The Airline Industry: Flying Less, Charge More

A Case Study

Part 1 Air Canada: from a crown corporation to a public traded corporation Air Canada was established by the Canadian Parliament in the Trans-Canada Air Lines Act of April 10, 1937. Known for almost 28 years as Trans-Canada Air Lines, it assumed its current name on January 1, 1965. Air Canada's headquarters are in Montreal. Initially flying a scheduled route between Vancouver,British Columbia, andSeattle, Washington, the airline so expanded its services through its own routes and through connectors that by the early 21st century it was reaching more than 90communities throughout Canada and the United States, as well as points in Bermuda, the Caribbean, the United Kingdom, continentalEurope,Asia, Australia, andSouth America. In 1966 it became the first North American airline to serve Moscow. As a crown corporation the company enjoyed a monopoly on Canadian domestic air transport from 1937 to 1959; in the 1960s and '70s, however, restrictions were gradually lifted, and other Canadian carriers began to compete for both domestic and international routes. To further deregulate, to acquire capital for upgrading its fleet, and to better operate in a competitive market, the company was partially privatized in 1988 by the sale of 45 percent of its shares to its employees and the general public; it was fully privatized the following year. In 2000 Air Canada became one of the world's largest commercial airlines after acquiring Canadian Airlines International, the second largest carrier in Canada.

Part 2 The global airline industry made $35.6 billion in profits in 2016, up from nearly $18.4 billion in 2013. However, in 2008, during the U.S. recession, the industry was teetering on the edge of disaster. According to the International Air Transport Association, the industry lost $26.1 billion that year. However, by 2009, despite the fact that the economy was still extremely weak and airline traffic was still well below normal, profitability began to rebound. In addition, by 2010, despite continued economic weakness, the global airline industry had definitely recovered, achieving a $17.3 billion profit that year. How did the airline industry achieve such a dramatic turnaround? Simple: fly less and charge more. In 2011, fares were 8% higher than they had been the previous year and 17% higher compared to 2009. Flights were more crowded than they had been in decades, with fewer than one in five seats empty on domestic flights. And that trend continues today.In addition to cutting back on the number of flightsparticularly money-losing onesairlines began to vary ticket prices based on time of departure and when the ticket was purchased. For example, the cheapest day to fly is Wednesday, with Friday and Saturday the most expensive days to travel. The first flight of the morning (the one that requires you to get up at 4 a.m.) is cheaper than later flights. And the cheapest time to buy a ticket is Tuesday at 3 p.m. Eastern Standard Time, with tickets purchased over the weekend carrying the highest prices. It doesn't stop there. As every beleaguered traveler knows, airlines have tacked on a wide variety of new fees and increased old onesfees for food, blankets, baggage, even the right to board first or choose your seat in advance. Airlines have also become more inventive at imposing fees that are hard for travelers to track in advancesuch as imposing a holiday surcharge while claiming that fares have not increased for the holiday. Airlines worldwide collected US$22.6 billion from ancillary fees in 2010, 4.8% of their total revenue. However, the share of ancillary fees has increased to 7.8% of total revenue, reaching US$59.2 billion in 2015. And in 2016, despite fuel being at its lowest level in six years, many airlines continued to charge passengers a fuel surcharge, which airline regulators allowed airlines to impose in times of very high fuel costs. Calin Rovinescu, the CEO of Air Canada, claimed that these ancillary fees would not go away soon because they represent a good share of the firm's profit. However, industry analysts question whether airlines can maintain such high levels of profitability. In the past, as travel demand picked up, airlines increased capacityadded seatstoo quickly, leading to falling airfares. "The wild card is always capacity discipline," says an airline industry researcher. "All it takes is one carrier to begin to add capacity aggressively, and then we follow and we undo all the good work that's been done."

Market Segment	Median Elasticity of Demand
Long-haul International Business	0.27
Short-haul Business	0.70
Long-haul International Leisure	1.04
Long-haul Domestic Leisure	1.10
Long-haul Domestic Business	1.15
Short-haul Leisure	1.52

Source: The New Zealand Aviation Operational Environment: A Guide for the Tourism Sector 2019

Questions:

1. Why Air Canada was privatized in 1988?
2. What market structure was Air Canada in from 1937 to 1958? What about now and why?
3. What in your opinion should be Air Canada's main competitive strategies and why?
4. How would you describe the price elasticity of demand for airline flights given the information in this case? Explain.
5. Using the concept of elasticity, explain why airlines would create such great variations in the price of a ticket depending on when it is purchased and the day and time the flight departs. Assume that some people are willing to spend time shopping for deals as well as fly at inconvenient times, but others are not.
6. Using the concept of elasticity, explain why airlines have imposed fees on things such as checked bags. Why might they try to hide or disguise fees?
7. Use an elasticity concept to explain under what conditions the airline industry will be able to maintain its high profitability in the future. Explain.
8. At the end of the article, the industry research commented: "The wild card is always capacity discipline. All it takes is one carrier to begin to add capacity aggressively, and then we follow and we undo all the good work that's been done." What do you think he is referring to?