BUSINESS

In search of a partner

A marriage looms for Canadian Airlines

BRENDA DALGLISH December 30 1991
BUSINESS

In search of a partner

A marriage looms for Canadian Airlines

BRENDA DALGLISH December 30 1991

In search of a partner

BUSINESS

A marriage looms for Canadian Airlines

Even in the worst of times, corporate directors try to put a positive spin on their company’s financial problems. But as a board member of money-losing PWA Corp., the parent company of Canadian Airlines International Ltd., Maxwell Ward is finding it difficult to remain optimistic about the industry in which he has worked for 40 years. For months, airline industry analysts have speculated that American Airlines Inc., the world’s largest in revenues, is planning to purchase as much as 49 per cent of Canadian. Although Ward declines to comment on that possibility, he says that it is unlikely that Canada’s two major carriers will be able to survive alone much longer in their current financially weakened states. Declares Ward, who sold his own airline, Wardair Inc., to PWA in 1989 for $248 million: “When I look at Air Canada and Canadian today, I honestly do not think they are viable.”

Although an alliance between Canadian and American would likely attract criticism from labor leaders concerned about job losses, as well as from nationalists, most industry analysts say that the Calgary-based airline has little choice but to link up with a larger, wealthier partner. Battered by declining passenger traffic and by intense competition on Canadian’s domestic and international routes, PWA lost $93 million on revenues of $2.2 billion in the first nine months of 1991. The company managed to avoid even greater losses by selling eight of its 80 aircraft, most of which are leased. American Airlines’ parent company,

Dallas-based AMR Corp., also lost money in the first nine months of the year—$131 million on revenues of $10.7 billion. But in the most recent three-month period, it reported a turnaround, netting a profit of $80 million on revenues of $4 billion. American now has 616 aircraft, giving it one of the largest airline fleets in the world.

So far, neither company has confirmed that a possible alliance is under negotiation. But Bay Street insiders say that PWA has retained Toronto-based investment firm Gordon Capital Corp. to advise the company in its search for a partner. At the same time, industry analysts say that American appears ready to inject as much as $250 million into PWA or its subsidiary. Canadian law currently limits the share of foreign investment in domestic airlines to 25 per cent, but federal Transport Minister Jean Corbeil says that the government would consider amending that policy if it would ensure the survival of either or both of the country’s two major carriers.

Analysts say that a mating of Canadian and American would produce several financial advantages. The two companies fly many of the same models of aircraft, and their fleets could easily be amalgamated and overall maintenance costs reduced. Canadian also flies from Toronto and Vancouver to five destinations in the Far East, a region in which American would like to have an increased presence. And Canadian currently operates 13 of the 24 gates at the recently opened Terminal 3 at Toronto’s Pearson International Airport. American,

which controls five gates in the same building, would likely combine those positions to create a new hub operation serving Eastern Canada and the U.S. Northeast.

But an alliance between PWA and American would pose a serious challenge to Montrealbased Air Canada. The company lost $126 million on revenues of $2.7 billion in the first nine months of 1991, and analysts say that it is in only slightly better shape financially than Canadian. But its ability to compete would likely suffer if Canadian had access to American’s huge financial resources and computerized ticketing operations. Ultimately, Air Canada might be forced to negotiate a similar partnership with another large international carrier. The company announced in August that it was planning an alliance with USAir, the sixth-largest U.S. carrier, but that arrangement would be far less comprehensive than the one envisioned between Canadian and American.

For his part, Air Canada chairman Claude Taylor harshly criticized what he termed a possible “takeover” of PWA by American. In a newsletter sent to Air Canada employees last week, Taylor warned that the sale of a large stake in PWA to a U.S.-based carrier would “inevitably lead to exportation of economic activity, the funnelling of Canadian passengers through U.S. hubs instead of nonstop

service, and foreign control of international routes from Canada.” He added: “Such a prospect would mark the beginning of the end for the Canadian airline industry.”

In fact, Air Canada officials have traditionally maintained that Canada can support only one

international carrier. They have hinted that the country’s interests would be better served if the government allowed Air Canada to take over some of Canadian’s international routes, rather than allow one of the airlines to fall into U.S. hands. Said Taylor in the newsletter to his employees: “If a restructuring of the industry turns out to be needed, we believe there are

constructive, and far more preferable, madein-Canada solutions.”

Other experts maintain that American’s presence in Canada would benefit consumers by strengthening Canadian and allowing it to compete more aggressively with Air Canada. But they also point out that consumers in some smaller cities across the country could suffer if the Dallas-based airline rearranged Canadian’s schedule on a north-south, rather than eastwest, basis. And fares will likely rise in the longer term as the industry’s restructuring reduces the number of airlines in North America, squeezing overcapacity out of the system.

Ultimately, Ward says, the only way to strengthen the industry’s financial position while preserving reasonable fares is by reducing costs. To do that, existing operations will have to be made more efficient. Added Ward: “This is an industry where pilots earn as much as $200,000 a year to fly for eight or nine days a month. And those kind of costs permeate the rest of the business, too. The public can’t afford it any longer.” In the meantime, Canadians may have to choose the lesser of two evils—a proud national symbol that is suffering financially, or a more efficient airline that is partly controlled by foreign interests.

BRENDA DALGLISH