Calin Rovinescu, President and CEO of Air Canada, says focusing on the moment as well as the long- term strategy are the keys to success. Interview by Graham Newton
How is the airline performing?
We had a transformational year in 2013. For a start, we posted a record net income. The margins continue to be thin, as they are for the industry, but it was nonetheless our best financial year ever. The stock price showed a 340% return over the 12 months and Air Canada was the best performing stock on the Toronto Stock Exchange out of any stock—not just aviation.
And for the fourth consecutive year, Air Canada was voted Best Airline in North America by Skytrax. From a customer perspective that’s a great result and shows our efforts have been appreciated. It’s very gratifying.
It was a great year for our employees too because they really bought in to what we are trying to achieve, we struck some new deals, and they could see the fruits of their labors. So, overall, there was a compelling story from a company perspective, a customer perspective, and an employee perspective.
How does rouge fit into your business strategy?
The objective of rouge fits into our three core priorities. The first is to reduce our cost structure. Air Canada has a 75-year history and that comes with a price. Operating rouge provides a 21%-29% cost advantage in CASM over Air Canada. That’s achieved largely through a different aircraft configuration that allows us to get in more seats, but there are also labor savings because rouge operates under different rules and rates.
The second priority is to continue international expansion. That wouldn’t be possible without a lower cost structure. Operating rouge has allowed us to serve Barcelona, Athens, Manchester, and Dublin as well as provide a persuasive offer for the leisure destinations in the Caribbean and Mexico.
Third, rouge meets our cultural change targets. There is a different mindset in rouge. It is a different entity with its own management team and certification and cannot be confused with Air Canada. The rouge staff even receive their customer service training at Disney because we wanted that feel-good factor.
You also have a group of partners under the Air Canada Express banner?
Air Canada Express is a collection of four partners, not owned by Air Canada but that do feed into our network. Jazz, for example, is able to serve the domestic market at a much lower cost using smaller aircraft, such as Q400s and CRJs.
The three different business concepts of Air Canada, rouge, and Air Canada Express actually just reflect the nature of a legacy carrier. Air Canada Express feeds into our hubs so it is really just about managing connecting traffic while rouge gives customers a different take on the product, a chance to do the journey in the manner of their choosing.
Is Star Alliance still a critical part of your planning?
Through Star Alliance we serve the world. On an Air Canada ticket, our customer can fly pretty much anywhere in the world. That delivers enormous value to them.
And as long as ownership restrictions are in place in most of the world, an alliance will continue to be relevant to the industry. Within an alliance, we are seeing a lot of joint ventures that deepen the relationship between carriers and provide even greater value to customers. Air Canada has a very powerful relationship with United and Lufthansa that provides great scope for the future.
How is your marketing changing?
Our objective is to be a global leader. So we are revamping the Air Canada brand to highlight that global nature by concentrating on international markets. We have a tag line of “Go Far”, meaning not only transporting customers to other parts of the world but also an offer to take advantage of the many opportunities that aviation generates. Basically, we want to expose the Air Canada
You have Boeing 787s on order. How will the aircraft change your network planning?
In the main, Air Canada will use the Boeing 787s to replace its 767s. It will give us about a 25% cost saving. But it’s also about an enhanced customer experience. The 787 has better air quality, it has larger windows, and it delivers a great customer experience.
Most importantly, the 787 is the perfect aircraft for Air Canada given our geography and customer base. It is the ideal size to serve just about any destination from Canada and will open up our network. It was a challenge, for example, for us to serve India using a Boeing 777 because the costs and yields made it difficult. But the 787 makes it possible and so we may well go back to India. It’s great for our core routes too, such as Tokyo Haneda.
“Air Canada will use the Boeing 787s to replace its 767s. It will give us about a 25% cost saving”
The 787 will feature your new premium economy cabin. How is that working out?
Our premium economy cabin was first installed on a Boeing 777 between Montreal and Paris. We now offer it on the Vancouver-Hong Kong and the Vancouver-London Heathrow routes too. It’s our first attempt at this cabin and it has been very well received. Our customers appreciate the opportunity to take advantage of a product that fills a gap in the market and it provides Air Canada with some extra revenue. We’re looking forward to having the product on our new 787s.
You’re working with the Greater Toronto Aviation Authority to develop Toronto Pearson Airport. What needs to be done?
