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STANDING COMMITTEE ON TRANSPORT
LE COMITÉ PERMANENT DES TRANSPORTS
[Recorded by Electronic Apparatus]
Thursday, October 28, 1999
The Chair (Mr. Stan Keyes (Hamilton West, Lib.)): I call to order this meeting pursuant to Standing Order 108(2), a study on the future of the airline industry in Canada. This is meeting ten.
We welcome our witnesses, the president and chief executive officer of Canadian Airlines International Ltd., Mr. Kevin Benson, and the senior vice-president, corporate and government affairs, Mr. Stephen Markey.
Gentlemen, good morning, and welcome to the Standing Committee on Transport. We look forward to hearing your presentation to our committee today, which will be followed by questions from my colleagues.
When you're comfortable, please begin your presentation.
Mr. Kevin Benson (President and Chief Executive Officer, Canadian Airlines International Ltd.): Thank you very much, Mr. Chairman, and good morning, ladies and gentlemen.
I appreciate the opportunity to say a few words here this morning. I have been warned that my time is limited, so I'll try to keep my comments precise and succinct.
Much has been said in the past few months about the issues facing Canadian Airlines, in particular the challenges we're facing as we attempt to raise the long-term capital that's essential for our future growth.
The Chair: I'm sorry to interrupt, Mr. Benson.
Can we have the cameras either shut down or taken from the room, please.
Please continue, sir.
Mr. Kevin Benson: I'd like to say this morning that the real issue is not Canadian near as much as it is the structure of the industry in which we are operating. While we fully acknowledge that at any time in the 1990s Canadian's performance has been less than acceptable, the truth is, Air Canada's has not been all that sterling either. Their operating margin, in fact, in the past five years has been about half that of the major U.S. carriers'. Until the minister opened up an alternative for a potential solution earlier this year, their stock had dropped some 14% over the past five years compared with the major U.S. carriers', whose stock had increased approximately 300% in the same period.
It is absolutely true that in the 1990s, Canadian lost some $1.6 billion, but during the same time, Air Canada lost about $300 million, and that is after the extraordinary or one-time profits. If you were to look at the operating losses prior to those one-time profits, that number would be more like $800 million.
So in the nineties the two national airlines have lost somewhere in the order of $2.5 billion. Clearly, based on that, the status quo is not an option. Change is required, and in fact essential.
In talking now about the type of change that we believe is required, I think it's important just to reflect for a minute on the characteristics of the industry in which we operate. It's an industry that is global and therefore highly competitive. It's capital-intensive. The cheapest airplane today runs in the order of $50 million, and most of them run north of $100 million. It's people-intensive. Again, you need look only at the 40,000 people involved directly in the industry to recognize that.
As well, it's extremely sensitive to margins. It's a low-margin industry where small changes make a huge difference. For instance, decreasing unit costs by only 1¢ would have an impact of some $450 million to $500 million on the bottom lines of the two national airlines.
To these challenges come three others that are specific to Canada—challenges of geography, challenges of duopoly, and challenges of seasonality. I'd like to say just a few words on each.
I think Canada's geography is obvious. It arises from the fact that we have a huge geographic area and a relatively small population base. The result of that is very thin city pairs. In fact, if you look at the traffic around Canada, 25% of all traffic occurs in just three city pairs—Toronto-Montreal, Toronto-Vancouver, and Toronto-Calgary.
The top ten markets in Canada account for 39% of all travel. To give you a sense of perspective there, in the U.S. the top ten markets account for about 4% of all travel.
Again, just to put it into perspective, because we have to compete constantly with the carriers to our south, only five Canadian markets are bigger than the 50th-largest in the U.S.
This entire issue of geography is further compounded by the fact that the U.S. border is so close and that 90% of Canadians live within 150 miles of that border, or about 30 minutes' flying time.
The result is that domestic travel in Canada is almost entirely east-west, making the dynamic economic mass essential for a viable hub very difficult. We have in addition the huge U.S. hubs immediately south of the border in an active position to poach traffic from Canada.
The second challenge arises from the duopoly Air Canada and Canadian have operated now for many years. In fact, if you look at major routes in Canada, 82% of those routes are flown by both major carriers. Again by way of comparison, in the U.S. only about 45% of routes would have more than one major carrier operating on them.
Looking at the flights operated in this duopoly, 80% of those flights leave within 10 minutes of each other. I think the point from the customer's perspective is that there are more flights but there certainly is not more choice.
The whole issue of this duopoly has been further complicated by the recent evolution of the international alliances. It often means that when one Canadian carrier does not serve an international destination directly, it prefers to put its Canadian customers on a non-Canadian airline rather than on the other Canadian airline, even when that other airline does serve that market directly.
The sum of that has been that if you look at all international travel originating in Canada, only about one-third of that travel actually leaves the continent on either Canadian or Air Canada. Being able to increase that number to just 50%—that's half the travel originating in Canada—would be an additional $850 million to $1 billion of revenue staying in Canada, generating income and generating jobs in Canada.
The third issue is Canadian's favourite topic, the weather, and the seasonality that results from it. The truth is, we simply do not have a lot of winter destinations in Canada. We get this tremendous compacting of travel in the four to five months of the summer period, when we do two-thirds of our annual business.
It doesn't take a lot of arithmetic to conclude that if you do two-thirds of your business in four to five months, you have a lot of extra seats in the other seven to eight months. Those empty seats lead to vicious competition, to heavy discounting, and clearly not to a very profitable bottom line during that period.
The nineties have been tough years for Canadian. They've been tough years for the industry. They have eroded Canadian's resources in that period of time, and I truly do believe we, Canadian, are now at a critical point.
I'm asked frequently about Canadian's cash position and about Canadian's ability to survive. The challenge we have in determining that and in answering that question is that clearly when we compute our cash requirements for the next 12 months and when we compute our ability to meet those cash requirements, a major portion of that computation depends on our future revenue stream, on the future booking patterns. So often in this industry where an airline's financial health depends on customers' confidence in that financial health, the time between operating stability and financial disaster is very short indeed. That's why I believe we must act now and we must act quickly to put in place changes that will restore confidence in Canadian and in the industry. Please understand at the moment time is very much our enemy.
I would say I believe that Air Canada also recognizes that the industry requires major change. Our detailed discussions with them in the first quarter of this year showed us both the synergies and benefits of a combined airline—benefits for shareholders, benefits for employees, and benefits for the customers. I guess it's only how we get there where we've differed somewhat.
In early 1999, as you now know, we approached Air Canada and discussed in some detail the basis for a friendly merger. In the final analysis, while we agreed in principle on almost all the areas, the negotiations broke down by their demand for a huge cash payment. Subsequently, Air Canada themselves attempted to address some of the industry challenges through an offer for Canadian's international routes, but were then unwilling or unable to discuss the assumptions behind that offer. We believe, and still believe, that the impediment at that time to an honest and open discussion with them was the Competition Act. Hence our approach to the minister that he look at ways of facilitating open discussion and innovative solutions to what were some very complex issues. We believe his action in using section 47 required courage and foresight, and we believe very much that it's been supported by the subsequent proposals that have come forward from both Onex and Air Canada.
I'll just say a few words, if I may, about those proposals. I would stress that we have not yet received a formal offer from Air Canada, so we have to base our comments on the public information currently at hand. But based on that information, we've stated our position that we believe the Onex proposal is superior to that of Air Canada and we believe it is likely to be supported by the shareholders of both airlines. We believe the Onex plan will create significant opportunities. It will enable us to remove duplication, improve schedules, and, from the customers' point of view, improve non-stop flights. It will enable us to increase the share of international traffic and I think at the same time allow the growth in charter and discount carriers, allow the growth of competition that the minister has made very clear has to be the central part of any plan that comes forward.
Unfortunately, the benefits of this offer, I believe, have been clouded somewhat by a certain amount of false information in regard to American Airline's role in AirCo or in the new Air Canada. There have been some allegations in fact that the Onex or AirCo offer will lead to American Airline's control of the Canadian industry. I want to stress—and I think you've heard these words before—that I believe this is strictly fearmongering and it is absolutely wrong. I point out that all existing rights that American Airlines currently has in regard to Canadian Airlines will be extinguished in the formation of the new Air Canada. In fact Onex has made it very clear that it will be the controlling shareholder of the new AirCo and not American Airlines.
I would further say that American Airlines' interest in the new Air Canada, as it has been in Canadian, is strictly in the access that is offered to Asia for American Airlines. American has very few route authorities to Asia. In the U.S. those authorities have gone to United and Northwest. It has a few, but very few, and so it relies heavily on our network to supplement the lack thereof. Obviously that traffic is very valuable to us as well. Last year American Airlines put over $60 million worth of traffic onto our Asian network.
I would stress that American Airlines have no interest in owning or controlling the new Air Canada. In effect they have promised their own shareholders—shareholders who have held them to ransom a couple of times.... In fact you will recall that in February, a sick-out by the pilots cost American Airlines $90 million in only a few days. They have made it clear to that group and to their other employees that their intention is to sell their interest in the new Air Canada in a couple of years.
The Air Canada proposal also recognizes the need for structural change within the industry. It raises, however, a number of significant questions.
It raises questions of employment. There is significant employment risk in their plan for a separate company, far beyond the 2,500 number initially mentioned.
There are questions of fairness, as all layoffs would be endured by the Canadian employees and not by the combined group.
There are questions of litigation, as creditors and preferred shareholders would take the new owners to task about settlements with ordinary shareholders being at market while they are asked to take discounts.
There are questions of intent in terms of the creditor action that could quickly lead to aircraft confiscation and to the grounding of the airline.
There are questions of efficiency. We fail to understand how you can operate three brands anywhere near as efficiently or as effectively as the plan proposed by Onex, similar in fact to the plan we had discussed with Air Canada directly.
There are questions of confusion on the part of passengers: which terminal do flights leave from, which do they arrive from, where do they connect from, and particularly, which international airlines are partners of which Canadian airline? We find the initial comments confusing, and we feel the public will too.
Mr. Chairman, I hope I've shown why we believe change is more than essential—it's inevitable—and why we sincerely believe status quo is not an option. This is a high-capital industry, and both Air Canada and Canadian need to be able to access that capital at reasonable rates. To do so, we have to earn returns comparable to those earned by the major U.S. carriers. Those carriers sit to our immediate south and are strong competitors.
We cannot afford any longer the costs and the international erosion in market share caused by and resulting from a duopoly. Onex has proposed a solution that would protect the jobs and the rights of all stakeholders, and in fact would create one of the top 10 airlines in the world, something I think all Canadians would be proud of. I'd love to see the slogan: “Air Canada, a Canadian airline”.
We strongly support the creation of a single, full-service, national airline serving all of Canada, retaining its fair share of the international market. We sincerely urge the committee to support the legislative changes required for its establishment.
Mr. Chairman, those are my comments. I'd be happy to take any questions.
The Chair: Thank you very much, Mr. Benson, for your presentation to our committee this morning.
We'd like to hear some questions now from my colleagues. We'll begin with Ms. Meredith.
