Canadian Airlines Struggles to Stay Aloft

This article was originally published in Maclean’s magazine on December 2, 1996. Partner content is not updated.

Mike Lowther calls it "Black Friday" - the day CANADIAN AIRLINES INTERNATIONAL LTD. told its 16,400 employees that the company was on the brink of collapse.
This article was originally published in Maclean’s magazine on December 2, 1996. Partner content is not updated. Mike Lowther calls it "Black Friday" - the day CANADIAN AIRLINES INTERNATIONAL LTD. told its 16,400 employees that the company was on the brink of collapse.

Canadian Airlines Struggles to Stay Aloft

Mike Lowther calls it "Black Friday" - the day CANADIAN AIRLINES INTERNATIONAL LTD. told its 16,400 employees that the company was on the brink of collapse. The message was not only grim but familiar: unless the struggling Calgary-based airline slashed wages by 10 per cent, restructured its route schedule and received concessions from minority shareholder AMR Corp., which owns American Airlines, Canadian would be out of business early in 1997. For Lowther, a Canadian Airlines pilot for 10 years, the Nov. 1 announcement was déjà vu all over again. "I moped around the house all weekend until my wife said, 'What's the matter with you? You guys fought so hard last time - aren't you going to fight now?' "

It was the spark of encouragement Lowther needed. Four days later, he attended a staff meeting in Vancouver at which the company outlined its survival plans. "I literally stopped halfway out the door of the meeting and said, 'God damn it -I'm not going to let this go down without a fight,' " says Lowther, who, like other Canadian pilots, absorbed a five-per-cent wage cut two years ago.

For the emotionally weary and financially battered employees of Canadian, fighting to save the company is nothing new. Late last week, the International Association of Machinists and Aerospace Workers, which represents 5,600 Canadian employees, agreed to discuss the company's demand for wage cuts, although only for staff making more than $30,000 a year. "Employees will share some of the pain," said union vice-president Dave Ritchie. And in Ottawa, Transport Minister David Anderson said that the federal government is prepared to consider any proposal to help the company, provided the unions accept the airline's restructuring plan. That could mean lower fuel taxes or a relaxation of the rules on foreign ownership - clearing the way for AMR Corp. to increase its 25-per-cent stake in Canadian.

Last month's proclamation that the company will stop flying unless it finds $200 million in savings is merely the latest twist in a painful and very public struggle for survival. Over the past four years, Canadian employees have absorbed pay cuts of between five and 17 per cent. In return, they received $200 million in share entitlements at an effective price of $13 per share - stock that today is worth a mere $1.80. On top of that, in 1994, Ottawa, Alberta and British Columbia kicked in loan guarantees of $120 million. With each concession, Canadian officials declared that the company was on the road to becoming a worthy competitor to Air Canada.

But the real coup came two years ago when AMR Corp. of Fort Worth, Tex., paid $246 million for its 25- per-cent voting stake in Canadian. Aside from injecting badly needed equity into the debt-ridden carrier, the purchase heralded the start of a "strategic alliance" between Canadian and American Airlines that was essential to ensuring the former's survival in an industry dominated by major players. Or so the story went.

But two years later, Canadian is back on life support. As though stricken with a virus that will not quit, the airline says it needs another massive financial transfusion, including $70 million in wage concessions. Without the restructuring, Canadian president and CEO Kevin Benson has said, the airline is doomed.

After initially using the media to publicize their warnings of a financial crisis, the airline's executives ran for cover last week, avoiding interviews or speaking only on condition of anonymity. The cone of silence descended after the Nov. 15 resignation of the company's 10-member board of directors, including former Alberta premier Peter LOUGHEED, CTV chief executive John Cassady and Benson himself, a native South African who assumed control of Canadian last summer following the resignation of Kevin Jenkins. A terse news release explained that the directors had stepped down on advice of legal counsel to avoid personal responsibility for the company's payroll costs in the event of bankruptcy. But while the decision added to the atmosphere of crisis, airline officials insisted last week that their focus was on finding internal solutions rather than continuing to air the company's woes. "We've been quoted enough," said one senior manager.

It is difficult, if not impossible, to argue with Benson's dire assessment of the airline's condition. Canadian has been hemorrhaging money for years. Its last reported profit was in 1988; since then, the company has piled up almost $1.4 billion in losses, including a shortfall of $49 million in the first nine months of the current fiscal year. Without drastic measures, Canadian could be out of cash early in the new year. "This is not negotiable. There is no Plan B," Benson warned earlier this month when asked if there are alternatives to the wage cuts. If there is no agreement, Benson says he will have no choice other than "to move in a dignified way to close the company."

With pressure growing by the day, the effort to save Canadian last week took on an air of desperation. Benson spent much of the week locked in meetings, alternately trying to convince leaders of the airline's six unions of the need for concessions and reassuring a gathering of key corporate clients and travel agents that Canadian hopes to remain in the air. Meanwhile, 20 hopeful-sounding Canadian employees in Vancouver who call themselves "Team Tomorrow" began peddling T-shirts emblazoned with the slogan, "I believe in Canadian Airlines." After selling out a first batch of 50 shirts in one day, the group ordered 200 more - a sliver of optimism in an otherwise bleak situation.

Privately, company officials blame the crisis on rising fuel costs, a depreciating Japanese yen - which has sliced deeply into the profitability of Canadian's Far East routes - and cutthroat competition in Western Canada from WestJet and Greyhound, two recently launched discounters. But while all are important elements in Canadian's financial dilemma - this year's fuel bill, for example, will be about $525 million, compared with $475 million in 1995 - they fail to account for the severity of the problem, particularly given that archrival Air Canada has managed to pull out of its financial nosedive and record a $167-million profit for the first nine months of 1996.

