On Sept. 1, 1937, a small, propeller-driven plane with an orange maple leaf emblazoned on its nose flew from Vancouver to Seattle with 10 passengers. It was the maiden passenger flight of state-owned Trans-Canada Air Lines, later to be renamed Air Canada. Now, half a century later, the mammoth $2.9-billion Crown corporation is poised to fly out from under the wing of its government owners.
Deputy Prime Minister Donald Mazankowski announced last week that he would introduce legislation within a month that would allow the government to sell the company—and national symbol—to private investors. But in its announcement, the government said that it will sell only 45 per cent of the airline this year and plans to offer the remaining 55 per cent during the next five to 10 years. Said Air Canada chairman Claude Taylor, a fierce proponent of privatization: “I am not sure whether it is a caesarian or natural birth.”
The government has planned to privatize Air Canada since early 1987, but a sale was avoided until the pressure on Air Canada to refurbish its fleet became so intense that Ottawa was either going to have to privatize the corporation or put up the
capital itself. The government was also forced to create a private Air Canada without privileged access to government funds because it had slowly deregulated the airline industry since 1984, and Air Canada had to be placed on the same competitive footing as the rest of the Canadian airline sector. The Air Canada sale also advances the Conservative government’s stalled program to sell Crown corporations that no longer have a public policy function. The sale of Air Canada also allows Ottawa to avoid the politically sensitive task of deciding which aircraft manufacturer will provide the airline’s fleet.
The timing of the announcement arose directly from the demand to replace Air Canada’s outmoded fleet of Boeing 727s. Air Canada’s national competitors are each in the midst of extensive fleet 3 renewal programs. Canadian Airlines International Ltd. (CAIL) of Calgary is spending $2.4 billion to purchase 24 Boeing 767-300s for long-haul flights. And Edmontonbased Wardair Inc. has issued $125 million in common shares to help finance the purchase of 12 of Europe’s Airbus A310-300 aircraft. In response, Air Canada, which has no access to the stock markets, requested
$300 million from the government last January to help finance its purchase of 34 new aircraft. Sources in Ottawa said that forced the government to come to its decision to privatize so quickly.
Air Canada’s competitors were also strongly opposed to refinancing Air Canada from the public treasury. Shortly after the Crown corporation asked for financing in January, Rhys Eyton, chairman of CAIL, and George Curley, president of Wardair, both charged that a government infusion of funds was patently unfair. Said Curley: “In the spirit of generosity we end up competing against the public treasury and, in that case, we cannot win.”
The structure of the sale is designed to produce a widely held Canadian corporation. The government will not turn over more than 10 per cent of the initial Air Canada share issue to any one individual and it will offer the issue to Canadian investors first. But some analysts have raised concerns about the government’s plan to retain 55 per cent of the shares as voting shares. They say that investors will be reluctant to buy into any company whose management is held hostage to political decisions.
According to some analysts, the private issue should raise exactly the $300 million Air Canada wanted. Tony Hines, an analyst with McLeod Young Weir Ltd. in Toronto, estimated that a 45-per-cent interest in the airline would be worth between $200 million and $500 million, depending on its acceptance at the time of the issue. And some analysts say that the government will ensure the issue’s success by undervaluing it, in order to make it an extremely attractive short-term buy.
The government still has to draft and pass legislation legalizing the sale and wait for a period of calm on the TSE before launching the issue. The government has also decided not to forgive $135 million in Air Canada debt that it holds. Air Canada’s remaining $900 million in debt for past aircraft purchases is held mainly by European banks. But once it gets off the ground, Air Canada’s flight into the private sector will be a historic— and turbulent—event.
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