CANADA

AERIAL DOGFIGHT

THE CRISIS IN CANADA’S AIRLINE INDUSTRY HAS OPENED A DEEP POLITICAL CHASM WITHIN THE TORY GOVERNMENT

Anthony Wilson-Smith February 3 1992
CANADA

AERIAL DOGFIGHT

THE CRISIS IN CANADA’S AIRLINE INDUSTRY HAS OPENED A DEEP POLITICAL CHASM WITHIN THE TORY GOVERNMENT

Anthony Wilson-Smith February 3 1992

AERIAL DOGFIGHT

CANADA

THE CRISIS IN CANADA’S AIRLINE INDUSTRY HAS OPENED A DEEP POLITICAL CHASM WITHIN THE TORY GOVERNMENT

Inside the 25th-floor Ottawa office of Transport Minister Jean Corbeil, the reminders of one of his professional preoccupations are readily evident. One wall is lined with photographs and models of aircraft of various sizes. Outside his picture windows, Corbeil can often see small, propeller-driven seaplanes landing on the Ottawa River and larger jet aircraft bound for, or leaving, the capital’s main airport. But as Corbeil sat on a couch in his office at 7:30 a.m. one day last week, the view outside was grey and foreboding—much like the political atmosphere confronting Corbeil. His mandate includes regulating Canada’s two major airlines, Montreal-based Air Canada and Canadian Airlines International (CAI), with its head office in Calgary. For both financially troubled carriers, declared the 58-year-old Corbeil, “this is the most critical period in history.”

It is a critical moment for the soft-spoken Corbeil, as well. The minister, who represents the east-end Montreal riding of Anjou/Rivière-des-Prairies, is at the centre of a complex and deeply divisive debate over the future of Canada’s two airlines. At stake are the air-travel habits of millions of Canadians, the future of many of the 35,000 people who work for the two airlines—and the fragile alliance between the Quebec and western wings of the federal Conservative government.

Publicly, Corbeil and representatives of both airlines decline to discuss the choices facing them. The minister told Maclean’s: “We operate on the principle that having two national airlines is good for Canada, and we do not discuss other hypotheses while that is in effect.” But within the next year, many industry analysts predict that either Air Canada or CAI will be forced out of the sky by the combined weight of crushing debts, fierce global competition and international deregulation. Indeed, in the first nine months of 1991, CAI lost $93 million on revenues of $2.2 billion, while Air Canada lost $126 million on revenues of $6.2 billion.

As both airlines struggle to survive, their managers are likely to seek Corbeil’s approval for radical solutions. Two options are most often discussed among industry analysts, both of them fraught with political difficulty for Corbeil and the Conservatives. One would allow the two airlines to merge; the other would permit foreign investors to buy into one or both of them at ownership levels above the currently permitted maximum of 25 per cent—to perhaps as much as 49 per cent. Last week, The Globe and Mail said that a confidential report by a government task force examining international air travel has recommended the latter option.

Still, the minister insists that those options are not being formally discussed within the cabinet, where the final decision would be made. Declared Corbeil: “We will not examine any such steps until one or both of the airlines asks us to do so.” But other senior Tories acknowledge privately that the measures have been discussed informally in senior government circles—and that they have the potential to cause a bitter split among cabinet ministers from Quebec and those from the rest of the country. The reason: while western-based CAI may be courting a foreign white knight, any large investment from outside the country in that airline will provoke stiff resistance from Air Canada. That company would prefer to buy its smaller rival outright— a course of action certain to be unpopular in the West. Conceded one senior federal minister: “It is very much in our interest to procrastinate on this issue for as long as possible.”

In fact, Tory sources say that the issue has already been the source of intense friction among caucus members, despite efforts to keep discussions low-key. Those debates have pitted Quebec Tories against their counterparts from the West. And many ministers express the fear that the party may ultimately face the same explosive resentment in the West that greeted its 1986 decision to award a $600-million contract to service Canada’s CF18 fighter jets to Montreal-based Canadair Ltd., despite a technically superior bid from Bristol Aerospace Ltd. of Winnipeg.

For his part, Air Canada’s chief executive officer, Claude Taylor, has actively sought the support of Quebec MPs for his company’s takeover of CAI if it fails. As well, Taylor has strongly opposed proposals for allowing increased foreign ownership of airlines, arguing that it would eventually kill independent Canadian airlines. (His company, which was privatized by the Canadian government, is wholly owned by private investors.)

Outside Quebec, however, other experts make strong arguments in favor of allowing greater foreign ownership of the industry in general. They favor permitting Fort Worth, Texas-based American Airlines to buy up to 49 per cent of CAI. Analysts such as the University of British Columbia’s chairman of transportation studies, Tae Oum, say that would probably bring the greatest immediate benefit to consumers, because it would increase direct air access to the United States while maintaining competition between the two airlines. The likelihood that an infusion of foreign cash would keep CAI aloft holds particular appeal in Calgary—where 1,800 people work in the airline’s head office and main fleet base.

