Maclean's SPECIAL REPORT

WINGS AND A PRAYER

The bleeding airlines—not least Air Canada—plead for government help

KATHERINE MACKLEM October 1 2001
Maclean's SPECIAL REPORT

WINGS AND A PRAYER

The bleeding airlines—not least Air Canada—plead for government help

KATHERINE MACKLEM October 1 2001

WINGS AND A PRAYER

The bleeding airlines—not least Air Canada—plead for government help

KATHERINE MACKLEM

Sharon Doyle

Five days after the horrifying terrorist attacks on the United States, Sherry Lee Gregory and a friend travelled home to Halifax from Athens. They spent twice as much time on the ground— waiting in check-in lines, waiting to pass through security, waiting while the plane refuelled in Iceland—as they did in the air. At the security check, every item in Gregorys purse was removed and inspected, she says. Agents confiscated from other passengers small sharp objects like tweezers and miniature eyeglass screwdrivers. In all, the trip took 26 hours, or roughly the time it normally takes to circle the globe. Flying home, she says, “I didn’t feel all that safe,” and in the end, it was a nine-day holiday she wishes they hadn’t taken. “We would never have travelled that far,” she says, “if we had anticipated how gruelling it would be.”

On Sept. 11, the day terrorists took over four passenger jets and used them to kill more than 6,800 people, the world of air travel changed—some say forever. In the immediate wake of the suicide attacks, airplanes were grounded across North America, leaving thousands of passengers stranded and scrambling for alternative ways home. The horror of the attacks unleashed both widespread fear of repeat actions and a renewed respect for the frailty of life. Once the airlines resumed flying, it was on a drastically reduced schedule amid intensive new security measures. As lines of passengers snaked slowly towards crowded departure lounges, heavily armed police in paramilitary dress patrolled airport corridors. After that initial rush of displaced travellers, the airports sat virtually deserted— and an already faltering industry was enveloped in crisis. “The absolute core of the airline industry is aviation safety,” says Clifford Mackay, the head of the Air Transport Association of Canada. “If you lose the public trust, you’re out of business.”

In the U.S., business reaction was swift. Airline stocks nosedived when the markets reopened last week. Some, including giants Continental Airlines Inc. and US Airways Group Inc., lost half their value in a day. U.S. carriers, calling for financial support from Congress, slashed more than 70,000 jobs. Aircraft maker Boeing Co. said it will lay off 20,000 to 30,000 people, out of its total of200,000.

In Canada, no layoffs have been announced so far in the wake of the crisis. But Air Canada shares had fallen 45 per cent by the end of last week. The airline, like many large U.S. and international carriers, was already on shaky turf when the World Trade Center towers were struck.

FLYING OUT THE DOOR

Announced layoffs, as of Sept. 21

COMPANY

LAID OFF

% OF STAFF

Boeing up to 30,000 up to 15%

American Airlines 20,000 14%

United Airlines 20,000 20%

Continental Airlines 12,000 21%

US Airways 11,000 24%

Northwest Airlines 10,000 19%

Air Canada * 7,500 18%

British Airways 7,000 12%

*Air Canada’s layoffs were announced in previous months. All others since Sept. 11.

In the first six months of 2001, Air Canada lost $276 million, much of it blamed on rising fuel costs and a decline in the big money-spinner, business travel. The airline had upped the number of planned job cuts to 7,500 from 3,500 announced

earlier, and was tweaking schedules so planes would fly with fewer empty seats. Management had agreed to a pay cut, including CEO Robert Milton, who chopped his own annual salary by 10 per cent, to $900,000. The airline was in talks with Ottawa, asking for the same sort of low-cost loans granted earlier this year to foreign carriers, such as Northwest Airlines, that bought jets from Montreal-based manufacturer Bombardier Inc. (“I’m in this preposterous position where I want to buy the Canadian plane, but I can’t get the cheap money the U.S. guys can get,” says Milton, exasperated.) Air Canada, which carries a hefty debt-load of more than $10 billion, said it was on track to break even in the third quarter, but that hope was shattered on Sept. 11. In the days following the attacks, the airline says it lost $100 million—money Canada’s dominant and only national carrier could scarcely afford.

Milton, who told Macleans he expects Air Canada will take a revenue hit “in the billions” over the next 15 months as a result of the attacks, warned that more job cuts could be coming. He’s negotiating with the unions, he says, to chop $500 million in labour costs. Air Canada’s flight schedule to the U.S. was slashed 20 per cent—a painful move given that cross-border travel, especially business travel, provides a disproportionately high share of revenues. And Milton called on Ottawa to step up to the plate with $3 billion to $4 billion in tax deferrals, loan guarantees and other aid to head off a serious liquidity crunch. If the U.S. carriers receive government help, he argues, the Canadian government should follow suit, to keep the playing field level. “I want to be clear: this is not Milton asking for a cheque for three or four billion dollars,” he says, amid reports Air Canada may seek court protection from creditors. “It’s not that I need a bailout—I need stability.”

MILTON’S CASE

Air Canada CEO Robert Milton spoke to Maclean’s Katherine Macklem last week on the terror crisis. Excerpts:

On the effect on Air Canada: The revenue impact will be in the billions—let’s say, to the end of next year. So obviously, we’ve got to get costs down. The notion that this situation is stabilized is preposterous. We’ve not seen the U.S. response yet. We’re going to have two weeks now of watching the U.S. military machine flying airplanes all over the place, sucking up jet fuel, driving up jet fuel prices, people watching this on CNN 24 hours a day, concerned to come out of their houses, and we’ve got an airline to run. This notion that somehow last week’s grounding is the issue for us is farcical.

