BUSINESS

LOSING ALTITUDE

AIR CANADA AND CANADIAN AIRLINES ARE FACING NEW CHALLENGES DURING TOUGH ECONOMIC TIMES

JOHN DeMONT December 10 1990
BUSINESS

LOSING ALTITUDE

AIR CANADA AND CANADIAN AIRLINES ARE FACING NEW CHALLENGES DURING TOUGH ECONOMIC TIMES

JOHN DeMONT December 10 1990

LOSING ALTITUDE

BUSINESS

AIR CANADA AND CANADIAN AIRLINES ARE FACING NEW CHALLENGES DURING TOUGH ECONOMIC TIMES

Ralph Mohammed said that he knew something was wrong last week when he and the rest of the staff at Air Canada’s Halifax reservations centre were told to gather at their desks for a special meeting. At 1:05 p.m. on Monday, the company’s regional sales manager walked into the room and read a statement announcing the airline’s plans to close the office on July 6. A few of the 67 full-time and 36 part-time employees would be given other Air Canada jobs in the area, the executive added, while the rest would be offered company-paid transfers or severance packages. “When I looked around the office, people were in shock,” recalled Mohammed, 42, who joined the Halifax office 18 years ago. His wife, Merle, 42, a 17-year Air Canada employee, stood in a corner of the room, tears rolling down her face. Said Mohammed: “Everyone knew the airline was facing problems. But no one expected this.”

In fact, the latest wave of layoff announcements at Air Canada—the company also revealed last week that it is planning to shut down reservations offices in Calgary, Edmonton and St. John’s, Nfld.—is part of an industry-wide

trend. Buffeted by rising fuel costs and the recession, small carriers are failing at an alarming rate. Meanwhile, Air Canada and its main rival, Canadian Airlines International Ltd., are slashing thousands of jobs, selling airplanes, vacating office space and cancelling unprofitable routes. Both of the country’s major carriers are also trying to gear up for a possible increase in competition from U.S. airlines, who are trying to expand their services in Canada as part of a proposed “open skies” agreement

between the two countries. In the long run, Vladimir Slivitsky, Air Canada’s vice-president for government and industry affairs, suggested last week, Canada’s two major airlines may have little choice but to merge in order to stay aloft in the rapidly changing air travel business.

For now, both Air Canada and Canadian Airlines are concentrating on trying to reduce costs. In addition to last week’s announcement of imminent layoffs, Air Canada said two months ago that it was cutting 2,900 jobs from its 23,000-person workforce, selling off three of its 117 aircraft and putting its 26-storey Montreal headquarters building, Place Air Canada, up for sale. Over the past two months, the airline has cancelled service to Athens, Lisbon, Madrid, Bombay and Singapore, and postponed indefinitely the planned introduction of service to Seoul next year. According to Steven Garmaise, an analyst with First Marathon Securities Ltd., a Toronto investment dealer, those measures demonstrate that Air Canada—which the federal government privatized in two stages in 1988 and 1989—has now adopted a tougher, leaner management style. “This is finally an admission that, as a Crown

Corporation, they were fat, bloated and inefficient,” Garmaise said. “They had to make these steps not just to thrive but to survive.”

Some analysts say that Air Canada’s newfound willingness to make sweeping cuts may be related, at least in part, to the sudden departure of former president Pierre Jeanniot in August. Frederick Larkin, an analyst with Toronto-based brokerage house Bunting Warburg Inc., for one, says that he doubts Jeanniot—who said that he was retiring for personal reasons—would have favored the current campaign of widespread layoffs and cost reductions. Added Larkin: “Jeanniot always favored the little guy.” Among those now in the running to take over as president is businessman Michael Warren, who gained a reputation for toughness as president of Canada Post Corp. from 1981 to 1985.

Calgary-based Canadian Airlines International is also taking a no-nonsense approach to improving its balance sheets. Last week, the airline announced that it was eliminating five of its 21 vice-presidents—firing two and retiring

three—as part of a program to reduce the ranks of senior management. Since taking over Wardair Inc. in 1988, Canadian Airlines has also cut 1,900 of its 18,000 employees, sold five of its 95 aircraft and eliminated service to Amsterdam. Between now and next June, the company plans to get rid of another nine aircraft.

The cost cutting may be extended even further. Last week, Canadian Airlines chairman Rhys Eyton told Maclean ’s that the company is still considering whether or not to sell its administrative building in Richmond, B.C., which the company says could raise about $25 million, and lease the building back. Declared Eyton: “All the difficult things have been done. We have gotten the shape of the airline the way we want it. Now, the goal is to get the whole company a bit leaner.” He added that in the current economic climate, the airline can-

not afford to stand pat. “These are tougher times than we have ever seen before, ” he said.

