Visiting Industry Fellow: Ms Roula Zaarour, Air Canada – Air China Alliance

Development

Negotiating Across Cultures: Case Study

Case Description:

• In early 2001, Air Canada was looking for growth opportunities. The domestic
market was saturated and the U.S. market declining and fiercely competitive.
International markets were the only answer.
• Air Canada’s strategy team evaluated some potential markets and highlighted China
as a first priority. Air Canada was operating a total of 14 frequencies per week, daily
on Vancouver – Beijing, and daily Vancouver – Shanghai. The only other carrier
operating between Canada and China was the national carrier of China - Air China,
and they had 3 flights per week, Vancouver – Beijing. A large part of the Canada-
China market was flowing via U.S. gateways (Los Angeles, San Francisco, and
Seattle), on competitor airlines. Not only was Air Canada not participating in the
U.S.-China market, but the U.S. carriers were taking traffic from Canada.
• The Chinese market is very regulated. The Air Service Agreement between Canada
and China allows each of their national carriers (Air Canada and Air China) to
operate a maximum of 14 frequencies between Canada and China. Air Canada is
already utilizing all the entitled capacity.

• The only way Air Canada can convince the Chinese government to increase the
number of frequencies between the two countries (from the current 14 to 21, to serve
daily a new route Toronto-Beijing), is to develop a commercial partnership with
China’s national carrier, Air China, and work together to change the regulatory
hurdles. (A national carrier usually has leverage with its government when it comes
to foreign air policies, especially when the carrier is government owned, as is Air
China).
• The Air Canada strategy team saw two potential ways in which this commercial
partnership could be structured:
 Option 1: Ask Air China to operate more flights (they were still entitled to
11 additional frequencies) and buy a block of seats on those flights, or;
 Option 2: Give Air China better access to the Canadian domestic market
through blocks of seats on Air Canada’s domestic flights (i.e. Vancouver-Calgary,
Vancouver-Toronto, etc.), and in return, ask for their support in negotiating with
their government for additional frequencies for Air Canada.
• Option 1 was not very attractive to the Air Canada team. It meant that for Air Canada
to grow, Air China had to grow as well, so that Air Canada would be helping a weak
competitor to grow in the market. Moreover, Air Canada was concerned about the
quality of Air China’s on-board product, since Option 1 meant that Air Canada would
have to sell its passengers seats on the Air China-operated flights. Air Canada’s team

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 viewed Air China’s on-board product as an inferior one. Air China had not renewed
its product for two decades, and it had become very uncompetitive in the industry.
Air Canada was very proud of its own product and wanted to grow with its own
aircraft and its own product offering. So, the Canadian team decided not to put this
option forward at the negotiating table.
• Air Canada’s team selected to propose Option 2, and they considered this to be a win-
win scenario. The Air Canada team’s reasoning was as follows: Air Canada was
performing very well on their two existing routes; Air China’s three flights to Canada
were doing poorly. Air Canada needed to grow and to compete effectively with the
U.S. carriers; while Air China needed more traffic on its flights, which could be
achieved by getting better access to the domestic Canadian market. It was really a
win-win proposition.

• For eight months, Air Canada negotiated with Air China, but was unsuccessful in
reaching a deal. Air China wanted to pay very little for the seats they wanted to take
on Air Canada’s domestic routes. The Canadian team could not accept their offer
because it meant Air Canada would lose money on these seats. Also, the Air China
team kept asking the Canadians to buy seats on their carrier, but Air Canada could not
accept for the reasons mentioned above. They simply did not see this as a quality
product. The negotiations broke off.
• The two negotiating teams met four times in total, three times in China (Beijing) and
once in Canada. Between meetings, formal letters were exchanged. The meetings in
Beijing were in a very large and formal room at Air China’s headquarters, where the
Chinese always outnumbered the Canadians by a large margin. The Canadian team
was usually 4 or 5 people (Vice President International, the GM for Asia Sales, the
director of alliances, one or two people from marketing). The Chinese team had more
than 12 people when the meetings took place in China, and 7 people when they met in
Canada (Chief economist, three senior executives from Marketing and International, a
translator, and the remaining were managers from pricing, marketing, network, etc.)
Both teams always brought the key decision-makers to the meetings. Each delegation
had a spokesperson (the Vice President on the Canadian side, and the Chief
Economist on the Chinese side). The Canadian team always arrived well-prepared
and with a clear proposal, but found a lot of ambiguity in the Chinese proposals, as if
the latter team was not prepared. The Canadian team found the meetings lengthy and
draining. The two teams would spend the day, with breaks for internal consultation,
and each time they would come back to resume discussions, the Canadian team felt
that their new position was very generous, but continued to be surprised with the
persistence of the Chinese not moving far at all from their initial position. It was also
frustrating to the Canadian team that, although most members of the Chinese team
spoke good English, they chose to use a translator to communicate back and forth
with the Canadians, which made the negotiating process even more difficult. After a
long day of negotiations, the Canadian team was usually very tired and ended up
either on a flight back home, or stayed at the hotel to analyze the situation and the
outcome of the negotiations. They did not take the time to know the Chinese
members away from the negotiating table.

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• What the Canadian team thought was a win-win solution turned out to be completely
unacceptable to Chinese whose counter-proposal (Options 1 and 2 combined at
lower-than-market prices) was very far from where the Canadian team wanted to end
up. During the negotiations, the Chinese always listened very carefully, nodded their
heads, and were calm, not showing a lot of emotion. On the other hand, the Canadian
team became impatient by the end of the negotiating days. As a group they did not
have a lot of direct experience or cultural awareness of the Chinese. However the
team had already successfully negotiated with other Asian cultures such as Japanese,
Korean and Taiwanese, and believed that the Chinese culture should not be very
different.
• The Canadian team felt they were negotiating from a position of strength and did not
understand why so little progress was being achieved. After the negotiations
terminated unsuccessfully, the Canadian team received a message from a third party
that they had been insulting to the Chinese. The Canadian team never understood how
they could have insulted the Chinese since they did not at any point behave in an
inappropriate manner, and instead felt that the Chinese had been too demanding.

• It has been two years now since the last time Air Canada’s management team met
with Air China’s. China is still very much a hot market to Air Canada. The regulatory
restrictions remain the same. Air Canada is still operating the same flights, but Air
China has doubled its capacity to 6 flights per week.
• Air Canada is revisiting its China strategy and has scheduled a meeting with Air
China in a month’s time.

(NOTE: Some details in this business case were modified to fit the purpose of the class.)

Instructions:

Air Canada has come to you asking for an analysis of the situation and asking your views
on how their team should proceed. Mainly what they would like to know is the following:
 The negotiations with Air China were very difficult during the first round. Air
Canada’s team does not understand what went wrong. They pursued a win-win
scenario, and that is usually key for successful negotiations. What is your analysis of
the situation?
 What strategy do you think Air Canada’s team should adopt in China in this next
round?
 How can the Air Canada team re-build the relationship with Air China?
 The Canadian team does not know what negotiating tactics to use this time. What
would be your advice?
 Has Air China entered into a strategic alliance with a Western company? Which one
and when?