Air Canada Joins European Airlines in Trying the Failed “Airline Within an Airline” Strategy (Again)

When you don’t have any new ideas in this industry but your airline needs help, what do you do? You just recycle old ideas and make them sound like the best thing since sliced bread. Throughout the late 1990s and into the early 2000s, the “airline within an airline” plan of having multiple brands in Got a Bridge to Sell Youthe same company took hold. If hotels can have multiple brands, why can’t airlines, right? (Huzzah!) They all failed except for one down under. But that won’t stop airlines from trying it again and again and again. This time, Air Canada is jumping onboard as are all the big European carriers. Bleh.

The original rationale for this kind of thing was that low cost carriers were encroaching on existing legacy airline turf. Because of that, the big airlines decided the only way to compete was to go the commodity route. They decided they needed to have the lowest fares in the market but to do that, they also had to have lower costs so that the venture was profitable. Piece of cake, right?

Just about every US airline save American and Northwest tried this. Everyone remember CALite, Shuttle by United, Metrojet, Delta Express, Song, and Ted? They’re all long gone because they failed miserably. In some cases, they didn’t really have reduced costs. In other cases, they were used on the wrong routes. But in all cases, they were huge distractions for the main airline that resulted in little benefit.

Air Canada Says Third Time’s a Charm
This strategy wasn’t just tried in the US either. It was pitched by consulting firm after consulting firm, time and time again. Many airlines fell for it, including Air Canada. It started Zip in 2002 to try to compete with upstart WestJet with some tired old 737-200s. You might remember seeing those airplanes – they had a different bright neon color on each airplane. But that wasn’t enough. Air Canada also started Tango, an airline that did longer flights to leisure destinations. Neither lasted long and today, only Tango lives on simply as the name of Air Canada’s cheapest published fares.

Air Canada now thinks its time for round three. Next summer, the airline will once again create a leisure-focused low fare airline. This one will even be combined with its vacation package arm. It will start with four aircraft and eventually, there will be 20 767s flying over the ocean and 30 A319s flying North America routes.

And why is it that this plan will magically solve all that ails Air Canada? Well, step 1 is that they will cram more seats on the airplane and they will have lower labor costs. Step 3 is profit. Step 2? Magic.

The idea is to fly routes that the airline doesn’t currently serve, but will that help to support the rest of the airline? Not really, and that’s what bothers me about all these schemes. They’re cramming seats in and going for low fares. If they connect people into the Air Canada network, then it’s going to be on low fares and it’s not going to be very helpful to the current airline. If it’s point to point flying, then maybe the idea is to make enough money that they can mask the failings at the rest of the airline? That’s been the strategy behind the very successful Jetstar in Australia. But let’s not get there just yet.

Europeans Love the Strategy
On the other side of the Atlantic, just about every European airline is trying to figure out how it can compete with the low cost carriers that are currently winning all the battles. IAG (owner of BA and Iberia) launched Iberia Express to take over existing Iberia routes mostly in and out of its Madrid hub. This is purely a play to lower operating costs in order to support the larger airline so it’s somewhat different than most efforts.

Meanwhile, Transavia has been carrying the torch for Air France/KLM in the low cost world. The Dutch airline has long served leisure markets from Amsterdam but it has also now established a French subsidiary to fill in for Air France too, primarily out of Orly airport.

Lufthansa is putting together its own low cost carrier plans as well. It already has a low cost carrier called Germanwings which it picked up in 2009. Germanwings does a lot of flying on low fare routes outside of Lufthansa’s main hubs. Now Lufthansa will take ALL short haul flying that doesn’t touch Munich or Frankfurt and transfer it into this new low cost carrier. Unlike with Iberia Express, the short haul flights that feed the long haul operation will still be Lufthansa in Munich and Frankfurt.

What’s the Point?
In the end, these plans always have the same purpose. Low cost carriers with their cheap labor and lower operating costs come in and eat the legacy carriers’ lunches. Leacy management decides labor costs are too high so they find a way to start a new airline with lower labor costs. Sometimes there’s an operational twist about how lean and mean the new operation will be. Then that will solve everything, right? Not quite.

In nearly all cases, this plan hasn’t worked. Airlines set up specifically as low cost carriers have the business in their DNA. They (at least the successful ones) are simply really good at keeping costs down and fares low. The ones started by other airlines don’t usually have that same level of success because there is too much interference from people elsewhere in the organization. (Oh, and there often isn’t demand for them anyway.)

The one place it worked? Australia, where Jetstar seems to be doing well. Jetstar was set up as a completely separate airline and appears to have had more separation from Qantas than other airline attempts had. But guess what? That still hasn’t done anything for Qantas itself. That airline continues to struggle mightily. It’s just that the parent company now has at least something that’s making money unlike the mess that is Qantas. Just think what might have happened if they focused on fixing the main airline instead.

Can this strategy actually help the main airline? Yeah, financially it can if they flip the thing over. Look at Austrian, which recently transferred everything over to lower cost Tyrolean. It still operates as Austrian from a customer perspective but its at lower labor rates under the Tyrolean contract. Naturally, employees hate this because management really just makes an end-run around hard-negotiated contracts. This may help the airline’s balance sheet but it guts the soul of the airline itself.

Jetstar hasn’t reached that point… yet, but every airline employee naturally looks at these things skeptically, as they should. Most of these fail and simply divert important resources from the core airline. Some succeed but without helping the parent airline. And others, as in the case of Austrian, just take the parent airline over entirely. In the end, the chance of seeing real benefit is minimal.

Just run the airline you have, please.

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