Air Canada a blueprint for airline industry?

For his frequent trips to Canada, Tom Burke, a Dallas-based consultant, no longer worries about sky-high charges for changing his plane reservation, booking too close to his trip or booking during a peak travel season.

Burke last year paid Air Canada a flat $6,858 for 20 flights between eastern Canada and many of the 53 U.S. cities where the carrier operates, including his home airport, Dallas/Fort Worth. That means each round trip costs $686 no matter when Burke takes it during the 12-month life of the deal. He's eligible for free upgrades to business class, and he can book the trip up to one hour before flight time, and change or cancel without penalty.

"A couple of times (before buying the pass), I got socked with significant increases in fare because I changed the (travel) date," Burke said recently at the Toronto airport.

Selling bulk travel to individual customers is just one of a half-dozen innovations by Air Canada in recent years that have U.S. rivals glancing northward to monitor their acceptance by travelers. Once a lumbering money-loser, it's now a profitable pioneer, finding new ways to sell passengers only the services and amenities they want and nothing more.

With Air Canada, a traveler can, for example, cut fares by agreeing to leave a suitcase at home or by forgoing loyalty points. Or the traveler can choose to pay more for reserving a seat. In short, Canada's biggest and oldest carrier is showing its U.S. competitors a new way of doing business that could become the future of air travel.

Since the travel bust earlier this decade, Air Canada, the world's 13th-biggest airline, has broken from the pack of big airlines by focusing on customers rather than deep cost cuts, says Perry Flint, editor-in-chief of trade magazine Air Transport World.

"Very few airlines tackled the idea of trying to persuade customers that airlines deliver value for money," Flint says. Air Canada has achieved that largely by unbundling fares on its website so customers have no longer been forced to pay for things they haven't wanted, says Flint, whose publication awarded Air Canada its 2007 Airline Industry Achievement Award for Market Leadership.

Flint says major U.S. airlines, for now, are reluctant to adopt Air Canada's approach largely because of the financial risks if they prove to be a flop with their passengers. "The herd mentality means that no one wants to move first," Flint says.

Peter Belobaba, an airline pricing expert at the Massachusetts Institute of Technology, agrees that Air Canada is ahead of the pack among North American airlines. "More than any other U.S. legacy carrier, they've been willing to try innovative ideas," he says.

Sept. 11 impact

Like the U.S. airlines, Air Canada grappled with the travel downturn following the 9/11 terrorism in 2001. And, like U.S. rivals, Air Canada lost domestic business to a discount rival, WestJet.

In 2003, Canadian travel sank when the SARS outbreak scared travelers. That year, Air Canada began an 18-month, top-to-bottom restructuring under bankruptcy-court protection.

Lately, the outlook has brightened. The company earned $171 million last year and is expected to improve on that this year. It also has restored its workforce to 23,000, about the level before the travel downturn.

Some of what travelers are seeing as a result of the restructuring:

•Ticket pricing. Last year, Air Canada became the first North American carrier to implement a la carte pricing. Fliers can buy cheap tickets for bare-bones service, then pay more for extras such as schedule flexibility or reserved seating. Fliers can also decline services such as baggage handling and loyalty points and deduct $4 to $12 from the price of the ticket.

The cheapest, "Tango" tickets, come with minimal service and are Air Canada's most popular. The most expensive, "Executive Class," include the works: meals, lounge access and reserved seating.

Ticketing levels below the deluxe Executive Class offer a long list of options, and they vary by ticketing level. Among them: reserved seats, $13; the option to change departure time, $36; agreeing not to cancel or change the ticket, a $6 credit; or agreeing not to check baggage, a $5 credit each way.

•Flight passes. In 2004, Air Canada started selling passes that let customers buy 10 or 20 flights for travel in specified zones over a set period. For example, a traveler can pay $2,100 upfront to fly Air Canada 10 times (five round trips) in western North America, territory consisting of 12 U.S. cities and 30 Canadian cities. The flights must be taken within 12 months of the purchase date or they're forfeited. Individual pass sales, which generate about 6% of Air Canada revenue, doubled in 2006 over 2005.

Marianne Borenstein, an executive at Toronto-based data tracker, calls the passes "really convenient." She can call up to an hour before departure to reschedule without penalty.

•Subscription travel. In October 2006, Air Canada introduced subscriptions, which allow buyers to take an unlimited number of flights for three or six months. In March, the carrier started selling them for the first time the USA. Because prices vary by fare class as well as geography, fliers wanting the most freedom pay more. A pass to fly anywhere in North America, for instance, costs more than a pass restricted to eastern North America.

Frequent flier Jim Flieler of Toronto, who flies at least 100 times a year, now buys a pass for a set number of trips, and plans to switch to a subscription to bring down the cost of his travel on Air Canada.

"It's huge savings," he said in an Air Canada VIP lounge in Toronto before flying recently.

