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Speaking Notes For
Robert A. Milton
Topic:
"The World Has Changed: Air Canada responds to
Toronto May 21, 2003
Mr. Milton:
Thank you very much for that kind introduction. It’s a pleasure to be here in
such distinguished company for this forum.
I’m delighted to be in this city today to
join with many others in getting the message out that Toronto is a safe city, a great city
and open for business.
I especially want to take this
occasion to join many others in voicing my admiration for the frontline healthcare workers
who have worked long hours during these trying times. They have been instrumental in
caring for the victims of SARS and containing the spread of the outbreak.
I also want to
express my thanks and appreciation to the Air Canada team in Toronto who have kept our
operation going under challenging circumstances.
Once the WHO
lifted its travel advisory, this city was faced with the task of restoring and rebuilding
the economic damage caused by SARS. In this mission, you can rest assured that
Toronto is not alone.
When Air Canada launched its
“Canada Loves Toronto” campaign three weeks ago, we offered one thousand, one
dollar fares on Tango for the Victoria Day long weekend. Given all the emotion
surrounding travel to Toronto, we had no idea what would happen, but we soon found out.
The Tango website was quickly
overwhelmed and received over 4 million visits within one hour with the special $1 fares
selling out in just four hours.
The $1 fares may be long gone but the
spirit - and the deals - live on.
Canadians everywhere are rallying to get
Toronto back on track. From Mike Myers on the Tonight Show to the over 120 partners
Air Canada has brought together on a dedicated "Canada Loves Toronto" website,
we are working hard to show the world that this city has placed the welcome mat out for
the world.
Over the coming weeks and months, we hope that
the collective efforts of Toronto’s many supporters will erase the legacy of SARS
from a business perspective and I assure the people of Toronto that Air Canada will there
with you every step of the way.
But Air Canada, like so many of your own
businesses, has already experienced significant fallout from the SARS crisis. We
estimate the negative impact on revenues at more than $125 million for the month of April
alone and bookings for the key summer season continue to be sluggish.
For Air Canada, SARS added one more adverse
circumstance to a mountain of adversity which ultimately led us to file for protection
under the Companies' Creditors Arrangement Act (CCAA).
Many people have asked me how Air Canada got to
this point.
I have to say that there was no one reason or
factor – but rather an unfortunate collection of external circumstances which have
worked against us and have also affected other members of our industry.
Over the past three years, airlines around the
world have been battered by a series of events. The high tech meltdown which started
in 2000. The economic slowdown starting in 2001. The terrorist attacks of
September 11, 2001. The rapid growth of new low cost airlines. High oil
prices, the war in Iraq and SARS have all contributed to the crisis which all
international airlines including Air Canada currently face.
But Air Canada was far from passive
throughout this time. On the contrary, Air Canada has dealt aggressively with many
of these issues. The airline has outperformed North America’s major airlines
for the past three years including, remarkably this past quarter. But, as soon as we
improved on the cost side and made changes to our product offering, the threat of war, the
actual conflict and then SARS conspired to undermine any progress we made.
In the end, all our achievements were not
simply enough to overcome the insurmountable problems posed by these dreadful events and
the court and CCAA became the only logical course of action.
While this is an extremely difficult situation
for all those involved, it can also be seen as something more positive: a fresh
start.
What the CCAA process will allow Air Canada to
do is restructure our balance sheet and costs, and to emerge a leaner, stronger and more
competitive airline. This is not the end, but a new beginning for the airline.
A CCAA filing is not something that any CEO
wants, but it’s something that Air Canada needs to make the required changes to
compete effectively and profitably. That process is now moving forward. We
have a timetable and we are working with all our stakeholders on our vision for the
future.
For our customers, it continues to be
‘business as usual’. Air Canada's customers here and around the world can
continue booking with confidence. Our commitment to safety and service is
unchanged. We continue to improve our products and services. We will continue
to get you where you need to go comfortably and at a fair price.
