BUSINESS

The flying game

PWA fights on all fronts to stay aloft

DEIRDRE McMURDY March 22 1993
BUSINESS

The flying game

PWA fights on all fronts to stay aloft

DEIRDRE McMURDY March 22 1993

The flying game

PWA fights on all fronts to stay aloft

DEIRDRE McMURDY

The story of Rhys Eyton's life resembles the plot of an elaborate corporate soap opera. The chairman of Canada’s second largest airline company, PWA Corp. of Calgary, Eyton is engaged in a dramatic life-or-death struggle to save his firm and the jobs of about 16,000 workers across Canada. To accomplish that noble task Eyton will have to overcome daunting obstacles, including a bitter rivalry with a larger competitor and former suitor, Air Canada of Montreal. That starcrossed corporate romance, with executives of the two airlines approaching—and abandoning—the altar twice, is also rife with regional political tension between Albertans and Quebecers. Now, while cash-strapped PWA attempts to restructure over $3 billion in debt and to win the approval of 130 international creditors, a white knight is waiting in the wings to step in with $246 million and improved access to U.S. markets. But before PWAowned Canadian Airlines can fall into the arms of American Airlines Inc. of Fort Worth, Texas, it must overcome a rich cast of adversaries, as well as difficulties that include complicated lawsuits and regulatory hearings.

BUSINESS

Then, Eyton will have to get the federal government’s approval. As Eyton told Maclean’s, “In my next life, I really hope things are simpler.”

Despite his determination to keep PWA from becoming another corporate casualty of the recession, Eyton acknowledges that his proposed threeyear survival plan is fragile. At hearings in Calgary on March 22, the National Transportation Agency will review the terms of the proposed accord with American, which includes a 25-per-cent equity interest in PWA. By the end of April, the federal Competition Tribunal will rule on a fierce dispute between PWA and its reservation services partner, Gemini Group Ltd. of Toronto. To meet the terms for a deal, PWA has to extricate itself from a contract with Gemini so that it can switch to American’s reservation system. Gemini claims that that action would plunge it into bankruptcy and force the layoff of 700 employees. In addition to the government appeal, the two sides are also locked in a separate legal dispute. At the same time, none of these situations is inspiring the confidence of creditors. “PWA is doing all it can. The question is whether that’s enough,” said Frederick Larkin, an investment analyst with Bunting Warburg Inc. in Toronto.

Eyton is far from alone in his struggle to survive in the airline business. In 1992, the

global industry lost $3 billion and it is still struggling with massive overcapacity. In Canada, where capacity exceeds demand by about 20 per cent, the problems of the recession have been magnified by deregulation, which was fully implemented in 1988. In the United States, deregulation in 1978 caused an upheaval in which dozens of airlines disappeared along with roughly 50,000 jobs. Today, according to Larkin, the debt of every major U.S. airline has now been downgraded to speculative or so-

called junk level. In Canada, just as air carriers were grappling with deregulated conditions, as well as the privatization of Air Canada, the recession hit.

The predictable market rivalry between Canada’s two competing airlines has taken a decidedly acrimonious twist since the two attempts to merge have failed. Indeed, Eyton told Maclean ’s that Air Canada’s lawyers are protracting the expensive court battle with Gemini, which Air Canada also uses for reservation services, by recommending rejection of a cash settlement. He added that Air Canada deliberately lengthened the last round of merger talks because executives knew that PWA was quickly running out of cash—and options. As well, PWA remains strongly—and vocally—opposed to Air Canada’s refusal to ease pressure on both companies by co-operating in the reduction of capacity. Said Eyton: “I can’t figure Air Canada out. They’ve led us down blind allies twice and that will never

happen again. We all deserve better than that.”

On one potentially controversial front, however, PWA has won a respite. According to Eyton, Canada-U.S. talks on a so-called Open Skies agreement have stopped. The agreement was intended to provide a framework for open access between Canadian and U.S. airline markets. Talks, however, ground to a halt even before the U.S. election last year and President Bill Clinton has not yet appointed new negotiators. With Canadian elections expected later this year, Eyton says that the talks are unlikely to resume in the near future. But he noted that Clinton’s recent consideration of new fuel taxes in the United States could help PWA. Canadian airlines have usually had higher operating costs than their U.S. counterparts because fuel taxes in Canada run at about 40 per cent higher, on average, than those in the U.S.

As Eyton and members of his close-knit management team struggle to operate Canadian, while making court appearances and government presentations and attending creditor and shareholder information sessions, Eyton says that PWA’s employees have been an inspiration. During the summer, the company’s six unions agreed to forego their labor contracts, taking sizable salary and benefit cuts. “We’ve all been on an emotional roller-coaster and there were days when management felt completely overwhelmed and discouraged,” Eyton told Maclean ’s. But he noted that the “tremendous rally” made by PWA staff has also attracted many new customers to the airline. Said Eyton: “People have been touched by the story of our employees’ sacrifices and have supported us in turn.” It remains in the hands of those still offstage, however, whether the roiling corporate drama has a happy ending.