When I was at the Boyd conference in Vegas a couple weeks ago, I had the chance to sit down with several airline execs. You already heard from Virgin America CEO David Cush on his grand plan to expand regulation. Now let’s move north of the border with Air Canada’s President of Passenger Airlines Ben Smith.
Ben was the man behind the launch of Tango back at the dawn of the millennium, and I was eager to talk about that. But first, we dove into the airline’s decision to put some super-dense 777s into service under the Air Canada brand.
Cranky: Let’s start with the densification of the widebody fleet. The new 777s are rolling out with, what, 300,000 seats on board?
Ben: *laughs* We’re not as dense at the Air France Caribbean/Indian Ocean aircraft.
Cranky: Fair, but it’s an interesting strategy so I’m curious how you arrived at that number of seats, which is close to 450?
Ben: In Canada we have a market phenomenon which does not exist in the US. We have a large presence by a charter-type carrier, Air Transat, in a big way in some of the biggest international markets out of Canada. I would say that’s not the main reason why we densified the 777s but it was one of the main reasons. We did not have a cost structure to effectively compete against this carrier. There were a number of ways we went to resolve this. One was through Rouge and another was through having a high capacity aircraft that could not only have a premium cabin but also a very competitive seat cost in economy.
Air France had a similar issue to the Caribbean. When they started deploying that to Montreal we said, “ugh, what are we going to do here?” They have this beast with 472 seats flying. If Air France, which does very well in the Canadian market, can do it, we can try it out. We have the same issues in the Pacific against Cathay Pacific between Vancouver and Hong Kong which is a big leisure market. Neither were the sole reason we did the high density [configuration] but the airplane has proven to be extremely effective across the Atlantic. We’ve come to the realization we pushed the premium cabin a bit too far so we’re going to put the 787 product on the airplane and bring capacity down from 458 to 450.
Cranky: Well forget it now, that’s not densified anymore.
Ben: *laughs* But we’re gonna have a uniform product offering across all 777s and 787s. Both have premium business class seats, premium economy, and economy. We’ll be the only North American carrier to have a true premium economy cabin internationally. Not just pitch but also width. That’s been very successful. And the business class seat is great.
The 777 high density is an amazing amazing airplane for us as an airline. It’s one of the most powerful weapons we’ve had. It’s a huge barrier of entry to anyone. When we put the new business class seat in there, you’ve got the best premium cabin in North America, true premium economy, and you have a seat mile cost in economy with a product which is basically the same as Emirates, same as any of the US legacy or European carriers with a great inflight entertainment system. What more could you ask for? And it has the unit costs so why wouldn’t we use this airplane?
Cranky: How big is this going to be in the end?
Ben: At the end state, it’s going to be a very small portion of our fleet.
Cranky: For now
Ben: No, no. As you’re seeing with many airlines around the world, the real estate on the airplane, you have to get it right. Every carrier is trying to find the right balance. I think we’re a little ahead of most of the western carriers. Our go-forward cabin offering is 4 seat types, standard economy, what we call preferred seat, premium economy, then business class.
Cranky: Does Rouge fit into that as well? Will you have the same product?
Ben: Yeah. The Rouge difference is we won’t have the real business class.
Cranky: Can you talk a little bit about how you decided to go with a true premium economy cabin?
Ben: For us, when you look at our four biggest international competitors — Cathay Pacific, British Airways, Air France, and Air Transat — all 4 of them have such a product. It was a competitive issue.
Cranky: Now you have WestJet maybe gonna be number 5.
Ben: Yeah, but we’ve been expecting that.
Cranky: You’ve already stepped up the competition in London with Gatwick service. Did you think that was necessary?
Ben: We’ve served Gatwick in the past so it’s not a first for us. The London market is the biggest air market in the world. We do serve multiple airports in many cities, so it’s not crazy for us to serve a second airport there. It will be on a limited basis though.
Cranky: Let’s talk narrowbodies. Rouge… well, first, you started Tango right?
