BUSINESS

A NEW WAR OF WORDS

CANADA'S TWO MAJOR AIRLINES REKINDLE THEIR LONG-STANDING FIGHT FOR SURVIVAL

BARBARA WICKENS August 30 1993
BUSINESS

A NEW WAR OF WORDS

CANADA'S TWO MAJOR AIRLINES REKINDLE THEIR LONG-STANDING FIGHT FOR SURVIVAL

BARBARA WICKENS August 30 1993

A NEW WAR OF WORDS

BUSINESS

CANADA'S TWO MAJOR AIRLINES REKINDLE THEIR LONG-STANDING FIGHT FOR SURVIVAL

The offer was unsolicited—and unwanted. Last week, Air Canada offered to buy the international routes from its financially beleaguered rival, Canadian Airlines International Ltd. Air Canada’s president, Hollis Harris, told a news conference in Montreal, where the former Crown corporation is based, that his company was willing to pay $200 million for Canadian’s routes to Europe and the Asian market, including Japan and Hong Kong. As well, Harris offered to take over eight of Canadian’s aircraft, relieving it of about $800 million of its $1.3-billion debt. But Rhys Eyton, chairman of Canadian’s parent company, PWA Corp. of Calgary, was clearly angered by the proposed billion-dollar deal. Within hours, he held his own news conference in Toronto, where he was already meeting with major creditors to discuss plans to restructure Canadian’s finances. There, he described Harris’s offer as “a diabolical plot to kill Canadian Airlines” by undermining its negotiations with creditors. In a later interview with Maclean’s, Eyton said that Canadian would not survive for long as a domestic airline shorn of its international routes, which contribute $200 million a year in revenues and about 20 per cent of its business. Air Canada, he alleges, is fully aware of that fact. Declared Eyton: “It’s malicious— this proposed deal is their backhanded way of trying to get the monopoly they want.”

The spumed Air Canada offer was just one in a series of events that, within a week, brought a long-simmering feud between the two airlines to a rolling boil. A bitter dispute erupted last fall after Air Canada abruptly terminated year-long merger talks with Canadian. Soon after, PWA announced that it had reached an agreement with AMR Corp., the parent company of giant American Airlines Inc. based in Fort Worth, Texas, to sell 25 per cent of Canadian Airlines for $246 million. To meet the terms of that deal, which calls for Canadian to join American’s Sabre reservation system, the airline must first extricate itself from the Gemini reservation system that it shares with Air Canada. Although Air Canada opposes that move, there was a ceasefire for several months as PWA applied to both the courts and regulatory authorities for permission to opt out of Gemini. With the outcome still unresolved, Eyton said that he and Harris were planning to get together soon to discuss the Gemini issue.

Against that background, Eyton says that he was shocked when he opened his newspaper on Aug. 14 and saw a full-page advertisement placed by Air Canada in several papers at a cost of $250,000. The ad denounced the PWA-AMR deal and declared that the merger would end thousands of Canadian jobs. Instead, it proposed a “Canadian solution”—a merger between Air Canada and Canadian Airlines. But, Eyton noted, merger talks broke down last fall after Air Canada’s board of directors decided that the combined debt of the two airlines made a merger unviable. “I was stunned,” Eyton said. “The ad made no sense.”

There was more to come. On Aug. 16, Air Canada, which earlier in the month had reported its first quarterly profit in almost two years, announced that it had signed a letter of intent to buy 24 new Regional Jets—each

worth about $20 million. The 50-seat planes, manufactured in Montreal by Canadair Aerospace Group of Bombardier Inc., will be used to break into new U.S. markets. Harris then capped the week with the offer to buy Canadian’s international routes.

PWA soon returned fire. On Aug. 18, Canadian took out $70,000 worth of ads in 12 newspapers across the country. Addressed to Air Canada, the ads asked, “Are you confused?” Canadian then released internal Air Canada briefing documents that describe how it would “continue the strategy of slowing down/denying the AMR deal.” A spokesman for Air Canada acknowledged that the documents were genuine, but declined any further comment.

According to at least one airline industry analyst, there was a deliberate strategy behind the timing of Air Canada’s aggressive moves. William Stanbury, a commerce professor with the University of British Columbia in Vancouver, said that PWA’s major creditors and shareholders were scheduled to vote on Aug. 27 on the company’s restructuring plan—and their approval of that plan is a key to the success of the crucial AMR deal. “The

creditors will determine Canadian’s future,” said Stanbury. “Air Canada is hoping that if they create enough division and confusion, the creditors will force Eyton and the PWA board of directors to take the Air Canada offer.” For his part, Harris admitted that the offer for Canadian’s international routes was an effort to try to sway the opinion of Canadian Airlines’ shareholders, employees and creditors. But, he said, the deal would save 2,000 jobs that would be lost if Canadian makes the deal with American Airlines. Still, the offer is not a straightforward one. Although the sale of routes would not require approval from the National Transportation Agency, cabinet approval is mandatory. All international routes are set out in bilateral treaties with other nations and the federal government specifies which carriers may fly those routes. Said Stanbury: “Those routes are not Air Canada’s to buy nor Canadian Airlines’ to sell.”

For now, however, the federal government is trying to steer clear of the dispute. Patrice Miron, a spokesman for Transport Minister Jean Corbeil, said that it would be “premature” to discuss government approval for route ownership. But, he added, Ottawa is pleased to see some activity in the airline standoff—whatever the merits of each side’s arguments. Said Miron: “The minister has said all along that this is a private-sector matter, and must be solved by the private sector.”

Nevertheless, Canadian Airlines employees are campaigning to persuade Ottawa to intervene. Last week, they set up tables next to Canadian Airlines check-in counters across Canada where they asked passengers to sign petitions urging the federal government to resolve the Gemini dispute through negotiation. They plan to glue the petitions to a round table, which they will then present to Ottawa. Said Peter Janovcik, an employee organizer in Calgary: “The round table symbolizes where the negotiations should be taking place.” And with a federal election on the horizon, the government just might decide that the dispute between Canada’s two major air carriers is too hot not to handle.

BARBARA WICKENS