Air Canada

views updated

Air Canada

Air Canada Centre
P.O. Box 14000
St. Laurent, Quebec
Canada H4Y 1H4
(514) 422-5000
Fax: (514) 422-5909

Public Company
Incorporated: 1988
Sales: C $3.57 billion
Employees: 20,600
Stock Exchanges: Montreal Toronto Winnipeg Alberta Vancouver

Air Canada is an international air carrier that provides scheduled and chartered air transportation services for passengers and cargo. Twenty-four North American cities are serviced by the airline’s passenger route network, and, through its domestic connector partners, the airline is able to serve an additional 62 Canadian communities and six cities in the United States. In addition, Air Canada services 24 cities in Europe and the Caribbean, and the airline’s cargo division provides services to 60 destinations in Canada and around the world.

The Canadian government created Air Canada as a Crown corporation in 1937 to provide transcontinental airline service within Canada’s borders. From its founding through 1959, the government-owned company had a complete monopoly on all of Canada’s domestic air routes; it also had a monopoly on all trans-border routes (routes that crossed the Canadian border with the United States) until 1967. The federal Cabinet of Canada approved all of the airline’s routes and fares, and government regulators issued licenses approved by the Cabinet for the airline.

In 1959 the Canadian government allowed CP Air of Vancouver, British Columbia, to provide one flight each day in each direction between Vancouver and Montreal, Quebec. From that small bit of business, CP Air grew through 1965 to acquire an average of 12.7 percent—the total it was allowed by federal regulations—of the domestic intercontinental traffic formerly held by Air Canada. In 1967 the Canadian government further relaxed its regulations and allowed CP Air two flights per day and, by 1970, CP Air was permitted to gain 25 percent of the intercontinental traffic in Canada. Also in 1967 the Canadian government allowed CP Air, which was given the right to establish international air routes across the Pacific Ocean in 1948, to establish a route from Vancouver to San Francisco, California—the first trans-border route not flown by Air Canada. Despite the encroaching competition from CP Air and that airline’s dominance in international routes across the Pacific Ocean, Air Canada held, by government fiat, a monopoly on all other international routes and intercontinental domestic air travel.

Government regulations set forth in 1966 prevented regional air carriers to compete with both Air Canada and CP Air, which were directed to work with the regional carriers to establish joint fare and commission arrangements and to cooperate on technical and servicing matters, including service to specific areas that required special equipment. Later, in 1969, the Canadian government established specific regions in which each of the five regional Canadian airlines could operate; those regulations lasted through the early 1980s.

Throughout the 1970s several pressures—many of which arose or were centered in the United States—challenged the Canadian government and the Air Canada monopoly. Larger jets for airline service provided air carriers with roomier vehicles, but high air fares, which were regulated in both the United States and Canada by federal agencies, prevented the efficient use of those vehicles. The power of consumers increased during the decade, and customers used that power to demand lower air fares from more competitive airlines. Information on how deregulated industries would perform was convincing many regulators, airline executives, and consumers that a regulated airline industry was not in the best interest of anyone. In the late 1970s these forces combined to gain the support of leading politicians in the United States. The deregulation process of the United States airline industry began, with Canadian politicians watching closely—especially as Canadian passengers increasingly chose United States airlines for their international and transcontinental flights because they could to take advantage of lower fares and improved services.

When Parliament passed the Air Canada Act of 1978, the Crown corporation was finally subjected to the same regulations and regulatory agencies that other Canadian airlines faced, bringing it more fully into competition with CP Air and the other regional airlines that were then operating. That act ended the government’s unique regulatory control over Air Canada’s routes, fare structures, and services— control the government wielded over the company throughout its first 41 years of business. On March 23, 1979, the minister of transport removed all capacity restraints on CP Air’s share of transcontinental traffic, and it was given a license to provide domestic transcontinental flights. CP Air established transcontinental service in May of 1980 to compete directly with Air Canada. While these changes were occurring in its domestic competition, Air Canada was also facing increasing competition in international routes from American Airlines, British Airways, SwissAir, and Lufthansa.

By 1984 Air Canada hinted in its annual report that, in order to continue to compete with other international airlines, it would require a tremendous amount of new capital to replace its aging fleet of airliners with state-of-the-art jets. To upgrade its fleet, Air Canada was considering buying, between the years 1984 and 1993, more than 40 new airliners at a cost of more than $135 million each; the company also said in its annual report that it did not believe it could finance such purchases from retained earnings. At that time, six airline companies were operating in Canada, and Air Canada, which had more than a 50 percent share of the market, owned and operated the country’s only computer reservations system. This provided them with access to all of the major travel agents in Canada and enabled them to collect a fee from other airlines when their tickets were sold on the computerized system. CP Air, which became Canadian Airlines International Ltd. in the mid-1980s, established its own computerized reservation system, but in 1987 the two airlines’ systems were merged into a single network called the Gemini Group Limited Partnership.

In 1985, then Transport Minister Donald Mazankowski said that the Canadian government was planning to allow Air Canada and the Canadian National Railways the freedom to operate as private companies. The Canadian public appeared to support that move. In its annual report for the year 1985, Air Canada said it was determined to resolve the challenges it faced from its competition by managing its own destiny and achieving “a standard of financial credibility that will ultimately enable the shareholder to pursue a course of private and employee equity participation.” This statement pointed toward the direction the company intended to move and coincided with further relaxation of regulations that encouraged its domestic and international competitors.

