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STANDING COMMITTEE ON TRANSPORT
LE COMITÉ PERMANENT DES TRANSPORTS
[Recorded by Electronic Apparatus]
Tuesday, November 23, 1999
The Vice-Chairman (Mr. Joe Comuzzi (Thunder Bay—Superior North, Lib.)): Welcome to the Standing Committee on Transport, meeting 27.
Welcome, Mr. Benson and Mr. Markey. I welcome you back. I'm just sitting in for the chair for a few moments, and I'm unfamiliar with the procedure at this point. Were you going to give an opening statement or were we going to go right to the questions?
Mr. Kevin Benson (President and Chief Executive Officer, Canadian Airlines Ltd.): Mr. Chairman, if you'll give us just a few moments, I wouldn't mind making a few comments.
The Vice-Chairman (Mr. Joe Comuzzi): Mr. Benson, you have all the time you need. You've waited for us, so you just make yourself comfortable and go ahead, sir.
Mr. Kevin Benson: I'll try not to abuse that privilege. Thank you.
Thank you for the invitation to come back and meet with you here again this evening. It doesn't seem like just four weeks since we were last here. It seems more like four months—for many of you as well, I'm sure.
An hon. member: Three or four years.
Mr. Kevin Benson: Three or four years? And they say time flies when you're having fun, right?
They have been busy weeks though, Mr. Chairman, for all of us involved in the industry. We've all seen the bidding war that developed between Onex and Air Canada, one that I'm sure did not disappoint the Air Canada shareholders at the time.
That bidding war came to an end with the court ruling that declared the Onex offer illegal. Of course that offer has now been withdrawn and they have left the process, which did bring our attention back to the Air Canada offer made in October and actually mailed out to shareholders about a week ago. That offer, as you know, is to acquire the common shares of Canadian for $2 a share, effect a creditor reorganization and, as we understand it, ultimately merge the two carriers.
We are on record as supporting a single carrier and we remain on record as supporting a single carrier. Accordingly, we are in discussions with Air Canada at the moment, trying to understand the offer they've made us, in particular trying to understand the conditions to the offer and the process that's likely to follow from the offer.
I would stress, Mr. Chairman, that it is still early in the process. I think we are making progress, but there are clearly a number of bridges we have to build: bridges to develop trust and confidence in each other, clearly; bridges that will help us understand and explain the Air Canada offer to the different Canadian stakeholders; bridges that will give us comfort that the conditions they have imposed in terms of government approvals and American Airline approvals can actually be met.
I would stress that we are working on this aggressively. We are very conscious of the December 7 deadline that Air Canada has imposed, and we'll do our best to answer all those questions prior to that time.
In the meantime, the members of the Oneworld Alliance have looked at the support given and the rights obtained in regard to Air Canada by Star. They are clearly wondering now whether our merger with Air Canada would result in their being totally shut out of Canada and, in doing so, wondering what support, if any, they should be offering to us.
American Airlines is obviously very involved in this exercise and is trying to understand what the ramifications of the new arrangements might be for them. In addition, they have asked us to once again look at our capital requirements, the sorts of requirements that we would have in a stand-alone program.
Unfortunately, all of these initiatives are going to take a couple of weeks to develop, and I know that your report is likely to be completed prior to that time. In that regard, Mr. Chairman, if I may, I would like to close these comments with a few comments that reflect my own personal standpoint.
In regard to the 10% ownership in Air Canada, something that has received plenty of attention in the last few months, my own view is that these sorts of restrictions serve management far better than they serve shareholders, customers, or any other stakeholders. I believe that ultimately companies belong to the shareholders and that if there are going to be restrictions on ownership perhaps those restrictions belong more in the articles of memorandum than they do in an act of Parliament. In that position, shareholders are free to live with those restrictions or to change them as they see fit.
Much has also been said in the past few weeks about foreign ownership and the present restrictions that limit it to 25%. I would say in that regard, Mr. Chairman, that this is clearly a global industry. As I think has been illustrated in recent weeks, there are often ways to do things indirectly, even when they are prevented from being done directly.
I understand that there is a strong desire on the part of many Canadians to keep this industry closely centred in Canada and controlled in Canada, but in the long term I would say that these airlines—be it one or be it two—in Canada are going to require access to the huge U.S. capital markets, particularly if they're going to compete with the huge U.S. carriers. I would ask, perhaps, whether the committee could give some consideration to recommending some increases in that 25% limit.
Finally, in regard to regional carriers, I have a few comments, if I may. I believe there is little to be gained by asking a merged carrier to rid itself of its regional carriers. We'd have to start off, with such a decision made, in defining what a regional carrier is. Is it a definition by size of airplane? In which case, Canadian flies 65-seat jets in the regional carriers and Air Canada flies 50-seat jets in its main line. So clearly that's not a definition.
Do we base it on routes? Clearly again, Air Canada tends to use their regional carriers on particular routes, while we intersperse our aircraft on many mainline short-haul routes. So again, a definition of what routes they would fly would have to be agreed upon.
In many cases, both of us use a regional carrier to develop a route—starting a route, adding frequency with a small airplane and, as that route grows, moving it to a mainline aircraft. How would that work in the case of a separate carrier? Would you be allowed to grow it? Could you enlarge your service on a route?
Finally, from a customer point of view, I think the schedules of the regional carrier and the mainline carrier have to be closely integrated if you're going to provide maximum convenience to customers. Clearly in a situation where a regional carrier was operating on its own, perhaps they would have no incentive to operate a flight from Sault Ste. Marie to Toronto at 10 o'clock in the morning to connect to the five or six flights leaving internationally from Toronto. In other words, they will perhaps require a passenger to get on at 8 o'clock in the morning in order to wait for a flight. There would be no incentive to run a plane with a small load absent this incentive to connect to mainline traffic.
Mr. Chairman, for some of these reasons, and really for the overall necessity in Canada to avoid the unnecessary overhead wherever we can, I would really urge the committee, if they possibly can, to avoid recommending a disposition of regional carriers.
Mr. Chairman, in closing my comments I would like to express on behalf of all of the employees of Canadian Airlines the appreciation we have for the time and energy this committee has put into this issue, our problems, in the past four weeks. Thank you.
If there are any questions, I think that's what we're here for.
The Chairman (Mr. Stan Keyes (Hamilton West, Lib.)): Thanks very much, Mr. Benson, for your reappearance before the committee and for your bullet points in your presentation. We look forward to asking some of the questions that have been asked of some of the witnesses who have appeared before us over the last couple of weeks. We thought it better that those questions be addressed directly to you and to the representative for Air Canada when he appears after you.
Ms. Meredith, please.
Ms. Val Meredith (South Surrey—White Rock—Langley, Ref.): Thank you, Mr. Chair.
Thank you, Mr. Benson and Mr. Markey, for returning to answer some of our questions.
Some of the issues that have been raised over the last number of weeks dealt with the Air Canada offer. According to various witnesses, it would appear that basically what we're talking about is Air Canada as a stand-alone domestic carrier with the Canadian regionals operating only in western Canada. This is just what we've heard from some of the witnesses. If this is the case, my question to you is can Canadian survive as a subsidiary of Air Canada if it is only a domestic carrier competing against Air Canada's domestic routes? I understand they don't see they would be cutting back.
Mr. Kevin Benson: Mr. Chairman, our understanding of the Air Canada offer is perhaps a little different. Our understanding is that Air Canada would acquire the shares of Canadian, the parent, and would therefore acquire the shares of the regional carrier, Canadian Regional Airlines. They would run Canadian separately but look for quick coordination of schedules. In other words, they would be looking to eliminate some of the empty seats and some of the wastage that occurs between the two airlines today. They would run Canadian as a full-service airline with international routes, transborder routes, and domestic routes. Following their interaction with the creditors and allowing sufficient time, I think, for employees to understand the opportunities of a merged carrier, they would then look to actually merge the two carriers.
I did not understand at all that the intention is to create it simply as a domestic carrier. That is not what has been represented to us, and it's not what I think is written in the offer we have.
Ms. Val Meredith: Is your understanding that the operations would be run much the way they are now but just interlinked with the Air Canada operations from a management point of view?
Mr. Kevin Benson: Our understanding is that they would very quickly put together network planning and probably marketing and sales. Network planning would plan a schedule for the two airlines to avoid wastage, as I said, so there would be one flight at 8 a.m. and one flight at 10 a.m. where there perhaps had been two at 8 a.m. and nothing until noon. That would be coordinated early on, but they would be flown and staffed by the separate carriers for a period of time.
Ms. Val Meredith: Canadian has an older fleet of aircraft. If you were bringing in new equipment, who would they give it to? Are we talking about Air Canada willingly giving Canadian the new equipment and new routes that come on board and Air Canada employees being willing to allow that to happen? I fail to see how that can work.
Mr. Kevin Benson: Mr. Chair, please understand that we are in the exploratory stage, and we are asking many of those questions. What I share with you is only my understanding at this time, not necessarily fact.
My understanding is the following: first of all, a number of the aging aircraft fleet types in both airlines would be removed. Likely the DC-10s in Canadian and the DC-9s in Air Canada would disappear quite quickly. We have some 737s that are older than others, and perhaps some of those might disappear, along with a fair number of the small F-28 jets, which are quite elderly.
I believe Air Canada's plan is then to look at fleet rationalization, in other words, to say to the extent we have eight or ten of one fleet type and they have three or four, we might put them all together in the one company and run them that way for a while, again looking for ways of optimizing spare utilization reserves and all those other good things. But their overriding pledge is that no employee will be asked prior to March 2002 to accept a layoff. It will all be voluntary.
Having done that, they then need to utilize the people in the airlines as they exist. I therefore do believe there's a lot of merit behind what they say in terms of splitting up the fleet and optimizing the utilization of their fleet among the workforce.
Ms. Val Meredith: Thank you.
The Chairman: Thanks very much, Val.
Mr. Calder, please.
Mr. Murray Calder (Dufferin—Peel—Wellington—Grey, Lib.): Thank you very much, Mr. Chairman.
Kevin and Stephen, welcome back.
Over the last few weeks I have basically come down to ten points, and I'm going to deal with this from a policy direction point of view. I'm very interested as to how this is going to merge, but we've been charged with the point of making policy.
You've already addressed the one carrier. You've addressed the 10% clause on ownership and the 25% clause on foreign ownership. You have also partially addressed regional carrier policy and given a wee bit on employment retirement by attrition, buyout packages, or whatever when the two merge. I would like, though, some insight on airport slot policy, charter policy, reciprocal cabotage, remote communities, and frequent flyer points.
Mr. Kevin Benson: I'm going to try to address some of those, if I may, Mr. Chairman.
I assume these questions are being asked in the context of a merged airline.
Mr. Murray Calder: That's right.
Mr. Kevin Benson: That is not the only option right now, but it's clearly the primary one.
Mr. Murray Calder: Yes.
Mr. Kevin Benson: In terms of airport slots, I think there are only one or two airports in Canada where slots are a problem. I think it would be absolutely reasonable to ask of the new airline that they free up a certain number of slots in order to enable competition to come in, should it so desire. Obviously, those slots have a value to the extent that money is paid for them, and that ought to flow back to the parent company. Perhaps there could be a “use it or lose it” policy. If the airline acquiring it doesn't use the slot, the slot goes back to the airline that owned it previously.
In terms of charter operations, I think we would encourage an open, free market enterprise system. If charter carriers want to operate from point A to B and feel they can do so profitably, absolutely—free them up to do so. That's what will keep all carriers honest and the competition available.
Cabotage really scares me, even reciprocal cabotage. We are, as I said before, a very small airline, and the combined carrier would be a very small airline compared with at least five major airlines south of the border. I think reciprocal cabotage would really be like watching a National Football League team playing a high school team. It was be a damaging aspect. I would be very worried about it.
Mr. Joe Fontana (London North Centre, Lib.): Are you talking about Green Bay these days?
Some hon. members: Oh, oh.
Mr. Kevin Benson: In terms of remote communities, the free market system would operate very simply, I think. Where there is an opportunity and a need, the market system tends to respond to that need, and I would really encourage that to be the way. To the extent that there is one person a day flying between points A and B, it's very difficult in any free market system to offer any form of service to that community. But where there is active demand, whether it's a 6-seater, a 12-seater, an 18-seater, or something big run by the national carrier, the market will respond very quickly to that. I believe as long as the market is an open, free system that can respond, that will occur.
