Canadian Airlines:

Reservations
About Its Future
Case Analysis PGSEM
Faculty Professor Rajendra K Bandi

Abhishek Chitre(1312003)
Debopam Sharma(1312013)
Shubhakanta Ranasingh(1312040)
Srihari Krishnakurup(1312041)
27/06/2014

Introduction:
This case is testimony to how information systems can be an important tool to gain strategic and
competitive advantage for some players in an industry, but at the same time being detrimental for the
growth and existence of other players. Case in point is the bargaining power and the ability of players
like United and American Airlines to preempt their competition by attaining a dominant position which
was a result of their technological innovation in developing strategic computerized reservation systems, in
the airline industry. The case touches upon the brutal truth: Evolve or perish! when it comes to adopting
information systems and at the same time the importance of the first-mover advantage in this regard
cannot be understated. The case amply demonstrates that even if a business proposition may not
score highly on Porters 5 forces to make it look attractive, a Strategic Information System if
designed effectively can become a core competence of an organization for at least a few years.
James Tong, general manager passenger services system at Cathay Pacific Airways had once said
"We believe it is basically a step change for the business, which is why we classify the change as a big
bang" about how difficult it is to decide on a particular reservations platform.
It is important to understand that not every player can develop the competitive edge by adopting
information systems due to the huge costs involved in some systems like the res systems. Hence, such
players are at times forced to enter into agreements with those who already have the systems and be also
subject to partial and preferential treatment.
The case exemplifies how early cynics of Information Systems gradually realized its importance,
sometimes a bit late, as was the case with Frontier Airlines! While companies with insights realized the
importance of computerized reservation systems in controlling the retail distribution channels of the
airline industry. Reservation systems provided new business opportunities to the airline industry by
indulging in selling ancillary services like hotel and car rental bookings.

Canadas Airline Industry:

Since late 1980s the Canadian airline industry, just like the industry worldwide, saw consolidation of
smaller players into bigger ones. For example, Air Canada, Canadian Pacific, Pacific Western, Nordair,
Quebecair, EPA, Wardair and a few smaller players were reduced to two major carriers: Air Canada and
Pacific Western Airlines (PWA) whose main subsidiary was Canadian Airlines. This was attributed to the
ease of obtaining access privileges with foreign governments, which could be made possible by a stronger
alliance between domestic players. The deregulation of the US market also played a role in this.
Canadas airline industry during 1993 was small and carried only about 2% of the entire worlds
passengers. This was miniscule in comparison to the bigger U.S carriers, which carried around 40%.
There was intense competition between the 2 major players: Canadian Airlines and Air Canada in the
small Canadian market. But on a world pedestal Canadian airlines and Air Canada were only ranked 23rd
and 20th respectively in terms of revenues and 40th and 13th respectively in terms of profits (as per
1990 rankings) The countrys geography dictates the profitable markets. There are around 12 profitable
markets on the east-west axis. These are city markets situated closer to the countrys southern border.
Unlike in some other countries, there is significant government regulation in the airline industry. Airlines

are provided with government subsidies to ply on unprofitable rural routes. Additionally, government has
divided the routes and world markets between Canadian and Air Canada to avoid direct competition. And
as a result, Air Canada is head-quartered in French speaking Quebec and controls routes between major
Canadian cities as well as routes to US. Whereas, Canadian Airlines is based out of English speaking
Calgary, Alberta and its routes include Asia (east of Burma), Australia and Latin America. Apart from its
domestic market, the Canadian-US trans-border routes comprise a huge market of volumes around 13
million in terms of passenger count and $2.3 billion in revenue. Although, the Canadian airlines are
competitive when it comes to the local sides of the trans-border routes, within the US borders, cabotage
rights prevent Canadian airlines to carry domestic traffic. This is counter-productive for Canadian
Airlines as passengers intending to travel using connecting flights after the destination city (or the
gateway hub) of their Canada-US travel, prefer U.S airline as it saves them from inconvenient transfers
(had they opted for Canadian airlines). Hence, cabotage rights prevent the Canadian airlines from biting
into the pie of the lucrative US domestic market.
Both Canadian Airlines and Air Canada had a difficult time since 1988 due to world-wide recession and
global decline in the airline industry as well as the resulting overcapacities. Both incurred huge losses but
Air Canada handled the recession better through the means of huge cutbacks. Canadian airlines was
struggling to stay afloat.
To salvage competition and help Canadian airlines stay afloat the federal government provided interim
loans. While Canadian airlines had 2 alternatives: form an alliance with American Airlines in return for
incorporating its SABRE res system or merge with Air Canada. The former was preferred by Canadian
airlines but was complicated by its existing contract with Gemini, which would have to be replaced with
SABRE.

Core IT issues faced by the 2 major players: Canadian Airlines and Air Canada:
Both Canadian Airlines and Air Canada were thwarted by the adoption of American airlines SABRE res
system. SABRE was gaining market share in Canada at a quick pace much to the dismay of both the
airlines. None could afford the huge costs in developing their own res systems but at the same time were
wary of entering into co-hosting arrangements and exposing themselves to the opportunism of larger
American players. But the fact was that res systems were needed to survive. And this was well known to
both the major airlines.
A bilingual market with the existence of both French and English further complicated the development or
adoption of res system in the Canadian market. Mending ways to an extent, both Canadian Airlines and
Air Canada took equal stakes in the Gemini partnership, for the development of a Canadian res system.
This was contested in a tribunal by some consumer groups citing competitive implications. But the
tribunal ruled in favor of the partnership. And hence Gemini came into existence. But moving forward,
after a series of losses, Canadian Airlines had to make a move to SABRE, to enter into an alliance with
AMR, American Airlines parent company. This was understandably resisted by GEMINI. At that time
when Canadian Airlines were in deep trouble, they had to either side with American Airlines or Air
Canada for their survival. Apart from all other differences between American Airlines and Air
Canada, the central difference was the reservation system. Both American Airlines SABRE and Air

Canadas GEMINI were good, but were completely different IT offerings. To align with American
Airlines, Canadian Airlines had to give up on Gemini. So, this IT/IS issue was the bone of
contention among all the stake holders who were involved during Canadian Airlines distress as this
IT issues any form of resolution could possibly spell doom for some of them.

