Canada

Capital Solution

The Onex offer to buy and merge Air Canada with Canadian Airlines has lessened Ottawa’s headaches

Bruce Wallace September 13 1999
Canada

Capital Solution

The Onex offer to buy and merge Air Canada with Canadian Airlines has lessened Ottawa’s headaches

Bruce Wallace September 13 1999

Capital Solution

Canada

The Onex offer to buy and merge Air Canada with Canadian Airlines has lessened Ottawa’s headaches

Bruce Wallace

As someone known to hold a grudge, Jean Chrétien would not normally be expected to look fondly upon anything Gerry Schwartz does. After all, only 10 years have elapsed since the Toronto-based financier and Liberal party fund-raiser got his elbows up on Chrétien in the party back-rooms. In the summer of 1989, with John Turner stepping down as Liberal leader, the party’s national executive met in Ottawa to determine the date for a leadership convention. Chrétien, the front-runner, wanted a convention as quickly as possible. Paul Martin, his main challenger, needed a longer campaign to try to catch him.

In those days, Schwartz was a member of the party’s national executive, “but like all the other big-money guys who didn’t want to mix with the rubes from the regions, he never came to our meetings,” remembers one former executive member with a laugh. He was, however, a Martin supporter. And it was not lost on Chrétien that on this occasion, Schwartz made a point of flying into Ottawa on a private plane to make the meeting. Liberals still recall a restless Schwartz standing at the back of the room, waiting impatiendy to cast his vote for a later convention before bolting for his plane. Martin won

his reprieve for a longer campaign. By a margin of one.

Six years in power have still not cured all the hurt from that leadership race, but Chrétien has finally found a reason to be thankful for Gerry Schwartz. With an audacious $ 1.8-billion proposal to have his Toronto-based Onex Corp. buy Canadian Airlines International Ltd. and Air Canada and merge them into a single carrier, Schwartz handed Chrétiens Liberal government an escape from the nasty political consequences of Canadian Airlines collapsing into bankruptcy. The Onex offer, with its careful attention to the politically sensitive issues of job losses and regional pride, made it possible for Ottawa to utter aloud, at last, that Canadians might have to settle for a single domestic national airline. Schwartz may not get his airline in the end—Air Canada finally rallied from its shock last week to begin resisting the merger proposal, which Onex had prepared in conjunction with Canadian. But the era of the so-called two-airline policy appears over. “This two national airline policy was wrong,” Schwartz

told Macleans. “Its got to come to an end, and I give Mr. Chrétiens government enormous credit for owning up to the fact that they were wrong.”

The Liberal government has not yet pronounced its opinion on the Onex offer, Transport Minister David Collenette preferring to stay in the tall grass until an anticipated bidding war for the airlines is fully played out. But the Onex deal came as manna from Bay Street just when Collenette saw nothing ahead but grim options: Canadian either dead, or its hand outstretched for more federal cash. “I have never been subjected to anything close to the pressure put on you when Canadian Airlines gets into trouble,” says one former Liberal cabinet minister. “Everything gets thrown at you: regional politics, French versus English, Calgary versus Montreal, the

‘Canadian Way,’ unions, mayors, provincial governments. Its an enormously aggressive and very, very broad coalition that comes out.”

That is exactly the kind of political noise the Liberals will do anything to avoid. Last June, with MPs itching to get out of Ottawa for summer recess, Chrétien was ready to keep Parliament sitting in case air-traffic controllers made good on their threat to call a national strike. The Liberals planned to legislate the controllers back immediately, on grounds that the cash crunch at Canadian was so severe the airline could not survive any interruption of business.

So Ottawa was relieved to see a proposal that tried to marry a seemingly good business plan with

political realities. Schwartz » strove to be evenhanded. He 1 said his deal would save some I jobs in the west, and keep the 1 new airline’s head office in B Montreal. He promised that cost savings from ending du-

plication in flights would be evident in affordable airfares and that competition on regional routes would keep prices down. Even crusty union boss Buzz Hargrove, whose Canadian Auto s Workers union represents about | 10,000 airline employees, could not 1 muster a blunt “no” to Gerry. “I was J impressed; he had a well-thought-out

plan,” Hargrove told Macleans after a 90-minute meeting with Schwartz in Toronto last week. “He had really thought through the whole idea of how you do a Canadian airline with the commitment to Canadian jobs and investment.” (The machinists’ union was more hostile, threatening to strike on Sept. 27 unless airline jobs were guaranteed.)

