TRAN Committee Meeting

STANDING COMMITTEE ON TRANSPORT

LE COMITÉ PERMANENT DES TRANSPORTS

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, October 27, 1999

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[English]

The Chair (Mr. Stan Keyes (Hamilton West, Lib.): Order, colleagues.

Pursuant to Standing Order 108(2), a study on the future of the airline industry in Canada, we have meeting number nine. Our witnesses before us this evening are the president and chief executive officer of Air Canada, Mr. Robert Milton; his senior vice-president of corporate affairs and government relations, Mr. Doug Port; and the manager of government relations, Mr. Duncan Dee.

Gentlemen, welcome to the Standing Committee on Transport. We look forward to your presentation, which we hope will be no longer than 12 minutes, so that our colleagues can have a chance to ask their questions and gain some insights from you.

I also ask that if there are cellphones on in the room, could you please turn them off? Thank you very much.

Gentlemen, when you are comfortable.

Mr. Robert A. Milton (President and Chief Executive Officer, Air Canada): Mr. Chairman and honourable members, we appreciate the opportunity to appear before this committee to talk about Air Canada's plan for the future.

Appearing with me this evening are Mr. Doug Port, our senior vice-president of government affairs, and Mr. Duncan Dee, our manager of government relations.

It has now been over two months since the federal government announced an unprecedented process to restructure Canada's airline industry. During these ten weeks, we have adopted a very simple strategy: to listen and think before acting. We felt that it was more important to develop a good plan, rather than a fast plan. To that end, we listened carefully to the concerns of our shareholders, employees, consumers, and smaller communities. We listened to the Minister of Transport on his five principles for any potential solution. We listened to other elected officials at the federal level and in the provinces, all of whom have legitimate, indeed crucial, roles to play in the restructuring of the airline industry in Canada.

Having listened, we then went to work. On October 19 I was pleased to announce Air Canada's plan for the future, copies of which were distributed to all members of the House of Commons and Senate. For this reason, and in the interests of time, I do not propose to review all of the details of our plan this evening. However, there are a few key issues I would like to highlight.

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First, it is important to remember that Canadian Airlines' financial difficulties are the catalyst for the current industry restructuring. Air Canada did not initiate this process and does not require government intervention to facilitate its future growth and development.

Second, having said this, we recognize that something needs to be done to fix Canadian Airlines. There is no doubt about that.

We believe that both Air Canada and Canadian Airlines must be part of any solution, but that Air Canada is the company best positioned to lead any industry restructuring based on its financial strength and market leadership. In this regard, I would point to our recently announced third-quarter results, which confirm that we have had our best nine-month period since privatization in 1988. For the period ending September 30, 1999, the company recorded an operating income of $412 million. We are very proud of these results.

Obviously we're doing a lot of things right, and our hard-working employees should not be penalized, as they would be under the Onex-American Airlines proposal, for their successful efforts to build a world-class airline.

Third, I want to make very clear our statement to members of this committee and to Canadians generally that we are absolutely committed to reviving and rebuilding Canadian Airlines. Indeed, this is a key part of our plan. Some would have you believe that we intend to shut down Canadian or that Canadian's creditors will begin seizing the company's aircraft as soon as any deal with Air Canada is concluded. Nothing could be further from the truth.

Such scare-mongering is not helpful in the context of the profoundly important debate that is now under way. And it is not fair to Canadian's employees, many of whom are understandably worried about their future. They are hard-working people, and I do not believe it is right to play politics with them and their families.

The fact is that Canadian Airlines is a strong brand. Its employees are true professionals. Simply put, we are committed to returning the airline to financial health and profitability and to operating the company as a distinct brand. Anyone who tells you otherwise is not telling the truth.

Fourth, the Air Canada plan meets and in many cases exceeds the five principles outlined recently by the Minister of Transport. Our plan protects consumers by preserving choice and ensuring full review by the Competition Bureau. In addition, frequent flyer points will be honoured, new international destinations will be served, and an exciting new low-fare airline will be established in Hamilton, Ontario.

Our plan guarantees regional service to all communities that are currently served by either of the two major airlines or their subsidiaries. Our plan addresses employee concerns through our simple promise to ensure that no one is forced out of a job as a result of our proposed transaction. In fact, our plan will result in half as many job reductions, approximately 2,500, as the Onex-American Airlines proposal.

Our plan fosters industry competition, since Air Canada and Canadian Airlines would continue to operate under separate management and would offer brand choice on domestic, transborder, and international routes. Existing competition in transborder and international markets will continue, and charter flights on domestic routes will continue to grow.

Our plan ensures that effective control remains in Canadian hands. None of our partners—CIBC, United Airlines, or Lufthansa—would acquire voting shares in Air Canada in return for their financial support. And there would be no new board members representing these parties.

Fifth, and finally, I would like to say a few words further to the Minister of Transport's presentation to the committee yesterday.

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We share the minister's commitment to a safe and healthy airline industry in Canada. Indeed, our plan fits within the policy framework announced by the minister.

I want to remind honourable members that the Air Canada plan complies with all existing laws governing Air Canada, and that it would not require legislative change in terms of either the 10% rule concerning individual ownership or the 25% rule concerning foreign ownership.

I personally believe the 10% rule contained in the Air Canada Public Participation Act is shareholder unfriendly. However, all of our shareholders have invested in the company with the knowledge that the rule exists. It continues to serve valuable public policy objectives.

The point is, the 10% rule was introduced by Parliament not to protect Air Canada's shareholders or to entrench management but to protect the interests of the country. If this rule is to be changed—and I recognize that the minister yesterday asked for the advice of this committee—such change should only occur after thorough debate and analysis by Parliament.

Given the importance of this issue to the current industry restructuring exercise, the matter should receive full and adequate deliberation. One might reasonably ask whether Canadians will have sufficient time to offer their views and whether Parliament will have sufficient time to consider them before the November 26 deadline suggested by the minister yesterday. This, however, is a matter I leave to your good judgment.

Mr. Chairman, honourable members, we at Air Canada are very proud of the plan we have developed. It is a bold and practical plan that looks to the future—for our country and its airlines. It is a truly made-in-Canada plan that respects the laws of the land. It is a plan that protects the interests of employees, consumers, and smaller communities. It is a plan that provides immediate tangible value to our shareholders while maximizing future growth potential and efficiencies. It is based on realistic and realizable opportunities and constitutes an innovative and creative solution to the important challenges facing Canada's airline industry.

I would now like to answer any questions you might have.

Thank you.

The Chair: Thank you, Mr. Milton.

Ms. Meredith, please.

Ms. Val Meredith (South Surrey—White Rock—Langley, Ref.): Thank you, Mr. Chair.

Thank you to our witnesses for appearing before the committee.

Mr. Milton, I want to have you reiterate your commitment. As I understand it from what you've said, if your merger deal went through your commitment to Canadian Airlines would be to keep them functioning over a long period of time. Is that understanding correct?

Mr. Robert Milton: Absolutely. As emphatically and categorically as I can state it, it is a long-term proposition. We look to protect the interests of the employees of Canadian Airlines and to build that franchise, long term, by rejuvenating it, re-fleeting it, and really letting it achieve its full potential.

Ms. Val Meredith: Thanks.

That leads me to my second question. If you have the dominant carrier, if you have control and ownership rights of the competing carrier, and if you start a new low-cost carrier in the low-cost marketplace, isn't there a concern that you are taking away any competition of the airline industry, that you're really in a control position in all the different levels of providing service? I would suggest the regional carriers would be included in that as well.

Mr. Robert Milton: From our standpoint, this process was begun because of the increasing crisis at Canadian Airlines. We did not put a proposal forward first. We have operated Air Canada for many years on the basis of the government's two-airline policy. We did not create the problem but we are looking to find a solution to the problem.

The proposal we've put forward—we have been extremely clear on this, and fully expect and endorse it—we will send to the Competition Bureau for full review as well as to any appropriate government regulators. Additionally, we would be looking to talk to the unions and employees of both companies.

We feel the best we can do is to put forward a sensible proposition that keeps this business, this industry, in Canada, controlled by Canadians. We will put what we've recommended before the Competition Bureau and the government.

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Ms. Val Meredith: In your opening statements you refer to a made-in-Canada solution. We know that Lufthansa and United Airlines are financing the counterproposal you have, to a fairly large degree. I'm curious as to the total foreign ownership, the total percentage of foreign shares that are held in Air Canada. Can you tell us?

Mr. Robert Milton: Air Canada is also bound by the 25% foreign ownership law. I should be clear that in the deal we have structured, we have not leveraged Air Canada with debt. We have received value from these partners who have said “Air Canada is one of the great world airlines. We're the 20th-biggest airline in the world. We want you, as a founding member of Star Alliance, to continue to fully participate in Star Alliance and to deal with us. So for the benefit of a 10-year relationship, we will provide this money as value.” I am taking that value and giving it back to our shareholders in the amount of $800 million.

