SUBMITTED TO :
AIR CANADA- RISK MANAGEMENT
Colin Rovinescu, the Chief Executive Officer (CEO), for Air Canada was reviewing the Risk Management program of the company because the scheduled board meeting was approaching soon. He needed to deliver a comprehensive presentation in front of the board members. CHALLENGES FACED BY THE AIRLINE INDUSTRY:
An Airline is a business providing a system of scheduled air transport. Also called airway. Airline industry is the business of transporting paying passengers and freight by air along regularly scheduled routes, typically by airplanes but also by helicopter. The industry faced several challenges which it had to resolve. They are as follows: * Attack on WTC and Pentagon: The attacks on World Trade Centre and Pentagon, very well known as 9/11 led to decrease in confidence of people. The mindset of people changed to “if US can be attacked then nothing is safe in the world”. This mindset led to less number of people moving towards Air Transport. * Increasing cost of operation: An increase in air traffic and number of new airport terminals drove up the landing fee of airlines impacting the overall operating cost and profitability of the Airline Industry. * Increasing fuel: Increase in prices of crude oil from $27 to $133 had a major impact on the profitability of the industry. The sudden increase in fuel prices left the industry in a fix and increased the cost of the industry by many folds as fuel accounts for around 30-40% of the total operating expenses. * Health related issues: Health related concerns had also interrupted the international travel. SARS in 2003 and Influenza in 2009 created a fear in minds of travelers of being infected. As it is known that people from much demography fly together and apparently the risk of getting infected also increases. This also added to the woes of the Airline Industry. * High fixed cost: The nature of fixed cost in the sector also alluded to the woes of the Airline sector. The leasing cost for the equipment was 5 to 10% of the total expenses and labor accounted for another 30% of the expenses. * Declining trend of projected consumer spending on Air travel: The projected yearly spending in us by consumer on Air travel by IBID provided a rare opportunity for optimism in the airline industry. The state of global economy also remained a major concern. AIR CANADA: A BRIEF DESCRIPTION:
In 2001, Air Canada acquired its largest rival Canadian Airways to become the 8th largest Airline in the world. After the merger, there started the problems for Air Canada. The basic challenges were to integrate two types of fleets, labor relations and Information Technology Systems. Over-all to integrate two types of companies. This resulted in the degradation of customer services and the problems became bigger than their anticipations. Air Canada was falling short of finance. Hence, it filed consumer protection in April, 2003. In September, 2004 it emerged from bankruptcy protection with the help of $850 million financing package from Deutsche Bank. There was a condition laid by the bank which was the further reduction in costs and the agreement on this condition made this package available to them. Since, the years of restructuring Air Canada focused on customer service, cost cutting and improving revenue. Between 2004-07, Air Canada earned operating profits but due to deteriorating economy, they turned into losses. In 2010, finally came the time for improvement in result and then Air Canada started earning sufficient revenue. During this time the focus was shifted to four key initiatives for better future. They were: I. Expanding international operations- Operating globally II. Generating incremental revenue and significant cost savings- Optimal cost...