With bankruptcy behind it, carrier intends to follow a new route to profitability
By BRENT JANG/TRANSPORTATION REPORTER
Monday, August 23, 2004 - Page B3
An Ontario court is expected to grant an order today approving Air Canada's comeback strategy, allowing the beleaguered airline to revamp its fleet, boost international routes and prepare to spin off subsidiaries.
Mr. Justice James Farley of Ontario Superior Court is scheduled to consider an Air Canada motion seeking the court's blessing for the company's restructuring plan.
The spotlight for the past 17 months has been on Montreal-based Air Canada's efforts to attract financing and get creditors onside. Now that investors and lenders are lined up, and creditors have agreed to forgive a large portion of debt owed by Air Canada, the nuts and bolts of the carrier's business plan will soon take centre stage.
Air Canada, having reduced labour expenses by wringing wage concessions from unionized employees, intends to further shrink costs while gaining passengers.
The court sanctioning order expected today will pave the way for Air Canada to emerge from bankruptcy protection on Sept. 30.
The goal is to run the airline efficiently and, eventually, profitably. With oil prices last week flirting near $50 (U.S.) a barrel and jet fuel prices soaring, however, the carrier has a steep path to recovery.
Creditors, who gave the green light last week to Air Canada's reorganization plan despite typically reaping just a dime on a dollar owed, will be keenly watching how well the airline can execute its business strategy. Creditors are poised to effectively assume an 88-per-cent interest in Air Canada, which sought court protection under the Companies' Creditors Arrangement Act (CCAA) on April 1, 2003.
"It's been a long, tough road and it's encouraging for all of us to have the end in sight," Air Canada chief executive officer Robert Milton said in a tape-recorded message to employees last week.Two key executives helping Mr. Milton are Montie Brewer, executive vice-president of commercial operations, and Stephen Smith, recently named to the newly created position of senior vice-president of customer experience.
It's Mr. Brewer's task to shape competitive and simplified fares, while Mr. Smith, a former WestJet Airlines Ltd. executive, seeks to motivate employees to provide the best service possible to consumers.
Mr. Milton emphasizes that he senses momentum building for Air Canada to implement its strategy, and he's optimistic about delivering a "winning performance."
Air Canada already has eliminated from its fleet dozens of aircraft deemed old and inefficient. It's now ready to remove aircraft such as the Boeing 737-200 and the BAE 146 while phasing out the oldest Dash-8s in its regional Jazz operation. New aircraft costing $2-billion will be purchased, notably regional jets from Brazil's Embraer SA and Montreal's Bombardier Inc., with delivery starting next month.
As well, the much-ballyhooed Zip fleet in Western Canada, launched nearly two years ago as Air Canada's discount rival to Calgary-based WestJet, will be retired. Zip employees are set to be integrated into Air Canada's mainline operation within a month.
On the international front, Air Canada will be seeking to build on its strength on global routes. The airline wants to expand its service to destinations abroad while looking for gains in efficiency by being careful to match the right aircraft with appropriate routes.
Markets in Latin America and the Caribbean are seen as growth areas, including flights to Lima, Peru, starting this November. Last month, the airline introduced its service to Bogota and Caracas.
Canada-U.S. routes will be another key component of Air Canada's restructuring plan.
While Air Canada boasts the most transborder flights into the United States of any carrier, the competition for customers is fierce and will get even tougher. WestJet, for instance, plans to expand into several U.S. markets by the end of this year.
Domestically, Air Canada's regional Jazz subsidiary will remain under the Air Canada banner. But eventually, Jazz could be one of several entities spun off as separate, publicly traded firms.
Douglas Reid, a professor at Queen's University's school of business, said it will be difficult for Air Canada to carry out its game plan in a profitable manner. While Air Canada has come a long way, "it's still in a frail state financially" because rising fuel prices will place greater pressure on the airline to find cost savings elsewhere and perhaps stretch employees too thin, Prof. Reid said.
"I don't want to sound like I'm raining on Air Canada's parade, and I feel very bad about saying this, but objectively, I don't understand how they'll be able to assemble the winning conditions needed to create profits" any time soon. Prof. Reid envisages Air Canada continuing to post annual losses through 2006.A new parent company for Air Canada, ACE Aviation Holdings Inc., is set to be created next month, and it's ACE that would control Jazz and other subsidiaries such as the Aeroplan loyalty program and the technical services unit, which oversees aircraft maintenance.
Just how much control ACE will maintain over the subsidiaries is unclear since ACE's new directors will need time to decide if and when to sell off minority stakes in, for example, Aeroplan and Jazz.
Rupert Duchesne, Aeroplan's president and CEO, said the expansion of the rewards program -- beyond the staples of hotels and car rentals -- will help restore consumer confidence in Air Canada.
He said Air Canada is on the verge of receiving court approval for its restructuring plan, so consumers should be "very reassured that their Aeroplan mileage is safe and it's safe to carry on accumulating more."