Articles on Air Canada in Macleans

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Panama Jack
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Articles on Air Canada in Macleans

#1 Post by Panama Jack » Wed Apr 21, 2004 1:10 pm

The Death Watch

Should unloved and perennially broke Air Canada be put out of its misery?


IT MAY be just a matter of time. Air Canada, the country's flagship airline, has been protected from its creditors for more than a year by order of the Ontario Superior Court. An exclusive, five-month-long courtship with billionaire Victor Li hasn't been consummated and may well be dropped altogether. Other potential suitors appear reluctant to step into the breach. In 2003, the carrier lost almost $2 billion. The year before, it lost nearly another billion. How close to going bust is Canada's dominant airline?

As the restructuring drama drags on, observers have changed their tone. Instead of discussing how the airline might recover from the mess it's in, they're now speculating about what will push it under. "I've turned bearish on Air Canada," says Douglas Reid, a professor of strategy at Queen's School of Business who focuses on the aviation industry. "My instinct today is, it's going to be difficult for them to turn around what has been a deteriorating situation."

Reid's reasoning: Air Canada's plan to slash its expenses has come up short -- by a significant $200 million -- despite heavy layoffs and renegotiated airplane leases. WestJet Airlines Ltd., the Calgary-based upstart that costs much less to operate than Air Canada, continues to nab its rival's customers. And if someone finds a way to offer cheap long-distance flights using a low-cost model like the one WestJet and others employ on shorter trips, Air Canada's for-now profitable overseas flights would be seriously challenged. "I believe Air Canada will be back in bankruptcy protection within two years," Reid says. "By that point, it will be all over."

Ultimately, what will decide the company's fate is whether it turns out to be worth more as an ongoing enterprise or one busted into pieces -- and, of course, only a select few know the true state of Air Canada's books. But even that elite group faces many unknowns. Will a deep-pocketed partner be found, and if so, how much might it pony up? Will employees agree to further concessions in order to make the company still leaner? What will happen in the troubled airline industry as a whole?

"Every time I go to a cocktail party, people ask me, 'Should I buy a plane ticket? What do I do about my Aeroplan points?'" says Richard McLaren, a University of Western Ontario professor of law specializing in bankruptcy issues. "People don't want to be stranded on their holiday." That kind of chaos has been averted so far because the airline is still protected from its creditors. But if the current restructuring effort fails, those creditors will get the chance to squeeze any money they can from the carrier's assets. Air Canada isn't there yet, McLaren says. "But we're right on the edge."

Still, customers may not be willing to wait for the company to get its act together. As the cocktail circuit confirms, Canadians are already asking whether their summer vacations are in jeopardy. If that scare spreads to business travellers -- the airline's bread and butter -- and they decide to seek alternatives to Air Canada, it won't matter what concessions employees make or how much new money is injected into the company, McLaren says. "Should it be liquidated? We're getting pretty close to the point where the answer is yes."

Questions about the fate of the Aeroplan frequent-flyer program are front-of-mind not only for Air Canada's customers but also its partners. Canadian Imperial Bank of Commerce, whose Aerogold Visa is one of the most widely held credit cards in Canada, is considering a future without the popular plan that lets its cardholders amass points toward ticket purchases. When asked during a conference call with analysts what would happen if the airline were to fail, CIBC chief executive John Hunkin tried to be reassuring. "If some day for some reason there was no longer an Aeroplan program," he said, "it'd be our job to make sure we can provide an offer that would continue to hold those clients." He didn't elaborate.

Canadians can find some comfort in the fact that Aeroplan is a separate entity that would likely be sold if Air Canada went bust. It could be run by another player and make new alliances with other airlines. But no one can predict how such deals would affect people holding all those points.

Likewise, the airline's aircraft maintenance unit and Jazz, its regional feeder service, would both probably be put on the block. Even though Air Canada has few other hard assets -- most of its planes are leased -- the process of divvying up the company would be complex and hotly contested. Conflicts would flare up over such things as its coveted departure time slots at O'Hare, Heathrow and other major airports.

WestJet, meanwhile, would scramble to capture as much of the Canadian traffic as possible. But at only a fraction of the size -- Air Canada has nine times the number of employees and seven times as many planes -- WestJet could not grow fast enough to fill the yawning gap. The federal government might be inclined to finally allow U.S. carriers to expand into the Canadian market. It's also possible that a remnant of Air Canada could be kept alive and regain the skies -- just as Swiss International Air Lines rose two years ago from the ashes of Swissair Group.

Will that happen? The mere suggestion of an Air Canada bankruptcy raises Buzz Hargrove's ire. The president of Canadian Auto Workers, which represents about a quarter of Air Canada employees, calls such speculation "absolute nonsense." He offers, "I'm not a business guy, but even I could make money with it. You've got 60 per cent of the domestic market, 90 per cent of the international market. You just got a billion dollars in concessions from the unions and over a billion in concessions from suppliers and people who lease the planes. The creditors are giving up a hell of a lot more than that and you've just spent a billion on brand new airplanes. It seems to me there's a pretty good business model here."

Hargrove knows union members would bear the brunt of a bankruptcy's impact. They would not only lose their livelihoods, they'd lose a chunk of their pensions. In fact, it's the effort to protect those pensions that pushed Victor Li away. To help find a replacement, Hargrove wants the federal government to lift the 25-per-cent cap on foreign investment in the airline business so Air Canada can welcome money from around the world.

So far, the stakeholder that's been the least vocal is the federal government. Paul Martin knows a bailout by Ottawa would not only anger taxpayers but, worse still, it would probably fail. At the same time, he will want to avoid seeing the national carrier go under in an election year, putting 30,000 voters out of work. Opening the door to foreign investors might be his -- and Air Canada's -- best bet. ... 9219_79219
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