A "crystal ball" perspective of the Canadian airline industry

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A "crystal ball" perspective of the Canadian
airline industry

• Dr. Barry E. Prentice
• Professor, I.H. Asper School of Business
• Director, Transport Institute
• University of Manitoba

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Outline

• What choices must airlines make to become
  profitable? 
• What happens if they don't make the correct
  choices? 
• Will Air Canada continue to dominate the market
  in 10 years? 
• Will those who are pushing for cabotage
  authorization be successful? 
• What kind of change can we expect to the travel
  experience 10 years from now.

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Timelines in the Canadian Aviation Market

• De-regulation 1984-1987
• Canadian Airlines International 1988
• Privatization of Air Canada 1989
• Discount airlines begin 1996
• Air Canada-CAI merger 1999
• 9/11 terrorist attack 2001
• Canada 3000 fails 2001
• Air Canada creditor protection 2003
• WestJet posts 30th consecutive quarterly profit
  (August 2004)

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What happened to the legacy carriers?

• Labour market adjustment
• Union gains made under regulation are
  unsustainable under deregulation
• Ability to segment markets lost
• Discount carriers destroyed the Saturday night
  restriction and made one way fares equal, web
  fares made information available
• Inefficiencies of hubs became apparent
• Low utilization, high fixed costs

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Future of the airline industry

• Legacy carriers in bankruptcy protection
• US Air, Delta, United Airlines, Alitalia, Air
  Canada others on the edge of insolvency
• Growth of discount airlines
• Southwest, Jet Blue, WestJet, Ryan Air, etc.
• Higher taxes/fees and security costs
• Higher petroleum prices
• Shifting demand for air travel

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Supply of Air Transport
Price
Supply
0
Quantity
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Impact of Demand Shifts for Air Transport
Price
Supply
High Demand
Regular Demand
Low Demand
0
Quantity
8
Pro-cyclical Market for Air Transport
Price
Supply
Pc
Demand
Pa
Pb
high
regular
low
0
Qb
Qa
Qc
Quantity
9
Market for Air Transport 1996-2004
Supply 1996
Price
Supply 2000
Pc
Demand
Pa
Pb
2000
2004
1996
0
Q 1996
Q2004
Q2000
Quantity
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Where will Air Canada be in 10 years?

• Advantages
• International route licenses
• New labour contracts
• New aircraft leases
• Network economies/Star Alliance
• Preeminent loyalty program
• Debt written off
• New Board of Directors

• Disadvantages
• Bruised corporate culture
• Skeptical consumers
• Higher costs per ASM than discounters

Percentage of total capacity in Canada 2000 to
2005 (based on historical trends)
Source Air Canada, 2003
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Who is pushing air cabotage?

• European/U.S. inequity of history must be righted
• Canadas policy Straight Ahead (2003) says no to
  cabotage at this time, but open to gradual
  liberalization
• Canadian airlines seem to run hot and cold on
  cabotage

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Longer run trends to 2014

• Technological change in aviation
• Demographics/Travel Demand
• Energy prices
• Environmental restrictions/Climate change
• Economic growth/World trade

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Technological changes in aviation

• Composite materials-based advances
• Avionics, GPS, robotics and communications
  advances
• New aircraft designs

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Advances in Composite Materials

• Boeing 7E7
• super-efficient, twin-aisle 200-250 passengers
  on long-range routes
• windows 19 inches (48 cm) tall and 11 inches (28
  cm) wide
• primarily of composite materials
• more relaxed and spacious environment
• scheduled to enter service in 2008

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Advances in Composite Materials

• Airbus 380
• twin-deck, four-aisle 555 passenger airliner
• 49 more floor space and 35 more seats than the
  747-400
• operating costs between 15 and 20 lower than
  any competitor
• Scheduled to enter service in 2006

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Advances in AvionicsUnmanned Aerial Vehicles
Dragon Eye - UAV
Predator - UAV
Firescout - UAV
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Automatic Dependent Surveillance Broadcast ADS-B
Developed in the 1990s, ADS-B is a system by
which airplanes constantly broadcast their
current location, speed, flight plan, size and
type of craft, and other information. This
information is received by other airplanes and
flight controllers. The purpose of the system is
to reduce the risk of collisions between
airplanes, as well as to reduce congestion by
allowing for more effective management of air
traffic.
The FAA expects to have pockets of the ground
infrastructure in place within the next four
years, and that ADS-B will be in widespread use
among air carriers within a decade.
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Jet Taxi Services

• 4,700 pounds MTOW, able to carry five people
• speed of 315 kts, low fuel consumption (34 gph)
• operation from 2,000 foot runways and low noise
  level
• certification is expected beginning 2007
• projected price will be well under US 1 million

Diamond Aircraft Industries D-JET
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New Aircraft Designs Evolution of Complex
Adaptive Systems
Increasing Value
Value Landscape
per Stuart Kauffman, The Origins of Order and Kim
Clark Carliss Baldwin, Design Rules
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Evolution and Maturation of Airplane Design
Turbofans
Turboprops
Piston Props
Concorde
Metal Monoplane (Boeing 247)
First Jets (Comet, 707)
Source Paul Collopy, Engineering Economist, DFM
Consulting, Inc.
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Evolution of Airships and the Introduction of
Hybrid Buoyancy Aircraft

• 1900-1940
• Rigid Zeppelin Airships
• 1941-1962
• U.S. Navy Blimps

• 1963-2000
• Goodyear/Skyship blimps
• 2001-2030
• Hybrids/Semi-rigids

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Airships for Intercontinental Travel

• Spacious cabins, sleeping accommodations for 500
• Floating offices, connected with wireless
  Internet
• Cruise speeds of 100 knots
• Arrive without jetlag, rested and ready

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Conclusions

• Aviation is a dynamic market
• Watch for
• Airplane ticket prices to rise
• Air Canadas City Pair program
• A domestic interlining service for foreign
  carriers
• Significant technical changes affecting aviation