What we are doing now is looking to the
future. In my opinion, the airline industry is evolving into one which can be
divided into three distinct groups:
· First,
the true low cost carriers such as JetBlue, Southwest and Air Tran in the U.S., Westjet in
Canada, and Ryanair and EasyJet in Europe;
· Second,
the fundamentally re-structured so-called “legacy carriers” including USAirways,
and by the end of this year, Air Canada;
· And
finally, what I call the “walking dead” or those carriers who continue to cling
to the outdated airline models of the past which will simply – as one industry
observer put it – continue to limp along from crisis to crisis.
At Air Canada, we have every intention of doing
more than just “limping along”. Our objective is to radically and fundamentally
transform ourselves into a new airline by retaining those Air Canada qualities that our
customers and employees value – such as safety, reliability and customer service
– while adapting to a changed environment and to the new realities of today by
embracing innovation, flexibility, simplicity and a new customer value proposition.
But I believe our essential challenge
for the future - is the same challenge which companies are facing everywhere. It’s not just about aircraft or tickets or airports. It’s about changing a culture.
I have to tell you, I’ve always
wondered exactly what people meant by “culture change”. Is it the way a
company’s people work together? Their attitude? Their training? How
fast decisions are made? How innovation and creativity is viewed? A
competitive work environment? Or, all of the above.
It seems to be an elusive quality. At the
corporate level, we spend a lot of time and money looking for it.
Whether we work in telecommunications
or financial services or the auto sector, we all want to change the culture of our
business to perform better, generate profits and remain competitive.
My advice on this (based strictly on an airline
perspective) boils down to two words: don’t wait. At Air Canada, we
can’t afford to wait to change the culture. It has to happen fast.
I believe the way to make it happen fast is to
just go ahead and implement the new company – if need be, in parallel with the old
business. Provide the tools, set the parameters and build the ‘brick and
mortar’ structures. It’s much like introducing a new computer system,
while the legacy system is still running.
Then make the transition or cutover to the new
business and pull the plug on the legacy operation. The cultural change will follow.
In the auto sector, for example, the Saturn
company was launched in the mid-1980s. General Motors created this new company as a
new business model, with the freedom to create not only a product but a whole new
organization. It has since had a significant impact on the industry and the way cars
are manufactured and sold.
Air Canada has done much the same
thing with brands like ZIP. We’ve introduced whole new businesses into the
marketplace.
This is not just to respond to
changing consumer preferences, but also to kick-start the airline into a new way of doing
business.
And believe me, no business needs a
cultural ‘kick-start’ more than the airline business.
This is an industry which makes the infamous
‘Saturday night stay’ a condition for selling a product.
This is the only industry in the world which
uses the desert to manage supply and demand - by parking surplus aircraft in huge desert
parking lots during economic downturns.
This is an industry which has
succeeded in devising the most confusing, complicated and consumer-unfriendly fares
possible. An industry which has systematically tried to extract more and more money,
from fewer and fewer high-fare business travelers.
But, here’s the thing. It’s not
working. It’s not working just about anywhere in the world. It’s not
working to the tune of about $31 billion in worldwide losses in the last two years,
according to the International Air Transport Association. This is what I’m
talking about when I say the traditional airline business model is broken.
We need to pull
the plug on this model and establish a new business model and new culture. To do
this, we have set up new businesses and embrace new ways of doing things.
19 months ago – an eternity in
the airline business – we set up Tango as an airline within an airline. In
essence, we took all the best demonstrated practices of the low cost airlines in the world
- like online booking, no frills service, simplified fares and more seats per plane - and
built a company around it.
Then we set up ZIP as a bona fide
low-cost carrier. A separate company – like Saturn – with its own
operating licence, employees, aircraft and management.
We put the bricks and mortar in place
and let the cultural change flow from that - and it has – in a very short time frame.
Now we’ve got the experience,
momentum and a sense of urgency to tackle Air Canada itself.
This is a huge challenge, but we have
already established a blueprint of what works, and we have a powerful vision of where we
want to go.
That vision is one of a leaner and
more cost competitive Air Canada – with a cost structure, wage rates and productivity
levels that are consistent with the business realities of today. Our new cost
structure will also allow us to serve new international routes and offer consumers
simplified fares.
If there are sound, profitable
enterprises inherent in the airline, we will break them out and mold them into stand-alone
businesses like we have with Aeroplan, ACTS for aircraft maintenance and Jetz for
specialty charters.