•Digital entertainment. Air Canada is the first airline in the world to install digital entertainment systems in every seat, even in its smallest 70-seat jets. The fleet will be outfitted by the end of 2008. The systems contain digital movies and music that passengers can start, stop and pause whenever they want. The system is free, even for Tango ticket holders.

Music fans this month, for instance, can choose from a few XM satellite radio channels or make a playlist from albums by artists including Beyoncé, Abba and Zero 7. Only top-tier international carriers such as Emirates, Singapore and Cathay Pacific have similar systems.

This spring, Air Canada will begin testing technology that lets travelers check in, check bags and ultimately board Air Canada flights with just a cellphone or mobile device. A traveler will be able to receive boarding pass information through a tiny bar-code image on a cellphone or mobile device.

That, too, would put Air Canada ahead of U.S. airlines. Now, U.S. airline security rules require travelers to have a paper boarding pass in hand when going through security, says Betsy Talton, a Delta Air Lines spokeswoman.

Reinventing the wing

Former Air Canada CEO Robert Milton, who is now chairman of airline parent company ACE Aviation Holdings, concluded in the late 1990s that the traditional airline business model was broken and needed reinvention. Customers no longer trusted that airlines were dealing fairly with them, partly because of the hassle and expense of buying a ticket, he said. Milton said Southwest Airlines, the consistently profitable discount giant, had shown the value of keeping the trust of its customers.

The result of the changes, says Henry Harteveldt, travel industry analyst at Forrester Research, is "the smartest travel retail model" among big traditional airlines. "It allows the customer to buy what they value, gives the customer an extraordinary amount of control, and it helps Air Canada earn more money."

He likens the airline to a "shopping mall with wings." When taking a short flight to be at an appointment on time, they can buy the cheapest, most restrictive Tango ticket. When flying home after a business meeting that could end early, they might buy a more expensive ticket so they can catch an earlier flight. It's no different than when consumers choose among K-Mart, Macy's and Neiman Marcus, he says.

Despite the views of Air Canada's fans, airline analyst Ray Neidl says its pricing approach will be slow to catch on with U.S. competitors. Neidl thinks small U.S. carriers will embrace it faster than the big airlines.

And some Air Canada-style features are showing up at smaller U.S. airlines.

In June, low-fare carrier Spirit Airlines will make baggage check-in and on-board beverages optional charges so that it could lower its own costs and keep fares low. Soft drinks and coffee now cost $1 on flights, while those wanting to check bags must pay $5 online or $10 at the airport. Columbus, Ohio-based Skybus, which is set to launch service on May 22, charges separately for an array of services from baggage handling to on-board snacks.

Air Canada has had enough visits from curious U.S. industry executives that it gives them a "canned presentation," says Sean Menke, Air Canada's chief commercial officer. On visits to its low-key, seven-building campus between runways at the Montreal airport, U.S. airline executives hear about how surprisingly few customers buy only a Tango ticket. Only about 25% of Air Canada travelers buy one with no upgrade, he says.

Menke and Air Canada CEO Montie Brewer also share findings about what customers don't want to pay for, such as $10 meals.

While Air Canada executives won't say which U.S. executives have visited, the airline's Star Alliance partner in the USA — United Airlines — is studying the concept of offering customers an option to choose services they're willing to pay for, says Robin Urbanski, a United spokeswoman.

Shareholders win, too

Not all of Air Canada's innovations are visible to travelers.

Milton, the ACE chairman, created the new holding company three years ago, believing that Air Canada's stock price didn't reflect its true value. The holding company has allowed the company to launch separate publicly traded companies: Aeroplan, its loyalty program; Jazz, its regional carrier; and Acts, its maintenance unit, which contracts with 100 airlines.

The spinoffs created billions of dollars in value for shareholders, Milton says. In all, ACE and its four business units — the two airlines, the maintenance unit and the loyalty program — have a stock market value of about $7 billion, roughly on par with American Airlines, the world's biggest airline.

Air Canada is in the midst of the biggest fleet overhaul of any North American airline. Some 130 planes are getting new interiors, including seats, power outlets for laptops and lavatories. Air Canada's 44 Boeing 767s, which are used to fly to London Heathrow, Tel Aviv, Shanghai and other distant cities, are getting cutting-edge, lie-flat beds in business class. Air Canada has ordered 37 Boeing 787 Dreamliners, the most of any North American airline.

What could be Air Canada's biggest and riskiest behind-the-scenes move won't happen until next year.

The airline is spending an undisclosed sum to replace its decades-old computer reservations system, a patchwork of mainframe computers similar to the systems that the world's major airlines continue to rely on today. Air Canada now sells 60% of its domestic tickets directly from its website, vs. more than 70% for Southwest, one of the industry leaders in that area. The more flexible Web-based system will allow the airline to develop even more inventive ways to sell its fares, says CEO Brewer. For example, it will allow customers to accumulate and spend credits from a canceled reservation or a food voucher given during a flight delay.

"As long as (airlines) sell through the traditional channels," he says, "they preclude innovation."