The full ownership today, as a result of the transaction we've consummated with Lufthansa and United Airlines, is zero. On a fully diluted basis, they can get to a total, between them, of 7% of our non-voting stock.

Ms. Val Meredith: But how many foreign investors do you already have in it? That 7% isn't the only foreign ownership.

Mr. Robert Milton: Right. We would still stay within the law on the 25%, with that 7%.

Ms. Val Meredith: But can you tell us the percentage of foreign ownership?

Mr. Robert Milton: It's in the mid-teens, to the best of my knowledge.

Ms. Val Meredith: Okay. Thank you.

Mr. Robert Milton: And it's widely held.

The Chair: Thanks, Ms. Meredith.

Mr. Fontana, please.

Mr. Joe Fontana (London North Centre, Lib.): Thank you, Mr. Chairman, and welcome, Air Canada.

Mr. Robert Milton: Thank you.

Mr. Joe Fontana: As you know, I come from the home of one of your good regional carriers, Air Ontario, which I'd like to think is a no-frills airline.

Mr. Robert Milton: They might think differently.

Mr. Joe Fontana: They're a good company and ready to build and prosper from London, Ontario—not that I have anything against your Hamilton proposal at all, whatsoever.

There are many questions I could ask, but my time is limited, so let me start by asking you this. You indicated that Canada's in this crisis, so to speak, and we have to restructure our airline industry because your competitor, Canadian, is in a dire situation.

I think you've admitted, and Mr. Benson as well as the Minister of Transport has indicated, there were talks between yourselves and Canadian way back when. Obviously you had those discussions, and even went to the minister and probably asked him to invoke section 47.

The talks broke up before that provision was invoked, but are you in a position to say what some of those issues you talked about with Canadian were? Obviously there was an attempt by yourselves and Canadian to try to find a solution among yourselves. But obviously the offer you must have put forward to Canadian was flatly rejected, hence that's why all other things started to happen.

I wonder if you could just give us a little bit of history about those discussions, if it's possible.

Mr. Robert Milton: Sure. In about January of this year my predecessor and the chairman of Air Canada were approached by Canadian Airlines and American Airlines to seek discussions over a possible merger, due to the increasing difficulty that Canadian Airlines was having. Air Canada agreed to enter into those discussions, which continued over a considerable length of time. Air Canada and Canadian continued a dialogue that seemed to be making progress on a resolution. However, Air Canada and American Airlines could not reach a meeting of the minds as to the value of a transaction. The ultimate impact was that American Airlines unilaterally aborted the discussions.

As to the section 47 request, I want to be very clear that section 47 was raised by Canadian Airlines at the time. We did not think it was applicable. It was raised by Canadian Airlines because they felt they would not survive the public pressure of being deemed to be a failing firm and the full scrutiny of the Competition Bureau over a prolonged period.

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We asked the Ministry of Transport about the applicability of section 47; we did not ask for section 47. We were told by the minister's office that section 47 was not applicable in the case of an airline merger.

Mr. Joe Fontana: Mr. Milton, in your negotiations—and again some of us are outside that room—did it come down to the fact that Air Canada was just offering to buy the international routes of Canadian? Obviously the offer wasn't acceptable to both Canadian and American Airlines, because you indicated American Airlines put the kibosh on that.

I guess your offer also necessitates some discussions with American Airlines, which is Canadian's partner in this. Do you think you will be any more fruitful with American Airlines this time around than you were back in January, when you were having direct discussions with Canadian and American Airlines?

Mr. Robert Milton: Obviously from my standpoint the situation has changed: the grave situation at Canadian Airlines is clear. The results, with American presiding over that company for the last five years, are clear. It is clear that American are now in a position where they're saying they're willing to put $650 million into an industry solution in Canada, as long as they can get Air Canada with it. They're not willing to put the money into Canadian Airlines to fix it.

As far as those talks went, there was a gap of well over $1 billion between where we sat and where American sat. A big part of that was the creditor situation at Canadian and many of its obligations, and that continues to be an issue. We are not willing to let the creditors of Canadian get off scot-free in our proposal, because they've been charging extremely high interest rates. They've been selling them goods for much higher prices than we've been paying. Although we are fully committed to protecting all the employees of Canadian and our employees, and re-fleeting and building that airline, I cannot be sympathetic to those creditors because they took risks and charged a lot, and ultimately it looks like they lost. So it was American Airlines and Air Canada that could not reach a meeting of the minds—we're far apart.

Mr. Joe Fontana: Thank you for that background.

You indicated in your submission that you felt confident enough to put your proposal before the Competition Bureau. I don't know if you've seen the Competition Bureau paper that was given to us. On pages 2 and 3 they talk about a possible merger to create this one airline. It says the conditions might include surrendering arrival and departure times, known as slots; changing the way airlines pay for airport services; ensuring that any new airline competitors be able to purchase the dominant carrier's frequent flyer points; changing the method of calculating travel agents' commissions; offering to transfer surplus planes to any new entrants; the possible divestiture of regional carriers; and ensuring that any new or expanding airlines be able to interline and code-share with the dominant carrier.

I don't know if you knew that or not, but it poses a heck of a big risk on you if somebody has to tell you that if you want to do this you will have to divest yourself of Air BC, Air Ontario, Air Nova, and perhaps do a whole bunch of other things corporately.

At the end of the day, I think most of us are concerned not about your shareholders—I don't have any Air Canada or Canadian shares, so I couldn't care less about the shareholder value—but about consumers and competition in this country. I'm just wondering, with the conditions the Competition Bureau may impose upon you, whether you will have to reformat your business plan to see if all this will work.

Mr. Robert Milton: Obviously “may” is the operative word in what you've just said. That's a starting point, and I expect a healthy dialogue to determine precisely how we go.

But from Air Canada's standpoint, vis-à-vis competition, in the last five years we have radically transformed ourself. We have gone from being an airline that seven years ago was losing $1 million a day, to an airline that now has has 65% more aircraft. We have re-fleeted, re-imaged, and begun winning awards and making a lot of money.

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We've done this while competing with the best airlines in the world, across the Atlantic, across the Pacific, and even versus the entire U.S. airline industry after the open skies agreement was introduced four years ago. We have moved our market share on transborder routes from just over 30% to just over 40%. Air Canada is not concerned about competing.

The Chair: Thanks, Mr. Fontana.

Mr. Guimond, please.

[Translation]

Mr. Michel Guimond (Beauport—Montmorency—Côte-de- Beaupré—Île d'Orléans): Mr. Milton, I'd like you to hear more from you about the 10 per cent individual ownership rule. Surely you read and listened yesterday to the testimony given by Minister Collenette to the committee. Among other things, he informed us that the government was prepared to consider increasing the limit.

What is your company's position on this issue? Yesterday's Le Devoir reported that former Liberal Minister Marc Lalonde had argued that this limit was in the public interest because it had been instituted pursuant to the legislation privatizing Air Canada and that it should remain in place. I'd like to hear your views on the subject.

[English]

Mr. Robert Milton: Unlike some others, I'm not presumptuous enough to assume that I make or change laws in this country; I abide by them. From my standpoint, I am operating Air Canada on the basis that the 10% rule exists. If the 10% rule is changed, Robert Milton makes a lot of money, because we are that much more accessible and purchasable. The shareholders make a lot more money.

The 10% rule is not there for the shareholders. Our shareholders bought their shares in Air Canada with the full knowledge that the 10% rule exists. If Parliament ultimately debates it and determines that the 10% law should be changed, that's fine. I'll deal with it.

I don't think it's appropriate to operate in this condition we are currently operating in, where the rules are incredibly unclear. With the statements made yesterday in terms of the possibility of change, I think it's important to note that the 10% rule was introduced when there were two key national airlines. It ensures widely held control.

We are now clearly looking at the prospect of one dominant—as it is now termed—airline, so the notion of that concentration of ownership should be even more alarming to the country.

I read the polls. We've conducted polling. The country is saying, in a very significant majority, that it thinks Air Canada's 10% rule should be maintained and that there should be widely held control of the airline.

But it is up to this committee to make recommendations on it and, ultimately, it is up to Parliament to determine it. Whatever the determination is, I will deal with it, but it is not reasonable that we are operating under a situation where it is totally unclear what the rules are.

[Translation]

Mr. Michel Guimond: Mr. Milton, I'd like to hear your opinion, as President and CEO of Air Canada, of the following statement. On August 11, that is two days before the Competition Bureau rules were suspended, the management of Onex sent a memo to the members of the company's board of directors in which the following was noted:

[English]

Onex will not proceed with this transaction unless we receive clear assurance from Ottawa that they are prepared to support the type of initiative we are contemplating and, two, the combined airline will not be burdened in the future with cumbersome regulatory requirements.

[Translation]

Do you find that yesterday's presentation by Mr. Collenette to the Transport Committee provides the clear assurances Onex was seeking on August 11?