Ms. Val Meredith (South Surrey—White Rock—Langley, Ref.): Thank you, Mr. Benson and Mr. Markey.
I appreciate your comments, but from our presentation yesterday I got the impression that when Don Carty calls you and tells you to jump, it's a question of how high. Do you feel that is an adequate reflection of your relationship with American Airlines?
Mr. Kevin Benson: My first challenge would be to get him to call me regularly. We are a very small part of their organization, and his calls are few and far between. It is absolutely not a question of jumping. He is not involved in our business. He does not make our day-to-day decisions for us. He does not decide where we fly, what we fly, or how much we fly. So that statement is absolutely incorrect.
Ms. Val Meredith: Thank you. I thought it important to clear the air before we got on to other questions.
You don't deny that the operation of Canadian has been not as sound as it should have been over the period of time. Can you give us any idea of what happened that caused Canadian to get into the financial situation it is in today?
You mentioned the need to move quickly, that time is of the essence. Maybe you could give us some idea of how quickly and what kind of timeframe we should be working under.
Mr. Kevin Benson: Let me try to answer both those questions.
As for the first question, I'll go back only four years. Prior to that would be hearsay and not appropriate here.
A number of factors have influenced Canadian. Overall, the operation of the airline has been sound. Operating costs have been well controlled, and the technology available to us through the SABRE system has been well utilized.
This, however, as I said earlier, is a high-capital industry, and Canadian has never had that level of capital. In fact Canadian has never had an asset that is not fully charged and requires full service. That is a huge detriment in an industry that is as cyclical as ours is.
I'll use the major U.S. carriers as an example, because we're perhaps a little independent from them. If you look at the return earned by the major U.S. carriers in the last five years, that return is north of 15% to 18% on capital. If you look at the last 15 years, it's down at 6% to 7%. So it's a hugely cyclical industry, and you need capital to work your way through those cycles.
In terms of our current cash position, we started negotiations with Air Canada in January. We started negotiations then because even though we had some sense that we were starting to make progress, we felt we could not make that progress fast enough to achieve the break-even point before we ran out of cash. We're now 10 months into the year. Yesterday we published our third-quarter results and disclosed, in discussion with the analysts, the fact that were it not for American Airlines' willingness to stand at our side, we would have had a cash shortage as early as the first quarter of next year.
So our predicament is one, as I said earlier, where time is our enemy. We really do need to move this process as quickly and as equitably as we can.
Ms. Val Meredith: Would it be fair to say all of this public discussion on the business of Canadian is having an effect on customer confidence and the number of people who choose to fly with your airline? Is it having an impact that all of this discussion is on the front page of every national newspaper?
Mr. Kevin Benson: No. At this point a couple of factors have mitigated that.
The first has been an incredible loyalty on the part of our customer base, a loyalty that expects a resolution to these issues, and a timely one.
The second has been that our employees perform well at any time, and they perform outstandingly well under stress. We have had a level of service, on-time performance, and customer focus in the last two months that really has created standards in the industry that even the customers are awed by.
So at this point in time I would say no, that's not true.
However, as I said in my comments earlier, an indication that there was not going to be a quick and satisfactory resolution to the issue I think would result in a quick book-away. Customers are concerned about their points in the long run too, the places they're banking with.
It's something like a Canadian jet fighter whipping through the sky at Mach 2 or 2.2: at the moment that throttle cuts, there are only seconds before disaster. Unfortunately that's the way it works in our industry with cashflows: from the moment the customers start booking away, it's only weeks.
Ms. Val Meredith: Thank you.
The Chair: Thank you, Val.
Mr. Comuzzi, please.
Mr. Joe Comuzzi (Thunder Bay—Superior North, Lib.): Thank you.
Good morning, Mr. Benson and Mr. Markey.
When the minister was with us the other day, I asked if he would give the committee the request you made to invoke section 47—the formal document that I assume must have been forwarded to the minister—and the reply, if any. We haven't got that. Yesterday we requested that again through the parliamentary system. I'm wondering if you would make it easier for us and just supply us with your formal demand to the Minister of Transport requesting the invocation of section 47 of the Canada Transportation Act.
Mr. Kevin Benson: That was a simple letter to the minister. I will certainly consult with our counsel as soon as I leave here, and if I'm entitled to release that letter, I would be happy to.
Mr. Joe Comuzzi: It's obvious, Mr. Benson, that in asking for the invocation of section 47, you would have to give the extraordinary reasons or the disruptions, pursuant to the section of the statute. So that must have been part of your request.
Mr. Kevin Benson: Our discussion of section 47 actually originated with Air Canada, funnily enough, in our discussions with them, as we all acknowledged the need for speed. In our discussions with the Department of Transport, we asked if there was any way to expedite what we anticipated would be a very long process. We raised and suggested a number of different alternatives. Section 47 clearly was one of them. We did not lay out in any detail exactly why we felt our request met section 47. We felt Transport would obviously decide whether or not it did or didn't, but we still believed it was the best way to expedite a rapid solution.
Mr. Joe Comuzzi: But my question, Mr. Benson, is there had to be reasons accompanying your request for the minister to act.
Mr. Kevin Benson: I think our reasons were very simple, and I think the minister understood them quite quickly and quite easily. They were that failure to act and find a resolution would result in the failure of Canadian Airlines, would result in a very rapid failure of Canadian Airlines. The impact on the different stakeholder groups would be traumatic. The impact on the market, on the customer, would be chaos.
I might take a minute, if I may, Mr. Chairman, and explain that when one airline fails and aircraft are suddenly pulled out of the market, another airline cannot step in and simply pick up those aircraft and start using them. Those aircraft are differently configured; cockpits are different; they're on different operating licences. I would point to the failure of Eastern Airlines in the U.S. and the resultant impact on prices and fares and availability to indicate just how severe that chaos would be for the Canadian public.
Mr. Joe Comuzzi: You're going to consult, Mr. Benson, with your solicitor. Will you advise the chairman of the committee if it's his advice to release the letter?
Mr. Kevin Benson: Absolutely.
Mr. Joe Comuzzi: Thank you.
As we look at the chronology of events as they happened, and I don't have any dispute in the process, it seems to me that on March 26 there was a meeting between officials of the Department of Transport and yourselves. As you say, 47 is one of the possibilities. Maybe in your answer you could say whether there was any other remedy available. I'll get back to that in a moment, though.
But as we go down the road, May 1999, in terms of Canadian and Onex, was the first time Onex came into the discussion. Did you have vacancies on your board at that time, Mr. Benson?
Mr. Kevin Benson: No, I don't believe we had vacancies in May or June. We did have a death of one of the directors about that time—I can't place it exactly—which left a vacancy.
Mr. Joe Comuzzi: What concerns me is that at the particular time when you were asking for government intervention—and this process started in January—I think in your opening remarks you said that in early 1999 the minister opened up a solution to you on the Canadian problem. I'm sure you're referring to the Minister of Transport.
Mr. Kevin Benson: No, I don't think I said exactly what you just repeated.
Mr. Joe Comuzzi: What was it that you said?
Mr. Kevin Benson: If I can quickly run through the chronology, we commenced discussions with Air Canada in January with the intention of finding a solution. We obviously advised the Minister of Transport, as those discussions got underway, of the fact that they were underway. I don't believe we ever raised section 47 or any other issues such as that with Transport at that time. We continued our discussions with Air Canada. In our discussions with Air Canada we discussed, as between Air Canada and Canadian, different ways of speeding up the process.
Mr. Joe Comuzzi: Thank you.
My final question, Mr. Chairman. Then in June 1999—
The Chair: Could we hear the end of the answer first, Mr. Comuzzi? We were getting a chronology of what happened for our benefit.
Mr. Kevin Benson: In the middle of April the discussions between Air Canada and Canadian were terminated, and we then hunted around for other solutions. We started discussions with Onex and one or two other parties to see if we could get them to share the vision, and they obviously took time to do that. I believe the first time we raised with the Department of Transport the possibility of using section 47 in regard to this transaction was mid to late June.
Mr. Joe Comuzzi: Thank you, Mr. Benson.
I have a final question, Mr. Chairman. It was just around that time then—obviously, since there are no vacancies on your board of directors—that you increased the number of directors. It's surprising to me that you would appoint to your directorship a former assistant to the Prime Minister, Mr. Carle, and recently appointed a senator from British Columbia, Senator Fitzpatrick, in June 1999. Is that correct?
Mr. Kevin Benson: No, that is not correct, Mr. Chairman. We did not increase the size of the board. First of all, we had a number of normal retirements and we simply replaced those retirements. Mr. Fitzpatrick has been on the board for a long time. Certainly he outlasts me. He was there when I joined the board, and I imagine he had been there for a number of years before that.
I set out to look for additional directors this year to replace vacancies coming up. It is difficult to find directors willing to make the time commitment and take on the financial responsibility of becoming a director of a company that clearly is facing difficulties.
We had some difficulty in attracting the right people. Mr. Carle met all the requirements. He understood the industry. We clearly had worked with him before and believed he was interested in the airline and was motivated to support and help the airline in any way he could. He had a good understanding of issues in the eastern half of the country, particularly in Quebec—issues that were very important to us. More than that he was enthusiastic and willing to commit extensive time to helping us work our way through some of the issues we had. He was an ideal director, and we're very pleased to have him join the board.
The Chair: Thank you very much, Mr. Comuzzi.
Mr. Guimond, please.
Mr. Michel Guimond (Beauport—Montmorency—Côte-de- Beaupré—Île-d'Orléans, BQ): Thank you for coming before us this morning, Mr. Benson. You're in a position to see that the opposition, on this side of the table, is quite interested in your evidence. I find it's a shame that outside Mr. Comuzzi, who has very relevant questions, and my colleague Hubbard from New Brunswick, the people from your Liberal majority aren't very interested in your evidence. However, on our side, we'll try to put relevant questions to you.
Mr. Benson, on page 7 of the English version of your text, you say, and I quote:
They have invested money, expertise and resources with no return.
You said it before in your evidence. You said it without smiling, but that's unbelievable. It's enough to tear your hair out by the roots. Is AMR a philanthropic organization? Is it a non- profit organization? Is it a charitable organization? Might one believe that this company is investing money in Canadian just for the pure heck of it? Is AMR so patriotic it absolutely wants a company to be maintained in Canada? Is that what you're telling us? They invested with no return, you say. Mr. Benson, I think you are literally laughing at this committee when you state things like that and even more when you write them.
Mr. Benson, according to Onex's proposal, AMR is going to invest $750 million. The chairman of Onex, when I personally met with him—and he's going to come and give evidence before this committee—said that AMR was going to invest $750 million without asking for anything in return, without any kind of control at all. Is that possible? Is it plausible? Do such things actually, really happen?
Mr. Kevin Benson: Mr. Chairman, let me clarify AMR's role. Certainly it is not our intention in our comments to in any way laugh at the committee.
AMR—and this is the point we try to make under AMR—entered into a contract with Canadian in 1994. That contract provided that it would provide certain services and receive certain remuneration.
The intent behind our comments is that they have provided services well beyond that for which they were obligated and they have not been paid the full amount they were entitled to receive. You will recall that in order to enable this current plan to move forward, they agreed to reductions of some $200 million in the amounts payable to them.
