A Bright Future for Canadian Airlines

Head Table Guests

Marcia McClung, President, Applause Communications and a Director, The Empire Club of Canada; Sam Blyth, President, Blyth & Company Travel and a former Director, The Empire Club of Canada; Sonia Fernandes, OAC student, West Toronto Collegiate Institute; Cathy Sobczak, Flight Attendant, Canadian Airlines International; The Rev. David Watson, Minister, Kew Beach United Church; Allister Paterson, Vice-President, Sales, North America Canadian Airlines International; John Cassaday, President and CEO, CTV Television Network; Chief William McCormack, retired, Metropolitan Toronto Police Service and a Director, The Empire Club of Canada; William Baxter, President, The Baxter Travel Group & Baxter Publishing; Alex Wang, Customer Service Director, Canadian Airlines International; Susan Bloch-Nevitte, Director, Public Affairs, University of Toronto; Jim MacDonald, Deputy Chairman, ScotiaMcLeod Inc.; and Ronald Denham, Director, A.T. Kearney Management Consultants.

Introduction by David Edmison

On December 17, 1903 Wilbur and Orville Wright successfully flew the first motor-driven airplane at Kitty Hawke, North Carolina. Their aircraft weighed 750 pounds and was powered by a 12-horsepower engine, about the same as a tractor lawnmower! A decade later the brothers were able to fulfil a government requirement to fly with a passenger for up to one hour. It could be said that this marked the beginning of the commercial airline business as we know it. Since the early part of the century the growth in the airline industry has been nothing short of spectacular leading to Marshall McLuhan's concept of a "global village." We can fly almost anywhere in the world in less than 24 hours.

The commercial airline industry has gone through radical changes in the past decade. There have been numerous mergers, restructuring and several bankruptcies in what is a highly competitive business. This restructuring has not been easy nor without cost. Perhaps the biggest winners through all of this have been the travelling public. More flights have meant greater choice and intense competition has meant lower ticket prices.

Increased competition has also spawned a revolution in marketing and advertising by the airlines. Millions of dollars have been spent on consumer research to identify more accurately who's flying and how to reach them. Marketing programmes are far more targetted with high-impact offers and promotions that are rich and relevant. In the last 10 years, frequent flyer programmes with their exciting travel awards have literally "taken off."

The regulatory market has also changed. With the recent signing of the Canada/U.S. "Open Skies Agreement," air travel between our two countries has expanded dramatically. In order to survive in the present environment, carriers have formed strategic alliances. The partnership between Canadian Airlines International and American Airlines is an example. It has facilitated a greater number of flights between our two countries as well as more efficient use of resources. With us today to talk about this fascinating industry, and Canadian International Airlines in particular, is the company's dynamic President and CEO, Kevin Jenkins.

Mr. Jenkins received a law degree from the University of Alberta and an MBA from Harvard University. He joined Canadian Airlines in 1985 in the Finance Department, after practicing law for five years. He very swiftly moved up the ladder serving as Chief Financial Officer and President of subsidiary Wardair. He was appointed President and CEO in April 1994 and also serves on the Board of Directors.

Our guest is a Member of the Board of Governors of the International Air Transport Association and was formerly Chairman of the Canadian Air Transport Association. He is a Member of the Committee of the Canadian Tourism Commission and serves on the Business Council on National Issues. Mr. Jenkins is 1995 Chairman of Canada Quality Month and is a member of the Business Advisory Council of the Faculty of Business at the University of Alberta. He is also a member of the Young President's Association (and as you can see, he's about as young a president as they come) and a Board member of Young Life of Canada.

Ladies and gentlemen, please welcome our distinguished guest, the President and CEO of Canadian Airlines International, Kevin Jenkins.

Kevin Jenkins

I have been looking forward to addressing Toronto business leaders because Toronto is by far the number-one airline hub in the country. More than 60 per cent of all travellers to, from and within Canada, either start in Toronto, are destined for Toronto or flow through Toronto to hundreds of destinations around the globe.

However, I feel Canadian has been a little too reticent in drawing attention to our activities here, so I hope you'll indulge me as I try and balance your perceptions.

First, our role in what really counts in this city--professional sports. There's lots of competition here for major professional sports affiliations. You should know that we are the official airline of both the Toronto Maple Leafs and the Blue Jays. Maybe we should buy a few more billboards.

Second, our actual competitive position is a lot more impressive than you might have thought. Canadian Airlines actually serves more destinations in Canada and around the world than our competitor. It's true! Canadian Airlines and its partners fly to 116 locations in Canada versus only 67 served by Air Canada and its partners. We serve five continents; they serve three. This is even more impressive when you consider that prior to the formation of Canadian Airlines in the late 1980s, Air Canada never faced any real national competition. It's quite a story! And one that will continue to benefit you as air travellers, with better service and lower prices. I suspect you've noticed a bit of that lately.

In 1991, shortly after Canadian Airlines was formed, the world airline industry entered the most devastating financial period in its history and saw some of the best-known airlines disappear. In total the industry lost $15 billion.

