Northern parallel

Five innings game

Calin Rovinescu’s 25 years with Air Canada has seen him involved in – and heavily influence – nearly each of the airline’s watersheds. It has made him uniquely qualified to occupy the top seat, something he has done since April 2009.

In 1987 he advised Air Canada independently as a lawyer on its privatisation, in what Rovinescu calls his “first innings” with the airline’s transformation.

Since then he has helped steer the airline through global recession, SARS outbreaks, 9/11 and industrial reform to bring Air Canada today to being a profitable, expansionist carrier that is embracing change, not eschewing it. “It started with the recognition that change was going to be inevitable and continuous,” Rovinescu said when asked about how he has achieved such a remarkable turnaround amidst stubbornly persistent global economic turmoil.

Privatisation of Air Canada in 1988/89 delivered commercial freedoms to the airline enabling it to capitalise a fleet renewal program and to redefine its corporate culture. Air Canada posted consistent profits during the ’90s as reform of competition regulation in Canada led to the potential for the consolidation of carriers, at that time Canadian Airlines (formerly CP Air) and Pacific Western.

Continuing his baseball analogy, Rovinescu said: “The second innings, which was really a reality check, was in 1999 when there was a hostile takeover bid by Onex and American Airlines, and the company changed again. That resulted in the acquisition and merger with Canadian Airlines. ” It was soon after this in 2000 that Rovinescu surrendered his legal practice specialising in mergers and acquisitions and joined Air Canada.

The bringing together of once arch-rival and founding oneworld alliance member Canadian Airlines into a merged global airline provided Rovinescu with an opportunity to help deliver a rolling program of change that has defined Air Canada as a progressive – and ambitious – airline that plays a strong role in Northern America and globally as an influential member of the STAR alliance. In many ways the avoidance of the takeover bid by American Airlines was prescient.

“I see this as an early form of consolidation. All the US carriers are going through consolidation now, but we went through that when we had that second phase (of change). ” The consolidation of Canadian and Air Canada in both the domestic and international arenas, meanwhile, similarly created a single, strong entity that represented a fundamental change to Canadian – and indeed North American – aeropolitics, competition and market perception, all things that would become critical to strategies to fend off vicious global events that would further characterise Air Canada in what would become a permanently changed world.

As North America succumbed to the wreckage of the airline industry that arose from 9/11 and contended with the restrictive effects of SARS (something Air Canada was particularly susceptible to given its exposure to Asian markets), Air Canada drew upon the strengths of its changed governance structure to set an even bolder agenda of change. The program aimed to not only stem the consequential tide of red ink running across the balance sheets, but to set a future direction that created a robust enough airline to set a global agenda, not simply to follow it.

As the airline entered bankruptcy protection reeling from the exposure of Canadian Airlines’ deep financial woes, the resulting restructuring of 2003/04 examined what was core to the airline’s business and to further the cultural change in the organisation, in particular the way it delivered its products to domestic and international consumers.

“That restructuring resulted in the carving out of the loyalty business (AeroPlan) and the regional carrier Jazz and the maintenance company,” Rovinescu said, having been chief restructuring officer during that period. “This did two things – it made us more dependent on ourselves and at the same time enabled us to deliver something to shareholders. ” Those changes have delivered an impressive $5 billion in shareholder value, something the ambitious CEO sees as a high priority.

“That characterises the third innings, if you like, and then the fourth is the more recent one – survival,” Rovinescu said, setting the scene for the penultimate transformation of Air Canada under his leadership.

“When I came in as CEO the number one task was survival. I’ve often characterised it as being like a Rubik’s cube – having to modify the labour dynamic, the pension dynamic, the cost structure of the organisation and the product. The idea is how can you move all of these in parallel with one another.

“Going back into restructuring was not an option at that time,” Rovinescu explained emphatically, drawing on his astute reading of the workforce to know when – and more importantly how – a new change agenda will generate optimum impact.

“We created four priorities. One is the customer service dynamic: do we have a culture of customer care that is embedded in the company or are we going to head towards the US style of product which is more just transportation?” The focus on service has paid high profile dividends for Air Canada. In 2012 it won the Skytrax Best Airline in North America for the third consecutive year and has consistently won awards for its products.

