Air Canada's fragmenting brands November 2002

Air Canada has added yet another brand, Elite, to its growing stable which currently includes Jazz (regional), Tango, (eastern Canadian mid–cost), and ZIP (west Canadian mid–cost). Elite, set to launch in 2003, will be a premium business brand with 30–40 seats in A319s, targeted at the corporate jet timeshare market.

The Air Canada strategy could, taken to its logical conclusion, lead to the end of the mainline Air Canada brand. Ever since the Air Canada purchase of Canadian Airlines, employee integration issues have proven expensive and damaging to morale as well as customer service. Many of the senior Canadian employees spent their careers competing with Air Canada, and so there is little mutual goodwill between the now legally and contractually integrated labour groups.

By gradually eliminating the Air Canada brand one could get to the position whereby all of the employees will be working for "new" companies. This would allow for the emergence of new loyalties, and hopefully, improved customer service. A fracturing of the Air Canada brand would also allow management to assign front–line service employees based on criteria other than seniority. All Air Canada employees are currently guaranteed a job but not at a specific Air Canada brand. So, for example, the Elite brand would have a fresh and interested customer service employee allocated to it.

This branding may also create a different, more positive perception among Canada’s consumers, removing some of the negative perception about Air Canada’s monopolistic, bureaucratic presence.

Sub-brand weaknesses

However, the two semi–discount brands (ZIP and Tango) are not significantly lower cost when compared to the genuine low cost competitor, WestJet, and the newer JetsGo.

Many of the services are still provided by Air Canada facilities, with the attendant costs attached.

Then there are all of the well–documented arguments around the complete failure of low cost subsidiary brands (see Aviation Strategy, "Compromise carriers", May 2002), as well as the total failure, so far, of any pure high–end airline brands (MGM Grand Air, etc).

Moreover, as the mainline Air Canada operation shrinks, a higher and higher allocation of the corporate fixed cost pile will be allocated to the newer brands, thus undermining their profitability over time. Once again, agreements with organised labour will limit the percentage of total key union groups that could be paid lower rates or have more flexible work conditions. These union "scope" clauses in effect prevent Air Canada achieving the wholesale labour cost reductions needed to allow its lower cost models to grow and develop.

There are also market–based issues to consider. Will the ZIP brand steal any market share from the ever–expanding Westjet or will it simply cannibalise Air Canada’s mainline traffic? Inevitably, prices will fall faster than Air Canada can lower ZIP’s costs. Perhaps ZIP’s main role is to make life a bit more difficult for Westjet in western Canada, and so slow its expansion in the eastern markets.

However, Tango has not prevented either a re–launch of the previously failed Canjet in eastern Canadian markets nor the launch of JetsGo. The Tango brand is also less focused and more expensive to operate than ZIP, but Air Canada will experiment with deployment of the Tango brand on leisure–oriented Canada–US sectors this coming winter season. (Tango would compare favourably to US mainline airline costs).

In the longer run, Air Canada may be able to make money by spinning off its successful brands to outside investors. But by then the question may be: will there be any mainline Air Canada left operating in North American airspace?