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The Canadian Airline Industry

Essay by   •  December 25, 2010  •  Research Paper  •  1,519 Words (7 Pages)  •  1,594 Views

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INTRODUCTION

An airline is an organization providing aviation services to passengers and/or cargo. It owns or leases airlines with which to supply these services and may form partnerships or alliances with other airlines for reasons of mutual benefit

The scale and scope of airline companies ranges from those with a single airplane carrying mail or cargo, through full-service international airlines operating many hundreds of airplanes in various types. Airline services can be categorized as being intercontinental, intercontinental, regional or domestic and may be operated as scheduled services or charters.

Canada's domestic airline industry has evolved from being an Air Canada monopoly to a virtually deregulated industry where the market is open to any carrier who can obtain an operating license and pass a financial fitness test. This environment came about in response to pressure from carriers for less government regulation to allow them to better compete in the domestic marketplace. To this end, the government passed the National Transportation Act in 1987, which brought about the economic deregulation of Canada's domestic airline industry.

Air Canada consolidated its position by becoming a privatized corporation in 1988, thereby allowing it to compete without the constraints of being a Crown corporation, including the need for government approval of corporate and financial plans. It also acquired regional airlines, further strengthening its position

The Canadian Airline Market

* Air Canada has always been the largest carrier, initially as the publicly owned carrier, with exclusive rights to serve domestic markets, and latterly, since relaxation of entry and pricing restrictions, by success over domestic competitors. With the acquisition of Canadian Airlines International, Air Canada moved from the 18th to the 12th largest passenger airline in the world and the 7th largest in North America.

The other major development in the domestic market has been expanded service by medium-sized carriers. West Jet, Western Canada's discount carrier, which began operations in February 1996 and has recently extended its services into Eastern Canada, has been Canada's fastest growing and most financially successful independent carrier.WestJet has made enormous strides over the last few years, increasing to a 14.16% share from 4.26% of the market between 2002 and 1999. Low fare service, including Tango, is booming - 36% in summer 2002 from 16% in 2003. The largest independent is Canada 3000, a 12-year-old airline that has gone from being a charter carrier to a significant provider of low-cost scheduled service. With its recent acquisition of Royal Airlines and CanJet Airlines, Canada 3000 has become a more important player in the domestic industry. Air Transat, Canada's largest charter-type carrier, has been expanding its domestic service as well.

Most recently, new entrants have begun service; including Capital City Air, an Edmonton-based carrier, while small regional carriers like Hawkair and Peace Air have expanded their service

This expansion has created new options for travellers, but it has not significantly affected Air Canada's position as the dominant carrier. Early in 2003, Air Canada estimated that it had a 90% share of Canadian travel agency sales and a 75% share of seat capacity in the domestic market.6 After Air Canada gained control of CAI, it became the sole carrier on the majority of the top 200 domestic routes. As of August 2000, Air Canada accounted for 80% or more of the capacity on 11 of the top 25 domestic routes and at least 50% of the capacity on 22 of the routes.

Niche and fringe carriers serve mainly leisure travelers and some less time-sensitive business travelers in major markets. Air Canada has important competitive advantages in the general business market, where travelers value the airline's flight frequency, seamless service, frequent flyer points and other amenities. Canada 3000 is targeting business travellers on selected city routes, but it does not pose a major threat to Air Canada's dominance of this segment.

Competition is also limited in the markets served by Air Canada's regional airlines. After trying unsuccessfully to find a buyer, Air Canada absorbed CAI's regional affiliate in August 2000, then subsequently incorporated it -- along with Air Ontario, Air Nova and Air BC -- as Air Canada Regional Inc. early in 2001. Although the regionals play an important role as feeders to Air Canada, more than 65% of their customers use the airlines for local travel. In most local and regional markets, there is no alternative scheduled or charter service. These markets appear 'contestable', but prices are generally not subject to competition from other market participants.

Transborder and International Markets

Since the signing of the 1995 Open Skies agreement -- allowing Canadian and U.S. carriers virtually unrestricted access on transborder routes -- air traffic between Canada and the U.S. increased substantially, from 13.6 million passengers in 1994 to almost 20 million in 1999. Canadian carriers, which have strengthened their competitive position in this market since the agreement, now account for about half the transborder traffic.

Most travellers have choices on transborder routes. As of December 31, 2000, Canadians flying to the U.S. had access to two or more U.S. carriers, along with at least one Canadian carrier, at eight airports. Transborder routes from Toronto, Vancouver and Calgary were served by nine, eight and six U.S. carriers respectively. While only one or two carriers offer direct flights from Canadian airports to many specific U.S. destinations, the availability of connecting services through U.S. hubs limits the prices that can be charged for non-stop services between Canada and the U.S.

International air passenger services are governed by some 70 bilateral agreements between Canada and other countries. The agreements specify the rights of carriers on international routes, including cities to be served, aircraft to be used, and frequency of service to be provided.

Bilateral agreements ensure

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