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

Air Canada, Lufthansa

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

  1. What’s that saying about doing the same thing the same way over and over again but expecting a different result-oh yeah INSANITY!

  2. Seems the only way an airlinie owning an airline would work would be to start one and not have it do anything with the main airline. Like AC starting a new off spring and for example base it in Vancouver flying to/from West Coast USA markets and not do anything else or connect up with main AC. It never works if you are flying UA connecting to UA and it was mainline UA connecting to Shuttle by United. That did nothing, might as well just save money on repainting planes with “Shuttle” in front of the United.

    And as someone who flew Shuttle a lot back then, it was one giant mess. So keeping your two airlines separate is the only hope an airline has of making it work.

  3. This is getting to be ridiculous. Lufthansa short haul is perfectly fine as it is.

    Hopefully if they go with this plan, the new airline remains named “Germanwings”. This DirectForYou or whatever codename they have just sounds stupid.

    1. Sanjeev – Direct For You is a play on the code for Germanwings, namely 4U.
      People flying to/from Dusseldorf or Hamburg on Lufthansa generally are not connecting – it’s just a point-to-point short haul flight. There simply is no need for all the costs that come with a legacy carrier with a simple flight. Airlines like Easyjet are eating at LH’s profit margins because Easyjet can offer a flight for a cheaper cost while still maintaining sufficient service standards.

      British Airways used to have substantial non-hub operations for non-connecting short haul at cities like Birmingham, Bristol and Manchester in the UK. With full legacy airline costs but competition from LCCs, eventually they became so unprofitable BA had no option but to sell them to a pseudo-LCC just to get rid of the loses. Lufthansa wants to avoid that scenario.

      1. It makes sense that the strategy for powerhouses Frankfurt and Munich should be different than for the smaller domestic markets. But then there’s the elephant in the room — Berlin…

      2. Yeah I figured it was a play on 4U :)

        LH should not make the BA mistake of ignoring regional markets. BA left regional UK alone and EK gobbled it up. There is plenty of premium demand in places like Düsseldorf which cannot be ignored. Not everyone wants to connect in FRA or MUC.

        A low cost carrier is fine, but it better earn points in Miles&More, offer some benefits to maintain those Star loyalists (specifically on LH and not TK or anyone else).

        LH better come up with some solution that works or everyone is gonna fly TK nonstop to IST and beyond (evidenced by FOUR DAILY IST-DUS and new flights to places like Bremen).

      3. David – Here’s the problem as I see it in an instance like this. Ok, so you’re a guy in Dusseldorf and you just want cheap fares. Both easyJet and Ryanair come in and offer you low fares. Now you’re no longer flying Lufthansa because you have a cheaper option. Makes sense.

        The natural thought from Lufthansa is, “Hey, that sucks. If only we had lower costs we could compete.” But the problem is that people don’t want that from Lufthansa. They already have good, competent low fare service from existing airlines. If Lufthansa comes in to match, then why would people fly Lufthansa’s entry? Maybe they like frequent flier miles. Ok, there’s something else that boosts the cost vs easyJet or Ryanair. Maybe they want assigned seats. That hurts the efficiency as well as the ancillary-generation capability.

        You can try to start a low cost carrier, but then you’re solely competing on price even though people have higher expectations from you. And others will do a much better job than you can if that’s the game you want to play anyway. Meanwhile, you’re diverting people who should be working on fixing what’s left of your airline.

        BA was probably right to lose much of that regional service. There are other players who can do a much better job and are doing so today. It has probably prevented BA from losing even more money.

        1. Easyjet will be completely assigned seating by November 2012. Germanwings already is all assigned seating, and offers LH loyalty miles, but doesn’t have the full cost base of LH.
          Ryanair on the other hand isn’t a competitior to LH in the German short haul market from Dusseldorf / Hamburg – it flies to airports at least an hour away from these 2 cities, in the form of Weeze and Lubeck. The other big competitior for LH at Dusseldorf comes in the form of Air Berlin.

          1. David – Well, easyJet is going to assigned seating but you can only pick your seat if you pay for it. Otherwise you get whatever seat they decide to give you (which will undoubtedly be a middle seat in order to get you to pay up). And while Ryanair may not be a competitor for those in the middle of town in these cities, Ryanair is still a very solid option for people who live in suburbs.

            But the point is that people have a higher expectation for a legacy carrier than for a low cost carrier in general.