Canadian Airlines survived this period by doing a massive restructuring. We overcame every legal roadblock that Air Canada could put in our way. It won't come as a surprise to you when I say that we are pleased to have the early 90s behind us. However, like all other aspects of our society today, the airline industry continues to experience tremendous change. Competition is fierce and Air Canada makes no secret of its desire to go back to the past! Back to the "good old days" when they dominated Central Canada, they dominated routes to the United States and they dominated most international markets. Well, we are not going back. We plan to compete for your business with superior service in the airport and on board our aircraft.

Airline industry prospects are always closely tied to the prospects for the general economy. Consumer confidence will be a key issue for the Canadian economy in 1996. With approximately 10 per cent of the population unemployed, and an ever-changing workplace, the average Canadian buys later and waits for bargains. For the airline industry this has also been the trend, with travellers buying their tickets later than usual, and waiting for last-minute deals. Much like the Christmas shopper who in 1995 bought more gifts after Christmas than before, Canadian's customers are not in a frivolous mood.

On the plus side, the low Canadian dollar is positive for tourism in Canada. While domestic travel declined between 1991 and 1994, it increased by 25 per cent in 1995. When the dollar is low, more Canadians vacation in their own country and Canada becomes very affordable for foreign travellers. Growth in international travel is even more robust than domestic. As Canada's premier Asian carrier, the rapid growth in that region represents a tremendous opportunity for our airline.

Unparalleled new market opportunities have also emerged as a result of the federal government's leadership in both the free trade and open skies treaties between Canada and the United States. By working closely with our partner, American Airlines, we now offer a significant increase in service to 29 U.S. cities such as New York and Chicago. In less than a year we catapulted from 102 flights per week between Canada and the United States to 461 flights per week.

When you hear me speak about our partnership with American Airlines, you may be wondering what in the world is this "anti-trust immunity." The reality is very simple. American Airlines and ourselves are seeking anti-trust immunity so that we can co-ordinate our schedules and pricing on trans-border routes without being concerned about nuisance legal challenges from competitors or others. Contrary to what Air Canada says, there is nothing nefarious or unusual about this application.

The United States is a highly litigious society. (Ask my friend, Ray Loewen who runs the Loewen Group Funeral Home Company about his highly publicised dose of Mississippi justice!) Like most other foreign partners of U.S. airlines, we are making this application out of an abundance of caution. For example, Northwest Airlines and KLM were granted anti-trust immunity by the U.S. Justice Department for their joint venture. Other airlines have applications pending. In fact, last week the Wall Street Journal reported that Air Canada's own partner, United Airlines, will seek anti-trust immunity to coordinate operations with Lufthansa. Air Canada's objection to this application is just another example of their desire to cement their dominant position on trans-border markets instead of making the adjustments necessary to compete in the new open skies environment. The fact is, Canadian Airlines and American Airlines together have only a 13 per-cent market share on trans-border routes, compared to Air Canada's overwhelming 35-per-cent market share.

Like every other issue Air Canada dreams up, somehow they have twisted this one into cries of American control. This is blatant nonsense! It's also old news. In 1993 the national transportation agency spent weeks examining our arrangement with American Airlines. They concluded that Canadian Airlines was controlled by Canadians. Air Canada appealed the decision to cabinet. Not surprisingly their appeal was denied. They couldn't win in a court of law, so they've now turned to the court of public opinion. I have to tell you, it's a bit hard to take, especially when you consider the facts.

The facts are that no one at Canadian Airlines, including me, reports to anyone at American Airlines. American has a 25-per-cent voting interest and two representatives on the 11-member board of our airline subsidiary. Our parent company, Canadian Airlines Corporation, controls the remaining 75 per cent of the votes. Furthermore, American holds no shares and has no representatives on the board of our parent company! Paradoxically, Hollis Harris was recently quoted in "Travel Weekly" as saying he didn't believe there was a qualified Canadian to run Air Canada and that he is "pushing for one of the guys" he brought with him from the United States as a successor. I am reminded of glass houses and throwing stones.

I suspect the big question many of you have, however, is related to our staying power. You may also be wondering if Canadian Airlines has the financial stability to take advantage of all the growth opportunities I spoke of earlier. I'm here to tell you that we do! We have announced that we will lose between $185 million and $195 million in 1995. The actual results will be announced at the end of this month. Not only is it disappointing to have a loss, but the loss turned out to be much larger than we had expected. Some of the loss is explained by an increase in fuel prices and a weaker yen. However, the loss was much higher than anticipated due to adjustments to accounting for commissions and rebates to travel agents in Asia. In addition, we took some one-time charges to reflect a yearend clean-up initiated by our new chief financial officer, Kevin Benson, and to account for the cost of some strategic decisions, such as the consolidation of all our heavy maintenance work in Vancouver. The good news is that while the loss is significant, we had a cash balance of approximately $200 million at year end. This was well ahead of our forecast. I am also pleased to say that 1996 is off to a very good start and will be a vast improvement over 1995.

