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STANDING COMMITTEE ON TRANSPORT
LE COMITÉ PERMANENT DES TRANSPORTS
[Recorded by Electronic Apparatus]
Thursday, November 4, 1999
The Chair (Mr. Stan Keyes (Hamilton West, Lib.)): Good morning, colleagues.
Our first order of business this morning is a motion by Mr. Bill Casey. He provided us with the notice of motion 48 hours ago, so will deal with the motion, hopefully quickly and firstly.
Mr. Casey, do you want to make your motion and speak to it?
Mr. Bill Casey (Cumberland—Colchester, PC): I move that the committee subpoena or obtain all of the documents relating to the court case in Quebec about the 10% restriction. We should get documents from both sides—Air Canada and Canadian Airlines. We have some of the Canadian Airlines ones now, and they obviously refer to the 10% restriction in several places, but they also refer to cumbersome regulations of a single airline or a monopoly, if that were to happen. That could certainly affect the regulations with regard to slot spaces, frequent flyer points, access to short lines and main lines, and all those things.
I just think it's important that we have this information from both sides. We have some of it from Canadian Airlines, but we should have it from Air Canada too, because the number one issue we will probably have to make a recommendation on is whether the government should change the 10% rule. That's what this is all about. Air Canada is arguing against the change. Canadian Airlines and Onex are arguing for it. We should have all that information.
The Chair: Mr. Comuzzi.
Mr. Joe Comuzzi (Thunder Bay—Superior North, Lib.): Is this for debate? Thank you.
Mr. Casey, would it be proper to amend your motion so we wouldn't have to go to Onex Corporation, Air Canada, or whatever other parties you mentioned? We would just request, from the Quebec Superior Court, the documents that have been filed with respect to whatever the name of the case is—Air Canada and AirCo—including all subpoenaed documents that pertain to the affidavits, the examinations on the affidavits, and any subpoenaed documents that arise out of those. They all form part of the court record, and I think what you're asking for is a court record.
Mr. Bill Casey: No, I'm not, because the documents that were submitted to the court were edited, and I want the unedited ones on both sides.
The court got the full documentation, but they got permission to edit from the documents anything that didn't specifically deal with the 10% rule. There's all kinds of other information in there about the process they're following and what we're following in Parliament. It actually talks about Parliament. It talks about regulations that should not be allowed if a monopoly is allowed to go ahead. It talks about section 47. There are many other things in the documents that we don't have, and probably the same things are in the Air Canada documents that we don't have at all.
This is all pertaining to exactly what we're talking about. We want the unedited ones, not the ones with the holes in them.
The Chair: Thank you, Mr. Comuzzi and Mr. Casey.
I want us all to keep in mind that we can deal with this very quickly, because the motion as it reads says that the Standing Committee on Transport request from Onex Corporation and associates, like Air Canada, documents tabled, etc. So the motion is for a request. The other side we're requesting these documents from can say “Sure, here they are,” or “No, we're not interested in giving you our documents”.
As this motion stands, we can deal with this immediately. We can make the request, because this does not say subpoena, it does not say “you must”, or anything of that nature; it's just a request. We'll make the request and see what happens at the end of the day.
(Motion agreed to) [See Minutes of Proceedings]
The Chair: We'll make the request.
Colleagues, there's one other quick motion. My clerk tells me I have to move a motion that the chair be authorized, on behalf of the committee, to write to the individuals in question on Mr. Casey's letter, requesting the documents that are asked for by Mr. Casey in his motion. Is that okay, colleagues?
Some hon. members: Agreed.
The Chair: Ms. Parrish.
Ms. Carolyn Parrish (Mississauga Centre, Lib.): I'm just concerned. We're requesting documents from both sides in this conflict. If both sides refuse, we're fine; if both sides say yes, we're fine; if one side refuses and the other gives them, will that change the whole perception of the committee proceedings?
The Chair: That will be up to the parties that will provide us with the information to decide. We're not going to get into that game.
Colleagues, I have one other motion we have to pass. It is that the Standing Committee on Transport approve the proposed budget of $84,600 for the period October 14, 1999, to March 31, 2000, and that the chair be authorized to present the said budget to the liaison committee. It's the money we need to operate as a committee.
An hon. member: So moved.
(Motion agreed to)
The Chair: Thank you, colleagues.
Mr. Bill Casey: Thank you, Mr. Chairman.
The Chair: You're welcome, Mr. Casey. There's never any harm in asking for something.
Mr. Joe Comuzzi: Mr. Chairman, on a point of order on that, I don't want to open the debate again, but do you not think, if we have all parties' support, it may be proper to request the documents from the Quebec court on this?
The Chair: Mr. Comuzzi, if you want to make a motion to that effect, you can file a notice of motion.
Mr. Joe Comuzzi: Mr. Keyes, if you will remember, I started by saying that if we have all parties' support—if you'd pay attention—I'd like to request the documents from the Superior Court of Quebec.
The Chair: Mr. Comuzzi, by the rules, you make your motion first and then we'll ask for all parties' support. Okay?
Mr. Joe Comuzzi: All right.
The Chair: If you want to follow the rules precisely, then I'll follow the rules precisely for you, Mr. Comuzzi. So put your motion. Do you have a motion?
Mr. Joe Comuzzi: The motion has been made.
The Chair: I haven't heard a motion.
Mr. Joe Comuzzi: The motion was made. I think it's written. Do you have it there, Madam Clerk? It's about requesting the court documents on whatever the name of this case is in Quebec dealing with Air Canada and Canadian Airlines.
The Chair: First I have to ask the committee for its unanimous consent to deal with a motion without 48 hours' notice. Is anyone in dissent to Mr. Comuzzi's suggestion? Hearing none, Mr. Comuzzi has a motion.
Ms. Carolyn Parrish: I'll go back to my good old days as a school board chair. We were involved in a very serious case back then on the wearing of kirpans in schools. We went through this process of requesting documents from the courts. It took months and ended up costing our board thousands and thousands of dollars. It's a very expensive process to request them. This was all a matter of public record, but by the time they put the documents together to give to us, it cost $50,000 or $60,000.
So I would suggest Mr. Casey's motion will do the job. I don't think we should go to that next step, because it's too expensive.
The Chair: Mr. Comuzzi, may I make a suggestion? So we don't deal with it at this point, could I ask you to maybe just research a little whether or not our request would entail any cost to this committee, and whether or not this information could be forthcoming in a short period of time, etc.?
Ms. Bev Desjarlais (Churchill, NDP): Point of order, Mr. Chair.
The Chair: Yes, Ms. Desjarlais.
Ms. Bev Desjarlais: I believe we've already had the unanimous consent of the committee to go ahead and request those documents—
The Chair: From the companies. Mr. Comuzzi wants to request them from the court.
Ms. Bev Desjarlais: That's right.
The Chair: We had unanimous consent to consider the motion, but I'm asking Mr. Comuzzi if he would withdraw the motion today in order to do a little research and maybe come back—
Ms. Bev Desjarlais: Why wouldn't we request them, and if there's any kind of a disagreement or problem getting them, then bring the issue back to committee? It's just that we're getting to the end of the week and we're continually delaying this process. I think it would look really poor if for some reason some party out there said “We don't want them to have the records”.
The Chair: Ms. Desjarlais, that's not the point. The point is that Mr. Casey's motion passed and we are requesting the records from the companies. On a separate matter, Mr. Comuzzi would like to get the records filed with the Quebec Superior Court, which are a public record. But we have a budget of $84,000 that you have just passed, and if it's going to cost this committee $50,000 to get those records and we won't be in possession of them for three months, it won't do us much good and it will be expensive.
So I'm asking Mr. Comuzzi to inform the committee on the cost and duration of time it will take to get the records. He could report back to us as early as this afternoon. We have a meeting this afternoon.
Mr. Joe Comuzzi: Let me just answer that query. In one of my previous lives I was a lawyer. In order to get the court documents you go to the court, ask for the document, take it and photocopy it. It costs you five cents a page. I don't know where Ms. Parrish is getting the idea that it costs $50,000 or $60,000. Maybe that's why the Toronto school board is in difficulty. It's a matter of photocopying, and that's all the cost involved. The public record is open for public scrutiny; you just have to pay for the photocopying. If we can get somebody in Montreal who's an ally of ours, we'll send him $15 or $30 to pay for the photocopying. That's all it's going to cost, Mr. Chairman.
The Chair: We have the assurance of Mr. Comuzzi that it will be no more than $30. Anything else will come out of his pocket.
Mr. Joe Comuzzi: I don't know how many pages there are in the document.
The Chair: Oh, I see.
Mr. Joe Comuzzi: But it's just a matter of photocopying, and we have very competent people sitting with you at the front who would take that copy and photocopy it for the committee. I'm sure, since it's from the Quebec Superior Court, it will be in both official languages.
The Chair: We have the motion on the table. You as the committee have decided you want to vote on this now. You're flying a little blind here, and I think it's dangerous because of costs that might be involved and duration of time it may take to get the documents, but the committee is the master of its own destiny.
Yes, Mr. Casey.
Mr. Bill Casey: I was able to get some of the documents at no cost. That was earlier. The court case is proceeding. But I don't see why there would be any cost.
The Chair: Colleagues, I'll leave it to you.
Ms. Parrish, one more intervention.
Ms. Carolyn Parrish: How about a friendly amendment—“cost not to exceed”, and put a figure in?
Mr. Stan Dromisky (Thunder Bay—Atikokan, Lib.): Like $30.
Ms. Carolyn Parrish: No, Mr. Dromisky, I think something a little more reasonable.
Mr. Joe Comuzzi: Let's say somewhere between my $30 and your $50,000. How's that?
The Chair: Well, $49,900 is still too high for me.
Mr. Comuzzi, is this a friendly amendment and acceptable to you: “as long as the costs don't exceed $100”?
Mr. Joe Comuzzi: That's fine.
(Amendment agreed to)
(Motion agreed to)
The Chair: Thank you, colleagues.
Mr. Roy Bailey (Souris—Moose Mountain, Ref.): On a quick point of order, in the original motion just moved by my colleague Mr. Casey, in the written request we are giving, would there be anything wrong with emphasizing the fact that it had the unanimous consent of this group?
The Chair: I didn't count the votes, Mr. Bailey.
Mr. Roy Bailey: I didn't see anybody dissenting on the first vote.
The Chair: No, I'm sorry, we can't revisit a vote that has already taken place. That was probably a request that could have come earlier, and I didn't see all the hands go up either.
Colleagues, we've dealt with this matter long enough and we're cutting into the witnesses' precious time to make their presentation to us this morning.
Going on to the business of the day pursuant to Standing Order 108(2), a study on the future of the airline industry in Canada, this morning we welcome representatives of Star Alliance: Rono Dutta, who is president of United Airlines; Shelley Longmuir, who is joining Mr. Dutta; and Jake Brace.
Mr. Brace, Mr. Dutta, and Ms. Longmuir, welcome to the Standing Committee on Transport. We look forward to your presentation of between 10 and 12 minutes so that our colleagues have time to ask the important questions that will come your way.
Mr. Rono J. Dutta (President, United Airlines; Star Alliance): Good morning, and thank you for inviting us here. It really is a privilege.
I'm here on behalf of Star Alliance to share with you our views of the Onex-Air Canada transaction. At the very outset, it might be helpful for me to outline what I am going to talk about and what I'm not going to talk about. We have submitted a written text, and I request that be taken as a matter of record. I'm going to speak from a few slides.
First of all, I'm not going to talk about the financial transaction per se. Given their very nature, financial transactions are sometimes of short-term focus, and parties are often enticed into a deal without looking at the long-term benefits of the deal. Sometimes these enticements are of the nature of “If you do this, which you don't really want to do, I'll give you a calculator, and if that's not enough I'll give you a TV, and if that's not enough I'll throw in a washing machine”. But for the purpose of this important board, I think it's more important to look at the significant effects after the transaction in terms of the long-term viability and strength of Canadian aviation, for both Air Canada and Canada, after a proposed transaction.
To that effect, I'm going to talk a lot about the alliance. Alliances, I must emphasize, have become a factor that determines the future fortunes of most airlines. You might wonder why that is.
Before going into that, I have been carefully trained to say a few words in French. So if you'll bear with me....
Mr. Chairman, allow me to emphasize why these alliances are so important, what is at stake for all the carriers targeted and, in particular, what is at risk for Canadian consumers.
That was the most difficult part of this morning. I'm glad that's over with.
Going on to the issue of alliances, why have they become such an important factor in aviation? Ten or fifteen years ago most of the traffic was focused on major cities like Toronto to New York, New York to London, and so on. However, the growth these days is in the medium-sized cities. It's the traffic that's going from Calgary and Edmonton to Istanbul, Milan, and Sao Paulo that has the highest growth rate.
Clearly, no single airline can provide a network for all that traffic. Therefore airlines have gotten together to put together networks that can serve their customers. That's why alliances are important, and that's why I'm going to focus on that so much.
Essentially, then, global trends are positioning aviation as the key engine of economic competitiveness. We all know that there's an explosion of world trade today that is driven by all the barriers coming down. Historically, the barriers were information, currencies, and government protection. All those barriers are coming down. As a result, world trade is exploding, and along with that, global traffic. Aviation is clearly at the forefront of all this.
We can think of it as a new highway being built in the air. And just as in the old days, when the highways were first built, town and cities that were next to the highways saw an explosion of economic activity and those that were removed from the highways saw a diminution in economic activity. Therefore it's very important for world competitiveness that nations, cities, and communities have a global airline traffic system. That's why airlines are very important.
So the key question that needs to be raised is how Canada's interests are best served. In talking about this, I'm afraid I'll have to refer to hubs and networks a lot, so it might be helpful for the committee if I spend two minutes explaining why hubs are so important.
Let's talk about a theoretical eight cities that have a traffic flow of 50 from each city to another. So from city A to G, there's a potential traffic of 50 passengers, from A to C another 50 passengers, and so on. Now let's say for airplane equipment, there's a break-even load factor of about 80 passengers. Although this demand exists, it cannot be served, because it's below the economic break-even of the equipment type you have. So you have a potential demand that can't be met. Even if you do meet the demand, you meet it with one scheduled flight a day. Clearly, that's not very convenient for these passengers. As a result, economic activity remains stagnant.
Now, however, let's build a hub structure around the same eight cities. Instead of the 50 passengers flying from point to point, they're all being funnelled into one major hub. All of a sudden, you have 400 passengers going into that hub. Again using that 80 break-even theoretical number, you now can have five flights where before you could have none. Now the same passengers have five options in terms of a morning flight, afternoon flight, evening flight. As a result, you see a huge growth in airline traffic.
