BUSINESS

Flights into court

The struggle to save an airline nears a climax

BARBARA WICKENS November 30 1992
BUSINESS

Flights into court

The struggle to save an airline nears a climax

BARBARA WICKENS November 30 1992

Flights into court

BUSINESS

The struggle to save an airline nears a climax

The battle is for supremacy in the air. And last week, the country’s two major airlines intensified their skirmishes— in the streets and in the courts. The objective: to influence the federal cabinet’s decision on whether to extend financial aid to troubled Canadian Airlines with a $90-million loan guarantee and $100 million in bridge financing. That support would enable the Calgary-based carrier to conclude an investment deal with its employees and with Forth Worth, Tex.-based American Airlines Inc. Many employees of Montreal-based Air Canada, however, are bitterly opposed, claiming that the government would, in effect, be subsidizing American’s takeover of the domestic airline industry.

To make their point, hundreds of Air Canada employees took part in protest rallies across Canada. For his part, Rhys Eyton, chairman of Canadian Airlines parent PWA Corp., filed a $1billion lawsuit, alleging that Air Canada charged unreasonably low prices in an effort to

drive his company out of business. Still, by week’s end, neither companies’ tactics had succeeded. For the second week in a row, the federal cabinet retired without announcing a decision.

In contemplating its options, the government had to grapple with a highly complex issue: how to produce a competitive airline industry while still serving the national interest. Many airline industry insiders and analysts say that it may be impossible to reconcile those two objectives. Combined, both airlines are losing nearly $2 million a day. But Canadian has a shorter credit line and, without the government’s support to help close the deal with American, it could be bankrupt within months.

That would throw nearly 16,000 people out of work—many of them in Western Canada, a traditional Tory stronghold—and leave Air Canada without a competitor on most of its major domestic routes. Said Roger Ware, an economics professor at Queen’s University in

Kingston, Ont.: “The government is trying to avoid a monopoly, appease the West and at the same time keep the pro-competition forces happy. It will be pretty tricky.”

Air Canada employees demonstrated last week just what kind of pressure they could apply. After smaller rallies across Canada, nearly 1,500 ground and air crew, many in their company uniforms, converged on Parliament Hill in Ottawa. As they marched on the lawn in front of the Centre Block, many carried placards with such slogans as “55 years serving the West” and “Free enterprise: Let it Fly.”

Among them was Samuel Gorodzinski, a mechanic at Montreal’s Dorval Airport, who said that he and his fellow protesters oppose aid for Canadian. But he added: “We’re not against Canadian itself—it’s just a shame to spend taxpayers’ money on it.” Declared Dawn Shannon, a Toronto-based flight attendant who has been with Air Canada for 32 years: “I am concerned not just about Air Canada, but the entire industry. If the government goes this route, it will lead to the Americanization of the industry.”

Meanwhile, PWA executives were clearly uncertain of their rival’s intentions. After filing the $l-billion lawsuit, which charges Air Cana-

da with predatory pricing practices, in the Alberta Court of Queen’s Bench, the increasingly vociferous Eyton lashed out at his cross-country rival. He claimed that Air Canada was never serious about merging with Canadian and, instead, has done its best to prevent PWA from forming an alliance with American. “There has been a concerted effort to take us out of business,” Eyton said. “[The lawsuit] recognizes the fact of what has been happening.” For his part, Air Canada spokesman Denis Couture said that PWA’S lawsuit was unfounded, but declined to elaborate. “Air Canada is not going to engage in mudslinging,” he added.

PWA’S civil suit was an unusual move. Jack Roberts, a law professor at the University of Western Ontario in London who specializes in competition law, said that the only two similar suits on record involved criminal charges. In the first, Roberts said, drug company Hoffmann-La Roche was convicted in 1980 for distributing the tranquillizer Valium to hospitals free to try to prevent rival manufacturers from introducing new tranquillizers, generically known as diazepam. In in the second suit, in 1981, Consumers Glass was acquitted of selling its products at unreasonably low I prices.

