Business

After the Takeover

An expert outlines the future shape of Canada’s airline industry— consumers will not be happy

December 20 1999
Business

After the Takeover

An expert outlines the future shape of Canada’s airline industry— consumers will not be happy

December 20 1999

After the Takeover

Business

An expert outlines the future shape of Canada’s airline industry— consumers will not be happy

Last week—pending federal government approval and a shareholders’ vote on Dec. 23—Air Canada took control of Canadian Airlines International with a $92-million offer.

At the same time, a House of Commons transport committee warned the new near-monopoly that the price of approval may be stringent regulations governing everything from ticket prices to route schedules. To assess the fallout, Macleans National Affairs Columnist Anthony Wilson-Smith spoke with Phil Phan, a professor of strategic management at the Shulich School of Business at Toronto’s York University, and one of Canada’s leading experts on the airline industry:

Macleans: Transport Minister David Collenette says he will introduce legislation in February setting the grounds by which Air Canada, as a near-monopoly, would operate.

Is that appropriate timing?

Phan: It is too long, and therefore bad for all involved. It creates investor uncertainty, and paralyzes the decision-making process at a key time. He should have been able to anticipate this outcome earlier.

Macleans: How do you expect Air Canada will manage Canadian’s affairs if the takeover is approved?

Phan: It would make great sense to immediately turn around and sell it. This is a very expensive purchase: in addition to the $92 million Air Canada is paying, it will cost an immediate $250 to $300 million to recapitalize Canadian. On top of that, there is $100 to $140 million that must be paid to AMR

[Fort Worth, Tex.-based parent company of American Airlines] to make peace. All this comes after a $900million stock buyback earlier this year. Macleans: Who would buy it?

Phan: One solution is to allow “Canada-only charters” by which foreign investors could own airlines that would operate only in Canada. That is what is happening in Australia. Or you need someone again like Gerry Schwartz [CEO of Onex Corp.], -® who sees synergies with his other busi| nesses, and thinks he can make money I that way.

I Macleans: Why is it so hard to make money on airlines in Canada?

Phan: Canada and Australia have similar problems, which is why the government here is watching events there closely. Both countries have a huge land mass, and not many people. That is the worst possible combination, because you need big planes to fly great distances, and they burn a great amount of fuel proportionally. That makes costs high and revenue low, because the planes often fly more than half empty.

Macleans: Is there a way to beat that?

Phan: You need lots of regional carriers with interlocking schedules that feed off each others networks to co-ordinate travel. That way, you fly smaller, more fuel-efficient jets, lower costs, and fill airplanes.

Macleans: Are fare increases inevitable in a monopoly situation? Phan: You notice Air Canada immediately raised ticket prices three per cent last week—but only domestically, where the competition is now dead. That’s an example of why they must change their management thinking, or alienate people. The alternative is for the government to allow foreign-owned companies to fly domestically, and they have said they will not consider that.

Macleans: Aside from nationalist sentiment, why not?

Phan: If you allow that, you reopen price wars, which caused the entire mess in the first place. With the monopoly situation Air Canada now has, you will get a healthy company. You also get higher prices with that. So pick your poison. Macleans: What is the likely long-term outcome?

Phan: Sixty per cent of travel now goes north-south, where you compete with the American carriers. That figure is steadily increasing. So no matter what the government now says, it seems inevitable that we will eventually have within North America a full open-skies agreement, with complete access to markets on both sides of the border. And with international alliances and shared services, things like schedules and ticket prices are interlocked with those of other airlines. No airline is really independent now. People can like or dislike that, but they can’t ignore it. E3