Eyton’s emphasis on cost cutting appears to be bearing fruit. Last week, the airline’s parent company, PWA Corp. of Calgary, declared a $19.4-million profit for the nine months ending Sept. 30—partly as a result of a gain of $24 million from the sale of aircraft. That compared with a loss of $5.2 million in the same period a year earlier. Air Canada’s profit for the ninemonth period dropped to $50 million, 45 per cent less than during the same period in 1989. Last week, Air Canada shares closed at $8.25 on the Toronto Stock Exchange, while PWA stock sold for $7.75—respectively, about 40 and 50 per cent less than their highest prices over the past year.

To a large extent, the problems facing Canada’s two major air carriers are similar to those afflicting airlines around the world (page 46). Iraq’s invasion of Kuwait last August lead to a doubling in the price of jet fuel, which now sells for about 60 cents a litre compared with 29 cents a litre in July. As a result, fuel costs, which used to amount to about 15 per cent of total airline revenues, now absorb about 20 per cent of revenues. The impact on the airlines’ profit is substantial. Analysts say that Air Canada’s fuel bill will likely rise by nearly $150 million next year if crude-oil prices remain at current levels.

The increase in fuel costs has left airlines with few options other than to raise fares—something they say they are loath to do at a time when the economy is already weak and many businesses are cutting back on travel exo penses. Canadian Airlines has g raised its ticket prices by an 5 average of 14.2 per cent 5 since the beginning of the 5 year and plans another 5.8per-cent hike this week. In the same period, Air Canada has increased its fares by an average of 20 per cent. And airline executives say that further increases are likely because ticket prices have still failed to keep pace with expenses.

To make matters worse, the deepening recession is already eating into airline passengertraffic volume. Says analyst Larkin: “The airline business is extremely cyclical. When the economy turns down, this industry is one of the first to suffer.”

The combination of higher fuel prices, lower passenger volume and increasing competition has lead to an industry-wide shake-out. So far this year, more than a dozen charter and small commuter airlines have run into financial problems across the country. They include charter carrier Worldways Canada Inc. and City Express, which runs commuter flights to destinations in southern Ontario, Quebec and Newark, NJ. Later this month, creditors of Intair Inc.

will meet to determine the fate of the debt-laden Quebec regional airline. At the same time, the failure of such a large number of small carriers provides welcome respite for Canada’s larger airlines, each of which controls a network of regional airlines that will benefit from diminished competition.

But Air Canada and Canadian Airlines are under increasing pressure on another front. In October, federal Transport Minister Douglas Lewis announced that Ottawa and Washington intend to begin negotiations early in 1991 on a new bilateral air transport treaty that would expose carriers in each country to additional competition from airlines across the border. If the talks succeed, Canadian airlines will be able for the first time to fly between U.S. cities, instead of just from Canada to a U.S. city and back. U.S. airlines would have the same right in Canada.

Two months ago, both Air Canada and Canadian Airlines supported the open-skies proposal on the grounds that it would enable them to service more U.S. routes. But since then, officials for each of the major carriers have voiced several major reservations about the concept of unrestricted air travel between the two countries. Eyton, for one, says that American carriers have a better chance of penetrating the Canadian market—at his and Air Canada’s expense—than Canadian airlines have of grabbing additional U.S. business. Added Eyton: “It is pretty tough to get a toehold down there.” As well, some critics claim that an

open-skies agreement would eliminate thousands of Canadian jobs. They also say that it would put pressure on domestic airlines to cancel services to many smaller communities and focus their efforts on more heavily travelled routes, which tend to be more profitable. Lewis, however, says that Canadian workers have nothing to fear from cross-border deregulation. “If we get the open skies we want, there will be more jobs,” the minister told Maclean ’s last week.

But that view is disputed by some airline analysts, who predict that Canada’s two major carriers will eventually have to merge because

of the competition from American airlines and the worldwide trend towards consolidation. For his part, Air Canada’s Slivitsky said that the introduction of an open-skies agreement would set the stage for “the last scene of the Canadian aviation industry.” He added that Canada’s air carriers will have to learn to work together if they are to avoid becoming feeder airlines for the U.S. aviation industry.

In the meantime, Air Canada is pursuing another possible way of attracting new investment in order to finance future expansion. Last month, airline chairman Claude Taylor asked g Ottawa to raise the legal ceiling on g foreign investment in a domestic air| line to 49 per cent, from the current 25 per cent. As Eyton put it last week, “Our competition must have an investor waiting in the wings.”

Eyton adds that he is confident that there will be room for two Canadian airlines even if Canada and the U.S. sign a new agreement. “We have no interest,” he declared, “in discussing any sort of merger.” But a growing number of analysts say that they doubt that his dream will be possible. Andrew Roman, a Toronto-based regulatory lawyer, says that he fears that Ottawa will eventually allow Air Canada and Canadian Airlines to merge on the grounds that Canada can support only one major international carrier. If he is right, the winds of change may soon become a tornado.

JOHN DeMONT

JOHN DALY