BUSINESS

Seeking the right route

Canada’s two major airlines are fighting for survival

BARBARA WICKENS November 23 1992
BUSINESS

Seeking the right route

Canada’s two major airlines are fighting for survival

BARBARA WICKENS November 23 1992

Seeking the right route

Canada’s two major airlines are fighting for survival

BUSINESS

It was a no-win proposition. With Canadian Airlines losing more than $500,000 a day—and with nearly 16,000 jobs at risk—the federal government was under intense public pressure to help bail out the troubled carrier. The Calgary-based airline asked Ottawa for a $90-million loan guarantee and $100 million in bridge financing to support an employee-led rescue plan based on a partnership deal with American Airlines Inc. of Fort Worth, Tex. The employees also sought $100 million in guarantees from the four Western provinces to trigger American’s $250million purchase. Ottawa’s consideration of financial backing, however, angered Canadian’s formidable rival, Air Canada of Montreal, and, at week's end, the federal cabinet retired to contemplate its next move.

The negotiating in Ottawa began as Air Canada’s chairman Claude Taylor demanded equal treatment for his company, which is losing

more than $1 C ¿lllcldt

million a day.

The government’s tally for helping both airlines could easily reach well over $500 million, industry analysts said.

Not only that, it would expose the government to an increase in the deficit, which is already expected to rise to $32.5 billion, compared to the original budget forecast of $27.5 billion. Still, the consequences of not helping Canadian are also politically unpalatable. Without a cash infusion, the airline and its parent, PWA Corp., could soon be bankrupt, creating massive unemployment in Western Canada, a crucial bastion of the Tories’ political support. By week’s end, PWA’s plight had Ottawa’s attention. Transport Minister Jean Corbeil and Finance Minister Don Mazankowski flew from the capital to Edmonton, where they met with PWA chairman Rhys Eyton and representatives of the employees'group. Afterwards, Mazankowski said that he would make his decision within a few days. He added: “There are some hurdles, some areas we want clarification on."

Whatever path Ottawa chooses, Canada’s airline industry will continue to face daunting challenges—as does the rest of the industry worldwide. According to Gunter Eser, director general of the Montreal-based International Air Transport Association, the group’s 212 member airlines will lose an estimated $3 billion this year. That follows losses of nearly $5 billion in 1991 and $3.3 billion in 1990. Canada’s major airlines combined are losing more than $1.5 million a day, and some ana-

lysts questioned whether the federal government would be able to find a domestic solution, when the problems stretch far beyond Canada’s borders.

Air Canada clearly is looking to the future. Last week, the former Crown corporation and its Forth Worth-based partners, Air Partners LP, bid successfully to acquire Houston-based Continental Airlines Holdings Inc., the fifthlargest carrier in the United States in terms of passenger miles. Directors for Continental accepted the bid, saying the $550-million deal would enable it to emerge from bankruptcy protection in early 1993. In exchange for a $140-million cash infusion and $310 million borrowed against assets, Air Canada and Air Partners will each own 27.5 per cent of Continental and will hold warrants allowing them to increase their ownership.

Air Canada spokesman Denis Couture said that the Continental deal is part of his company’s long-term strategy of surviving consolidation in the global airline industry by forming strategic alliances with carriers around the world. In this case, Air Canada will be able to draw on Continental’s marketing savvy, as well as sell tickets to a greater number of destinations. Still, certain analysts said that, although the strategy of forming alliances may be sound, Air Canada’s deal with Continental may not necessarily help either airline. Said Kevin Murphy, an airline analyst with New York City-based brokerage Morgan Stanley & Co.: “Two beleaguered airlines don’t make one strong airline.”

According to some industry insiders and analysts, the only way for Canada to maintain a toehold in the international aviation industry is for Air Canada and PWA to merge. A merger, which the two airlines first discussed almost a year ago, has remained elusive as both companies have at times broken off talks. Last week, both airlines withdrew their merger applications before the National Transportation Agency in Ottawa. Nevertheless, Couture said that Air Canada still wants to discuss a merger with Canadian. “We are still interested in a viable, permanent solution,” he added. PWA spokesman Linda Thomas said the company has had no new offers from Air Canada.

In the meantime, Canadian Airlines has continued to pursue an alliance with American Airlines, which derailed last summer. Under the terms of that potential deal, the largest U.S. airline would invest $250 million in Canadian for a 25-per-cent stake. In return, PWA would merge its administrative, reservation and scheduling functions with American's Sabre system, while abandoning the Gemini reservation system that it currently shares with Air Canada. In the end, American insisted the deal could only go ahead if Canadian strengthened its balance sheet.