[English]

Mr. Robert Milton: Unfortunately, because of the situation, I was a bit busy yesterday when the minister was speaking so I didn't get to watch his discussion.

However, obviously like many Canadians, I'm alarmed by what I read over and over again in the papers as to how this has transpired. As I mentioned earlier, I have grave concerns as to how the situation is being played out. I am really not in a position, given my need to continue to work with the Ministry of Transport on a variety of issues, to comment any further.

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[Translation]

Mr. Michel Guimond: Perhaps you're concerned about reprisals as far as international routes are concerned. In any event, we know how these things are. The Minister assures us that the government will do what it can to promote competition - what it can - and will adopt legislative and regulatory measures to this effect. Obviously, we'll review these legislative and regulatory provisions, but are you concerned that the authority of the Competition Bureau may be largely watered down, to the point where it becomes nothing more than a consultative boy, much like the government's ethics advisor, for example?

[English]

Mr. Robert Milton: One of the troubling aspects of this whole situation since the introduction of section 47 has been, as I said earlier, the lack of clarity on the rules of the game. Our shareholders have been asked to tender into an absolutely unknown black hole, in that we have felt all along that section 47 did not mean a suspension of the Competition Bureau review. Ultimately, through a legal challenge we commenced, the government's own lawyers from the Attorney General's office concurred with Air Canada that any deal would have to be scrutinized by the Competition Bureau. We felt that was positive and beneficial for our shareholders, who we have been fighting for.

It is also interesting to note that in the Onex proposal there is an acknowledgement of the need to undergo both EU competition scrutiny and scrutiny by the Department of Justice, but simply a statement that they are trying to get this deal done without the review of the Competition Bureau in Canada. It's highly inappropriate for Canada and very bad for our shareholders.

I think with some of the scrutiny that the EU is now putting on in Europe where the concentration of activity at Heathrow is being questioned...I am glad that the EU is able to take this appropriate review. Ultimately I look forward to the Competition Bureau being able to provide that review. It is my hope—and it is clearly in the interests of Canada—that the Competition Bureau will be able to act independently.

The Chair: Thanks very much.

Mr. Dromisky, please.

Mr. Stan Dromisky (Thunder Bay—Atikokan, Lib.): Thank you very much, Mr. Chairman.

Mr. Milton, in analysing, examining, and reading all the documents, letters, and statements in the newspapers, and in listening to all the media, it's amazing to hear the promises you're making, including those you're making here today. Really, in a sense, not much is going to change. You're not getting rid of employees. No one is going to be laid off. Pilots are going to keep their jobs. Planes are not going to be sold or scrapped or released from their contracts. In other words, there are quite a few promises you're making.

Now, everything is still going to be maintained; in other words, the expenditure side of operations is still going to be there. They have to be maintained. Keep that in mind. All these promises...there must be a miracle worker someplace, Mr. Milton. I don't know if it's just in one factor and that's administration; there has to be more than just the administration of a new amalgamated air industry.

I have some other factors I have to put into that scenario. We know that when mega-companies amalgamate, megabucks are involved as far as the costs of that process are concerned—not only the megabucks that are involved with your company going through this entire process, especially for the last 75 days, but also the megabucks for Canadian Airlines. If the two are amalgamated, you have maybe more than double in the sense of expenditures that normally would come about for doing any kind of business.

So keep that in mind, plus all the other expenditures that are already there on the books, like the very heavy debt that Canadian has at present. What other debts you might have, I don't know. Put all that together. How in the world are you going to manage that heavy debt? There's only one other alternative, and that is to increase the fares. Is that how you're going to raise all that money to cover all the debts that are pending and that will be there for quite some time?

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Mr. Robert Milton: Our plan is significantly different from the Onex proposal being put forward.

The Onex proposal is one related to the interests of American Airlines, and American Airlines' interest is to further control the industry in Canada. If you look at what we have read recently as being the American Airlines pilot contract, it indicates that any flying over a 6.4% operating margin on transborder routes must be conducted by American Airlines and their aircraft and their pilots, not by Canadian Airlines. The only obvious, logical, follow-on conclusion that can be derived is that Canadian Airlines can only essentially do unprofitable transborder flying.

Air Canada has been phenomenally successful on transborder flying, with 51 new routes in the last four years. Canadian has been deterred from achieving profitability by virtue of that, and also by virtue of the flying activity of their other Oneworld partners.

Look at Qantas of Australia. Air Canada would love to fly to Sydney. Qantas flies Sydney-Honolulu and gives the low-yielding traffic, Honolulu up to Canada, to Canadian Airlines.

Look at Cathay Pacific in Hong Kong, another partner. Cathay Pacific flies three wide-bodies a day to Canada. Canadian Airlines, in response, flies one flight a day from Vancouver to Hong Kong. Air Canada is restricted to only four flights a week. We'd love to do a daily Hong Kong-Toronto flight. As I said, we'd love to do a daily flight to Sydney.

Contrast that with our Star Alliance proposition and why we were so excited to commit long-term to Star. Air Canada is the only airline within Star Alliance that is restricted by its own government from flying to partner countries.

Air Canada is restricted from flying to Mexico. A million passengers a year fly from Canada to Mexico. We're not allowed to fly there. Air Canada is not allowed to fly to Brazil, the home of Varig, another partner. We're not allowed to fly to New Zealand, home of Air New Zealand. We don't have any immediate interest in flying there, but it's another partner country. It's the same with Thailand, with Thai International. We don't want to fly there, but we're not allowed to fly there. We want to fly to Australia, home of Ansett Australia. We're not allowed to. We'd love to fly to Tokyo. We're not allowed to fly to Tokyo. We would love to fly to Tokyo, because ANA and United have massive hub complexes in Tokyo.

If Air Canada were able to unleash the flying activity we are not allowed to do into real growth, we would be able to produce tremendous international growth, over and above routes that Canadian either cannot fly, because they don't have the equipment, or will not fly, for a variety of reasons, which may include that American Airlines doesn't want them to fly.

It's interesting to note that after years and years of operation on the Toronto-Tokyo route, this month Canadian Airlines stopped their Toronto-Tokyo service. Two of the biggest markets in the world don't get service. Air Canada is not allowed to do it. Canadian is, but they're not going to. It's interesting to note that about six months ago, American Airlines started a new Chicago-Tokyo daily non-stop service. Does anybody want to guess where the traffic is being siphoned over? It's going via Chicago at the expense of Canada. You will see a lot of that.

One proposal is made in the interests of American Airlines. The other proposal is made in the interests of Air Canada and Canada. Air Canada and Canadian will be able to grow on those new route opportunities I just described. Additionally, Air Canada has introduced the low-fare airline, which has increased growth. Finally, a very exciting aspect is that our partners, United Airlines, because they are not out to rule the world, have agreed that we can link Canadian Airlines to Delta Airlines.

If you look at the existing proposal from Onex, the net impact there is that you have the two biggest airlines in Canada dealing with the two biggest airlines in the United States: United and American. American wants to kick the biggest airline in the world out of the picture: United Airlines. So you'd have a massive contraction of activity on transborder, as well as contraction of activity in Canada and internationally.

With the Onex proposal, there's no way it's 5,000 job layoffs. It's way bigger. But Air Canada, under our scheme, at Chicago, yes, we're eliminating American, but United is already there. Yes, we're eliminating American at their big hub in Dallas, but Delta is there. The net gain is the biggest hub in the world: Delta Airlines at Atlanta, Delta Airlines at Cincinnati, and Delta Airlines at Salt Lake City. And Delta and United have agreed that Canadian Airlines can do that growth flying. This is a tremendously positive proposition for Canadian that will produce tremendous growth for both airlines.

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So the answer to your question is that through streamlining capacity domestically, taking those surplus aircraft, and putting them into new opportunities, we will produce tremendous revenue growth, which is not there in the other proposition. That's how we keep the jobs, that's how we make this thing grow, and that's how we make it so much more profitable. It is growth opportunity that doesn't exist in the other scheme.

Mr. Stan Dromisky: Thanks very much.

The Chair: Thanks, Mr. Dromisky.

Ms. Desjarlais, please.

Ms. Bev Desjarlais (Churchill, NDP): In regard to the principles the minister has asked for, what firm, and I would hope enforceable, commitments are you willing to sign on to, and for what length of time, once the restructuring is over? I understand you have signed on to this new agreement with Star Alliance for up to 10 years. Will you give at least the same commitment to ensuring the five principles are maintained?

Mr. Robert Milton: The best way for me to answer that is to simply say that some of the promises made by Onex in their political campaign around the country—promising new routes that won't work and fare lock-ins, which mean nothing, because of the complexity of fare structures.... If you know something about the way airline fares—

Ms. Bev Desjarlais: I'm talking specifically of the minister's insurance of commitment to the five principles.

