Case Summary

Computerized Reservation System (CRS) systems had changed the way the Airline industry functioned.
A CRS system like SABRE (developed by American Airlines in 1960s) enabled a new method of
inventory management with the use of computer networks. The way tickets were listed, priced and
booked changed dramatically.
In the context of this case, the case highlights how the first movers towards a proprietary
strategic information system (SIS) in CRS turbocharged vis--vis other players struggling with innate
and inherent issues faced by Airlines like route sharing, regulation etc. It adds, highlighting the ways
the proprietary CRS systems were put to use by some of the early adopters to demonstrate the strategic
advantage they wanted to achieve whilst investing into developing such a system.
Canadian Airline industry carried only 2% of the worlds passenger traffic in 1993 compared to
40% by US Carriers. With a small market, and lack of cabotage rights (right to fly domestic routes) in
the adjacent big US market constrained growth interests of Canadian carriers. The Canadian Airline
industry consolidated as expected. Air Canada and Pacific Western Airlines (PWA) with its primary
subsidy being Canadian Airlines International Ltd., were the two prime carriers that lasted in 1993. The
Canadian federal government favored Air Canada to ply the major international routes and wanted
PWA to focus on other moderate routes in the global airline market.
A CRS system as that of SABRE or APOLLO allowed American Airlines (AA) and United to
remain at a strategically advantageous position. CRS allowed then to lock travel agents that contributed
to 80% of sales in the US alone. The likes of Frontier Airlines that did not tread this path then vanished.
In order to deter anti-competitive claims by other airlines, AA and United allowed co-hosting facility
for other airlines, so that they can list their tickets in the reservation system for a fee.
While AA continued to tread the proprietary path, United let APOLLO grow into an alliance
with other Airlines, to evolve towards a jointly hosted CRS system called the GEMINI.
With mounting losses compounding year after year, Canadian carriers were hurting with PWA
hit the worst among the two. In an attempt to save PWA (Canadian Airlines), AMR, the parent
company of American airlines, came up with a life-saving deal that also involved a caveat. PWA must
replace GEMINI with SABRE. With efforts towards merging both the Canadian carriers failing, GEMINI
also sued PWA for engaging AA on the charges of breaching fiduciary duty. PWA counter sued Air
Canada on charges of predatory pricing to drive out PWA.
Sitting on a $3.2 Billion debt, PWA got the assistance of the federal government to continue
operations. The government was set in a scenario where they had to choose among the two worsts. If
PWA moves out of GEMINI, will GEMINI sustain? If PWA does not join SABRE, the Canadian domestic
market would suffer?
Under these circumstances, an Ottawa court ordered for the dissolution of GEMINI if the PWA
AA deal does not go through by a certain timeline. The deal went through at last with PWA adopting
the SABRE system.

Canadas position in the airline industry
The Canadian airline industry represented only 2% of the global airline industry. It was flooded with US
carriers through their cabotage rights to fly inside Canada. US Airline deregulation led to US Carriers
capturing 40% of the global airline market. On the contrary, Canadian Airlines only constituted 2% of
the worlds passengers. Like most countries air carriers, Canadian air routes were also regulated by
extensive federal government subsidies and involvement in regulating policies on international routes
(dividing skies between the two dominant players) and domestic rural routes (ensuring air routes
include rural routes which are usually unprofitable for the carriers). And, air carriers also faced fierce
competition in the country.
Canadian carriers were generating most of their revenues through bilateral airline-to-airline
relationship with US Carriers. They were competitive when the trans-border traffic was local between
Canada and US, but lost out on revenue opportunities due to lack of cabotage rights in the US. To
summarize, Canadas airline industry was both dependent on US Carriers on the trans-border routes
but were fierce competitors on the International routes.
Though, the government took measures to divide the opportunities for the local air carriers (by dividing
the sky), US had an advantage as their air carriers were more established and had strong foothold (US
carriers were preferred over Canadian air carriers by Canadian - locals) even in the Canadian market
and in the international air routes the US government rules gave the local players an upper hand in
trans-border operations between US and Canada, thereby reducing their opportunity to gain some
international customers.