I think frequent flyer points are fundamental to everybody. It's like cash in the bank. I think Onex recognized that early on. And I think Air Canada has recognized that too: in both the issuer bid and their offer they've made the point that frequent flyer points would be protected.
Mr. Murray Calder: Thank you.
The Chairman: Thanks, Mr. Calder.
Michel Guimond, please.
Mr. Michel Guimond (Beauport—Montmorency—Côte-de- Beaupré—Île-d'Orléans, BQ): Thank you, Mr. Chairman. This is our 27th meeting since we started examining the air transport system, and I would like to welcome the Liberal member for Vaudreuil—Soulanges, who is at the table for the very first time. I am convinced he will find our proceedings extremely interesting.
Mr. Benson, I would appreciate a brief outline of Canadian's financial status at present. A number of statements have been attributed to you, and various interpretations of these statements have been made. How would you describe Canadian Airlines' financial health? Could it go bankrupt before the end of the year? Are we talking about six months or a year? Has American Airlines guaranteed unlimited funding, a kind of financial Niagara Falls? What is the financial status of Canadian Airlines right now?
Mr. Kevin Benson: It's a question I've been asked a number of times, and I'm not very good at explaining it, because the media don't seem to carry what I'm trying to say very clearly.
Let me say first of all, we clearly today do not have adequate cash resources for the next year. We spend about $3 billion a year, and we obviously don't have $3 billion in the bank.
What we do, though, is once a quarter we take our current cash position, we look at the expected bookings over the next 12 months, we look at our expected inflow from those bookings, compare it to our expected or known expenditures through that 12 months, and look, almost on a daily basis, for days on which we don't have sufficient resources to meet the outflow.
When we did that exercise in November for the September quarter end, we found a period of time at the end of the first quarter and going into the second quarter when we did not have adequate resources to meet our obligations. American Airlines agreed that starting as soon as we wanted to, we could delay certain payments to them through and into the summer period. And obviously in the summer in the third quarter is when our cash position builds back up again, so there's a means to repay them in that quarter.
A number of things can impact that and impact it very quickly. The first would be that the booking pattern changes. My only experience of a booking pattern changing radically and quickly was at the end of 1996, when the uncertainty about Canadian was prevalent, and we saw bookings drop off to almost zero in about two days. There were still a large number of people on the airplanes, but they were all frequent flyers using points as quickly as they could. That position can change very quickly as confidence disappears in the airline.
In terms of American Airlines' support, American are careful. They understand that we will have cash available to meet our obligations in the third quarter and pay them back what's owed them in the first and second quarter. And for that reason I think they've been quite quick and quite strong in promising their support.
We will shortly, however, be doing the exercise for the 12 months ending December 2000. And if that requires American support into the fourth quarter without a known date of repayment, that might be a lot more difficult. They have not pledged to give us that support.
So the best answer I can give to the question is as long as people remain confident in Canadian and its ability to keep flying we can meet our obligations. Based on the calculation we did in October, we can meet them for the next year. However, if that changes then we could be down to weeks.
Mr. Michel Guimond: Mr. Benson, according to many of the people who have been studying this issue for some time, American Airlines' main interest in taking over Canadian is to have access to international routes, particularly to Asia. Would you agree that these international routes do not belong to Canadian, but are granted by the Government of Canada following bilateral negotiations with the countries involved? These routes therefore belong to Canadian taxpayers, not to one particular company. Am I right, or does Canadian—and you as its CEO—consider that the routes belong to the company?
The Chairman: Thank you, Mr. Guimond.
Mr. Kevin Benson: Mr. Chairman, in response to the direct question, the routes are clearly the assets of Canada. They are assets that have been designated to Canadian and in some cases to Air Canada, and in some cases to other airlines as well, to use under established air policy, and in fact under the laws of Canada as they relate to transportation. They clearly belong to Canada, and Air Canada, Canadian, Transat, and other airlines use those authorities.
Mr. Stephen Markey (Senior Vice-President, Corporate and Government Affairs, Canadian Airlines Ltd.): And under the specific terms...[Technical Difficulties—Editor]...which define how you must use those route authorities.
The Chairman: Thanks, Mr. Guimond.
Mr. Fontana, please.
Mr. Joe Fontana: Thank you, Mr. Chairman, and thank you, Mr. Benson.
Mr. Markey, let me pick up on what you said. I'm reassured that what you're telling Canadian customers and Canadians in general is that if they continue to support Canadian, you don't have an imminent crisis on your hands, and neither do we, as a country. And I want to talk a little bit about that customer, because everybody talks about shareholders, everybody talks about this, that, and everything else, and I think at the end of the day we have to make that customer the priority in whatever policy we do.
So if you do have some time, if Canadians continue to support you by buying your tickets, and this committee puts in place the public policy framework that talks about customers, talks about competition, and so on, in pricing, and based on the fact that you said your Oneworld partners are asking you to put together a stand-alone project, let me just give you this hypothesis: If we change the 10% rule, if we increase foreign investment, if we do a number of key things, are you perhaps telling us today that there is an opportunity that Canadian could survive under a different regulatory framework or public policy framework?
Mr. Kevin Benson: I'm afraid I have to start off by challenging some of the “ifs”. I have to do that because, as I said the previous time I appeared here, our financial health depends so much upon the perception of our financial health. The moment we go out and indicate we have a problem in December next year that we have not covered off, for whatever reason, then that problem immediately becomes a problem of tomorrow, in that the customers book away instantly; they start to move in the other direction. So the challenge becomes how do we keep them there.
Mr. Joe Fontana: Today I thought I heard a very reassuring statement that if Canadians continue to buy your tickets you're fine for at least a year.
Mr. Kevin Benson: We're fine for at least a year through the end of September. However, I would say again that the moment we issue a statement to say maybe we have a problem in October, we have a problem in January.
Mr. Joe Fontana: Maybe you shouldn't say that.
The Chairman: Let's let Mr. Benson finish his answer first.
Mr. Kevin Benson: I don't have an answer.
To come back, if Oneworld or if American Airlines were to step up with a capital assignment, a capital allotment, that was sufficient for us to redo the business plan, then, yes, we absolutely would have a go on a stand-alone basis. The question, of course, is how much. There's a tremendous tendency to trickle in, to provide enough for this month and no more. Then as management and as a board we have an obligation to go away and ask ourselves what is best for the stakeholder groups, and particularly the employee group.
Mr. Joe Fontana: If we were to fashion the best public policy framework and the best choices for consumers, which means competition, which means maybe two pretty darn good dominant national carriers, and with your regional infrastructures and independents and charter companies, that's obviously what we would want. I'll ask Mr. Milton this. He's going to essentially buy you but then run you as two separate companies, like you are right now. So I'd like to know how he thinks he can run Canadian exactly how you are and make a profit or keep it viable. Unless he has some very deep pockets and a heck of an awful lot of money coming in from someplace that you can't access, I find that rather bizarre. Everybody talks about a single air carrier, but now they all want to run Canadian and Air Canada as if nothing had changed.
My point to you is that if we put in place a public policy framework that would attract investors, from wherever they may come, so that Canadians are served by healthy competition and pricing at the national, international, and regional levels, wouldn't that be the best scenario for Canadians?
Mr. Kevin Benson: There were two questions. The answer to the second one is yes. If you could create two healthy companies competing with each other, providing service to Canadians, that definitely would be the best situation.
I would then go back, if I may, to our comments previously, when we were proposing a single carrier. The huge difference between a single carrier and the two carriers competing today is excess unused capacity. There's a huge cost in that. Every time a plane leaves, every time a plane lands, it burns much the same fuel whether it's empty or full, and it pays the same landing fees whether it's empty or full. So the costs are there. Both of us are scared to break a schedule because of the old horseshoe pattern that says that the customer goes to the best schedule. So we both fly empty flights many hours of the day when one would be plenty. That's the big saving a single owner can effect.
Mr. Joe Fontana: But let's face it, both Air Canada and Canadian I think have been on a self-destructive corporate plan for the past six or seven years, which has weakened both of you, you more than Air Canada. What is wrong with working together in the public interest? In other words, if you want to reduce capacity, what's wrong with saying to each other that perhaps you ought to work together in reducing capacity and using the existing fleets of both carriers so that Canadians are best served by the best possible solution? Was that part of your negotiations? Is that possible? Could you enlighten us about that?
Mr. Kevin Benson: I guess we dreamed it was possible. We started discussions with Air Canada back in January in the hope of achieving something along those lines, and we're now in late November and it has not yet been possible. Perhaps it yet will, but history indicates otherwise.
The Chairman: Ms. Desjarlais, please.
Ms. Bev Desjarlais (Churchill, NDP): Mr. Benson, it's been suggested that in actuality the reason we're into this crisis isn't necessarily because of the capacity issue but rather because of the debt load Canadian has taken on with American Airlines and others. Is that the biggest issue, the debt load Canadian has, or is it strictly the capacity issue?
Mr. Kevin Benson: I think it's the same question, in that you're looking at the revenue relative to cost base. To the extent that you have more revenue than costs, you have the ability to service debt.
Ms. Bev Desjarlais: Did you bite off more than you could chew with your debt load?
Mr. Kevin Benson: That would certainly indicate that we have more debt than we can comfortably service.
Ms. Bev Desjarlais: One of the other thoughts out there is that even if somehow we could come up with a solution and have two airlines, which I think many of us see as ultimately the best result, the first thing we would have to do is ditch the Canadian management because production-wise and employee-wise they are doing okay, but somehow the management just hasn't handled this issue. Is that a fair assumption?
Mr. Kevin Benson: You'll understand if I say that is a very unfair assumption and I disagree totally with the statement.
Ms. Bev Desjarlais: Should we end up with one major airline, is it reasonable to take away some of the international routes that are between the two, and to not allow the regionals to be part of the parent company, so to speak, in order to ensure that we have competition and service for Canadians?
Mr. Kevin Benson: Mr. Chairman, I would strongly advocate against that. If I can go back to my comments in front of this committee four weeks ago, I pointed out that one of the challenges Canada has is a small population and huge geographic area and major competitors just south of the border. If we're able to create the history that one of the committee members referred to just now and create a single carrier that could strongly represent Canada, why would we set about breaking it down the day after we created it?
Ms. Bev Desjarlais: Because they haven't garnered the respect of the Canadian people by working together to provide service to Canadians.
Mr. Kevin Benson: My answer would be that to the extent that we work totally together, which I think competition law forbids, there wouldn't be the prices or opportunities that customers or consumers are claiming they need today.
Ms. Bev Desjarlais: Competition law wasn't respected a few months back either, in all respect, Mr. Benson. You were quite willing to waive the competition law or the rules at that point and access section 47. So I think rules, if they ensure that we're going to build a stronger airline or two airlines, can be put into place to ensure that this does happen but still provide service.
Mr. Kevin Benson: I might just say that, first of all, we have always complied with the competition laws. If those laws were set aside from time to time to enable opportunities to come forward, then we've taken advantage of those opportunities, which is I think exactly the purpose of setting them aside.
If, going forward, the competition laws were changed to enable the airlines, be they one, two, or three, to sit together and plan prices, then perhaps they would all be profitable, but I suspect the customer and consumer would not be that happy.
Ms. Bev Desjarlais: I wouldn't suggest it for all time, but certainly to ensure that we stabilize our industry it would be reasonable.
That's it. Thank you.
The Chairman: Mr. Comuzzi, please.
Mr. Joe Comuzzi: Mr. Benson, I'm still of the opinion that I'm not about to give up on Canadian just yet. I know there are a lot of people out there, and from your original submission and the minister talking about a dominant airline and his opening remarks.... I'm not about to buy into that yet, until I exhaust all possibilities. I think Canadian has still too much to offer the Canadian people to go by the board or be taken over. So that's what I want to ask you some questions on today.
You've said that you may have enough funds to operate until December, which is a good indication. Some of the major airlines in the world, in the United States, have gone into creditor protection. We have that same remedy in Canada. I don't think there's any embarrassment in seeking that protection from the courts. It does give you that opportunity to really enhance your position in the time the court allows you to restructure. At this particular period in a very proud history, and with very good employees, I'm wondering why that situation has never been canvassed at Canadian.
Mr. Kevin Benson: Mr. Chairman, I have a couple of comments, if I may.
First of all, I fully reflect and support the comments in regard to Canadian and the desire to see Canadian prosper and move forward.
