BUSINESS/ECONOMY

MIDAIR CLASHES

D'ARCY JENISH November 23 1987
BUSINESS/ECONOMY

MIDAIR CLASHES

D'ARCY JENISH November 23 1987

MIDAIR CLASHES

BUSINESS/ECONOMY

Five years ago an economic recession, record-high interest rates and a travel industry slump nearly put Maxwell Ward out of business. Ward, chairman of Edmonton-based Wardair Inc., the country’s third-largest airline, said that he came close to defaulting on his loans even after cutting operating expenses to the “poverty level.” But since then, Wardair has rebounded to challenge Montreal-based Air Canada and Calgary-based Canadian Airlines International (CAÍ) for a share of the lucrative domestic market. And later this month Wardair will receive the first two of 12 new aircraft purchased from the European consortium Airbus Industries for $880 million. “We want a market share domestically,” Ward said. “I’m talking about the business traveller, the must-ride traveller.”

The new aircraft are the cornerstone of Ward’s strategy to transform his company from a charter operation into a scheduled airline serving every class of traveller. But the emergence of a third national, scheduled airline will heat up the already intense battle for passengers being waged by Air Canada and CAL It also reflects the dramatic changes occurring in the airline industry. Management at CAI is still attempting to merge four major airlines into one effective company, while Air Canada badly needs new capital to replace about half its fleet of 111 aircraft.

Until recently, executives of the Crown corporation were anticipating that the Mulroney government would allow them to raise part of the money through a public offering of Air Canada shares. But a spokesman for Minister of State for Privatization Barbara McDougall said last week that the issue is still being reviewed, particularly in light of the October stock market crash. Besides

its internal financial problems, Air Canada is in the middle of a dispute with its ground crew members, who are threatening to begin rotating strikes in order to win a new contract. Meanwhile, William Reid, an Air Canada senior vicepresident, said, “We will have to stickhandle our way around the question of financing.”

Although Wardair announced the

purchase of the Airbus A310-300s last January, the financial negotiations were completed only two weeks ago. In a signing ceremony at the Dorchester, a swank hotel in London, England, on Nov. 6, Ward sat at the head of a Ushaped table surrounded by 50 officials representing 11 banks from eight countries. They will provide loans totalling $680 million. The deal with the banks is unique because it provides for a 15-year repayment period—compared to the normal 10 to 12 years—and just as im-

portantly, the money is being advanced in Canadian funds, which will prevent Wardair’s costs from rising due to currency swings. As part of the deal, Wardair is raising money through the sale of aircraft, a share issue sold last May and . a bond issue now on the market.

Despite the attractive features of the loan package, some critics question whether Wardair can carry an additional $800 million on top of its existing $166 million in long-term debt. “The company has always been exceedingly leveraged,” said Roland Jones, airline analyst with Toronto-based Merrill Lynch Canada Inc. “It makes an investment in Wardair that much more speculative than it has been.” Given its financial obligations, Wardair would face huge losses if it fails to take some market share from Air Canada and CAI, said Jones.

But Ward argues that, in order to survive, his company had to become a scheduled airline. Federal deregulation of the airline industry allowed Wardair to begin offering scheduled domestic flights in mid1986. Currently, the company runs scheduled flights on 14 routes between Canadian cities. But the company cannot offer enough flights daily to attract business travellers because it must fill 456seat Boeing 747s and 300seat McDonnell Douglas DC-10s. By comparison, the Airbus A310-300s seat only 194. With smaller, more fuel-efficient aircraft, Wardair will substantially increase flight frequencies. Said Ward: “We had to get a smaller airplane to get into such areas as the Toronto-Montreal-Ottawa triangle.”

Indeed, the fiercest battles between the three airlines will likely be waged in that triangle because it is so lucrative. Traditionally, Air Canada has held about 80 per cent of that market, admits Murray Sigler, president and chief oper-

ating officer of CAI. But in the past year his airline has begun offering 18 flights each weekday each way between Toronto and Montreal. CAI also flies 13 times each way between Toronto and Ottawa on weekdays. Said Sigler: “Our goal is to get half of that market.”