Ben: Tango was, from an Air Canada perspective, we were really happy with it. At the time most of the legacy carriers were full service. In Canada you had full meals, a bar on board. The only way to do it was to have these crazy gouge Y fares and then low fares with Saturday night stay and 14 day advance purchase. Tango offered a lower-risk way of introducing buy on board, one way fares, internet only fares, all the things airlines were scared to do at the time. It worked really well for us. We ran a closed network and had a much lower risk of tarnishing the mainline brand. But because we weren’t interlining with mainline, we had to make a decision. Do we interline or how do we handle this? The decision was made to introduce branded fares, and we morphed Tango from a separate operation into our base branded fare across all North America.
Cranky: Instead of launching Tango as a separate airline, do you think looking back you could have launched it as part of a branded fare in the first place?
Ben: No I think it was necessary. The industry and the margins were so tight. In Canada at the time, I don’t think we would have risked the business. Right now, if you asked if we’d do it again, I’d say definitely.
Cranky: So then we fast forward to Rouge, obviously not a closed network. Why the decision to go with Rouge as a separate airline instead of cramming more in the back and cutting seat pitch and doing more densification with mainline as you’ve done with the 777s?
Ben: I think because in Canada we’ve got so much capacity and competition from Air Transat and Sunwing, just doing density was not going to be enough. We needed a b-scale from flight attendants and pilots, and we needed more flexibility. That was only doable with a separate [operating certificate]. On top of that, if we were going to have a product that was comparable to the others, we needed different branding as well.
Cranky: Of course now you have people connecting between the two, not getting what they expected. And that led to product changes, so can you talk about what you learned early on?
Ben: Of the 60 plus routes we’ve started with Rouge, I’d say 55 of them have been successful for us on most fronts. We had some big challenges on Western Canada-California customer expectations and we now have a ten year pilot contract, no strike no lock out on very good terms. With that it eased some of the restrictions they had imposed on us which allowed us to put the premium seats in. That along with customer feedback has allowed us to address a lot of the product issues.
Cranky: Interesting, so it was the pilots?
Ben: One of the reasons.
Cranky: Is the premium cabin the only place you see issues with Rouge today?
Ben: That was one of the bigger issues but not the only issue.
Cranky: So what do you want to see change going forward? Is it at a place you’re happy with it?
Ben: I mean, look, we’re always evolving in our business but it’s far exceeding my expectations. First of all on bottom line financial performance, it helps support our main go-forward strategies. And people don’t like change and people like a good deal. Flying mainline against these charter carriers, we weren’t making any money. If you make the comparison of Rouge to Air Transat and Sunwing, we win. If you make the comparison between Rouge and mainline, you can understand why people might be upset. But once people understand what the comparison is, our customers usually come around.
Cranky: Is there more growth for Rouge?
Ben: It’s capped at 50 airplanes. We’ll be there by summer 2017.
[Cranky Note: Air Canada announced a big expansion with flights to Prague, Casablanca, Budapest, Glasgow, and Warsaw after this interview.]
Cranky: When the 737MAXs come in, is it going to look like the same product as people see today?
Ben: I think it’s a bit early for us. We’re watching closely New York to California, 5 airlines with an international product. It’s unbelievable.
Cranky: Well you have Toronto to the West Coast with an international product.
Ben: Well we don’t have a dedicated fleet. We haven’t got this A321 with a 3-class configuration, but I would think the bulk of those airplanes would be very similar to what thy’re replacing. Whether we go one step further and do something one step up for long haul transcon, I don’t know.
Cranky: Are you looking to put these airplanes on longer routes that you can’t do today?
Ben: For sure you’re going to see us deploy that airplane in places where the Airbus narrowbody doesn’t go.
Cranky: Some creative stuff over time?
Ben: Sure, North and South America, Hawai’i, Europe, transcon. I mean, it’s a great airplane.
If you missed my earlier discussion with Virgin America CEO David Cush, you can read that here.