US Airlines may have AirCanada in their Crosshairs

[Guest]

Transport • Airlines

Air Canada Wants to Fly More U.S. Travelers Through Canada and Overseas

Justin Bachman, Bloomberg - Feb 15, 2017 12:00 pm

Air Canada may face questions from investment analysts who seek reassurance that it is resisting its old instinct to redistribute profits to its customers by adding flights.

— Sean O'Neill

When it comes to maintaining domestic air superiority, U.S. carriers have been shaking their fists at Persian Gulf airlines that have rapidly increased their American presence. Yet there’s another threat that may be growing in their backyard—or more precisely, just north of it.

Air Canada has been around for 80 years, but only recently sought to parlay torrid growth into global ambition. The company aims to turn its three major Canadian hubs into larger transfer points for global travelers crossing North America. Flying to Europe or Asia? Try Toronto, Montreal, or Vancouver as your connection—you may very well like these airports far more than Chicago, New York, or Los Angeles, Air Canada is telling travelers. And the carrier isn’t shy about singing its own praises.

“Every time an American flies up on us they go ‘Oh my God, you’re the best-kept secret. How did we not know about this?’” said Ben Smith, Air Canada’s president of passenger airlines. “That is what’s music to my ears.”

Air Canada’s full-year 2016 results are expected Friday, and will probably continue a remarkable financial turnaround that began after what Chief Executive Officer Calin Rovinescu described as “the near-death crisis years” of 2008-2009.

The carrier has been radically increasing its international footprint, and in the second and third quarters of 2017 will become the champion of long-haul capacity growth. That seating capacity comes atop annual, overall capacity growth averaging about 20 percent. As it ramps up seasonal flying this spring, Air Canada’s total long-haul capacity will exceed 18 percent, surpassing Emirates, which has been adding new routes from Dubai to just about everywhere. In the summer quarter, long-haul seat growth will top 10 percent.

New American routes

With these powerful numbers as a backdrop, Air Canada is launching an all-out assault to the south. In May, the airline launches new service to a half dozen U.S. cities, including smaller markets such as Memphis and Savannah, Ga. These will further expand a global route map that stretches from Algiers to Reykjavik and Taipei to Tel Aviv. The airline is also scouting Africa for future destinations.

So-called “ sixth freedom ” flying—the right of an airline to carry passengers or cargo between two foreign countries as long as it touches down in its home nation— is the cornerstone of Air Canada’s strategy. It helped the Montreal-based airline post record net income of C$308 million (US$235 million) in 2015, more than double the prior year.

Boosting Air Canada as an international connecting point is also crucial to broadening its long-haul service, such as the nonstop Toronto to Delhi flight launched in 2015 and a new nonstop to Mumbai that begins in July. (Meanwhile, among U.S. carriers, only United Continental Holdings Inc. flies to India.)

To fill planes bound for Sydney or Munich, Air Canada requires a healthy dose of traffic from elsewhere. “That connecting flow helps you support the launch of new services,” said Cameron Doerksen, a transportation analyst with National Bank of Canada Financial Inc. “You may not have thought it was viable to launch Toronto-Delhi unless you were getting some connecting traffic from the U.S.”

Air Canada isn’t alone in pursuing this type of international transfer strategy, given the range capabilities of modern aircraft and the enormous hubs that have emerged in the Persian Gulf. Low-cost Iceland leisure carrier WOW Air, though only five-years-old, has grand ambitions to boost its Reykjavik base as a North Atlantic hub, and Singapore Airlines Ltd. has similar designs on making Changi Airport an easy one-stop connection for North Americans heading to Southeast Asia.

For Air Canada, the tactic comes with some risk. The carrier is nowhere near the size of the American behemoths to the south, most of which don’t take kindly to losing passengers to anyone. Long-haul flying typically commands higher fares and thus a more lucrative customer base, placing it among the more fiercely contested segments in air travel, said Helane Becker, an aviation analyst with Cowen & Co.

Carriers like Delta Air Lines Inc. are notoriously sharp-elbowed when it comes to turf scuffles, and Emirates can throw on huge capacity as needed simply by moving the service to its superjumbo Airbus A380. In other words, Air Canada may be running a risk of getting squeezed.

“I don’t know when, but there will be a reaction by the U.S. carriers at some point when the supply of seats gets too high,” Becker said. “In the short term, the U.S. carriers are probably focusing on some other markets as a group—Los Angeles, Orlando, San Francisco—but once they stop focusing on that, you might start to see some competitive response to Air Canada. For now, it’s not on their radar screen. They have bigger fish to fry, such as the Middle East carriers.”

Revenge for the lean years

Smith, who on Feb. 9 helped unveil Air Canada’s striking new black-and-white aircraft livery during a ceremony in Toronto, isn’t too worried about U.S. rivals. Air Canada is targeting a 1.8 percent market share of the U.S.-international market, he said, which is roughly double its current amount. “And that means one or two business customers a day from Philadelphia, you know? One or two from Cleveland,” he said. “If someone’s going to add an extra flight to go fight for that, then they’re kind of irrational.”