That's exactly what has happened worldwide since the introduction of hub-and-spoke systems. A dormant demand that was lying there has now been converted into an economic demand through a hub-and-spoke system. Alliances take this hub concept a step further by building networks connecting hubs to hubs. As you can see, through the Star Alliance Toronto and Frankfurt have been connected, but even more important are the 81 cities feeding into Toronto that now get connection to the 135 cities beyond Frankfurt. All of a sudden, you have the capability of flying on a single airline seamlessly from Calgary to Istanbul, and Edmonton to Milan. That's the power of the network that alliances build by allowing traffic to flow from medium cities to medium cities worldwide.
Let's look, then, at what Star has built. We have focused on all the major economic centres throughout the world, whether it's Tokyo, Singapore, Sydney, Sao Paulo, Chicago, Toronto, London, or Frankfurt. In each of the major economic centres of the world, we have built a hub structure, a network structure, again to flow this global traffic that's exploding throughout the world. As you can see, we have two gaps, China and Africa, but we are working on those. Except for those, we have pretty much built a worldwide network to accommodate this traffic.
It's not just the network that's important, however. Clearly, the product, the safety, and the brand are very important. Again, we are very proud of the brands we have put together, starting with the Maple Leaf and continuing to Singapore Airlines, Thai Airways, to United Airlines, Austrian Airlines, etc. We have put together a very powerful brand, and we are very proud to have the Maple Leaf alongside the rest of us.
This is not just a self-serving acknowledgement of Star as a leader. Outside, public, disinterested parties point to the same thing. In all measures put together, Star is clearly the leading alliance, and that's driven primarily by our network, our geographic market size, etc. This particular study is from Merrill Lynch, but a number of other studies point to the same conclusion, that Star truly is the leader among all alliances.
Let's look at some of the differences. Oneworld's international flows overlap. Star flows, on the other hand, are complementary. What does that mean? Let's take the two largest international markets out of Canada. They happen to be London and Hong Kong. As you can see, if Air Canada were to combine with Oneworld for London, there would be no competition left. Essentially, both British Airways and Air Canada would be part of the same system. The same thing is true with Hong Kong. With Cathay Pacific and Oneworld, Cathay Pacific and Air Canada would have no competition at all from a second alliance.
This is the issue that greatly disturbed the EU when there was a proposed alliance between British and American, because the same sort of overlap existed between the U.S. and the U.K. As a result, both the U.S. government and the EU were very concerned about it. There is no reason why there wouldn't be a similar sort of issue from the EU for sure, and from Canada as well, I would suggest, if there was this sort of an overlapping market concentration.
With Air Canada, on the other hand, Star continues to provide competition against British Airways and Cathay Pacific. At the same time, however, given our feed beyond London, with SAS, with Lufthansa, with Austrian, we would provide a lot of connecting traffic to Air Canada at London in order to compete effectively with British Airways. It is pro-competitive at the same time that we're providing significant support to Air Canada.
I would also like to look at one other issue, and that is the issue of which airline is best suited to support Canadian aviation. You're asking Air Canada and Canadian to compete fiercely with all the major U.S. airlines in transborder traffic, including United, American, Continental and Northwest. That's not easy. What they need is the help of either American or United in competing with every other airline. The question is, which airline is best suited to provide that support to either Canadian or to Air Canada?
American is essentially a southern tier airline. Its hubs are far away, in the sense of Dallas and Miami. It does have pockets of strength in New York and Chicago; however, it's essentially a southern airline. United, on the other hand, has lots of cities close to the Canadian border. Whether it's Seattle or Portland, Spokane or Boise, that's where United's strength is. Air Canada knows that, which is why they have freely and consciously reviewed the situation over and over again and have come back with the same conclusion: United is the best airline to support Air Canada.
Canadian's tragedy, in some sense, is that they've teamed up with the wrong airline. If you look at the market share in the major cities, United is far bigger than American in the cities in the transborder traffic on the west coast. If United were to help Canadian, Canadian would successfully be able to grow in the transborder traffic, which is a very profitable and high-growth market. So the question is how American gets Air Canada to do what Air Canada does not want to do, because Air Canada knows it's not in its own self-interest to do a deal with American. The only way they can do it is through a financial deal, not a business and economic deal that Air Canada knows is not in the interests of the Canadian economy, Canadian consumers, and Canadian employees.
Finally, let's look at some of the founding principles of Star. The principle of equality and collaboration is very important to us. We have a number of small airlines in Star, and many more have joined us. Whether it's Ansett Australia, British Midland, or Austrian, they're very sensitive to the issue of having an equal voice at the table. We have only been able to attract smaller airlines because we provide that.
We're driven by the benefits of the marketplace rather than financial control. Our carriers enter into relationships with us after an in-depth review of the economics and of their own choice. There are no service contracts in Star. There are no hidden transfer payments because of services rendered at non-economic market prices.
Our successes are proof of our own strength. Whether it's ANA, Singapore, or Austrian, they all defected from other alliances because they saw the strength of Star. It really is a win-win for all participants, and that's why we've attracted so many members.
Finally, we're further ahead than Oneworld in integration in terms of code-share and getting anti-trust immunity.
In closing, I would say the American deal is fundamentally flawed. It's flawed because it insists on management insertion by American into their partners. It's flawed because it looks for equity, it looks for board membership. But most of all, it's flawed because it's a carrier with inadequate strength in the northern tier cities. It's trying to entice its partners not through free recruitment, but through financial control.
That completes my opening statement. I'd now be happy to take any questions.
The Chair: Thank you very much for your presentation, Mr. Dutta.
Ms. Meredith, please.
Ms. Val Meredith (South Surrey—White Rock—Langley, Ref.): Thank you, Mr. Chair.
I would appreciate answers that are as short as you can give me, because my time is limited.
I have two questions. First, in the event of the Air Canada deal being successful in terms of the shareholders accepting it, what is the value of the economic benefit to United and Star Alliance?
Mr. Rono Dutta: The Star Alliance overall contributes in excess of $200 million to United. Of that, the contribution of Air Canada is roughly $30 million a year.
Ms. Val Meredith: Okay, thank you.
In the event that the Onex deal is the one that is accepted by the shareholders, what is your financial loss, both from the standpoint of United and that of Star Alliance? And as a follow-up to that, what is the penalty the new Air Canada company would have to pay to compensate for that financial loss?
Mr. Rono Dutta: Again, on an ongoing basis, we lose the $30 million that I mentioned.
Relating to the specific penalties, we are putting some money into Air Canada, and we'd get that back. On the liquidated damages, I'll check with my associates here, but I believe there would be $250 million in liquidated damages.
Ms. Val Meredith: So you would get back the money you were putting into the deal. I take it that would be a book figure, though, because if the deal doesn't go through, you won't really be advancing the money, right?
Mr. Rono Dutta: That's correct, yes.
Ms. Val Meredith: So what you're talking about is a $250 million penalty fee for the cancellation of the new Air Canada's relationship with Star Alliance.
Mr. Rono Dutta: That is correct.
Ms. Val Meredith: And that $250 million would cover roughly eight years' worth of lost benefits to the Star Alliance.
Mr. Rono Dutta: In nominal terms, yes.
Ms. Val Meredith: I think I'll pass the rest of my time.
The Chair: Good questions. Thanks, Val.
Ovid Jackson, please.
Mr. Ovid L. Jackson (Bruce—Grey, Lib.): Thank you very much, Mr. Chairman.
Mr. Dutta, as a regulator, we're looking for what the public interest is, and how to best serve it. We've been listening to everybody, including the small air carriers. There are a number of things they want us to do, and one of them is to regulate the slots. They're also asking for you guys to share the travel points and reward systems with them. What is your company's position with regard to allowing these small people to compete on an even basis by allowing them to share in your time slots and your points?
Mr. Rono Dutta: We have formally told the U.S. government in particular that our position on slots says that we don't want slots set at U.S. airports in particular, like La Guardia International and Chicago. In general, we think slots are anti-competitive and we'd like them to be removed.
Mr. Ovid Jackson: They want code-sharing in order to coordinate and to give the customer the options, and the other thing is they feel they've become terribly disenfranchised and isolated because they can't contribute toward the points. You did mention that you've come to that agreement with British Midland and a number of other ones. So I'm wondering what your policy is with regard to some of the smaller airlines we've been talking to.
Mr. Rono Dutta: We have a number of small carriers in both Star and United exclusively. I'm referring to the regional carriers, such as Atlantic Coast Airlines, SkyWest, etc. So, yes, we have relationships with some small airlines, but we pick and choose the right partners.
Mr. Ovid Jackson: How would you feel if because of the merger, whichever way it goes, we as a regulator put some of these conditions on in order to give our people better pricing and better options?
Mr. Rono Dutta: I think we'd be against it. Again, the issue is that we're looking for connecting traffic and for mutual feed to each other. Giving away United points to someone in Saudi Arabia—to draw an extreme example—which is of no benefit to us and is only a cost, does not make economic sense to us.
Mr. Ovid Jackson: Thank you for being frank.
The Chair: Thank you, Mr. Jackson.
Mr. Guimond, please.
Mr. Michel Guimond (Beauport—Montmorency—Côte-de- Beaupré—Île-d'Orléans, BQ): Mr. Dutta, while preparing for the hearings of this Committee, it seems to me I read that United Airlines is an employee coop. I am trying to understand the status of this player, United Airlines, within the Star Alliance network. Is it true that it is an employee coop and that the company was bought out as the result of the joint efforts of machinists and, especially, pilots? I don't know if you use this approach in the United States and if, in a case like this, you speak of cooperatives.
Mr. Rono Dutta: That's a very important point, and I'm glad you brought it up. Yes, United is an employee-owned corporation. Fifty-one percent or more of the stock of United is owned by its employees, principally the pilots, the mechanics, and management and administrative staff. There are three members on the board that represent employees, one for the pilots, one for the IAM, and one for management and salaried. As a result, I would characterize United as a very employee-friendly company. A lot of our philosophy in terms of employee ownership and relationship rubs off on staff. I would therefore characterize Star in general as a very employee-friendly alliance.
Mr. Michel Guimond: Mr. Dutta, what I have here are statistics from the July 1999 World Airline Report, a special issue of Air Transport World concerning the two alliances, Star Alliance and Oneworld. The two networks are compared on page 71. One of the things to be learned is that Star Alliance is 10.7% larger than Oneworld in terms of revenue and 28.2% larger in terms of passengers. Another data item on FTKs Freight Ton Kilometers, indicates that Star Alliance is 38.4% larger than Oneworld and has a 9.1% larger fleet.
Are there any comparative data on Star Alliance and Oneworld more recent than July 1999? If there are, could you send them to our clerk so she can pass them on to the members of the Committee?
Mr. Rono Dutta: With regard to the issue of more recent data, Star is growing continuously. We recently added ANA, Singapore has committed to join, and British Midland has said they have an intention to join, although they haven't formally joined yet. When you add those numbers, I'm sure it will be larger than the numbers you just read. So, yes, we can give you the latest data.
I think the essential point is that Star is the biggest and growing bigger. That's important for both Canadian and Air Canada, because to the extent Air Canada and Canadian are part of Star, they will attract passengers from Australia, Japan, eastern Europe, etc.—all those that are on the Star system and that will therefore have a natural inclination also to be on Air Canada.
Again, I'm sure the numbers you quoted are correct, but I would suggest that they've grown in the meantime because of the addition of a number of other partners.
Mr. Michel Guimond: The next question I ask you, I will also ask the witnesses who follow you, the representatives of Oneworld. This will give American Airlines representatives an advantage by allowing them to prepare their response. I am notifying them now so that their lobbyists, who are seated in the room, can help them formulate a response.
Some witnesses, largely intellectuals and academics, have told us that these alliances favour development of predatory competition. Such alliances encourage large players, in your case United and in the other American, to acquire the largest passenger volume. This illustrates what I mean when I say that you have a predatory alliance. What do you say to a statement like that? There is danger of air transportation in Canada becoming an immense hub for the Americans, a hub for United in Chicago or for...
What do you say when people accuse you of being predators?
Mr. Rono Dutta: I have several comments on that. First of all, there are four competitive alliances that are being built: Star; Oneworld; Wings, which is led by Northwest and KLM; and Delta and Air France are starting one of their own. So you have four alliances.
The U.S. Department of Justice did a major study on this whole issue of alliances, and it came to the conclusion that they result in growth and lower prices. Does it attract a lot of traffic? Of course it does, but it does so because of a higher level of customer service. Customers want to go from one point to another in a seamless way in a coordinated schedule, and that's what alliances offer them. So, no, they're not predatory. They have actually resulted in a growth in traffic with lower prices and all based on service.
To your final point about whether or not Thai is going to use Canada as a hub, the answer is absolutely and unequivocally no. Again, the reason these networks are important is because they're complementary. There is no way United or Lufthansa can get feed-in points internal to Canada itself, just as Canada cannot go into Germany or the U.S. and get feed-in points internal to the U.S. or Germany. What we are doing, therefore, is putting the hubs together—Toronto and Chicago, Toronto and Frankfurt, Vancouver and Tokyo—so they can seamlessly flow from each other. It's very complementary to each other. It's not predatory at all.
The Chair: Thanks very much, Mr. Guimond.
Mr. Calder, please.
Mr. Murray Calder (Dufferin—Peel—Wellington—Grey, Lib.): Thank you very much, Mr. Chairman.
I have found this presentation to be very interesting. I think this gets down to the old rivalry between American and United Airlines, as we start digging into this a little deeper.
A couple of days ago I gave some information I'd found in Air Transport World, and it was “World Airline Report, July 1999”. It shows that Star is at least 10% ahead in revenue, 9% ahead in operating income, about 28.2% ahead in passengers, about 38.4% ahead in air freight, and the fleet's almost 10% larger too. Where did Merrill Lynch source information to come up with this one?
Mr. Rono Dutta: Again, this information unfortunately is a little dated. It's almost a year old. And as I've said, this is a continuous growth in Star, so it depends on what point of time you take it. This, I believe, is about a year old, and it does not include the ANAs, the Singapores, the Austrians, which are recent additions.
Mr. Murray Calder: Okay. Now, you also said that Star Alliance is willing to put money to help back Air Canada with their bid to do what they're talking about with Canadian. You're awfully nice people and everything, but you are lending them money. What kinds of strings are attached to that money?
Mr. Rono Dutta: I think I'll let Jake answer that question.
Mr. Jake Brace (Senior Vice-President, Finance, Star Alliance): We're lending them money on commercial terms. Air Canada is our partner. They've been our partner for a long time. When this situation with them came up, they came to us and asked for our help.