“Second, on the cost structure we knew we needed to get significant amounts out of the cost structure on a recurring basis so we set a very lofty target of about $530 million over three years. ”

When I came in as CEO the number one task was survival. ROVINESCU

Cost is a natural focus for any CEO and leadership team, but with legacy labour agreements, rising fuel prices and heavy capital investments, the focus on cost in this round of change has arguably been more unrelenting that at any time in the past. This, said Rovinescu, has been at the centre of other aspects of the change process the airline is engaged in at every level.

“In order to achieve some of things we needed to do we need to have an embedded cost culture that continues to take those costs out. ” Air Canada’s strategy has been a success, with cost control measures contributing more than a third of the favourable earnings results recently announced.

The third cornerstone of the four priorities is Air Canada’s international strategy, or what Rovinescu describes as “refocusing the company on international”.

“We need to be strong domestically to feed the international network and we’re not about to concede. We feel we need at least 50 per cent domestic marketshare for it to make a meaningful contribution to international operations, but then we need to start growing and winning internationally.

“Some of the immediate international growth came from redeployment of the fleet so we could add places like Copenhagen, Brussels and Geneva just by reshuffling the network. We are now adding two new 777s which is enabling us to build our low-cost leisure carrier (Rouge) and at the same time add frequencies primarily to Asia – seven more a week to Beijing, daily Calgary to Narita, Seoul from Toronto (in addition to our existing Vancouver service) and we also announced Istanbul in partnership with Turkish Airlines,” Rovinescu said about his course for international expansion, noting already Air Canada has recorded 14 per cent growth on its Japan services.

“We’re starting to flex our muscles,” he added with emphatic conviction. “We do have the ability to build an international powerhouse and our brand is very strong. We couldn’t do this before because we didn’t have enough liquidity and the balance sheet was too challenged.

“A big focus has been on the cost transformation process and repaying debt with the excess cash we had, to get us ready for a massive capital expenditure program coming up with the 787s worth $4. 8 billion and we have another $800 million or so in the five new 777s.

“When you look at that, you have to get in shape to take that on,” Rovinescu said about the importance the cost management program has had to the aspects of the transformation program that is forming a broader future for Air Canada than at any time in its 77-year history. The fourth and final element of the program is culture change.

“We started a very aggressive culture change program which went both to managers and frontline – empowerment of frontline staff and training managers to be more like entrepreneurial leaders.

“That was going well and then of course we faced our labour challenges last year and that culture change initiative in all honesty took a sideways step,” Rovinescu admitted with a candour refreshing for a CEO, while adding: “But as a result we have achieved some more flexible work rules. ” “We took some labour disruptions, I guess similar to Australia but the outcome was a little bit different.

“We served notice of lock-out on our pilots, which resulted in a binding arbitration process for those groups and we had two aborted strike threats from our flight attendants. So with every single one of our labour groups we had a very difficult time. My view is we needed to work through that to obtain the kind of flexibility that gives us the opportunity to do what we’re doing now. ” On the day of the interview with Rovinescu, Air Canada announced the launch of its low-cost leisure airline Rouge, which he said would not have been possible “without having gone through that difficult transformational change, but if you look at it as a collective period, I’d say we’re in the fifth innings of a nine inning game. ”

The wider world

“The earth is not going to stop shifting underneath us as we see the competition that’s coming,” Rovinescu said alertly, never one to be complacent with status quo in an ever-changing world.

The new four- to five-year labour contracts offer what Rovinescu sees as a period of stability for the short to medium term.

Taking a read on the state of the workforce post a period of tumultuous change, he said: “There is now a period of relative stability and my sense is that people are pleased and understanding of the fact that this is what enabled us to achieve this stability. ” Air Canada’s staff, having been through the impact of reform, together with the leadership team are now looking to the horizon to see how their acceptance of change is delivering tangible benefits beyond relative employment security. A major part of this palpable appetite for development of the airline is the push internationally, which itself is giving Air Canada renewed energy that not only is ushering in new routes, but the further development of its product within Canada.

One key priority for Rovinescu is the creation of a global hub in Toronto.

“We should be able to create a hub that is as strong as any of the US hubs. That has to be part of the future for us and it has to include the evolution of our world-class Canadian hub in Toronto. ” This is an important theme for Rovinescu, since it rounds out the labours of reform into a project that embraces customer focus, international growth, belief in product strength and Air Canada’s prominent role in the STAR alliance.