In August, Sidney Fattedad, a retired vicepresident of Canadian, tried to help the airline do just that. He formed the Council of Canadian Airline Employees and said he wanted to raise $500 million from employees and outside investors. With the backing of five of PWA's six unions, and loan guarantees from provincial governments in British Columbia and Alberta, the council came close to its goal. Last week, the final holdout among the unions, the Canadian Auto Workers (CAW), re-

versed its policy of not participating in employee-led rescue plans, and announced that it will endorse concessions to help keep the talks with American going.

Under a deal reached with Canadian, CAW’s 3,400 members, including pilots and maintenance workers, will give up five per cent of their wages over three years—a total of about $15 million—to buy stock options in PWA. In exchange, PWA agreed to keep about 900 reservation jobs in Canada under any partnership deal it reaches with American. Union president Basil (Buzz) Hargrove told a news conference that his organization simply saw no alternative. “This is a last-ditch attempt—us grasping at straws—to try to find a way to assist in saving the jobs of our membership,” he said.

PWA’s deal with American also received a boost from another unexpected party. On Nov. 5, Howard Wetston, head of the federal government's independent bureau of competition policy, sought a legal order that would allow PWA to extricate itself from the Gemini flight reservation system. In 1989, the quasi-judicial competition tribunal passed a consent order that allowed both major airlines to use Gemini Group Automated Distribution Systems Inc., as long as smaller carriers were also allowed access. If Wetston’s request is approved, PWA will be free to switch to American’s Sabre system, meeting another critical condition set by American. Timothy Smith, a spokesman for

American in Fort Worth, said that it was his company’s policy not to discuss the details of the negotiations with Canadian. But he added: “We have stated since the beginning that the attractiveness of any deal for us is the services we would provide.”

PWA’s move to withdraw from Gemini provoked an impassioned backlash. Paul Nelson, president of the Toronto-based Gemini Group, launched lawsuits totalling more than $1 billion against PWA and American Airlines—saying that his company cannot survive without the $30 million in annual revenues from Canadian. If Gemini collapses, he said, 700 high-tech jobs will disappear in Canada, and American’s Sabre

network will control the entire Canadian market for reservations services.

Indeed, Mazankowski cited the Gemini dispute as one of the hurdles that must be overcome before the government can reach a decision on helping PWA. But time is becoming a crucial factor in PWA’s chances for survival. Eyton said that his airline has enough money to survive until next spring. But some analysts are skeptical, claiming that the airline may only have a few weeks left. The actual timing may be a moot point, however. Although Air Canada is losing more money each day than PWA, it has a longer credit line. Last week, Eyton lashed out at Air Canada, accusing his competitor of hoping all along that PWA would go bankrupt. Said Eyton: “They intend to accomplish this by using their bigger bank account to outlast us.” Couture denied the accusation, saying that a speedy resolution was best for all concerned. He added: “Eight months ago a merger would have looked better. Both our financial positions have deteriorated since then.”

Despite the aggressive corporate posturing, Fred Lazar, an economics professor at Toron-

to’s York University, said that the federal government should proceed with its bailout for PWA because it is highly unlikely it will ever have to pay out the full amount. The reason: Canadian had made a deal with the stronger U.S. airline. “American will be one of the surviving carriers into the next century,” he added. “If Air Canada and Continental have enough time, talent and money, they could turn their situation around— but they don’t have enough of those.”

For his part, Tae Oum, a commerce professor at the University of British Columbia in Vancouver, sees the future quite differently. He said that by the turn of the century there will be five or six global giants dominating the

world’s airline industry. By then, Canadian will be just a regional feeder airline to American— and the competition will force Air Canada to also become a subsidiary of a much larger U.S. airline. As a result, Oum said, the Canadian airline industry will become marginalized.

To avoid that situation, Canada must have a strong domestic airline that provides an international gateway to the North American market. A merger of Canada’s two largest airlines would go a long way towards solving that problem, said Oum. Given that, he added, any assistance the federal government provides to PWA is just a short-term solution. Said Oum: “If I was a Canadian Airlines employee, I would be doing the same thing, and trying to save my job. But our national policy-makers must look at the long-term results.” Governments, however, especially those facing an imminent election, tend to look at the short term—and Mazankowski's decision will be largely based on how he assesses the political impact of preserving jobs versus a possible increase in a burgeoning deficit.

BARBARA WICKENS