BUSINESS

A DOGFIGHT FOR SURVIVAL

AIR CANADA AND CANADIAN AIRLINES ARE STRUGGLING TO FLY HIGHER IN MORE COMPETITIVE SKIES

BARBARA WICKENS October 1 1990
BUSINESS

A DOGFIGHT FOR SURVIVAL

AIR CANADA AND CANADIAN AIRLINES ARE STRUGGLING TO FLY HIGHER IN MORE COMPETITIVE SKIES

BARBARA WICKENS October 1 1990

A DOGFIGHT FOR SURVIVAL

BUSINESS

AIR CANADA AND CANADIAN AIRLINES ARE STRUGGLING TO FLY HIGHER IN MORE COMPETITIVE SKIES

Victor Pappalardo, the 47-year-old president and owner of the troubled Toronto-based City Express airline, says that he has always been fascinated by flight. As a child in Montreal, Pappalardo and his father spent hours at Dorval airport watching DC-3s take off. Still enthralled as an adult, Pappalardo entered the airline industry in 1963 as a cargo loader for Montrealbased Nordair, after graduating with a BA from Concordia University. In 1984, he fulfilled a lifelong ambition and launched his own airline, City Express, then serving only the TorontoOttawa market. He built up the airline, made money, and at one point owned 12 aircraft, serving eight cities. But a slumping economy, declining passenger travel and stiff competition from other airlines, particularly from Air Canada subsidiary Air Ontario, has forced Pappalardo into a crash landing. And airline analysts predict that more airlines, small and large, may soon follow City Express into a tailspin. Indeed, last week Air Canada said that to save money it would consider layoffs of up to 10 per cent of its 23,000 employees.

City Express, one of only a handful of airlines still not owned or controlled by Canada’s two major airlines—Air Canada and Canadian Airlines International Ltd.—has applied for protection from its creditors under Part III of the Bankruptcy Act. And last week, Pappalardo persuaded 300 of City’s creditors, who are owed $10.4 million, to give him until Dec. 15 to restructure and refinance his company. Said Pappalardo: “It’s a David and Goliath situation. We’re David, and Air Canada is Goliath. Their mission is to put us out of business.”

But for Air Canada, the survival of City Express could be at its expense. Indeed, despite its domination of the national market, Air Canada, the nation’s largest airline, and Calgary-based PWA Corp., the parent of secondlargest Canadian, are facing a decline in passenger traffic due to a softening economy. The number of Canadians flying during the first six months of this year dropped to 10.7 million, down she per cent from the same period last year. As well, the Persian Gulf crisis has pushed up jet-fuel prices, which already account for 15 to 20 per cent of airline operating expenses, from about 55 cents a gallon on

Aug. 2 to as high as $1 a gallon last week.

As a result, most of the world’s airlines, including Canada’s two national carriers, earlier this month increased fares on international routes by about eight per cent, effective on Oct. 1. The jump in fuel costs will also likely lead to higher domestic fares—forcing the price of a regular economy return ticket from Toronto to Vancouver even higher than its current $1,294 level.

Canada’s major airlines are also encounter-

ing internal problems. PWA has a large $ 1.5billion long-term debt, part of which it accumulated to finance a takeover of Edmonton-based Wardair Inc. for $248 million in January, 1989. But PWA chairman Rhys Eyton told Maclean ’s that the airline’s debt is under control and the worst of Canadian’s troubles are behind it. He added: “We’ve done all the tough stuff. We have spent three years rationalizing. We have put five carriers together, have gone through

an awful lot of change and pain and now believe we are at a point where we have completed that exercise and we’re ready to go.”

Last year, the airline recorded a $56-million loss—the first in its 44-year history—on operating revenues of $2.7 billion, partly as a result of costs associated with taking over Wardair. Despite an increase in revenues, it lost another $25.9 million in the first six months of this year on revenues of $871.3 million. Meanwhile, Air Canada’s profit in the first six months of this year dropped to just $6 million on higher revenues of $1.92 billion, down from a $ 19million profit on revenues of $1.76 billion during the same period in 1989, the former Crown corporation’s first year as a private company. Analysts say that most of the airlines’ increased revenues are generated by the sale of airplanes, not from higher ticket prices. Said Frederick Larkin, airline analyst with Toronto-based Bunting Warburg Inc.: “The airlines don’t make much money at all from their main business of carrying people and cargo.”

Ironically, Ottawa’s 1984 deregulation program, which was supposed to create more competition for the two majors and lower prices, has had the opposite effect. Under deregulation, the airlines were allowed to acquire dozens of small regional or so-called feeder airlines. As a result, the two national carriers now control more than 90 per cent of the domestic market.

For the smaller airlines, association with one of Canada’s majors gives them critical competitive advantages such as counter space at major airports and better-placed gates at the terminal. More importantly, the feeder airlines participate in the majors’ frequent-flyer programs and the Gemini reservation system, which Air Canada and Canadian jointly own and which more than 70 per cent of Canadian travel agents use to obtain information and book flights.

