To the surprise of very few, Air Canada has filed for protection from its creditors, brought to earth by a crushing debt load, a sky-high cost structure and a broken business model. The Companies Creditors' Arrangement Act will keep the airline's lenders at bay while a restructuring is worked out, but it should not become a shield to further protect the carrier from reality, nor should it become a vehicle for a government rescue package. Air Canada needs radical surgery, not just a debt holiday.
If you're looking for places to assign blame for Air Canada's predicament, there are plenty to go around. While it's true that the airline has been hit by a succession of unplanned events over the past three years — including a severe economic downturn in the United States, the terrorist attacks of Sept. 11 and the negative effects of the runup to war with Iraq — Air Canada has also been the author of much of its own misfortune, and Ottawa must shoulder some blame for the current situation as well.
When Air Canada started its life as a fully public company in 1989 it was virtually debt-free, thanks to its former parent the federal government, with a pile of cash raised from its public equity issue. The airline then chose to fight a costly price and service battle with its competitor Canadian Airlines, a war of attrition that eventually helped drive Canadian into bankruptcy protection but also took a toll on Air Canada.
As the U.S. economy was softening, CEO Robert Milton chose to enter into a costly merger with Canadian Airlines that depended on a virtually perfect business environment. The debate over whether Air Canada jumped at this deal or was pushed by the federal government will probably never end, and the truth is likely a little bit of both. Ottawa didn't want American Airlines to take a large role in the merged entity, and Mr. Milton didn't want to admit that he had lost the competitive war.
The result was that Air Canada took on far too much debt to acquire Canadian, and to fend off Onex, and then agreed to be hamstrung by a series of restrictive union agreements both with Canadian employees and its own staff, in part as a result of pressure from Ottawa. Those two factors weighed down the balance sheet to the point where only the most favourable business conditions could have floated Air Canada into profitable territory — and it wound up with something much less than that.
Mr. Milton's attempt to re-engineer the airline on the fly, by creating a series of sub-brands aimed at various market niches, might have worked if it had taken place at a different airline — one without a money-losing mainline carrier, one without $12-billion in debt and one without a stubbornly high cost structure. Even profitable sub-units couldn't make up for the gaping holes in the rest of Air Canada's business model, and a price war with WestJet only exacerbated the problem.
The simple fact is that Air Canada could not continue the way it was, even if its unions had agreed to the $650-million in cost cuts that the airline was looking for. That would not have removed the massive debt hanging around the airline's neck, and unless both of those constraints are dealt with, Air Canada doesn't have a chance of profitability now or in the future. CCAA gives the airline a chance to do that.
Even that isn't enough, however. What Air Canada must do is restructure its business model from the ground up, to find out what works and what doesn't. It can no longer be all things to all people: a regional carrier, a discount carrier, a national carrier and an international carrier. It needs to find the things that it does well and focus on those, and the government needs to allow it to do so — including allowing it to seek foreign sources of capital and even part ownership if necessary.
Anything less will doom Air Canada — not to mention its passengers and shareholders — to the same kind of crippling mediocrity it has been trying to escape for the past decade.
E-mail Mathew Ingram at mingram@globeandmail.ca
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