They've asked us to do three things. We're buying some preferred stock from them—we and Lufthansa. That preferred stock is on very favourable terms to Air Canada; it has below-market restrictions on it. We are doing a sale leaseback with three of their aircraft for them on very, very favourable terms to them. Those have no restrictions at all. And then we are acting as a guarantor of some bank debt facility that they have lined up.
Mr. Murray Calder: Okay.
Mr. Jake Brace: So the restrictions we have in there are typical market restrictions, and are actually more favourable than typical market restrictions to Air Canada.
Mr. Murray Calder: Now I know American has what would be construed as a slightly different way of doing things. Invested capital that they have is always weighed against a process called the weighted average cost of capital. Do you have something like that?
Mr. Jake Brace: Yes, sir. The weighted average cost of capital is a typical financial concept, and we use it in a number of our investments. But in this case, we are putting money into Air Canada at their request on commercial terms, and the return that we get on it is not judged by a weighted average cost of capital.
Mr. Murray Calder: Would you have any way you would be able to jump into the profitable routes and take over some of those routes from Air Canada, to satisfy that weighted average cost of capital?
Mr. Jake Brace: Absolutely not.
Mr. Murray Calder: Okay.
The Vice-Chair (Mr. Joe Comuzzi): You have more time, Mr. Calder, if you want to take it.
Mr. Murray Calder: Oh, thank you.
What pilot association do you deal with?
Mr. Rono Dutta: ALPA.
Mr. Murray Calder: Maybe you can explain to me the Allied Pilots Association. How does that work?
Mr. Rono Dutta: I'll try.
American pilots have a separate union of their own called APA, the Allied Pilots Association. Most of the airlines—Northwest, United, Delta, USAir, for example—belong to the same pilots association called ALPA. So theirs is more of a national union. American is more of a stand-alone separate union.
Mr. Murray Calder: I think that's as far as I want to go right now, Mr. Chair.
The Vice-Chair (Mr. Joe Comuzzi): Thank you, Mr. Calder.
Ms. Bev Desjarlais: You said you'd give him a couple of minutes, and Murray tends to take a little extra.
The Vice-Chair (Mr. Joe Comuzzi): Take a little time to get yourself acclimatized.
Ms. Bev Desjarlais: Okay, here we go.
When did Air Canada come to you in regard to needing assistance with this proposal?
Mr. Jake Brace: It was sometime after the Onex bid. It was late August.
Ms. Bev Desjarlais: Late August? Okay. Had you been aware of the possibility of this situation at any point earlier on in the year?
Mr. Jake Brace: We'd heard rumours earlier in the year that there was something going on, but as far as I knew, I did not have any specifics. The first I heard of anything specific was in late August.
Ms. Bev Desjarlais: I've been looking for the right term here so you'd know exactly what I was talking about, but there's a suggestion that American ends up charging Canadian for a lot of cost in a sort of roundabout way. Does United Airlines have any kind of arrangement like that?
Mr. Rono Dutta: None at all. I think you're referring to all the transfer payments of services rendered. We don't have any such arrangement with Air Canada.
Ms. Bev Desjarlais: Would that type of arrangement be extremely costly, say, from your perspective? If you were to do that with Air Canada, what type of an additional cost would they end up having to pay?
Mr. Rono Dutta: That's hard to say. The issue is, given the relationship, are those set at market prices or not? That's what no one really knows. That's I think the issue that keeps bubbling up: How are those prices set?
Ms. Bev Desjarlais: There is a suggestion out there that American has quite high prices and as a result charges those to Canadian, and Canadian, as a result, doesn't have a chance to ever get on their feet. So I was curious as to exactly what those types of costs could be.
Without knowing Canadian's part in it or American's, from your perspective, how would you cost those out right now with what Air Canada would be receiving from United?
Mr. Rono Dutta: What you're talking of are things like technology. SABRE, for example, would charge a certain rate. You could do certain processing for them, whether it's accounting, pricing, yield management. Airlines do this among each other. The question is, are those set at market prices? This again becomes the real issue.
Ms. Bev Desjarlais: But I'm asking you, do you think those are set at market prices?
Mr. Rono Dutta: There's no way for me to truly know. I've heard the same rumours that you've heard.
Ms. Bev Desjarlais: Okay.
Mr. Jake Brace: We don't know the details of their contracts. It's very difficult to assess whether they're at market prices. When we do some minor amount of work for Air Canada in terms of handling them in Chicago, and when they handle us in Toronto, I believe that's all done on a cost-plus basis. But what they pay American for yield management.... Yield management is something that's critical to the success of the airline. What Canadian pays to American for that I really don't know.
Ms. Bev Desjarlais: I forgot my other question. It was all there and I just forgot it. I'll get it next time around.
The Vice-Chair (Mr. Joe Comuzzi): Do you want me to save that time?
Ms. Bev Desjarlais: Save it for next time. Can I save that minute?
The Vice-Chair (Mr. Joe Comuzzi): Absolutely.
Ms. Bev Desjarlais: Thank you.
Mr. Stan Dromisky: With interest.
The Vice-Chair (Mr. Joe Comuzzi): Mr. Dromisky.
Mr. Stan Dromisky: Thank you very much, Mr. Chairman.
Thank you very much for your presentation, Mr. Dutta.
I understand your web system and your hubs and so forth, and you're very familiar, I'm sure, with the proposal that Air Canada has already made. In their structure they have this entity called the Canadian that they're going to preserve. What I'm concerned about is competition. I would like to hear from you how United can help that component of the entire dominant structure to survive. What can your company do as far as this web service is concerned, the hub, and whatever other way...?
And I have another question I'll follow with.
Mr. Rono Dutta: Canadian's biggest opportunity is in the transborder traffic. As I showed you before, United is very strong in markets on the west coast. It's in the cities of San Francisco, Portland, and Seattle that Canadian has growth opportunities they've never been able to realize. That's where United can help Canadian the most. It can also help Canadian internationally, flying to the Pacific. Because we have strength in Tokyo with ANA, and in Singapore and Thailand, United and Star can help Canadian internationally and domestically.
Mr. Stan Dromisky: Thank you very much.
I'm very concerned about the type of competition and the degree of competition that might exist. We've had presentations that I thought were quite exciting regarding the kinds of things that could happen here in this country. I'm talking here about the web of services that exist. Where in that new web of services, as far as your model is concerned, would charter flights like Canada 3000, Air Transat, or Royal Airlines fit into the pattern? Would there be a place in your web for that type of service?
Mr. Rono Dutta: United itself does not engage a lot in charter flights. Lufthansa, on the other hand, with the Condor, is very strong in charter flights. Charter flights are generally most productive in leisure markets, whether it's to Hawaii, Las Vegas, the Caribbean, etc. United doesn't have a lot of expertise in that area, but Lufthansa certainly does.
Mr. Stan Dromisky: Thank you.
The Chair: Mr. Casey, please.
Mr. Bill Casey: Thanks very much.
Thank you for your presentation. It was very interesting.
What would be the reaction in the United States about a reciprocal cabotage agreement with Canada?
Mr. Rono Dutta: It's clearly a very emotional subject. Beyond that, I don't know. There would be fireworks on both sides. I don't think United has a position on it one way or the other. I know that employees, the pilots, are very concerned about these sorts of issues. So I'd say it's a very inflammable subject, but I can't shed much light on it at this point.
Mr. Bill Casey: Some of the Onex comments we've seen indicate that they feel the agreement Air Canada signed, the renewal and the extension of the Star agreement, could be broken because it was done at such a late date and because it was done as a poison pill, so to speak. What's your opinion on that? Are the extension and the long-term Star agreement binding?
Mr. Rono Dutta: Yes.
Mr. Jake Brace: Our view is that it is a binding agreement. It was negotiated at arm's length. It's a commercially justified agreement and it was entered into for commercial purposes, not for any poison pill type of purpose.
Mr. Bill Casey: You mentioned that the money that has gone from United to Air Canada was done on commercial terms. Is that debt?
Mr. Jake Brace: It was done on better than commercial terms. Actually it involved us adding some value to Air Canada. In the process we and Lufthansa added about $300 million Canadian in value to Air Canada in this investment we made. CIBC also added about $200 million in value to Air Canada in doing that.
The form of the investment was threefold. As I mentioned earlier, there was an investment in preferred stock, which is convertible into 7% of Air Canada's shares. The conversion price is actually quite high, at $24 to $28 a share. They're trading at around $11 now, so it's obviously on fairly favourable terms to them.
The second piece is a sale leaseback of three 830 aircraft where we are providing the equity to them on very favourable terms. We get almost no return on our equity contribution there, so it's a very favourable sale leaseback in terms to them when we buy the aircraft and lease it back to them for 25 years.
Then the third piece is we and Lufthansa are going to guarantee up to $310 million of their bank facility.
Mr. Bill Casey: Do you have any collateral for that guarantee?
Mr. Jake Brace: Our relationship with Air Canada is the collateral.
Mr. Bill Casey: There is a lot of debate about the influence applied to airlines in Canada by American companies that can impose on Canadian companies by virtue of loans, equities, and services provided. Are you going to have any control at all? Does this investment through the different formats you have provide you with access to management or control at all on the Air Canada deal?
Mr. Rono Dutta: None whatsoever.
Again, I think that's the distinction between the Air Canada and Star Alliance relationship and the Canadian-American relationship. Ours is absolutely a partnership of equals. Do we talk about Star vision and about Star branding? Of course we do. But do we try to influence each other in our own markets? The answer is absolutely not.
Mr. Bill Casey: How is the Star Alliance managed?
Mr. Rono Dutta: We have several committees. There's a committee of all CEOs. They meet worldwide typically once a year. If you recall, they just had a meeting in Tokyo when then announced ANA. Then we have several committees, and the committees for example deal with information systems. It's very important for us that when a customer who's important for United is flying in Tokyo on ANA that the ANA employees recognize that customer as a United customer.
There is a lot of information systems work that needs to be done, and there's a committee for that. There's a committee on marketing. There are a number of committees that deal with these sorts of issues.
The Chair: Thanks, Mr. Casey.
Mr. Comuzzi, please.
Mr. Joe Comuzzi: Thank you, Mr. Chairman.
Good morning, ladies and gentlemen. I'm going to hear from you before the day's through. You're going to get a chance to speak.
Mr. Jake Brace: If it's a tough one we'll give it to her.
Mr. Joe Comuzzi: All right, I'm going to give you one, I hope.
You folks were here during the debate this morning in some of the mundane matters we had to deal with. You've noticed that we have a very difficult chairman. Because he calls meetings in the morning, afternoon, late in the evening, and so on, that leaves some of us on the committee with the inability to do the seven-day advance notice, all the things you're supposed to do if you want to go somewhere on a weekend or whatever, because of the rules he imposes. And he's right, we have to get this job done.
I have to tell you folks, this is absolutely by chance and it's providential that you're here today. Charters where I want to go cost a couple of hundred or three hundred dollars. There's Air Canada, but you can't get on because you haven't done the seven-day or ten-day thing, and that costs $500 or $600. You folks through this wonderful alliance you've mentioned today are going to go from here to Chicago and on for $1,560. Now, you tell me what advantage this has for the Canadian consumer. It's $200, $250, $500, and we go on this marvellous set-up and now we're in the range of $1,500. People don't have that kind of money unless you're travelling with the government.
Mr. Rono Dutta: Let me try to address the whole issue.
Mr. Joe Comuzzi: I was hoping that Ms. Longmuir would.
Mr. Rono Dutta: That's not tough enough for her. Let me address the whole issue of airline pricing.
Mr. Joe Comuzzi: I just want to know about this one.
Mr. Rono Dutta: I'm going to address exactly that question.
Mr. Joe Comuzzi: Okay.
Mr. Rono Dutta: The fact is that our seats have a lot of time value to them. We have all kinds of different customers. There's a customer who'll say “I want to go to Australia, and I'll only go if the fare is $500 or $400. If it's $10 more I'm not going.” We have that kind of customer. We have another customer who says “I'm not sure if I'm going to go to Australia at all, but when I want to go I'm going to give you 24 hours' notice, and by God you'd better have a seat available for me.” Therefore, some of our seats we sell to the customer who will only go at $300, but that customer has to make up their mind three months in advance, has no choice of schedule, cannot change the time, cannot change itinerary, etc. The person who's asking for that flight seat to be held for them empty is demanding that they have the opportunity to change their mind at the last minute, etc. That's the customer who pays the higher price.
So in effect we're serving different segments in different ways. Yes, we have prices that are $300 too. We also have prices that are $2,000.
Mr. Joe Comuzzi: You're not answering my question, Mr. Dutta, with respect. Is that route under normal circumstances a $500 or $600 route?
Mr. Rono Dutta: What specific example are you referring to?
Mr. Joe Comuzzi: It's a $500 or $600 route, cheaper if you get the charter, but it's normally a $500 or $600 route. All of a sudden now you can't go there because you have to go to Chicago, and then from Chicago on. Now it's $1,500. I want you to explain why there is the difference in price. I'm going to the same place. You guys insisted I stop someplace else. Why do I have to pay three times as much? That's what I want to know, and that's what the consumer in Canada has a right to know.
Mr. Rono Dutta: Again, without knowing the specifics I can't elaborate further. I would suggest to you—
Mr. Joe Comuzzi: Take my word for it.
Mr. Rono Dutta: I'm sure. But I would suggest that there's a difference in time, meaning that you would get a $300 fare wherever you're going and however you're going—non-stop, one stop, two stops—if you book that seat two months in advance. It's when you get very close that it becomes a much higher price. That's the difference. It's not the routing; it's the timing.
Mr. Joe Comuzzi: That's still not the question, Mr. Dutta. I'm asking you, how can you charge $1,500 to go from A to B on this Star Alliance thing when through one of your carriers, through Air Canada, it is regularly $500 or $600? There's a difference of $900 that you're charging the consumer. You're not answering that part of the question.
Mr. Rono Dutta: With due respect, I can't answer it without knowing the specifics. I can only suggest to you that if we charged the higher price all the time, we'd go out of business. The reason it's probably happening in that particular case is because we have $300 fares, but they're all filled up and the last few seats we have left happen to be the $1,500 fares.
Mr. Joe Comuzzi: I don't think I'm going to get the answer.
The Chair: Thanks, Mr. Comuzzi.
Mr. Rono Dutta: Sorry.
The Chair: Mr. Bailey, please.
Mr. Roy Bailey: Thank you for being here, and thank you for doing your best to answer the questions. Maybe I won't be as difficult as my colleague.