In regard to bankruptcy, no, it's not a question of pride at all. The laws here are perhaps somewhat different from chapter 11, with which some of us are more familiar. Chapter 11, as I understand it—I'm not a lawyer—gives management the opportunity to present a plan. The plan might include compromising creditors or changing certain other rules. The court might well call on experts to see whether they feel the plan is valid. If they do, they will force that implementation of that plan.
That is not the case in Canada. When you file under CCAA, your opening statement is that you are bankrupt. As you file, as you make that statement, you hand all control of the company to the creditors. It's then up to the creditors to decide if they like it do not not like it. In the case of aircraft, aircraft are very fluid objects. They can be moved around the world very quickly and can be redeployed wherever there is an opportunity. I think the temptation on the part of creditors is to do that. That's the first issue.
The second issue, though, is that merely compromising the debt does not make the airline profitable going forward. The airline has to be able to earn a sufficient return on the assets to justify future investment, and that measure is taken prior to any debt service. Injecting $100 million into Canadian today and doing nothing about it just gives us the means of covering our losses for the next year. It doesn't change the picture a year from today, unless a lot of other things change with it.
My big concern in regard to your statement would be that we're gambling with a lot of lives when we do that. If there is a valid offer on the table, one that protects the majority of jobs and protects the majority of stakeholders, however much we might want to protect the individuality of Canadian, we must consider that before I put the jobs at risk, because Canadian may never emerge from that bankruptcy.
Mr. Joe Comuzzi: Just as a point of clarification, Mr. Benson, chapter 11 is under the bankruptcy law in the United States. We have a special act in Canada, the Companies' Creditors Arrangement Act, which really has more protections for the corporation, especially with respect to public policy and the amount of employees involved.
Mr. Chairman, in the last one or two years we've seen the courts to be very liberal in interpreting and applying the public policy aspects to an application for some reorganization. Let's just talk about this for a minute.
What Canadian needs is time to reorganize into a healthy corporation and to eventually come to grips, through a court plan that you and your directors would propose, with how you're going to handle that awesome debt. I just don't understand, Mr. Benson, why we ran in for a section 47 when we really should have considered that aspect.
That's just one aspect, because we haven't given other suitors time to come to the table. I'm not going to give up on Canadian tonight. Regardless of what you say and regardless of what the next witness is going to say, I still think there's some hope to maintain the presence of Canadian Airlines in Canada.
Mr. Kevin Benson: Well, Mr. Chairman, I would reflect that hope. If the opportunity came up, I would embrace it with both hands. But it would have to be the right opportunity and the right answer. We started our presentation here four weeks ago by saying that the industry is broken. This industry needs to be fixed. We went through a series of reasons as to why we thought it was broken and how it might be fixed.
The key issue we faced at the time, and which we have tried to address through a single carrier, is how to match the revenue opportunities with the costs inherent in running an airline. It is our belief that while it can be done as two separate airlines, it is very difficult and it's a challenge. Perhaps the better alternative for all the employee groups, for the shareholders, for the stakeholders and for the customers might be to at least have a good hard look at the question of whether or not a merged airline can be created. Can a merged airline be created that gives it the ability to service debt and earn the returns the U.S. airlines are earning?
The Chairman: Thanks, Mr. Comuzzi.
Mr. Casey, please.
Mr. Bill Casey (Cumberland—Colchester, PC): Thank you very much.
On a personal note, I have to compliment you on your stamina and resilience for going through this exercise, which very few executives probably will ever have to go through, and the spotlight you've been under and the pressure. Also, your commitment to Canadian Airlines has never been questioned.
Today you have issued a press release, which I have a couple of questions on. One statement says the board has been advised by legal counsel that the offer as currently structured does not constitute a permitted bid, and you've recommended that your shareholders not tender their shares. Are you suggesting the Air Canada bid is not legal?
Mr. Kevin Benson: No, no. The suggestion there is this. Canadian has a shareholder rights plan; we've had it for a number of years now. The design of the shareholder rights plan is intended that should an offer arrive at short notice, like December 16, when it's hard to find legal counsel and it's hard to find financial advice and it's certainly very hard to find competing bids, the company can in essence reject with a poisoner, which is what I call poison pills, in order to buy itself time to find an alternative bid. If a bid is to be made that is permitted, it must be outstanding for at least 60 days.
The Air Canada offer, as it currently stands, is not out for 60 days. It's out for 21 days, in fact, the minimum required at law. So under our existing shareholder rights plan it is not a permitted bid. The board of directors can clearly waive that plan and recommend to shareholders that they go ahead, or they can waive that plan and simply say they have no opinion.
Mr. Bill Casey: The other line that's interesting is that you recommend shareholders not tender their shares because other alternatives are being considered.
Mr. Kevin Benson: As I mentioned in my opening statement, first of all, we need to understand more about the Air Canada offer itself, a process we're involved in right now. Secondly, the board has a fiduciary responsibility to examine all options. Oneworld have expressed a desire to understand the option and what the involvement might be. Until we get some response back from them, it would be inappropriate to go out with a recommendation.
Mr. Bill Casey: Another question I have is perhaps more appropriate for the next speaker, but I want to ask you too. There are a few airlines that are on the sidelines here. One is InterCanadian, for instance, and they are really vulnerable. They're not part of the process. They have no idea what their future holds. They're not included. And we had the Air Nova president here a moment ago, and the only conclusion you could draw is there's no place in their plan for InterCanadian. Now, that may or may not be right, but that's definitely the impression he left with me.
Where do InterCanadian and the privately owned regionals fit into this equation with the Air Canada offer?
Mr. Kevin Benson: I think the small carriers have a couple of advantages and a couple of abilities to compete. For one, their overhead costs are lower. For another, they don't have to run the regular schedule that a full-service airline needs to operate under. So their opportunities I think are to come in and open up markets, particularly with small aircraft, really act as fillers, in essence, to pick up the sort of customer the mainline is not chasing, just as WestJet did actually, with fairly large aircraft. They identified a customer that was not the target customer of the mainline airline and made a good business out of catering to that.
Mr. Bill Casey: Actually, you said the same thing the Air Nova president said; that is, independents have lower costs than subsidiaries. Again that raises the question, why not have an independent series of regionals, rather than subsidiaries that have a higher cost structure?
Mr. Kevin Benson: The regional carriers serve a number of purposes. Number one, they serve on routes that are too small for mainline carriers, where they simply can't justify a 100-seat, 150-seat airplane flying a route. Secondly, they serve to open up routes, so they can go into thin routes, gradually grow them as the business grows, and build them to the point where they can be replaced by the larger aircraft. As such, they are an integral part of the airline. They just operate under a different cost structure and a different set of rules. That cost structure and those rules are designed to keep costs as low as possible within the context they're in.
They really are part of the airline, and it would not be a huge reach to say then why not take all the narrow-bodied aircraft out and force this airline only to be a wide-bodied operator? What you do—each time a decision like that is made, the ability of the airline to move and adjust to market circumstances is significantly reduced.
Mr. Bill Casey: We are supposed to come up with some recommendations, and certainly one of the priorities is from the perspective of the consumer, as Mr. Fontana said earlier. If there is a lower-cost structure and a lower-cost way to provide air passengers the flights they need, I have to ask, why don't we consider that? If there's a lower-cost way of doing it, other than to try to maintain everything under one roof, under one umbrella, why don't we have a more diverse aviation industry than just one?
Mr. Kevin Benson: I think what's being envisaged here is that you have a single international/national carrier. It's the carrier that serves all markets internationally and domestically, but it can't serve all customers within those markets.
So the proposal Onex had—and I believe Air Canada has a similar one, and I'm sure they will answer for themselves later—is to provide an airline that services all markets, but certainly to leave open the opportunity for carriers to come in and serve particular elements of those markets. Those elements could be motivated more by cost than by time or more by cost than by schedule. They could be prepared to fly routes indirectly, again in order to save costs. They could be elements that don't place priority, for instance, on access to lounges, or access to a concierge sort of service, or food on board airplanes, or telephones, or all the little extras that all add up on a full-service airline. They can provide that sort of service in direct competition to the full-service airline.
But to go in and carve parts of the airline out for no other reason than to try to create competition I really believe simply creates inefficiencies. It's not beneficial to the airline or to the customer.
Mr. Bill Casey: Thank you.
The Chairman: Thanks, Mr. Casey.
Since we've done one round, I just have one quick question, if I could.
In Air Canada's proposal to restructure the airline industry, they are saying they would like to have Canadian Airlines owned by them as a wholly owned subsidiary. Is that in much the same way that Air Canada owns its regionals, as wholly owned subsidiaries?
Mr. Kevin Benson: Mr. Chairman, I'll give you again my understanding of the situation.
I think Air Canada understands a number of very practical issues that come into play once you apply control ownership of Canadian.
The first issue is of course that you have two operating licences; you have two different sets of operating rules. You can't intermingle safely. You must keep those maintained separately until you can retrain and reconfigure. That takes time.
The second thing I think they understand clearly is that employees in both companies need some time to heal. They need some time to understand that this new airline offers significant opportunities.
The Chairman: Yes, but I'm trying to get to a structural thing here. In much the same way that Air Canada owns its regionals as wholly owned subsidiaries, is it similar to their proposal to own you? For example, would Air Canada appoint your board?
Mr. Kevin Benson: The answer is yes.
The Chairman: Air Canada would appoint your board?
Mr. Kevin Benson: Yes, they would, once they acquired—
The Chairman: Wouldn't that make you somewhat nervous, given the reputation of what's been going on between you both over the last number of years, given the fight that took place just weeks ago, and given that Air Canada has a desire to be the flag carrier—I don't think there's any question of that—and suddenly now they say “We're going to buy you, and by the way, it's our board that will be appointed to you”?
Who makes the decision, for example, on whether Air Canada or Canadian flies between Toronto and Ottawa or Montreal and Quebec City, in the triangle where money is made? And who makes the decision on the debt load? Do they acquire part of that debt, or is all the debt that belongs to Canadian Airlines going to be put on Canadian Airlines?
Mr. Kevin Benson: Mr. Chairman, you're asking the same questions we've asked of Air Canada.
My understanding is that a combined network would be planned. A combined network would allocate routes according to current aircraft configurations, and they would be flown.
In the end, the routes that make money and the routes that don't make money, as I would see it, are not material. What is material is whether the customer continues to get the service on all the routes and whether the employees are guaranteed that if the job eventually winds down out of Canadian, it will reappear in Air Canada as a merged airline.
The Chairman: But you have to make money. You have to make money. It's great to say “As long as the customer is served...”, but you have to make money, and as a result, decisions are going to have to be made. I suppose you are going to have an agreement that probably has documentation as thick as this room is high in order to ensure you have fairness so that you can make money.
Mr. Kevin Benson: Well, we will certainly seek to ensure there is fairness and protection for the stakeholders going forward.
I must stress to the committee that in the end, this decision gets made by the shareholders. We are not able to stop the decision or make the decision.
The Chairman: Thanks very much.
That's four minutes and thirty seconds, Joe, just for your information.
Voices: Oh, oh!
The Chairman: Mr. Bailey, please.
Mr. Roy Bailey (Souris—Moose Mountain, Ref.): Thank you very much, Mr. Chairman and Mr. Benson.
I'm somewhat like my colleague, Mr. Comuzzi, over there. I still maintain that we can give life to Canadian.
This is meeting number 27, and we've had a lot of witnesses, but two of the witnesses who came before us guaranteed, and would guarantee in writing. One was representing Onex, Mr. Schwartz, and the other was Buzz Hargrove. Both said in writing that they were willing to match the guarantees and that they would sign that to the employees of Canadian and Air Canada. That was one merger.
The question now in the negotiations is whether it is possible that Air Canada could be required then to provide the same guarantee to the employees throughout as was provided by the other bid at that time.
Mr. Kevin Benson: You'd have to address that question to Air Canada.
Mr. Roy Bailey: I will.
Mr. Kevin Benson: If they apply the shares of the company, they are then the owners of the company. They will appoint the board; they will make the recommendations.
I don't want to leave this committee, though, under any misapprehensions. Should Oneworld or any other party step forward with the capital required to sustain and give rebirth to Canadian, as a management team, we will absolutely make the best decision for all the stakeholders. We are not tied to any one decision.
Clearly there's only one offer on the table today, and it's an offer that reflects our own thinking in terms of stakeholders and customers.
