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The Importance of the Canadian Airline Industry.

Extracts from this document...

Introduction

Introduction: The Importance of the Canadian Airline Industry In today's highly advanced and globalized society, the Canadian airline industry is crucial to the country's economy. Although Canada's largest trade and business partner and, perhaps, vacation destination is the United States, which can often be accessed by car, truck, or train, the airline industry remains vital to Canadian business operations as they continue to expand in order to reach more locations and to exploit the competitive advantages that other countries have to offer. Airlines encourage economic growth and development by providing a quick, efficient means of transportation across the vast country and around the world. For many years, Canada's airline industry was led by the federal government on behalf of the Canadian people. Routes, performance standards, and airfares were controlled by a government agency to ensure that Canadians enjoyed safe and fair-priced air travel. The purpose of regulation was to avoid wasteful and destructive competition among companies, to help the aviation industry grow, and to provide a broad range of national airline services to consumers at the best possible price. However, like all airlines around the world, Canada's carriers eventually faced numerous problems caused by high fuel prices (Appendix 1), worldwide recessions, and decreased demand. Furthermore, government control seemed to foster the stagnation of the industry, which did not have to be creative or innovative in order to remain competitive. Following the example of the United States, the Canadian government decided to deregulate the industry. Although the goal of deregulation was to achieve cheaper airfares, greater frequency of flights, and better service, it has resulted in serious problems, including overcapacity and destructive competition. Since the Canadian airline industry, an integral part of the Canadian economy, has experienced serious problems in a regulated market as well as under deregulation, only a collaborative effort by the government, airline executives, investors, and consumers can stimulate the industry and improve profitability. ...read more.

Middle

The airlines would have benefited by avoiding price-cuts. However, they fell victim to destructive competition, which is another serious problem caused by deregulation. Destructive competition caused the operations of the companies involved to be driven by one-upmanship rather than demand (Verburg b 73). Thus, many Canadians were traveling on discount fares less than cost as the two major Canadian carriers had locked themselves into a travel war by cutting fares. The situation continued to deteriorate to the point where the combined debt of the airlines was in excess of $7 billion with a debt-equity ratio of 15:1 (Skene 34). To this day, Air Canada has maintained its market-share mentality, copying "virtually every route, frequency and fare offered by Calgary-based Westjet Airlines Ltd. (WJA), [and] losing hundreds of millions of dollars in the process" (Verburg b 73). As it became more apparent that Canadian Airlines International was heading toward insolvency, a proposed merger with the ailing Air Canada sparked fear in the industry. Although it seemed like the logical solution, the merger would leave the entire domestic industry in the hands of one company and make a mockery of deregulation in Canada because the country would once again be heading toward a single, national carrier. The merger also meant that Canadians faced the prospect of higher fares, less service, and no one to whom they could complain. Furthermore, employees of the airline industry feared large job cuts. The country had started with one transcontinental air carrier dominating the market, and now it had one private carrier doing the same. Air Canada's monopoly position permitted it to tell Canadians where they could fly and for how much (Skene 32). Deregulation promised more airlines competing for business, cheaper air fares, greater frequency of flights, better service, and a stronger airline industry. However, what Canadians actually received was very different. The results of deregulation included fewer competing airlines, unaffected fares, less service on most major routes, and a domestic industry on the verge of collapse (Skene 19). ...read more.

Conclusion

in order to encourage greater foreign investment. In fact, Hong Kong's Victor Li has been granted a 31 percent equity stake in Air Canada for $650 million (Verburg a 11). The government must also study ways to improve service to smaller communities so that their economies could grow and become more diverse. Finally, Canada's largest air carrier, Air Canada, must continue to make drastic changes in order to pull itself out of bankruptcy protection. Some of these changes might include overhauling the board and hiring new management. Mr. Li's investment is a step in this direction. By focusing on international flights, the company could also reduce domestic capacity and increase competition. Thus, the co-operation of the government, airline executives, investors, and consumers would begin to restore faith in the essential, but faltering, Canadian airline industry. Conclusion For many years, Canadian airlines have struggled to continue operating. Mergers, acquisitions and bankruptcies have become commonplace. Countless jobs are in jeopardy and small, remote communities risk losing a vital link to the rest of the country, thereby facing the death of their economy. Furthermore, the industry's problems were magnified following unforeseen events such as the terrorist attacks in New York, the onset of the war in Iraq, and the outbreak of the SARS epidemic. As a result, Canada has seen the demise of several prominent carriers. Although one of the goals of deregulation is decreased government intervention, the industry is too vital to Canada's economic future for the government to stand by and watch Canada's airlines succumb to failure. Effective and efficient solutions must be planned and implemented in order to minimize the damaging effects of the challenges faced by the airline industry. Policies must be enacted to create an environment that fosters stability and profitability. However, the government alone cannot rescue the Canadian airline industry. Airline executives, foreign and domestic investors, employees, and consumers must all co-operate. Nothing short of a major concerted effort among stakeholders, combined with a set of logical and cohesive government policies, will fully alleviate the burdens faced by the Canadian airline industry. ...read more.

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