On the very first slide, you have an oval that says “How are Canada's interests best served?” I think that's the purpose of this committee. We have heard a lot of testimony, and you no doubt realize that what's before us is the two mergers that are making all the headlines in the airline industry.
You are fully aware, albeit that you are the Star Alliance, that there are at least two different legs that prop up Star Alliance, and because of the sparse population of this country, one of those legs in Canada is the feeder airlines, if you wish, or the regional airlines. Sometimes they're short flights. Sometimes they will go and catch the dominant carrier in Canada and on to Air Alliance.
On another slide you have in there, you point out that Star Alliance is superior in your rating to Oneworld. I want to ask you a quick question on that, because I want to be absolutely sure in my mind. If the playing field—that is, the number of time slots and the availability to the airports themselves—were the same for Star Alliance and Oneworld, would those figures remain the same?
Mr. Rono Dutta: I guess the question is if slot restrictions were removed, what would happen? Would Star Alliance still be as strong as it is?
We are actively trying to remove slot restrictions at Chicago and at New York, for example, and at London, for that matter. I think you have to take each airport and look at it specifically.
At Chicago, we are the biggest; American is smaller than us. If the slot restrictions were removed, I guess both of us would grow. Would they be able to grow more disproportionately? I kind of doubt it, given our market presence in that city.
Heathrow may be a different example. At Heathrow, there is competition from Virgin and British Midland, who might be able to grow faster than British.
Mr. Roy Bailey: But you, like others, sir, have mentioned the fact that the profitability in the airlines is now the north-south flow into such places you had mentioned on the west coast. You mentioned too that Star Alliance can get you to these points faster than Canadian can.
Coming back to that same question, is the reason that Canadian is not getting to the west coast with their flights right now because of the hindrance they may have in time slots and landing?
Mr. Rono Dutta: No, I don't believe that's the issue. If I can direct your attention to this particular slide—
Mr. Roy Bailey: Yes, I saw that.
Mr. Rono Dutta: —the strength in cities like San Francisco, Portland, and Seattle is from United. American simply doesn't provide enough strength for Canadian to fly in there in competition with Alaska, with Northwest, and with United. I believe that is the fundamental problem.
Mr. Roy Bailey: I have two short questions for you, sir.
One, did I hear you mention that a place like Vancouver wouldn't become a hub for Air Alliance in the overseas travel?
Mr. Rono Dutta: No. We would very much like Vancouver. Vancouver has the potential of being a major Pacific hub.
Mr. Roy Bailey: My final question deals more with the Canadian flavour, if you don't mind. I happen to be from an area where we do not have a great population. I say Canadian flavour because, as you know, much of Canada is sparsely populated, so the regional airlines are tremendously important. And I might add, their importance will continue to grow.
Having said that, we on this committee have heard, last night in particular, from many of these suppliers or the feeders, whatever you want to call them, but they're very important airlines. The majority said they liked the Onex deal the best, and some were quite emphatic about that. To this committee, would you state why they should consider your position as Star Alliance, which is two steps up from the feeder lines? I can tell you that it came through loud and clear, to me, at least, and I'm sure my colleagues would agree, that they very definitely liked the other proposal, for their future, much more than Air Canada's proposal.
That will be my last question, sir. Thank you very much.
Mr. Rono Dutta: Let me tell you why we feel they'd be better off with Star.
First of all, again, the issue is let's look at the health and vitality of Air Canada and Canadian. How can they be the strongest? They'll be the strongest getting help and support from an airline that has the strongest market position just south of the border. That airline happens to be United. That airline is not American. As a result, both Canadian and Air Canada can grow faster if they link up with United.
If that were to happen, then the regional carriers—and you're absolutely right that they're growing very rapidly—will get more traffic flow from the U.S. through the Star Alliance than they would with Oneworld. As a result, the regional carriers would be stronger as well. So I'm surprised they came to that conclusion. I simply don't understand it.
The Chair: Thanks, Mr. Bailey.
Ms. Parrish, please.
Ms. Carolyn Parrish: I'm going to have to be quick, because we have the old chairman back. Mr. Comuzzi might have let me go over a bit.
You said you're 51% owned by your employees. Do you have any other owners in United Airlines that hold more than 10% of shares?
Mr. Rono Dutta: I don't believe so.
Mr. Jake Brace: No. The employees own actually about 60% right now, but there are no other holders that hold that much.
Ms. Carolyn Parrish: Okay. And within those employee groups—you mentioned pilots, mechanics, and so forth—do the pilots own more than 10%?
Mr. Rono Dutta: The pilots own 25%—right?
Mr. Jake Brace: The pilots as a group own about 25%.
Ms. Carolyn Parrish: The pilots own 25%.
To your knowledge, do any of your partners, Lufthansa or any of the others, have shareholders in their companies that own blocks bigger than 10%?
Mr. Rono Dutta: You're asking about shareholders in their companies?
Ms. Carolyn Parrish: Yes.
Mr. Rono Dutta: If they're a fidelity, for example, that owns 2% of Lufthansa and 3% of United, that could happen.
Ms. Carolyn Parrish: Do you know if any of those airlines you're in the Star Alliance with, for example, Lufthansa—and this might be an unfair question, because I guess you don't know the inner workings of your partners—have a policy that allows more than 10% ownership of that airline?
Mr. Jake Brace: I don't think we know the answer to that question.
Ms. Carolyn Parrish: Ms. Longmuir, you raised your eyebrows.
Mr. Jake Brace: Maybe she knows.
Ms. Shelley A. Longmuir (Star Alliance): I don't know, only that it's a difficult question.
Ms. Carolyn Parrish: Okay.
Would it be a major disruption to your traffic patterns to lose the Canadian link that you have through Star Alliance?
Mr. Rono Dutta: Air Canada is very important to us. The Canadian market overall is very important to us. It would be a loss for Star overall if we were to lose that.
Ms. Carolyn Parrish: A tragic loss.
Mr. Rono Dutta: Absolutely.
Ms. Carolyn Parrish: Let's say one of these deals goes through, and that happens to be the Onex deal. If they wanted to withdraw from Oneworld and go into your alliance because you already have a ten-year contract with Air Canada, would the penalties to get out of Oneworld be similar to the ones you described getting out of your alliance?
Mr. Rono Dutta: I believe they're much larger.
Mr. Jake Brace: What I've read—and I don't know this other than what I've read—is that they're actually larger. The penalty that Air Canada would have to pay to get out of Oneworld is roughly two times the size of the penalty to get out of their relationship with Lufthansa and United.
Ms. Carolyn Parrish: You just signed a ten-year agreement with Air Canada. How long was the agreement you had before you signed this one? What was the duration of the one you just completed?
Mr. Rono Dutta: Typically, Star started off without having long-term contracts. We thought they should be totally voluntary deals, and that there shouldn't be any contracts at all. Given the nature of the transactions that are now happening, though, we're considering signing long-term contracts with all our partners.
Ms. Carolyn Parrish: Now, the short answer to how many years it would—
Mr. Rono Dutta: Previously, we didn't have any.
Ms. Carolyn Parrish: Was it a voluntary association?
Mr. Jake Brace: It was a contract you could get out of in six months.
Ms. Carolyn Parrish: Six months?
Mr. Jake Brace: Yes, I think it was six months' notice.
Ms. Carolyn Parrish: Is the ten-year agreement that you have with Air Canada right now the longest agreement that you've signed?
Mr. Rono Dutta: With a Star partner, that's true. It's not true with some of our other departments. For example, we have a ten-year deal with Atlantic Coast, which also has significant liquidated averages.
Ms. Carolyn Parrish: Okay, but for Star Alliance itself, is your agreement with Lufthansa—I'm flying with them next week, so I hope they don't throw me in the baggage compartment—a ten-year agreement now?
Mr. Rono Dutta: No.
Ms. Carolyn Parrish: Are you proposing to sign a ten-year agreement with them?
Mr. Rono Dutta: We're discussing it, yes.
Ms. Carolyn Parrish: But you don't feel any big danger with them, so you're not in a hurry to sign a ten-year agreement?
Mr. Rono Dutta: Well, this clearly sets a precedent, and we are quite concerned about it.
Ms. Carolyn Parrish: This is my last question, Mr. Chairman.
I think Mr. Bailey alluded to the fact that we have a very unique population that is spread along the American border in Canada. We only have 30 million people. It might not be a fair question, but let's go for it, because I'm very impressed with your answers. With your experience, could we support two full international airlines with 30 million people in the space we have to cover?
Mr. Rono Dutta: I honestly don't know enough to answer the question.
Ms. Carolyn Parrish: What's your gut feeling?
Mr. Rono Dutta: No, that's not fair.
Ms. Carolyn Parrish: Come on, you're a pretty smart man.
Mr. Rono Dutta: No, I'm sorry, but it would be absolutely unfair for me to answer that question, because I don't know enough.
The Chair: Thank you, Ms. Parrish.
Mr. Guimond, please.
Mr. Michel Guimond: I would simply like to thank you for your presentation. I could have asked you many other questions, but I wanted to save them for the President of American Airlines. In baseball terms, I will try to throw him a few curves, and we will see how he reacts at the plate.
When it's time for the United Shuttle fleet to be replaced, I would like you to think seriously, if you have not already done so, of acquiring Bombardier RJ planes, made in Montreal by Canadair. It is a beautiful plans, far superior to the Brazilian Embraer. Thank you.
The Chair: Thank you, Mr. Guimond.
Mr. Drouin, please.
Mr. Claude Drouin (Beauce, Lib.): Thank you for your presentation. I would like a few more details, including details on the preferred shares you mentioned. Mr. Brace, you said you are not a member of the Air Canada Board of Directors. How can you influence decisions made by Air Canada? Does your contract with Air Canada allow you to influence Air Canada decisions?
Mr. Jake Brace: We will not have any board members on the Air Canada board. We will not have any special treatment with them regarding insights into management and control of management in any way. We'll continue to deal with them as we have in the past.
Mr. Claude Drouin: Mr. Dutta, you talked about a committee within Star Alliance. Does this committee have powers of decision? Under the terms of the agreement, can the committee set restrictions and obligations for the companies?
Mr. Rono Dutta: As I said, the CEOs meet once a year in the various committees dealing with information, marketing, and the like. They cannot impose decisions on each other. This clearly has to work to a mutual advantage in terms of the issue of costs and how they are shared. For example, there might be a budget for $10 million in advertising. Just as happens here, if there's a vote and everyone agrees, that budget is passed. If they vote no because they think the budget is too big, it won't be passed. To the extent that the $10-million budget does get passed and one airline doesn't like it, I guess they still have to live with it based on the majority. But everyone has an equal vote on each of those issues.
Mr. Claude Drouin: You say the Canadian market is very important to you. If the shareholders decide to support the Onex proposal, will the figures we were shown this morning change a great deal? If there are nine people on your side and three on the other, and three people on your side switch, it will be six to six. Would it have the same impact if Air Canada formed an alliance with Oneworld?
Mr. Rono Dutta: Again, as I stated before, we have a revenue benefit of $20 million as a result of the alliance. Air Canada must have a similar number on their side, although I'm not sure how big it is. To the extent that Air Canada went with Oneworld, we would lose that.
Mr. Joe Comuzzi: Air Canada is with Star Alliance.
Mr. Rono Dutta: Today it is. Isn't your question about what would happen if they went with Oneworld?
Mr. Joe Comuzzi: Yes, I'm sorry. I apologize.
Mr. Rono Dutta: Clearly, we would then lose that revenue benefit and it would go to Oneworld. Equally, in terms of all the ratings you saw about how many cities we cover and what our market coverage is, we would deteriorate in strategic terms as well for all of Star. It is therefore an important issue for us in every dimension.
Mr. Claude Drouin: When Mr. Casey asked your opinion on cabotage, you answered that it did not exist in your company. If it did exist, would that not be a problem for you because of the advantage it gave you or, as President, are you not interested in cabotage?
Mr. Rono Dutta: I would like to have a studied answer on that. It's not my gut feeling. It's not the issue here. At United, I have to admit that we haven't discussed it in terms of a policy on what United's stand should be. On major international issues like that, we usually have in-depth reviews, studies, and a consensus before we go out with a public statement. We're simply not ready to take a public position on that issue.
The Chair: Thank you, Claude.
Ms. Bev Desjarlais: Actually, I should be quicker, because Ms. Parrish asked two of my questions. That will make it much easier here, but I've had time to think about this, so I have some more.
In your experienced view, what do you think will happen in the EU if what they're seeing is going to be anti-competitive, if we have just one airline operating in Canada?
Mr. Rono Dutta: If we use the case of British Airways and American Airlines as a benchmark, they asked for a significant divestment of slots in London when they saw that. Those slots were to be given to other carriers in order to develop some alternate competition. I guess that would be one of the reactions in this case. I think they would take a hard look at it, and they would not be too receptive to it. That would be my gut reaction.
Ms. Bev Desjarlais: Okay, so for slots that we now have for Canada's airlines, rather than just Canadian Airlines, could that go to another airline outside of Canada rather than—
Mr. Rono Dutta: They could try to encourage Virgin Atlantic, British Midland, or any other Canadian airline. They would try to encourage competition.
Ms. Bev Desjarlais: Should the Onex proposal be accepted and everything be hunky-dory with the Parliament of Canada and the Department of Transport, what's your plan? What's your plan if the Onex proposal goes ahead and Star Alliance is ousted out of here?
Mr. Rono Dutta: I think it's to have a stiff drink.
Some hon. members: Hear, hear.
Mr. Rono Dutta: Seriously, there is no plan B, if that's what you're asking.
Clearly, it would hurt our world network, and it would hurt Star as a whole, but at some point we would have to swallow the bitter pill. I'm not sure what the alternative would be at that point.
Ms. Bev Desjarlais: I just want to comment on something, because Mr. Bailey indicated that the regionals were very supportive of the Onex proposal. I think it's important that we not lose sight of the fact that the regionals we met with last night are aligned with the Canadian Airlines side of it. We will be meeting Air Canada's regionals the next time we meet, either tomorrow or Monday, so I think we're going to see that coming from both sides of the regional aspect.
Mr. Rono Dutta: May I just respond to that?
Again, most of the strength that's coming to Air Canada, to United, is cross-border traffic. Canadian is simply not participating in that. They have an opportunity to participate if they are with Star. They do not have an opportunity to participate if they are with Oneworld. I am surprised and perplexed at the conclusion, frankly.
Ms. Bev Desjarlais: Is part of the reason they're not participating that American Airlines does not allow them to be a participant?
Mr. Rono Dutta: That may or may not be true. I do not know. But more importantly, in the markets as such—again, the Seattles, the Portlands, the San Franciscos, the Boises, the Spokanes—American is a very weak carrier in every one of those markets.