So the intention we're trying to convey, Mr. Chairman, is that American has not acted as any other creditor or any other stand-off fund. They have indeed worked with us. They have suffered financial losses. They have loaned us people. They have advanced us expertise in the attempt to enable us to move forward.
Their involvement in the new AirCo I think is apparent. I think the documents that have been filed are available to this committee. They clearly are putting up a substantial amount of money. As I said in my presentation earlier, a major attraction for them is the access to our routes.
I would point this out, Mr. Chairman, if I may. As I said to you, last year American put some $60 million of travel onto our aircraft to Asia. In that same time United took about $110 million of travel from Air Canada to carry people over the Pacific. If those people had been put on a Canadian aircraft instead of a United Airlines aircraft, the difference would have been $110 million staying in Canada. That was the attempt we try to convey, Mr. Chairman, in our comments.
Mr. Michel Guimond: Mr. Benson, in the contract between Canadian and AMR, is there a clause giving a veto over any project of acquisition or merger involving Canadian? You understand this is of the utmost importance to Air Canada's offer. Unless this provision is judged to be invalid or against public policy, it will be impossible for Air Canada to attempt any kind of merger or acquisition of Canadian. Does American Airlines have any such veto?
Mr. Kevin Benson: Mr. Chairman, American Airlines has a veto over certain actions of Canadian Airlines. They can't initiate anything that can veto certain actions. The intention was that American was investing some $246 million of capital in Canadian and wanted to ensure to the best of its abilities that its capital was spent in the best interests of all shareholders. They have never invoked that clause, certainly in the time I've been there and I believe never before either.
In terms of their cancellation fees, yes, there were cancellation fees. It was a 20-year contract signed in the normal course of business, and it anticipated fees payable if the clause was cancelled.
However, I would point out that in our negotiations with Air Canada at the beginning of the year, and I believe also reflected in the documents that are now filed by AirCo, American has evidenced their willingness to forgive the preferred shares for a very nominal amount, to forgive the termination payment again for nothing, and has asked only that the new Air Canada execute the contract with SABRE on a most favoured nation basis; in other words, a pricing more attractive than that available to Canadian and a pricing more attractive, I believe, than the pricing indicated to Air Canada when they had direct discussions with SABRE earlier in the year.
The Chair: Thanks, Mr. Guimond.
Mr. Hubbard, please.
Mr. Charles Hubbard (Miramichi, Lib.): Mr. Chairman, I'd like to follow up on a question I asked the minister when he was here. You began your presentation with the comment that the industry is broken. Coming from a rather remote area of the airline industry in terms of Atlantic Canada, of course we have to be concerned with that idea of being broken and whether or not an industry can operate economically and efficiently and can continue to exist as an industry. I'd like to have some of your comments in terms of your regional partners. If the major carriers are broken, if the industry as a whole is broken, how can the regional carriers exist in terms of your perception of what our industry should be?
Mr. Kevin Benson: Mr. Chairman, I think the regional carriers have been battling in exactly the same manner as the mainline carriers have. I think you've seen increasingly a downscaling of aircraft at the regional level. You've seen a number of cases where we have, for instance, withdrawn the smallest aircraft we operate, which is some 34-seat Dash 8s, and replaced them with subcontracts with operators operating 19-seat Beech aircraft. I believe Air Canada has done exactly the same.
What has happened is that as communities have insisted on frequency and as both carriers insist upon flying flights side by side with each other, the available traffic to fill those aircraft has not grown, and therefore the size of aircraft continues to shrink. It is our very strong contention that in bringing together the two mainline carriers in this country, you must absolutely bring together the regional carriers as well.
I think a number of things will happen right away. First of all, larger aircraft will start flying. From a customer's perception, there won't be as many planes arriving, but they will arrive more regularly and will be of a larger size. I think it will significantly benefit regional service. Any market that can be served by two separate carriers today certainly looks a lot better as a single carrier, and there are a number of markets that today do not enjoy service or any regular service that I believe become viable once you combine the customer bases of the two airlines.
Mr. Charles Hubbard: With your vision of this new company that may exist, would there be any guarantees in terms of that regional service?
Mr. Kevin Benson: Mr. Chairman, I must point out that my own role in this new company is somewhat uncertain, so I'm operating—
Mr. Charles Hubbard: I'm asking about your vision.
Mr. Kevin Benson: This committee may be aware that the job has been offered to my competitor's CEO, an offer that I will say I supported.
I think Mr. Schwartz has already enunciated his intention to maintain every service that is currently operating and to consistently look for new opportunities. I believe those opportunities exist. I've seen some of the results of the model runs indicating which cities might become viable, and I think the Canadian public will quickly see the impact of a combined carrier. It's a very exciting opportunity, I think, for all three stakeholder groups.
Mr. Charles Hubbard: Mr. Chairman, just to comment on this, yesterday I spoke to a gentleman who travels to Labrador, and we could travel cheaper to New Zealand and back than to Labrador and return. We have to question that.
Then we have the public being rather suspicious of all that's happening. Yesterday we heard that when you buy a ticket from a travel agent, you may be forced to pay a fee to cover that cost. Apparently that's coming to the industry. We've seen the concept of having to pay to use an airport, which is something new with some of our airports in terms of new strategies and new methods of accounting and administration. I've been disappointed over the years in terms of the attitude the two major carriers have had. In fact, if you fly by Inter-Canadien to Montreal and pick up Air Canada from there, you pay about $100 extra to change from one to the other in terms of the actual ticket prices.
So I just want to put on record today the great concerns Canadians have and the fact that they're very suspicious of what's happening in terms of the industry in this present state, as I think Mr. Comuzzi also alluded to.
Thank you Mr. Chairman.
The Chair: Thanks, Mr. Hubbard. That's the whole reason we're here.
Ms. Desjarlais, please.
Ms. Bev Desjarlais (Churchill, NDP): Just to clarify with regard to the new director that was added to your board in the middle part of this year, what was that fellow's name?
Mr. Kevin Benson: Mr. Jean Carle.
Ms. Bev Desjarlais: Is he still working in the Prime Minister's office?
Mr. Kevin Benson: No, he's not. He is a senior vice-president with BDC.
Ms. Bev Desjarlais: This Mr. Jean Carle, and I just think it's curious, is he the same fellow we had been hearing about in the news last year?
Mr. Kevin Benson: I suspect he is.
Ms. Bev Desjarlais: You can well imagine why there is some skepticism amongst parliamentarians as well as Canadians over everything that's involved in this whole deal. As a committee, when we're dealing with something as crucial as the airline industry in Canada, I think it's somewhat annoying to be regarded as if we wouldn't look at all those things as being suspicious. There are just too many factors here not to believe that something isn't up front. We have one more factor added today. I'm wondering what Onex can do, what you can do, and what the transport minister can do right now after all the tainted aspects of this deal are before Canadians, and how can they trust what's happening as being up front and honest and that people are trying to ensure they're providing the best airline transportation in Canada? If you were the Canadian public and parliamentarians like us, how on earth could you possibly expect us not to be suspicious?
The Chair: I'm going to let that question go but with a bit of a warning. We have to understand that this transport committee has always tried to act in the best non-partisan fashion it can. I understand, Bev, what politics is all about. I've sat in your chair. But at the same time I don't want that kind of questioning to reflect on the witnesses, who I believe are here to give us their best presentation, their best factual information.
Mr. Benson, if you want to reply to that question, you may, but it's entirely up to you.
Mr. Kevin Benson: Maybe I could offer a comment that the committee might take as a reply or merely a comment, Mr. Chairman. Mr. Chairman, were the status quo an option, there is nothing I would like more than to lead Canadian Airlines back to profitability and financial health. I think it would be the ultimate salute to an incredible group of people. I'm talking about some of the people sitting here behind me. But it's not possible. The status quo is not an option, in my opinion, and therefore it's up to us—and, I suspect, ultimately up to this committee—to suggest what the next best option might be. What I've tried to do this morning is to suggest an option.
You have every right to be suspicious, to question, and to ask, and I'm sure you will.
Ms. Bev Desjarlais: To follow up on that, I don't think there's any question amongst us parliamentarians that we believe the employees from both airlines are highly respected. We believe they've provided an excellent service. But that's what makes this whole scenario that much worse, because they are the ones who are ultimately going to be the most seriously affected, they and the Canadian public. It seems as though there is someone at the top dangling them around like the pawns in this whole game, and I think it's been very unfair to the Canadian public and to those employees to have this going on.
The Chair: You don't have a question?
Ms. Bev Desjarlais: That's it for now.
The Chair: Thank you, Ms. Desjarlais.
Mr. Dromisky, please.
Mr. Stan Dromisky (Thunder Bay—Atikokan, Lib.): Thank you very much, Mr. Chairman.
Mr. Benson, much has been said in the past few days regarding percentages for licensing purposes. We know we have several acts, such as the Canada Transportation Act, which really limits foreign ownership in Canadian commercial airlines to a maximum of 25% of the voting shares. We have the Investment Canada Act, which is also relevant. It applies when a single foreign investor wishes to acquire more than 33 1/3% of a Canadian enterprise. Also, we've done a lot of talking about the Air Canada Participation Act, which has a requirement that no more than 10% of the voting shares be held by one entity.
I'm going to ask several questions, and I'll put them all together simply because your answer will cover, I think, parts of each one as you go along: Are these percentages adequate to ensure Canadian ownership? Alternatively, do the percentages unnecessarily limit foreign investment?
Okay, I'll stop right there.
Mr. Kevin Benson: Mr. Chairman, I will try to respond as to the 10% and the 25% as they apply to our industry.
The 25%, which is the limit on foreign ownership of a Canadian airline, certainly gave us some concern until we spent time talking with investors outside of Canada and understood that they really had no interest in investing in our airline or our industry because of the level of returns. Therefore I really think the 25% is an arbitrary thing. It's a number the minister has indicated is important to him, and certainly it's not a problem from our point of view, or a problem that I can perceive. Perhaps when returns are up and the industry becomes more attractive to non-Canadians, that may change. But for now, I don't think so.
As for the 10%, I have some fairly strong personal views on that. I believe a limitation on ownership in any one company such as that really has the impact of entrenching management, of preventing a strong shareholder from ever bringing discipline to a management team. We had such a 10% limit and we took it away in 1997. We requested the Alberta government to change the old PWA Act to reflect the removal of that 10%. I'm a strong proponent of seeing it removed from the Air Canada Act, and have been since long before this discussion.
Mr. Stan Dromisky: What other measures might be used to ensure Canadian ownership as well as effective Canadian control, and how important are Canadian ownership and effective controls as far as you're concerned?
Mr. Kevin Benson: I think effective control is important. I think Canadians want control of their own industry, particularly the airline industry. It seems to attract more public interest and more public pride than many other industries. I think keeping control in Canada is very important, and I think the minister intends to do that.
Mr. Stan Dromisky: When we take a look at these percentages, are they consistent with maybe some other models? For instance, what's happening in the European countries?