Mr. Roy Bailey: So you know of no other bid or business arrangement at this time, other than what Air Canada is proposing?
Mr. Kevin Benson: No, there is no bid on the table at this time apart from Air Canada's.
Mr. Roy Bailey: Thank you.
The Chairman: Thank you, Mr. Bailey.
Mr. Dromisky, please.
Mr. Stan Dromisky (Thunder Bay—Atikokan, Lib.): Thank you very much, Mr. Chairman.
Mr. Benson, much of what we have been dealing with has been more or less in a hypothetical situation up to this point. I'd like to look at something that is very realistic. I turn to an article that appeared in the Globe and Mail yesterday. It is really a very disturbing piece of news about how American Airlines is really pulling the rug from underneath Canadian Airlines, pertaining to the most lucrative routes you have at the present time.
According to this article, over 100,000 passengers will be transferred from American Airlines in the hub of Vancouver, put on Canadian planes, and flown across the Pacific to deal with the Asiatic market. Over 100,000 passengers—that is a tremendous amount of money coming from your long-range plans, diminishing your cashflow. There's no doubt about it.
Then the article goes on to point out that there are other routes where American and other members of the Oneworld Alliance are doing the very same thing. They're bypassing the use of Canadian planes and using their own or others that are in that alliance to carry passengers to the lucrative markets in Asia and in Europe. Can you react to what I've just said, please?
Mr. Kevin Benson: Certainly. I want to react in the strongest terms to that and be very clear. American, in my tenure at Canadian, has been nothing but a supportive, understanding partner, willing to step to the table when nobody else would, willing to provide funds at times when nobody else would, as well as technical expertise and people.
The article you saw in the paper I'm afraid is totally false. It's inaccurate. It does not contain all the information. It certainly isn't even well researched.
American has had a dual relationship with China Airlines for a number of years; how many I couldn't tell you. They served Taiwan with China Airlines. They recently dropped that relationship and started a relationship with EVA, I assume because they were not happy with the service. All the new service with EVA has done is replace the old China Airlines service.
Secondly, the 100,000 passengers a year each way is where the number has built. It's built from some 20,000, as recently as 1996, to up over 100,000 this year—American people coming through Vancouver and onto our airplanes. We have no expectation except that that number will continue to grow. American has made no arrangements that would decrease that number. American has done nothing.... In fact to the contrary, they have consciously worked with us to increase and facilitate the flow of passengers across Vancouver.
Mr. Stan Dromisky: Thank you very much.
The Chairman: Thanks, Mr. Dromisky.
Mr. Guimond, please.
Mr. Michel Guimond: I will ask a brief question that you may wish to note, because I would like to save some time for a second question.
When the International Association of Machinists and Aerospace Workers appeared before this committee, I took note of some comments because I wanted to check them with you. You are still the only person from Canadian that I have met, though I keep getting letters saying all kinds of things. I have received everything from your offices in Hong Kong and Japan, but you are still the only person from Canadian Airlines that I have met with.
The IAM told us that 384 machinists' positions have disappeared since American Airlines invested in Canadian. Is this true? That is my first question, and I would like an answer in a few moments.
My second question is on the role of charter carriers. We have met with the CEOs of Canada 3000, Air Transat and Royal Aviation. A number of analysts have shown that carriers who run charter flights might be one part of the solution to increase competition. If the government decided to approve a dominant carrier, these charter carriers could be given opportunities to operate regular routes in order to provide greater competition.
However, the charter carriers have said that, though they themselves are ready to run such routes, no one really wants to arrive in Toronto at 11:30 or 12:30. So should our committee ask the government to ensure that the framework policy formulated provides for slots to allow new players in to foster competition?
Mr. Kevin Benson: There are two questions there. In regard to the first part—and it has nothing to do with American Airlines whatsoever—in 1995 Canadian Airlines decided that running a maintenance base in Calgary for the mainline carrier was simply too expensive, and it was not fully occupied. Canadian therefore decided to consolidate its maintenance operations into Vancouver. The heavy maintenance operation is now consolidated in Vancouver, and two lines are run.
To the best of my knowledge and belief—and I was not CEO of the company at the time, so I'm going purely from history—jobs were offered to most of the technical people if they moved to Vancouver. Now, obviously the cost of living in Vancouver is higher. There are plenty of jobs available in Calgary, so many people opted not to make the move. But the decision was not motivated by American in any way. It was just an inability to fill the third line, which was Calgary, and therefore Canadian chose to close it down.
In terms of the role of the charter carriers, I said here a little earlier that there are a couple of airports in Canada that are very short on slots. I would think it would be quite reasonable of the government to enact some form of order that would enable new carriers desirous of operating into those airports to be given some access.
I would also point out that this is not normal around the world. We would dearly love to have more access to the airports of Heathrow, La Guardia, and O'Hare. We have to wait our turn. We have to buy them as they come free. We have to negotiate and trade to get them. But as a starting point, I think it is certainly quite reasonable for some slots to be made available to these new carriers. I would really recommend that anything like that should be a “use it or lose it” idea, though. You don't get it and try to trade it. You get it and use it, or you give it back to the airline you got it from.
The Chairman: Thanks, Mr. Guimond.
Mr. Hubbard, please.
Mr. Charles Hubbard (Miramichi, Lib.): Thank you, Mr. Chairman.
Just to use a few figures, Mr. Benson, it appears you're saying to this committee that from your perception at the present time, the best avenue for these two airlines is to put them together under one direction, one leadership. With that, in terms of Canadian Airlines at present, there's a per share value of two dollars. If you multiply that value by the number of shares, it probably gives you about $90 million in terms of Canadian's worth. In terms of the debt load you're carrying, I assume most of that is outside of Canada.
Mr. Kevin Benson: About 25% is Canadian, and 75% is outside of Canada.
Mr. Charles Hubbard: What percentage of operating revenues are going to service that debt?
Mr. Kevin Benson: Operating revenues run at about $3 billion a year. Regarding service on debt, I couldn't give you offhand what the total leases come to, probably some $300 million, plus or minus, with about $100 million of principal on the debt itself being repaid as well.
When you ask what portion of it.... Ownership costs run at $500 million to $600 million a year, and that would include depreciation, leases, interest on the particular aircraft acquisitions, and so on.
Mr. Charles Hubbard: With your operations at present—we looked at the Onex business, and that's past now—were there other suitors in Canada or elsewhere that might assume the role that Air Canada is trying to assume in terms of taking over Canadian?
Mr. Kevin Benson: Not that we've been able to find, and we have worked quite hard trying to find that.
Mr. Charles Hubbard: In looking at the employees, it seems, in terms of rationalization of the two fleets, that you have a surplus of aircraft and would probably be cutting back aircraft, so that about 75% of the present fleet might be in existence after the two were merged or put together as a single unit. As a member, I find it somewhat difficult to believe that when you can eliminate maybe 25% of your operations, you can continue with 100% of your employees. Even if you have a 5% loss of employees, you still have a lot of surplus people that you're going to have within that industry. That is a concern I would have.
The second point I'd like to make is that we are looking at Air Canada—who will be here in a few minutes—and they apparently are ready to pick up the operation of Canadian at the $2 offer. As a government, I think we have to be concerned in the long run about whether or not this single carrier can offer service and maintain an operation, carrying the amount of debt the two might have.
Air Canada has had a big step up in terms of how it was created back in the 1980s. For that reason, over the last number of years they've had a distinct advantage over Canadian in terms of what they received as a gift to the company. But if we look at Air Canada, it hasn't really made that much money for its shareholders. In fact it's made nothing for its shareholders, unless they dealt with capital gains, which are very few.
In your opinion, in terms of the Canadian industry as a whole, could this single carrier that we talk about, this merging of the two, operate in terms of a viable industry the government wouldn't have to come back to serve and support in another year or two?
Mr. Kevin Benson: With regard to the people, I think it's been accepted by Onex that there would be layoffs. The promise was that they would be voluntary, that there would be early retirement packages, and that they would be handled by attrition. There would be no involuntary layoffs for a period of two years. They estimated the number of reductions at around 5,000.
Air Canada has a slightly different plan. I believe they're estimating the number at about 2,500, but they're making similar undertakings that should the acquisition proceed they will do the same—offer early retirement packages and use attrition. There would be no involuntary layoffs.
So, yes, there are excess people, but I believe there are also a fair number of people who, given the right incentive, would be willing to look at moving on and opening up opportunities for others.
In terms of debt, I can say only that the concern you've expressed I believe was exactly the concern Air Canada had when we terminated our discussions back in April. We felt that in locating a company like Onex, known for their ability to recognize and generate value, who were prepared to offer to purchase shares from the public at a premium to the then market price and look for their return and their upside strictly off the increases from that increased price, that ought to say to less-sophisticated investors that there is a very real opportunity here, and yes, this airline can afford the debt of both companies.
The Chairman: Thanks, Mr. Hubbard.
Bev Desjarlais, please.
Ms. Bev Desjarlais: Mr. Benson, considering that there would be two airlines, and you now have the Christmas wish book in front of you, what does Canadian Airlines need to survive?
Mr. Kevin Benson: Well, $300 million to $500 million would be a real good start.
Ms. Bev Desjarlais: In the way of finances, as well, if there are particular regulations or rules—and out of fear that somebody's going to burst into flames if they hear the word “regulation”, just call them rules—do we need to have certain rules in place to ensure...?
Mr. Kevin Benson: If I could advocate four sort of ground rules, number one would be removal of all restrictions on ownership. Number two, and perhaps as an addendum to that, would be removal of restrictions on foreign ownership, or at least a significant increase in the percentage of foreign ownership allowed. Perhaps that could be covered in some way by a Canadian-dominated board. The third one would be please protect the ability of the major carriers to develop the regional carriers and provide the sort of service the customers are looking for across the country. And finally, I have a great faith in the free market system. Whether it has treated me kindly or not is immaterial. I really have great faith in it. Allow the free market system, whenever possible, to provide the competition and encourage that competition, because it will.
The Chairman: Thanks, Bev.
Lou Sekora, please.
Mr. Lou Sekora (Port Moody—Coquitlam—Port Coquitlam, Lib.): Thank you, Mr. Chair.
Mr. Benson, the fact is it could also happen that Air Canada comes in and buys you out and puts you out in left field on certain flights, on certain things, on certain equipment, and gives you all the debt load they have and you have. You can't sustain, and it sinks you. Is that a possibility?
Mr. Kevin Benson: It is a possibility. It's what wakes me up at four in the morning these mornings.
Mr. Lou Sekora: I woke up in a sweat the other day myself.
A voice: I'm afraid to ask why.
Mr. Lou Sekora: Don't ask why.
The Chairman: Order.
Mr. Lou Sekora: The most important thing for me, as a Canadian, is service across Canada, pricing, and employees. Surely to God, we politicians can say okay, maybe the 10% ten years ago was a good thing, but maybe today it isn't; maybe the 25% ten years ago was good, but maybe today it isn't. On those two things, if we looked at it good and hard, maybe we could get some good bids in here to where both airlines would be very viable. So that's what I'm looking at.
I look with very great interest at the fact that your Oneworld travels through Vancouver. Star Alliance comes out of Los Angeles. Air Canada has 24,000 employees, Canadian 16,000. I'm not talking about the regionals, because you've got 47,000 altogether.
I asked Air Canada, Mr. Milton, the other day, of the 24,000 employees, how many retire on a yearly basis. He couldn't give me the exact figure, but I asked for a round percentage. He gave me 3%. I know it's a little higher, but 3% of 24,000 is 720 people. If Canadian has 16,000 people and you retire at 3% again, that's close to 500 people.
You're retiring at 1,200 to 1,300 people a year. So in five years that's 6,000 people. It's not 2,500 or 5,000; it's a lot higher. So I don't know what the argument is that somehow there are some horrendous job losses and one will do a little better than the other one. All that is just a story. If you put it in that perspective and if you have 47,000 employees between the two you and they retire at 3% a year, figure it out. That's over 1,300 a year—way over. So that makes more sense.
I can't understand these job losses, the terminations, the layoffs. There are none.
Mr. Kevin Benson: If you simply stood back and waited for attrition to take its toll, yes, that's indeed the case—attrition and retirements. However, it would take seven or eight years. On a very friendly basis, it could be achieved a lot quicker. There are a number of people who I think today would welcome an early retirement package. Of course it's the size of the package and the benefits that go with it that would be of interest. But to the extent that something can be arranged that meets the needs of both, I think all Onex said and all Air Canada is now suggesting is why not go ahead and do that? If someone is anxious to be on a retirement basis today and it can be done to accommodate all parties, do it. Do it today. A lot of the other jobs will be rehired. They'll be new hires. You reach a certain size in the airline where you need to maintain, and therefore you'll be hiring and growing again.