Ms. Bev Desjarlais: Mr. Chairman, I wasn't looking at you so you couldn't give me the hook. Thank you.
The Chair: Not a problem, Ms. Desjarlais. Thank you very much for your questions.
There's just one quick question from me. I just want to dig a little deeper on the point Ms. Parrish made earlier on the ten-year agreement between yourselves and Air Canada. Did Star Alliance approach Air Canada on the ten-year deal, or did Air Canada approach Star Alliance?
Mr. Jake Brace: I'm not exactly sure. It was a discussion. After the Onex proposal came out, it's my understanding that Air Canada talked to us. I'm not sure whose idea it was for a ten-year proposal.
The Chair: After the Onex deal came out, Air Canada talked to you. So it's not purely coincidental that Star Alliance decided to strike a ten-year deal with Air Canada in the midst of what's going on today.
Mr. Jake Brace: The discussion of changing the contract and entering into a longer-term contract than we've had began after the latter part of August.
The Chair: Gentlemen, thank you very much for your presentation.
Ms. Longmuir, thank you very much for joining us.
Colleagues, we'll have a three-minute recess while we change our witness table.
The Chair: Colleagues, we'll resume our hearings on the future of the airline industry in Canada.
We welcome our other witness this morning representing Oneworld, Mr. Donald J. Carty, who is the chair, president, and CEO of American Airlines. Mr. Carty, welcome to the Standing Committee on Transport. We look forward to your presentation of between 10 and 12 minutes, and then we'll have questions for you. Please begin whenever you're comfortable, sir.
Mr. Donald J. Carty (Oneworld; Chair, President, and Chief Executive Officer, American Airlines): Thank you, Mr. Chairman.
Mr. Chair and members of the committee, I appreciate your inviting me to come here today. I always enjoy the opportunity to come home to Canada. I appreciate your arranging the weather so that I could experience the beginning of a Canadian winter.
As some of you know, I've lived and worked in Texas for a number of years. It probably hasn't improved my English, never mind my French, so I'll not attempt to duplicate Mr. Dutta's noble effort and try to do some of this testimony in French.
I have been a participant in and an observer of Canada's transportation industry for more than 25 years. I worked at Air Canada and the Canadian Pacific Railway before I joined American Airlines. I also subsequently left American Airlines and served as president and CEO of CP Air before returning to American some 12 years ago.
Let me say at the outset that I think American has been an extremely good partner to Canadian Airlines. We backed Canadian with capital when no one else was willing to step forward, and together over the years we have built a very strong partnership. Today we channel a half a million passengers a year and in excess of $125 million in revenue to Canadian each and every year, and the revenue Canadian does derive from us exceeds the revenue we derive from Canadian by some 44%. In the transborder markets, where the heart of our partnership is, American now accounts for 20% of the sales of Canadian's transborder flights.
Unfortunately, Canadian faces difficult financial challenges, and, as Mr. Benson testified before this committee, the status quo may no longer be sustainable.
Let me start off by explaining why American is willing to make an additional substantial investment in Canada's airline industry and why we are willing to do so under the Onex plan without seeking any form of control, a subject that has been the focus of a lot of the discussion around this transaction.
Let me shorten my testimony for you this morning. Since my friend Mr. Dutta has already given you a tutorial on hub economics and the benefit of international alliances, I'll abbreviate my comments and try to focus on why, contrary to Mr. Dutta's views, Oneworld is the right partner for a new Air Canada.
Let's simply start with a comparison of American Airlines with United Airlines from again the new Air Canada's point of view. We're a superior partner because we have a better network and a better frequent flyer program. You just have to look at the U.S.-Canada transborder markets to see that American's stronger network feed—contrary to what was suggested in the earlier testimony—has resulted in American now accounting for 20% of Canadian Airlines' sale of seats on transborder routes. Meanwhile, United accounts for only 13% of all sales on Air Canada's transborder flights.
Today our frequent flyer program, the AAdvantage program, which was the first loyalty program in the industry, is by far the largest and strongest program by all measurements. That translates into greater market penetration for our partners, and that's especially true among our premium customers.
I think even more importantly, American Airlines is a superior partner because of our excellent network fit with Canada's airlines. We simply do not have a west coast gateway to Asia. As a result, it is absolutely in our interest to strongly support Canadian's Vancouver gateway to Asia. In the last year this translated into revenues of over $60 million that American put on Canadian's flights to Asia. That traffic has been growing literally at 33% a year, even throughout this downturn in the Asian economies.
In contrast, of course—and I noticed that Mr. Dutta didn't elaborate or dwell on this—United Airlines has Asian gateways. They have an Asian gateway in both Los Angeles and San Francisco. Those gateways clearly compete with Vancouver for flow traffic heading from North America to Asia, and they draw away lucrative traffic, I might add, from eastern Canada that should be going through Vancouver. As a matter of fact, as a result of that phenomenon, United carried $127 million of Canada-Asia traffic via its gateways, not in Vancouver but in San Francisco and Los Angeles.
Turning to Latin America where Canada's carriers simply as a result of geography have a relatively limited presence and where insufficient traffic exists to justify operating a comprehensive network of their own, we have a dramatically stronger network than United.
In Europe, British Airways' presence in Oneworld is incredibly important. The largest market to and from Canada is Great Britain. There's no question about that. In fact, it's a market about three times as large as the German market, and that obviously makes BA a more beneficial partner to the new Air Canada than Lufthansa. Also, British Airways would provide Air Canada with the widest array of connecting services at Europe's most important hub airport, London's Heathrow, which is obviously optimally geographically located from the Canadian market perspective.
I could go on to compare Oneworld's members against Star's on a region-by-region basis, but what this all boils down to is that in every region of the world, bar none, the airlines of Oneworld are going to bring a larger worldwide market presence to the new Air Canada than Star would.
But let me add that the Onex plan does not stop the new Air Canada from continuing to enjoy bilateral code-sharing relationships with Lufthansa, SAS, or any other non-U.S. member of the Star Alliance. Our Oneworld arrangements leave Air Canada free to make its own decisions about where to fly and how to manage its fleet and other assets. That stands in sharp contrast to the restrictive covenants that have been imposed on Air Canada by its recent poison pill agreement with Star.
The merger of Canadian and Air Canada and the partnering of Canada's new flag carrier with American and Oneworld is going to equip Canada's industry to become a winning player in the global alliance contest. American Airlines and Oneworld have a community of interest with Canada's airlines. Quite simply, Oneworld offers Canada the most value added.
If I may, let me take one minute to address another subject that has been the source of a lot of the confusion and disinformation in recent weeks, and that's the role of SABRE in the Onex plan. SABRE is of course the world's leading travel technology company. AMR Corporation, which is the parent of American Airlines, currently holds about 80% of Sabre. We sold 20% of SABRE to the public three years ago, and we are now nearing the point where we may completely spin off our ownership stake to the public, the result being that SABRE will be a completely independent company.
Let me be clear. The Onex plan offers the opportunity, but it certainly does not compel Air Canada to use SABRE's technology. SABRE is going to offer services to the new Air Canada on a most-favoured-customer set of terms—terms, I might add, that are more favourable than those that Air Canada management could ever have negotiated on its own. However, it's going to be up to the new Air Canada management to decide whether they wish to take advantage of that opportunity.
SABRE's products include systems for virtually every aspect of an airline's operation, but it is important to keep in mind that when SABRE provides one or more of these systems to an airline, the airline itself maintains full control of its own processes, its own decisions, and its own management.
If the airline as customer wishes to transfer its employees to SABRE, that's going to be negotiated as part of the transaction, but it's not about jobs necessarily being lost to the United States, and Mr. Schwartz has been very clear on this. For example, at USAir, where SABRE recently implemented a comprehensive technology outsourcing plant, SABRE extended job offers to 800 USAir employees; 650 of those employees accepted those job offers, and they remain at their former base of operations.
So a SABRE transaction with Air Canada would be about the transfer of advanced technology skills to Canada, upgrading worker skills, and offering employment opportunities in Canada. Let me remind everyone that before it launched its hostile PR campaign, the Air Canada management team was already actively considering moving to the SABRE system.
American has been proud to serve Canada. Contrary again to some testimony, this isn't a southern airline. We've been in Canada for 58 years as a carrier. We see where alliances are going, and we understand the strategic importance of Canada's networks, but we can derive appropriate benefits from Canada's networks without owning or controlling Canada's flag carrier.
The foreign control issue has simply been a red herring and quite frankly a slanderous attack on our company. In this regard, those who have argued the merits of that case have done a great disservice to the important public policy debate that is occurring in Ottawa and across this country.
I hope the recent changes American made—and I might add voluntary and willingly made—in the revised Onex proposal finally will put this issue to rest once and for all.
We have witnessed, somewhat with dismay, the war of attrition that's been waged by Air Canada management against Canadian Airlines. It's a war that has cost shareholders of both companies very dearly. We have not been able to facilitate a resolution until now, and we were very pleased to see a Canadian business leader such as Mr. Schwartz step forward to overcome the deadlock.
The Onex deal is going to get done, and it's going to get done because it's based on a smart business plan. It addresses the interests of all key stakeholders. Let me say, with respect, that in contrast to the Onex plan, the Air Canada management plan is simply unrealistic. It fails to address the significant rights of a number of Canadian Airlines stakeholders, including American's.
We believe the competition, transport regulators, and this committee now understand the status quo is probably not sustainable. We are confident they and you will act reasonably and expeditiously to achieve a policy framework that is compatible with the optimal plan for the Canadian airline industry, and that's the Onex plan.
Thank you very much, Mr. Chairman and members of the committee, for listening to me. I'd be very pleased to be responsive to your questions.
The Chair: Mr. Carty, thank you very much for your presentation.
We'll begin our questioning with Ms. Meredith.
Ms. Val Meredith: Thank you, Mr. Chair. I apologize for missing the first part. I hope my question hasn't been answered already.
Mr. Carty, you've been accused of running Canadian Airlines and of making all of the strategic decisions, and it's been said that will carry forward in the Onex plan. I understand that with the counter-offer from Onex, you have agreed not to have any voting shares and you are going to minimize your input, if you will, into the new AirCo.
Can you expand upon how somebody with the investment American has in the Canadian airline can walk away from that investment in the way you appear to be doing in the counter-bid from Onex?
Mr. Donald Carty: It's been tremendously unfair for anyone to characterize American Airlines as running Canadian Airlines. That simply has not been the case. Mr. Benson has made that point again and again with the press. Canadian Airlines is a completely independent company that makes a number of its own independent decisions and runs the airline day to day.
In that transaction, because American was asked to put up substantial equity rights, American did receive certain governance rights that protect its investment, but they don't have anything to do with running the airline day to day, making fleet decisions, making route decisions, and so on.
Conversely, in the Air Canada proposal that is now on the table, as you said, we have essentially indicated a willingness to let the existing Air Canada shareholders take up the block of shares that has been set aside for us. We've essentially said that if they don't take them up, we will vote our shares proportionally with the other shareholders. Essentially, we will not have any voting rights independent of the independent shareholders, and we would have no rights to appoint any members of the board of directors.
Now, why would we do that? We're not a charitable institution, obviously, and I don't want the committee to come away with any sense other than that. But as I indicated in my testimony, the benefit that accrues to us by being partners with a Canadian airline—such as the network benefits of flowing traffic across the Canadian system, of allowing our customers in the U.S. to access Asia through Vancouver, of allowing the new Air Canada customers to access U.S. markets that they're not able to serve non-stop—all puts benefit on both our airline and on the new Air Canada. As a result of that, we obviously are willing to invest money in this transaction. And I might add that, as part of this, we will sell our existing equity share in Canadian to AirCo.
Ms. Val Meredith: Thank you.
I'm going to ask you the same question I asked the Star Alliance people: In the event that the Air Canada deal is accepted by the shareholders, that would mean Oneworld probably would not be the alliance serving Canada. What would be the penalty you would get from the new AirCo? What penalty would you be asking for for the loss of that partnership?
Mr. Donald Carty: If the Air Canada management proposal moves forward, there is no penalty. If the shareholders of Air Canada and Canadian vote in favour of our proposal, there is then a lock-up of the relationship between American and the new Air Canada. But that's a decision for the Air Canada shareholders to make and for the Canadian shareholders to make. In the Air Canada proposal, there appears to have been crafted a poisoned pill that the Air Canada shareholders are not getting to vote on.
Ms. Val Meredith: So you're telling me that there isn't any poisoned pill in Oneworld being eliminated from the Canadian marketplace, that there is no penalty that will be paid by the new company for losing that alliance?
Mr. Donald Carty: The new company essentially won't exist if its proposal doesn't move forward, so the answer is that there will be no penalty paid.
Ms. Val Meredith: Thank you.
The Chair: Thanks, Ms. Meredith.
Mr. Calder, please.
Mr. Murray Calder: Thank you very much, Mr. Chairman.
Mr. Carty, we just listened to the Star Alliance, and their presentation showed them to be ahead of Oneworld. You've already addressed that, and you've also addressed the issue of the old rivalry between United and American.
I'm going to concentrate on a number of things here. First off, what ownership do the American pilots have in American?
Mr. Donald Carty: I can't tell you as of today, but it's not a very substantial portion. As part of our last contract we issued stock options to our pilots, and those stock options represented potentially 2% or 3% of the ownership of the country. Some of those stock options have been exercised, but I don't know how many of those exercised stock options have in turn been sold by the pilots, quite frankly.
Mr. Murray Calder: Currently, it is my understanding that American has 33% non-voting and 25% voting ownership in Canadian Airlines. Would that be correct?
Mr. Donald Carty: We have 33% of the economic interest and 25% of the voting interest. Those numbers are duplicative, in a sense. We have 25% voting and I guess 8.33% non-voting.
Mr. Murray Calder: Okay, then what I want to deal with a wee bit here is the AMR-Allied Pilots Association agreement. I asked a question before about weighted average cost of capital. It says on page 3 that American Airlines
...shall continue to seek route
authority and to pursue all opportunities for deploying
its aircraft assets on U.S.-Canada transborder routes
where the company can earn a return on invested capital
at least the equal to the weighted average cost
That basically, to me, translates into this: wherever a Canada-U.S. route becomes profitable, AMR, in a contractual agreement with its pilots, has committed that they will pursue route authority over the profitable routes, with its code-sharing partners, and that would be Canadian Airlines. What's your comment on that?
Mr. Donald Carty: My comment is that that undertaking to our pilots is simply the undertaking we make to our shareholders: that anytime we can find a profitable opportunity to fly airplanes, we will do so. But it is a contractual relationship between us and our pilots, not between us and any partner we have.