Mr. Kevin Benson: I don't think they are vastly dissimilar. I think most countries protect their own airline industries. Most countries have limits on foreign ownership in their airline industries. I don't think Canada is in any way extraordinary in that regard.
Mr. Stan Dromisky: Are you aware of any of the percentages?
Mr. Kevin Benson: They range from as low as 10%, I believe, to as high as 33%, and so we're sitting in the middle.
Perhaps what is unique for Canada is that we have a thin population base, which I referred to earlier, and a particular geography, where we're constantly competing with five or six huge carriers immediately south of the border. That raises challenges in terms of capital, it raises challenges in terms of costs and competition, and I think it speaks all the more to the need to create a single, strong, national, Canadian-controlled airline.
Mr. Stan Dromisky: Thank you very much, Mr. Benson.
The Chair: Thanks, Mr. Dromisky.
Mr. Casey, please.
Mr. Bill Casey (Cumberland—Colchester, PC): Thank you.
You mentioned earlier that you have outstanding employees, especially under pressure. On Friday I was going home via Montreal and Moncton, and when I went up to the ticket counter at Canadian Airlines I was met with a great big smile. The lady was very professional, she did a great job, and I went away laughing. She was really funny; she had a good sense of humour. It was the same thing when I got on the plane. There was very professional service to Montreal, and it was the same thing to Moncton. It really struck me that these people, with the pressure they're working under, have done and are doing a great job.
I even thought for a moment that maybe I was more troubled about this than they were. I know that can't be true, but they certainly didn't show an ounce of pressure. They left a big impression on me anyway, and I'll probably do that again tomorrow.
My beef with this thing is the process. I just find it crazy that we are given the responsibility to try to restructure a 60-year-old aviation industry that affects thousands of employees, hundreds of airports and communities, and the future of probably every community that has an airport right now, and we're given 90 days to do this. I think it's crazy. As I said earlier, you couldn't buy a house in 90 days. We're commissioned with this job to come up with the right idea on how to restructure, and I think it's the wrong process. I wish we could buy some time and do this right.
I myself don't think that either one of the proposals on the table now addresses the number one issue that I hear about, and that's the competition issue. I think the process has resulted in a lot of missed opportunities and ideas because it's so brief and because the rules have been changing. Even if the minister had announced on the first day of the 90 days that he was considering changing the 10% rule, that might have invited some other ideas and some other investors. That's a fundamental change, and to announce that with 16 days left in the process doesn't leave anybody the opportunity to do anything.
Having said that, I just want you to know that if you see some emotion in this at the table here, it's because we take it seriously. Maybe it's more difficult for you, but it's also a challenge for us.
Now to my job. In your earlier statement you said that in April you began negotiations with Onex about a possible merger. From April to June and July, was that a close relationship? Were you in negotiations with them often?
Mr. Kevin Benson: First of all, Mr. Chairman, if I can, let me clarify that.
Actually, I believe it was in early May that we first sat down with Onex. We sat down with Onex and we also sat down with a couple of other parties whose names I would prefer not to use since they were confidential discussions. What we then had to do was convince those parties—and Onex clearly was the one we were able to do that with most successfully—as to the wisdom of division and the opportunity that we saw for all stakeholders. I don't think Onex accepted too much of what we said at face value. They did an extensive amount of research work. They brought in experts and they consulted with them. They built their own models.
So I would say that through that initial process of two and a half or even three months, it was very much an idea exchange, an information exchange. We really didn't have any serious indications until quite late in the game as to whether or not Onex was prepared to move forward. In fact I believe it's on public record now that even in the week that section 47 was invoked, Onex and American discontinued discussions and negotiations. They felt they had reached a loggerhead, and it broke up.
Mr. Bill Casey: There's a critical time period there. You said you talked to Transport Canada in middle to late June about a section 47 suspension. In your discussions with Onex, did you share that discussion with them?
Mr. Kevin Benson: The answer is yes. We stressed from our very early days with Onex that speed was essential for us, that if they saw a normal competition review process, which we felt could be anywhere from 12 to 33 or 35 months, that was not a path we could go down. Events would simply overtake us. We stressed that there was a shorter way to do it. I think they were somewhat skeptical; in fact I think they were very skeptical. They had some fairly experienced advice, and I think the advice was that it was an unlikely path.
Notwithstanding that, we obviously kept our request to Transport to consider ways of speeding the process, be it a section 47 or any other method, and we certainly kept Onex informed of the fact that we were pushing in that direction.
Mr. Bill Casey: At exactly the same time—I'm sure you know this—the volume of share trading in Air Canada skyrocketed. It went from about 200,000 shares a day to almost a million shares. In fact Mr. Schwartz acknowledged that he started buying shares June 23, I think he said.
Anyway, if Onex was buying Air Canada shares and knew that you were in discussions with Transport Canada about a possible suspension, and the other shareholders who were selling the shares didn't know about this possibility, don't you think that gave, not inside information, but a material advantage to the people who were buying the shares? The people who were selling them for $6.50 did not know that Transport Canada was considering the section 47.
Mr. Kevin Benson: Mr. Chairman, I'm not a securities lawyer, so I can only give you an opinion on that.
First of all, section 47 is written into the act, and it's available there, obviously, for anybody to look at.
Secondly, we never at any time had comfort that a section 47 would in fact be given. I recall vividly the day of the press conference. I was in Vancouver, contacting Steve Markey here in Ottawa, saying we have to find out somehow what's being said. We didn't have access to the TV. We wanted an audio feed—something—to hear what the minister would say.
I don't believe we ever gave Onex any sense of comfort that this can happen, that this will happen. In fact, to the contrary. It was constantly our idea, and I believe some of their advisers were constantly telling us in all likelihood then as well that it was a silly idea.
The Chair: Thanks very much, Mr. Casey.
Ms. Parrish, please.
Ms. Carolyn Parrish (Mississauga Centre, Lib.): Thank you very much. You'll have to accept my apologies for missing the beginning. I may be asking questions you've already covered.
First, a very quick question. On August 13, during the suspension of section 47, did you believe the possibility was available to change the 10% rule on August 13, or whatever day it was suspended?
Mr. Kevin Benson: We certainly never had any comfort. If I could say this—and I don't mean to be facetious at all, Mr. Chairman—our attitude was there's no harm in asking.
Ms. Carolyn Parrish: But you believed it was a possibility on August 13.
Mr. Kevin Benson: We had removed the 10%. We knew there had likely been some discussion at some point in Air Canada's camp about removing the 10%. I must say we knew because I believe at some point we did exchange comments to that regard a year or 18 months before. We certainly had no comfort at all that it was likely or could happen.
Ms. Carolyn Parrish: I'm probably a little biased here. I have been a Canadian Airlines flyer since I was elected. That's my airline of choice because of the attitude of the people on it.
Could you explain quickly the history of the pay cuts and the pay freezes? I used to hear about it when I got on the planes. These people were taking pay cuts, they were taking pay freezes, so that they didn't have layoffs. Could you describe it briefly?
Mr. Kevin Benson: Mr. Chairman, I can only go back to 1995, my own involvement with the airline.
In 1995...I'd rather go forward. In mid-1996 when we recognized that we were going to have to fairly substantially revise our business plan, we looked at ways of stabilizing the airline and decided that while revenue growth would take time, costs were something you could attack right away. We decided that if you were going to attack costs, you had to go to the stakeholders who had most at stake, number one, and also to the largest expenses. Taking 10% or 15% off a small expense doesn't do a lot.
Our largest expense is salaries and wages, so we started with our employees and asked them to take a pay cut. All employees, every single person in the company, earning more than $25,000 a year agreed to a 10% cut of their salary over that amount. We then obviously came to Ottawa and said “Ottawa, we pay substantial fuel taxes, substantial landing fees, navigation fees, etc., and we would like some relief in that area in terms of at least fuel taxes.” We then went to American Airlines, who were major suppliers of services, and we asked them for major relief as well. When we put these three different amounts together, we came up with annual savings in the area of $160 million, $180 million a year, of which the employees were indeed contributing in the area of $30 million, $35 million.
Ms. Carolyn Parrish: Does this explain how the seniority problem has cropped up? Despite the comments that the Canadian public is distraught, the only people who have contacted me in my riding, except for a couple of businessmen who say the Onex deal is good, are Air Canada pilots, who are hysterical. Does this explain how your people seem to have better seniority than they do?
Mr. Kevin Benson: No. I think a large area of what you're hearing in terms of the Air Canada pilots is not related to that, and it's not related necessarily to date of hire either.
The Air Canada pilots, I understand, have an arrangement with Air Canada—it's one of the terms of their contract—that should Air Canada acquire or merge with another airline, the pilots of that airline will come in stacked below them in terms of seniority. For a pilot that's very important. That indicates equipment, hours, type of hours, and obviously remuneration. Every other union, I believe, has a clause that says they'll be integrated on the basis of seniority.
Again, I'm not a labour lawyer. There has been some contention that the clause that Air Canada pilots have would in fact not stand up opposite the labour board, and that is what's agonizing the Air Canada pilots.
Ms. Carolyn Parrish: If I could have one more quick question...I've had this explained to me by Mr. Schwartz. I don't think he's in the airline industry yet, and I'd rather hear it from you. I've heard from some people that the American Airlines pilots have some sort of deal that if there's a cross-border flight and there's more than 6.5% profit on that flight, you have to put American teams in the cockpit. Is that true?
Mr. Kevin Benson: It is absolutely untrue. There are two facts. Number one, since 1984 we've increased our ASMs, available seat miles, transborder by 300%; American have increased theirs by about 55%. The only clause that applies is that American agreed with their pilots that they would look at the transborder available seat miles that American pilots flew in 1995, and then going forward, if the number of ASMs they flew ever fell below 95% of that number, American Airlines pilots would have the right to insist that the American Airlines code came off our new flights. And that's all.
They could not stop us flying flights. That in fact is exactly what happened in 1998. In 1997, the number slipped down to 94%—there was a calculation that was missed—and we lost the American Airlines code on new transborder flights for nine months. That is the only...there's no other limitation. The only other limitation that applies anywhere is the promise American Airlines have made to their pilots that they will never again own more than 15% of a Canadian or any other airline.
Ms. Carolyn Parrish: Thank you very much, Mr. Chairman.
The Chair: Thank you, Ms. Parrish.
Mr. Bailey, please.
Mr. Roy Bailey (Souris—Moose Mountain, Ref.): Thank you, Mr. Chairman, and my apology to my colleagues here and the table officers for my in and out, but we're also dealing with other transportation issues at this time.
It seems strange...if you went back 100 years to the eve of the new millennium, Canada was very excited about the building of railways, and shortly afterwards Will Rogers visited Canada and he said Canadians were building railways just for the fun of it. It seems to me that perhaps that statement he made is somewhat in line with what we have here when we look at the duplication of flights, flights leaving from the two carriers now.
I see in your report that in total, between yourself and Air Canada, you have 350 aircraft going.
Mr. Kevin Benson: Roughly.
Mr. Roy Bailey: And it seems to me with the reorganization, that probably could go down to 300 aircraft without anybody suffering any service. Is that a fair number?