          2. I agree with David. Easyjet and Ryanair are no big competitors to Lufthansa in most of their home markets (Cologne/Bonn, Dresden, Düsseldorf, Hamburg, Leipzig/Halle, Nuremberg and Stuttgart besides both hubs). The last two Lufthansa CEOs Weber and Mayrhuber however underestimated the upcoming Berlin market and gave room for Easyjet’s and Ryanair’s expansions and Air Berlin to build up a rudimentary hub. After 9/11 Lufthansa focussed on Frankfurt hub first and than expanded in Munich due to capacity limits at its main hub. As a result passenger volume e.g. in Düsseldorf dropped by around one million. In 2002 they established Germanwings as a subsidiary of Eurowings – a former competitior which Lufthansa took over in late 2000 (only 49% first, but with full economical and operational responsibility) – to compete with the fast growing low cost airlines and to shield their home market. Unfortunately they forgot Berlin.

            That’s for the history. If you look at destinations and frequencies out of Ryanair’s bases in Weeze (50 miles away from Düsseldorf) and Lübeck (45 miles away from Hamburg), there is no serious competition to Lufthansa’s operations. There are just a few overlaps in destinations such as London and… well, London. The other destinations offered by Ryanair are predominantly in the Mediterranean region and are flown from one two three times a week. As mentioned the competition out of Berlin is crucial. The Hahn-Base (75 miles away from Frankfurt) is a mixture between typical city pairs and leisure destinations at the Mediterranean sea. Except for Berlin, Easyjets operations are no big threat to Lufthansa. They could only retain flights to London from several cities like Düsseldorf or Munich. They failed on Basel (from Düsseldorf, Hamburg and Munich), Rome and a few more. So none of them can compete with Lufthansa on their core business!

            Air Berlin is a bigger issue. But Lufthansa forced them back to DBA’s (former Deutsche BA) domestic network ten years ago – with a similar passenger volume. The European network far from Berlin an Düsseldorf is too dominated by leisure destinations.

            So, CF, I’m with your quotation: “Just run the airline you have, please.”
            Lufthansa should follow the obviously successful way of Aer Lingus and Air New Zealand. Especially in operations. German automobile manufacturers replicated Japanese lean production methods in the 1970s. So Lufthansa should emulate only a few aspects of lean production in airline industry like homogenous fleet (one of the goals for new Germanwings), optimized operations (too many aircrafts are flattening their wheels on concrete on weekends), easier tariff system with only basic services for the low fare booking classes, specialized maintenance stations periphery to lower stockholding costs due to only one or two types of aircraft operating from these airports and so on. Some of these points are already in progress!

            I’m very tensed about the upcoming three years as Lufthansa CEO Franz made the target for Germanwings to be profitable in 2015. And of course about Germanwings’ new product and tariffs. The bigger the gap between Lufthansa and its renewed affiliat, the lower the chances of success…

  4. I’m a customer service agent with AC and pride/morale is about as low as it could be. Air Canada’s going to have a fight on its hands for this new airline, because as far as the union is concerned, the new airline will be covered by our original contract. What Austrian did with Tyrolean is horrific and none of that will be tolerated here. Other than that, though, we’ve been given next to no info.

    One thing that you might recognise, too, cranky, is that Air Canada is taking another page out of the US carriers books’ by playing its regional carriers against each other. As of now, they’ve only really had one major carrier, Jazz, as well as a handful of small players operating Beechcrafts to nowhere. When they launched last year at Toronto Island Airport (YTZ), they contracted with Sky Regional Airlines, the generically named newcomer that is the progeny of old vacation charter company Skyservice. As part of Calin’s announcement about the new low cost carrier, he also mentioned that he’d be transferring a whack of Embraer 175’s to Sky Regional to build them up into a competitor to Jazz, I’m sure with the intent to play them against each other for routes.

    1. Thanks for chiming in, canrocks. The regionals are a whole different story for sure. It’s so funny because Jazz is essentially a combination of all the old regionals that got rolled up into one back when that seemed like a good idea. Remember Air BC, anyone? Air Ontario? Air Nova? Yep, all rolled up. Now AC wants more diversification.

      I don’t blame management for that. You live and die by the reliability of anything using your brand, but AC management has no control over that. (I mean, it can set standards but it can’t guarantee things.) So having some diversity smoothes out the risk.

    2. The simple solution to the YTZ issue is to boot AC out and let Porter have the whole thing. I’m AC Elite and addicted to my miles, but even I choose Porter for my regional flying now. Better service, better planes, better prices.

