Air Canada - Current Competition - Business Overview and Competitive Environment

Introduction

Air Canada has benefitted from its brand name recognition and long operating history because the airline industry is and has been mostly dominated by established network carriers. Air Canada is the largest airline and the largest provider of scheduled passenger services in the Canadian market, U.S transborder market and the international market to and from Canada. However, Air Canada operates within a highly competitive industry, as over the past thirty years, the Canadian federal government has gradually deregulated the airline industry and allowed many competitors to enter the market to prevent Air Canada from gaining a monopoly in the airline industry (Competition Bureau - Competition in the Canadian Airline Industry).

Business Overview and Competitive Environment

The Canadian domestic airline market is concentrated in four Canadian major cities - Toronto, Montreal, Vancouver and Calgary. Air Canada is the largest provider of scheduled passenger services in this market with an estimated market share of approximately 56% based on Available Seat Miles (ASM). Jazz is the largest regional airline in Canada and operates regional services for Air Canada under a capacity purchase agreement. Competition in the domestic market is primarily from WestJet. However, the growth of Porter Airline has also created a surge in domestic competition. According to the recent news (it came out in July 2011), the small rival Porter Airline Inc. has earned a significant domestic market share after Air Canada's employees recently went on strike for three days. Also, WestJet's seats were slightly emptier than they were on the same month of last year, while Porter was fuller in June 2011. Although its rivals have grown much in the past few years, Air Canada has also been expanding its regional services by entering a capacity purchase agreement with Sky Regional Airlines to operate flights to and from the Billy Bishop Toronto City Airport in 2010 and a terminal agreement with the City Centre Terminal Corp. (owned by Porter Aviation Holdings Inc.) to commence services from Toronto Island's Billy Bishop Airport in May 2011.

Transborder services between Canada and the United Sates were initially liberalized by the 1995 Canada-U.S. Air Services Agreement, and in 2007 the Open Skies Agreement (which further liberalized the services) came into force. The agreement is summarized as below. The agreement allows air carriers of both countries:

 To pick up passengers in the other country and carry that traffic to a third country as part of a service to or from the carrier's home country;

 To operate stand-alone cargo services between the other country's territory and third countries; and

 Greater pricing flexibility for services between the other country and a third country.

Although the Open Skies Agreement invited many US competitors into the Canadian airline industry, Cabotage--which prohibits the carriage of local traffic between points within one country by carriers of the other country--still stays in effect and plays an important role in the Canadian airline market. Air Canada, together with its subsidiaries like Jazz, serves more destinations and provides more scheduled services than any other airline. Its primary competitors are US network carriers (and their regional affiliates) and WestJet. The US network carriers include Alaska Airlines, American Airlines, United Airlines, Delta Airlines and U.S Airways.

International routes are set by bilateral agreements between foreign countries and Canada, and the Minister of Transport has the authority to designate which Canadian air carriers may serve scheduled international routes. In November 2006, the Minister of Transport introduced a policy called Blue Sky that introduced a more liberalized approach to Canada's bilateral air transportation negotiations. The most successful bilateral agreement that Canada had was with Qatar in February 2011. Continuous efforts to develop new international

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