Mr. Lou Sekora: Thank you.
The Chairman: Thanks, Mr. Sekora.
Just for the benefit of the witnesses who are waiting, we had a vote in the House of Commons, which delayed everything. We only have two questioners left and we have to move on.
Mr. Casey, please.
Mr. Bill Casey: The way I understand the Air Canada proposal is they have offered to buy the shares under a numbered company, not the Air Canada company. A numbered company will buy the shares, and then they're going to try to restructure the debt, which has been quite a bit of the topic here.
Have you talked to them about what happens if they can't restructure that debt? What do they do if it doesn't work out the way they want it to?
Mr. Kevin Benson: Mr. Chairman, we're in that discussion now. You're just a little ahead of it. We've asked the question, and I think together we're trying to work out the answer. Our board will need some comfort as to the nature of the restructuring, how deep it's going to be. If the plan is to ask everyone to take an 80-cent-on-the-dollar reduction, there's not a lot of chance of its succeeding, and we should know that.
On the other hand, I think it's a little tough for Air Canada to tell us exactly how far they're going to go until they get a chance to look at the debt and look at the security on the debt. It's pointless asking someone who has asset coverage of 120% to take a discount. They'll take their asset instead.
So there's a process that needs to continue here before we can give an intelligent answer. That is the reason, though, that the statement you read from earlier does not yet recommend acceptance of the offer. It's a very serious concern. It would be very easy for this restructuring, after the acquisition, to go nowhere.
Mr. Bill Casey: We'll ask the question in a few minutes. Maybe we can help you get an answer.
Mr. Kevin Benson: Thanks.
Mr. Bill Casey: That's the question on the minds of all the Canadian Airlines workers: what's going to happen if they're not successful in rearranging the deal? The commitment is to buy the company, but they have one foot on the dock and one foot in the boat at the same time.
Anyway, thank you.
The Chairman: Thanks, Mr Casey.
Mr. Dale Johnston (Wetaskiwin, Ref.): Thank you, Mr. Chairman.
Thanks for your presentation, gentlemen.
I think one of my questions has been answered, but maybe you can just confirm it for me. I know the 10% rule doesn't affect Canadian, but the 25% foreign ownership rule does. Did I hear you say that you would like to see them both wide-open?
Mr. Kevin Benson: Correct. You did. Canadian used to have a 10% rule under the Alberta act that originally formed Canadian. We removed that about three years ago. It's no longer a restriction.
Concerning the foreign ownership, I understand how sensitive that is, but I would welcome certainly its raising. Its removal would open up opportunities.
Mr. Dale Johnston: I also know that you're a free enterpriser, and you certainly would not recommend regulation as far as dealing with the overcapacity in the system. But I would like to have your take on what the solution to overcapacity in the system would be.
Mr. Kevin Benson: My concern on regulation is it doesn't create efficiency, and efficiency is what's required in a global industry. Again, I guess I'll fall back on the free market system. I believe strongly that in an open environment the individual participants will fill the demand, as the case may be, filling in around the primary carrier. So any form of regulation in terms of numbers of seats allocated to individual carriers I think is designed to create inefficiencies. I don't think it benefits the customer. If there are that many more Air Canada customers that want to go from place A to place B, they should be able to accommodate them. If there are that many more Canadian, we should be able to accommodate them.
So my strong advocation would be to stay away from regulations, stay away from route regulations.
Mr. Dale Johnston: Maybe you'll just clarify for me, then, how would you address the problem of the obvious fact that there is simply more capacity than can be utilized, and you have these aircraft flying around with half or partial loads?
Mr. Kevin Benson: Our response four weeks ago, and it has not changed, was that the ability to create a single national carrier that fulfils the primary business needs is the first step. That carrier, as I said earlier, will not cater to all demands of the market; there will be opportunities for other carriers to come in and fill in underneath and win business around that primary carrier. But the ability for two carriers to compete aggressively on 82% of routes, as we currently do, in a market that is not only thin, but very east-west—it's very linear, and in addition has this competition of five big airlines immediately south of us—I think makes it very difficult.
The Chairman: Thanks, Mr. Johnston.
Mr. Discepola, please.
Mr. Nick Discepola (Vaudreuil—Soulanges, Lib): Thank you, Mr. Chairman. Mr. Guimond knows full well that I'm not a permanent member of this committee, and that I sit on the Finance Committee and Environment Committee. However, that has not prevented me from carrying out my duties as a member of the House of Commons. I would like to thank the chairman for allowing me to ask a question, even though I am not a permanent member of this committee.
Mr. Benson, I have two quick questions. I know the chair wants to get on to the next witnesses.
My fear is that it's very tempting, the way they've structured the Air Canada offer, to simply walk away from that offer of $92 million. It's a small price to pay to get rid of a competitor. So what guarantees would you be demanding to make sure they can't just simply walk away?
You've often referred to the 10% rule as better serving the interests of management versus the interests of shareholders. But I also have a concern when I see that you want it totally eliminated. How do I rationalize removing it totally, versus lifting it up to say 15% or 20%, and ensuring that control remains within Canada? Also, having it widely held seems to serve the interests of Canadian consumers much better than if you open it up and have it held in the interests of several individuals, for example.
Mr. Kevin Benson: On foreign ownership, if there is a demand to keep control in Canada, and demand I would support, perhaps that can be effected through a board more effectively than through share ownership, as I said earlier. So regardless of who owns the shares, the board must be predominantly Canadian, meetings must be held in Canada, and quorum must include a majority of Canadians. I think those are all good measures.
On the 10% rule, there's always a danger that a major shareholder will acquire control of the company and develop that company, obviously, for their own benefit. At the same time though, companies are owned by shareholders, in the end. To the extent that shareholders demand a certain performance of management or a certain reaction from management, I think they're much better able to do that when they have a block big enough to command management's attention.
At a limit of 10%, shareholders must knock before they walk into management's offices, or they won't get an appointment. I would argue with you that management's actions in defeating the Onex deal through really a technicality—never allowing shareholders to get up and vote—was an example of that. It might not have happened if you'd had a 40% or 50% shareholder. So perhaps it's weighing the benefits of both.
The Chairman: Thanks, Mr. Discepola.
Colleagues, Mr. Benson and Mr. Markey, thank you very much for taking the time to come back to the Standing Committee on Transport and helping to answer some more questions that came our way.
If during our deliberations in the draft report we need a clarification, we may want to get you on the phone or write you a quick note.
Mr. Kevin Benson: Thank you to all the members for the time and energy that's gone into this presentation. We'd be delighted to come back and help you write the report at any time.
Voices: Oh, oh.
The Chairman: Colleagues, we'll take a two-minute recess just to change witnesses.
The Chairman: With us this evening are representatives of Air Canada. We welcome back the president and CEO, Mr. Robert Milton; the senior vice-president, corporate affairs and government relations, Doug Port; the vice-president and general counsel, John Baker; and the senior vice-president, finance and chief financial officer, Mr. Rob Peterson.
Gentlemen, thank you for returning to the Standing Committee on Transport.
Mr. Milton, our apologies; because of the vote we were delayed. I understand that you had previous commitments. We do apologize for the inconvenience this may have caused, but as you can understand, it's an important matter for us, and naturally for yourself.
We look forward to your brief presentation and then we'll have a round of questioning.
Mr. Robert A. Milton (President and Chief Executive Officer, Air Canada): Absolutely. Thank you.
Mr. Chair, honourable members, we appreciate the opportunity to appear once again before the committee to talk about Air Canada's plan for the future and generally to discuss the restructuring of Canada's airline industry.
As I have acknowledged on many occasions, the current industry restructuring has important and indeed far-reaching public policy implications. While my principal responsibility as CEO is to the shareholders of Air Canada, I recognize that the outcome of the current debate goes far beyond the interests of shareholders. As a result, Parliament has a crucial role to play in developing a regulatory and policy framework that protects the public interest while promoting a healthy and profitable airline industry.
I understand the important responsibility that rests upon your shoulders. I want to reiterate our commitment to helping parliamentarians, both here and in the Senate, work through this process. We will be accessible, we will be frank and forthright, and perhaps most importantly, we will listen.
Since I last appeared before this committee on October 27 a lot has happened. But despite these important developments, one thing has not changed—namely our commitment to proceeding with the innovative and sensible plan that we announced on October 19. This includes acquiring Canadian Airlines and establishing a low-fare carrier to operate out of Hamilton, Ontario, both of which are key elements to our plan for the future.
Last week we mailed to Canadian shareholders our formal offer to acquire that airline. Copies of our offer have been distributed to all members of this committee.
Air Canada's blueprint for the future is multifaceted. Not only does it make sense for shareholders, but it also takes into account the interests of employees, consumers, and smaller communities. In short, it meets and exceeds the five principles outlined by the Minister of Transport and it reflects many of the concerns raised by elected officials at the federal and provincial levels of government. In developing our plan this was a very important consideration for us.
During my recent appearance before this committee, honourable members rightly expressed concern about the impact of any restructuring on the employees of Air Canada and Canadian Airlines. No one has suffered more through the past few months than the employees of both airlines and their families. They have experienced emotional upheaval and uncertainty. They have watched helplessly on the sidelines as their futures were debated publicly. They have worried about what will become of them and their jobs once the restructuring process concludes.
We have heard your concerns and the concerns of employees. From the outset we have said that no one will be forced out of a job as a result of our proposed transaction. Recently I went further in a written seven-point commitment to the union leaders of both airlines, including regional subsidiaries. Copies of this letter have been tabled with the clerk of the committee.
Simply put, we cannot run a profitable airline, nor can we successfully restructure the airline industry, without the support and active participation of airline employees. But there is more to our commitment than simple business calculations. We actually believe that it is possible to build a great airline while also respecting the future aspirations of our people. Compassion and understanding are essential elements of our corporate culture at Air Canada. These characteristics reinforce, rather than undermine, our ability to compete and win on the world stage.
Before answering any questions you might have I want to touch briefly on two issues that honourable members raised during my last appearance.
First is the issue of competition. As I have said from the beginning of this process, we welcome the involvement and scrutiny of the Competition Bureau. To that end, last week we submitted a pre-notification of our plan to purchase Canadian Airlines to the bureau for review. We expect to receive an information request shortly, to enable the bureau to further its review. We believe our plan offers the best hope for a healthy and prosperous airline industry.
The second issue has to do with the 10% restriction on individual ownership contained in the Air Canada Public Participation Act. To date, we have not taken a formal position on whether the restriction should be modified. We have simply maintained that if the 10% rule is to be changed, such change should only occur through debate in Parliament. However, we have accepted the invitation of this committee to reflect on whether the rule should be changed.
The position of our board of directors, which has given the matter thorough consideration, is that the rule should be increased to 15%, in the case of individual share ownership. This is consistent with the ownership regime that applies to CN. In our view, 15% makes sense because it would enhance investor interest in Air Canada, but would prevent investors from exercising undue influence over the company. At the same time, a 15% ownership limit would prevent a single person from controlling Canada's leading air carrier, and thus it would continue to serve an important public policy objective.
Under provincial security laws, it is recognized that 25% ownership provides effective control. This is the level at which takeover bids must be made and control blocks are defined. Given that 20% ownership is also the level at which companies, from an accounting perspective, can consolidate their holdings, we believe it would be inappropriate to foster this control, in view of the public policy issues involved. In addition, attendance at shareholders' meetings of widely held companies such as Air Canada generally ranges from 35% to 50% of eligible votes.
We have also outlined our position with regard to the 25% limit on foreign ownership of Air Canada. We believe the Commissioner of Competition's recommendation to raise the limit to 49% is appropriate. It would encourage increased investment in Air Canada while, in concert with the 15% limit on individual ownership, ensuring that Air Canada does not become controlled by an individual investor, either Canadian or foreign. There is an important distinction between ownership and control. The 49% limit is also in keeping with various bilateral air service agreements, to which Canada has committed.
In conclusion, I want to say to the federal government and to all parliamentarians that we at Air Canada look forward to working with you to develop a regulatory framework that works to protect the public interest, while enabling the nation's airline industry to grow, prosper, and compete internationally.