  5. AC is such a mess; the government wants it to be profitable but it wants it to bend to all its whims as well. Pick one and stick with it, and you’ll avoid most of these charades.

  6. I’m not that familiar with Air Canada, but my understanding is it is the dominant carrier that has been a member of the world’s dominant airline alliance, in a very large country with 34 million people whose population is spread over a relatively wide area with the 12th highest GDP per capita in the world, and whose economy is doing reasonably OK, trades actively with the rest of the world, and has strong cultural links with many other countries.

    All this indicates an airline that should be highly profitable. So what parts of the operation are losing all the money ?

    1. David one of the things that muddies the water with Air Canada is something like 90 percent of Canada’s population lives within 100 miles of the United States, so it isn’t completely its own market. Its quite common for Canadians to drive down to the US and take a flight from here, because departure taxes are less, and we’ve got a wee bit more competition in the US.

      One thing Canada does have is service to Cuba.. Apparently, US Border Patrol watches people go to Canada in the winter, and come back with nice nice tans..

      1. Nick, that only makes a difference on departures to the USA. A USA-USA flight has no US Immigration/Customs/Agriculture fees, and the AIF(PFC) is typically lowered on a domestic flight.

    2. David – Air Canada is a mess financially from high labor costs and just general baggage that accumulated over the years. Canada isn’t that big of a country and WestJet has put a serious dent in a lot of the higher value markets with lower fares. It’s a tough business up there.

      1. WestJet’s fares are almost always the same as AC. They’ve got a loyal following of AC-haters who are happy to pay a similar price to avoid AC.

        Also, WestJet is based (big surprise here) in the west while AC is seen as eastern Canada’s airline. There’s an element of regional rivalry in Canada that most Americans don’t appreciate. Think of AC as the Yankee airline and WestJet as the upstart from the Old South and you’ll get a better idea of the regional favouritism involved.

  7. What about such airlines in Asia? Several exist (Air India Express, Thai Smile, Scoot), but any word on how they are doing? Air India has its own problems, and the other two are both very new, so it’s hard to say, but I’m not sure that the idea will work well in Asia either.

    1. Fred – I didn’t even touch Asia with this one (except for Jetstar which bleeds over), but you’re right. There are plenty of efforts over there. I haven’t seen one succeed yet but many are in the early phases, including Scoot. I’ll be watching for sure.

    1. john – I actually flew a CALite 737-100 Baltimore-Greensboro-Atlanta. The mighty Greensboro hub didn’t quite pan out…

    1. David – I don’t think of Silk Air as really a low cost carrier. It’s more of a regional operator that’s a full service airline. I think it’s a different kind of thing – it wasn’t started to fend off other low cost carriers, at least not that I know.

      1. What Cranky said: SilkAir is just a way for Sing to serve smaller markets while the mainline only uses widebodies.

  8. I’m getting more and more disgruntled with North American-based airlines. I’ve been traveling Air Canada and other airlines for years, and it is always, same ‘ole, same ‘ole. These guys really need to take some lessons from the Middle East or Asian-based airlines.

    Airlines like Emirates and Singapore Airlines put these guys to shame!


    1. So you’re saying the North American airlines should be like Emirates and employ foreign workers from poor countries; that those workers should work for child labour rates; and that those workers should be forced to live in squalored communes with the barest of necessities – places where you and I wouldn’t allow our dogs to live. Those North American airlines should also have the benefit of unfettered fiscal subsidies from their governments without worrying about nasty inconveniences like free trade agreements and unfair trade complaint tribunals. That means they should be supplied with jet fuel at 30% of the normal market rates, like Emirates gets out of their main hub in Dubai. And finally, they should be able to discriminate against their front line staff on the basis of their looks and their weight – and to be able to fire them at will for gaining 5 lbs.

      All this to say there’s a reason that Emirates can put on such a dog and pony show with their beautiful women in their beautiful uniforms. They don’t have to worry about most of the things we take for granted here in the civilized world.

      1. Dan – If you have proof of any of these things, please provide it here. Emirates crews are treated very well. I’m sure the rampers don’t get quite the same treatment, but I haven’t heard about “squalored communes” where dogs shouldn’t live. The airline pays the market rate for fuel. Anyone in Dubai gets the same price. Does that mean it’s cheaper in Dubai than in a place like London? I would assume so since the taxes are less stifling. But that’s simply the fault of European government policy. There’s nothing wrong with the UAE having a policy to promote aviation. And that doesn’t make it a subsidy.