We are not at all in control of where a partner flies and when it flies. Since we've entered into that agreement with our pilots, Canadian has entered a number of transborder routes, and there's good reason for that. There are a number of routes where one partner, because of its strategic advantage, can do very well on particular routes—for example, ones that flow out of our hubs. Conversely, the other partner can do very well on routes that flow out of their hubs.
In Canadian's terms, obviously the routes that flow out of Calgary and Vancouver and Toronto are routes they can be uniquely strong on. We can be uniquely strong on the ones that flow out of Dallas and Miami and Chicago. Nonetheless, both parties have the right to fly on any of those routes that they want to. Canadian recently added flights in both the Vancouver-Dallas market and the Toronto-Dallas market. We've recently added routes in Chicago-Calgary.
So the commitment we made to our pilots is simply a commitment to fly where we can be profitable, which is the same commitment we have to our shareholders. It does nothing to impact on, restrict, or make determinations about where Canadian or any other of our partners internationally would fly.
Mr. Murray Calder: So Mr. Carty, you're very simply telling me this agreement right here would have no bearing on the problem Canadian Airlines is in at present time, then?
Mr. Donald Carty: None whatsoever.
Mr. Murray Calder: Okay.
I'll go on to my next question. I posed this same question to Mr. Schwartz, and quite frankly, he didn't answer it; he skated around it. So I'll ask you the question.
AMR right now has nearly $750 million tied up in the Onex deal. In fact from 1994 to date, my guess would be that you have pretty close to $1.2 billion or $1.3 billion. Now, you're really nice guys and everything, but you're also businessmen, and quite frankly, no company invests that amount of money in another company without expecting returns.
So what I want to know is, what kind of control do you want to exercise over this deal, and what are you expecting back for that amount of money you have invested?
Mr. Donald Carty: Those questions are two very different questions, of course, Mr. Calder.
Mr. Murray Calder: Yes, but they still hinge on the amount of money you've put in.
Mr. Donald Carty: And I will be as responsive as I know how to be to those questions.
In the first instance, let me just clarify one piece of that. The $750 million that American has offered to invest in the new Air Canada under the most recent proposal will not be $750 million, because as you'll recall, we're offering to let the Air Canada shareholders buy up more of what was going to be our investment than we did in the original proposal.
What do we expect back in return financially? Very clearly two things. To the extent that we're invested in the new Air Canada's equity, it is an expression of confidence that this can be a highly successful, profitable global player, and therefore the equity investment is a good one. We're interested in making good equity investments.
The second benefit we get from this is the same benefit you were talking about to the United people, the Lufthansa people, and the British Airways people, and that is the benefit of partnership—the network benefit of revenues that might otherwise flow across one of your competitor's systems to flow across yours.
You raised the question of just how much of this was a battle between United and American Airlines. As far as the network benefit is concerned, you're spot-on: we are competing for partnering with a new Air Canada benefit, just as Lufthansa and the other Star partners and the other Oneworld partners are. So that makes investment attractive.
What control pieces do we get? You've seen them all, sir. We have given up virtually any right to have any say about anything in the new Air Canada.
The Chair: Thanks, Mr. Calder.
Mr. Guimond, please.
Mr. Michel Guimond: Mr. Carty, thank you for your presentation, but I am a little disappointed that you did not arrive here this morning draped in the Maple Leaf. You regularly claim to be a good Canadian and say you are getting tired of Canada. I am also disappointed because I thought you were going to tell us that you had succeeded in convincing your board of directors and shareholders to transfer the head office of American Airlines from Dallas - Fort Worth to Hamilton. I really am disappointed. I was being sarcastic, and you mustn't take what I have said seriously.
I will now move on to a somewhat more serious question. Mr. Carty, what is this right of veto you mentioned? Is it true that, under the contract that binds you to Canadian, American Airlines has a right of veto on any acquisition or merger involving Canadian Airlines?
Mr. Donald Carty: That is not correct, sir. We do not have a veto right on those kinds of business arrangements. As a consequence of a potential merger acquisition, we do have some financial recourses that are available to us, but none of them allow us to veto anything of that type that Canadian might or might not do.
And I might just add that if I were able to persuade American Airlines shareholders to move their headquarters to Canada, it would probably be to Renfrew, Ontario, where I have a small home. It would make my commuting very easy.
Mr. Michel Guimond: Mr. Carty, does American Airlines have any input on routes or destinations served by Canadian Airlines?
Mr. Donald Carty: No, sir, none.
Mr. Michel Guimond: There is an expression in French “le hasard fait bien les choses” [surprise, surprise!]. I will give you a small example. It is a shame that you are not accompanied by a vice-president of operations who would be unable to respond to such a pointed question, even though it is extremely significant. You will see where I am heading with this preamble. You are probably unaware of what I am going to tell you, but I know it is true because I checked it out.
Is it true that, about six months ago, American Airlines added a daily non-stop flight between Chicago and Tokyo?
Mr. Donald Carty: Yes, sir, it certainly is.
Mr. Michel Guimond: As if by chance, we learned that this month Canadian Airlines will probably cancel its long-standing service between Toronto and Tokyo. Does this mean there is no longer sufficient traffic to justify a Toronto to Tokyo flight?
I will give you my explanation before you give me yours. In the marketplace and in the airline industry, you are considered a predator, a company that siphons off passengers and makes them change planes at hubs in Chicago, Dallas, Fort Worth, etc. It is difficult to believe you. If some people around this table believe you, all the better, but there is no way you have convinced me.
A little later, I will ask you additional financial questions, but I would like you to tell me first of all if it is true that American Airlines is considered a predator that siphons off passengers and that Canada will become a huge feeder for American Airlines if the Onex transaction goes through.
Mr. Donald Carty: No, quite the contrary. Again, I'm not sure how everybody considers this. The only person I have ever referred to as a predator is a Mr. Robert Milton, and he's the same guy—and the same American guy, I might add—who referred to Canada as a third world country yesterday. So with all due respect, I don't believe we're considered predators. We are considered a very vigorous competitor. We will always be a very vigorous competitor.
And because I've asked Mr. Benson about this, I will also tell you that the Toronto-Tokyo route was suspended when the Japanese economy went through some very difficult and trying times and that route became significantly unprofitable for Canadian.
Mr. Michel Guimond: It was this month, not two years ago, when the Japanese began to have problems, that the Toronto to Tokyo route was abandoned.
Mr. Donald Carty: Yes, but the consequence of the Japanese economy weakening is what caused Canadian to go into an unprofitable situation, and ultimately realized they couldn't continue that route after having tried to make it work for an extended period of time, sir.
The Chair: Thank you, Mr. Guimond.
Ms. Carolyn Parrish: Thank you, Mr. Carty. I'm going to ask you roughly the same questions I asked the last witness.
Do you have any such rule in the States similar to our 10% rule that was brought in when we privatized Air Canada?
Mr. Donald Carty: No, Ms. Parrish, we do not. We do, of course, have very similar restrictions on foreign ownership in the United States, but we do not have anything in terms of a single shareholder. In fact, from time to time a number of our large airlines have been owned or controlled by a single entity or a single individual.
Ms. Carolyn Parrish: Given that you grew up on Bloor Street, I'm going to save my really big question until the end, because I think your experience in both countries is probably very valuable to us.
The last witness talked about a major disruption to his traffic patterns in the Star Alliance if this deal goes to Onex. You've said the same thing applies for American Airlines. Could you expand on that a little?
Mr. Donald Carty: Ms. Parrish, if you look at some of the numbers I referred to in my testimony—the fact that we bring $125 million to Canadian, and that they bring a slightly smaller but nonetheless significant number to the American Airlines system on the transborder routes—and if you look at the fact that we are able to provide a number of our customers outlets to Asian markets through Vancouver that we otherwise wouldn't be in a position to sell, those are the holes that essentially get created in your system. It's your inability to service your customer base as broadly as you'd like to.
Ms. Carolyn Parrish: So when people talk about this as somewhat of a competition between United Airlines and American Airlines, in fact it is.
Mr. Donald Carty: Absolutely. It is indeed more than United Airlines and American; it really is a global competition. What we're busy competing for—and this is one thing that I certainly wouldn't disagree with Mr. Dutta on—is trying to forge several global alliances that will all be competitive with each other. Obviously, any win by one global alliance is potentially a loss for another.
The point I was trying to make to this committee is that, given the nature and the geography of Canada, and given the nature and the structure of the Oneworld alliance as is currently constituted, the Oneworld alliance happens to create more value for a Canadian entity than does the Star Alliance.
As I've also said publicly, when we were having a dialogue with Air Canada last winter about effecting some consolidation in the Canadian industry between Canadian and Air Canada, they made it very clear that their issue wasn't about alliances at that time; it was simply about money. They were prepared to abandon the Star Alliance to join the Oneworld alliance. They were very much interested in being technologically supported by the existing SABRE infrastructure. The only issue that separated us at that time was money.
Ms. Carolyn Parrish: So for the first time in our lives, we here in Canada are an important little jewel in two huge global battles.
Mr. Donald Carty: You are, indeed.
Ms. Carolyn Parrish: Does that ever feel good. We should keep you dangling longer. This is really exciting.
Mr. Donald Carty: Some members of the committee expressed that they wished this issue wouldn't get dangled any longer, that they've already worked hard enough on this.
Ms. Carolyn Parrish: On the ten-year agreement we talked about that was just signed by Air Canada with the Star Alliance, you've explained clearly that there are no penalties if they get out of it. Do you have any ten-year agreements with any of your partners?
Mr. Donald Carty: We do not. The Oneworld alliance is an alliance that permits partners essentially to come and go. There's obviously some complexity in doing that as you extricate yourself from frequent flyer programs and so on, but essentially carriers come and go. In fact, I'm not aware of any ten-year relationships anywhere in the industry.
Ms. Carolyn Parrish: You've answered my subsequent one, so I'll get to my last Bloor Street question. Given the 30-million person population, given the configuration of this country, and given that you've worked in the airlines here and in the States, do you, in your own opinion, believe we have enough people and traffic patterns to support two international airlines?
Mr. Donald Carty: I wish I could be clearer about this, because I think there was a time, although to be honest with you I'm not 100% certain of that. For a number of years, I do know I was a firm believer that there was no reason that two such systems couldn't be supported, especially if they found a way to divide up the market. However, I think it's fair to say that, as has happened in the United States—and I don't mean this in any conspiratorial kind of way—they focused on their strengths and didn't necessarily try to invade the other guys' area of strength every single day of the week. The last ten years, however, have proven that at least the experiment thus far has failed. The status quo was not working, and while it's Canadian that is an airline that is in some financial peril, it has been a disaster for Air Canada investors as well.
So the practical answer is that the status quo certainly hasn't worked thus far.
Ms. Carolyn Parrish: And I have one really unfair question. My very simple perception of this is that the reason why Air Canada and Canadian haven't formed a partnership in the last year is that it would be much more beneficial to Air Canada to just have Canadian go down into the ocean and disappear, leaving Air Canada to pick up the pieces rather than actually forming a business deal with them.
Mr. Donald Carty: That's certainly what they tell the financial markets.
Ms. Carolyn Parrish: Thank you.
The Chair: Thanks, Ms. Parrish.
Ms. Desjarlais, please.
Ms. Bev Desjarlais: When were you approached by Canadian or Onex regarding the Onex deal?
Mr. Donald Carty: I wish I could give you a specific answer to that—
Ms. Bev Desjarlais: So do I.
Mr. Donald Carty: —but I really can't remember the timing. It was certainly several weeks before the offer was made. There was an extensive period of negotiation between us. I might be able to get that answer for you, but as I sit here, I can't—
Ms. Bev Desjarlais: Would several weeks be 8, 12, 16, 20, 24?
Mr. Donald Carty: No, it certainly wasn't anything like 12. Let me just think for a moment. The Onex offer was rolled out on.... Does anybody remember the date?
Mr. Bill Casey: August 24.
Mr. Donald Carty: August 24? Then it certainly had to be very early in the summer when we first started that dialogue.
Ms. Bev Desjarlais: Very early summer doesn't come into 8, 12, or 16 weeks, so give it to me in months. How many months ahead of time did you know about this deal?
Mr. Donald Carty: I don't want to give you an erroneous answer. Again, I could check on when I had the first dialogue with Mr. Schwartz. I can't answer you right now, but it was certainly a couple of months.
Ms. Bev Desjarlais: Okay.
I just want to clarify what's happening here. I think you did indicate that there's no penalty to Air Canada if Canadian is pulled out of Oneworld, but I got the impression that you were saying there would be no penalty because the deal won't go through. Let's say the Air Canada side does go through. Is it American's intention to continue a partnership with Canadian and not go by an Air Canada plan, or is it American's intention to pull out?
Mr. Donald Carty: I guess we should clarify what we mean by the Air Canada plan going through.
Ms. Bev Desjarlais: I think so.
Mr. Donald Carty: If Air Canada's plan to restructure itself goes through, obviously that would have no consequence for ourselves or Canadian. I would certainly expect to continue our relationship with Canadian and carry forward.
Ms. Bev Desjarlais: Okay, so that's why there would be no penalty. You would still be dealing with Canadian Airlines rather than not being part of the picture.
Mr. Donald Carty: But again, in our relationship with Canadian, there is no penalty for them not continuing to have a marketing relationship with us or the Oneworld carriers. Essentially, you can extricate yourself from the Oneworld alliance voluntarily.
Ms. Bev Desjarlais: You indicated that although you don't have voting rights per se, American has certain governance rights. Could you be a little more specific about what the governance rights entail?
Mr. Donald Carty: Again, I don't have that agreement in front of me. It was fully reviewed in front of what was the National Transportation Agency at that time, and it has been reviewed with them since. It entitles us to votes on business plans and capital plans, but I can't recite for you the specific details of it. Those details are certainly a matter of public record.
Ms. Bev Desjarlais: Would some of those business plans be whether or not they would expand their market into certain areas?
Mr. Donald Carty: No.
Ms. Bev Desjarlais: Would some of those plans be whether or not they would purchase new aircraft?
Mr. Donald Carty: No.
Ms. Bev Desjarlais: That's pretty specific. You remember that part about it, so fill me in on more that I'm just not coming up with.
Mr. Donald Carty: For example, they can't launch a capital plan to spend $8 billion if they don't have it and we're not happy about it. But again, without the details in front of me.... I wish I could be more specific. This is now six or seven years old.
Ms. Bev Desjarlais: All the more reason to be—
Mr. Donald Carty: I will make an observation, though. We have never had to exercise any of our governance rights that are embedded in that contract in all of the time we've been associated with Air Canada.