While the last few months have been trying ones for all of us involved in this historic debate, I firmly believe it is time to look to the future. The wounds of this debate will heal with time and a sincere commitment on the part of those involved to listen, learn, and work together. That is a commitment I am proud to make on behalf of everyone at Air Canada.
The Chairman: Thanks very much, Mr. Milton, for your brief presentation.
Colleagues, we have a long list of questions, so please try to keep to your five minutes, and please try to keep the questions as short as possible, so we can get the maximum answered.
Mr. Comuzzi, we'll begin with you.
Mr. Joe Comuzzi: Thank you, Mr. Chairman.
Welcome back, gentlemen.
Just as the judgment came down in the Quebec court, we were led to believe the Caisse de dépôt et placement du Québec invested $300 million in Air Canada; they took out debentures. We were also told that the debentures were convertible. Given Air Canada's share structure, if those debentures were convertible, that would give them an ownership in excess of the numbers you talked about today, but would give them maximum ownership. I think they now own about 7%, if I'm not mistaken in that.
Mr. Milton, what triggers the convertibility of that issue? With a substantial investment such as the caisse made, did they insist on having any directors in your corporation? Were there any other commitments made by Air Canada in order to get that investment?
Mr. Robert Milton: I'll have Rob Peterson support me on this. Rob is our CFO.
Essentially, we were in a dialogue with the caisse for a fair while prior to coming close to a deal that Friday. We actually concluded the transaction the following week. Given the environment we're in, with escalating bids, there are not a lot of enterprises, particularly shareholders, in a position to provide up to $300 million of liquidity quickly. Caisse has been a fine shareholder. So given the situation we were in, we were working towards a transaction and ultimately concluded it the following week.
As far as the board seat goes, we're absolutely happy to dialogue with them over this. We continue to be in a process whereby we're finalizing that overall transaction. So we have not actually dotted every “i” and crossed every “t” as relates to that transaction.
Mr. Joe Comuzzi: Has a request been made for board seats?
Mr. Robert Milton: We have had active discussions with them, and I will tell you honestly they have not requested it, but we are open to the notion.
Mr. Joe Comuzzi: Thank you.
Mr. M. Rob Peterson (Senior Vice-President of Finance and Chief Financial Officer, Air Canada): You asked about some of the provisions. In fact the $300 million issue is in two tranches of $150 million each. We have committed to take down the first $150 million. The other $150 million is available at our option, not at the caisse's option.
The caisse currently, to my knowledge, owns about 20% of our non-voting shares and about 7% of our voting shares, so the way the transaction is structured, should they wish to convert their debentures into shares, they would be able to convert into voting shares first, up to the maximum amount allowed by law, and then they would have to convert into non-voting shares.
Mr. Joe Comuzzi: And were any other commitments made, other than those you've just talked about?
Mr. Robert Milton: No.
Mr. Joe Comuzzi: Okay.
I want to talk about regulatory control. As you know, with a dominant carrier, there's going to have to be some regulation. You can do that either through recommendations this committee will make or—and I don't know whether you'd consider this—by putting a nominee of the federal government on your board of directors in order to ensure that the rules to ensure competitiveness and other aspects of the transaction, as we go down this road over a period of time, are adhered to. What are your thoughts on that, Mr. Milton?
Mr. Robert Milton: Again, in anything we're looking to do going forward, we expect the involvement of the Competition Bureau. I have not been presented with the thought of a member of the federal government on our board. I wouldn't rule it in or rule it out at this time. As a strong advocate of allowing market forces to prevail and allowing a deregulated market to act freely, it's not something I would readily think is an appropriate mechanism by which to protect the interests you're concerned about—i.e., the interests of the consumer. But again, through dialogue with the Competition Bureau, we ought to be able to get to some sensible mechanisms whereby those safeguards are in place. I am completely open to protecting the interests of consumers on a sensible basis.
Mr. Joe Comuzzi: Thank you.
The Chairman: Thanks, Mr. Comuzzi.
Ms. Meredith, please.
Ms. Val Meredith: Thank you, Mr. Chair.
Thank you, Mr. Milton.
My questions are going to be on the agreement you've made with Star Alliance. You can appreciate I represent a riding just around the Vancouver airport, so my interest is in seeing the Vancouver hub as we know it develop and grow. I'm concerned that your agreement with United Airlines has locked you for ten years into an arrangement to have Asian passengers fly through San Francisco and L.A.
So my questions to you are the following. Is this an exclusive arrangement that you have with United? Does it exclude other Oneworld or other code-sharing programs with other airlines? Is it a ten-year commitment that you can't get out of? And what is the ramification going to be for the Vancouver airport?
Mr. Robert Milton: That's something I'm happy to deal with, because the spin that's often put on it I find incredibly inaccurate for people who really understand airline networks and how they work.
To respond initially, yes, it is a ten-year commitment to Star Alliance. Star Alliance, though, across the Pacific, also comprises Singapore Airlines, a member next year, and All Nippon Airways, which has a massive hub at Tokyo Narita, as does United Airlines. United has a hub as big as Japan Airlines and ANA do. So the argument that is being made that Oneworld is superior for Vancouver is patently incorrect.
Air Canada has already said through this process we intend to increase service out of Vancouver. We want to introduce non-stop service to Shanghai, we'd like to get on with getting service to Australia, and I believe there will be other routes to be added.
As an illustration, the Vancouver-Tokyo service is one that Canadian in recent years has had a lot of difficulty on. They've gone from a 747-400 right down to a 767, half the size, in the last year. Their inability to connect passengers over Tokyo is diminishing the viability of Vancouver. Air Canada, with the ability to feed into All Nippon Airways and United at Tokyo and Singapore Airlines over Singapore, will strengthen Vancouver.
Additionally, it's important to note that American, the partner of Canadian to this point, because they are very limited in presence across the Pacific, have not really done much to aid the growth of that hub. They've added one flight in five years into Vancouver from New York. In our case, United is the leading trans-Pacific airline.
Ms. Val Meredith: Okay, but Mr. Milton, that's my question. I want to know whether Air Canada is going to take the Asian passengers out of Toronto and put them through Vancouver onto a Canadian airline going over to Singapore, Tokyo, Beijing, or wherever. I want to know from you that you're not going to be letting United take those passengers—that Air Canada is not going to take those passengers from Toronto to L.A. or San Francisco and put them on United or the other airline out of Tokyo. That's what I'm looking for.
Mr. Robert Milton: What I'm trying to say is it's much better than that, because you're going from a non-player on the Pacific, American Airlines, to the biggest player. United will funnel tonnes of passengers over Vancouver. It is an incredible opportunity for Vancouver, which will lead to tremendous growth. So we will absolutely add to what currently exists at Vancouver, and you will see a tremendous increase in the size and scope of Vancouver, the trans-Pacific hub, which is not possible today. And the last five years have demonstrated that.
Ms. Val Meredith: So your agreement with Star Alliance and United will allow you to funnel those passengers through Vancouver?
Mr. Robert Milton: It's not only allowed; it will happen in a big way. There is no restriction, if that's the question.
Ms. Val Meredith: Thank you.
The Chairman: Thanks, Val.
Mr. Joe Fontana: Thank you, Mr. Chairman.
Mr. Milton, I want to talk a little bit about the consumer, because he or she is the missing person out of this equation. Everybody talks a good line. I hear a lot about shareholders and I hear a lot about everything else, but at the end of the day, it's those customers who have to fly who keep you and Canadian and the regionals and everybody else in business. I want to make sure, without any equivocation, that in fact they are being protected under one dominant carrier in the marketplace.
So I'm going to ask you a philosophical question about how you're really going to protect the consumer and what regulations we will have to put in place in order to make sure the consumer is not being gouged.
In fact under your proposal, you're going to control the domestic and international. You'll get Canadian involved in some way, shape, or form, and some others may ask exactly what that thing is. Thirdly, you're going to control all the regionals. You're going to own them, you're going to control them, and they're going to be taking directions from the board members you appoint. And then you're going to create this discount airline that's supposed to be for eastern Canada. So you become the only game in town. Sure, we have some independents, but....
How are consumers supposed to feel comfortable? I like the idea of a benevolent dictator too, if you can ever find one, but either you're very, very benevolent and therefore going to promise to make sure all of these customers you have are not going to be gouged....
You're going to be the only game in town. You'll be able to set price, schedules, routing, you name it. I want you to let the customers know how you are going to be able to make sure they get a break and that in fact prices will go down and not up.
Mr. Robert Milton: First of all, dialogue with the Competition Bureau to produce appropriate safeguards that are in the interests of consumers is completely acceptable to me. It is important that we do not regulate or over-regulate to the point of being detrimental to the resulting airline and airlines of Canada, because we want Canada and Air Canada to be able to compete globally. So I fully endorse dialogue with the Competition Bureau to protect the interests of consumers on these issues where there's concern.
As far as price is concerned, in responding to the Minister of Transport and some of his key objectives on this, we specifically introduced the notion of a low-fare airline, something that has never been done out of Hamilton. We did it, and now a lot of people are saying they want to do it. Hallelujah! Let them all begin, and let's have lots of competition and lots of low fares for consumers. I am happy for Air Canada to compete. We've demonstrated an ability to compete globally.
As far as the only-game-in-town notion is concerned, I think it is very important, and I ask this committee to please study the facts, including StatsCan facts on precisely the dynamics of the Canadian domestic marketplace. The charters are real players. It might be interesting for you to know that charter carriers, on a combined basis, have more seats in their fleets than Canadian Airlines does. We're still keeping Canadian around in our scheme. The charters are growing at a rate of 30% per year between 1992 and 1998, so there is real competition. They are profitable and they are the pricing leaders in this business.
Additionally, I believe, given the geographic layout and the population dispersal of Canada, the ultimate competitive hammer over Air Canada is opening up the ability to flow traffic via the U.S. I have been crystal clear in my willingness on a reciprocal basis, and I think it is completely inappropriate when people argue that Canada should give up, without getting reciprocal rights from the United States, the ability to flow Canadian traffic over U.S. points. But if they're allowed to do it, I am absolutely game for us to compete with the U.S. guys, and that's a great competitive hammer.
Finally, on the regional carriers, it is important to note—in regard to some of what's been thrown out in terms of the regional carriers and spinning them off—that for people who understand networks, including the opportunists who are trying to recommend that these things be spun off, they know that these are not competitive networks; they are compatible networks, and the regionals are critical pieces to feed what the mainline provides. So smaller communities, in particular, will be adversely affected by spinning off, because a company like Air Canada looks at small communities and the regional carriers on a totally global basis, not a local basis.
So I think what we're advocating is pro-consumer, because ultimately, what we talked about with the Onex proposal was the failure of Canadian Airlines or its evolution into the arms of Air Canada. In our proposal we are talking about Canadian being part of Air Canada. The other thing that's being thrown around—seemingly because there are apparently no alternatives—is the failure of Canadian. In any circumstance, we're talking about the disappearance of the Canadian we know today. I am game to go before the Competition Bureau, and we will be absolutely willing to protect the interests of the consumer.
The Chairman: Thanks, Mr. Fontana.
Mr. Guimond, please.
Mr. Michel Guimond: Thank you for your presentation, Mr. Milton. How long have you been with Air Canada?
Mr. Robert Milton: Seven years.
Mr. Michel Guimond: Seven years?
Mr. Robert Milton: Yes.
Mr. Michel Guimond: You probably remember that, in 1995, when international routes were allocated, then Minister of Transport Doug Young refused to give Air Canada the Vancouver-Hong Kong and Vancouver-Tokyo routes, both routes that would have made it possible to develop Vancouver. Apparently, the refusal was based on insufficient passenger demand. You probably forgot to point this out a few moments ago, and I would like to state it for the record.
When he appeared before the committee, Mr. Deluce more or less asked the government to ensure that regional carriers would be sold or transferred if the industry was reorganized and a dominant carrier emerged. I would call that expropriation through the back door, though I am told that is not the term I should be using. I don't want another semantic debate on the term “expropriation”. But do you agree with the proposal which Mr. Deluce submitted on behalf of Regco, stating that the government should sell off regional carriers?
Mr. Robert Milton: I believe in the universal language it is referred to as “disguised expropriation”. In my estimation, what is being advocated is detrimental to the consumers.