The new Air Canada will also make
greater use of smaller aircraft. The traditional notion that big revenues come with
big aircraft is another industry myth which has been put to rest. Versatility and
flexibility make money – whether we’re talking about retail outlets,
manufacturing plants or aircraft.
We see an Air Canada fleet with a
large number of 90 to 100-seat regional jets which will allow us to serve our customers in
North America in a new and different way. The jets are cheaper to operate than
bigger aircraft, and can pull in profits in small markets that cannot fill large planes.
Technology will drive this airline and
this business like never before. When you’re buying a ticket, when you arrive
at the airport, when you’re in the aircraft and when you arrive at your
destination. If there’s an Internet application or hi-tech innovation which
makes the airline experience easier or more economical for you - or for us - we want
it. In the 21st century the airline business will be based on information
technology, not just aircraft.
So when will you start seeing this new
company and its new culture?
As I said, we have no time to wait so
it’s already happening. The revolution has begun – and it starts with
fares.
As of today, Air Canada’s new
online fare structure greatly simplifies travel booking for customers and travel
agents. All domestic fares now fall into just five categories. These fares
will permanently offer new low, competitive, best-value one way and return fares available
exclusively online. Current published fares have also been significantly
streamlined.
Go on line and you will be able to
easily build the best itinerary and control exactly when and where you want to fly -- at a
price that works for you. Customers can now see exactly which fares are available
and under what terms and conditions. The web now offers complete transparency.
This is the first step in rolling out
a new business model based on value, simplicity and cost efficiency. This will be
the theme for more changes to come in the weeks and months ahead. You can expect to
see many more elements of a new Air Canada emerge.
Announcements about our fleet, our
costs, our technology and our products will all form the components of a totally
reinvented business.
It’s a busy time and a
challenging time but I’m proud to say that our people are making tremendous progress.
Sometimes, you have to stand back from
the day-to-day operations of a company to really see where it needs go in the
future. This was underlined for me recently by no other than Bill Gates of
Microsoft. In a recent article celebrating the achievements of Wilbur and Orville
Wright, he described the birth of the aviation industry as quote “the World Wide Web
of that era, bringing people, languages, ideas and values together”. He went on
to say that this revolution did not come about by luck or accident: “It was
vision, quiet resolve and the application of scientific methodology.”
It’s been 100 years since the
Wrights flew 120 feet in a flimsy flying machine made of spruce, ash and muslin. The
industry they inspired has made tremendous strides over that time but it has now reached a
plateau. The traditional legacy carriers have not changed significantly in four
decades. They must change now. For this to happen, we still need vision,
resolve and a methodology to make airlines a successful and relevant part of today’s
world.
In our corner of the world, in our
industry, at our airline we too need vision, resolve and a methodology. We have
those elements.
Against tremendous adversity, we are
making headway in our efforts to shed an antiquated business model and bring Air Canada
into the 21st century. It is nothing less than a complete cultural shift.
Air Canada entered CCAA with a vision
for what this company and, indeed, this industry had to do in order to survive.
Now we are making it happen. We
have a timetable. We are making progress. The restructuring is working.
We have a lot more work ahead of us and you will probably read and hear about more
problems and roadblocks. That’s to be expected, but let me reassure you that we
will tackle every hurdle along the way.
The bottom line is: we will
emerge from this process, we will succeed in our efforts to transform this airline and we
will be there to serve customers in new ways, and better ways - for a long, /long time to
come.
Thank You.
-30-
M.C. – Ron
Hewat:
At this time, we
will now engage in a question and answer session. The Q&A will be moderated by
Linda Sims, Business Editor, CTV Newsnet, Linda . . .
.