Mr. Kevin Benson: Yes, I think it is, Mr. Chairman. I think we've certainly seen that the older aircraft types, the DC-9s of Air Canada, the DC-10s of Canadian, and perhaps many of the F-28s of Canadian as well could be retired, and yet all the flying could be done with the aircraft that remain, as well as some newer aircraft that are on order by both airlines.
Mr. Roy Bailey: In light of that, is it safe to assume, as a committee member and as a member of the Canadian public, that by having fewer flights at their service—instead of having eight duplicated flights, you would, say, have six flights—there would be no reason because of that to increase the fares? That would be the opposite end of it.
Mr. Kevin Benson: I think, Mr. Chairman, Mr. Schwartz is on record as giving certain undertakings, or being willing to give certain undertakings, to the minister in that regard. The key issue, when you look at return on an aircraft is not the ultimate fare level. Gerry Schwartz is fond of saying to a room like this “Who in this room believes air fares are low?” I think I'm the only one who ever puts my hand up. Canadians do not believe air fares are low, and they're not low.
The challenge is that on a typical 130-seat airplane, we're only selling 10% to 15% of the seats at those full fares. Then, depending on the time of the year, the balance of the fares are being discounted, sometimes as much as 85% or 90%. The objective in getting rid of some of those seats is to say, when we fly someone across the country at $600 return, we lose money. One of the discount carriers—Canada 3000, Air Transat, Royal—when they fly someone at that price, they make money; they're different airlines.
We've got to stop stealing from that group at their price. So the objective of the new airline is not to raise the upper end, but to sell fewer seats at $600 and a few more at $1,000, and perhaps there's even the potential to bring prices down. Now, I'm not going to say that here because you'll laugh at me, and this is not a laughing matter, but the potential truly exists to do that. When you're running a network geared to the business traveller, when you keep a flight flying with 8 or 10 people on board because you're scared of losing those 10 permanently to the other airline, you have this heavy loss at the back of the airplane that you have to recover somewhere. And you'll recover it off the person who is least susceptible; that is, the business traveller who must travel. If you could fill that plane with reasonable-fare people, your need to make that recovery is reduced significantly.
Mr. Roy Bailey: Mr. Benson, obviously there are regional concerns, and you've heard them all, I'm sure.
The first concern I got, the first three telephone calls I got over this issue, way back during the summer, were “Keep your hands off WestJet”. Having said that, you would understand why in my area, which is southern Saskatchewan, they have fallen in love with WestJet—financially, routes, and so on.
I would hope that warning would be somewhat taken to heart by yourself, because here you have a carrier operating quick service, good service, and cheap service at the present time, and I would not want to see the regional carriers wiped out by any particular merger bid that comes in. Could I have your comments on that, please?
Mr. Kevin Benson: The regional carriers and the discount carriers, some of whom are more than regional today, have been quite supportive of this transaction, even if it's only in their silence. They certainly have not been against it.
The reason they've not been against it or have been in fact supportive is that they recognize, as we do, that between $500 million and $800 million a year of travel will be spilled down to them. In other words, we'll stop trying to take traffic away from them. WestJet has grown and it has grown well in spite of the fact that both Canadian and Air Canada fly around the west competing with them.
What the new airline is going to do is to save our real customers, not the customer that is prepared to go once a day or come back once a day between two city points. Our real customer is the customer who has to be there at 8 o'clock, has no idea when they want to leave but want a flight available when they want to leave and will pay a premium for having that. That's our customer and that's the customer a new airline will be focusing on.
Mr. Roy Bailey: I have one quick last question.
The Chair: Thanks, Mr. Bailey; I'm sorry.
Mr. Comuzzi, please.
Mr. Joe Comuzzi: Thank you, Mr. Chairman. In my opening questioning, Mr. Benson, I didn't give you the opportunity to, or we didn't get around to, clarifying the opening statement you made that you said was incorrect.
The other question was, were there any other remedies that were available to Canadian other than the invocation of a suspension of 47? I think there were, but I'd like to hear from you.
I'm going to carry on with what Bev Desjarlais and Mr. Casey said. Despite the lock-up agreements, and I've read them, I think you have the opportunity. I talked to Air Canada last night. We're at the wall; I think we're at the wall. I cannot believe we're sitting here today discussing this issue when we have two fine airlines in this country that for some reason or other have got off track, can't come to a table and reconcile their differences, and bring this problem that we have to a solution yourselves. Rather than requiring the intervention of a third party, rather than requiring the intervention of this committee or this government, you cannot sit down together.
I've talked to both of you. You both seem like reasonable people. I cannot believe, in my mind, as these folks have said, that Canadian Airlines and Air Canada cannot sit down, reconcile their differences, and operate competitively. All competitors do not have to be enemies. You cannot operate competitively. So I'd like you to end my time on that basis, please, if your answer could clarify the opening statement, the other remedies, and why we can't get along.
Mr. Kevin Benson: Mr. Chairman, when we looked at options for expediting this process, we felt that a section 47 was a potential and we felt it was certainly an appropriate way of dealing with it within the timeframes. When we approached Transport and pled our case, and we pled it regularly because we didn't always get a welcome reception, Transport made it very clear to us that they would go away and examine every option. They would look at Canadian, they would look at the status quo, they would look at the industry, and they would make the decision as to what was appropriate.
I don't know exactly what they looked at. I don't know the options they pursued, but they certainly indicated they were going to come back to a fairly extensive study into it. So the section 47 was one of a number they looked at. It clearly was our choice, as I said, in terms of speed.
In terms of sitting down with Air Canada, I think I'm a very reasonable person, Mr. Chairman, so the problem clearly lies with Mr. Milton.
I agree with your statement totally; unfortunately, history has proven otherwise.
Mr. Joe Comuzzi: Well, we're here to change history.
Mr. Kevin Benson: Or make it.
Mr. Joe Comuzzi: We'd prefer not to make it. I'll be very frank with you, Mr. Benson. We prefer not to make it.
Mr. Kevin Benson: We informed him. If I could go back and perhaps link the two questions together, if I may, I felt the same as you did, which is why we approached Air Canada. We initiated the discussion in very early February and were active members of that discussion right through until, I believe, April 14, when we learned that the price of the merger was somebody—that is, American—having to sign a cheque of some $1.7 billion. American clearly was unwilling to do that, and that ended the discussion.
The minister was aware of the fact that discussions were underway. Certainly his department was to be kept informed of how they went, and we informed him when the discussions terminated.
We then went off and spent the better part of the month of May trying to share a vision and sell a dream. We believed if Air Canada agreed with each aspect of the merger, as they seem to have, other than the effect on their balance sheet, if we could find someone who would endorse the balance sheet, that ought to remove that concern from them and perhaps they would even embrace the solution.
We didn't really go back to the minister, other than to tell the department that we were out looking, until mid to late June, at which point in time Onex was clearly more than interested. They were now spending money on consultants—always a good sign—expensive consultants, to understand the opportunities. So we felt they were seriously interested, and therefore we were anxious to understand whether we could move it in an expedited process.
If I could just say in closing, to answer this question, debate by Onex for a year with the Competition Bureau or anybody else would do us absolutely no good, and we knew that.
The Chair: Thank you, Mr. Comuzzi.
Mr. Guimond, please.
Mr. Michel Guimond: Mr. Benson, just in case you don't know, I'm a lawyer and I learned that when you put questions to witnesses, you must always know the answer before asking the question. Mr. Comuzzi is an outstanding lawyer from Thunder Bay and you can see that he often practices this technique. I know the answer to the question I'm going to be asking you. What is the percentage of francophones at Canadian, overall or job category by category?
Mr. Kevin Benson: I have no idea of the percentage of francophones, anglophones, or any others. What I know is that I have 16,000 employees and I count on every one of them.
Mr. Michel Guimond: Canadian doesn't have a reputation for equal hiring of francophones, especially for the pilots.
Second, I put a question to the Minister of Transport in the House concerning international route allocation. Amongst other things, I asked him if a second carrier couldn't be given a flight to Hong Kong. The volume of traffic more than justifies the designation of a second carrier. The Minister answered in the House that it might appear unfair, but that we had to give a chance to Canadian because it's having financial difficulties.
So, to some extent, Air Canada is being penalized for its good financial management.
Mr. Benson, do you find that Canada's present international route allocation is fair and equitable?
Mr. Kevin Benson: To answer that question I might go back to last year when Taiwan was awarded to Air Canada in what we considered to be very marginal numbers and Canadian did not receive anything in return. I certainly don't think we received any preferences.
But your question raises a bigger issue: Does Canada and do Canadians benefit from the current system as opposed to a system that would see one carrier flying everywhere? I believe they do not. The country was initially divided up, the world was divided up, giving Air Canada certain routes and giving the predecessors of Canadian certain routes. Obviously as those markets have grown we've each wanted to go into each other's markets. Canadian has been hamstrung. Some of the markets we wanted to go into, the key markets of Heathrow, of La Guardia, of O'Hare, are now slot-constrained and we can't get in. This is why if you look at flights, for instance, from eastern Canada to La Guardia daily, we have half a dozen, four or five actually; Air Canada has some 34 or 35, slots they got historically.
So the system doesn't always work fairly on the current basis, and I believe all Canadians would benefit by putting the route structures together and creating a single airline. Just look at the list of destinations that Canadian flies to that Air Canada does not and vice versa. Suddenly all those destinations become available to every Canadian.
Mr. Michel Guimond: This is my last question, Mr. Chairman.
Mr. Benson, I have to tell you that I'm going to be missing the end of your evidence because I have to go to make a speech in the House, because today is the Bloc Québécois' opposition day and I have tabled a motion that will be debated all day. I'm pointing this out because I don't want someone else to say what I said to my Liberal colleagues earlier.
On page 8 of the English version of your document, it says:
The third option—and I would suggest the option that makes the
most sense—is to combine resources with Air Canada to create a
single, national, full-service airline.
What would the name of that company be, where would its head office be and what reservation system would this new company use?
Mr. Kevin Benson: As I said earlier, my own role in the new airline is somewhat uncertain, if it's any role at all. However, I understand from Mr. Schwartz and from Onex and AirCo that the new company will be called Air Canada and that the head office will be in Montreal.
In terms of the reservation system, I think that's very much going to be the choice of the new management team, what system they want. I would point out that 50 airlines around the world use the SABRE system today, and that Air Canada themselves were in negotiation with SABRE earlier in the year to utilize the same system. There are also some revenue enhancement systems that SABRE will shortly be offering, and I think every airline in the world is going to want those.
Mr. Michel Guimond: Thank you, Mr. Chairman.
The Chair: Thanks, Mr. Guimond.
Mr. Calder, please.
Mr. Murray Calder (Dufferin—Peel—Wellington—Grey, Lib.): Thank you very much, Mr. Chairman. I apologize; I was called away to another committee.
Yesterday I asked the question of Mr. Milton on what this new airline is going to be. I dealt with the issue of what is commonly referred to all the time as “the huge debt Canadian carries”, when in fact you carry $930 million on your books, and Air Canada, as it stands right now, carries about $3.2 billion. So for the new merged airline, right off the bat, Air Canada brings to the table about 70% of the debt of whatever this new airline is going to be.