Mr. Robert Milton: Yes, and the best way to do that is to have appropriate regulatory oversight and appropriate Competition Bureau oversight. Whatever is appropriate based on that, I will commit to Air Canada respecting those outcomes.

Ms. Bev Desjarlais: Thanks.

The Chair: Thanks, Bev.

Mr. Sekora, please.

Mr. Lou Sekora (Port Moody—Coquitlam—Port Coquitlam, Lib.): Thank you, Mr. Chair. I have a couple of questions.

There are two different salaries for Air Canada and Canadian, as far as pilots and employees are concerned. How do you expect to handle that?

Mr. Robert Milton: Right now the best thing for me to try to do is talk to the employees of Canadian Airlines. I will simply say that with their support and interest, anything is possible, and it is fully my expectation that because they will be doing precisely the same jobs, they will be paid precisely the same thing. It's just a question of how we work with the employees of Canadian Airlines to get there.

There is no question in my mind as to what is right and fair.

Mr. Lou Sekora: My second question is this. You say Canadian Airlines is losing money and you're making money, but you sold a lot of assets to make money, did you not? How much in assets did you sell to show the profit you're showing?

Mr. Robert Milton: This year, the operating profit I mentioned is simply from running the airline from an operational standpoint.

Yes, over the last few years, we've made some very prudent investments. We made an investment in Continental Airlines, on which we made about $365 million, if I remember.

Also, there was a highly acrimonious debate with American Airlines over another strong company Canada had, Gemini, which Canadian and American insisted was insolvent. We had to fight to keep that company alive, which was the computer reservation business of Canada. We fought to keep it alive. They claimed it was insolvent, took 1,400 jobs and moved them to Dallas, and ultimately we made $250 million on that transaction.

So I'm proud of what we've done in terms of some of the investments we've made in the last few years. However, Air Canada is strongly profitable.

Last year we had a very disappointing year, because of the pilots' strike, which clearly negatively affected us and helped our competitors. But in the last three years, Air Canada has, with the exception of the strike, demonstrated a strong ability to be profitable. And as I mentioned, this year's numbers are purely on the basis of running the airline.

Mr. Lou Sekora: Okay. I have two more.

You said Onex will probably have more than 5,000 job losses, and you're quoting 2,500. What if I suggest this to you? How many pilots alone in Air Canada will be retiring on a yearly basis in the next five years, let's say? Is it 80, 100?

Mr. Robert Milton: In the next five years? No. It's a bigger number than that.

Mr. Lou Sekora: No, but per year.

Mr. Robert Milton: That sounds high, but there clearly is a natural attrition rate. Anyway, go ahead with your question.

Mr. Lou Sekora: So between the two airlines, the 2,500 or the 5,000 could be reached by attrition alone, could it not—in five years, with all the employees who are retiring?

Mr. Robert Milton: In five years, I think 5,000 is probably tough, but clearly part of it will be natural attrition.

• 1800

Mr. Lou Sekora: In your company alone, never mind Canadian Airlines, how many do you think will retire in the next five years?

Mr. Robert Milton: In Air Canada our attrition rate is around 3% per annum.

Mr. Lou Sekora: How many employees do you have?

Mr. Robert Milton: There are 24,000 employees.

Mr. Lou Sekora: I'm from the west coast, and I get a lot of calls from travel agencies—I'm not saying it's only your airline, because every airline has done the same thing—and they tell me that whether they sell a ticket for $200, $5,000, or $10,000, they get $60 or $70. Among all the airlines, what you've done is thrown a lot of travel agencies out of business, so there's automatically unemployment right there. Do you intend to handle it in the same way so that they can't survive?

Mr. Robert Milton: They're quite different situations, in that United Airlines in the States actually commenced this move to 5% commissions. The last reduction to 8% was commenced by Delta Airlines. The competitive pressure on airlines to produce an adequate return for its shareholders has driven the airlines to be very focused on cost. At Air Canada we're under tremendous scrutiny in this situation for the level of profitability we achieve. So when the best, most profitable airlines in the world, which are operating in the U.S., make these moves, it's clearly required of us to do the same things.

It is regrettable that we're doing this to the travel agents. In fact, it's depressing that we're doing this to travel agents. However, it is clear to most industry observers that we are looking at a paradigm shift in terms of how the industry operates vis-à-vis the travel agents. Ultimately, travel agents are looking at going to fee collection as opposed to airline commission. We're looking at a fundamental change in how the commission structure works and the airline travel agency works.

Mr. Lou Sekora: But the airlines are not giving the travel agencies in British Columbia 7%. I doubt if they even get 1% in some cases.

Mr. Robert Milton: It really depends on the type of ticket. Domestically, there are fixed fees with caps, and there can be big commissions and commission overrides on international traffic, so it really is a hodge-podge of commissions. But again, I think what we're moving toward as an industry is a situation where the best travel agents will succeed, with part of their pricing structure consisting of charging fees.

Mr. Lou Sekora: So what you're saying is that when I go to a travel agent and buy my ticket to go to Ottawa and back home again, now they can tab me for another $50, $60, or $70 because you people are not paying them. So I'm going to be paying again.

Mr. Robert Milton: The probability says that is the way the industry is going.

The Chair: Thanks, Mr. Sekora.

Ms. Meredith, please.

Ms. Val Meredith: Thank you, Mr. Chair.

In our discussions here you haven't really indicated how your regional carriers would fit into the big picture. I know the competition commissioner, who was here just prior to you, indicated that he would like to see these regional carriers become independent from the dominant carrier. In your plans, how do you perceive the regional carriers fitting in? If your merger plan goes ahead, you would have not only your own regional carriers but also Canadian Airlines' regional carriers.

Mr. Robert Milton: Regional carriers are critically important to mainland carriers in terms of developing feed, serving smaller markets, and helping to build the hub mass. A hub that is as big and profitable as Toronto, for example, could not be so big and profitable without the benefit of our regional carriers. The regional carriers are a critical component of any major world airline, so I'm going forward on the basis that they remain a critically important aligned piece of our business.

However, not having seen or understood exactly what the Competition Bureau is talking about, it's difficult for me to comment on that other than to say that I have no intention of doing things that don't make sense for our shareholders. But I believe there are a lot of ways to achieve a sensible outcome that is acceptable to the regulators and also beneficial for our shareholders. So with regard to precisely how we work on the regionals, I'm open for discussion.

• 1805

Ms. Val Meredith: The reason it concerns me is because I've been drawn into the debate your company is having with its regional carriers on the one employer. When I look at that debate, that disagreement, and you add another airline and another set of regional carriers to that mix, I just don't see how it's going to work, unless there is some flexibility in how you would merge all of these employees. Do you see my concern that it's not really an easy issue to...?

Mr. Robert Milton: I think flexibility will be important. You are absolutely right that this is complicated and difficult. Again, we didn't start this process. We're looking to come up with a sensible solution for all the key stakeholders, including the country. If you look at airline mergers historically, there are very few examples of successful people integration. I would want to do that right, and I believe the first step in doing it right is to keep the operating units separate and to work with the employees on a sensible outcome that benefits them. All too often these things are draconian and produce very unacceptable negative results.

Ms. Val Meredith: You mentioned something a little earlier in one of your responses about an adequate return for shareholders. If you look at the fluctuation of returns for Air Canada's shares, is it fair to say that your shareholders haven't really received any returns on their investment for quite a while?

Mr. Robert Milton: We have done a lousy job for our shareholders. The results we are beginning to achieve, as we've announced through the first nine months of this year, are indicative of the value we will create for our shareholders going forward.

I think it's important to note, though, that we've been in a marketplace where the conditions are fairly unique from a global standpoint. We have a market set where the government has said we want two airlines, and we will subsidize an airline. In the last seven years during which I've been at Air Canada, they've said we will put fuel tax rebates into Canadian Airlines, we'll buy A-310s for more than they're worth to get the money in there, and we'll provide hundreds of millions of dollars' worth of loan guarantees. These are not natural market forces.

So Air Canada has competed in a set where we're constrained from flying the routes we want to fly and our competitor is getting infusions of capital from the federal government. Air Canada is not in a position to compete with the federal government.

The overall returns for the industry are lousy. Canadian Airlines' stock, if you go back five years, was about $80. It's down to $1.60 now. If you go back 10 years, I think it was $400 a share, down to $200. So Air Canada, in competing in the competitive set, has been heroic for our shareholders relative to the other guys, given the market forces we've had to deal with. The results we are now achieving, though, are going to produce very solid returns, because we have the drill down now and we know how to do it right and how to make money. So we will perform going forward.

Ms. Val Meredith: You mentioned the government's support of Canadian Airlines, and I have to say that in looking at the information provided to me over the last six and a half years, because I've been involved in this discussion since before 1993, Air Canada really started in a prime position. They were a government-owned airline. They had the taxpayers build hangars and tarmacs and provide planes and all the rest of it. So in all fairness to your competitors, Air Canada started in a privileged position. Over the last number of years we've seen that support going to Canadian Airlines and perhaps not to Air Canada, but Air Canada did start in a privileged position.

