Canadian Airlines

Reservations about Its Future

Suggested Study Questions

1. What is Canadas position in the

airline industry?
2. What are core IT issues facing the
two airlines?
3. How important is a good reservation
system?
4. Do you agree with the Ottawa court?

Why Choose the Canadian Airlines Case?

No industry has provided so clear and public

an example of evolving strategic use of IT
as the international airline industry.

FIVE COMPETITIVE FORCES MODEL

NEW
MARKET
ENTRANTS

THE FIRM

SUPPLIERS

SUBSTITUTE
PRODUCTS
& SERVICES

Threats

TRADITIONAL
COMPETITORS

Bargaining power

CUSTOMERS

A. How important is the reservation system

to the airline industry and what is its
impact to shape competition? (Appendix for
its pre-background)

Frontier had to fight to have their flights displayed on

the UA reservation system. Only legal action allowed
them to prevail. The denial of the co-host status
meant on Frontiers connections were not included in
the system.
Monopoly prices are charged by UA to Frontier.
Screen bias problems exist where Frontier flights are
displayed less favorably than US.

Frontier Case (cont.)

UA has instant insight on loading data on Frontier

flights, which travel agents will favor Frontier, etc.
Ninety-five percent rule forces travel agents to use a
single reservation system so the screen bias in
Apollo would be widely effective.
Special value added features like printing boarding
passes only work for UA flights.
UA controls and delays the timing of communicating
Frontier fares to travel agents.
UA incorrectly signals that Frontier flights are sold out
when in fact they are not.

B. Discuss potential problems of Electronic

Commerce and why disinterested
information providers have a real
advantage.

The following factors softened the impact on using

CRS (res) as weapons:
public pressure
competition from other reservations systems
threat of law suits

It is too costly to develop its own system and to

include global flight data.
AA has a $150 million a year profit from selling
SABRE services to its customers.

C. Discuss the current state of play in

the Canadian Airline industry.

1. What is Canadas position in the

airline industry?
2. What are core IT issues facing the
two airlines?
3. How important is a good reservation
system?
4. Do you agree with the Ottawa court?

Airlines Organization Chart and their

Airline Reservation Systems (CRS/res)
Gemini

PWA

Canadian Air

Air Canada

Covia

AMR

UA

AA

APOLLO

SABRE

1. What is Canadas position in the airline

industry?

It handles only 2% of the worlds passengers.

It is an East/West airline with perhaps 12 profitable
cities in the southern part of Canada.
It faces intense U.S.A. competition where U.S.A.
airlines have a huge advantage because of their hubs
where they can, for example, easily transfer
somebody from Calgary to San Francisco while
staying on the same airline. The Canadian Airline
obviously do not have this connection facility.

What is Canadas position in the airline

industry? (Cont.)

The industry has shrunk from 7 airlines (1985) to 2

airlines. By 1992 both were under extreme profit
pressures with Canadian Airlines having lost more
than a billion dollars in the last three years. Their
financial viability was genuinely in doubt.
Canadian authorities key objective is to preserve
competition inside Canada and, therefore, want two
Canadian airlines to exist. It is clear, however, that
this competition needs not exist on international
routes where, in fact, the two airlines do not compete.

2. What are core IT issues facing the two

airlines?
Two major players
SABRE
109 global terminals handling 60,000 transactions
per day
achieve 50% market share in Toronto and much
less in the rest of the country
has not evolved to handle bilingual interactions,
i.e., English and French

Gemini
uses United Airlines Apollo software
operates largest private telecommunications network in
Canada and employs 700 people
co-owned by Canadian Airlines and Air Canada

Therefore, it represents a formidable barrier to

Americans expansion inside Canada.
In order to get significant revenue growth out of
Canada, American Airlines needs to find a way to
disarm Gemini.

Canadian Airlines Specific Situations:

Employees fearing for the very survival of the airline

and thus, their jobs, are willing to give significant
wage concessions.
Gemini, fearing for its very survival, doesnt want to
surrender Canadian Air to American Air
Reasonably aggressively price, moving from Gemini
to SABRE, would save Canadian Air $25 million per
year
Merger with Air Canada is not a possibility because
of the Federal Government

The Bottom is ...

Canadian Air wanting to survive, would be happy to

sign a favorable contract to American Airlines
combined with the significant American cash infusion
and an employee wage cut.
Air Canada, neutralized by the government, can do
nothing but swallow hard and maintain their
relationship with Gemini.
The real losers in all of this, of course, are
the staff at Gemini who must operate under a small scope

FIVE COMPETITIVE FORCES MODEL

NEW
MARKET
ENTRANTS

THE FIRM

SUPPLIERS

SUBSTITUTE
PRODUCTS
& SERVICES

Threats

TRADITIONAL
COMPETITORS

Bargaining power

CUSTOMERS

3. How important is a good reservation

system?

Outsourcing vs. strategic weapon

Competition (competitor) vs. cooperation (partner)

airlines reservation system
crew scheduling
hotel reservation system
car rental
restaurant
shopping
its internal IS such as accounting, data processing,
communication services, operations planning, pricing, and
management capability
and more ...

4. Do you agree with the Ottawa court?

YES/ NO

Conclusions

The competition between AA and UA is very helpful

in keeping the worst of the Frontier abuses from
happening in Canada.
This is a different kind of outsourcing case where two
mid-sized firms have completely given up the
capacity to innovate through systems.
As opposed to the Internet and the world of Emarkets, this is an intriguing case about how AA and
UA starting with their own international reservations,
have now turned them into major profit centers which
in reality need not be associated with their founding
airlines.

Conclusions (cont.)

Canadian spends $20-$25 million less to run its

business now that AMR will be handling its IT.
Savings from the services were not the driving force
behind the deal, explained a spokesman for PWA,
We are able to ride on Americans coat tails in
development.
From AA perspective, the deal allowed American to
expand into the information services market; for
Canadian, it was a question of survival. The deal has
ensured its future at least for the next two or three
years.

Worldwide Airlines Reservation Systems

and Foretelling Geminis Future
Galileo Intl.
Galileo

PWA

AA expects to receive
about C$120 million
annually for the duration
of 20 year contract

Gemini

Air Canada

Canadian Air
Canadian Air receives
C$246 million through
the AMR deal plus
other services

Covia

AMR

UA

AA

APOLLO

SABRE

Turbulence in the Domestic Market

Jean-Jacques Bourgeault, Air Canadas COO:

air Canadas position remains that Canada should have
only one flag carrier abroad, but two competing domestic
airlines.
The merger option is not off. We havent given up. Anyone
who knows about the airline industry - unless youre an
executive at Canadian or a politician, tends to agree that
there is no room for two international airlines in this country.
Even if the AMR-PWA deal works out, eventually well be
back to tackling the problem. When In two years? In three.?
In five.? As long as Canada remains Canada, theres one
airline too many and were going to keep fighting until one of
us loses, and I dont think thats (going to be) Air Canada.