Indeed, because of the difficulty that I PWA will have in proving its case against o Air Canada, Roberts said that the com$ pany had most likely launched the suit in § retaliation for an earlier claim filed “ against it. On Nov. 12, Paul Nelson, president of Toronto-based Gemini Group Automated Distribution Systems Inc., initiated lawsuits totalling more than $1 billion against PWA and American Airlines after PWA began procedures to withdraw from the Gemini reservation system that it shares with Air Canada. PWA wanted to switch to American’s Sabre system, a critical condition for the $250-million deal with the U.S. carrier. “I don’t expect to see either suit come to trial,” Roberts said. “These are just skirmishes in the overall battle, a way to get the government to make a decision.” PWA’s Eyton denied that the lawsuit against Air Canada is retaliation for the Gemini case. He added: “We don’t operate tit for tat.” The increasing acrimony between the two airlines, however, is just one more factor for the government to consider as it debates granting financial assistance to PWA. As well, it would have to come up with the money in a time of extreme economic pressure: the original federal budget deficit forecast of $27.5 billion is now expected to reach $32.5 billion for the current fiscal year. The Conservatives would also have to abandon their cherished philosophy of letting market forces decide the course of events. That could be particularly difficult for them now, especially in light of a royal commission report on passenger transportation released last week.

The report, commissioned two years ago before the current crisis in the airline industry,

studied the entire transportation industry, including rail, bus and air. It concluded, among other things, that governments should not be in the business of bailing out airlines. The report added that if, as a result, Canadian carriers fail, then the government can open its skies and give foreigners greater access to Canadian markets.

For his part, Andrew Roman, a Toronto lawyer who specializes in regulated industries, said that open skies is fine in theory but will not work in practice. The United States, the country whose carriers are most likely to compete in Canada, does not want an open-skies agreement with Canada, Roman said, because that would set a precedent. “If they did it for the Canadians, they would be under pressure to do it internationally,” he said. “Nobody is really prepared to do that.”

If the Canadian government is determined to encourage competition, Roman said, it should remove the 25-per-cent ceiling on foreign ownership of Canadian airlines. The limit, he said, discourages investment because few buyers are willing to put in millions without having some influence in running the organization.

For now, at least, the federal government has not put lifting the 25-per-cent ceiling on its agenda. Instead, it is dealing with the more pressing issue of providing financial support to PWA. But it is difficult for the government to help one beleaguered company and not another. Indeed, Air Canada chairman Claude Taylor has already demanded equal treatment for his company, which is losing more than $1 million a day. But Queen’s Ware said that there is historical precedent for the government, if it chooses to help PWA. “The government has gotten away with selective support in the past,” he said. The government bailed out Dome Petroleum with $500 million in 1982.

A third government option—encouraging the two major Canadian airlines to merge—

would also face stiff opposition. Their officials first discussed a merger almost a year ago, but since then both companies have taken turns breaking off the talks. Last week’s hostilities would clearly make it difficult for them to resume negotiations. A merger would also leave Canada in the same situation as if Canadian failed: with a single major airline, which in the absence of competition, would be free to abandon unprofitable routes and raise fares. Michael Tretheway, a professor of transportation studies at the University of British Columbia in Vancouver, said that a study he conducted last fall showed that “a merger is not in the Canadian interest.” He added, “You get little in the way of economies of scale while encouraging inefficiency.”

Ottawa must also keep in mind that the Canadian industry operates within a global context—and that the industry worldwide is hemorrhaging badly. It lost $5 billion last year, and will lose an estimated $3 billion this year. At the same time, more than 1,000 jetliners are sitting idle in the dry desert air of the vast Mojave in the southwestern United States as

their owners try to reduce the overcapacity in the system.

Kevin Keeney, vice-president of Southwest Securities, a Dallas-based retail securities dealer, noted that interest rates and fuel prices are the most critical cost elements for airlines. But even though both have been working in the carriers’ favor in recent years, most airlines cannot make a profit. Said Keeney: "I don’t know why anyone would want an airline. It seems to me they just bleed red ink.” Clearly, the federal government will have to be at its creative best in order to devise a solution that helps more Canadians than it hurts.

BARBARA WICKENS

GLEN ALLEN