FINANCIAL POST
In for the long haul
The international aviation market is a volatile place but it's also where the growth is, and the new Air Canada is in a good position to benefit
Rick Erickson
Financial Post
Thursday, October 07, 2004
Air Canada moved out of bankruptcy protection recently amid considerable industry speculation as to its impending future. No question, it has been a tumultuous 18 months since the carrier slipped into the Companies' Creditors Arrangement Act, with a surfeit of gut-wrenching and brinksmanship moments experienced by participants and observers alike.
So what has the re-structuring accomplished? And, more importantly for the airline's employees, customers and investors, where do the fortunes lie for the revitalized airline?
Air Canada remains the country's largest carrier by a wide margin, and that is not about to change. The carrier's comprehensive restructuring process has reduced operating costs by roughly 25%, with labour productivity gains as meaningful as the immediate savings in wages and benefits. Furthermore, Air Canada has reduced both the number and types of aircraft in its fleet, winnowing out the problem children while retaining all of the newer, most fuel-efficient models. Through most of its private sector existence, Air Canada experienced low liquidity, high debt levels and high debt service requirements, generally ending in unacceptable losses each year. Major haircuts have been taken by all stakeholders, resulting in a significantly reduced debt and lease servicing requirements and a much "cleaner" balance sheet.
Not so obvious have been the changes to Air Canada's corporate structure. ACE Aviation Holdings, as the new parent company will be traded, is essentially a modern holding company with considerable latitude to "carve out" parts of Air Canada's various business interests. Doing so will access the considerable asset appreciation that can be realized from any of Aeroplan, Jazz, Air Canada Vacations, Destina and, perhaps down the road, Air Canada Technical Services, Ground Handling and Air Cargo.
Media attention remains largely focused on the domestic domain. Yes, this is a big country and yes, we Canadians tend to treat the private sector aviation industry like a public utility. The domestic market remains important to Air Canada, who intend to protect their interests with significant new regional jet resources. Yet, no matter how you slice it, Air Canada's domestic market share is shrinking. As well, a great year for passenger demand in Canada produces growth in the range of 1% to 2%. While most of Canada's international routes display annual growth patterns of between 3% (North Atlantic) and 5% (Asia), pent-up demand in Latin American currently produces a healthy 6% to 8%. Further, yields -- the amount of money a customer is willing to pay for air services (usually measured on a seat-mile basis) -- show an unabated downward pressure, but display stable if not modest growth on international routes. Clearly, customers are willing to pay for on-board amenities like in-flight entertainment, roomier seats, hot meals and the like on long haul routes where comfort is appreciated, if not a necessity.
Air Canada has moved further, more quickly than virtually any other world "legacy" carrier -- airlines that provide a full-range of services over a large network. Nowhere is this more true than in comparison with all of Air Canada's U.S.-based competitors. Pity the U.S. legacy player awash in capacity and having no choice but to fight head-to-head with domestic low-cost operators since it does not enjoy much in the way of international traffic rights. The blood is only starting to be let.
European carriers are more fortunate, as are most Asian competitors, but significant change yet need to occur -- witness British Airways and Singapore Airlines' announced job cuts, not to mention the perilous, if not terminal, state of Alitalia and Greece's Olympic Airways.
Air Canada's international route network can only be described as magnificent: 147 airports served in 33 countries with its own metal. However, Air Canada's international arena is not entirely rosy. The carrier has no choice but to up-grade its products both in the front and back of the aircraft, since it has done precious little product development over the past three years. Air Canada's newest A340-500s -- the super long-range jobs flying non-stop between Toronto and Hong Kong -- suggest where the carrier is going : flat-bed seats in business and seat-back television in economy, among other offerings.
Another more oblique point need be made: From an economic welfare benefit perspective -- a premise only an economist could love -- Air Canada's international efforts produce consequential returns to the Canadian economy. Where the domestic air transport "economic pie" is largely being redistributed among the low-cost operators, Air Canada creates new value through its expanded international operations. In particular, the U.S. has been rather short-sighted with its onerous intransit visa/security requirements for virtually all foreign travellers. Canada is less onerous, especially for passengers who never leave the airport intransit areas. U.S. industry observers suggest that US$300-million to US$350-million is up for grabs in attracting this segment. Air Canada is well-positioned to garner a substantial portion of this revenue, creating tangible economic benefits for our major gateway airports and the tourism markets behind Toronto, Vancouver and Montreal.
Doing so will mean jobs, labour income, value-added GDP, taxes at all levels, and, one trusts, profits. If we include the indirect and induced benefits -- the so-called rippling of economic benefits -- the Canadian economy could reap in excess of $1-billion per year. This is why pundits who over the past 18 months have called for Air Canada's bankruptcy are wrong. A strong international air carrier based in Canada supports our status as a trading nation and adds considerable value to our economy, benefits that are not generated by point-to-point service from foreign-based operators.
One last point should be gripped: The international aviation arena is a volatile place. A number of key variables remain totally outside of any carrier's ability to influence, including high fuel and insurance costs; unsteady economic and geo-political circumstances, especially any kind of terrorist attack on the world's air and tourism industries; the re-emergence of SARS or other epidemic diseases, fluctuating currency rates; and the like. Any of these could seriously disrupt Air Canada's promising international future.
Otherwise, it's steady as she goes: The carrier has emerged from CCAA with a robust balance sheet and a strong business plan that should leverage Air Canada's international assets into future profitability.
Rick Erickson is a Calgary-based observer of Canada's air carrier industry
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In for the long haul
Moderators: lilfssister, North Shore, sky's the limit, sepia, Sulako, I WAS Birddog
Warren Buffett, who has a lot more money than Rick Erickson ever will, has this to say:
"The airline business, from the time of Wilbur and Orville Wright, through 1991, made zero money net."
The owner of airline shares is a good demonstration of the axiom that a fool and his money are soon parted.
Ask anyone who used to own Air Canada shares, which were intentionally devalued to worthless by the management of the company.
"The airline business, from the time of Wilbur and Orville Wright, through 1991, made zero money net."
The owner of airline shares is a good demonstration of the axiom that a fool and his money are soon parted.
Ask anyone who used to own Air Canada shares, which were intentionally devalued to worthless by the management of the company.