Moreover, he argues, Air Canada’s flexing is only fair. Foreign carriers have been poaching its international traffic for a long time. Having acquired Canadian Airlines Ltd. in 1999—then the nation’s No. 2 carrier—Air Canada was hobbled by heavy debt and high costs. The airline sought protection from creditors four years later, and didn’t expand its 56 plane wide-body aircraft fleet for a dozen years. Air Canada acquired its first Boeing 777—a staple of most international long-haul fleets—just a decade ago.

 

During these lean times, Montreal tour company Transat A.T. Inc. emerged as its largest competitor on trans-Atlantic routes. Smelling blood, domestic upstarts, and Emirates grew exponentially at Air Canada’s expense as well, and Asian airlines targeted Canada as part of their North American expansion. “Talk about sitting there watching by the sidelines as prime routes into our prime markets have been taken away by premier carriers,” said Smith. “It drives you crazy.”

Air Canada has a “soft target” of about 50 percent connecting traffic at its hubs, up from its current 41 percent, Smith said. By comparison, Air France-KLM has about 70 percent at its Amsterdam Schiphol hub, while the Persian Gulf trio—Emirates Airline, Etihad Airways, and Qatar Airways Ltd.—all top 90 percent at their respective hubs.

Air Canada’s full-throated foray into long-haul flying has been fueled by a massive fleet renewal program, which includes 25 Boeing Co. 787s, and the migration of older Boeing 767s from its mainline fleet to its low-cost Rouge subsidiary. The carrier also has 12 additional 787s on order, 61 Boeing 737 Max planes that start to arrive later this year, and 45 Bombardier CS300s on tap for 2019 and beyond.

With a newer fleet and some on-board amenity upgrades, Air Canada is counting on its Toronto-Pearson hub to become a competitive factor in luring more global jet-setters. The airport has structured operations so passengers connecting at Pearson don’t need to claim and re-check their bags. Pearson also introduced a “baggage image and weight identification system” (BIWIS) in 2013, which takes a photo, weighs, and scans for radiation on each bag that arrives, which satisfies the post-Sept. 11 restrictions imposed on U.S.-bound flights.

Also helpful for U.S bound customers is that entry via U.S. Customs and Border Protection occurs in Canada. “You’re not going to convince somebody from New York to fly through Toronto,” Doerksen said, given the typical nonstop options from the largest U.S. cities. “But if you live in Cincinnati, you have to connect somewhere, and it makes sense to do it in Toronto.”

Growth will eventually slow

Even if Air Canada manages to avoid blowback from competitors, the pace of growth will ease in coming years. Its trans-Atlantic joint venture partners, United and Deutsche Lufthansa AG, will probably try to impose some curbs. On Tuesday, United Chief Financial Officer Andrew Levy alluded to this when he said seat supply over the Atlantic from its partners was “of most concern” given that higher capacity has dented profits.

More immediately, Air Canada is “up against the limits of what they can do with Rouge without going back to their pilots,” said Seth Kaplan, a managing partner of trade journal Airline Weekly, referring to further expansion of the low-cost unit, where wages are about 25 percent below the mainline operation. “So one way or another, further expansion would cost more, because either it would have to be mainline or they would have to trade their pilots something for it to be Rouge.”

Air Canada executives have already opened the door to expanding Rouge beyond the 50-aircraft limit they’ve negotiated with pilots, with Rovinescu telling analysts in November he would have opportunities to discuss the matter “over the coming years.”

Smith emphasizes that financial success, not attaining global stature, is driving the airline’s overall expansion. The growth ends, he said, when Air Canada sees no more profitable opportunities.

“We don’t need to be the largest carrier in the world.”

1. Long hauls are considered flights 3,000 miles or longer. Growth figures are according to schedule data from Diio Mi.
2. Excluding fuel, currency rates and one-time charges, the profit topped C$1.2 billion.

Related from yesterday: Air Canada and United May Try Again for U.S.-Canada Anti-Trust Immunity

—With assistance from Michael Sasso in Atlanta. 

[Zan Vetter]

Ben Smith is excellent at defending this strategy in a very non-threatening way. In fact I'd go so far as to say that it was developed with the knowledge that the need to defend/differentiate it from Gulf/ME carriers would be required, because to an uniformed it looks very similar. That said, what network airline isn't similar? Bring connecting traffic through hubs. At the core it is very, very basic, elemental even.

[st27]

The weak link in Bens strategy is the GTAA!

[Seeker]

American airlines may wish to compete with Air Canada but their government's policies might come into play;

http://news.nationalpost.com/news/canada/calgary-seniors-shocked-at-being-fingerprinted-mug-shotted-by-u-s-border-officials

Calgary seniors Carl and Sandra Hannigan were looking forward to a stress-free flight home after a 10-day visit to Mexico.

