Since inception, Air Canada has held a sustainable competitive advantage in the Canadian airline industry. Historically, Air Canada had been successful at building solid distinctive competencies by employing their strategic resources and strengthening their capability to use resources effectively. However, at the same time, much of their advantage existed due to government regulations which dictated the level of competition within the industry.
While Air Canada currently remains the dominant airline within Canada and in international flights from Canada, the company has been losing their sustained advantage for quite some time. Having recently emerged from bankruptcy protection, Air Canada is in need of a great deal of reconstruction in order to reduce costs and regain its competitive advantage. As a result, Air Canada’s sustained advantage may be examined on the basis of three factors; how it was first established, why it failed, and how it might be rebuilt.
Until more recently, Air Canada had been able to build and maintain its competitive advantage in the Canadian airline industry. Essentially, Air Canada was able to build distinctive competencies by using its firm-specific and valuable resources such as brand name and reputation and its capabilities to exploit such resources. In fact, Air Canada was once very successful at sustaining its competitive advantage because customers placed an enormous amount of value in their services.
For example, Air Canada’s importance to Canadians can be measured in the fact that it was the first key enabler for trade and tourism and local and global business in Canada. As a monopoly, Air Canada was also the only carrier in the country, at one time, which offered internationally allied, full-service carriage, with high frequencies, frequent flyer points and perks, and connections to over 800 domestic, trans-border and international destinations.
Furthermore, when faced with the challenge of increasing focus on core business and improving competitive stature in the highly competitive air cargo industry, Air Canada Cargo decided that outsourcing would be the most effective solution and Air Canada upgraded its enterprise cargo systems to a Managed Applications Services model for hosting, managing and maintaining hardware and software. As a result of outsourcing services, Air Canada realized the lower cost of accessing a shared infrastructure and is able to respond faster to market changes in cargo transportation.
Air Canada was able to build their competitive advantage because they had the capabilities to do so. For example, Air Canada’s had the capabilities to construct a comprehensive network and many strategic partnerships worldwide. Additionally, their once strong capabilities were also the product of its organizational objectives, culture, and internal processes geared toward growing stable services and maintaining their market share and image as Canada’s airline.
Also adding to Air Canada’s ability to sustain a competitive advantage was and is the high barriers to imitation of its distinctive competencies. At present, Air Canada still holds a 65% share of the Canadian airline market despite the expansion of West jet and the entrance of new low-cost carriers. This suggests that although the competition may have been able to have an impact on Air Canada, market shifts will still be small and incremental due to both the sheer size of Air Canada’s network and its intangible resources such as brand name.
Additionally, Air Canada has been successful in sustaining its advantage due to the lack of dynamism that exists in the airline industry’s ability to rapidly change and innovate. Although Air Canada has sustained their competitive advantage and market share in the airline industry for an extended period of time, they have recently begun loosing it to compete with their well managed, low-cost, and more efficient counterparts.
Air Canada’s loss of its sustained advantage, decreased profitability, and eventual filing for bankruptcy protection could have been caused by its inertia and prior strategic commitments. Taking the inertia argument into consideration, one may denote that it is difficult for Air Canada to change their strategies and structure in order to adapt the changing competitive conditions of Canada’s airline industry. Having gained its competitive advantage as a monopoly in an industry where government regulation restricted competition, Air Canada was able to maintain higher price levels and profits.
However, in order to adapt to present industry changes, it must become more responsive to customer demands. Furthermore, while it would appear that Air Canada’s difficulties began with the terrorist attack in 2001, the main downfall of Air Canada was its focus on pursuing market share rather than profits. Trying to grow by squeezing out competitors ultimately resulted in the airline losing funds on its flights. Air Canada, and almost every other airline, lost money in September.
On the other hand, West Jet, Air Canada’s rival, actually turned a profit. As a result, Air Canada will need to adapt and create new strategies that will enable them to develop a cost base where they can be profitable at the low price levels of their industry competitors. Air Canada also has prior strategic commitments in its employee pension responsibilities that have caused it to loose its competitive advantage to newer carriers that operate without the added costs of employee unions.
At present, Air Canada is attempting to regain their competitive advantage and dominant market share in the Canadian airline industry. In fact, much of this has been in the form of new and improved resources that will enable them to be more responsive to customer demands. For example, Air Canada has recently purchased 30 planes from Bombardier. These planes will replace older planes and help Air Canada emerge from bankruptcy protection. Furthermore, this smaller sized aircraft will be extremely competitive with low-cost carriers on a trip-cost basis.
While job and pay cuts are still evident in Air Canada’s restructuring plans, they also appear intent on fully reshaping their operations. This means retrenching from certain markets in order to sharpen their focus in fewer, select cities where they stand the best chance of growing. Additionally, this will mean utilizing aircraft, employees, and information systems more efficiently, so that they have less idle time in which expenses are incurred but no revenue comes in.