Tory MPs from the West who support that policy have also enlisted backing from some Toronto colleagues. Boosters of a CAI bailout by American cite claims by some analysts that the U.S. carrier might then use the Terminal 3 facility at Toronto’s Pearson International Airport—where CAI is now the largest occupant— as a hub for the majority of its international flights. Such a development could lead to the creation of hundreds of new jobs. As well, conceded one Tory minister, “In principle, that is consistent with our notion of free trade.”

The debate over the airlines’ future is rendered more complex by personal and political difficulties for many of the key figures involved. Some Toronto-area Tory MPs have complained privately that their Quebec counterparts— who led the campaign for free trade with the United States—are now providing the strongest opposition to increased foreign ownership in the airline business.

Some of those at the centre of the debate may be forced to approach any decision with deeply divided loyalties. Air Canada’s Taylor, who one associate said is “vigorously and passionately” involved in the debate, is a close friend of Donald Mazankowski, the Alberta MP who is both finance minister and deputy prime minister. At the same time, Mazankowski, who will be one of the key figures in any eventual federal decision, is under strong pressure from westerners to support a decision favorable to CAI. Among ministers, Mazankowski has not yet spoken on the issue.

A further irony is that one of the key figures in discussions between CAI and American is the U.S. airline’s executive vice-president, Toronto-born Donald Carty. Carty was considered to be Air Canada’s preferred choice to succeed the 66-year-old Taylor as head of the airline until negotiations broke down last year over Carty’s salary demands. In fact, his appointment as senior vice-president and Taylor’s heir apparent had seemed so certain that at one point, Air Canada officials scheduled a news

conference to announce the move. One source at Air Canada said that Taylor took Carty’s refusal “as a personal rebuff.”

At the same time, many Tories acknowledge mixed feelings over the potential choices confronting them. Calgary MP Alan Johnson, for one, whose riding has a large number of CAI employees, declared: “I can see the argument that there might be a few more jobs saved if an American airline took over. Eventually, you have to save jobs by being competitive.” But he added: “I think there is an implied preference for there being a Canadian solution. It matches my sense that if we cannot have two airlines, we should have one big Canadian airline.” Those mixed emotions are reflected in the Tories’ political opposition. Said Ottawa MP John Manley, the Liberal transport critic: “We have to look at solutions that keep Canadian jobs and provide the best service for consumers. But those are pretty broad-based needs, so I think we have to look at a number of ways of achieving them.” And Stephen Harper, an official with the western-based Reform party, said that his party has not yet taken a formal position on the issue. Said Harper: “Frankly, we hope it will resolve itself before the next election.”

In the face of that ambivalence, many airline experts also look for solutions that would allow both airlines to survive. One frequently cited option is for Ottawa to let one airline control domestic routes while the other would fly exclusively internationally. But critics argue that while such a measure might allow both

airlines to survive, it would give each a monopoly on its routes and restrict consumer choice—and keep ticket prices high.

Another potential solution is a practice called cabotage, which allows foreign carriers to fly between two Canadian cities in return for inter-city flight permits for Canadian airlines in those countries. But federal officials ruled out that option during the so-called open-skies discussions with American regulators last year. According to Corbeil, Canada asked for flying rights between U.S. cities—but made it clear that it would not allow similar rights for American carriers in Canada. Said Corbeil of the U.S. airlines involved: “They are simply too big. We would be swallowed.”

But even if the Canadian airline industry gained such a foothold in the United States, it would still face difficulties. Unlike Canadian airports, which are usually operated by the federal government, American airports are often run by a combination of municipalities and private interests. As a result, even after Washington grants a carrier landing rights, the airline often has to conduct lengthy separate negotiations with the airport’s operators before securing a landing slot or a boarding gate.

For now, both Canadian airlines are making other attempts to increase their presence in the United States. While CAI has had discussions with American Airlines aimed at establishing a cross-border link between the two airlines, Air Canada held a series of talks last year with USAir. Air Canada officials emphasize, however, that an agreement would not have involved a purchase of the company’s stock by US Air. And in any event, the negotiations have now been temporarily suspended.

For their part, the federal Tories are clearly hoping that the two carriers can either reverse their losses or make a deal with each other. But few analysts expect that to happen. Oum, for one, predicts that the airlines’ future “depends on the political choices.” Indeed, unless Ottawa allows American Airlines or some other foreign investor to come to the rescue of CAI, said Oum, “I think Canadian Airlines will have difficulty surviving this year.”

But even that outcome threatens to unleash a final irony on the participants in the east-west debate. Under the terms of its privatization agreement, Air Canada is obliged to keep its base of operations in Montreal. But some experts suggest that an Air Canada takeover of CAI could be less beneficial for Quebec than many Tories from that province expect. In that event, one western-based federal minister suggested, there would be heavy pressure within government to allow Air Canada to shift some of its operations out of Montreal to Toronto for greater economic efficiency. Added the minister sarcastically: “Wouldn’t that be popular in the West and Quebec.” For the Tories, one of the first casualties of a prolonged war over the skies could be peace in their caucus.

ANTHONY WILSON-SMITH with GLEN ALLEN and LUKE FISHER in Ottawa

GLEN ALLEN

LUKE FISHER