Ms. Bev Desjarlais: Can you foresee any of those governance rights coming into play if one of these proposals or if, say, the Air Canada proposal should be chosen?
Mr. Donald Carty: Again, if the Air Canada shareholders pick Air Canada's proposal, it's sort of independent of Canadian.
Ms. Bev Desjarlais: Canadian will still exist. That's what you're saying.
Mr. Donald Carty: Yes.
The Chair: Thank you, Bev.
Mr. Comuzzi, please.
Mr. Joe Comuzzi: Thank you.
Ms. Desjarlais asked a question that I can answer, so you don't have to do the research, Mr. Carty. This is in Mr. Justice Blair's decision. In May, however, Canadian and Onex began considering a basis upon which a merger of Canadian and Air Canada might be accomplished. Because of the significant interest of American Airlines and AMR in Canadian, it too became involved with the discussions at that time. So it was May.
Another question that Ms. Desjarlais asked was about the import of those lock-up agreements that were entered into at the same time, Mr. Carty. There were three aspects of it as outlined in that case. I would imagine that in the lock-up agreements, AirCo.... AirCo is who?
Mr. Donald Carty: AirCo is the entity that has been created.
Mr. Joe Comuzzi: By Onex?
Mr. Donald Carty: By Onex.
Mr. Joe Comuzzi: In the lock-up agreements that were there, AirCo and American Airlines were not to participate in any other airline acquisition proposal. That was one aspect, and so on. Are those lock-up agreements still in place?
Mr. Donald Carty: Yes, sir, they are.
Mr. Joe Comuzzi: Thank you.
I'm sorry. I'm not here to answer your questions, Mr. Carty, but I thought it'd be easier to do that.
Ms. Bev Desjarlais: It's a good thing you know what's going on with these companies, Joe.
Mr. Joe Comuzzi: Mr. Carty, we thank you very much for coming here today. You were a little humble in your own introduction.
I want to just say to the members of the committee that perhaps we're not here to.... Maybe some of us are getting long in the tooth—and maybe some of us should be leaving soon—but you, Mr. Carty, were so instrumental in giving us guidance some years back, in helping to open up the issue and in developing the basis under which the open skies agreement was adopted.
I think we all agree that if there was any one area in which both airlines, Canadian and Air Canada, prospered, it was because of the willingness on behalf of everyone to take the big risk and go into the open skies agreement. You, sir, were very helpful to our committee at that time and I thank you for that.
Mr. Donald Carty: Thank you, sir.
Mr. Joe Comuzzi: As a result of that, I have a great deal of faith in the integrity that you bring to this debate.
I want to talk, then, if I may, Mr. Chairman, just in a kind of a conceptual way. I get the feeling today that Canada's airline passengers are becoming, considering our 30 million people, pawns in a global overtaking of everything that's happening in the airways—no different from the Americans, but they're so much bigger than us, and we know what happens when we get into that competitive atmosphere.
The mandate of our committee is to look after the Canadian air traveller. I said this yesterday and I'll repeat it today: Part of our $500 billion debt is that through taxation we've paid for every airport in this country, we've built every runway in this country, and we've paid for every navigation system in this country. We provide all of the facilities. You pay rent and Air Canada pays rent, but we provide all of the facilities so you folks can operate this business.
I get the feeling that in this global positioning for all of the passengers—to get them funnelled into certain places—Canadians become pretty insignificant. Our rights aren't truly protected. I'd like to ask you about that. That's the first question.
Second, then, is it not possible, for the protection of the Canadian consumer, to deal in what I call reciprocal cabotage? I never use the word cabotage without saying “reciprocal”; that adjective should be welded to the word. Would you be kind enough to give me your thoughts on that?
The Chair: Thanks, Mr. Comuzzi.
Mr. Carty, please.
Mr. Donald Carty: Let me just make a number of observations. I personally like the interpretation Ms. Parrish put on the position of Canada and Canadians in this debate: that Canada and Canadians are not pawns but actually key players, in a number of ways.
One of the reasons they are key players is simply the geography of Canada. If you draw the great circle route to Europe or to Asia, you see that for most places in the United States and even in Mexico and parts of northern Latin America, it flows right over Canada. Therefore, the geography for positioning Canada as a gateway is good geography: clearly Vancouver's geography with respect to Asia; clearly Toronto's geography with respect to Europe; and especially Montreal's geography with respect to Europe. They are all well-positioned, significant cities to act as gateways.
When you draw a circle of 500 miles around Toronto, there are more people in that circle than there are in a similar circle around New York. The potential to flow traffic over Toronto is non-trivial; the whole Ohio valley opens itself up to a Toronto gateway. Similarly, when it comes to Vancouver, I was making a distinction in regard to Vancouver as a gateway versus San Francisco and Los Angeles, but the shorter route from most places in the United States is over Vancouver. I think Canada is actually in a pretty interesting position as this debate unfolds.
Now, the issue that you've raised, the one of cabotage, is a worthwhile debate, I think. As time goes by, I guess there is a question of whether or not we will really liberalize this business and provide access to the consumers of this business by taking away all of the restrictions in international aviation.
I think there are short-term impediments to that happening. One short-term impediment is the one you just raised, that is, it can't be a unilateral disarmament. It would simply not make any sense for a country to give up all its rights when other countries aren't willing to.
As you know, I think, this is an issue in the United States that is a difficult one for them. It's embedded in legislation. It's not something that the administration could make a decision about or negotiate with Canada about without enabling legislation. So it's not something that's going to happen quickly.
I'd say one other thing. If the Onex plan is successful and we are able to collectively see emerge from it what I think will be a world-class, world-scale airline even in the context of the large U.S. carriers, then you have a Canadian entity positioned for that eventual liberalization, which may be ten or fifteen years down the road. It could become a truly global player. But I think it's a bit of an academic argument in the next decade.
The Chair: Thanks, Mr. Carty.
Mr. Casey, please.
Mr. Bill Casey: Thank you.
Mr. Donald Carty: Gee, golly, I don't know.
Mr. Bill Casey: There you go. I notice with interest that you worked with Air Canada.
Mr. Donald Carty: I did, sir.
Mr. Bill Casey: And our previous presenter with United, the vice-president, used to work for you.
Mr. Donald Carty: That's exactly right.
Mr. Bill Casey: It's like the NHL.
Mr. Donald Carty: It's a small circle of people. In the last ten years, an awful lot of people who have graduated from American Airlines have gone on to very senior jobs at other airlines. In fact not only did that guy work for us, but his boss at United also worked for us.
Mr. Bill Casey: I'm curious about your present investment in Canadian Airlines. Is that in preferred shares, about $246 million?
Mr. Donald Carty: That is in preferred shares, yes sir.
Mr. Bill Casey: What happens to those preferred shares? Do they have any value right now, considering the situation? Could you sell those shares?
Mr. Donald Carty: There probably isn't any market for those today, but my guess is if they were technically transferable.... And I'd have to go look at whether they'd even be technically transferable. Since they represent 33% of the economic interest of Canadian, they potentially attract the same kind of valuation as the common stock of Canadian, so they are probably worth something...$50 million or $60 million would be the inferred value. Whether it's a realizable value is another matter.
Mr. Bill Casey: If Canadian were to fail, those shares would be worth zero, right?
Mr. Donald Carty: That's correct.
Mr. Bill Casey: So if Canadian makes a deal with either Onex or Air Canada, are those preferred shares suddenly full value?
Mr. Donald Carty: No. We've never had a proposal from Air Canada for those shares. They have talked about one publicly, but they've never made such a proposal.
In the Onex proposal, we would sell those shares for the equivalent of the $2 a share price that the other common shareholders are selling their stock for—about $60 million of value.
Mr. Bill Casey: How do you arrive at that value? Is that just a value they put on it?
Mr. Donald Carty: That's in effect 33% of the.... The $2 a share is what Onex has offered to the common shareholders. Our 33% would attract the same price and it would be about $60 million.
Mr. Bill Casey: What would happen if Air Canada's deal went through and they bought the common shares of Canadian Airlines? Would your preferred shares be worth $246 million then?
Mr. Donald Carty: It would depend on the specific proposal that Air Canada made.
Mr. Bill Casey: What if they just bought the common shares?
Mr. Donald Carty: Then they wouldn't own 33% of the economic interest of the company, because we still would.
Mr. Bill Casey: Would they have all of the voting shares?
Mr. Donald Carty: They would have all the voting shares, that's correct.
Mr. Bill Casey: When do your preferred shares—
Mr. Donald Carty: Subject to some governance rights. And they could take our preferred shares out at face value.
Mr. Bill Casey: For $246 million.
Mr. Donald Carty: Right.
Mr. Bill Casey: You should be talking to Air Canada, maybe.
Mr. Donald Carty: We tried to last winter, Mr. Casey. We tried very hard to.
Mr. Bill Casey: I'm just trying to put this all together. I guess that's it.
The terms of those preferred shares, are they callable at a certain date?
Mr. Donald Carty: Let me turn to one of my colleagues. Do you guys know the answer to that?
Mr. Bill Casey: What's the interest rate on them, just while you're looking? Is it flexible, or is it tied to the base rate?
Mr. Donald Carty: It's a compounding non-cash annual premium of 6.25%.
Mr. Bill Casey: Okay, that's fixed.
Mr. Donald Carty: Yes.
Mr. Bill Casey: Right.
The Chair: Is that it, Mr. Casey?
Mr. Bill Casey: I'd just like to get that answer, that's all.
If the Air Canada deal went through, could the Canadian Airlines subsidiary maintain their association with Oneworld?
Mr. Donald Carty: Do you mean if Air Canada were to make a proposal to Canadian to buy their stock—
Mr. Bill Casey: If Air Canada were to make a proposal.
Mr. Donald Carty: —and successfully buy it? Absolutely. We have that relationship. There's no reason for them to suspend it.
Mr. Bill Casey: So we could actually have access to both those systems.
Mr. Donald Carty: Yes. Although as I understand it, Air Canada has said—and who knows what their intent is, because as I say, there's not been an offer made—that if they were to offer, and if they were to successfully acquire, they intend this carrier to have a partnership with Delta Airlines.
Mr. Bill Casey: Was that Canadian Airlines that was going into partnership with Delta?
Mr. Donald Carty: That is my understanding, that Canadian Airlines would have a partnership.
Mr. Bill Casey: Okay. They'd have a connection with Delta. Is the Delta alliance called Delta?
Mr. Donald Carty: It doesn't have a name at this stage.
Mr. Bill Casey: It's new?
Mr. Donald Carty: It's new. I think it formally involves three carriers: Air France, Delta, and AeroMexico.
Mr. Bill Casey: So Air Canada's plan appears to be to pull out of Oneworld and go with Delta.
Mr. Donald Carty: Again, that's what it appears to be—if it is a plan and if there is an offer.
Mr. Bill Casey: Thanks very much.
The Chair: Thanks, Mr. Casey.
Mr. Jackson, please.
Mr. Ovid Jackson: I have one quick question to follow up what Mr. Casey was asking.
When Mr. Dutta was here and we asked him about the penalty for loss of partnership, I think he said it would be in the range of $250 million. In the case of American Airlines, he inferred that it would be double that—about $500 million. There's a hook in there somewhere. I can't imagine that anyone would make an alliance without having some benefit.
So I'm asking you again, Mr. Carty, what would be the loss to Canadians should this partnership be broken?
Mr. Donald Carty: Well, that's a slightly different question. If Air Canada were to acquire Canadian Airlines and absolutely abrogate its long-term contract with SABRE, in particular, and with American Airlines, there is a substantial penalty for abrogating that commitment.
In addition, there is our preferred stock that was asked about before. There's no question about that. The distinction I was making earlier is that today, any penalty that is put in place as a result of the AirCo transaction can be put in place only with the full vote and approval of the Air Canada shareholders.
That appears not to be the case in what United and Air Canada have just done. They put in place an agreement that will penalize Air Canada's shareholders if Air Canada pulls out of Star, and has some limits on what Air Canada can do in terms of its growth or contraction. Those penalties have been put in place without any approval of their shareholders.
Mr. Ovid Jackson: That's a good political answer, but what is the value? How many millions of dollars?
Mr. Donald Carty: Of what, Mr. Jackson?
Mr. Ovid Jackson: Let's say if the deal goes sour for American Airlines. This would all come out.
Mr. Donald Carty: No, no. Our agreement with Canadian Airlines, sir, is a matter of public record in great detail. It's been in the public record, in the public domain, for six or seven years. There is a substantial penalty, which is declining over time, for abrogating the relationship with SABRE. They made a long-term, 20-year commitment to SABRE, and as time goes by the penalty for abrogating that contract is diminished. So it's a declining amount. But as we stand today, it would probably be a couple of hundred million dollars.
The preferred shares can be called—Mr. Grunow just reminded me—but they need to be called at $246 million plus 15% compounded, not at the accruing interest rate. So they're very substantial penalties.
Just to remind everybody, they were put in place at a time when no one, not Air Canada, not any other investor anywhere in the world, would invest money in Canadian. American took a very substantial risk and did so. Those penalties are in place.
Any other penalty associated with extricating itself from a relationship with American or AirCo is all subject to any vote by the shareholders of both companies.
Mr. Ovid Jackson: Okay. A lot of my colleagues feel that we get emotional about Canadian and Air Canada. We have the pilots and all the smaller communities, and we get into a lot of politics about that. But at the bottom of this, the people who make the money are Gemini and SABRE, and the contractual arrangement that you made with Canadian has literally tied their hands. You give them $100 million, and they pay you back $200 million a year or something like that.
Mr. Donald Carty: Mr. Jackson, that's simply not right. I don't want to suggest to you for a moment that the Canadian contract with SABRE isn't profitable to SABRE, but SABRE doesn't make a tremendous amount of money on that contract. In fact, SABRE makes a smaller margin right now on their contract with Canadian than they do on their contracts with American Airlines and USAir. So this is not a wildly lucrative contract.
The contract AirCo has potentially negotiated away from AMR only promises Air Canada, if they want it and if AirCo were to acquire the Air Canada shares, a contract that is as good as American Airlines' contract and USAir's contract.
As I said to you a moment ago, AMR is very close to the point of separating American Airlines and SABRE. At that point, American Airlines' relationship with SABRE will be the same as the relationship SABRE has with 50 or 60 other airlines in the world. It will be an independent company and will simply be a service provider for American.
The Chair: Thanks, Mr. Jackson.
Ms. Meredith, please.
Ms. Val Meredith: Yes. Thank you, Mr. Chair, and thank you, Mr. Carty.
There's a whole bunch of issues I'd like to cover, but obviously there isn't a whole lot of time.