If Hargrove seemed caught off balance by Schwartz’s smooth pitch, it was nothing compared with the confusion in Air Canadas executive suites. There seems little doubt the

Whether Schwartz succeeds or fails, the era of the "two national airline policy’ is over

company was surprised by the Onex offer. There is no doubt they were furious about it. Some Air Canada employees reacted angrily to those Ottawa politicians, bureaucrats and lobbyists who seemed to be calling them up to express condolences about the airline’s fate, as if its future had already been setded. In fact, the prevailing attitude in Ottawa towards Air Canada was more one of disdain for its failure to come up with any strategy other than loitering until Canadian surrendered. “They were asleep, totally blindsided,” said one lobbyist with strong connections to Air Canada.

But the healthiest airline becoming the prey of the one on life support was too much for Air Canada, already carrying a substantial chip on its shoulder. Air Canada executives complain that despite being privatized 11 years ago, the airline is still regarded unsympathetically by many Canadians as the “government airline.” (Some MPs still get occasional complaints about Air Canada service from their constituents.) And they contend Ottawa is forever propping up Canadian:

favouring it with better international gateways (Tokyo to Air Canadas Osaka, for example), chartering Canadian for its Team Canada trade missions, and placing the federal Liberal party travel account with them.

But Air Canada slowly recovered its footing and began to fight back last week. The company issued a curt “No thanks” to Schwartz, then unveiled a poison pill defence that would delay any shareholder vote on the offer until Jan. 7, 2000. Onex, which wants its proposal to go to Air Canadas shareholders by Nov. 8, immediately filed an application in Ontario Superior Court to crush the move. But almost all observers were convinced that Onex would have to sweeten its

offer at some point, and Air Canadas stock market price reflected that. It finished the week at $9.40, well above Onex’s offer of $8.25. Though he has insisted his ante is final, Schwartz seemed to acknowledge to Macleans there might be room to manoeuvre. “Maybe there is an argument our price is too low, or that there’s a shift of wealth from their shareholders to ours,” he said. “OK. Those are discussable things.” Schwartz preferred to harp on what he sees as the essential

flaw in Air Canada’s wait-till-the-other-guy-expires strategy: he insists Ottawa will never let Canadian fail. But it was hard to find much widespread support for pumping in public money. Perhaps by labour leader instinct, Hargrove tried peddling the suggestion that Ottawa take an equity stake in Canadian to keep it flying. So did Judy Darcy, president of the Canadian Union of Public Employees, which represents 7,500 flight attendants. “Maybe the government should consider an equity role,” she said. “It means they could play an influential role in what happens with service to Canadians.” But neither union leader sounded as if they believed it would happen, or knew who might take up their cause.

The Liberals sounded like they would not even debate it. “My constituents have no appetite to see a quarter of a billion dollars or more get pumped into an airline that doesn’t have the wherewithal to make it work,” said Hamilton Liberal MP Stan Keyes, a member of the Commons’ transport committee. Caucus concerns are more likely to focus on ensuring there are regulatory restraints on any single carrier. Final approval of any deal rests with cabinet, and government sources say they will be insisting on guarantees of fair pricing, reasonable service to remote areas, and fair treatment of employees.

But a politically co-operative tone has already been established by Schwartz’s proposal, something any Air Canada counteroffer will almost surely have to match. “Gerry’s genius was in offering to create a single airline that took account of the political imperatives,” said one observer who has worked both in Ottawa and on Bay Street. “Now, nobody needs Gerry. The synergies in merging the two airlines are there for anyone. Nothing prevents Air Canada from making the same politically wise offer, but with more money.” All Air Canada has to do, in other words, is find its own Gerry Schwartz.

Patricia Chisholm

Kimberley Noble