Rising fuel costs and a global economic slowdown present challenges for Air Canada. Fuel costs for airlines have increased from $44 billion in 2003 to $178 billion in 2011, and the 2008 financial crisis led to falling demand for air travel. Adopting a cost leadership model could help Air Canada compete, but may be difficult due to non-controllable fuel costs and other expenses. The airline may need to focus on both cost cuts and service quality to succeed in the competitive airline industry.

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1- Identify one or two elements for each on the economic and technological segments only.
Air Canada like other companies does not exist in isolation and its performance can be affected
from changes in its external environment. We will discuss about only two economical and two
technological factors which are beyond Air Canada’s control but affect its performance.
A-Economic Segment
The economic environment for Air Canada refers to the broad economic conditions in Canada and
global economy that affects air industry in general and Air Canada performance in specific such as:
A-1 Rising in Oil Price and fuel
The three main operating costs for airplanes are fuel cost, maintenance, and labour cost.
The fuel cost is a non-controllable cost and important operating cost. The price of each barrel of oil
has increased sharply 34 times in average from $2.85/barrel in 1960 to $87.48 in 2011. (7)
As figure one shows the total cost of fuel for airlines at global level from $44 billion in year 2003
increased to $178 billion in year 2011. In other words the fuel cost for airline companies within these
years has increased with average 38% per year.
Source: IATA: http://www.iata.org/pressroom/facts_figures/fact_sheets/pages/fuel.aspx
$0
$50
$100
$150
$200
2002 2004 2006 2008 2010 2012
Total Fuel Cost(in billion dollar)

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A-2 World Financial crisis and Global Economic slow down:
Since financial crisis in 2008 and increasing unemployment rate, the demand for travel and tourism
is shrinking.”The International Air Transport Association (IATA) announced a revised outlook for
the global air transport industry with losses of US$4.7 billion in 2009. This is significantly worse
than IATA’s December forecast for a US$2.5 billion loss in 2009, reflecting the rapid deterioration
of the global economic conditions. Industry revenues are expected to fall by 12.0%* (US$62 billion)
to US$467 billion. By comparison, the previous revenue decline, after the events of 11 September
2001, saw industry revenues fall by US$23 billion over the period of 2000 to 2002 (approximately
7.0%**)”.(8)
B- Technology
There are a number of technological drivers for change in the aviation industry including for AIR
Canada:
B-1Automation initiatives to improve customer service and enhance productivity
Internet and electronic for booking flights, check in and check flight status has become a dominant
way that caused major efficiencies for aviation industry.(4,5)
B-2 New Model of Airplanes with better fuel efficiency and larger capacities
One of the main characteristic of air Industry is being capital intensive especially expensive air crafts
fleet. Invention of efficient fuel and high speed supersonic air crafts have been major technological l
development in air industry in recent years. Air Canada, like the other major airlines is forced to

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purchase new planes because the new ones are more fuel efficient, safer, and easier to maintain.
Airlines that choose to stay with an older fleet of planes have to deal with higher fuel and
maintenance costs. Costs are still relatively high for all of the world’s major airlines because of high
cost of new airplanes. Just One Boeing777 costs from $25 to $100 million dollar. More modern
planes like Boeing 787 Dreamliners are quieter, faster and have longer ranges, less stops and fuel
efficient and more environmental friendly than the old and current models in market.(4,5)
2- What potential challenges might Air Canada face in moving to a cost leadership model?
In recent years the airline industry has become increasingly competitive. “Since deregulated during
1970, long established airline such as Pan American and Eastern have gone out of business as new
upstarts like Midwest Express and Southwest have successfully entered the market. It appeared that
almost any one could buy a few used planes to serve the smaller cities that larger airlines no longer
wanted to serve. These low – cost, small –capacity commuter planes were able to make healthy
profits in these markets where it was too expensive to land large jets. Rail and bus transportation
either did not exist or was undesirable in many locations” Eventually the low cost local commuter
airlines expanded services to major by offering cheaper fares with no-frills service “(P.77, 3)
That happens with less degree in Canada. WestJet was a good model to offer cheap air ticket with
good customer relationships.”Air Canada has spent the past few years increasing the utilization of
existing planes as a cost - effective way to increase capacity” .(7) “ If it is able to speed up the turn
around at airport by 15 minutes, for example, it would be able to free up the equivalent of two
airplanes.”(7) These assertions show there a lot of room for increasing efficiency and lowering cost
for Air Canada by better utilization and economy of scale to keep its profit margin higher in

