The bankruptcy and dissolution of air Canada were due to restrictive government policy that made it impossible for the air line to respond in extremely competitive market in the aftermath of September 11th. The causes of Air Canada’s bankruptcy were due to the restrictive government policy, increased competition, decrease in demand, changes in market and the impact of September 11th. In the following essay this will be explained by examining the causes and effects of the bankruptcy of air Canada and the steps Air Canada is taking for successful restructuring.
The airline industry in which Air Canada operates is extremely competitive. Air travel has become a commodity where travelers will often choose the airline that can deliver the product most cheaply. The market in which Airline industry operates is 1Oligoplolistic environment. Observing the airline industry it can be stated that Air Canada was operating under cutthroat competition. Air Canada immediately after its merger with Canadian Airlines faced tremendous amount of competition from domestic “low fare” airlines.
As stated earlier that travelers choose airline that has the lowest fares specially the business travellers, which used to represent a significant portion if air Canada profit margin increased their bookings with low fare carriers like Westjet and Jetsgo, which are the primary competitors of Air Canada. Air Canada could not respond to such competition immediately because of the undertakings given in connection with the Canadian Airlines International Limited restructuring. More over the Government of Canada’s competition Act limited Air Canada’s response and thus restricted it from responding to such competition.
Also the undertakings by Air Canada to the Canadian commissioner of competition, gave it a very little or no space to move in order to tackle such competitive threats by the low fare carriers. Because of such legal barriers, Air Canada lost its important passengers in the premium corporate and business travel market. Due to which Air Canada suffered an operating loss of C$394 million in the fourth quarter of year 2000. Comparing this with the operating income of C$478 million for the first three quarters of the same year, Air Canada ended the year 2000 with the loss of C$274 million.
In hope of reducing some of its operating costs in the face if increasing competition and suddenly reduced demand for its services, Air Canada immediately implemented numerous cost cutting measures, including closing various ticketing offices, cancelling flights and reducing on-board services. Air Canada was the first airline in North America to identify and respond to the sudden economic down turn. How ever despite many cost saving initiatives undertaken by Air Canada in late 2000 and 2001, it was unable to reduce its costs to the extent necessitated by the reduction on revenues it was experiencing.
Air Canada also attempted to reduce its labour costs at the end of 2000 by eliminating many of the employees who were surplus as the result of the integration with 2CAIL as the subsequent hiring efforts. Because air Canada was not permitted to lay off employees who were surplus as a result of the integration (or in the case of some unions) it offered “voluntary separation packages” and voluntary work sharing arrangements to many of its employee groups, at an average cost of approximately C$54,000 per voluntary separation package.
Thousands of these offered by air Canada came at a significant short term cost but did assist in reducing, not eliminating, the employee surplus through the first eight months of 2001. The economic decline continued through 2001. In the early 2001, Air Canada’s largest private sector clients reduced their travel budgets overnight. Air Canada continued its cost cutting initiatives, but as it remained largely unable to further reduce its labour costs, its initiatives were insufficient. Through the first and second quarters of 2001, Air Canada suffered a net loss of C$276 million.
Consumer demand plunged after he events of September 11th. Airlines across North America, including Air Canada, began implementing capacity reductions of up to 20 percent across their systems. How ever with only limited ability to lay off employees and having an effectively fixed aircraft fleet cost, Air Canada was wholly unable to reduce costs to a level anywhere close to the decline in revenues it was experiencing. The resulting losses were staggering, for the year Air Canada had an operating loss of C$731 million and net loss of C$1. 315.
Thus after September 11th, there was a tremendous decrease in demand for air transport. Air Canada had excess of supply (air crafts) and to cut its needs Air Canada grounded its DC9 fleet, as well as several of its Boeing 767, Boeing 737 and regional aircraft. But because of the fact that most airlines worldwide were experiencing similar overcapacity problems, the ability to dispose of aircraft was greatly restricted. The fair market values of aircrafts plummeted. Air Canada raised cash to fund its ongoing operations in this environment in part by engaging in 3sale-leaseback transactions with respect to many of its aircrafts.
Since September 11th, United States carriers (which had received considerable support from the united states government) had added significant new capacity to the transborder market using regional jets. Many of which were purchased with Canadian government subsidies not available to air Canada. These regional jets were being operated by 4feeder carriers that have much lower operating costs and more flexible work rules than Air Canada and 5Jazz. Due to this Air Canada now faced increasing competition in all segments of its marketplace- both domestic and international. Air Canada’s revenue derived from transborder service continued to decline.