For Canadian Airlines in 1996, the customer will be king (or queen!). We will gain a higher share of the business travel market by reshaping our route network and improving our product. Let me tell you how.

We have worked hard on our network to significantly increase its breadth from Toronto, maintain our leadership position in Western Canada, and eliminate services where margins are low. As part of this strategy, 14 stations across our system have either been closed or transferred to our commuter partner Canadian Regional. The aircraft have been redeployed to other markets. This allows us to greatly increase frequency and capacity to 26 destinations from Toronto. As Canada's primary commercial centre, Toronto is crucial to our success.

For those of you who are frequent flyers, you will have noticed that we are improving the quality and competitiveness of our products. We have dramatically upgraded the business class service on our Boeing 747-400 and DC10 aircraft with the introduction of Club Empress. Club Empress was created with input from our customers. It features a brand new comfortable seat with 50 inches of personal space and in-seat video. Customers particularly enjoy the headrest winglets which provide exceptional head and neck support as well as additional privacy.

Our recently announced Canadian shuttle service makes us a player in Toronto as never before. The Canadian shuttle connects Montreal, Ottawa and Toronto in Central Canada; and Calgary, Edmonton and Vancouver in the West. For Torontonians, our shuttle operates 41 flights a day between Toronto and Montreal and 33 between Toronto and Ottawa. Basically, service between the three cities is hourly, with extra half-hourly flights during peak periods.

Last-minute work before flights is now possible at our new airport business centres adjacent to departure gates. They come complete with photocopy/fax/printer machines, telephones and computer data ports. No other airline offers customers this service in Canada. Of course, we also have complimentary morning coffee and newspapers. Once you're on board the shuttle, we'll treat you well with new business class seats. We are installing the new seats on our B737 fleet at the rate of one aircraft per day through the month of February. These are high-quality seats and offer more leg-room than the competition.

In 1996 we intend to increase our market share out of Toronto. We want to earn a higher percentage of your business. For too many of you it's become a habit to fly primarily with our competitor. There were historical reasons for this, but they no longer exist. We're offering exciting new ways to travel. If you're willing to break old habits, we'll make sure you're glad you did. We have been listening to Toronto business people and changing to meet your needs. As I have already mentioned, in the past year we have vastly improved our product and our frequency out of Toronto's modern Terminal 3. But, on top of all that, our employees own 25 per cent of the company and want your business as much as I do. They will provide you with an observable service difference. Try us, I think you'll be impressed!

I have spent a lot of time discussing business customers, but leisure travellers are important too. While business travellers are far more profitable, it is essential to carry a significant percentage of leisure customers in order to be truly successful, not to mention that today's business customer may be a leisure customer with a family on their next trip. The most important thing to a leisure customer is price, price, price. Our new management information systems give us a far greater ability to use price strategically. A seat sale done well enhances profitability by generating new demand at a slow time of the year, or for that matter, a slow day of the week. This has been our experience with both our getaway fares and our recent special winter fares. In both cases we were successful in generating significant incremental revenues. Our current bookings are well ahead of this same time last year.

Canadian's best growth opportunities continue to be in international markets. In 1996 we are dramatically increasing our service out of Toronto to other countries. For example, we recently inaugurated daily non-stop flights to Frankfurt and are doubling our capacity from Toronto to South America. Canada is geographically well located to take advantage of the significant growth expected in international travel well into the next century. We are a northerly country and therefore often on the flight path of the most direct routing between two international cities. For example, one of the best ways to get from Japan to Brazil is through Toronto. However, for Canada to take full advantage of its location we must have far better infrastructure and in-transit regulations. Toronto, in particular, deserves to be a major North American and international gateway.

Pearson International will be compared to Chicago's O'Hare or Heathrow or Singapore. Is there congestion? Is it difficult to get a landing slot? Is it difficult to find an available gate? Can you make a quick connection if you have to? The answer to all of these questions underlines why it is so important that the redevelopment of Pearson Airport proceeds promptly and in the right direction. I have every confidence that Lou Turpen, the new CEO at the Toronto Airport Authority, is exactly the right man for this job. Pearson will never make it to the big leagues, however, with Canada's outdated transit and visa regulations. Today if you are travelling from Brazil to Japan through Toronto, not only do you need the appropriate documentation for Japan, but you also need a visa to enter Canada and must clear customs in Canada before boarding your flight to Japan. This is a lot of hassle which can be avoided by choosing a connection point outside Canada. Obviously, that is not in our collective best interests.

There will always be turbulence in the airline business, but with new markets, new opportunities and a new senior management team at Canadian Airlines, the future looks brighter than ever before. Canadian Airlines has put the elements in place to be the premier airline in Canada for the business traveller. A big part of this investment is focussed on Toronto. As a world-class airline offering competitive service in a world-class city, we'd like you to join our team. Choice, rather than chance, determines destiny. At Canadian, we've put a lot of hard work and determination into our choices. Now it's time to perform.

The appreciation of the meeting was expressed by Chief William McCormack, retired, Metropolitan Toronto Police Service and a Director, The Empire Club of Canada.