AC Q4 $727M loss

[Martin Tamme]

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TORONTO STAR


Painful lessons courtesy of Air Canada

Feb 16, 2009 04:30 AM

Andy Wilson


The release of Air Canada's year-end results last week – the airline announced a loss of $1.03 billion – provides an opportunity to take stock of the changes that have taken place at our country's largest airline since it emerged from bankruptcy protection. The case study of Air Canada's dismantling and diminishment offers some valuable and painful lessons for legislators and regulators – and the public they are supposed to serve.

It was 2003, when Air Canada was in trouble, that the financial sharks first smelled their opportunity. Air Canada employees were told that they had to "do their part" to rescue their employer. And they did, with more than $2 billion in concessions. Employees also understood the logic of restructuring the business in order to realize the promised long-term prosperity of their airline.

Unfortunately, that logic was not allowed to prevail. The sale of Aeroplan and Jazz to a new parent firm, Air Canada Enterprises (ACE), was engineered in 2006, at a deep discount. Then ACE announced distributions of $2 billion to its shareholders. Through an elaborate series of transactions, the result was that the employee concessions all ended up in the hands of the vulture funds who were supposed to be the "rescuers" of Air Canada. The billions extracted from the airline represent an amount greater than the entire aggregate profit earned by Air Canada since 1937. Little, if anything, remains for the enduring benefit of Air Canada.

The final windup of ACE is now imminent. All that remains is a squabble over the remaining scraps. When the plan of arrangement is eventually approved, Air Canada will be worth less on the market than the price of a single Boeing 777.

ACE is a poster child for what ails the Western world's economic system. That system's success was built on the model of corporations assembling capital, ingenuity and human resources for the purpose of efficiently producing high quality goods and services. In return, businesses earn a well-deserved profit and reinvest some of that profit in the corporation so that the cycle of success can continue and grow. In the process, businesses also employ people, who are then able to buy the products and services they need, creating consumer demand that powers our entire economy. We all recognize this model as the primary source of the immense wealth and productive capacity the West has built up over generations.

But somewhere along the line Western economies seem to have lost their way. International financial moguls have learned that there is more quick and easy cash to be had through financial shell games than through the hard work and rigorous management of efficient, productive enterprises.

Our system of corporate law and regulation offers no protection from such unethical attitudes and actions. Our system is based on the naive assumption that corporate activity is essentially ethical, beneficial and productive. This assumption underlies our inadequate financial disclosure regulations and a tax structure that in some cases actually provides incentive for the decapitalization of industry. The recent Canada Revenue Agency ruling, which significantly reduces the amount of tax that ACE preferred shareholders will pay on their distribution, is a case in point. It is little wonder that Air Canada employees see this public subsidization of the ACE deal as a final insult to their history of dedication and the contributions they have made to the viability of the company.

Western nations are further hampered by a dysfunctional collective corporate culture that is focused on the short term, with a dearth of leadership and vision to create a better long-term future. Worse, we have embraced a culture that accepts this as the norm. We hear continuous reports by breathless stock cheerleaders without considering long-term economic consequences. We rely on a flood of cheaply produced foreign goods to give us lower prices, but fail to see how this has deprived us of the productive capacity to generate the national income that pays for them. In a very real way, we have all contributed to the financial situation we now face.

In the case of Air Canada, this has resulted in our flag carrier – the largest part of our national air transportation system and the hope and pride of its dedicated employees – being weakened and diminished.

We all want to live in a prosperous country, where our laws, policies and practices encourage efficient, productive and competitive industry. But today, our laws, actions and attitudes are permitting financial carpetbaggers to prosper, while employees, the travelling public and the communities Air Canada is supposed to serve are left holding an empty bag.

It's time to consider how we allowed this to happen and what we can all do – as employees, consumers, shareholders, regulators and legislators – to stop it from happening again.

[Stick-Shaker]

WJ is unhedged

oops!

[E-Flyer]

Lots can happen in 6 months or a year.

Just look at summer and now.

[WS739]

Pretty sad how a company can blame Pensions for its financial irresponsibility. The hard earned money by employees over the last 60 years shouldnt be touched! It should be paid, and for anyone to go after it is a sad day in aviation.

I think once the 787 billion is signed in by Obama, you will see an uptrend in the markets and in oil. So while hedging seems to be hurting now, it might be a smart move come summer.

[Brick Head]

We should have seen this coming almost a decade ago.

Remember what Milton did shortly after he became AC's CEO? The Onex hostile takeover took place. He stated he would give all AC's cash on hand to share holders before Onex would get its hands on it. He said it belonged to shareholders.

He followed through and gave what to shareholders? 1.1Billion was it not? Don't remember? Martin, do you remember the number? At the time AC was taking a pension holiday as was legal at the time. 3 years later, after the tech wreck, when that decision caught up to them and the OSFI stepped in, demanding payment based on dropping pension valuations, what did he do? Filed for CCAA. During CCAA he was able to get a ten year repayment on the amount due. All end loaded to the 2008-2013 period. So in fact AC still hasn't paid what they owed the pension from early 2000.

See a trend? Give the cash to shareholders before it ends up in the employees pensions. Treat pension contributions exactly like a hostile takeover attempt. give it to shareholders first. Nothing left. So sad.

AC has played fast and loose with their pension obligations for the last decade. One might even argue they consciously knew their actions would jeopardize pensions. And it is all perfectly legal.

So what is the tally to shareholders for the last decade? 4.4Billion?

