A no-fail proposition

By Gérard Bérubé

Air Canada is condemned to succeed. Engaged in a long restructuring process that started April 2003 the country’s major carrier now has to convince everyone that the colossal job it has performed while under court protection has been sound and relevant. Unless it’s dogged by bad luck, Air Canada can hope to profit from the tremendous power inherent in its franchise.

In an industry as sensitive as civil aviation, there has been no shortage of blunders. Take the repeated bankruptcies of Continental Airlines or, more recently, the US Airways situation. It emerged from court protection in early 2003 with US$2 billion in recurrent cost reductions per year, half  from its employees. A year later, the seventh largest US carrier had no choice but to ask again for court protection after requesting new concessions from the same employees, this time worth US$1 billion. United, American and Delta are seeking similar flexibility to offset the erosion of their domestic market by discount airlines.

Nor can anyone forget the failure of Swissair in late 2001. A new entity, Swiss, took off in April 2002 with the support of billions of Swiss francs in public funding and sustained by a cost structure, fleet and staff that had been reduced by one-third. But that wasn’t enough. The following year, Swiss had to accept a new re- structuring plan, just as draconian as the previous one, calling for a further one-third reduction of fleet and staff. At the end of 2003, the national carrier announced its loss for the year amounted to 687 million Swiss francs ($712 million), compared with one billion in 2002. It needed 500 million francs to meet its cash needs. The only consolation was in early 2004, Swiss was accumulating losses at the rate of only 850,000 francs a day, compared with more than two million francs in 2003. The airline had been in crisis well before Sep- tember 11, and the war in Iraq augured the worst for the carrier.

But the comparisons stop here. It is acknowledged the US industry is suffering from chronic overcap-acity, with one or two big players too many. Air Canada operates in a different environment. In spite of everything, it had succeeded in withstanding the effects of the geopolitical context and competition from WestJet in local markets, as the improvement in its operating results in  2001 and 2002 in-dicate, at a time when US airlines were in serious trouble. The day after September 11, the US industry would face losses of US$31 billion over a two-year period. In that same period, Air Canada improved its operating income by more than $500 million.

Even dragging the ball and chain of the 1999 forced merg-er with Canadian, Air Canada managed to absorb the competition from WestJet and the aftermath of September 11.

But worse was to come: the US recession, two oil shocks, the outbreak of the war in Iraq and SARS, which forced it to halt traffic on its main markets in Asia and Toronto. It’s clear that in a more favourable economic situation, with a staff and operating cost structure reduced by one-quarter, its debt reduced by two-thirds and its equity entirely rebuilt, Air Canada can make a comeback. In a hopefully sounder economic and geopolitical con- text, the carrier can aspire to capitalize on its 70% share of the domestic market, half the cross-border market and international routes that include lucrative links with Asia.

Having eliminated the excesses of the past, mainly im-posed by a political environment that defied all economic logic, the carrier can exploit its renewed operational flexibility. Among the excesses was the burden of the merger with Canadian. As a result, Air Can- ada had to pay out $620 million, absorb $3 billion in additional debt with no offsetting assets, welcome old aircraft into its fleet and take on 16,000 employees.

This illogical restructuring nevertheless revealed the full power of the Air Canada franchise. according to two in- dependent evaluations, once it emerges from restructuring, the company will have a market value of $4 billion, the advantages of a tax loss of more than $2 billion and a non-ledger asset on its books worth $2 billion.

The company, headed by Robert Milton, has performed a tremendous feat. In 1999, milton was entrusted with the management of Air Canada as it entered the most tumultuous period of its history. In light of its capabilities and the many challenges it has met, there’s no doubt Air Canada has no option but to succeed.

Gérard Bérubé is editor of the Économie et finance section of Le Devoir in Montreal