air Canada needs to alleviate their debt as they move into their

expansion. Operational cash flow is imperative and is actually the lifeblood of the company to thrive while establishing new routes. One way is to seek more capital is to go back to the market to get more shares from investors. However, it is important to explain the debts and sell the growth strategy to future investors.

o Poor Customer Service - customer service needs vast improvement in order to compete against private carriers with a leaner organizational structure. Departments must be customer-focused ensuring that customers are listened to and problems are solved promptly. One method is to include turnaround times for customer service calls and case files (lost luggage claims). Another method is to establish a complaints department that investigates complaints, finds solutions, publishes findings and outlines recommendations. Customers would not have to go through various departments, but only one department.

o Corporate Culture Challenge - the culture has to change from a hierarchical one, filled with a traditional top-down approach to more of a lean approach whereby feedback is solicited from employees and clients. Collaboration also helps the employees to own the processes they help to create.

o Competition - Air Canada has to use its dominant status in Canada and its leverage from its strategic alliances to look into entering new markets.

References Press, T. C. (2016, November 07). Air Canada ready for competition but opposes quick exemptions for rivals. Retrieved December 01, 2016, from http://www.cbc.ca/news/business/air-canada-earnings-1.3839972 Bonigut, M., Severn, B., & Wilson, H. (n.d.). Porter Airlines Conquering Complexity | by Azure Corporation and Rotman Information Solutions. Retrieved December 01, 2016, from http://www.enablingideas.com/how-did-they-do-it/2013/03/porter-airlines-conquering-complexity/ https://www.aircanada.com/en/about/media/presentations/documents/BAML_2016_Transportation_Conference.pdf http://www.enablingideas.com/how-did-they-do-it/2013/03/porter-airlines-conquering-complexity/ http://www.cbc.ca/news/business/air-canada-earnings-1.3839972 American Airlines Group Inc 2014 Report file:///C:/Users/nares/Desktop/AmericanAirlinesGroupInc_10K_20150225.pdf 2015 Report file:///C:/Users/nares/Desktop/AmericanAirlinesGroupInc_10K_20160224.pdf Delta Airlines 2015 report http://www.annualreports.com/HostedData/AnnualReports/PDF/NYSE_DAL_2015.pdf 2014 Report http://www.annualreports.com/HostedData/AnnualReportArchive/d/NYSE_DAL_2014.pdf Westjet 2013 Report https://www.westjet.com/guest/en/media-investors/2013-annual-report/WestJet-Financial-Statements-2013.pdf 2015 Report https://www.westjet.com/assets/wj-web/documents/en/about-us/financialReports/WestJet2015AR.pdf Air Canada

2015 Report https://www.aircanada.com/en/about/investor/documents/2015_ar.pdf 2014 Report https://www.aircanada.com/en/about/investor/documents/2014_ar.pdf Canadian Aviation regulation: http://laws-lois.justice.gc.ca/eng/regulations/SOR-96-433/page-1.html Air Canada annual report 2015: Sedar.ca /company/airCanada Bloomberg: https://www.bloomberg.com/news/articles/2016-09-28/opec-said-to-agree-on-first-oil-output-cut-in-eight-years Fox news – OPEC deal: http://www.foxnews.com/world/2016/11/30/opec-agrees-to-cut-barrel-production-by-1-2-million-day-to-push-up-oil-price.html Boeing makes 787 for Air Canada: http://www.boeing.com/commercial/customers/air-canada/ Investor Conference presentation http://www.aircanada.com/en/about/media/presentations/documents/CIBC_15th_Annual_Eastern_Institutional_Investor_Conference_YUL_Sept222016.pdf Sedar : Air Canada- MD&A http://www.sedar.com/DisplayCompanyDocuments.do?lang=EN&issuerNo=00001324 http://www.aircanada.com/en/about/media/presentations/documents/Credit-Suisse-4th-Annual-Industrials-Conference-December1-2016.pdf Customer complaints:

Senior: http://globalnews.ca/video/3091949/air-canada-injury Baggage:http://globalnews.ca/video/3094201/lost-luggage-for-months-air-canada-finally-responds

Star alliance : http://www.staralliance.com/en/ceo-biography?airlineCode=AC Air Canada corporate : http://www.aircanada.com/en/about/acfamily/index.html