Airline Industry Analysis


Customer: Due to large competitors in the industry worldwide, customers have the option to travel by
any airlines based on their convenience. There is no lock-in experienced by customers to any air carrier
and so it makes it easier to switch from one air carrier to another and thus maintain low loyalty.

Threat of substitutes: Apart from air travel, customers could opt for travelling via rail or road ways.
However, Canada being a large country, most customers prefer to commute via air and would prefer to
switch from one air carrier to another than to change their mode of travel.

Threat of new entrants: Due to high government regulation in most countries, private players will
find it difficult to enter the airways market. Also, due to fierce competition existing, new entrants may
face challenges in establishing in the market

Competitor rivalry: In the same segment, there are a lot of major players already existing in the
market. They are well established in the market and as stated in the case, the competition is fierce. The
competition is not confined to Canada, but the whole world; as a customer can fly with any air carrier
to any country as long as the carrier is available.

Suppliers: Suppliers play a very important role in the airline industry. Due to the complexity of the
equipment used and consumed by the aircrafts, only experience players (Boeing and Airbus) were able
to supply aircraft components. Also, as aircrafts are fuel intensive, dependency is high on the fuel
supplier.

Overall, the airline industry faces high bargaining power from suppliers and buyers, thereby giving way
to lesser power to the air carriers. Also, as there is threat from substitutes, air carriers have chances of
losing out with other industry carriers too (road, rail). Thus, we can conclude that the Airline Industry
does not seem to be attractive.

CRS inception How this changed the playing field?

Computer Reservation System (CRS) is a strategic information system that facilitates simultaneous
multipoint sales through synchronized and accurate data exchange. It allow dynamic pricing (revenue
management options) and provides real time insights into the booking status and ticket availability. By
allowing complementary businesses like hotel reservation, car reservations etc. to interconnect, it vastly
expanded the scope of the CRS.

According to Business Directory (http://www.businessdictionary.com), CRS is defined as a worldwide
computerized reservation network used as a single point of access for reserving airline seats, hotel
rooms, rental cars, and other travel related items by travel agents, online reservation sites, and large
corporations. It is also called as the Global distribution system.
A CRS allowed those Airlines that invested, developed and hosted them to play a variety of inter-related
strategies viz.

Cost leadership strategy
Differentiation strategy
Operational effectiveness strategy
Increase switching costs strategy
Lock in customers or suppliers strategy

As observed in this case, a disruptive innovation like the CRS allowed businesses that realized its power
to harness what is defined today as the strategic or competitive advantage over its competitors. As a
proprietary solution, SABRE allowed AA to operate at profit margins incomparable to those that did not
adopt a CRS. Through the above listed strategic interplay, AA could win over its complementors and
competitors. As the case highlights, United could thrust hosted airlines with near monopoly prices and
could ensure their tickets are preferred by introducing systemic biases that overtly discriminated the
hosted carriers.

All these happened despite, public pressure and anti-competitive laws being in place.

Characteristics of a good CRS
A good strategic information systems in our opinion must be able to offer the core functionality in the
best possible way. Secondly, it must facilitate interconnecting other related businesses seamlessly so
that data could be exchanged in real time.

Selecting or developing a new CRS is by no means a simple task. Organization that could invest
through there deep pockets could adopt a PROACTIVE approach towards developing their own
systems. The others, that realized the needs and benefits of a CRS followed suit with a reactive
approach towards neutralizing the strategic advantage gained by the first movers.

Canada Airlines response

American Airlines always coined their strategy around SABRE System. They constantly worked to add
more functionality to the SABRE system and improvise it so that it appeals to growing international
market and travel agents. In contrast, Americas United had little strategic focus on APOLLO system. It
started forming the Covia partnership to manage reservations. Canadian Airlines, recognizing this
opportunity to kick start development of their own Computerized Reservation Systems, joined Covia
along with Air Canada through a company Gemini Group Automated Distributed Systems Ltd.

