Air Canada - Risk Management

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Air Canada – Risk Management
Case Report

Industry Overview
The airline industry is one of the largest global industries in the world. Airline companies in the airline industry have gone through challenging obstacles in the past decade. Many changes have occurred within the industry and increased regulations have driven up cost for the industry. The attacks on 9/11 left the industry in shock when planes were used in terrorist attacks in the United States. These attacks changed the mentality of the industry and shifted the focus towards safety. Safety was also a major concern in the industry with the breakout of SARS in 2003 and the H1N1 flu in 2009. The airlines had to ensure that public health and safety of the travelers were their main priority. Safety comes at a big price for the industry since a breach in safety can affect the reputation of the company and industry.

Mergers and consolidations were a key to the survival of the airline industry in recent history. The United Airlines and Continental Airlines merger created the world’s largest airline in 2010. After decades of misery for airline passengers, employees and shareholders alike, the proposed United-Continental merger offers an opportunity to rethink long-held assumptions about what the industry needs. The airline industry has lacked the kind of stability necessary to make long-term investments and long-term decisions necessary to serve fliers. It operates in an environment where a seat on a plane has become a commodity for which people will generally pay the lowest price to any airline they think will get them to their destination alive. Letting the number of legacy carriers shrink to a sustainable level of as few as three healthy ones might be the best way to ensure that fliers can get services they have lacked for so long. In the long run, fliers might be better off with fewer, stronger carriers rather than a bunch of small sickly ones.

In the United States, many low cost carriers are growing strong. A low-cost carrier offers generally low fares in exchange for reducing many of the traditionally offered passenger services, and by no means compromising the security of the travelers.

In 2009, the top five of twelve major carriers had the highest ratings in passenger satisfaction and preferences in a survey done by JD Power and Associates. Number three on the list is a Canadian low-cost carrier, WestJet Airlines. One of the key strategies to the success of low cost carriers include attaining low-cost leadership by under-pricing rivals or selling at going prices, earning higher profit margins. Cost activities must be scrutinized regularly so as to maintain a sustainable competitive advantage. Another key strategy is to achieve economies of scale by taking full advantage of experience curves, full capacity operations, increase sales volumes and improving efficiency. Low-cost carriers always aim to improve customer perception as low priced products are often perceived as inferior to higher priced counterparts, regardless of actual quality. Not all low-cost carriers are successful. In the US and Canada, airlines such as Canada 3000, Midwest Airlines, and Canjet ceased operations due to financial problems.

The airline industry has gone through financial hardship in the past decade. In 2001, airline companies experienced a severe liquidity crisis and required a US government bailout. Congress passed the Air Transportation Safety and System Stabilization Act in 2001. The bill contained $5 billion in immediate cash to the airlines, along with $3 billion in emergency spending directed by Bush as part of the $40 billion authorized by Congress in response to the attacks. Another $10 billion was provided to the airlines in the form of guaranteed loans. The airline industry has long been a big contributor to the Democratic and Republican parties, and this support was rewarded generously in the bailout package.

The financial performance of airline...
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