We are pleased to include questions from you, the audience. We have selected questions from the forms picked up earlier. If anyone else has a question, we have roving microphones on the floor. Just raise your hand if you have a question. Linda: You talked about how the future is going to look, we know that the discount model is the one that seems to succeed. Is five years from now that essentially going to be what airlines look like? Is the full service, full price seat more or less dead? Milton: My view of where this is going is similar to what we’re seeing in retail, especially in the US, where you had Wal-Mart start off with ‘We’re just going to go to small town America and that’s all what we’re interested in’ and now they are one of the biggest corporations in the world, you’ve also got the niche for Nordstrom’s at the top-end, so my view is there is going to be an overwhelming move to the Wal-Mart value proposition, I’d like us for those of you familiar with retailing in the US to wind up with a Target level of retail, just a notch above. Wal-Mart is a great company and I want us to be able to offer the full value proposition that comes with the business service that Air Canada is known for, especially internationally, but I think we are moving very much more toward the value end of the equation. Linda: This question is from the floor. Q. “It is about cost-savings and your staff. You talked a lot about culture change, but we know that one of your biggest challenges is the cost of labour. You’re in negotiations with your unions now, are you optimistic that you can create a new relationship with them, that will allow you to succeed as an airline”? Milton: In my view, this is really just about dealing with reality. Our employees did not cause us to get here. This is about a fundamental change in our business. Change that was probably accelerated five to ten years by September 11th and so for our employees it’s really an issue of me urging them to now get on with where we’ve got to get to. Changing the old way we compensated from purely salary to maybe salary plus profit-sharing. Our employees are ready to go in my view, but if you look at the structural cost-issues for us, as we articulated back in February, if you simply applied the WestJet concept, a successful airline here in Canada in the low-fare niche, their work rules and wage rates, to our company, our company would reduce it’s cost by 1.388 billion dollars a year. So you don’t have to be a rocket scientist to know what the key issue here is. It’s not our employees fault, but it’s the new reality, and so we’ve got to change and we’ve got to change quickly and that’s what we’re trying to deal with and yes, I have confidence in our employees. Linda: We have a question from the floor. Q. “Can you tell me what your savings have been or expected to be from shifting to the on-line direct sales”? Milton: It is significant in a lot of areas, not the least of which is the ability to by-pass, I’m gonna step on a lot of toes with this answer, by-pass the computer reservation systems, avoid printing paper tickets by doing it electronically and also move away from what traditionally been a have feed to the travel agent community, this said, a community that over the years, was terrifically supportive to Air Canada, but is part of this radical transformation that’s occurring in this industry, again, it was the low-fare airlines that cause this change is how we distribute. A lot of the travel agents would believe it’s us, but we’re just again trying to adapt, so there are so many slices of distribution, that come with distributing on the internet that saves us a lot of money. Linda: I think most people in the audience would want to know the answer to this. What are you going to do to make it easier for Canadians to use their Aeroplan points? Milton: Best frequent flyer program in the world, the official airline guides said it was the best program there is. One of the issues that’s always difficult to explain on Aeroplan is this view that there is never a seat available. I am trying to get the Thursday before Christmas weekend a year in advance and I can’t get it and it really irritates me. Again, I apologize for next Christmas, but everybody wants the same seats on the same days for the same flights. We allocate ten percent of the seats on every route in this airline to Aeroplan. We provide a ton of capacity for Aeroplan, but just like we can fill the flights up on those peak days and peak times with revenue passengers, everybody that’s buying with Aeroplan, using their points, wants to do the same thing on the same dates at the same time, and that is a problem, so on those Thursdays before Christmas even a year in advance, I can line up every seat available in this whole airline and fly it to Florida and it would go with Aeroplan seats, so part of the reality is there is this insatiable demand on certain key dates. We provide, I think, a healthy amount, a competitive amount of capacity on those key times but I understand that I’ll never be able to quench this sort of insatiable appetite for key flights. Linda: I have a more personal question to ask you. Milton: You want an upgrade!! (laughter) Linda: Well we’ll talk later!! (laughter) There are rumours that I and others in the media have heard for awhile, that you have been offered jobs at some of the other top airlines in the US, you have turned those down, you said that you’re going to stay at Air Canada. Are those rumours true and why are you staying? I’m sure they would pay you more. Milton: Thanks for that question!! (laughter) I’m sure there are a lot of people that would love to see me go, this is a great company with great