Following this Event, several consumer groups however brought a case against partnership suggesting
this would result in decrease in domestic competition. This was taken up by the Federal Competition
Tribunal in Ottawa which after much deliberation decided to support this partnership.

Arguments for Ottawa court ruling:
Very little evidence that merger would reduce competition.
General trend in this industry is towards formation of large, jointly-owned CRs.
American CRS providers could take over Canadian domestic market if it doesn't go through.

Arguments against Ottawa court ruling:
US has experienced competitive implications of CRs. Canadian landscape could repeat this
history.
Monopoly could emerge and there could be very little or no competition.

Eventually, Gemini became the largest private communications network in Canada with C$100M
investment and 700 employees. During this period, it met with intense competition from SABRE who
was able to retain its market share.

PWA Crisis
After consecutive 18 years of profits, PWA saw a major turnaround in their fortunes in 1988 primarily
due to the following reasons:
Worldwide recession
Acquisition of Ward air
The situation was further aggravated by the entry of US based airlines into Canada and implementation
of their CRSs in Canada. Canadian sought an alliance from American Airlines which demanded a
replacement of Gemini with its SABRE system. In addition AMR also put forth a demand for C$195 in
new equity. The deal therefore didnt go through. This was followed by another failed deal with Air
Canada where Air Canada proposed severe cutbacks at PWA.

To set things right, PWA employees proposed an equity investment by way of the wage give back plan.
In addition, PWA also sought help from the governments of Ottawa, Alberta and British Columbia. But
a major hurdle to get the deal through was to dissolve its partnership with Gemini. This however was
defeated by the vote of four of the six members of Gemini.

Following this, Air Canada came up with a new proposal which would give Canadian equal
representation. Though a pre-merger agreement was signed, Air Canada later backed out citing that the
bankers wouldnt let it near a deal due to the poor financial position of PWA. In an attempt to revive
Canadian, employees came up with a rescue plan which included salary reductions, a public stock issue
and loan guarantees. The major hurdle however still remained - dissolution of partnership with Gemini.

Several lawsuits ensued post which the Ottawa court ruled that Canadian Airlines was free to leave the
Gemini Group hosting contract and allowed it to move to the American Airlines SABRE system.

Our take on the Ottawa court ruling
This decision to coerce the two Canadian carriers to dissolve GEMINI if they do not agree to PWA
adopting SABRE was a well thought of decision. At face value, the decision appears to have been taken
in order to preserve healthy airline competition in Canada. In our opinion, the Canadian court foresaw
the integration of various CRS systems. Strategic advantage dilutes with more and more firms operating
using the help of CRS, which will ultimately lead to an interconnected CRS system.
Moreover, PWA could improve its operating position with SABRE as compared to GEMINI. The
additional capital that AMR brings in can help sustain PWA and thereby the Canadian domestic airline
industry.
We opine, the courts decision was correct.

Analysis Summary

Air Canada and Canadian Airlines missed IT were at a competitive disadvantageous position vis--vis
their US counterparts. Factors like regulatory obligations, dependency on US Carrier for trans-border
ticket sales, discriminatory treatments etc. led to this situation where the Canadian airline industry
almost touched the brink of getting dissolved.

With reactive approaches towards survival, the Canadian carriers could not handle the mounting
pressure from the competition. In this not so attractive industry, coercing two carriers to adopt a CRS
with equal investments was first of all farfetched. Treating domestic and international carriers on par
led to several lawsuits ensued post which the Ottawa court ruled that Canadian Airlines was free to
leave the Gemini Group hosting contract and allowed it to move to the American Airlines SABRE
system. The levels of integration, the competitive factors tied to the domestic and international routes,
the cost structure in itself clearly indicates the arrival of a disaster.

This decision is taken in order to preserve healthy airline competition in Canada while still realizing the
nature of the strategic forces of IT systems like the CRS. Todays proprietary system is bound to lose its
advantage when every other player starts using it. This will ultimately lead to a new dimension of
innovation and integration of the hygiene factors across the industry to benefit all.







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