Mr. Robert Milton: I would just say that in terms of Canadian Airlines and the components, pieces like Wardair and CP Air, there is a great heritage and a tremendous airline, and they scraped and fought and made it happen, absolutely.

Air Canada fulfilled all its obligations to the government. If you go back even to where Air Canada got the start in privatization, we're now talking about 11 years ago. For Canada what we really need to do is to draw a line in the sand and say we're going to stop these unnatural market forces taking place. We're going to truly do what the minister said two and a half months ago and let the market forces prevail in order to achieve a really sensible competitive set in the industry where competition can really flourish. That's what I believe will happen if the government gets out of the game and lets the market prevail.

The Chair: Thank you, Val.

• 1810

I believe it was the minister who said that we want to ensure there's that opportunity for competition and market forces alone will not be the sole criteria in which we proceed, after the shareholders, of course, have made their decision.

Just one quick question for me, Mr. Milton, on this characterization of Canadian being a distinct brand in an Air Canada solution. What would be the role of this distinct brand? Are they going to be able to operate as they are today? Would you look after their operations? Would they look after their own operations? If they're looking after their own operations, are they still going to be able to do the business and be open to do the business they're doing right now, including their domestic commitments as well as international commitments?

Mr. Robert Milton: First, I have to comment. You said “after the shareholders have decided”. I just have to comment that I find it a fascinating premise that as to a law of Canada, the 10% rule, there is an acceptance by parliamentarians who make these determinations through deliberation that it is the shareholders of Air Canada who are going to decide what's going to happen here. I respect my shareholders, but I frankly and bluntly find it difficult to understand how we're in a situation where Parliament is being given the outcome of the shareholders vote.

It really is very peculiar when you think of some of the other.... Maybe I could call my friends and neighbours over and we can decide we don't have to pay income tax any more because we think the government is going to change the law. One of the best analogies I've heard is that some guy gets arrested for trafficking heroin and says, oh, it's okay because I think the government is going to change the rules in a few weeks. The whole notion is a difficult one to accept. But as far as—

The Chair: Maybe I could just bootleg that a bit and say by explanation that the reason we've come to this step is because in the beginning, when Air Canada proposed with Canadian to take their international routes off their hands and help out Canadian in that fashion, that precipitated further discussions, which precipitated the next series of five steps, which brought us to where we are today, and that is a serious negotiation between a company called Onex, which is interested in purchasing both airlines, and of course Air Canada, which is interested in ensuring that it has control along with a purchase of Canadian.

So it's the private sector that has just embarked down this path, and all we can do is wait for the private sector to put their solutions to the shareholder. The shareholder makes its decision, and then of course that decision will be held up against a benchmark. That is the guidance that we have as a committee to the government and the minister on where we ought to go.

Mr. Robert Milton: But these are shareholders who are asked to tender into an unknown outcome in terms of what regulatory scrutiny will occur or really what they're even getting. So there are some very unique aspects to what.... How often do you have shareholders tendering into a possible law change that they really have no control over and an unknown regulatory outcome? I suspect in the history of global business it is a unique situation, and in my estimation not a situation appropriate for a G-7 country.

The Chair: My sympathies will lie less with the shareholders and more importantly with the taxpayers of this country, who should never fork out another dime for another airline in this country, as well as of course the consumers who are using the airlines to get across this country.

Mr. Robert Milton: I agree, and our proposal deals with no taxpayer—

The Chair: We'll agree on that one point, but maybe you could tell me a little bit about this distinct brand.

Mr. Robert Milton: As far as the distinct brands go, we're talking about a proposition where the two airlines operate independently. When you look at some of the new routes I've mentioned, some of them that aren't being flown, Toronto-Amsterdam, Toronto-Madrid, Toronto-Hong Kong.... I want both units to be operating at maximum efficiency, so I'm indifferent as to who operates. Both will carry the code of each other, AC and CP, and ultimately the consumer will be getting on an airplane that is operated by a unit of Air Canada on a high-quality, safe basis. One day it might have a goose on the tail and the next day it will have a maple leaf on the tail, but there are going to be consistent operational standards operating to the highest safety standards and a good outcome.

The Chair: Thanks, Mr. Milton.

Mr. Calder, please.

• 1815

Mr. Murray Calder (Dufferin—Peel—Wellington—Grey, Lib.): Thank you very much, Mr. Chairman.

I want to pick away at a few points in this report you have in your package here, dated October 19. I want to get clarification. You're saying here that Air Canada and Canadian will not be merged. The two airlines will operate as separate entities, but Canadian will become a subsidiary of Air Canada. The reason for this is because Air Canada will then be insulated from the risks associated with Canadian's huge debt load. I hear about this huge debt load all the time.

I have a group of Canadian employees in my riding. I'll refer to them as the Dufferin group. I asked them to put together a brief for me. One of the things that I asked was to clarify this huge Canadian debt. They stated that an investigation of merger proposals reveals that the debt takeover from Canadian Airlines totals $930 million. Well, Air Canada, if there is a bringing together of the two airlines, brings with it $3.2 billion in debt. The new Air Canada would indeed carry a significant debt load, but 70% of that debt load would belong to Air Canada.

Mr. Robert Milton: I think it's important to note that Air Canada as a profitable enterprise is adequately carrying that debt load and can handle it. It is apparent from Canadian's operating results that they are not in a position to handle the debt load. So when we say we will deal with their creditors on a sensible basis, I think it's important to highlight that Air Canada and Canadian have many common creditors, whether they be aircraft lessors or suppliers here in Canada. We think we will be able to reach a sensible accommodation with them that does not over-encumber the resulting airline, because clearly the configuration of Canadian right now, from a debt standpoint, from a revenue-generating standpoint, does not enable it to make a profit.

So this is what we're talking about, getting it to a profitable set. We think, given the very high costs that Canadian has had to incur in dealing with these creditors, it is entirely appropriate to go after them while we protect the interests of their employees.

Mr. Murray Calder: It sounds to me then, Robert, like you're not disputing those figures, though.

Mr. Robert Milton: No. We are a much bigger company and we have much higher debt numbers.

Mr. Murray Calder: Canadian will become a subsidiary of Air Canada. Is there going to be any timeframe on that in this deal? For instance, maybe three or four years down the road we say, gee, we tried really hard but we couldn't do it, and that's it for Canadian and there we are. Is there going to be any timeframe in the deal that you're going to incorporate into that?

Mr. Robert Milton: There is absolutely no timeframe in the deal. However, I will say that I suspect the people at Wardair would remember that they were going to be kept an independent subsidiary forever too.

My belief is that the key is the employees of the two companies, how we get on with the future, and what the regulators say. There is no plan, but as far as a natural evolution goes, it's hard to say.

Mr. Murray Calder: Let's get to the employees then. There are 16,000 jobs at stake within Canadian. I have 4,000 in the Toronto area and a lot of them live in my riding. The other point in your brief is that there will be a net employment reduction of 2,500 at Canadian Airlines.

There was a question Mr. Sekora asked about the retirement rate of the pilots. I know that over the next five years there are approximately 200 pilots a year who are retiring from both airlines. So that figure comes up to 1,000 or basically one-third of the combined pilot workforce. We're dealing with the 1,500 now with your proposal. What happens? Do those people just get the pink slip once this is done or do their jobs basically disappear through attrition, retirement, whatever? How is that going to be handled?

Mr. Robert Milton: If we're talking 200 pilots of combined airlines, it sounds as though they've got a smaller pilot group and their rate of retirement will be higher. They do have, to my knowledge, a more senior group of pilots.

As far as that math goes, I'm not sure it's entirely the way it would work. Essentially what we are saying is Air Canada and Canadian on a combined basis will grow like mad, as I've described, which will provide tremendous resilience in terms of keeping the jobs going.

• 1820

There are certain areas, such as the Calgary head office of Canadian Airlines, where we will see a significant downsizing because the requirement for that duplication of overhead is not there. Over and above that, as we reconfigure this airline, it is my absolute expectation that there will be some people, and maybe a lot of people, who don't want to move to wherever the job opportunity is. So we've made a provision in our assumptions to pay 2,500 people a fair and appropriate severance to retire from the company. If, ultimately, Air Canada people want to be some of those 2,500, I'm fine with that. So it could come from both.

Frankly, I suspect some Air Canada people will want the retirement packages, but I do not believe there will not be anyone who won't want to retire because of a new job move or whatever.

So we're trying to be extremely employee-friendly to both companies' employees and make a provision. Ultimately, I think it's important to note that we plan to repatriate the jobs out of the States that American Airlines took down there from Canadian five years ago and bring them back up to Canada. So from a national job standpoint, we are talking about a flat picture overall.

The Chair: Thanks, Mr. Calder.

Mr. Guimond, please.