  9. This may be overly simplistic, but maybe the best strategy is to have a sound business plan to do what you do better than the other guy. If that means downsizing, it means downsizing. In mature industries like airlines, that’s often been the best strategy.

  10. I don’t believe the airlines give a hoot as to the effect their organization, operations, and pricing have on their customers.

    Multiple brands? With their regional operations, they already operate at least two brands. Is that what their customers want?

    Hub to hub, UA, IAD to IAH, for example, almost half are regionals. Even regionals to ORD.

    Clean, clear types of operations? Hub to hub, UA again, IAD to SFO, today (Thurs.) for example. 11 non-stops, nice, (5:50a to 9:54P) but is there really a need to operate this with 5 different types of aircraft? (A319, A320, 738, 752, 753).

    And, from 9 different gates at IAD (C9, C11, C17, D5, D19, D23, D26, D29, and D30). Getting to C and D are two different types of experiences. And, into 7 different gates at SFO (73, 74, 75, 81, 87, 88, and 96). Flight numbers sometimes 3, sometimes 4 positions. Remember when such flagship routes carried very low, sort of high prestige flight numbers?

    And those fares. Cheapest non-stop on Sunday, Monday, and Tuesday, $685. Of course, on the same flights, if you connect at SFO and regional off to Reno, the fare drops to $201. Maybe the difference is in appreciation of your taking the wonderful shuttle from Terminal 3, gate 87A, down, up, across, through, up, down, etc., etc., to Terminal 1. But, a fare difference of that amount?

    Of course, I know, there are explanations for everything, at least from the airline’s point of view. But to the traveler, whatever his or her purpose for travelling, it’s frustrating.

    1. JayB – I don’t see the US airlines are offering multiple brands. I see it more as just brand inconsistency. United did try that with “exPlus” branding for the 70 seat regionals but they ditched it. Now it’s all an effort to provide as much consistency as possible and they don’t always do it well. But that’s the right idea.

    1. Compass Air was a regional operator for Northwest, not an airline within an airline. So it was more like American Eagle, Piedmont/PSA/Allegheny (the US Airways subsidiaries), or ExpressJet (Continental Airlines subsidiary.)

      1. What Nick said – but no need to talk about Compass in the past. It still flies today, wholly-owned by Trans States.

  11. I agree with most of the article with the exception that Air Canada Tango was a failure. The Tango service was expanded thoughout North America as today’s Domestic Y product. Tango allowed AC to expirement with different fare and service models sich as (buy on board, online/internet ticket purchase, seat selection for a fee, all economy flights). The sucesses and lessons learned from the Tango expirement went into the mainline Y product.

    I some ways, what AC should have done was transfer all narrowbody aircraft to Air Canada Tango by painting the planes purple and pulling out J/C class seats, leaving AC mainline to be a pure widebody operation. Had AC done this, there would be many comparisons between AC and QF (both airlines would have sucessful LCC brand with hugely unsucessful international divisions.

    1. Nick beat me to this one, Kris. Song was the same as what you’re saying. The in-seat TVs and buy-on-board fresh food offering started there and migrated to Delta. But it is a terribly expensive testbed as Nick says.

      You could just as easily try out buy-on-board on specific routes to see if it works at Air Canada. Any of those other things could have been tested without setting up a new airline and wasting time on it.

  12. I do a lot of flying in Europe and find City Jet the perfect airline for business
    passengers – for starters it flies from City Airport in London Always try to
    avoid Ryan Air!

  13. Don’t believe everything you read. Jetstar’s profitability is nothing more than a game of smoke and mirrors. The only reason they appear to be profitable is because many of their costs – like passenger and baggage handling – are provided by Qantas. There is no charge back of these services to Jetstar. This makes Jetstar appear to be profitable, all the while making Qantas look like an even bigger loser – thus feeding the drive to slash their union labour even further.

    If they were paying typical market rates for these services, Jetstar would no longer be profitable, and Qantas would have more revenues on their books.

  14. Am I correct in my understanding that the ‘LCC Air Canada’ will be staffed by new hires operating under labour contracts outside of incumbent AC employees?

  15. I suspect it wont be one LCC, but instead a whole bunch. They’ll set up “Air Canada Ole” for flights to Mexico, “Air Canada Euro” for flights to the EU etc etc. This allows them to create a Mexican company, a European company etc etc, out of the reach of the existing employees and their employee contracts

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