As I began to mention earlier, Air Canada looks at collecting passengers from around the globe as part of Star Alliance, the biggest network in the world. So if we look at a market like Terrace or Charlottetown, we are funnelling passengers on a basis whereby we are providing the optimum network routing to get them to those locations. For us, the ability to profitably run five passengers on a route like Vancouver-Terrace—because we're carrying them from London or Hong Kong—is far different from that regional airline now spun off and independent from the mainline, because they're just looking at that local Vancouver-Terrace. If they can't make money on that, they're going to pull the route.
I would urge the committee to be very careful in recommendations, from the standpoint of some of the conflicting aspects to these recommendations that are being thrown around. For example, is maintenance of service to small communities aided by price protection? I would argue that you have to be careful, because if you're protecting prices, if you're forcing airlines to not raise prices, then perhaps as fuel goes up to nine-year highs, you could be putting them in a position where the economics of that route won't make sense and they'll want to pull it. So now the small community doesn't have the route, because you've got price protection over here.
I would just encourage you to look at some of the causes and effects that might occur through this. I am very much of the mind that the regional networks are a critical piece of the mainline. I don't know what a good analogy would be, but it might be like telling General Motors they can make cars, but they have to spin off the division that makes the engines. It just doesn't make sense.
Mr. Michel Guimond: In the same vein, what can we say to reassure the 1,100 concerned Inter-Canadian employees, about 60% of whom are in Quebec and 40% of whom are in the Maritimes? Are these people part of your scenario? I know that Inter-Canadian is a direct competitor of Air Nova and Air Alliance.
Mr. Robert Milton: The issue for me is not that they are a direct competitor. The issue is that as a first effort here, we are trying to buy Canadian and its wholly owned subsidiaries. InterCanadian was spun off, I believe, about a year ago. I understand there was very little cash involved in the transaction. InterCanadian was not doing well financially prior to the spinoff, and my understanding—although I'm not positive about this—is that they continue to have a difficult time.
I am open to dialogue with them, but my first priority has been to protect the interests of Canadian airlines, its wholly owned subsidiaries, and its employees. I do not have a definitive view concerning InterCanadian or any other airlines affiliated with Canadian that have a relationship. I'm open to discussion. But I also think that they have the ability to perhaps go out and cut deals with other airlines, whether they be the charters, the charters collectively, or the U.S. airlines. I think there are a lot of options, but I have to have a better understanding of precisely their relationship with Canadian, and at this stage we have very little visibility on some of those issues.
Mr. Michel Guimond: I have one last question, Mr. Milton. We note that you took a very firm stand on the 10% restriction on individual ownership. You state unequivocally that it should be increased to 15%.
Your brief states:
The position of our board of directors, which has given the matter
thorough consideration, is that the rule should be increased to
Three weeks ago, I read an article by former Liberal Minister Marc Lalonde in Montreal's Le Devoir. In the House, I asked Mr. Collenette a question about it, and he answered that, in order to protect the public interest, the 10% rule should be maintained. Mr. Collenette added that, though Mr. Lalonde's opinion may well be valid, we should never forget he was speaking as legal counsel for Air Canada.
Could you tell me whether your board of directors has been involved in this over the past three weeks? Were Mr. Lalonde's comments in Le Devoir sanctioned by your board of directors?
Mr. Robert Milton: Obviously the views he was expressing were independant of the board of Air Canada. The committee heard me say here previously that this is a difficult issue for a CEO like me, in that you could split me in half on this issue. From a CEO standpoint, an individual shareholder standpoint, or the shareholder standpoint overall, these are not friendly rules. They inhibit value creation at Air Canada.
Even in this last episode we went through with Onex, and Air Canada trying to respond, you had two different games being played. One was making an offer on the basis of the rule being changed, so they could offer to buy up to a third of the company. We were trying to respond within 10%. If I could have come up with an offer, within the law—which we couldn't, and that was clearly articulated by the courts—I would have been able to produce tremendously greater value for all our shareholders by going to Lufthansa, United, the Caisse, and all sorts of people by saying “Hey, we can buy a third of this airline. Let's go.” So we were playing by two very different sets of rules.
Our estimation, as we looked at the various structures in play, was that the CN one was very attractive. In fact we would be open to 100% foreign ownership for pure value creation. To me the key issue for the country is that it's widely held. It's not who owns them. Ultimately, Canadians will own a lot of it. The reason we've held at 49%, though, is really because the bilateral agreements between a lot of countries indicate that the airline has to be owned and domiciled in the country at the other end of the bilateral.
I believe everything we've said is consistent. Our view is consistent with those, I believe, of Mr. Lalonde, except that we're saying the 10% could be bumped up to 15%. But the heart of what he's saying and the heart of what we're saying is that for Canada, the critical aspect is widely held. For the country, the interests are very different from those of the shareholders of Air Canada. That's why we believed and had to seek clarification on the law and the inherent difference between the interests of those two constituents.
The Chairman: Mr. Dromisky, please.
Mr. Stan Dromisky: Thank you very much, Mr. Chair.
Mr. Milton, I guess you realize that because the aviation industry is quite healthy in Canada, there are people chomping at the bit waiting for the dust to settle to see who's going to be the dominant carrier and see where they can fit in to provide a new service. Competition is something you always say you believe in. Yet earlier this afternoon we heard one of your employees, representing your three regional carriers that are under your complete control, clearly indicate to us that they would be in desperate straits if there were a strong competitor on any of their routes. In other words, it would be better if we left them alone in order to survive. I would just like your perception regarding that kind of situation.
Also, I would like you to, for the viewing public—because you're probably on nationally right now—give us some information pertaining to the guarantees your company is committing as far as employees are concerned, regarding their jobs. Could you be specific?
Mr. Robert Milton: Sure. On the first one, I assume you're talking about Joe Randell.
Mr. Stan Dromisky: Yes.
Mr. Robert Milton: I didn't get to hear Joe today. That statement is difficult for me to interpret, in that our regional carriers already face, in markets like Toronto and out in B.C., tremendous competition. They are thriving and are now part of a very profitable Air Canada network. So that one I really don't understand.
As far as the commitment to employees is concerned, I think we have shared with the committee commitments I've put in writing. I don't know how to be more sincere or emphatic. In fact I told one of the Canadian Airlines employees before he started to strap me to a lie detector test. I absolutely commit that we will protect the jobs of the employees of Canadian Airlines. But we have to be able to get there.
Again, I apologize for the way this sounds, because we're now susceptible to a lot of criticism. If I say we're diving in headlong to acquire Canadian Airlines, then everybody starts to say we'd better regulate this, we'd better do this, and inhibit them this way. And if I say if we don't get it exactly the way we want it, I'm willing to let them go bankrupt.... So there's no way I can win in this discussion, except to say we absolutely believe in the inherent brand value of Canadian Airlines. We absolutely want to buy them. But I think it is only fair that we be able to understand that American Airlines does not have the ability, if we go in there, to dilute us out the door through the deals they have with Canadian. So we need clarity on that. I think it is also reasonable that we understand from a regulatory standpoint what the world looks like after this whole process is done.
Mr. Stan Dromisky: I have just one more question, and that is regarding the report that we got this afternoon when we got into regional carriers. They made several references to the types of planes they have on certain routes, and it was quite obvious that they would like to have more jet service on some of these routes. Now I know there are all kinds of factors, like monetary factors and everything else, but in the restructuring do you have any kind of vision regarding some of these requests about the type of aircraft? I'm talking about the regional services.
Mr. Robert Milton: I assume what you're discussing is the scope provisions within the Air Canada pilots agreement, which restrict jet operations by our regional carriers.
I love Air Canada pilots, but I think this is wrong for them, and I believe—and they know I believe this—that I have to keep working to get that out. There is debate going on in the U.S. government about the fact that these provisions are anti-competitive and that they perhaps should be legislated out. I would welcome Parliament doing that, because I think this is not good for the industry in Canada or even for Air Canada's pilots.
However, Canadian Airlines does have the ability to do this, so my belief, going forward, is that both pilots groups will recognize that it is in their tremendous interest to allow the regional operations, the result from a combined airline, to operate jets, and I want to do that in a very significant way. Air Canada was the first mainline airline in the world to buy the Bombardier regional jet. We established its viability. It's now a phenomenal success story. We want a lot more of them, but we will not do so unless those aircraft can be operated by our regionals on a sensible basis.
The Chairman: Mr. Solomon, please.
Mr. John Solomon (Regina—Lumsden—Lake Centre, NDP): Thank you, Mr. Chair.
Maybe this is a good opportunity for me to come in, because this has to deal with regional service. I represent a riding in Regina and district. Regina has a population of about 200,000 people and a market area of about 350,000.
In the spring of 1997, Mr. Milton, service to Regina from Winnipeg and to Winnipeg and from Calgary and to Calgary was downgraded from the Airbus and DC-9s to the Canadair jets. I wrote Mr. Durrett at that time. I wanted to know whether this was a permanent situation and why the downgrading took place. His response, in essence, was, well, you should consider yourselves fortunate because it's a Canadian-made jet.
Since then, we've had the service further downgraded, not only in those districts, but also to and from Vancouver. There are no more direct flights to Vancouver from Regina, and we're now flying Dash 8s into Winnipeg and into Calgary and return.
This fall, Air Canada further downgraded the service. The flight from Toronto, which is an Airbus jet, now lands at midnight instead of at 10 o'clock in the evening. This is a very big concern for the business community in Saskatchewan and in Regina in particular. It's a big concern for consumers, because people land at midnight—and usually the plane is late so you're landing between midnight and 1 a.m. You're driving to Moose Jaw or Estevan and not getting there until pretty late. The next morning you have a business meeting and you're tired.
On top of this, in regard to flying return from Regina to Ottawa, in the last six years the business class ticket has gone from $1,450 to $2,500, a 72% increase, and a full fare flight has increased as much if not more.
So I guess my question, Mr. Milton, is this: What's in store next for Regina? Why are you seemingly targeting Regina, the capital city of Saskatchewan, I might add, by continuing to downgrade the service? What assurances will you provide, Mr. Milton, to the consumers in southern Saskatchewan that in the future there will be some recognition that it is a capital city, that there's good service to it, and that the service will not continue to be downgraded but will perhaps be upgraded to a decent level of aircraft?
The Chairman: Thanks, Mr. Solomon.
Mr. Robert Milton: I'm trying to get those in successive order.
The fundamental aspect is that we need to run. This is illustrated by the pressure we got into under the hostile takeover attempt, which occurred at a very low price. We have to produce shareholder value. We're complete privatized, so we have constituents that require a profitable return.
The returns being achieved on Winnipeg to Regina with the A-320 and DC-9 aircraft were not sufficient. We took what we thought was a good shot in putting the RJs in. We got complaints on winter weather operations and the fact that we didn't have bridges at the terminal. We invested in the bridges. It still didn't work. There was not enough support. We went to the turboprop equipment. We have continually tried to make the route work from an economic standpoint. Ultimately it has proven difficult.
We also, on the Vancouver-Regina route, had Air BC do that, and it didn't work. We tried it. We invested the aircraft. We went to the market and the market said “not interested enough”. It didn't work. We removed the Air BC 146 that operated a couple of years ago.
On the Toronto to Regina route, it's important to note, I believe, that we're the only airline that provides a service a couple of times a day, direct. Yes, it is true that we recently moved flight 153—I think it's flight 153—to 21.15 or something. The reason we did that is that we redesigned our hub at Toronto, to move it from what's called omnidirectional banking—where flights come in from all different directions and then go right back out—to directional flows, east to west, so that we improve the connectivity and, we believe, the profitability.
So we believe that what we did in Regina is attractive because of all the markets behind Toronto that will now have good connections at Toronto, particularly U.S. points that will be able to connect nicely. We believe we have in fact improved the accessibility of Regina. However, I commit that if this does not prove to be the case—because there is no way we're discontinuing Toronto to Regina in a non-stop service—I'll put it back to the old time. We believe that although the flight does arrive at midnight we're actually improving access to Regina.
The Chairman: Mr. Calder, please.
Mr. Murray Calder: Thank you, Mr. Chair.
I want to deal with a few issues, like this letter, for instance, which we were given, which is dated November 1, 1999, basically 22 days ago. I know that it says “union head”; I know it was sent out to a number of the unions—the International Association of Machinists and Aerospace Workers for one. Then, 14 days later, there was a press release that was put out to the business and financial editors; it was the offer to purchase Canadian Airlines Corporation shares, mailed to shareholders, etc. What I'm interested in is the discrepancy between the two of them.