The answer I got from Mr. Milton yesterday was the fact that you're a smaller airline and you have financial problems, and the $930 million is really sort of academic out of the whole thing. I'd like your comments on that right off the bat.
If we head in the direction of a merged airline—I'm kind of doing some flow charting here—two very important things that would come out of that right off the bat would be the service to the communities, as to how that's going to exist in the future, and then obviously the treatment of the employees, because the question I raised yesterday to Mr. Milton is that there are 16,000 people who work in Canadian, of which 4,000 basically work out of the Toronto area. Under his proposal it looked like about 2,500 people were going to go, and I wanted to know how they were going to go.
It was my understanding that under the original Onex proposal—and there could be another counter-proposal coming out today to fit the deadline for the November 8 meeting—it was 5,000 people. I have a concern because this is a decision that this committee has to make, to make sure that those employees are treated fairly.
I'd like you to comment on both of those, and I have some other questions.
Mr. Kevin Benson: As to debt, this is one on which Mr. Milton and I perhaps agree, at least in form. I think it is not the level of debt that is key in either company but the ability to service that debt. So the total amounts are perhaps not the whole picture; you have to look at the ability to service, and I think Air Canada clearly has a greater ability to service their debt today than we do.
In terms of employees, this is an issue very close to my heart and I believe very close to Mr. Schwartz's heart as well. If I can for a moment, I would just say that there are a number of challenges in moving where we're at. If I can make the assumption that this committee will agree with what I recommended earlier, and that the government will too—and I realize that is a big assumption—and we then can come to a combined airline, one of the major challenges we have is to take these 40,000 people and weld them into a team in the service industry. That will be a significant challenge for any executive officer. I believe that can only be done if every employee in the combined company has a sense of being treated fairly, has a sense that they're not going to be arbitrarily laid off or arbitrarily demoted, and has a sense that the concern and the respect for what they've put into their respective predecessor airline plays a part in the decision going forward.
Mr. Schwartz, I think, has made it clear on a couple of counts. Number one, as he has made clear to us in our discussions, any jobs that initially would be lost but would be replaced within two years ought not to be lost at all. You simply carry the people.
Secondly, I believe he's prepared—and you would have to ask this of him—to undertake that there will be no involuntary layoffs for at least a two-year period. I believe sincerely that attrition will take care of most of the 5,000 jobs that he and we have indicated we support, in terms of layoffs. It is a major reason why we at Canadian are emotionally very strongly behind the Onex bid.
Mr. Murray Calder: One of the things within the Air Canada counter-proposal was the idea of starting a regional discount carrier in Ontario, operating out of the Mount Hope airport. Now, one thing I see that is probably going to happen as you merge these two airlines is that there are obviously going to be surplus aircraft. The surplus aircraft would logically, in my eyes, go to this regional carrier.
But say, for instance, that the scenario happens where you have some surplus DC-9s, DC-10s, and B-737s, but you don't sell them here in Canada; you sell them outside of the country. Here we have some very stringent laws on safety and everything. It's easy for the aircraft to exit the country, but it's going to be darned hard for it to come back in again, because it's going to have to go through all these controls and specifications we have for safety. That, as I look at it, would probably negate the start-up of any other competition for a discount regional carrier along that line. What is your comment on that?
Mr. Kevin Benson: Mr. Chairman, it's a broad question. My comment, though, would be that one of the challenges you have when you acquire a used aircraft from anybody is that it is likely that both its cockpit and its galley specifications are different from those of your own fleet.
For instance, when we acquire Boeing 767 used aircraft and reconfigure them—we've acquired two of them in the past year—the cost is between $3 million and $5 million U.S. to fully configure those aircraft into the same configuration as the rest of the fleet, which is something that must be done unless you're going to fly the aircraft as a rogue aircraft.
So, first of all, in moving the aircraft from Canada to an outside party, all the return conditions must be met. That's an expensive process right there. Secondly, the buyer would then have to configure that airplane into his own cockpit specification and likely his own galley specification too. It's no good having a plane arrive somewhere when it can't take on food because the galleys don't interact. Safety reasons dictate that the cockpit must have them.
Therefore, the sale of a standard configured fleet of, say, B-737s or DC-9s to a start-up airline would be a financially attractive proposition in that the start-up airline could adopt the cockpit set-up of that particular fleet as their fleet set-up. It wouldn't have to go through those expensive changes. You also would not have to export or re-import the plane. So the likelihood is that there is a strong financial advantage. Bear in mind that a B-737 is only worth around $5 million to $6 million U.S. and, I suspect, a DC-9 less than that.
Mr. Murray Calder: I have a last quick question.
The Chair: No, I'm sorry, Mr. Calder. You're over your time.
Ms. Desjarlais, please.
Ms. Bev Desjarlais: What is your plan should the results of whatever takes place, whether it be a shareholders' meeting or whatever else happens, be that the 10% rule stay in place and that shareholders are not willing to commit to either proposal?
Mr. Kevin Benson: I don't have an answer for you. I guess I've never embarked on a course of action assuming that we won't get there. We may not get there, in which case we'll have to go away and examine what alternatives, if any, there are. My perception today is that there would be few.
Ms. Bev Desjarlais: You would have me believe that as a business, as an airline company, you don't have another strategy in place should things not go your way?
Mr. Kevin Benson: No, we do not. We have exhausted every source that we possibly can in terms of finding cash, of finding long-term investment. We have not been able to attract it. As you know, we have support from American Airlines in our next 12-month cashflow. It is my understanding that we only have that support because there is a potential for a plan in the works. Should that plan disappear, that support would likely disappear too.
Ms. Bev Desjarlais: So if it doesn't go through, you have no funding to continue; you automatically are gone.
Mr. Kevin Benson: No, nothing is automatic, but the chances of the airline surviving are very slim.
Ms. Bev Desjarlais: That's it? You don't have a timeframe in place?
Mr. Kevin Benson: As I think we indicated, we required support from American to manage our cash resources through the end of the first quarter. However, as I also indicated to you a little earlier, in determining our ability to meet our obligations going forward, we assume a normal booking pattern. If that booking pattern goes away, the $80 million or $90 million that we have on our balance sheet lasts about 10 to 12 days, at most—and I think that's the truth for most airlines in the world. Air Canada's annual expenditures, I imagine, would run in the area of $5 billion, and they certainly don't have $5 billion on their balance sheet today. So their ability to meet their obligations going forward also assumes a certain booking pattern.
The Chair: Thank you.
Mr. Dromisky, please.
Mr. Stan Dromisky: Thank you very much, Mr. Chairman.
Mr. Benson, in all fairness, I have to ask you the same kinds of questions that I asked your competitor yesterday in order to get your perception on how you're going to handle this very gigantic problem.
The problem is the debt load, which has already been introduced at the discussion this morning. We know that your company has a very large debt, but we also know that this process—I guess this is the 77th day today, isn't it?—has cost your company a great deal. It will probably continue to cost you for some time, until this is all settled, but it has also cost the other company. Plus, you have a 10-year penalty to deal with, which Air Canada has in their contract with their alliance partners. Plus, if possible—I don't know whether you're going to be taking this route—if workers are going to be bought out, there are funds that have to be considered.
I could go on regarding the accumulation of debts you would have to face if you became the company to provide the service to Canadians. I would be really interested, and so would the listening public, in hearing how you're going to handle that debt. Where does the consumer come into the picture? Everybody who is listening has one chief concern. They're not interested in the high finance of both companies or in the politics involved. What they're chiefly interested in is how much money they have to take out of their wallet to pay for a fare with this new company.
We know from history in this country and in other parts of the world that when mega-giants get together, amalgamate, and jump into bed together, there's a huge cost involved, and that cost is absorbed by the people who are receiving the services and the products of that conglomerate.
So, Mr. Benson, how are you going to handle it?
Mr. Kevin Benson: Mr. Chairman, I think the question is a perfect one, and I'm very pleased to be asked. It's perfect because it underscores exactly what it is we've been advocating.
Your last statement, I think, is the pertinent one in particular, that is, the consumer has to absorb the cost. What we have is a highly inefficient system. All you have to do is have a travel agent scan yesterday's flights and look at the average load factor on board flights in the most heavily travelled area in all of Canada, this eastern triangle, Ottawa-Toronto-Montreal. I'll undertake to you that you will not find that the overall load factors exceeded 60% for either airline yesterday. In other words, 40% of every airplane...every 200-seat airplane that left had 80 empty seats and every 100-seat airplane that left had 40 empty seats, and that was after two recent seat sales announced and led by Air Canada, two attempts to fill seats that they knew and we knew would be empty going forward.
That is a gross inefficiency that the Canadian consumer and public is paying for. I'm saying to you that if you have to be in Ottawa or Montreal at 8 a.m. tomorrow, I'll take you there, but you're going to pay me $800. What I ought to be saying to you is, yes, there's a flight at 8 a.m., only one, and I don't need $800. I just need to fill up 80% of the seats and I can charge you $700 or $600.
That's the opportunity. The opportunity is to take away the empty seats. If all we do is save the fuel, save the wear and tear on the airplane, save the landing and navigation fees.... Every time an airplane lands, it pays a landing fee based on its gross maximum all-up weight. Even if there's one person on board, the fee is based as if that plane is chockablock with fuel, cargo, and people. Take those costs out and you really have a huge savings that can be put towards these retirement packages, that can be put towards debt retirement. Our analysis is that without raising another cent of debts, the new airline can pay off all of its debt within five years. Every cent of existing debt can be gone within five years.
Mr. Stan Dromisky: Thank you very much.
The Chair: Thanks, Mr. Dromisky.
Mr. Casey, please.
Mr. Bill Casey: That's an incredible statement, but I have to ask what a rogue aircraft is.
Mr. Kevin Benson: A rogue aircraft is an aircraft that is configured differently from others in a fleet. A crew must therefore be trained on the differences and can only fly that one airplane.
Mr. Bill Casey: It's that specific?
Mr. Kevin Benson: Mr. Chairman, it's obvious to pilots—and there are many sitting behind me—that if they reach for a switch in an emergency, it must be there. They can't be hunting around the cockpit looking for the “flame out” switch.
Mr. Bill Casey: Good point.
You mentioned earlier that section 47 appeared to be an attractive feature or an attractive strategy to take in trying to find a solution. What features of 47 were attractive? Was it the fact that you could avoid the review process delay time, or was it the fact that you could negotiate? I understand you're negotiating anyway. What was it?
Mr. Kevin Benson: It was all speed, Mr. Chairman. It was all the ability to get things done quickly. The mere fact that 47 is a 90-day process orients everyone into getting things done in a 90-day process, and that was the attraction there. I think it has become more and more apparent why, even back in April and May, we felt time was our enemy.
Mr. Bill Casey: The purpose or the reason or the clause that allows the ministers to apply section 47 is that there has to be an extraordinary disruption in the national transportation service, or one must be imminent. Did you feel that was the situation?
Mr. Kevin Benson: I did very much, Mr. Chairman. Again, the industry we're in is a complex one. It's not like ordering a cup of tea, when you can decide on how you'd like it and the likelihood is that you'll have it in five or ten minutes. It's a huge, complicated process.