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declining global demand for air travel and confronting with non-controllable costs such as higher
insurance, security costs (especially after 9/11) Fuel cost, and high prices for new planes where there
is no or low bargaining power with suppliers (Boeing and Air Bus) for getting better prices. For
example “America Airlines says that one extra passenger on every flight would add US$114 million
to its annual turn over and nearly that to its profit.”(1,222)
As Mr. Calin Rovinescue says:” Low cost carrier model has been adopted by other carriers, such as
Singapore Airlines, All Nippon Airways, and Qantas, and it’s something Air Canada should adopt if
it wants to continue to expand in to new markets until it gets its 787s.”” We would be putting our
heads in the sand, and pretending it (low-cost strategy) is not important for us to pay attention to.”(7)
Porter (1980) has argued that “There exists two type of competitive advantages which can be
combined for strategies: cost leadership, differentiation, focused – low cost and focused
differentiation.( 6) Porter says being stuck in the middle of four above mentioned strategy will be a
disaster and causes below- returns performance he mentioned the experience of Laker.(6)
Integrated cost leadership and differentiation strategy which develops a competitive advantage by
simultaneously achieving low cost and different ion such as safety, on-time flight, and good catering
and customer relationship could be another strategy. West Jet is generally recognized for lower cost
air line but there is also high satisfaction of passenger and low complains that shows West Jest
actually is pursuing both low-cost and differentiation strategy simultaneously.
The airline industry is confronting increasing competitiveness, shrinking profit margin, rising fuel
cost and insurance for safety and request increase in wage and salaries from union have caused

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survival for airline companies such as Air Canada difficult. It is difficult to achieve growth in profit
margin only through traditional models either low cost or differentiation model. Air Canada with
concentrate in both lowering its cost down in various areas such as maintenance, catering, booking,
airport handling without making problems in core business by better management, ,offering stock in
company and seats on the board of directors to their unionized employees in exchange for wage and
benefit reduction or instituting a cap on travel agent commissions , improving efficiency by
increasing loading factor (percentage of aircraft seats occupied by passengers) and using economies
of scale (which results in reduction in the unit cost per passenger as more seats sold), and finally
formation of strategic alliance with other airlines companies but at the same time offering quality
service for customer satisfaction and superior service to keep a strong position for Air Canada as a
high prestigious quality service company in Airlines markets.” But Air Canada should be careful not
go to any price wars otherwise it contributes to low profit margin and in worst scenario bankruptcy
in long run.

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Works Cited
Books:
1-Brian Kenny, Edward Lea, George Luffman, and Stuart Sanderson, ”Strategic Management and
An Analytical Introduction” Blackwell Business, 1987, 3rd edition, Cambridge, Massachusetts.
2-Colin White” Strategic Management” Palgrave-Macmillan, NewYork,2004.
3-J. David Hunger and Thomas L. Wheelen, ”Strategic Management and Business Policy”,9th
edition, Pearson, Prentice Hall, New Jersy,2004.
4-Hitt, Ireland, Hoskisson, Rowe, Sheppard,”Strategic Management: Competitiveness and
Globalization”, 3rd Canadian Edition, Nelson Education, USA, 2009.
Journals:
5-Amit C. Kamath and Jonas Tornquist, ”Strategic issues in the airline industry and the role of
Singapore international airlines”, Delhi Business Review, Vol.5,January – June 2004.
6- Porter, M.E.”Competitive Strategy : Techniques for Analyzing Industries and Competitors”
Harvard Business Review, New York,NY,1990.
Newspaper:
7-Scott Deveau, ”Air Canada stays lean as it awaits Dreamliners”, National Post. Nov4, 2011.
Websites:
8-http://www.ioga.com/Special/crudeoil_Hist.htm, Nov. 15, 2011
9-http://www.iata.org/pressroom/facts_figures/fact_sheets/pages/fuel.aspx, Nov.19, 2011.
10-http://www.iata.org/pressroom/pr/pages/2009-03-24-01.aspx, Nov.19.2011.