Air Transport World

'The world has changed forever': Tango and Zip are part of Robert Milton's strategy to make Air Canada a winner in the brave new airline world. (Profile).

Air Canada President and CEO Robert Milton is in a race with time. His mission: To transform Air Canada so that it can survive, compete and ultimately prosper in a marketplace atomized by the collapse of the network pricing model and the rise of carriers able to produce a seat for less than it costs network airlines. It is a race that is being run simultaneously around the world by the CEOs of the so-called "legacy" carriers. Winners keep flying. Losers get a trip to bankruptcy court.

Adding to the challenge is the business that perhaps the first time in post-deregulation airline history, sheer size is not necessarily an advantage. It hasn't been enough to protect the industry's Big Three--American, Delta and United--from catastrophic losses, and it hasn't helped much to stanch the red ink at Air Canada. Despite the that it enjoys an estimated 70% share of the domestic market and has no network rivals at home since it acquired Canadian Airlines in 2000, AC lost C$428 million ($281.6 million) last year on top of C$1 .3 billion in 2001.

And Calgasy-based WestJet, which helped to drive the final nail in Canadian Airlines' coffin, is snapping at AC's heels, operating profitably and growing rapidly during the worst downturn anyone has ever seen. "The world has changed forever," Milton declared last month as he asked union leaders for C$650 million in annual labor savings.

"How old you are tells the story," Milton tells ATW "If you've been around a longtime, your wages and work rules aren't as competitive." That certainly is the story at Air Canada, where the salaries and benefits budget now tops C$3 billion per year--31% of operating costs. "We are at the stage where we have got to do things completely differently as an industry, and wages and work rules are a critical part. Everybody's got to get with the program, whether it's management or unions, or go the way of the dodo bird," he warns.

In fact, Air Canada already has made substantial progress in avoiding extinction. Within the past year, ASMs per employee rose 8% while cost per ASM fell 3% following on a 2% drop in 2001. Owing to workforce reduction programs put in place during the integration of Canadian, the number of employees has declined from 40,400 in August 2000 to 36,000 at the end of 2002 without the morale-sapping mass layoffs taking place south of the border. AC even turned a profit during the second and third quarters and cut its annual loss by C$887 million compared to 2001.

But it isn't enough. By Milton's estimate, WestJet enjoys a C$ 1.3 billion labor cost advantage over AC. "It's very clear for us that our [cost] parameters are what WestJet pays their employees as they grow 50% per annum and what US Regional carriers pay as they come flooding across the border. …

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