Our fear was that if we got to the point at which, even in April, May or June next year, we were in fact starting to see cash challenges for Canadian, and if we got to that point without a solution, it would become public knowledge very quickly. About a week after it became public knowledge, we'd have a financial disaster on our hands, and the Canadian consumer would then feel it a week after that. Therefore, the need to act opposite this industry was one of moving in good time, moving before it was apparent to everybody.
I have to tell you that Transport never ever indicated to us that they bought the argument. They indicated to us that they understood the problem, but they never gave us any sense of comfort that 47 was the right way to go. But we clearly indicated that there is a disaster coming, and that it will happen if you don't act now.
Mr. Bill Casey: Considering all the controversy, it's quite a vote of confidence in Canadian Airlines that you're still maintaining your ridership.
Mr. Kevin Benson: I think it's a combination of three factors. If I may, Mr. Chairman, I think one is strong support from an incredible customer base. The second is the level of service that some of you here have reflected in the commitment to the customer and is reflected in the level of service. The third is the hope that this process and this committee will find an equitable solution to the challenge.
Mr. Bill Casey: I have one last question, because I was just thinking about this. Including the ad hoc committee that we had in September in this room, yours is the 27th presentation on this issue in terms of trying to help me understand it. Of those presentations, 25 have brought up the concern about competition. Only you and Air Canada have not brought up the concern about competition. Can you address that? For most people, I think that is their protection: the discipline in the system that will protect consumers. Both of the proposals we have on the table now have a lack of competition.
Mr. Kevin Benson: Mr. Chairman, clearly the reason the public is focused on this issue is that the travelling public has been the net beneficiary of some of the vicious price wars between the two national airlines over the past years. As I said earlier today, however, those price wars have brought us a situation in which the status quo is just no longer an alternative. So I think the question I will try to answer, then, is what competition there is after having brought these two airlines together.
We've already heard stories about some of the discount carriers, charter carriers, adding to their fleets in anticipation of this. I believe we will see those carriers grow significantly. I think we'll see WestJet immediately start adding aircraft and continue adding new city pairs. I think we'll see the same with the other two or three. There are four more airlines flying around Canada, and I think we'll see all of them adding to their fleets. And there's no doubt that while the new airline, the new Air Canada, will continue to offer some discount seats and some sale seats, they will be far fewer than before. But those seats will be taken up by the charter carriers, who will provide some competition.
The final point I would like to make is one that I referenced earlier. There are at least five major U.S. hubs within an hour's flying time of our major cities. Any one of those hubs has the ability to add a set of two or three a day into the major cities, and to compete head on with what they consider to be a well-priced market. I would see that as a real governing control mechanism for the Canadian carrier. If flying from Toronto to Vancouver through Chicago is half the price, there are a lot of people who will do it.
The Chair: Thank you, Mr. Casey.
Mr. Comuzzi, please.
Mr. Joe Comuzzi: Thank you, Mr. Chairman.
Mr. Benson, I was interested in your remarks about scanning the screens yesterday and finding that you're operating at about 55% or 60%. That's always been a concern of mine.
I come from a community where you have Canadian and you have Air Canada, and you folks leave at 7.20 a.m. and Air Canada leaves at 7.30 a.m. They go out with a flight that's half-loaded and you go out with a flight that's half-loaded. That's been going on for four or five years. It's not that it hasn't been commented on before and it's not that it hasn't been noticed.
Two years ago, the Prime Minister himself said that the airlines have to come together. They cannot keep competing with each other that way. It's inefficient, and it's not good for the consumer in Canada. Jeepers, this has been going on and now we find ourselves at the crunch. We're at the wall, and finally everybody is realizing that maybe something has to be done.
I go back to my original statement. Yesterday, Mr. Benson, we heard some evidence that you and the person who was here from Air Canada get along very well. When the initial discussions started in January, Canadian and Air Canada were getting along very well. When they hit the block—this is the evidence, and I'm not putting any credibility in it—when they hit the wall, that was when Air Canada had to deal with AMR.
Notwithstanding that lock-up stuff that you have signed with Onex—I think you have freedom to deal with it—it just seems to me that it's evident that you have to give it another crack with Air Canada to see if you can't come up with something. I think a deal between the airlines themselves, if they can make one of their own, would be acceptable to the people of Canada. I'm asking if there's anything this committee can do to facilitate such an arrangement and such a meeting.
I don't know if that's in our jurisdiction, Mr. Chairman, but it seems to me that it's an obvious solution.
Mr. Kevin Benson: Mr. Chairman, if I may, I would like to just comment on one portion of the question.
Mr. Joe Comuzzi: I don't know if there was a question there or not, Mr. Benson. I think it was more of a plea.
Mr. Kevin Benson: There's one point that did leave an unfair impression, I think. The impression that was left is that the two Canadian carriers got on just fine until American walked in, and that we then started scrapping or they started scrapping or something. In fact, that was not the case. American was at the table because they had to be at the table fairly early on in our discussions with Air Canada. In fact, they were at the very first meeting. Don Carty joined me at the very first meeting with Lamar Durrett and Mr. Fraser.
Early on, American evidenced a willingness to forgive the termination payments and to take considerably less than fair value, fair market value, or even face value, for their preferred shares. They've certainly put a lot forward in an attempt to arrive at an agreement. However, in the final context, I think Air Canada's expectations were significantly different from theirs, and I think I would just like to leave the committee with the strong sense that there were two parties at the table who could not agree on what was a fair payment. It's not that any one was to blame.
In terms of the two parties getting together, I can only say we've tried that. There are some fundamental differences, and I guess I would like to suggest that the time is very close when the shareholders might get a chance to say what they think, as opposed to management saying what it thinks. Perhaps it would be appropriate to hear what the shareholders have to say, and then we can see if we can get back at the table again.
The Chair: Thanks, Mr. Comuzzi.
Just as a supplement to Mr. Comuzzi's question, Mr. Benson, aren't we going to be at what's been suggested, after November 8, if the proposal is turned down? Aren't we going to have to watch Air Canada and Canadian sit down at the table and rationalize something through, if the shareholders are saying no to Onex and to the Air Canada proposal?
Mr. Kevin Benson: Mr. Chair, I don't know if I can answer that question. If the Air Canada shareholders were to say no to Onex and no to us, then the only likelihood of any deal would be if the two management teams sat down and tried to come up with something they felt they could then sell to the shareholders. I would certainly be willing to undergo that process.
I have to tell you now, though, that I would be extremely skeptical of its outcome. With far less pressure on Canadian, we've conducted that negotiation from the beginning of February until the middle of April. As I said earlier, and I say it with no rancour at all, the objective is the same. Air Canada feels it can get there on a different path, and perhaps seeing Canadian disappear would be a far easier path to go down. I think that's the path they are currently committed to.
The Chair: Thanks, Mr. Benson.
Ms. Val Meredith: Thank you, Mr. Chair.
I would like to ask you about competition. The competition commissioner met with us yesterday, and he outlined two things he had recommended. One was a Canada-only airline, which could be 100% foreign owned but be able to fly only within Canada. The second was raising the foreign ownership requirement to 49%, which would allow more foreign equity to come and support our airlines, which are very capital intensified. Do you have any comments on the recommendations of the competition commissioner as to ways we could provide competition in a new airline scenario?
Mr. Kevin Benson: Obviously, I would like to be able to study that report in a little more detail, Mr. Chairman. My initial reaction is that those two objectives could be opposed to each other. I believe the only thing that will attract foreign investment into our industry is the industry's ability to yield a return at least comparable with other investment opportunities. The U.S. is clearly the largest market as a source of that investment. As we have approached people interested in the industry, they've constantly compared the returns available in the two countries and asked why we would take a currency risk unless the yield return is significantly enhanced, so that the risk is covered.
If you look at our performance—we released our results yesterday for the third quarter—our yield improvements on the international and transborder fronts are both significant, and I think they both indicate good progress. The area where we have slipped is the domestic front. The reason we've slipped—it's the reason I've been expounding here—is excess seats and high discounting. Creating another domestic carrier that flies only domestically, in addition to what is already there, would seem to aggravate that problem and would seem to lower the returns available to the international airline. If the international airline were then not to fly domestically at all, you would, in any event, require a very close link between the two, because if I'm going from Hamilton to London and I'm coming through Toronto, I want a connection that's effective. I don't want to stand around for two, three, or four hours because the two airlines don't talk to each other. And once you've interlined the network so that it is efficient, why would we carry two overheads? All we're doing is taking this fleet of 300 airplanes, splitting it in two and trying to compete with these 800 fleets south of the border. So, again, I would feel we're losing some of the efficiencies.
My answer would be that I would find it difficult to see how the creation of a domestic-only airline would enhance the efficiencies within Canada and therefore give us the ability to attract foreign capital.
Ms. Val Meredith: Okay, thank you. I have to go to the House to continue a debate there, but before I go, I'd like to publicly state to you, the president and CEO of Canadian, that I, too, have enjoyed the travel I have had on the airline, and I hope its future will be preserved in whatever merger occurs.
Mr. Kevin Benson: Thank you very much.
The Chair: Thank you, Val.
Mr. Benson, isn't the Competition Bureau in somewhat of a luxury position? When they look at competition, they look purely at competition, not the complicating factors of regional service, ownership, employee recognition, or prices. Well, to a degree they will look at prices, because it's part of the competition question. But they're in that luxury position where they don't have to be concerned about these other matters that this committee of course is very focused on.
If you were dealing purely with two businesses that had nothing to do with the importance the airline industry definitely has for our country, then the answer would be very simple. But referring to Ms. Meredith's question, if we are successful in putting together one airline at the end of the day, wouldn't it be logical to assume too then that, as you have indicated, the money will be there for the success of this airline, without having to go to 49% and borrow money from abroad or even next door?
Mr. Kevin Benson: I certainly believe that, Mr. Chairman. The models we worked our way through with Onex would indicate that as well. The capability of raising and attracting capital within Canada will be significant once you can achieve the returns we believe the new airline can.
The Chair: Thank you, sir.
Mr. Calder, please.
Mr. Murray Calder: Thank you very much, Mr. Chairman.
I'm going to pick up where Mr. Comuzzi left off, because this is an interesting series of questions that really needs to be answered.
You made the statement that when you were negotiating, Canadian and Air Canada, there wasn't really that much of a problem. It was when AMR came into the situation. No?
Mr. Kevin Benson: I did not make that statement. It was suggested that the two of us got along just fine until American got in, and I tried to say that's the wrong statement, and that the three parties were at the table from the beginning. You may recall I mentioned that Mr. Don Carty, the CEO of American, was at the very first meeting with Air Canada.
From the beginning we recognized that the payments and the penalties due to American were too great to be able to be paid in full, and therefore American would have to be part of the solution and be willing to give up something. They indicated at the very first meeting that they were prepared to give up substantial amounts.
Mr. Murray Calder: Okay then.