[Translation]

Mr. Michel Guimond: Mr. Chairman, I'm pleased to see that we're not talking solely about millions of dollars, voting shares, schedules and air fares and that we're also interested in human beings, in the women and men who are concerned about the fate of their company.

In response to a question from Mr. Sekora, you stated that the annual rate of attrition at Air Canada was 3 per cent. However, to arrive at the figure of 2,500 jobs lost as quoted by Mr. Calder, how many people do you expect will be leaving Canadian each year?

[English]

Mr. Robert Milton: I would imagine the overall attrition rate would be, on a combined basis, around the mid-single-digit level.

Absolutely, we are very focused on the people side. This is a tough business, the airline business, even in the best of times. Canadian Airlines employees have been through a tremendous amount over the last five years with restructuring, pay cuts, and so on. It is clear that American Airlines cannot fix Canadian Airlines, and there is only one enterprise that can. We want to get on with it. We think we have a solution that is the most people-friendly.

[Translation]

Mr. Michel Guimond: In the documents which you sent to us and in your submission which I have carefully read, you mention regional carriers. You stated that Air BC, Air Ontario, Air Nova, Air Alliance and Canadian Regional Airlines would also optimize their schedules. Have you forgotten about Inter-Canadien or are you still under the impression that the same company provides service to Quebec and the Maritimes? Inter-Canadien's head offices are located in Montreal and 1,100 or 1,200 people are employed at this location. It is a separate operation from Canadian Regional Airlines. Have you forgotten that?

[English]

Mr. Robert Milton: Well, it's not an intentional omission, but I think at this stage, given the new independence of InterCanadian, it's a bit presumptuous of us to say what their future will be. At this stage, they are not owned by Canadian Airlines. They're an independent company.

So in terms of how we deal with that going forward, that's open for review, but it would not be appropriate for us to say what we're doing about another private company.

[Translation]

Mr. Michel Guimond: I would now like to talk about the new low-cost carrier. I don't know what you're planning to call it, Hamilton Airways, EastJet, Keyes Airlines or whatever.

You state that the new airline will be based in Hamilton and will fly to up to 20 Canadian destinations. There is a very good possibility that these 20 Canadian destinations are already served by other airlines. Can you give us some examples of cities that are being targeted to give us a clearer understanding of the situation? Are you talking about new destinations, or about cities already served by Canadian or some other regional carrier? I'd appreciate a few examples.

• 1825

[English]

Mr. Robert Milton: We hadn't thought of Keyes Airlines. That might not be bad.

Voices: Oh, oh!

Mr. Robert Milton: As for the way this type of airline works, if you look at the main-line airline industry around the world, there are many major international airlines, like Delta, who have Delta Express, United, who have United Shuttle, and USAir, who have Metrojet. KLM has an outfit called Buzz. British Airways has just started GO. GO is located at Stansted, which is the third London airport. The primary airport is Heathrow; the secondary is at Gatwick. It's a little farther out and is lower cost, with less traffic congestion.

These new types of airlines are charging such low prices that they're pulling the traffic off the roads—off buses, cars, and trains. So we're looking at a different proposition. Hamilton is a perfect catchment area, with its proximity to Toronto and the population and the lack of congestion at Hamilton. There are examples around the country that are secondary locations not served by major airlines, and there are also markets that are served on a relatively low frequency basis.

Here's a good example of how I think we would want to deal with this. We would want to go to communities, to large catchment areas, and ask, who would like this airline to fly? The best example is Southwest Airlines in the U.S., a phenomenally successful, profitable, low-fare airline. Southwest is begged by cities around the United States to please come and fly there and bring the low fares.

I believe the introduction of this low-fare airline will lead communities to want this airline to fly there. An example would be New Brunswick. You might have the ability to serve Moncton, Fredericton, or Saint John. Well, the question is, which community wants it to come there? Which airport is most interested in having it fly there? How can we come up with the best commercial arrangement for this airline to fly there?

There is a long list of cities that can be served. Precisely which ones we will serve is really largely up to the communities, but for sure, as examples, there will be service from the Hamilton area to the Ottawa area and service to the Montreal area, into the Maritimes, and out west. It will happen, but it will be largely determined by community interest, the appropriateness of the catchment area, and an ability for the company to do well.

[Translation]

The Chairman: Thank you, Mr. Guimond. Mr. Drouin.

Mr. Claude Drouin (Beauce, Lib.): Thank you, Mr. Chairman. I merely have one comment I'd like to make.

Mr. Milton, I want to thank you for your presentation. The process launched by our government to bring about the restructuring of the Canadian airline industry appears to be well underway. One company has made a proposal that threatens 16,000 jobs. Another's proposal would spell the end of 5,000 jobs. Several days ago, we had a proposal that mentioned the elimination of 2,5000 jobs through attrition. In your proposal, which seems quite clear, we're told that regional services will continue and so forth and that Canadians will enjoy a level of service of which they can be proud. I'm very pleased to hear that. In my view, this is an important decision.

I want to stress regional service in Quebec. I think it's nice of you to think of Mr. Keyes in Hamilton, but I also want you to think about Quebec, to ensure that all regions enjoy an adequate level of service. This is very important issue to me, Mr. Milton.

That's all I wanted to say. Thank you.

[English]

Mr. Robert Milton: Thank you for those comments. We will keep that in mind.

[Translation]

The Chairman: Thank you, Mr. Drouin.

[English]

Bev Desjarlais, please.

Ms. Bev Desjarlais: I'm going to try to stay away from a whole lot of what's in the proposal and just question you on something that the minister as well as the Competition Bureau mentioned in regard to travel agents' fees.

I know you've indicated that the industry is moving away from commissions because of the constraints the industry is under. We've seen that happen in a lot of cases. Take the airports, for instance. The government turned them over to airport authorities, which are now charging everybody an additional $10 or $20 to fly.

• 1830

The intent was, I guess, to let people know where the money was supposed to be going, and none of us saw any decreases in our airline tickets or anything like that. That would be the situation in regard to the fees for the travel agents. The sad part is, I don't think most people realize just how the travel agents have earned their money or have made their money through this whole process. I'm curious, how much a year do you pay out in travel agent fees within Canada?

Mr. Robert Milton: My adviser, who used to be in charge of sales, is saying $300 million.

Ms. Bev Desjarlais: Gee, $300 million is a fair chunk of revenue being ripped out of all those communities.

Mr. Robert Milton: The whole chunk doesn't disappear. But again, I think we are looking at a fundamental change in the way the industry as a whole, not led by Air Canada—and I'll commit it's not going to be led by Air Canada—

Ms. Bev Desjarlais: It might be a good move to be led by Air Canada.

Mr. Robert Milton: If you want commitments, that's what I'll commit to. As long as I'm in charge of Air Canada, we will not initiate the changes.

Ms. Bev Desjarlais: Okay. As I said, it's a fair chunk if we talk about travel agencies. I think it's important that we all work diligently to make sure consumers know that those dollars are going to travel agents throughout all of our communities and that if they do start losing those fees, we should be really vigilant in ensuring that our airlines show us some kind of reduction in fares.

Mr. Robert Milton: I think you're right. I mean, things change, times change. The airport example you gave is a terrific one. Our fees at airports around this country have gone up phenomenally in the last few years. In the last year, it was over $100 million. The times are a-changin'.

Ms. Bev Desjarlais: That wouldn't be any reason for going into Hamilton, right?

Mr. Robert Milton: Very reasonable.

Ms. Bev Desjarlais: Thank you.

The Chair: Thanks, Bev.

Mr. Comuzzi, please.

Mr. Joe Comuzzi (Thunder Bay—Superior North, Lib.): Thank you, Mr. Chairman.

Mr. Milton, when you were talking about your share structure and said we had a lousy return on our investment, I think your colleagues behind you all put their hands to their heads in unison. It was funny, from this vantage point.

I get the feeling that Air Canada is running around doing a pretty good job of running a very fine airline, not only for Canadians but internationally. You're reporting profits and treating your folks pretty well, I think, and all of a sudden you're called to a party that you didn't want to attend. Is that pretty accurate? You don't want to be here, do you?

Mr. Robert Milton: Thanks for asking the question and posing it that way.

We believe there is a tremendous synergistic benefit in combining these two airlines and getting on with fully utilizing all the route rights that Canada has. Again, Air Canada is restricted from flying on a tremendous number of routes, so Canada as a whole is an underachiever.

However, it was clear to us with the two-airline policy for so many years...I couldn't have made a speech two months ago talking about how I want to merge the two airlines. But somebody else did it and it has stuck; it has resonated with the country. So if it's going to happen, I want Air Canada to do it and to perpetuate this winning story that we have going on. I think we're in the best position to do it. I am very hopeful and optimistic that what will come of this is what the minister has said, which is basically to let the market get on with it.

Mr. Joe Comuzzi: I just have two other questions, Mr. Chairman. I'll pose them now because you may cut me off.

