Air Canada: Defined Benefit Pension Plan Harvard Case Solution & Analysis

Air Canada: Defined Benefit Pension Plan Case Study Solution

Introduction

Air Canada is the largest airline service operating in Canada with respect to size and the number of passengers carried. Its headquarters are located in Saint-Laurent, Montreal, Quebec. It was founded in 1976 providing standard and chartered air flights to passengers in 222 countries around the world and also transporting cargo. The service also founded Star Alliance. Some of its subsidiaries include Air Canada Cargo, Air Canada Express, and Air Canada Foundation. It has an annual revenue of around CAN$5.833 billion as of 2020, a net income of C$4.647 billion having around 30,000+ employees as of 2018 statistics.

As the airline sector tanked during the Persian Gulf War, Air Canada faced financial challenges in the early 1990s. In response, the airline reorganized management by appointing Hollis L. Harris, a former executive at Delta Air Lines, as its CEO. In 1992, Harris reorganized the airline's operations, downsized the management team, relocated the corporate office to Dorval Airport, and sold the enRoute card division to Diners Club. Air Canada had achieved profitability once more by 1994. The airline was given permission to operate from Canada to the brand-new Kansai Airport in Osaka, Japan, in the same year. A new open skies agreement between the US and Canada allowed Air Canada to introduce 30 additional trans-border flights in 1995. Air Canada joined as a founding member in May 1997.

The pandemic era of 2020 caused a great setback for the airline service due to the ban on traveling. It announced a ban on its flights with effect from 31^st March2020.   In its initial trimestral fiscal report, the airline service pronounced it had suffered a loss of CA$1.05 billion, compared to a profit of CA$345 million in the first quarter of 2019. (Christine I. Wiedman, 2011)

Problem Statement

The firm has faced a tree days strike by the service staff which led an investor, Peter Black, to think about selling his shares in Air Canada. He wants to review the pension plans of the firm. The industry is heading a low recovery process and thus the long-term prospects of the firm are doubtful. The share price is also low around $2.01. The most significant issue that arose the airstrike had been the defined benefits plans. The investor was interested in learning how Air Canada's pension accounting will be affected by the shift to the International Financial Reporting Standards. (Christine I. Wiedman, 2011)

SWOT Analysis

The SWOT Analysis of a firm declared its major strengths, weaknesses, opportunities, and threats faced by the firm.It gives a deep insight to the analysts looking forward to solve major issues faced by the firm. SWOT Analysis is an effective paradigm that allows a firm to compare its procedures and actions to those of its competitors. (Büyüközkan, 2021)

Strengths

• It is one of the largest airline services in Canada.
• It has encored an experienced workforce.
• It has a remarkable infrastructure.
• It has encored a profitable local as well as international market.
• One of the largest airline services in the world.
• Having around 222 destination points globally operating in almost every part of the world.
• Around 35 million passengers fly with Air Canada in a year.
• It has an excellent staff service thereby working for years.

Weaknesses

• Brand awareness is high but brand affinity is relatively low.
• The aircrafts are aging in the fleet.
• The staff members' strikes are a major concern.
• The stock prices are decreasing.
• The company suffered a huge loss of around CA$1.05 billion during the pandemic.
• The shareholders are thinking of backing off.
• Brand affinity is low although the brand is recognized worldwide.
• There is a need to update the international Financing Report standards which is a huge concern.

Opportunities

• The business can improve its fiscal policies.
• Identifying the staff’s problems and then heading towards solving them.
• The shareholders can be dealt with on smooth terms.
• To ensure that the shareholders do not step back and sell their shares.
• They can head on to launch a low-cost airline service.
• Increasing tourist attraction in Canada.
• Better penetration into the market globallyby worldwide brand recognition like top industry players.

Threats

• The flight operates in around 222 countries so government regulations are a big concern.
• The currency rate fluctuation is a big deal.
• Carriers having low costs are also a concern.
• The increasing decline of shares is a major threat that can render the company at a loss.
• The staff strikes can lead to a decline in the quality of services being offered.
• The increasing rates of fuel are also a major concern worldwide.
• Countering the increasing tourism in a cost deficit service is a major problem.

Analysis

Air Canada’s competitors are tough and have a strong pension plan which is lagged by Air Canada despite having a huge employee base of around 23000+. The staff is reluctant to protest the likelihood. The airline now has the biggest collective pension plans, but financial problems related to solvency remained a major concern for the company. The airline also experienced a total pension deficit in 2011. Other rivals, like WestJet, were unable to get public support or protection, but because of their affordable business model, they were spared a serious pension crisis. Costs for rivals were significantly lower than for Air Canada. (Hartt, 2018)

The major problem related to the pension arose due to a lack of funding. The funding for other competitors like WestJet was also hurdled but that was easily encountered due to low infrastructure costs. That was not the case with Air Canada as the firm had expensive infrastructure. Air Canada has been having problems making pension payments due to a shortage of cash, therefore the company is putting up a new defined benefits pension plan, which employees are opposing. Due to the constant amount, Air Canada lacks financial leverage, which affects things like the performance of the company's investments or the volatility of profits. The airline is introducing a new defined contribution pension plan that would have this performance flexibility to combat this. The main issue with the existing plan is that, regardless of performance, the pension plan is set and has a significant negative impact on the company's finances.

Alternatives

The major problem, in this case, lay with the investor Peter Black thinking to sell his shares in Air Canada after the strike bursts from the staff members due to changes in pension policy. The change was mainly made to counter the lack of funding for the firm. Other airline services were also hit by a lack of funding but Air Canada was especially hit due to costly infrastructure.This led to the development of a defined benefit plan which was not accepted by most of the staff members and thus this called for a strike.Another reason was the decrease in the value of the shares which led him to think of a change of mind.

Alternative A (Proceed to Existing Plan)

The company has a major option of continuing the existing plan while preparing more effectively for overcoming the current hurdles.The plan can be executed with greater efficacy and modifications than the current plans to the extent that can be adopted by the employees.The senior staff members need to be trained in order to deploy the correct mindset in the junior employees to call off the strike. They need to be enlightened about the current scenario the firm is facing and the future prospects of the plan......................

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