But critics say that deregulation has made it virtually impossible for any other airline to enter the field. Even so, independent executives like Pappalardo say that they are determined to fight the odds. Pappalardo says that his firm operated profitably on the TorontoOttawa route until April, when Air Ontario began competing unfairly out of City Express’s Toronto Island airport base. Until then, Air Ontario had operated out of London, Ont. According to Pappalardo, Air Ontario made it impossible for City to operate on the Torontoto-Montreal route after it reduced its return fare to $109 from $165 in April. Declared Pappalardo: “They have come in and engaged in predatory pricing activity.”

Meanwhile, another independent, the 45year-old Montreal-based Intair Inc., is also going head to head with the two majors in their most lucrative markets. Last week, Intair, which flies to 30 locations in Quebec and Ontario, entered the hotly competitive Toron-

to-Ottawa route, charging $69 (return) for a access to American skies, Canada would likely regular Toron to-to-Ottawa economy flight. In have to grant much larger American carriers fact, Intair had planned to offer a $99 fare. But, freer access to lucrative Canadian domestic when both majors matched that price, the routes. But many analysts say both national independent was forced to drop its rate to $69. carriers are too small to compete against their Air Canada and Canadian responded by again far larger U.S. rivals on Canadian routes. Infollowing suit.

Like Pappalardo, Intair president Michel Leblanc claims that Air Canada and Canadian have been competing unfairly. Leblanc says that the two majors have matched his $69 fare only on those flights that leave about the same time as Intair’s four daily flights, and not on dozens of others that they make each day on the same route.

Added Leblanc: “What they did does not benefit all their passengers. They are only trying to prevent people from flying with us.”

Spokesmen for both national airlines say that they are not deliberately trying to eliminate their smaller competitors. But PWA’s Eyton says that it is now extremely difficult for small or even regional airlines to compete with major carriers anywhere in the world. And Air Canada spokesman Brock Stewart added that the move by Air Ontario to offer service from Toronto’s island airport was

not an attempt to force Pap-

palardo into bankruptcy

but rather sound marketing. Said Stewart: “We went in there because it made good business sense to us.”

Still, for Air Canada and Canadian, despite stiff competition at home, the major challenge is to develop profitable new routes abroad. Indeed, some airline analysts say that the Canadian market is too small to support two national carriers and that both must find a way to make a profit. Some analysts say that to increase their earnings, Air Canada and Canadian have two options: they must merge or compete in the even more competitive U.S. market.

Opening up the U.S. market to Air Canada and Canadian would require a change in both countries’ air-transportation laws—a measure that is currently under discussion by a ministerial task force on international air policy, which is to report to federal Transport Minister Douglas Lewis in 1991. Any proposals for change would then have to be accepted by the United States before they took effect. Currently, any U.S. or Canadian passenger-carrier can only pick up passengers in the other’s country if the next leg of the flight returns to the base country.

For Air Canada and Canadian, however, there is potentially a large measure of risk if they are allowed to fly between cities in the lucrative U.S. market. In return for greater

deed, American Airlines, the giant Dallasbased carrier, has 600 aircraft, three times the number of aircraft owned by Air Canada and Canadian combined.

In order to survive in such an arrangement, Air Canada’s Stewart said that there would have to be some kind of equitable agreement

between Canada and the _

United States that took into account the relative size of each country’s carriers. He added, “If there are completely open skies, a large U.S. carrier could come in and simply overwhelm and monopolize a major transcontinental route like Toronto to Vancouver.”

Eyton, meanwhile, says that Canadian Airlines’ lack of presence in the U.S. market is its greatest weakness. Canadian hopes to solve that problem by negotiating partnerships with U.S. airlines to give it access to that market.

But so far, Canadian only has four routings into the United States, compared with Air Canada’s 16.

Canadian’s main strategy, however, for ensuring its long-term success is competing on more overseas routes. To accomplish that, Eyton said that it has formed alliances with seven foreign carriers. By doing so, Eyton added, Canadian can offer more frequent and

varied service to international destinations while keeping down operating costs by sharing facilities and equipment with its international partners.

Eyton also said that there is probably not enough traffic to justify more than three flights a week to Frankfurt from Calgary. But rather _ than lose Canadian’s customers on the days it does not fly that route, the airline has an arrangement with the German carrier Lufthansa to carry Canadian customers— while Canadian carries Lufthansa customers on alternate days. Said Eyton: “We use one another’s aircraft and, in fact, we actually share seats on the same aircraft. They fly one, we fly another.” In the end, to survive in Canada’s crowded skies, Canada’s airk lines will need more partners 2 and new routes abroad— as

0 well as passengers who are

1 willing to pay ever-higher 5. ticket prices.

BARBARA WICKENS

JOHN DALY