I want to be absolutely sure about section 47, because as I'm told, in early spring Canadian approached some officials of the department to see if this would...no, let me rephrase that. You tell me about section 47 and when you first became involved with it. The story is that you heard through the grapevine that it had been proposed.

Mr. Robert Milton: Initially it really came out of the discussions with Canadian at their request and suggestion. However, because he was the person most centrally involved, maybe Doug Port could discuss this.

• 1835

Mr. Douglas D. Port (Senior Vice President, Corporate Affairs and Government Relations, Air Canada): Thank you, Mr. Chairman.

It was approximately March 25. Just previous to that we had been given a paper by Canadian Airlines called “The New National Dream”, written by Canadian, and in that there were a number of propositions as to how Canadian Airlines, in going forward on a potential merger with Air Canada, could find mechanisms that would accelerate the approval process. That was because there was concern that a normal approval process with the Competition Bureau could take up to two years.

One of the propositions put forward in that paper was something called a section 47, and although I'm in charge of government relations, I will confess at that time I had about four months experience in that role, having just arrived back from London, England, so I went to see Margaret Bloodworth and Louis Ranger. In fact Mr. Dee was with me at the time. During the course of a general discussion, informing them where Air Canada was with Canadian Airlines—I had the attitude that I did not wish the transport department to be caught short with any news about a potential merger because we had learned from what happened with the banks that surprises with the federal government are not a great idea. So I decided to talk to Ms. Bloodworth. In that conversation I asked the question, what is a section 47 and what impact would it have? That was the phraseology and the tone of the questions I asked. I was informed by Ms. Bloodworth, or her ADM, Louis Ranger, that such a measure was Draconian and would not have any impact on a potential merger situation because it was a short-lived venture.

That is the entire context of the questioning. There was never a request by Air Canada to in fact enact it. It was a question of what does it mean and what impact would it have.

Mr. Joe Comuzzi: Thank you very much, Mr. Port. That accurately reflects what we have in front of us.

My last question. I think Air Canada is going to be okay, but there is a whole bunch of Canadian employees out there who are feeling pretty uncomfortable and uncertain about their future. I wonder in the time I have available if you could just go down the road a little bit and explain to us what you propose to do with the Canadian employees, if you could give some statement now—not to put you on the spot, Mr. Milton—to alleviate their fears and say that it's a real concern of yours.

Mr. Robert Milton: I appreciate your asking that question. In fact, some of our executives have been meeting with union representatives of Canadian, and I would love to have been doing more of them. I'll be meeting with some of them on Friday. I don't know how much more sincerely I can convey to them our desire to make them part of a winning organization and give them job assurances. If it means I have to do it contractually, I will do that. I will commit. We will protect their jobs and get them out of this perpetual cycle of crisis they're constantly in. We are in the position to do that. So before you, I will do it contractually, just like I'll tell them. I will commit to them—my word, in writing, whatever they want.

The Chair: Thanks, Mr. Comuzzi.

Mr. Casey, please.

Mr. Bill Casey (Cumberland—Colchester, PC): Thank you.

What do you see as options on November 8? Have you looked at the different scenarios that might happen at the shareholders meeting? If there's no resolution, what happens then?

Mr. Robert Milton: In terms of how I look at November 8, I'm very focused on one outcome, and that is that our shareholders recognize that Air Canada's management is very focused on creating value for them and acting in their best interests and have before them the best proposal.

That said, we will continue in our effort to acquire Canadian Airlines and then start up this new low-fare airline. So we have no plans to deviate from the course at all.

Mr. Bill Casey: In the event that there wasn't a resolution, a clear vote by your shareholders on a direction, what would happen then?

Mr. Robert Milton: It seems to me that Onex has pretty clearly defined what they need to proceed. So because there is this very pointed definition, we will have a definitive outcome.

Mr. Bill Casey: It will just happen by itself.

The commissioner of the Competition Bureau was here a little while ago and I asked him about his opinion on which would be best for competition, because competition is the issue that comes up to me more often than any other thing. This is a complicated change we're going through. The only common denominator the people understand, it seems, is whether there is going to be competition.

• 1840

I asked about the divestiture of regional airlines. I asked him which would be best for competition and he said he would prefer divestiture.

Your plan includes not divesting the regional airlines. Would you address competition and how you see the future of regional airlines?

Mr. Robert Milton: I did answer that earlier. From my standpoint, regional carriers are critical components of a successful mainline global player. I do not think Canada or the Competition Bureau should want to make the resulting key airline of Canada not competitive by virtue of stripping it of its regionals. However, I am open to dialogue with the Competition Bureau that determines precisely what we do or don't do. I'm open to the outcome, and everything we're advocating we are putting before the Competition Bureau for discussion.

Mr. Bill Casey: Another part of regional service is the regional airports and their survival. I understand from testimony here that several of them, 10, maybe 15, are not viable now. The other proposal proponents have indicated that revenues to airports would be reduced. Do you see revenues to airports being reduced under your plan because of reduced landing fees and terminal fees?

Mr. Robert Milton: As I was describing earlier, because of the ability to once and for all grow the Canadian airline franchise, the combined Air Canada and Canadian, without restrictions by the government on where we fly, we will produce tremendous growth through our Star association, through the ability to work with Delta Airlines, and not being held back. So you will in fact see activity growth and increased revenues for those airports.

Mr. Bill Casey: I'm talking about the regionals where there are no Star connections—Penticton, Kelowna, Moncton.

Mr. Robert Milton: Those, by and large, have a fair bit of activity, but ultimately on the regional city, I commit that we will operate to every city that is currently served on a combined basis. In the purely domestic market, my expectation would be that if there are, for example, eight flights a day, you will see six flights a day, but you will see healthy schedules to all the cities that are currently served.

As to cities that are not currently viable from an airport funding standpoint, it is difficult for me to see how they become viable in this scenario if they're already not viable. But again, I think there has to be a will to deal with market realities, and we are going to be talking about smaller communities. Ultimately, it's within the purview of the government to decide that they want to do things as they are done in the United States, where there is essential air service. If the federal government wants to introduce an EAS program, that's fine, but if that airport that is not viable could attract service, I would argue that it would already be attracting service.

Mr. Bill Casey: In the airlines, where do you make the most money? Do you make it on regional or domestic or international flights? Does length of flight matter?

Mr. Robert Milton: Interestingly, and this is one of the key things that has set Air Canada's results apart from Canadian's over the last four years, I think, and I mentioned this earlier, by far the highest margin business Air Canada has now in operating aircraft is on transborder routes to the United States. We're talking about a market that is ten times the size of the Canadian market. When open skies occurred we ordered 24 Bombardier regional jets. We went right over the U.S. hubs. We stuck it to the U.S. guys. We repatriated the traffic, picked up the ten market share points I'm talking about, and we won. That is where we make the bulk of our money now. So it's a radical transformation from when I arrived at Air Canada seven years ago, when 70% of the airline's contribution was derived from the Canadian domestic market. That is no longer the case.

The Chair: Thanks, Mr. Casey.

Mr. Sekora, please.

Mr. Lou Sekora: Thank you very much.

I have a couple of things. For many, many years you've been asked to do some routes from Hamilton, the Niagara Peninsula, and Air Canada has always said no. For years and years you have said no. All of a sudden, in the middle of this war with the Onex bid, you conveniently seem to announce this new service from Hamilton.

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Mr. Joe Comuzzi: The chairman's from Hamilton.

Mr. Lou Sekora: I'd just like to know why. The chairman is from Hamilton. He's been there for seven years and never made that announcement before. All of a sudden, so conveniently....

Mr. Robert Milton: Fair question.

Air Canada has had in its plans for over two years service introduction by a low-fare unit of Air Canada, much like these other major international airlines that are described have. Last year, unfortunately, we had a pilot strike. The pilot strike radically redefined our plans going forward. As a result of that pilot strike, we sent DC-9 aircraft, ten of them, to the desert, and six 747, 100 and 200 series, aircraft to the desert as well.

Because of that big contraction, until we get the right dialogue, the positive dialogue, which I believe we've now evolved to, there is no way you can grow the airline without the employees onside. So when we made that big pull-back in the size of the airline, any thoughts of doing Hamilton and a low-cost airline were out the window, because we wanted the cooperation and support of our employees and it was clear it wasn't there. I think we have the opportunity now, in this outcome, to achieve that. And additionally, because of the units of capacity, the aircraft that will be made redundant by redeploying in this new configuration will be taken out of Canadian, with the 737s, or Air Canada, with their DC-9s, and put in Hamilton to run this thing. So it's opportunity, timing.

Mr. Lou Sekora: Okay. Thank you.

As a second question, did you not enter previously into a discussion with Canadian that included a proposal with American Airlines' involvement and the use of their SABRE system?

Mr. Robert Milton: Correct.