Although Wardair faces an uphill battle entering the Toronto-MontrealOttawa triangle and other scheduled markets, the company cannot afford to pass up the potential revenues. Director of corporate relations Christopher Yaneff notes that Wardair sells a TorontoLondon round trip for an average of $800, and it takes some 13 hours of flying time altogether. By comparison, a round trip between Toronto and Montreal takes only two hours, but the airlines charge $250 to $300 per passenger. “It’s the most lucrative market in the country,” said Yaneff. “With 10 to 15 per cent of the triangle market, Max would fill his planes.”

While Wardair is moving from a charter to a scheduled airline, the management of CAI is still trying to forge one company from various parts. CAI came into being last December when Calgary-based Pacific Western Airlines (PWA), the country’s third-largest air carrier at the time, acquired Canadian Pacific Airlines Ltd. (CPAL) of Vancouver and, with it, Eastern Provincial Airways (EPA), based in Atlantic Canada, and Montreal-based Nordair Ltd. CAI also holds equity interests averaging 45 per cent in five commuter airlines stretched across the country. They were purchased to feed CAI with passengers from smaller centres.

In order to establish its identity as a new airline, CAI has launched a massive advertising campaign, said Sigler. The company is also attempting to lower its 1988 operating budget by $80 million, largely through staff reductions. As of early October CAI had cut its management ranks by 700 through

early retirements, attrition and some 300 layoffs. Said Sigler: “We have gone through the company from top to bottom with a view to cost savings.”

But behind the advertised image of one larger, unified company, CAl’s operations have been hampered by disputes among the numerous unions inherited from the four airlines. The flight attendants have gone before a professional mediator and are now before an arbitrator because they cannot agree on how to merge seniority lists. Brenda McLean, a local vice-president of the Canadian Union of Public Employees’ (CUPE) airline division, said that former PWA, Nordair and EPA attendants want seniority for all attendants based on date of hire. Former CPAL attendants are fighting for a so-called “no gain, no loss” seniority formula that would allow them to retain coveted jobs on international flights, said McLean. As

well, the former PWA, Nordair and EPA attendants have launched a court action against CUPE —now their own union—over the issue.

For its part, Air Canada last week was still meeting the union in an attempt to avoid a potentially damaging series of rotating strikes by 8,500 ground crew and maintenance employees. Vincent Blais, president of District 148 of the International Association of Machinists and Aerospace Workers (IAMAW), said that his members want a 7.2per-cent wage increase

in a one-year contract. Air Canada pilots recently accepted a 27-month contract with two four-per-cent pay raises. The aerospace workers also want indexed pensions. Said Blais: “A strike seems almost unavoidable.” The airline contends that its wage offer is adequate because the workers already earn more than their counterparts at CAI and Wardair.

Although rotating strikes would hurt Air Canada on a short-term basis, the airline must upgrade its fleet in order to remain competitive over the next decade. The Crown corporation wants to replace 33 Boeing 727s and some of their 37 McDonnell Douglas DC-9s—about half its fleet of 111 aircraft. And Air Canada’s Reid said that the airline’s plans depended to some degree upon the government selling shares in the company to the public. “They were talking about quite a large privatization, which would have provided us with welcome financing,” Reid said. “People were disappointed by the failure to move.” Now, he added, the airline might have to obtain a cash infusion from the government or borrow the money.

Although the federal government earlier this year appeared close to a decision to privatize the airline, it subsequently dropped its plans. However, Ian Sadinsky, an adviser to McDougall, maintains that “it is not a dead issue.” He told Maclean's, “It is a complex issue, and the world changes on a daily basis.” But Sadinsky said that he had no idea when the Air Canada privatization review will be complete or when the government will make a final decision. That type of uncertainty will make life more difficult for Air Canada as the competition with CAI and Wardair takes off in the coming year.

D'ARCY JENISH

MARY NEMETH

LISA VAN DUSEN