How important is a good reservation system?

Initially reservation systems were focusing on controlling and tracking of inventory (available seats in
flights). But gradually these systems evolved to provide fares and schedules of multiple airlines, hotels
and car rental companies. This enables travel agents not only to book the air travel tickets across multiple
segments/carriers, but also to book hotels and car rentals through the reservation systems. So the
reservation system has evolved as a complete travel solution for travel agents. A good reservation system
enables the airlines to lock in the travel agents and provides greater control and understanding of
changing market share of various airlines. This in turn helps the host airlines to take necessary corrective
action (like bonus/incentives, lower fare and more schedules) to boost its market share in case it falls.
In US 80% of the tickets were done through travel agents. Travel agents use the reservation systems to
book tickets in airlines. So airlines (not having their own reservation system) have to depend on co-host
arrangements for SABRE/APOLLO reservation systems to gain access to the travel agents. Sometimes
host airlines use the reservation system unlawfully to gain and exercise monopoly power. As mentioned in
the case, United Airlines did not allow frontier airlines to be a co-host of Apollo reservation system for 2
years due to competitive reasons. So Frontier did not have access to the travel agents, who were using
Apollo systems during that period. Even after Frontier became co-host for Apollo, it faced bias problem.
Frontiers schedules were displayed less favorably compared to Uniteds schedule.
To summarize, reservation systems are the channels to gain access of the travel agents who do the bulk of
the ticket bookings in US. So control over reservation system gives the host airlines an edge over the
competitors. On the other hand underestimating the importance of reservation system can lead to
premature demise of the airline in similar manner as Frontier airline.
Do you agree with the Ottawa court?
It requires a deeper understanding of current predicament of Canadian Airlines. Canadian Airlines was
open for a merger with Air Canada every time a proposal was put forward even though it was not in the
best interest of its employees. However the deal was scuttled on at least different occasions as can be
inferred from the case. There merger plans reached a dead end once and for all when Air Canada proposed
to buy out Canadians international route. The poor financial condition of Canadian meant that they would
not survive purely as a domestic career and the deal was rejected. Canadian airlines therefore had no
choice but to strike a deal with AMR whose injection of cash was crucial to Canadians survival and
without it, Canadian was likely to fail.
The court also had to consider the impact of Canadian Airlines failure would have had on the airlines
market. According to the case, there was resistance from consumer groups on the formation of Gemini
partnership between Air Canada and Canadian Airlines as this would introduce lessening of competition
in the airline markets. Any failure of Canadian Airlines would completely eliminate competition as there

were no indications, up till the point in time the case written, that foreign players were or would be
allowed to enter Canadian markets or there would be any relaxation in cabotage rules. Therefore, it was
necessary for Canadian Airlines to survive as a healthy competitor to Air Canada.
Canadian airlines also had a vast majority of regional carriers affiliated to it. The court also had to
consider the plight of the travelers who ply along the routes catered to by Canadian Airlines and its
regional carriers. The significant barrier to entry in the airline industry meant that it is not easy for new
players or even for Air Canada to completely fill the vacuum created by Canadian Airlines demise.
From Geminis perspective, they were not reliant on Canadian Airlines for its survival. The case clearly
outlines that Air Canada has a larger share of the domestic market and Gemini would continue to cater to
them. It would rather be an opportunity for Gemini to revamp its reservation system and compete more
vigorously or collaborate strategically with SABRE and APPOLLO.
Based on all information provided in the case, we had to side with the position taken by National
Transportation Agency(NTA), who had approved Canadian Airlines deal with AMR, since it was
necessary for the survival of the former and its demise would only do more harm to the domestic market .
This argument is further strengthened by the fact that cabinet of former Prime Minister Brian Mulroney
rejected Air Canadas appeal of NTA ruling.
Under the given circumstances, we believe that the Ottawa courts ruling was the most appropriate, as it
would ensure the survival of Canadian Airlines, preserve fair competition in Canadas airline market and
also allowed Air Canada to negotiate a settlement with Canadian Airlines to free it from the latters
obligation to Gemini.
Conclusion
The case illustrates the importance of developing a foresight on the criticality of technology and the need
to adapt them. The failures to implement an efficient reservation system lead to the demise of Frontier
Airlines. Another interesting aspect that was evident from the case was the prominence of the reservation
system which was conceptualized as a support function. They themselves turned out to be major profit
centers and creates significant barrier to exit. It was also important to note how court decisions were
made when a firms survival is at stake. One could always get the feeling that Gemini was given a raw
deal but court had to consider the impact of Canadian Airlines survival. The latters demise would have
had severe effect on the customers and markets alike and its survival took greater precedence over
Geminis business interests.

References:
http://www.flightglobal.com/news/articles/airline-reservations-systems-can-it-deliver-221610/