Pearson is our main hub and represents an enormous opportunity for us if we can get it right. At the moment, we’re just scratching the surface of the airport’s potential. If you look at somewhere like Amsterdam Schiphol, it’s clearly possible to have a powerful hub with a thin population base. Schiphol is a good guide to how we want to develop Pearson to be a strong international hub.
Having said that, of course the airport still needs to have a cost structure that incentivizes Air Canada to start new services. If we bring in a new widebody to start an international service, we’re investing in the region of $150 million. So, first of all, the airport must have a cost structure that makes that a wise investment.
Then we need to ensure that the passenger has a very smooth transfer experience or can easily negotiate customs and immigration. There needs to be good way finding and I think we have already made good progress with that. And we need a great retail experience as well, which hasn’t been the case at Pearson before. That would also boost revenue and help with the cost structure. And finally, we have to get the security experience right.
If you can put all those elements together, you will have a powerful gateway. We’re not there yet at Pearson but we’re certainly on the right path and I believe we can double traffic compared with today in the long term.
The proposed hike in the Ontario fuel tax is the latest development in a series of harsh taxation regulations in Canada. What can be done?
I think the taxation regime is the most frustrating aspect of trying to do business in Canada today. Aviation is taxed to obscene levels. Canada is ranked 136th out of 140 countries in terms of aviation charges. Frankly, that’s pathetic. Aviation is viewed as a cash cow. We’re seen much like cigarettes and alcohol and yet aviation is a main driver of jobs and the economy. Airports have to contend with high ground rents, for example, a cost that is passed on to the airlines.
Ontario is adding to the problem, proposing a 148% hike in fuel tax at a time when British Columbia has eliminated fuel tax completely. It is a disincentive for growth. It is, however, an incentive for travelers to get into their vehicles to drive across the border to the United States so they can catch a cheaper flight. When you look at the thin profit margins in the industry, it is clearly a bad policy.
What qualities are needed in a modern airline CEO?
It’s not about the CEO, it’s about the team. The long list of recognition the airline had in 2013, from customer service to safety, shows that Air Canada has a great team. Look how quickly we built rouge. That’s only possible if you have a strong team. They were able to work in a legacy environment and yet show the entrepreneurial smarts to get things done quickly and set up a completely different business model.
For dealing with the moment you need a microscope to drill down into the details but for dealing with the long-term strategy you need a telescope. Together, these tools guide you toward your vision. I wouldn’t say you need legal skills but this is a multi-faceted industry, highly cyclical, highly volatile. And it’s true that labor negotiations, antitrust hearings, and government discussions are all components of the industry but ultimately this is not about one person but about the team and the skillset the entire team can bring.
What do you want to achieve as IATA Chairman?
There is a great management team at IATA, strengthened governance, and active and engaged committees. But this is a marathon not a sprint so we are talking about measurable progress and not completion in the key issues.
One of my top priorities is to ensure IATA continues to manage the industry’s money in an effective fashion and we will work hard to make sure we recover all monies due and have an even more secure and robust framework. I also look forward to making progress on New Distribution Capability (NDC). Airlines spend billions trying to differentiate their product and yet old-style global distribution systems are incapable of displaying the full range of product variations. Airlines need NDC.
There is also a lot of work to do on safety and the environment in the next 12 months. The Tracking Task Force will bring greater clarity by year end on an important topic. IATA is not a regulator but it has a key role to play for ICAO. The same is true on environmental issues. We need to keep feet to the fire and ensure there is progress on a global emissions scheme and battle with the European Union so they don’t come up with their own specific measures.
I’ve already spoken about taxation in regard to Canada but Canada isn’t the only off ender. We must sell the benefits of aviation and stop the unintended consequences of taxation. There are other regulatory questions that demand attention. IATA has to explain that an industry with less than a 3% profit margin needs more efficiency and so antitrust blocks on joint ventures need to be exposed. Nor can we have a patchwork of regulations on passenger rights. Finally, I’d like to start the conversation on infrastructure. Not only do we need more but airports and air traffic management need to be mature enough to keep up with airline technology. We can’t have a vital link in the supply chain being left behind.
“IATA has to explain that an industry with less than a 3% profit margin needs more efficiency and so antitrust blocks on joint ventures need to be exposed”