“We’re not going to win simply continuing to reduce our costs and battling it out with the low-cost airlines. We need to differentiate at the other end,” Rovinescu said when drawing together the strengths of the full-service product and brand strength with an effective hub and strong customer proposition.

If you look at traffic flows Canada is in a good location. ROVINESCU

“If you look at the successful global carriers they have all had a very powerful hub.

“When you look at the way the world connects, Canada itself is a good way to connect. People now look at the Middle East as the natural place where the world should connect but if you look at traffic flows Canada is in a good location. We’re already seeing traffic connecting through Canada, but to grow it you have to have a great product, many direct frequencies, great connections and a good airport experience. ” Rovinescu acknowledges “there is a long way to go” in terms of the airport experience at Toronto, including onerous customs and immigration processes, the latter requiring visas for some nationals even for transfers to onward international flights. Still, he is undeterred and the hub strategy will remain central to activities within Canada that bolster the airline’s global reputation.

The hub strength of Middle East carriers offers Rovinescu as much an example for his own hub ambitions as he sees them as a bane of existence.

In an aeropolitical sense, Middle East carriers’ services to Canada are tightly controlled, pointing to a stark difference in the way the governments of Canada and Australia view liberalised competition.

The Air Canada website shows the strength of concern about Emirates (in particular) and its competitive influences in global markets, citing the experiences of Australia as a case study as to why Canada needs to continue to adopt a tight policy on access.

Says the website under ‘industry facts’: “Since Emirates entered the Australian market in 1996, no fewer then 11 Australian and Continental European operators have terminated service. That traffic and the associated economic benefits now flow through Dubai. “In 2000, Australia enjoyed services to nine European cities aboard five carriers (Qantas, British Airways, KLM, Austrian and Alitalia). Today, the only carriers left serving Australia are British Airways, Qantas and Virgin Atlantic operating to just two European cities: London and Frankfurt.

“As a result of the Australian experience with the Gulf carriers, the Australian government today has decided to block any new carrier access to its Trans-Pacific routes (i. e. Australia to North America) including the refusal to provide these rights to Canada at the negotiations held in February 2009. The Australian government has made it clear that Australian carriers (particularly V Australia) will be given reasonable opportunity to establish services on the Trans-Pacific route prior to negotiating any new rights for Trans-Pacific Access with any country.

“If the Australian experience were repeated in Canada, the resulting impact on Air Canada and the Canadian air transportation sector would be devastating.

“The Gulf carriers (Emirates, Etihad and Qatar) are able to dump capacity into markets such as Canada and undercut incumbent air carriers such as Air Canada because of the virtually unlimited subsidies and support they receive from their respective governments. ” Rovinescu argues the position further: “Canada has made the decision to limit the bilaterals to the current frequencies, which are seven weekly between (Emirates and Etihad) plus Qatar to Montreal with three frequencies. The point-to-point market is adequately served if you look at the traffic that flows between the two markets.

“The approach we’ve taken – and we’ve communicated this quite vocally to the government – is that the market is adequately served and we don’t think it’s appropriate that someone shows up and the investment we’ve made over the last 20 or so years all of a sudden disappears overnight.

“If you’re talking about point-to-point traffic that’s going to stimulate the economy then fine, but if it’s about connecting traffic it gets a bit more complicated. ” Like Qantas, Air Canada has limits on foreign ownership, though Rovinescu sees a relaxation of the legislation in the offing. Currently set at 25 per cent, there is a likelihood Canada would follow the United States in raising foreign ownership to 49 per cent.

“Opening up the ownership restrictions has to be seen hand-in-hand with approaches to bilateral agreements because some governments don’t permit foreign carriers to own domestic carriers in various countries. Foreign ownership in time has to be intertwined with the bilateral air traffic negotiations. ” The current 25 per cent cap was a direct result of the hostile takeover bid by American Airlines, Rovinescu explained. “There is no ownership limit on a single foreign carrier owning shares provided it is within the (current) 25% cap. ” The CEO sees a potential link between foreign ownership and consolidation.

“Consolidation has been shown to be, generally speaking, a good thing for the industry. The total industry delivers around a one per cent net profit margin, there’s no other business that is as big or as important to the economy as the airline industry. The US has shown that consolidation makes for stronger and more stable carriers.

