BUSINESS

SPEAKING UP

CANADIAN AIRLINES PRESSES OTTAWA TO REMOVE THE LAST HURDLES BLOCKING A LIFESAVING DEAL

DEIRDRE McMURDY September 6 1993
BUSINESS

SPEAKING UP

CANADIAN AIRLINES PRESSES OTTAWA TO REMOVE THE LAST HURDLES BLOCKING A LIFESAVING DEAL

DEIRDRE McMURDY September 6 1993

SPEAKING UP

CANADIAN AIRLINES PRESSES OTTAWA TO REMOVE THE LAST HURDLES BLOCKING A LIFESAVING DEAL

BUSINESS

The sense of relief in the Calgary hotel ballroom was palpable. On Aug. 27, after nine months of preparation, the senior managers of cash-strapped PWA Corp., the parent company of Calgary-based Canadian Airlines International Ltd., won approval from shareholders and debt-holders for a sweeping financial restructuring plan. That assent brought PWA one step closer to meeting the terms of a lifesaving deal with AMR Corp. of Fort Worth, Texas. But although debenture holders and stockholders both voted over 96 per cent in favor of the plan, PWA managers did encounter some turbulence. Ted Hanlon, a shareholder from Calgary accused PWA management of “misleading” investors about the company’s financial problems. He also demanded to know why the independent members of the company’s board of directors, none of whom attended the meetings, continued to support the “cavalier management of the company.” After fielding questions, company chairman and chief executive Rhys Eyton acknowledged that “if I was a shareholder, and I saw the value of my investment fall so far, I’d ask tough questions, too.”

The meetings marked the end of another hectic week in the beleaguered airline’s scramble to survive. On August 24, PWA’s board of directors formally rejected Air Canada’s latest merger overture, which included an offer to buy eight aircraft from Canadian Airlines as well as its lucrative international routes. From the board meeting, Eyton flew to Vancouver to address a huge employee rally. There, the increasingly political tone to the rivalry between Canada’s two major airlines intensified. While some 2,000 Canadian employees sipped coffee and nibbled muffins in a cavernous airplane hangar, rally organizers urged them to sign petitions demanding federal support for the deal with AMR, the parent company of American Airlines, which has offered to buy a 25-per-cent stake in Canadian for $246 million. But to close that deal, PWA wants the federal cabinet to allow Canadian to withdraw from the Gemini computerized reservation system, which Canadian and Air Canada jointly own, and sign on with AMR’s Sabre system. To press their concerns, Canadian employees marched outside Prime Minister Kim Campbell’s riding nomination meeting in Vancouver on August 27. Declared Sidney Fattedad, chairman of the Council of Canadian Airlines Employees: “We have to get out there and make some real noise now. That’s all the people who inhabit Ottawa understand.”

That noise was clearly heard by the Liberal party last week, which attempted to move the feud between Air Canada and Canadian into the election campaign spotlight. Liberal Leader Jean Chrétien attacked Campbell’s Aug. 21 statement that it is up to the courts to resolve the problems between the two corporations in what she called a “private sector solution.” Instead, he urged the government to appoint an expert facilitator to arbitrate a ceasefire. Liberal transport critic John Manley told Maclean’s that Ottawa must manage competition and ensure that the two dominant airlines do not either “kill each other or conspire.” But he added: “There can’t be any private sector solution when the two sides aren’t even talking to each other.”

With PWA’s financial restructuring plan now endorsed by shareholders and creditors, the only matter to be resolved before the deal with AMR proceeds—and Canadian receives the critical cash infusion of $246 million—is the dispute over Gemini. On Aug. 11, the Ontario Supreme Court rejected

Canadian’s bid to extract itself from Gemini. If Canadian is not released from its Gemini contract and allowed to transfer to the Sabre reservation system by Dec. 31, AMR’s offer will expire. In Vancouver last week, Eyton said that Ottawa should not allow the deal to die—and drive Canadian and its 17,000 employees into bankruptcy or a shotgun merger with Air Canada—over the issue of Gemini’s future. “Gemini is just one department of our company,” said Eyton. “You just can’t let a whole company fail because one department doesn’t want to change.”

Whether or not Canadian meets AMR’s deadline, company managers and employees have overcome huge odds just by keeping Canadian alive over the past year. With their backs against the wall, Eyton has led them through a painful and complex financial restructuring process. Although about 70 per cent of PWA’s various classes of creditors supported the restructuring prior to last week’s shareholder meeting, senior managers at Air Canada admitted that their surprise offer to the company on Aug. 14 was deliberately intended to sway the final outcome. As well, last week Air Canada sponsored an aggressive national radio advertising campaign that continued to promote its proposal, despite PWA’s formal rejection of what Eyton called a “ludicrous” offer.

Eyton’s outrage over Air Canada’s most recent overtures stems from the fact that Air Canada walked away from merger talks last November, over three months after initiating them, when PWA was just weeks away from bankruptcy. Indeed, last Nov. 29, the airline ceased payments to all lenders and lessors. In February, PWA presented its restructuring plan to five groups of its creditors, owed a total of $2.8 billion, and to company shareholders. And last week, they approved that plan.

To reduce the company’s debt by about $730 million, the creditors will swap their debt for new shares in the company. PWA will issue 706 million new shares, bringing its total outstanding to over one billion shares. For existing common shareholders, that massive dilution of their investment is particularly hard to take. As recently as 1991, the stock was still trading around $10. But in February, it hit a low of 48 cents, and last week it closed at 59 cents on the Toronto Stock Exchange.

Still, the most significant change resulting from the restructuring is the new level of ownership for Canadian’s employees. Because of ^ wage and benefit concessions valI ued at $200 million over four years, the employees have earned socalled entitlements to over 25 per cent of PWA’s outstanding shares. For each 80 cents in reduced wages, the company will issue one share to any employee. That employee investment will be monitored by the Council of Canadian Airline Employees, consisting of leaders of five of the airline’s six unions.

Many of those employees were present at the creditors’ meeting last week to watch their personal sacrifices converted into paper. Said Rod McTavish, a Canadian ticket agent based in Ottawa: “A year ago, few people—including us—thought we’d still be here. But every obstacle has made us more determined to survive.” With only one obstacle left to overcome—and a slot on the election agenda—that determination may pay off soon.

DEIRDRE McMURDY

in Vancouver and Calgary