The Canadian airline industry has experienced several problems throughout its history, but the worst undoubtedly have been marked by the last couple of years. A combination of internal and external factors have led to the filing for bankruptcy protection by Canada’s largest airline company, Air Canada, and the struggles that the remaining companies have been coping with. However, in order to fully understand the situation the industry finds itself in today, it is important to account for all the factors that have influenced it over the years.
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The state of competition in the industry has been an important issue. Historically, Air Canada has dominated the domestic market, accounting for over 55% of market share. When it acquired its largest competitor, Canadian Airlines, this percentage was increased even further. This situation raised concerns that Canadian consumers were not benefiting from the effects of competition, meaning higher quality and lower prices.1 Their options were significantly reduced.
However, within the last couple of years the state of competition has begun to improve. The emergence and growth of other domestic airlines has forced Air Canada to give up 42 peak hour slots at Pearson International.2 In addition, Canada’s leading discount airline, WestJet, had been given access to Hamilton’s Airport in order to enter markets on the East Coast. Air Canada remains the dominant company in terms of size, but is facing increasing competition from WestJet and others such as JetsGo and CanJet.
In the last year alone, WestJet had increased the number of flights and destinations and has expanded to the West Coast. It now has access to all major Canadian cities. In order to accomplish this it had decided to purchase 11 new Boeing 737-700 planes in 2004 that are known to be more efficient in fuel consumption.3 As this company expands, its growth will naturally decline and it is expected that operating costs and competition will challenge its bottom line.4 Nevertheless, its profitability bodes well for the domestic industry.
The success of Air Canada’s domestic rivals has partly been achieved at their expense. However, the problems that Air Canada is facing go beyond the effects of competition. They go back for years and are present to this day. Initially, the company was weakened by intense competition with Canadian Airlines. After the two merged, Air Canada had to prevent a hostile takeover attempt by the Onex Corporation conglomerate. Following that, in 2000 there was a sudden collapse in business travel, as major customers such as Nortel Networks had to cut back on traveling in response to a weak economy.
Another way of looking at Air Canada’s problems is by acknowledging that the government had let Air Canada expand to the point that it did without completing major reforms. The industry is highly protected, as foreign airlines were always kept out of the domestic market and foreigners are prevented from gaining control over Canadian airlines.6 This contributed to the lack of efficiency within the company and is another internal factor causing problems in this particular industry. The Canadian airline industry has also suffered a great deal due to the after effects of 9-11, the SARS outbreak, rising costs as well as barriers to entry. The combination of these factors have impaired the airline’s ability to remain competitive and thrive in a time of necessity.