Canadians out there are under the impression that Air Canada has made an offer and has now made a counter-offer. I heard from Mr. Benson and again from you this morning that there is actually no offer on the table. Is that accurate?
Mr. Donald Carty: Yes, ma'am, it is accurate.
Ms. Val Meredith: So in essence, we're talking about apples and oranges. Do we have one committed offer on paper with certain conditions and affirmations that have been made, but nothing on the other side?
Mr. Donald Carty: I think Air Canada has very specifically proposed a capital restructuring of Air Canada itself, and has indicated that it intends to go forward with that capital restructuring. It involves a buy-back of their own stock using some of their own capital, some of United Airlines' capital, and some of Lufthansa's capital. That piece is firm. They have talked about making an offer for Canadian, but no offer has been forthcoming.
Ms. Val Meredith: Precisely. So there is no commitment on paper from Air Canada, beyond buying back 15% or 35% of their stock. There's no firm committed offer on paper to buy Canadian, keep it flying, provide job stability for that other airline, provide any route connections with Delta, or anything else. There is nothing on paper for that element of what we, the Canadian public, thought were two legitimate offers. Is that what you're telling me?
Mr. Donald Carty: As of 10:30 this morning, that was certainly correct.
Ms. Val Meredith: Thank you. That certainly clarifies that.
There's another issue I want to raise. I will leave out names, but I'm sure you know where this comes from. This was sent to shareholders. It says holders of common shares who accept the offer will generally be considered associates of...under the legislation, and this determination is subject to any order or direction of the Quebec Superior Court in the pending proceedings scheduled to be heard on or about.... It says this may result in their votes being disallowed, their common shares being struck from the corporate share registry, as well as the loss of all rights attached thereof.
Is it common practice in the business world to tell shareholders that if they don't vote the way certain people want them to, they will lose those shares in a company?
Mr. Donald Carty: Mr. Grunow probably knows a little more about that language than I do, so I will ask him to respond to that question.
Mr. Otto Grunow (Managing Director, International Affairs, Oneworld): I think the easiest way to look at that is as an Air Canada scare tactic. That 10% rule and the legalities will all be decided. I believe, with respect, the issue of whether the particular shares could be struck off the share register will be settled as part of the litigation.
Ms. Val Meredith: What I'm asking you, sir, is whether it is common practice in the business world to tell people who have invested money in a company that if they don't vote in a particular way, those shares will be meaningless and they will have lost all of their investment.
Mr. Donald Carty: I'm pretty shocked at the language, I have to admit to you. I haven't reviewed it, but I don't think there's any substance to it.
Ms. Val Meredith: Mr. Carty, it is my understanding that this went to every Air Canada shareholder. I got it from a shareholder who received it in the mail. I am just astounded that anybody would tell somebody who invested in a company that their investment and their shares would be disallowed and stricken from the register, and that whatever they invested in that company would be null and void. I wanted to place that on the public record and ask you if that's common practice. Whether you like it or not, you've been accused of being really tough creditors out to dismantle—an American takeover—the Canadian airline industry.
My final question is if you are being accused of this, do you operate any differently? Do you benefit any more than your competitors Star Alliance or United Airlines would from the settlement of this debate over where Canada's travelling public will travel, whether it's through Star Alliance or Oneworld? Do you gain anything more than United Airlines and Star Alliance? If you're a predator, are they also predators?
Mr. Donald Carty: As I say, I'm uncomfortable with the characterization of us as a predator. We're a healthy competitor. Do we gain any more? Potentially, because of the network fit, the network is more valuable to us. I made the point about Vancouver. We need and will be responsive to a new gateway to Asia more so than our competitors, so maybe there's more potential upside for us.
It's all the same game. We're all looking for network strengthening. I don't think of United Airlines or Lufthansa as predators; I think of them as pretty tough competitors. I quite frankly don't think either of them thinks of me as a predator.
Ms. Val Meredith: You may not think so, sir, but certainly that's the idea of the Canadian public.
The Chair: Thanks, Ms. Meredith. Ms. Parrish, please.
Ms. Carolyn Parrish: Thank you, Mr. Chairman.
I'm surprised at Val's line of questioning that there really isn't an offer on the table, because I thought there was this artificial Air Stan Keyes that was going to operate out of Hamilton with Canadian pilots. So if that's really not an offer, my question probably shouldn't be asked—but I'm going to do it anyway.
What do you think, again given your experience with the Canadian air industry and the American air industry, of taking the Canadian fleet and turning it into Air Stan Keyes coming out of Hamilton? What do you think the possibility of success is?
The Chair: Just to clear the record a little bit—
Ms. Carolyn Parrish: Come on, Stan, they know I'm joking.
The Chair: They might know you're joking, but we have a television audience much larger than this room that may be wondering what the heck Ms. Parrish is talking about. That was just part of a proposal by Air Canada and Hamilton airport.
Ms. Carolyn Parrish: It has nothing to do with you.
The Chair: Hamilton airport, with its huge catchment area, will likely have some kind of service operating out of there. It's just that one of the proponents happened to put it into their proposal.
Mr. Donald Carty: Mr. Chair, you made a good point. Obviously Hamilton has a very substantial catchment area. Most of that catchment area today is, in an aviation sense, being served by Pearson. Inevitably, as resources and capacity tighten up in the country, Hamilton will be served.
I find it almost frivolous that suddenly the wisdom of a Hamilton hub has emerged as part of this debate. I don't think it has anything to do with this debate. In the fullness of time, Hamilton will get the service, as the chairman has indicated, the catchment area deserves. I think it has very little to do with this debate. I don't think that eventuality has anything to do with this particular transaction.
Ms. Carolyn Parrish: What do you think, Mr. Carty, the chances are of taking the whole Canadian Airlines fleet and having it operate successfully out of Hamilton?
Mr. Donald Carty: Obviously a number of Air Canada's aircraft are simply not suitable for the kind of service that would initially come out of Hamilton. When you think about the 747 400s that fly to Tokyo, Hong Kong, and Taiwan, those airplanes are not suitable to develop the kind of operation you might want to initiate out of Hamilton in the early days. They're suitable for essentially gateways—international destinations. Even Vancouver or Toronto can't support that size of airplane, unless they have some feed into the catchment area. You can see that all over the world. So a very big percentage of Canadian's fleet is just not suitable for that kind of operation.
Ms. Carolyn Parrish: So would you suggest that it might be planned obsolescence for a very large chunk of Canadian Airlines?
Mr. Donald Carty: I think the plan is not responsive to a number of Canadian's stakeholders. I think Mr. Benson has indicated this. It's clearly not responsive to the company's employees and debt holders.
Ms. Carolyn Parrish: If you were contemplating such a glorious move, who would you assume would be responsible for the extensions of the 403 and the connectors to the highways? Would it be Canadian Airlines, or would it be the local municipality or the province?
Mr. Donald Carty: I suspect that the airline does not intend to be responsible for the ground transportation infrastructure.
The Chair: Thank you very much, Ms. Parrish.
There is an expression in Hamilton, though. If you come, we will build it.
Some hon. members: Oh, oh!
Ms. Carolyn Parrish: Did I really have five minutes?
The Chair: Yes. Time goes fast when we're having fun.
Mr. Guimond, please.
Mr. Michel Guimond: Thank you, Mr. Chairman.
Mr. Chairman I would like you to ask the witness to detail his role and his title.
I hope it will not be counted against my time.
The Chair: Mr. Otto Grunow is managing director of international affairs.
Mr. Michel Guimond: All right.
Mr. Carty, you undoubtedly know that I have not been given “my” definition of “predatory air carrier”. I will attempt to ask you further questions to enhance my understanding.
Do you know how many weekly transborder flights Air Canada supplies between Canada and the United States?
Mr. Donald Carty: Those operated by Air Canada, sir? I do not know the answer to that question.
Mr. Michel Guimond: I will tell you: there are 1,350.
Do you know what percent of these transborder flights land at United Airlines hubs?
Mr. Donald Carty: No, sir, I do not.
Mr. Michel Guimond: Twenty percent.
Do you know how many transborder flights Canadian Airlines supplies weekly between Canada and the United States?
Mr. Donald Carty: No, sir, I do not.
Mr. Michel Guimond: Neither do I. I don't know, but we can find out. I simply want to ask you if you know the percent of these Canadian transborder flights that land at American Airlines hubs.
Mr. Donald Carty: No, sir, I don't.
Mr. Michel Guimond: Seventy-five percent. An air carrier that does that is called a...
Mr. Donald Carty: I don't believe that percentage is correct, sir. They operate flights into San Francisco, Los Angeles, and New York, and I believe those flights constitute a substantially higher percentage than 25% of their flights, sir.
Mr. Michel Guimond: If I am wrong, I ask you to prove it and send the figures you believe to be correct to the clerk. The calculation is easy—simply take a schedule and count up...
Mr. Donald Carty: I agree with you. I'd just ask you to substantiate the 75% number, sir.
Mr. Michel Guimond: All right. So, are you going to send the clerk the figures that prove the opposite?
Mr. Donald Carty: Absolutely.
Mr. Michel Guimond: Would you do it before November 24, because our hearings end November 23 and we are to submit a report to the Minister on November 26? Apparently, there's a rush.
Mr. Donald Carty: I'd be delighted to, sir.
The Chair: And, Mr. Guimond, the committee clerk would also be interested in the information that you put forward on the 25%, if you have that available.
A voice: 75%.
Mr. Michel Guimond: When I am a witness, I will give you my—
The Chair: It was in your question.
Mr. Michel Guimond: No, I'm not a witness.
I will ask you one final question, Mr. Carty. Is it true that your involvement with Canadian Airlines dates from 1990?
Mr. Donald Carty: I believe that's the date. It's somewhere around there.
Mr. Michel Guimond: Yes. Is it profitable? You have probably been informed of the questions I asked Mr. Benson. I asked him if your company, American Airlines, was a philanthropic organization or charitable institution. You interjected that you are not a charitable institution. Your lobbyists probably told you that I cornered Mr. Benson on the subject. Have your investments been profitable?
Mr. Donald Carty: We have had a return on our investment. It's not been a good return. The return has taken the form of the network benefits we've talked about today. In terms of recapturing that original equity investment, then obviously, like every investment in both airlines in Canada, it has been very unsatisfactory.
Mr. Michel Guimond: Yes, but when someone says he is satisfied with his investment, this is an essentially subjective statement. Mr. Benson, when he appeared before us on Thursday, October 28 said, and we have it in black and white:
“They have invested money, expertise and resources with no return.”
In other words, he almost compares his company to a religious community that says it is absolutely essential to save the community's youth centre because it's important. In a way, that's the role you have played.
I told him that I did not believe it and I hope you will give me a satisfactory response if you want me to believe you. Very few people believe that American Airlines is totally disinterested and concerned only with philanthropic works when it attempts to save air transport in Canada.
Mr. Donald Carty: No, it is not philanthropic. Our objective is to enhance our shareholder value. That's our job.
I have to report to you that the investment we made in Canadian several years ago hasn't done a very satisfactory job of doing that. We have not been without benefit from it, but when we entered that relationship we expected benefit to accrue to our shareholders in three ways.
One, we hoped and expected the equity of Canadian would appreciate over time. That has not been a successful outcome. It hasn't appreciated. In fact, it has clearly depreciated.
Second, we hoped to achieve some network synergy between the two carriers that would accrue benefit not only to Canadian, where we were making that equity investment, but also to American. That has been successful. As I indicated to the committee in my testimony, significant revenues accrued to both sides as a result of that relationship.
The third place we hoped to achieve some shareholder value was in our services relation with respect to SABRE. That has been profitable. It has not been wildly profitable.
On balance, if you take all three of those expected returns, they have not been sufficient to warrant the original investment. So if you look at that original investment, it has not returned, as somebody alluded to earlier, our weighted average cost of capital. It has been somewhat disappointing.
Nonetheless, we are prepared to again invest in the Canadian airline industry with the exact same expectations about return—improved equity return, improved network benefits, and some services revenue.
The Chair: Thank you very much.
Ms. Desjarlais, please.
Ms. Bev Desjarlais: If the SABRE contract were continued with the restructured airline, then would there be no penalty? You mentioned, I think, a $200 million or $225 million penalty. If that contract was continued, where Canadian was still utilizing SABRE, there would be no penalty, correct?
Mr. Donald Carty: Yes. What in effect our friends at Onex extricated from us during the negotiation was an agreement that they could wrap the Canadian contract and a new contract with the new Air Canada into a single contract, at their option, with a most-favoured-nation clause in it so that it would be as good a contract as that of USAir, American, or the other vendors.
Ms. Bev Desjarlais: So in the event that an Air Canada proposal came in and SABRE still continued to be utilized by Canadian, there would be no penalty?
Mr. Donald Carty: I believe that's right.
Otto, am I missing anything there?
Mr. Otto Grunow: I'm sorry, I didn't quite catch the question.
Mr. Donald Carty: She's saying if Air Canada acquired Canadian, and if Canadian continued their contractual relationship with SABRE, would there be any penalty for Canadian?
Mr. Otto Grunow: No, I believe not.
Ms. Bev Desjarlais: The length of time remaining in that contract is something like...?
Mr. Otto Grunow: Sixteen years.
The Chair: Thanks, Ms. Desjarlais. I'm sorry, but I'm trying to split time here. This room has to be taken at noon by another organization.
Mr. Casey, you have one minute.
Mr. Bill Casey: Thanks very much.
I'd like to carry on from both Bev Desjarlais' questions and mine earlier. You indicated that if the deals didn't go through, there would be no cancellation of the contract between Canadian Airlines and Oneworld. Will you reinvest money in Canadian Airlines, if none of these deals go through, as a stand-alone deal to try to restructure and restrengthen it to protect your preferred shares, your connections, and your SABRE deal?
Mr. Donald Carty: Mr. Casey, that is, of course, a very hypothetical question. We expect, and plan for, the Onex deal to go through. If it does not, we'll obviously have to regroup and think about the financial implications of Canadian not being successful going forward, failing, and potentially depriving us of all that connect revenue as a result of them not being there.
But we have not made that decision at this time. Indeed, it would be a difficult decision for us to make.
Mr. Bill Casey: Haven't ruled it out.
Mr. Donald Carty: No, that's correct.
Mr. Bill Casey: Thanks very much.
The Chair: Thanks, Mr. Casey, for going so short.
Mr. Carty and Mr. Grunow, we appreciate your coming before the standing committee, giving us your presentation, and answering our questions. Thank you very much.
Mr. Donald Carty: Mr. Chairman, thank you very much.
The Chair: The meeting is adjourned.