But the two said they were stunned when U.S. Customs and Border Protection (CBP) officials pulled them aside at the Salt Lake City International Airport to fingerprint and photograph them.

The couple were on their way to catch a connecting flight to Calgary on Feb. 13 when what they call the privacy intrusion occurred, a process that took about 10 minutes.

After showing their boarding passes and Canadian passports, “we were told to put our hands on a green scanner, then they took facial photos,” said Carl Hannigan, 75, a Calgary veterinarian.

“It was a little bit unsettling and unnerving … I felt our privacy was invaded.”

Hannigan said he wasn’t about to object to the agents collecting the data, despite his frustration.

“I’m not the kind to zip my lip but I didn’t dare ask him,” said the U.K. native, who’s been a Canadian citizen since 1973.

“I know how powerful these guys are and I didn’t want to miss our flight.”

It didn’t sit well with the couple, who’d never experienced anything similar in previous trips through the U.S., and Carl Hannigan sent a letter outlining his concerns to his MP, Ron Liepert.

The Conservative MP wrote back saying he sympathized with the Hannigans and wondered if the approach was linked to the tougher immigration stance of the new Trump administration that might also be targeting travellers to Mexico.

“During this time of immigration upheaval it will be important for Canadians to, wherever possible, not connect through the U.S. when travelling to Mexico,” he wrote.

But in an email response, CBP spokesman Jaime Ruiz said the practice is routine and sweeping.

“Collecting biometrics and photos of all foreign visitors arriving at U.S. international airports is standard operating procedure,” he stated.

“Nothing new or unusual.”

The CBP says the data collection is partly for the good of those it’s taken from, by foiling identity theft if travel documents are stolen.

The information can also be checked against a database of criminals and suspected terrorists, and “protects the privacy of our visitors,” states the CBP website.

[boestar]

This Sort of this is just a little silly.  the process for connecting passengers is stupid for Border security and well as airport security.

If you remain in the sterile portion of the terminal when transiting to a different airline then why should you 1) have to clear a border checkpoint at all and 2) have to clear airport security a second time.

Last time I had a connection in YUL I cleared customs as I was entering Canada and connecting to a domestic flight.  I get the clearance here but I then had to leave the sterile area and go through security.  This led to my SECURITY SEALED bag of booze being opened and Scanned by security nearly making me miss my connection.  The purpose of the security sealed bag is so you don't have to do this and why did I have to leave the sterile area and re clear security?

Their processes are so screwed up is silly.  The US is getting even worse.

 

[Seeker]

Last year I went on vacation to Iceland.  Of course we went through pre-board security before boarding our Icelandair flight from Canada to REK.  Upon arrival we deplaned and got routed through the exact same screening again, then through customs before exiting out into the baggage area.  I had bought a bottle of water airside in Canada and they took it away from me upon arrival in REK because it was "liquids are not allowed" even though I was terminating.  This whole process was moronic.  I asked a few security people and airline people what we were doing and what purpose it served but, of course being out of uniform, all I got was standard boilerplate replies.  One person did tell me that, apparently, Iceland didn't think screening done in North America was good enough and they felt like they should do their own screening even though at this point the flight was done and everyone was just leaving the airport for their vacation!  Note that this was not a customs procedure and was handled by the same delta minus type contract security as CATSA.

On the other hand I was relieved to find out that processes in Iceland were just as screwed up and pointless as Canada, so that's good. 

[AIP]

The security screening at the connection airport is done because the connecting airport isn't assured of where you originated from, and they are obligated to process passengers through screening.

Happens all the time. Even in Canada, Leave YYC for a US destination via YVR for example, before US Customs, you will be screened again.

[Seeker]

2 minutes ago, AIP said:

The security screening at the connection airport is done because the connecting airport isn't assured of where you originated from, and they are obligated to process passengers through screening.

Happens all the time. Even in Canada, Leave YYC for a US destination via YVR for example, before US Customs, you will be screened again.

Yeah but we weren't connecting anywhere and weren't getting on another airplane so it's completely pointless.

[dagger]

There is strong speculation that UA and AC will reapply for anti-trust immunity, so let's not talk about what "all US airlines want. It's the same old "us vs them". AA and DL will object to the Justice Department but it won't be because AC picking up two passengers on a Dash 8 at Cleveland is an issue. As for the international segments, That said, sixth freedom traffic is gravy, profit, not the underlying support to bring a new route close to break even. If there is no domestic support for a given route, it won't last for long.

When Donald Trump met with the airline CEOs a couple of weeks ago, the one thing he zoned in on was airlines like the ME3 allegedly supported financially by their governments. Air Canada is a lot of things, but it is not directly funded by the federal government. In fact, one can argue the opposite today.