The complete deregulation of Canada’s airline industry was first proposed in a policy paper from Mazankowski to Parliament in July of 1985. That policy was not enacted until Parliament passed the National Transportation Act of 1987, which became effective January 1, 1988. On April 12, 1988, Mazankowski, who was then the minister responsible for privatization, announced that Air Canada would be sold to the public as “market conditions permit” with an initial treasury issue of up to 45 percent of its shares. When it was announced, the sale was seen as the most ambitious act of privatization that the Canadian government had attempted thus far; Air Canada had assets of $3.18 billion and revenues of $3.13 billion in 1987. The sale was subjected to several conditions that were placed into the enabling legislation, which Parliament approved in August of 1988.

The legislation stipulated several things: the company’s headquarters would remain in Montreal, Quebec; the airline, for the indefinite future, would maintain major operational and overhaul centers at Winnipeg, Manitoba, and in Montreal and Toronto; no more than 45 percent of the company’s shares would be sold and the proceeds would go to the airline, not to the government; employees would be given the first chance to buy shares in the company, small shareholders the second opportunity, followed by institutional investors and, finally, foreign investors; no individual shareholder would be allowed to hold more than 10 percent of the company’s shares and foreign ownership was limited to 25 percent of the initial offering; and the government’s 55 percent holding in the company would be voted in accordance with the private-sector shareholders to give the company an arm’s-length relationship to the government.

On September 26, 1988, Air Canada filed the prospectus on its stock, stating that its net income after taxes was $101 million for the year ended March 31, 1988. The next day the price of the stock was set at $8 per share, and the company issued 30.8 million shares—42.8 percent of the company’s total—with an option offered to brokers to buy an additional 3.5 percent of the total shares of the company at $8 per share. The company netted $225.8 million on the $246.2 million sale, with underwriting fees taking $12.3 million and with the airline absorbing $8 million in discounts to its employees. By the end of March of 1989, the company’s shares were trading at $11.75 per share, and the stock hit a high of $14.83 in August that same year.

Air Canada’s efficacious move to becoming a private company was seen as a result of a successful public relations program directed by the company’s chairman, Claude I. Taylor, and its president and chief executive officer, Pierre J. Jeanniot. The executives focused the public relations program on the company’s employees, the media, communities, customers, and potential shareholders; this was done in two carefully structured parts—pre-announcement and post-announcement—that were designed to ensure the success of the move to privatization by emphasizing the company’s strengths and competitive position as it worked to improve its service and operations.

In July of 1989 the company completed its move to privatization with the filing of a prospectus for its second issue of stock. The company sold 41.1 million shares—for a total of 57 percent of its equity in the filing—at $12 per share. Proceeds from that sale went to the government. As an indication of the issue’s success, by the end of the first week after the shares were issued the company’s stock was trading at $12.75 per share. The company’s operating results, however, did not reflect the enthusiastic welcome that its stock had met in the market. Air Canada reported losses of $74 million in 1990 and $218 million in 1991, and reported that it had nearly two million fewer passengers in 1991 than in the previous year. The company blamed its losses and decreased passenger load on the combined effects of the economic recession and the falloff in travel that resulted from the war in the Persian Gulf. It also, however, was seen as being hurt extensively by the pressures of competition with other international carriers.

In July of 1990 Jeanniot surprised his colleagues at Air Canada by announcing his retirement. Jeanniot, who spent 35 years with the company, told Traffic World magazine that he believed the time was right for him to retire: “I have done my time. A chief executive should not hang around forever.” Jeanniot was replaced in early 1992 by Hollis L. Harris, a former top executive at Delta Airlines and Continental Airlines; he was named vice chairman, president, and chief executive officer.

The year that Harris joined Air Canada was a difficult one for his company and for the airline industry in general. Air Canada restructured its operations, eliminating five senior management positions, including four senior vice presidents and the position of executive vice president and chief operating officer; it also cut 250 other management positions and 100 administrative and technical support positions, all in an effort to save $20 million a year. The restructuring was part of the move to cut operating expenses by 10 percent—$300 million a year—by 1993 and was expected to be accompanied by a reduction of nonmanagement, union employees later in 1992. The restructuring enhanced Harris’ position in day-to-day operations and gave him direct responsibility for the six divisions that were formed in the restructuring.

The restructuring also resulted in the sale of Air Canada’s “En Route” credit card operations to Diners Club of America, the selling of its Montreal headquarters building, and the relocating of its headquarters staff from downtown Montreal to Dorval Airport; in addition, the company enacted a plan to sell and lease back three of the Boeing 747-400s in its fleet. The restructuring was seen as a move to make Air Canada more efficient.

To gain further efficiencies, Air Canada proposed a merger in early 1992 with Canadian Airlines International Ltd., its primary Canadian competitor; the merger would have made Air Canada once again Canada’s only international carrier. However, Canadian Airlines International Ltd. rebuffed Air Canada’s merger proposal, and the idea was viewed as politically unpopular in Canada where it would have likely eliminated more than 10,000 jobs.

With streamlined operations, Air Canada seems to have improved its prospects for the future. International competition in the airline industry, though, promises to remain at very high levels, which will keep pressures on every airline and make it difficult for them to be profitable while maintaining and renewing their fleets.

Principal Subsidiaries

Touram Inc. (conducts business as Air Canada Vacations); Maple Leaf Holdings Inc.; North West Territorial Airways Ltd.; Dynamex Express Inc.; Air Nova Inc.; AirBC Ltd.; Air Ontario Inc.; Air Alliance Inc.; Wingco Leasing Inc.; Northern Express Messenger System Ltd.; Matac Cargo Ltd.; Global Travel Computer Holdings Inc.; Gemini Group Limited Partnership; GPA Group; PCL Courier Holdings Inc.