As is often the case when large corporations reach the brink of bankruptcy, there is no single reason for Canadian's dire situation. Many of its problems are deeply rooted in the company's past, while others - such as the 1988 deregulation of the Canadian passenger market and the 1995 "open skies" agreement between Canada and the United States - were beyond its control. Barry Prentice, director of the University of Manitoba's transportation institute, says that many of Canadian's difficulties can be traced back more than a decade. "You have to delve into the company's history before the last crisis to understand why it has come to this," says Prentice.

In the mid-1980s, with deregulation of the air industry on the horizon in Canada, domestic carriers were looking to the already deregulated U.S. market for a survival strategy. What they saw were big airlines gobbling up smaller carriers and creating what the industry terms "fortress hubs" - major airports dominated by a single carrier. It was in 1987 that Canadian itself emerged as a major carrier when PACIFIC WESTERN AIRLINES, based in Calgary, purchased CP Air with its lucrative Far East routes from Canadian Pacific Ltd. Two years later, the newly renamed Canadian Airlines International Ltd. bought WARDAIR, a charter carrier that had moved into the scheduled market. The acquisitions established Canadian as a clear rival to AIR CANADA, but they also burdened the company with a huge debt at a time when the economy was slowing down. From $91 million in 1985, Canadian's long-term debt exploded to more than $1.5 billion by 1990.

In the late 1980s, the cost of aircraft was also escalating rapidly, creating what Prentice describes as a buying frenzy among airline companies not unlike the psychology that grips the housing market when prices are increasing. Ted Larkin, an analyst with the Toronto brokerage firm Bunting Warburg, says that Canadian's purchase of Wardair, which had significantly increased its own fleet as part of its move into the scheduled market, "was the turning point. Not only was an enormous amount of debt consolidated on its balance sheet, but Canadian acquired a fleet of aircraft that were not compatible with their own, which meant higher maintenance costs."

Canadian's timing could hardly have been worse. No sooner had it positioned itself as a major airline than the recession struck. The result was more flights and more empty seats - a problem that persists today. In Canadian's case, the average proportion of seats sold per flight fell from a pre-deregulation peak of almost 70 per cent in 1987 to 64.5 per cent in 1991 and 65 per cent in 1995. Meanwhile, the two airlines were slashing fares and adding capacity.

Some argue that this kind of predatory competition is the reason Canadian is on the ropes. "The thing about airlines is the type of competition that gets unleashed is quite different from the perfect competition of economic textbooks," says economist Jim Stanford of the Canadian Auto Workers union, which represents 4,000 Canadian employees. Instead of an equilibrium in which competitors coexist within the same market, airlines seek to drive each other out of business - or at least out of key markets - so that they can raise prices and fill their planes. "They're happy to take losses as part of a short-term thing," Stanford says, "but the problem is that short-run losses become long-run losses because the competition does the same thing." An example is the high-volume Toronto-Ottawa-Montreal market, long dominated by Air Canada's Rapidair service. Larkin calls it the "Bermuda Triangle" of the Canadian AIRLINE INDUSTRY, a region in which small carriers such as Nationair, City Express and Intair have all disappeared after trying to take on Air Canada.

Ignoring the lessons of the past, Canadian launched the upgraded Eastern Shuttle service last January in a bid to capture a larger share of the business market in southern Ontario and Quebec. That followed Air Canada's decision to pour more resources into serving the Calgary-Edmonton-Vancouver triangle in Canadian's backyard of Western Canada. CAW president Buzz Hargrove, for one, maintains that this kind of rabid, dog-eat-dog competition is destabilizing to the industry and that the federal government should stop it. Rather than allow the industry to destroy itself, he adds, Ottawa should re-regulate the industry and create a "fair price commission" that would protect travellers from unjustified price increases.

Transport Minister Anderson, however, rejects Hargrove's suggestion, saying that deregulation has greatly benefited consumers. "Even if the regulatory genie could be put back in the bottle, it would be wrong to do so," he said in Montreal last week. Echoing that view, Dave Frank, an analyst with Vancouver-based Horizon Pacific Ventures Ltd., calls deregulation a "total, absolute red herring." Those who blame deregulation for Canadians' woes, he says, need to explain why Air Canada is on stronger financial ground. "Were they in a different version of deregulation? End of analysis," says Frank.

In fact, the advent of open skies, under which U.S. carriers are allowed access to Canadian airports but not the Canadian domestic market, may be the key to Canadian's survival. When the company struck its partnership with American Airlines, the agreement allowed the two airlines to take advantage of each other's strengths: Canadian's access to Far East destinations such as Tokyo, Hong Kong, Taiwan, China, Malaysia, and American's 25-per-cent share of the massive U.S. market.

Although Canadian and American consummated their alliance two years ago, the benefits from that marriage have yet to be realized. The two could not begin co-ordinating their schedules and prices until American won U.S. antitrust immunity last May. As a result, only in recent months has American increased its flights into Vancouver to link with Canadian's flights to the Orient. "Now you see American flights from Dallas, Miami and New York all arriving within an hour to link with Canadian's flights over the Pacific," says Frank. "That's some pretty serious horsepower." Another key to the partnership is Canadian's use of AMR's state-of-the-art Sabre reservation system. By tapping into the system, Canadian can get an analysis of any route's profitability by the day, or even the hour. "It's like going from a pocket calculator to a high-powered desktop computer," says Canadian chief financial officer Doug Carty, whose brother, Don Carty, is CEO of American Airlines.

Clearly, it is the still-unrealized potential of Canadian's alliance with American Airlines that holds the key to the Calgary company's survival. Lowther says he believes the company has the right plan and will find its way through the latest turbulence. "I feel more optimistic by the day," he says. For employees of Canadian Airlines, of course, optimism has long been a job requirement.

Maclean's December 2, 1996