[Martin Tamme]

Unfortunately, I don't remember what the exact number was, but it's something like that.

Speaking of pensions, Jazz pilots went to a Defined Benefit pension plan in 2002 (or was it 2003?). Then under the ACE restructuring, they made Air Canada -not ACE- responsible for the Jazz pilot's pension plan, even though they are 2 separate companies. As such, if Air Canada is having problems, it will affect the Jazz pilot's pension plan.

Dirty games!

[swervin]

We've had a defined Benefit plans since the 70's at Jazz. It was the Great Lakes plan.

[Jaques Strappe]

Throughout most of the nineties, the company took a pension holiday and paid nothing into it. Since that time, they went into CCAA and paid nothing into it. Now they claim they have no money and therefore, should pay nothing into it.

The reality, Monte must think everyone is as stupid as he is. How can the pension be a burden to you when you have paid nothing into it for the past decade! It does not take an economics prof to figure out that sooner or later, there will be a bill to pay.

Now he is crying like a baby blaming company woes on a pension that is grossly underfunded. ( underfunded by whom ??? ) No mention of the fact that the company execs royally fucked up on fuel hedging. Yet again, it didn't take an economics prof to know that oil was not going to say at $140 a barrel. A burden we are still paying for.

At no time has Monte or his executives, accepted any responsibility for the financial state of the company. They simply point fingers at everything else. As a pilot, if we ran an airplane out of fuel, we accept the burden of responsibility. If a CEO runs a company into the ground, he gets a golden parachute while everyone else dies in the crash.

Frankly, I think ACPA should publicly state that they are not willing to negotiate with an obviously incompetent executive and demand their resignations before any negotiation will take place.

[sportingrifle]

Jaques...

+1

And if they refuse, the only other way to get a real change of management is let the liquidate a'la SwissAir and let somebody new take it over. This is where my thoughts are currently. I just personally gave hundreds of thousands of dollars to RM, DeutcheBank, GECAS, et all. I am not going to do it again just for the warm fuzzy feeling of flying our toothpaste blue airplanes around!

Cheers sportingrifle

[Cloud 9]

As a pilot, if we ran an airplane out of fuel, we accept the burden of responsibility. If a CEO runs a company into the ground, he gets a golden parachute while everyone else dies in the crash

Well said

[Jaques Strappe]

Jaques...

+1

And if they refuse, the only other way to get a real change of management is let the liquidate a'la SwissAir and let somebody new take it over. This is where my thoughts are currently. I just personally gave hundreds of thousands of dollars to RM, DeutcheBank, GECAS, et all. I am not going to do it again just for the warm fuzzy feeling of flying our toothpaste blue airplanes around!

Cheers sportingrifle

I could not agree more. I am in the same head space as you. Giving these idiots more concessions would be like serving an alcoholic a double martini. They have continuously demonstrated that they cannot manage money nor be trusted. I sit back and watch the company spend dimes to save nickels and just shake my head. Air Canada, right now, in its' present state, does not deserve to be in business.

[yycflyguy]

Jaco! Haven't seen you terrorizing AvCanada for awhile and now you come out swinging! I have been conducting my own, very informal, survey asking my colleagues what do they think will happen this year and what would they like to have happen. I must say that I am not very impressed. There is a definite laissez faire attitude that is emanating from the ranks. I hope to see some more of your passion on the line in the coming months and that my survey is only a microcosm of what the membership truly feels. Say hi to the Mrs.

[Jaques Strappe]

Jaco! Haven't seen you terrorizing AvCanada for awhile and now you come out swinging! I have been conducting my own, very informal, survey asking my colleagues what do they think will happen this year and what would they like to have happen. I must say that I am not very impressed. There is a definite laissez faire attitude that is emanating from the ranks. I hope to see some more of your passion on the line in the coming months and that my survey is only a microcosm of what the membership truly feels. Say hi to the Mrs.

Hey Amigo..... como esta?

I miss you translating on the way into Havana!

Yeah, I tried to shut up for awhile and sit on my hands but I just can't do it any longer.

As for your survey, I am with Brickhead on this, I believe a pension reform is inevitable and in my opinion, it should have been done in conjunction with the deal Victor Li was offering. I will never forgive the unions for not even presenting that deal to the memberships and it would be very difficult to convince me that the deal with Cerberus was the better way to go.

In my opinion, if we had "negotiated" an exit strategy from the DB plan, we would be looking at a much better contract than what we have now. Now, there will be no negotiation.

However, having said that, I still stand by my reference to the alcoholic. Taking away the pension burden and expecting that money to actually go into the company instead of the pockets of the executives, would be very naive indeed. I mean how many times can you hit a dog with a stick before he bites you? This is where the lack of trust and faith in our leadership, should warrant their resignations, in my opinion.

The wife sends her best. How's the Colombian?

[yycflyguy]

Easy solution for the impeding pension reform (although I think that will be a tough sell). We will just take all the money owed from pension top off in retroactive pay, with 7-9% interest of course, as we all would have invested that money wisely.

The Colombian is very well... after several cuba libres and mojitos I convinced her to become Mrs yycflyguy. Alcohol works wonders and can make even the ugliest of Canadians attractive to Latinas.

[Jaques Strappe]

The Colombian is very well... after several cuba libres and mojitos I convinced her to become Mrs yycflyguy. Alcohol works wonders and can make even the ugliest of Canadians attractive to Latinas.

Hey congratulations! So I guess now you won't be needing a dental plan now?