people, and for me being here at this job a lot of people tell me I wouldn’t take your job for any amount of money in the world. For me, a guy that likes airplanes, this is a moment of cataclysmic change in this industry and I get to head one of the truly great franchises in the world through this period. Now it also happens that I’ve got two kids that were born here in Canada, my wife was telling me my life is over if we try to move from Canada and various other related issues, but a lot of it is personal issues and we’ve got issues to deal with here at Air Canada. Linda: I have another question from the floor. Q. “Mr. Milton, in the paper they describe the five new policies, price polices, but it said very little about what you’re going to do with ‘business class’ travel. Are there any plans at all that you’re going to make with business class travel”? Milton: On business class travel, they are also reductions coming in with purchases even for tomorrow at the top end for business class travel, you’ll see a pretty radical reduction in those prices as well, and at the same time, we’re putting more product on, especially in the front cabin on long haul transcontinental flights, you’ll see a new enhanced meal service, model very much along the lines with what we’ve done on international routes, which have been extremely well received, so you’re going to see across the board fare reductions, because it is obvious this is what consumers want, so we’re taking that leap and going there and now. Linda: This is multi-part question and we may not get to all of it. How much or how many of Air Canada’s current financial problems are the result of federal government polices? (laughter) Milton: If everybody turn the television cameras off, I’ll give you the answer! You know, it’s almost impossible to answer from the standpoint of, I’ve gotten my head so nicely bludgeoned in over the years on speaking my mind on these issues, but to give you a little insight into my perspective, two weeks ago the US airline industry received a further three billion US dollars of direct cash support, so at this stage, Air Canada, if we were a US airline, and I want to remind you that we’re in an NAFTA world, where there is all sorts of issues over all sorts of other trade disputes, whether it is Softwood Lumber, you name it, Air Canada would have received a cheque from government of approximately a billion dollars at this stage, if we were a US airline. We’ve received to-date sixty one million, I think it is, which I appreciate, but in terms of a level playing field, in a NAFTA market, competing for the same passengers, a lot of people think, Air Canada, the monopoly domestically, only about a third of our revenues are generated domestically. Two-thirds of our revenues are generated competing against the biggest airlines in the world. So if you want to go to Tokyo from here, you can go Air Canada non-stop, next summer, you can go Northwest by Detroit, you can go down to Newark and fly Continental, we’re competing against those US airlines to Europe as well, to Amsterdam or London by US hubs. So they’ve received at this stage, over thirty billion dollars of direct support and we’ve received as an industry in Canada, I think it’s a hundred million. Again, I appreciate that, but it’s a totally unlevel playing field and there are ramifications to that. Linda: Question from the floor. Q. “I booked an on-line flight on the weekend with your new system and I experienced 50% . . . and actually the fare was really good, I have to tell you that too. I found that the window of opportunity to complete the information on-line was 15 minutes, I was just wondering if you had any plans to accommodate people with disabilities or the aging senior demographics who may not be able to do that within that time frame, cause I expired and I’m pretty quick”?
Milton:
I’ll take the issue away of the time running out and obviously we want to be
sensitive to all constituents that might use the products, I mean the best thing I can do
is take that away for our people to deal with . . . but learn to type
faster! (laughter) Linda: One more question (from the floor). Q. “Mr. Milton, is there any point in signing corporate agreements anymore with the changes that you described?” Milton: I think that’s an excellent question. I think what we’re watching is the early stages of a move away from those kinds of agreements and really an every day value proposition, like I talked about earlier, you walk into Wal-Mart, you pick up something off the shelf, you know you feel okay about the price, it’s not like walking into a department store where you wonder, if I go to another department store would be thirty percent less, I don’t want to be ripped off, but then again you go into Wal-Mart and it’s always the right price, I think we’re moving towards the value-based pricing regime for all customer types, including corporate, but this is still the early stages. Linda: Last question. I just want to get whatever details you can give us on the restructuring process. I have questions from shareholders wondering how their going to fare, unsecured creditors, wondering how they’re going to fare, can you give us any kind of outline on what the agreement is going to come out with? Milton: We’ve got very sharp counsel on the case, in fact I see our lead attorney, Sean Dunphy, with Stikeman Elliott, and I suspect if I try to answer question that you’ll hear a scream as he comes running across the room and dives to tackle me. So thanks for the question, but I think I’ll pass on that answer.
(laughter) Linda: Mr. Milton, thank you very much. Milton: Thanks Linda
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