“I think you’ll see more consolidation (in Canada) but it will have to involve lifting of the foreign ownership rules,” Rovinescu said.

Equity and alliances

“I don’t see minority equity arrangements as driving efficiencies. Ownership is different.

“Either I own it, merge it or negotiate at arm’s-length. Minority equities are neither fish nor fowl and I don’t see the huge advantages unless someone needs the capital in which case minority investments can be a better source than public markets.

“If you look at the range of relationships that exist between carriers – interline, codeshare, joint venture, more integrated revenue and profit sharing – in many respects having two carriers that negotiate those things at arms-length as opposed to having ownership may actually lead to more efficiencies and better outcomes. ” “For example we signed a codeshare with Turkish Airlines – it has to work for both of us. It’s the same with our arrangements with United and Lufthansa – it has to work for all three of us. It’s complicated, it’s painful but you get a deal done. ” Alliances, however, are an important foundation for Rovinescu, even more so now he has been appointed chairman of STAR alliance, but he does see the original intent of alliances evolving in line with the changing needs of airlines.

“I think alliances are a very powerful tool to get the marketing of the airline to a broader range of constituents, and that has largely occurred. Just like we have seen the evolution (in this case) of Air Canada, we are seeing the evolution of alliances. So where alliances were 15 years ago when STAR began – and what the purpose was then – has shifted.

“We got the notion of partnership and the brand out there… the brand awareness has now occurred. It has given us access to some countries we wouldn’t otherwise have access to.

“The next level is the bilateral partnerships within these alliances and those are what deliver on hard revenue. Yes, we still enjoy the benefits of having interline relationships with everyone in the STAR alliance and having frequent flyer programs, but the differentiator now is the dollars and cents that come from building stronger bilaterals.

When confronted with the question of the relevance of alliances, something some prominent CEOs of non-aligned airlines are questioning, Rovinescu said: “I would not say alliances are any less relevant than they were before, but I think they are evolving and will continue to provide the basis of a common relationship (between airlines), but the real dollars and scents will come from individual bilateral negotiations.

Despite the growth of alliances in terms of the sheer numbers of member airlines in some alliances – including STAR and SkyTeam – and the potential dilution of the benefit of an alliance, Rovinescu sees no adverse impact or dilutory effect from growing memberships, rather he views the real strength lying in the bilateral deals done between airlines in a larger pool of potential partners. “A lot of the bilateral deals currently in place would not have happened if the basis of the alliance wasn’t in place. Alliances are the next best thing to global consolidation. ”

Australia

Building on the 64-year relationship with Australia, Rovinescu described performance of the route as “very good” with yields and load factors up. These are encouraging Air Canada to test demand towards the possible introduction of more capacity and a new route.

“We would like to look at secondary destinations in Australia, but realistically we’d be looking to wait until the 787-9s are in (in 2015). ” During the Australian summer season Air Canada added more frequencies between Sydney and Vancouver “on a test basis” to help determine whether a new service would be viable. The airline has been encouraged by the uptake of additional capacity and is looking to the possibility of adding Melbourne to its network as part of its international development program.

Rovinescu said that although the airline has an appetite to grow its presence in Australia, it would not do so alone and would be calling on Canadian tourism and business development authorities in both countries to help generate demand both in the short term and as Air Canada considers its future options.

“We have to do better selling Canada on the tourism side – better than we currently are. ” Rovinescu’s pitch is contagious, as is his strong belief in the future of Air Canada. In each period of reform he has played a pivotal or leading role and his investment in the airline’s growth is palpably personal.

“I’m pleased with where we are and that we’ve delivered value to shareholders. This is one of the biggest problems with the industry – generally speaking the industry has been a shareholder value destroyer.

“We’re in a place now where we have a ton of challenges, but I’m more comfortable in the knowledge we are actually making change. ”

AIR CANADA FAST FACTS Founded 1936 as Trans- Canada Airlines, renamed Air Canada 1965 Privatised 1988 Merged With Canadian Airlines 2001 Fleet 205 Destinations 178 Canada 59 United States 56 Rest of world 63 Passengers 33 million Ranking 15th Load factor (2012) 82. 7% Employees 27,000