On his request for $3 billion to $4 billion in government support: First of all, I think it’s important to highlight that this is not a request for a cheque. It’s part cheque, it’s part tax-deferral, it’s loan guarantees. Obviously, there’s a tremendous liquidity crisis for the world’s businesses right now. People are saying “where can I hide?” not “where can I invest money?” and they’re surely not saying “hey-airlines-that looks like a great place to invest right now.” You’ve got some of the biggest airlines in the world on the brink of bankruptcy in the U.S. There is a national security crisis, not of our making, and we need the government, which gets hundreds and hundreds of millions of dollars from us a year, to give us the liquidity we need to keep going, because revenues are going to come down very appreciably. I don’t believe in bailouts, but I think no airline industry is not good.

The reaction, frankly, that we’ve garnered in the media over the last couple of days on something that’s making very straightforward, low-key, sensible press reaction in the U.S.it’s disturbing. The airline industry is critical to the economy, and the U.S. government recognizes that. The situation for us is not different from the U.S. airlines.

On his competition: We’ve got airlines in Canada, like a WestJet, who are saying they don’t need the money. Well, fantastic, but they’re irrelevant. They’re 25 or so little 737s hopping around domestically. They don’t even fly across the border. Air Canada derives over 50 per cent of its revenue on international routes, and people are not flying. It’s going to take time to get confidence back. This is about stabilizing, this is not a bailout.

Milton, who may have had hopes of galvanizing the industry with his request for government help, instead seemed as hapless as a passenger bounced off an overbooked flight. He was accused of taking advantage of the disaster to seek a bailout for the already ailing airline. “I am more than skeptical,” said Senator Michael Kirby, who chaired a Senate committee on the airline industry two years ago.

But the toughest criticism came from Clive Beddoe, CEO of upstart Westjet Airlines Ltd., who said his Calgary-based company was on a firm footing and hadn’t asked for financial help from the federal government. “Robert Milton is using the current crisis as a way to camouflage the real fundamental problem with Air Canada,” Beddoe said. “I am disgusted.” In response, Milton didn’t mince words either. “Fantastic,” he said about Westjet’s lack of liquidity problems, “but they’re irrelevant. They are 25 or so little 737s hopping around domestically. They don’t even fly across the border.”

Other Canadian competitors came to Milton’s defence. Canada 3000 Inc., the Torontobased charter-turned-scheduled carrier, joined the appeal for government support. The company, which said last week it lost $15.8 million in its latest quarter, had expected to be profitable by the end of 2001. Now, it could run out of money by year-end if it doesn’t receive an aid package, president Angus Kinnear told its annual meeting.

Transport Minister David Collenette remained steadfastly noncommittal through the week. “No question, all the airlines have taken a hit, especially Air Canada,” the minister said in an interview. “Before the government responds, we have to know the facts, we have to be assured that if there is to be any assistance that it can be justified to the taxpayers. We’ve got to get it right.” On Friday, the U.S. Congress and White House agreed on a $ 15-billion (U.S.) support package for American airlines, down from an initial request of $24 billion. The Canadian airlines have been affected differently, Collenette said. “It’s not entirely comparable.”

Regardless of the minister’s decision, industry leaders are bracing for change—and most are sure it will be years before profitability returns. For airlines, insurance rates will go up. With war clouds over the Middle East region, fuel charges could rise dramatically. Security costs, which the industry on both sides of the border wants government to pick up, will also jump. In Canada, there’s talk of a restructured Air Canada, which really means overhauling the entire Canadian industry. But the big question, and the most difficult to answer is, how will consumers act over the long term? Will there be an eventual return to confidence, or will fear of flying become entrenched? Will the rising costs translate into more expensive travel—and place air travel out of the reach of many? Will the snowballing economic impact of the terrorist attacks turn into a recession, making it more difficult for people to afford airplane tickets? Some analysts say the privatejet industry will usurp high-end business travel, which would take away the commercial airlines’ big-margin revenue source. Over the long term, no one really knows. If the unthinkable happens, and there are additional attacks, all bets are off.

Over the short term, though, many individuals and many companies have already revamped their travel plans. The Canadian arm of the global accounting giant KPMG is advising its people to stay put. “We haven’t formally come out and said, ‘No travel,’ but we have said, ‘Travel right now only if it is absolutely necessary,’ ” says Lome Burns, chief of human resources at KPMG LLP, where half the 2,500 staff are frequent flyers. Physical safety and the long waits are obvious concerns. But the most important factor, says Burns, is the psychological impact. “People just don’t need to deal with the stress that goes along with it right now— and it’s not just the people doing the travel, it’s also the people who care about them.” Burns was in Australia when the four terrorist-steered planes crashed, and his family knew he was safe. Still, he says, his mother phoned his office voice mail—just to hear the sound of his voice.

The changes are in place at KPMG for the next 30 days, and then will be revisited. “How long will it go?” asks Burns. “I think we will not see significant travel start to pick up from our firm until the new year.” For the airlines, it won’t come soon enough.