Even working with that then, let's go to the overview of the whole thing. You have the competition and the rivalry between American Airlines and United Airlines. You have United in Star Alliance and you have American in Oneworld. You have Air Canada in Star Alliance and you have Canadian in Oneworld.
What if either one of these deals is not accepted by the shareholder and we go to whatever the third option is, and so unfortunately you have to go along with the status quo for a while? You've already said to us time is your enemy. Do you think American Airlines would let you go down, because right off the bat they'd lose a Canadian component out of Oneworld and the Canadian component would still stay in Star Alliance, and Star Alliance would surge ahead?
Mr. Kevin Benson: Given their druthers, American would clearly like to see us stay in Oneworld and would like to support us so that we could stay in Oneworld. The issue though is that they have a far larger fleet of their own and a far larger employee group of their own.
If you look at operating costs across different airlines, you will see our operating costs are among the lowest in the industry. One of the fears any employee group has in an airline is that flying they are doing will go to a cheaper airline, an airline that can fly at a cheaper cost per mile.
American employees are no different. Over a fairly minor dispute at the time of the acquisition of Reno, American suffered a sick-out on the part of their pilots. I mentioned earlier that it cost them $90 million U.S. in about 10 days. So much as American would like to facilitate the survival of Canadian, I don't believe they can without risking among their own employee groups a cost that is just too large to even be contemplated.
I think they will therefore, once it is clear there isn't a solution, very reluctantly move away. Air Canada is perhaps aware of this as well, and it could be part of their strategy.
Mr. Murray Calder: With this whole situation, then, if one of the two proposals are accepted by the shareholders, at the end of the day either Star Alliance or Oneworld is going to win out of this. There's not going to be any balance here. Because what's going to happen is you're going to have the new Air Canada, and the new Air Canada is going to be in either Star Alliance or Oneworld.
Would you agree with that?
Mr. Kevin Benson: I would start off by saying that, first, all Canadians will win. I think that's the first objective here. Then we can look as to who wins outside of the country.
I believe the agreements that AirCo has signed say in fact that the new Air Canada can co-chair with anybody they like outside of the U.S. The only restriction, really, is on the relationship with American. American, obviously, is putting up money, and they want to feed. They want to feed and they want to give us the feed.
Apart from that, then, they can co-chair with anyone, so they're not forced to be in any one alliance. They can in fact take on other parties. They can deal, they can co-chair, etc.
I rarely say this, and I don't mean to wrap myself in the flag when I say this, but we have to start looking at what benefits Canadians. I don't think you were here when I made the comment that today, if Air Canada has a customer going to a place we fly to and they don't, such as Beijing, that customer leaves on United Airlines. That revenue ought to be staying in Canada.
If we have a customer going to Germany, well, we might carry him to London and then our partner carries him from London on. Air Canada flies directly to Germany. We should start looking at this as Canadians.
Mr. Murray Calder: Nobody wants to see this more Canadian than I do, but I'll tell you, I'm not, as a committee member, going to go in there with blinders on.
Mr. Kevin Benson: Yes, I know.
Mr. Murray Calder: I know there's a bigger picture, and I know there are extenuating forces exerting themselves from that bigger picture.
With regard to the bigger picture, if you take a look at Air Canada, for instance, the money they're going to get out of CIBC, Lufthansa, and United, they've already signed contracts to make sure they're going to stay in Star Alliance or else there's a penalty.
So obviously the larger force here is exerting itself at the same time. That's why I'm asking you these questions.
The Chair: Thanks, Mr. Calder.
Mr. Asselin, please.
Mr. Gérard Asselin (Charlevoix, BQ): Mr. Benson, you have made the Minister and the Department of Transport as well as the committee aware of how important it is to react very rapidly. The government must react very swiftly because of Canadian's financial difficulties. If the government were not to react swiftly enough, Canadian might go bankrupt.
Mr. Benson, what is the work atmosphere like at Canadian, when it's known that if the government doesn't step in quickly, the business might go bankrupt? If Onex takes the company over, there might be anywhere from 5,000 to 10,000 jobs lost. If Air Canada merges with Canadian, 2,000 to 2,500 jobs might be lost. Basically, at the end of the day, jobs will be lost. You told us before that it wasn't normal when a red and white plane with the name Air Alliance or Air Canada—regionally, it's Air Alliance—painted on it shows up at 8:55 and another one with Canadian on it shows up at 10 past 9 and that this wouldn't happen anymore in a merged airline. There would only be one airplane. That means fewer pilots. That means fewer flight attendants, technicians and data processors. In short, there will be administrative reorganization and job losses at the end of the day.
What is the human relations situation in your company? Seeing that Canadian is having financial problems, might not one think—and I wouldn't want to alarm anyone, especially not your passengers—that Canadian might be delaying the maintenance on some of its aircraft?
Mr. Kevin Benson: To the last question, Mr. Chairman, absolutely not. Let me try to comment on a couple of those things.
Number one, I think we've already heard from committee members around the table, and I would say again I think the attitude, the service levels, and the atmosphere on board our airplanes reflects only one thing, and that is an incredible level of commitment to the company and dedication to the customer.
I don't believe—and I think we heard Mr. Casey say this a little earlier—it is evident to any of our customers that our crews are even worried about or informed of the issues going ahead. In fact, they are both informed and worried, but it does not show.
In terms of job loss, what Onex said is, when we look at this merged airline and when we go out two to three years, we see a genuine shrinking in the area of about 5,000 jobs. They've dealt with it honestly and they've dealt with it up front. They have promised that those jobs will be handled by attrition and by voluntary separations.
When we look at the Air Canada offer and the 2,500 jobs, one of the questions we had was how the essential efficiencies can be attained when there are only 2,500 jobs being given up. The answer that worries us most, the one that seems to leap off the page, is that that's only phase one. Phase two is the debate with the creditors and with the preferred shareholders, which will likely ground further aircraft, and when the aircraft are grounded the crews are grounded too.
So our concern has been that the Air Canada offer as stated and as we understand it at this point in time doesn't really give the whole picture to employees.
Creating a separate brand or keeping a separate brand doesn't appear to be a priority to the customer. I think what the customers have said they're looking for is quick, effective, price-efficient service. That's what the combined airline offers.
I think I would close the question, if I can, Mr. Chairman, by saying that the concern the public might have in terms of any issue of safety, in terms of any issue of our operation, should be and is, I believe, absolutely zero. We have an incredible safety record. We are very proud of that safety record, and there is nothing we will ever do—we will never ever put an airplane in the air that is not 100% safe in our opinion. I don't believe one of our crews would take a plane up that wasn't 100% safe. So that's not an issue, it has never been an issue, and it wouldn't be an issue today.
The Chair: Thank you, Mr. Asselin.
Mr. Casey, please.
Mr. Bill Casey: Thank you.
We talked a while ago about American Airlines' influence on the resulting merger if this proposal goes ahead. My understanding at the moment is that American Airlines is going to put hundreds of millions of dollars into the project, but they're also going to put hundreds of millions through Onex. They're going to lend Onex hundreds of millions of dollars and then Onex is going to put a couple of hundred million dollars in it too.
If Onex owes AMR hundreds of millions of dollars, will AMR not be in a position to influence their decisions? For instance, when the SABRE decision comes up, that decision will go before the board of directors. My understanding is that Onex and AMR between them will have nine members of the board, out of thirteen. If the Onex board of directors members are there knowing that their company owes AMR—I think it's $275 million, something like that—won't that be undue pressure and won't that be influence on how the votes go? Even though they don't have the members on the board and the percentage of ownership, they'll have an enormous pressure there.
Mr. Kevin Benson: Mr. Chairman, I don't think so. Clearly, Mr. Schwartz is the right one to ask about this. He's the one who will certainly be sitting at the table if this moves forward.
I would say this, though. My understanding is that the American loans and the American returns depend on the performance of AirCo, which depends on the performance of the new Air Canada. I don't see any board making a decision that decreases in any way their performance and therefore their ability to actually repay those loans. I think if anything they're going to be motivated to get the most effective price, the most efficient terms, and that's reflected in the deal that's being negotiated with SABRE. The new Air Canada has an option to do a SABRE contract on essentially the most favoured nation basis. There isn't a better contract than that.
Mr. Bill Casey: Did you say the new Air Canada has a contract...?
Mr. Kevin Benson: AirCo has negotiated the right for the new Air Canada, if they want to, to take up a contract with SABRE at pricing that is in essence a most favoured nation's price. They have the option to do so. It's perhaps significantly better than what we enjoy.
Mr. Bill Casey: Are there any other agreements that have been signed already in anticipation of this going ahead?
Mr. Kevin Benson: I think they've all been tabled. There are a variety of agreements between American, Onex, and the new company. Clearly Onex's objective in the beginning was to ensure that any negotiations that had to happen for the benefit of AirCo or for the benefit of the new Air Canada happened before they made a commitment to this deal. Obviously they were in the best negotiating position at that point in time.
Mr. Bill Casey: A quick question on divestiture. The competition commissioner said it would be his preference, in the interests of competition and consumers, that the regional airlines be divested from the dominant carrier. There's a major issue on the concerns of the pilots and the crews of the regionals about where they're going to fit into this new operation. Would you just comment on the Competition Bureau commissioner's comment that divestiture would be better? What's your plan?
Mr. Kevin Benson: It's not my plan obviously that's going to be key, Mr. Chair; it's going to be the plan of the senior management team and Gerry Schwartz. I believe certainly the plan as currently envisaged sees the amalgamation of the two regional carriers into a single carrier serving the new airline. It is essential, whether or not the new airline owns the regional carrier, that there is an effective merging of the networks of the two, for exactly the sort of reason I outlined earlier.
If I am travelling from Hamilton to Kelowna, which entails my flying first to Toronto and perhaps then to Vancouver and then to Kelowna, the customer wants me to make sure the networks are intertwined so that the connections are convenient and I don't take two and a half days to get from one spot to the other, which means there has to be some sort of agreement, if you don't own the airline, between the mainline airline and the regional carrier—some agreement to interline the networks, what fee you will get for putting traffic onto me, what share of the overheads I will pick up of your operation, etc. At some point in time all it becomes is another overhead. Therefore the benefits of the synergies are lost. From an operating point of view it's no different.
Mr. Bill Casey: What sort of impact is there on employees of the regionals?
Mr. Kevin Benson: Again, I think exactly the same promises or indications have been made by AirCo and Onex to the regional carriers—in other words, a full merger of the carriers, protection of jobs, layoffs only voluntarily and through attrition. I think it's exactly the same. They've not drawn a line between the method of handling the people.
I would say this, and clearly we are predisposed to the Onex offer: Onex have been very focused on the people issues from day one. It's something I really endorse. This airline will not work effectively going forward unless the people issues are addressed, addressed quickly, and addressed properly. And they're very focused on doing that.
The Chair: Thank you very much, Mr. Casey.
Colleagues, we've had a full two hours. We have to give up this room at 11 o'clock. We want to say thank you to Mr. Kevin Benson and Mr. Stephen Markey for their presentation to us today and for answering all our questions. If there is additional information they would like to provide, please provide it through the clerk so that it's distributed to the rest of the committee.
We stand adjourned until 3.30 p.m.