We are focused on reducing costs. Air Canada currently has a good relationship with IBM Canada, which is near its term. SABRE has presented to us the prospect of very dramatic cost reductions by using SABRE. Air Canada went into the dialogue—and I want to be 100% clear—stating that on all activity associated with an Air Canada-SABRE account, all employees would have to reside in Canada. So this is a dramatically different proposition from the one Canadian has had or Canadian is looking at. So that was a condition of this contract discussion.

We paid SABRE $5 million to come and look at Air Canada's systems and see what could be done. That $5 million was to be paid but was transferable into other services if we ultimately decided we did not want to go to SABRE. There were significant confidentiality aspects to the contract. We were just a little bit disappointed, given the confidentiality and how much money we paid, when Gerry Schwartz made a speech in Vancouver about a month and a half ago and mentioned that we had spent $5 million with SABRE, the implication being that we paid it to American, American told SABRE, who they own, SABRE told Onex, and Onex made a speech. So our confidence level in the integrity of SABRE is not the highest, but in all discussions it related to the jobs residing in Canada.

Mr. Lou Sekora: Okay. I have one more question.

The fact is that while everybody is talking about employees, job losses, and bringing people in from the United States to Canada to work and everything else, you told me earlier that you had 24,000 employees and a retirement rate of about 3%. Now, if I take that Canadian Airlines have 16,000 employees and their retirement rate is let's say 3% also, that is 1,200 a year. For five years you can accomplish 6,000 retirements, not 5,000. It can be 6,000.

Mr. Robert Milton: Yes, but again, is that what happens?

Mr. Lou Sekora: I don't know; I'm asking you.

Mr. Robert Milton: We're committing that the jobs stay: they're real, they're tangible, you can get your hands on them—not some hokey-pokey airy-fairy, maybe it happens, maybe it doesn't, maybe it's 10,000, maybe it's 15,000, you know, who knows? There are so many ways in which we will grow the franchise. Take maintenance as an example. As we look at the fleets of the combined airlines, Air Canada sends its 747 400s to Air France for heavy maintenance. Canadian sends theirs to Singapore Airlines. Those jobs and those seven aircraft and the heavy maintenance checks will be repatriated and done at Vancouver. There are so many ways Canada can grow as a result of what we're proposing.

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Mr. Lou Sekora: I realize that, but you know what I'm saying. You're right that they can grow, but when you're saying 2,500 jobs lost in five years through attrition and Onex says it's 5,000—and you say it could be a lot more with Onex—the fact is that you're right: it could be 6,000, it could be 10,000, and it could also grow to where there would be no job losses. So it's a fictitious kind of figure.

Mr. Robert Milton: It's a question over time as to when they may get the growth, and “may” is the operative word.

I'm saying that today you don't lose the jobs because of all the reasons I've described. So there is not a moment of trauma for these people. We make the franchise grow immediately.

The Chair: Thanks, Mr. Sekora.

Mr. Bailey, please.

Mr. Roy Bailey (Souris—Moose Mountain, Ref.): Thank you, Mr. Chairman.

Mr. Milton, I'm sure that all of the people assembled here.... What we're talking about is something of an historical nature. Not too far from this room there were made such great decisions as the building of the transcontinental railway. This is probably going to be the transportation issue of this century.

Having said that, I'm very concerned about the pattern of events that took place during the summer recess. I suspect you were well aware of the 10% and the 25% regulations and so on. When were you first aware of the other bid, so to speak? When were you first aware or when did you suspect that something was going on prior to the invoking of section 47?

Mr. Robert Milton: A couple of times I guess in the preceding month, in June, the Minister of Transport in conversation said “What if somebody independent comes and takes both airlines and slams them together?” That was just sort of a comment.

I didn't really start to hear anything.... Again, I don't want to seem like we were complacent, but there are laws surrounding the ownership of Air Canada, including the 10% rule, so the notion of someone buying Air Canada just didn't make sense. How could you do it? The laws were the laws.

Subsequent to that, in the preceding three weeks before the announcement, we were starting to hear rumours from the street. At one stage, about a week and a half before the announcement was made, I received a congratulatory call from the CEO of American Airlines on my new appointment, and I teased him about “So when are you and Gerry making your offer?” He laughed. He said “We're turning over every rock we can possibly find. We want to figure out what to do.” Obviously it was non-committal and it was a pleasant conversation. Then a week or two later the announcement was made.

So it was, in relative terms, a surprise, and a particular surprise given the prevailing law of Canada.

Mr. Roy Bailey: Were you surprised that when the announcement was made, obviously from your position the other bidder, if you want to use it that way, kind of had the inside track and was a quarter way around it before you could get your forces working? Is that not correct?

Mr. Robert Milton: I think again it probably doesn't serve me well to pour fuel on the fire.

Mr. Roy Bailey: Okay.

Mr. Robert Milton: When I look at the press coverage of this and the accuracy of detail, when I look at the spoof done on This Hour Has 22 Minutes of the situation, it seems to me the country has a quite defined perception as to what's gone on here.

Mr. Roy Bailey: And that defined perception that you've just talked about leads me to a point that.... When I was a kid I was collecting for a paper route on a Saturday morning, and I went to my first auction sale. They held up an incubator and somebody said “Would somebody give me a dollar?” I said “I will.” I didn't know what I was doing. I got the incubator, and I made it work, but the point was I was not really aware.

Somebody got a head start on you. It's out there, and it's very visible on the Canadian scene, that something wasn't fair about the invoking of section 47. I know you can't say it, but I've heard this more often than anything else about this whole thing. Something is going on. I think it's incumbent that we have some more questions to ask.

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My final question to you, sir, is when you present your bid, as you might say—you're not buying an incubator, you're buying a huge, huge transportation system—what will happen in reverse if the other bidder gets the cake? What happens to the employees of Air Canada, our traditions, and so on? What happens? Do you really believe that we'd lose the Canadian identity of what's happened here in Canada? We might call it made in Canada or it's a Canadian airline, but in effect there is a general fear out there that the 10% that is about to become 15%, if it in fact comes before the House and legislation is passed, looks to the people in the open market like an unfair advantage that has been given to the competitor.

Mr. Robert Milton: Obviously perceiving Air Canada to be one of the great airline franchises of the world—it's a powerful symbol that's on our tail, known the world over—I was insulted by an $8.25 offer, half of which was cash. Obviously we've seen the stock move north of that. Expectations in the analysts' community are for the stock on an independent basis to go up to about $16, and if Canadian were to fail—and obviously I'm making a commitment that it need not fail—up to $25. So this was an attempt to offer a low price during a 90-day period during which competition rules were lifted and there was no clarity as to what the rules of the game were. So obviously that was disturbing to us.

However, we dealt with the situation and responded on October 19 with a proposal that provided value to our shareholders that was entirely within the law of Canada. We are very proud of what we responded to, because we felt these were very difficult circumstances with which to deal and with which to come up with a really attractive proposition for the shareholders in the country.

As far as Onex is concerned, they are not interested in 10% or less of Air Canada, because they, from a bookkeeping standpoint, won't be able to consolidate the numbers. They need a bigger stake than 10%.

As far as Air Canada and its identity, I am fiercely proud of the company I run, which is a great world airline, despite what others might like people to believe—the twentieth biggest airline in the world, renowned globally, as is Canadian, for foul-weather operation and for extremely high technical competence.

I have no interest in watching the sellout of Air Canada or the industry in Canada to a company that has prided itself in not being a Canadian company, but a U.S. company based in Toronto, in the words of their CEO, which generates about 35% of the revenues only in Canada, which is going to be, without doubt, manhandled by American Airlines, which has devastated Canadian Airlines—the results are irrefutable—and now wants to take Air Canada down with it too. It's just not okay. It's not on. It's not good for any of my stakeholders and it's not good for the country.

The Chair: Thanks, Mr. Bailey.

Mr. Comuzzi, last question, unless colleagues indicate otherwise.

Mr. Joe Comuzzi: Mr. Milton, when I was talking about the employees of Canadian just a short while ago—and I thank you for that answer—I forgot to mention that they're different from Air Canada's. Their ground crews, the people who look after the airplanes and so on, are all independent contractors. I think it's Hudson Aviation or someone that looks after the larger centres. I would assume that they would be included in the words of encouragement you gave about how you were going to handle those people. Am I correct in that assumption?

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Mr. Robert Milton: That is an excellent question. It kind of is related to the inter-Canadian question. Because they're not wholly owned by either of the companies, it's a little bit difficult to answer from the standpoint of being presumptuous. But obviously I recognize there's a lot of activity out there, and that will have to be addressed.

Mr. Joe Comuzzi: Thank you, Mr. Chairman.

The Chair: Thanks, Mr. Comuzzi.

Colleagues, that concludes our questions. Perhaps you could stick around for one minute after. Mr. Comuzzi has a request of us.

We thank Mr. Milton, Mr. Dee, and Mr. Port for coming before us this evening. Gentlemen, thank you very much.

[Proceedings continue in camera]