Major airlines such as Air Canada Delta and Lufthansa are
Major airlines such as Air Canada, Delta, and Lufthansa are struggling to meet the challenges of budget carriers such as Southwest and WestJet. Suppose Air Canada's CFO Michael Rousseau has just returned from a meeting on strategies for responding to competition from budget carri ers. The vice president of operations suggests doing nothing: "We just need to wait until these new airlines run out of money. They cannot be making money with their low fares." In contrast, the vice president of marketing, not wanting to lose marketing share, suggests cutting Air Canada's fares to match the competition. "If WestJet charges only \$75 for that flight from Toronto, so must we!" Others, including CFO Rousseau, emphasize the potential for cutting costs.
Another possibility is starting a new budget airline within Air Canada. Imagine that CEO Calin Rovinescu cuts the meeting short and directs Rousseau to "get some hard data." As a start, Rousseau decides to collect cost and revenue data for a typical Air Canada flight and then compare it to the data for a competitor. Assume that he prepares the following schedule:
Excluding food and beverage, Rousseau estimates that the cost per available seat kilometre is \$0.084 for Air Canada, compared to \$0.053 for WestJet. ("Cost per available seat kilometre" is the cost of flying a seat for one kilometre-whether or not the seat is occupied.) Assume that the average cost of food and beverage is \$5 per passenger for snacks and \$10 for a meal.
Split your team into two groups. Group 1 should prepare its response to Requirement 1 and Group 2 should prepare its response to Requirement 2 before the entire team meets to consider Requirements 3-6.
Requirements
1. Group 1 uses the data to determine the following for Air Canada:
a. The total cost of Flight 1247 assuming a full plane (100% load factor)
b. The revenue generated by Flight 1247 assuming a 100% load factor and average revenue per one-way ticket of \$102
c. The profit per Flight 1247 given the responses to a and b
2. Group 2 uses the data to determine for WestJet:
a. The total cost of Flight 53 assuming a full plane (100% load factor)
b. The revenue generated by Flight 53 assuming a 100% load factor
c. The profit per Flight 53 given the responses to a and b
3. When the entire team meets, combine your analyses. Based on the responses to Requirements 1 and 2, carefully evaluate each of the four alternative strategies discussed in Air Canada's executive meeting.
4. The analysis in this project is based on several simplifying assumptions. As a team, brain storm factors that your quantitative evaluation does not include but that may affect a comparison of Air Canada's operations against budget carriers.
5. Prepare a memo from CFO Rousseau addressed to Air Canada CEO Rovinescu summarizing the results of your analyses. Be sure to include the limitations of your analyses identified in Requirement 5. Use the following format for your memo.
Date:______________
To:
From:
Subject: CEO Calin Rovinescu
CFO Michael Rousseau
Air Canada’s Response to Competition from WestJet Airlines
Membership