Private plans for Air Canada

ANN SHORTELL July 6 1987

Private plans for Air Canada

ANN SHORTELL July 6 1987

Private plans for Air Canada



A Maple Leaf is emblazoned on each of Air Canada’s 109 white jets, symbolizing not only a national identity but also a government transportation policy. The state-owned airline has linked the country’s major cities and smaller centres since its establishment 50 years ago as Trans-Canada Airlines. But now it seems possible that Air Canada, the country’s fourth-largest Crown corporation, will leave the sheltering wing of government ownership some time this year to stand on its own in the private sector. A plan for the privatization of the airline is before the cabinet, and some sources say that the government will announce the proposed sale later this summer. The same sources say that the plan calls for a public stock issue, with about half of the proceeds going to the federal Treasury and half to the newly independent airline.

Since the Conservative government came to power in September, 1984, it has sold 11 corporations, the largest of which was Teleglobe Canada. But Air Canada, with assets of $2.9 billion and 22,000 employees, would be by far the biggest. And a successful sale of the national airline could pave the way for another even trickier privatization— that of the state-owned oil company, Petro-Canada. Various insiders have been predicting an announcement of Air Canada’s privatization for several months. But Thomas Van Dusen, press secretary to Deputy Prime Minister Don Mazankowski, said last week that an overloaded government agenda has simply pushed more pressing items to the top. “There is no hitch,” he said. “There is a plan that everybody thinks is a good one.”

Previous sales of Crown corporations have triggered strong criticism from organized labor and opposition parties, but Canadians generally accepted the actions. For their part, government spokesmen have consistently argued that privatization, which was one of the Conservatives’ 1984 election pledges, helps to reduce the federal budget deficit. But the Mulroney gov-

ernment’s approach to the issue has changed over the years. At first, sales were done largely on a piecemeal basis. But since the appointment of Barbara McDougall as the first minister of state for privatization last June 30, Ottawa has adopted a more comprehensive strategy for each Crown corporation which involves a co-ordinated study of various options. Now, says University of British Columbia economist William Stanbury, the sale of Air Canada and Petro-Canada “will be the real test of the Tories’ commitment to privatization.”

Clearly, the sale of a national airline has serious political implications, especially because Mulroney, after a January, 1985, meeting in Montreal, stated that “Air Canada is not for sale.” He added, “Canada needs a national airline and it is going to have one.” And

since then cabinet has shown a reluctance to privatize Air Canada because of the emotional attachment many Canadians appear to have for the idea of a national airline. Said Brian Tobin, the Liberal party’s privatization critic: “It is a Canadian institution.”

But a combination of changes in

Canada’s airline industry and a government decision to push ahead with privatization in general a year ago under McDougall’s portfolio brought the issue back to cabinet. As a result of regulatory changes that loosened the rules governing fares and routes, the industry has undergone a number of mergers and acquisitions. The largest was the merger last December of the country’s two largest private airlines, Canadian Pacific Air Lines Ltd. and Pacific Western Airlines, to form Canadian Air Lines International Ltd. That put three major airlines—Wardair Canada Inc. is the third—in competition nationally where only a few years ago there had been one.

Air Canada has been profitable, but many analysts say that is because the company already operates as a privately run airline. Liberal critic Tobin claims that as a private company unfettered by a state mandate, Air Canada would feel less need to serve thinly populated regions in the West, Northern Ontario, northern Quebec and the Atlantic provinces. But David McKendry, spokesman on regulated industries for the Consumers’ Association of Canada, which favors its privatization, says that already, “if a city was unprofitable, Air Canada dropped it.”

For their part, Air Canada executives are also eager to see the company become a private business. In January company chairman Claude Taylor stated that there was no reason to delay

privatization. Indeed, airline executives say that the company needs to invest $2.5 billion in updating its fleet by the end of the 1990s, but Ottawa has already said that it will not provide the funds. Meanwhile, the two competing private Canadian airlines have recently raised $507 million on the stock markets and have ordered new aircraft. Said Taylor: “Unless we can gain the efficiency and financial flexibility that will come with privatization, Air Canada faces a troubled future.”

At Air Canada, pilot Edward Godin heads a group of employees that is urging the government to sell. Said Godin: “They have to do it now if they don’t want it lingering on through the next election.” Still, some Air Canada employees oppose the proposal. A committee set up by three unions, the International Association of Machinists & Aerospace Workers, the Canadian Auto Workers and the Canadian Union of Public Employees, representing 15,000 Air Canada employees, met with McDougall on June 18 in an effort to convince her not to privatize the airline. But, said Cheryl Kryzaniwsky, president of the airline division of the CAW, which represents 3,200 airport ticket and sales people, McDougall left no doubt about where she stood: “She said she thought she would have no trouble selling the privatization of Air Canada to the public.”

The preparation leading to the expected sale of Air Canada has been

more detailed and wider in scope than any previous privatization. McDougall ordered public opinion polls to assess the extent of support among Canadians for a sale and she commissioned major studies on the impact that a sale would have on employee pensions and benefits. As well, the minister hired a major Bay Street investment firm, Dominion Securities Inc., to determine the best way to sell the company.

Previous privatizations have usually involved outright sales to one corporate buyer, but McDougall told Maclean's that she favors a public stock issue for Air Canada. Said the minister: “I have a preference for that route if it is practical.” As well, under McDougall’s plan employees would have the opportunity to invest in their company. Said pilot Godin: “There will be a large amount of interest among the employees.”

Still, there are sticky questions surrounding a stock issue. One is whether the government should sell all or part of the airline. But an equally important matter that the government must settle is the price. In Britain the government has sold state-owned companies through large public stock offerings, including last February’s disposal of British Airways. On that and other British privatizations, small investors have enjoyed windfall profits when the price of the newly issued stock quickly rose on the market. That led some observers to criticize the government for

setting too low a price on the state companies at the expense of the taxpayer.

Ottawa remains sensitive to the political pitfalls of privatizing a national institution as readily identifiable as Air Canada. A February, 1987, Gallup poll showed that Canadians are split on the issue: 42 per cent of respondents favored the sale of Air Canada and the same number opposed the idea. Sixteen per cent were undecided.

But the contemplated privatization of giant Petro-Canada, triple the size of Air Canada with assets of $8.1 billion, poses an even pricklier political problem for McDougall. Even within the Conservative party, admitted McDougall, “there is a pretty lively discussion about that.” Some political observers predict that it will become a hotly debated issue because of the enormous public investment in the oil company and the possibility of a foreign buyer. Said one: “It would stir the heart and the soul of anybody who has the last vestiges of any national feeling.”

With the privatization of Canada’s national airline, and possibly its national oil company, the Mulroney government would confront Canadians for the first time with the prospect of selling off premium assets. Observed Tobin: “They’re not selling the old rocking chair, they’re selling the furniture out of the front room.”