Issue number one is that the first says:
No current unionized employee at Air Canada, Canadian
Airlines, Air Canada Regionals or Canadian Regional
will be involuntarily laid off as a direct result of this
Yet 14 days later the press release states: “There will be no involuntary termination of employment of any Canadian or Air Canada employees...”.
The words I want to jump on here are “termination” and “laid off”, because I see that 14 days later, if it is “involuntarily terminated”, that individual could be laid off indefinitely, whereas on the original one, that was basically taken out. If you can't lay the person off, obviously you can't terminate them. I'd like some clarification on this.
Mr. Robert Milton: Sure. I'll be glad to clarify. Maybe our chief counsel can give me a hand with some of this.
My intent, my commitment, is in the belief that between the two airlines there will be no requirement for people who want to keep their jobs to lose their jobs. However, I believe that at the two airlines there will be a significant number of people that would like severance packages and early retirement, so we've made a provision of $125 million for 2,500 people. I'm actually willing, if there are more people interested, to increase that number. The intent, the issue, the desire, is no forced losing of jobs, moving around or whatever.
But in terms of the actual choice of words, John, I don't think there's any ill intent.
Mr. John Baker (Vice-President and General Counsel, Air Canada): I believe the choice of words was intended to have an equivalent meaning.
Mr. Murray Calder: You must understand, it is my job to ferret out any discrepancies here. That was one I found.
The next point right below there is what you just talked about, and it also was not in the November 1 letter. But if this was going out to all the union organizations, it would seem to me that this should have been in there—namely, that there will be a net employment reduction of approximately 2,500 employees, a reduction accomplished through attrition, early retirement programs, and voluntary severance packages made available to the employees.
You're basically saying tonight as well that you'd even sweeten the pot, so you're anticipating that you might even want to see more than 2,500.
Mr. Robert Milton: I'm open to it. I'm not saying I would want to see more, but I believe we might have more offers than that. I'm open to, at that stage, looking at even increasing the size of the severance package allowances we make.
This serves the interests of the company to the extent that people want to take these packages, and the economics makes sense, bringing in employees at junior pay scales. We're open to that, but it is an economic question. At a minimum, we are committing to people getting severance packages, with respect, if they don't want the job that's available.
Mr. Murray Calder: What kind of timeframe are we talking about here that this severance deal would be available to the employees? Are we talking one year, two years, three years, five years?
Mr. Robert Milton: I don't know if we define it, but it is of short duration, definitely.
Do we define it, Rob or John?
Mr. John Baker: I believe we've said that certainly until March and April 2001 these commitments would be in place during the period of restructuring.
Mr. Murray Calder: In that situation, then, 2002, you are also setting a timeframe as to when you feel Air Canada and Canadian are going to become one. I could read this into that.
Mr. Robert Milton: I've been clear on the fact that airline mergers, airline integration exercises, are littered with the ruins of airlines. There are very few examples of good ones, and the only good ones are where the employees were absolutely on side.
There is tremendous history between Canadian Airlines and Air Canada, both of which are great companies. I want the participation of the employees and the unions before we proceed on whatever the future is in terms of integration. I'm open to it. I think it is an evolutionary process, and a process where we still will get the benefits of the integration.
So my view on how we proceed is through dialogue. Ultimately, I am not saying what the configuration is other than the fact that in the initial stages, these are two distinct operating units. How we go and where we go, I don't know.
Mr. Murray Calder: Last question?
The Chairman: Sure.
Mr. Murray Calder: What type of response did you get from this letter?
Mr. Robert Milton: It depends on the union. I would say it has been very positive and very strong from at least one of the key unions at Canadian, where there is an active dialogue, with the consent of Canadian Airlines, currently under way. There is dialogue with other unions at Canadian.
Again, somehow, over what is, we hope, a short period of time, with the support of Kevin Benson and the team at Canadian, we are hopeful there will be an understanding that our interests are sincere in protecting the interests of Canadian Airlines employees.
The Chairman: Mr. Casey, please.
Mr. Bill Casey: Thank you.
Right along those lines, the thing that makes Canadian Airlines employees most uncomfortable is the way you've structured the buy. You are buying it in a numbered company, not in Air Canada, but in a numbered company, which almost makes it look as though you're hedging your bets.
Do you know what I mean? It creates that impression. If it doesn't work out right, you've said you want to restructure Canadian's debt as part of the package. The question is, if you're not successful at restructuring the debt and the other changes you want to make, what happens to Canadian Airlines and their employees?
Mr. Robert Milton: In terms of hedging the bet, clearly what we're trying to do is deal, on what we believe is a sensible basis, with the debt situation at Canadian. It hopefully is understood that there are issues there in terms of how much they are paying for aircraft relative to what we're paying and how much they're paying to borrow money relative to what we're paying. We think it's only appropriate that we attempt to work on restructuring that debt.
We've also said we're willing to look at an asset purchase, but in any instance, we are going in with this plan and are willing to commit to, on any sensible basis, with an outcome that delivers us the route rights and the franchise of Canadian Airlines, the absolute protection of Canadian Airlines.
The problem we have, as I said earlier—and I don't want this to be misconstrued as my being cold or distant—is that we just don't know what's there. So the dialogue, we hope, will get a full head of steam in short order so that we can get to better understand what precisely is the structure of Canadian Airlines and its debt.
We cannot do things that don't make sense. I think anybody would understand that. But we are game to get on with it on a very expeditious basis and with the full commitment to the employees of that company.
Mr. Bill Casey: I understand it's very difficult for you to make certain commitments now—you're in negotiations—but it is the thing that makes Canadian Airlines employees most uncomfortable. Earlier tonight we had here the president of Air Nova and Air Alliance, and he as much as said there's no place in the new structure for InterCanadian, which is a Canadian Airlines partner.
It doesn't leave a good impression in terms of the attitude toward the Canadian Airlines people and organization. It makes it look as though they're second-class citizens in this partnership.
Mr. Robert Milton: To go back to the earlier question on InterCanadian, I do not understand the absolute structure of InterCanadian. I don't even know, although we've tried to find out, whether those are in fact employees of Canadian Airlines who have been transferred on some basis from Canadian Airlines to InterCanadian.
My earlier statement was that I am absolutely and emphatically committed to the employees of Canadian Airlines and their wholly owned subsidiaries. However, InterCanadian is not now at all owned by Canadian. So I have to begin from a starting point and focus on the big picture—the 16,000 people, plus those in the Canadian regional system, who are part of the wholly owned units of Canadian Airlines.
So that's where I'm starting from, with the best intentions possible.
Mr. Bill Casey: If possible, I think it would be really appropriate if you could contact InterCanadian.
Mr. Robert Milton: Okay.
Mr. Bill Casey: Because there are 1,100 employees there, and that company is completely out of the loop. They're totally dependent on their connection as a feeder to Canadian Airlines. They don't know where they come into it.
Mr. Robert Milton: With the consent of Canadian Airlines, that is perfectly reasonable. It applies to others as well, such as Canadian North, and Ontario Express, which is at this stage, I believe, the Canadian regional at Toronto. Various units of Canadian are not wholly owned by that airline at this stage.
There are issues there in terms of how much they're paying for aircraft relative to what we're paying, how much they're paying to borrow money relative to what we're paying. We think it's only appropriate that we attempt to work on restructuring that debt. I will undertake, with Canadian's consent, to talk to those companies.
Mr. Bill Casey: Just to bring them into the loop.
Mr. Robert Milton: Sure.
Mr. Bill Casey: I just want to go back a bit now. I don't know whether or not I got the answer I need, or whether you can give it. I understand that probably you can't give everything. But in terms of the commitment to the business side, and my suggestion that you're hedging your bets, what happens if you can't restructure those debts and the prices of their leases? What happens if you can't accomplish all the things you want to do?
Mr. Robert Milton: We have made this offer on the basis that we're going to go in with the intention of restructuring. However, our offer is not predicated on successfully restructuring the debt. We're going to make a best effort, but it is not predicated on that.
I believe, though, that because of how many common suppliers we have, and common lessors and so on, it will be a straightforward and successful exercise. But I remain committed, even if we fail at the restructuring, to buying Canadian and protecting those employees—if we can. There are also other pieces here. For instance, I just don't know what American Airlines intends to do here.
The Chairman: Thanks, Mr. Casey.
We've done one complete round, colleagues. Now for a question from me.
Mr. Milton, when you appeared before this committee back in October you indicated that the 10% rule contained in the Air Canada Public Participation Act is “shareholder unfriendly”. What exactly do you mean by that, in very short words?
Mr. Robert Milton: There are takeover premiums, control premiums, and the ability to get going some bidding wars, or auctions, over the control of the airline, with the likelihood that you get the price to move up. There are premiums paid for the company.
We're not in a position to do that. That is inherently unfriendly to the shareholders.
Rob, I don't know if you want to add anything.
The Chairman: Before you begin, Rob, part of the problem is you're now saying that 15% makes sense because it would enhance investor interest in Air Canada, but it would prevent investors from exercising undue influence over the company.
In part of this equation, do you mean the company or do you mean the board? You're preaching, the company's preaching, and everybody's preaching that we have to get global. Global means that major airlines in most countries around the world have, of course, restrictions on foreign ownership, but none on individual ownership.
In Canada, we have the 10% rule that you want to lift to 15%. But we've seen evidence of how companies that operate with 10% or 15% still don't have any control over who runs the company. If the shareholders want to walk into a board of directors meeting and say “Milton, you're not a bad guy, but you're doing a lousy job, so you're history”, they can't do that at 10%. So your job's pretty secure when shareholders have that kind of watered down hold. It is management-driven, as opposed to shareholder-driven.
The people who pay the money, make the investments and everything else really don't have a crack at Milton or anybody else sitting on the board of directors because they're only at 10%. It sounds pretty good, but is 15% a threat to us on the board? Not really. At 20% we're getting into dangerous territory, so we'd better not do that, even though the rest of the world and other airlines are saying “Hey, you know what, we don't need the 10% rule. We're confident enough in what we're doing, we're confident in the money, and quite frankly, we don't need it.” Others, of course, have said the same thing.
Mr. Robert Milton: It's good to know. Every day I feel like I'm in dangerous territory, so this is very reassuring; it's great.
The Chairman: The shareholders can decide whether you're doing a good job or not. I don't own shares.
Mr. Robert Milton: Internationally, there are not a lot with 10%, but there are a lot of ways to protect the enterprise. Alitalia, KLM, Air France and Iberia have significant portions of government ownership retained. Singapore Airlines, one of the great world airlines, has a 5% limit. Qantas has a golden share. There are many different ways countries protect their airline industries and keep them at home.
Again, from Milton's standpoint, I would make a lot of money if you made it 100%—just wipe out the rule. It would be great. This guy would be happy, I would be happy, we'd all happy. But the issue is that what's good for us, I believe, is not good for Canada. The U.S. industry is so big and so powerful, I predict that within no time at all, if that rule is changed, this industry will reside in the United States. I believe we came very close to that over the last 90 days. But if Parliament deliberates on it and agrees to 100% and there's no limit—great. I don't think I can be any more clear on that.
The Chairman: My time is up, but it wouldn't go south because we have the 49% limit.
Mr. Robert Milton: But again, if you eliminate that, it could go south.
The Chairman: It's obvious I have the answer I'm going to get.
Mr. Hubbard, please.
Mr. Charles Hubbard: Thanks, Mr. Chairman.
I want to go back to Mr. Casey here with InterCanadian. As he mentioned, they have more than 1,000 employees. When you talk with them, some have 10 to 20 years of seniority with the company. I'm rather surprised that they haven't really come to your table yet. I would be concerned, in terms of the service they provide to eastern Canada, that many communities that are served solely by InterCanadian would be left in the cold, as a result of this talk we've had today.
Mr. Milton, can you give us any firmer commitment that you would look at this InterCanadian problem the employees have? They're not listed, in terms of any of your correspondence, but I think they have to be just as much concerned and involved in this as any other group we're speaking of.
Mr. Robert Milton: As I committed to Mr. Casey, I will undertake to meet with them. We have had at least a letter, that I am aware of, from InterCanadian. Again, I am not aware of the commitments between InterCanadian and its employees. I will also go further. To the extent that there are any communities InterCanadian serves that Air Canada does not serve, should InterCanadian decide to terminate service, I will commit that we will introduce service. So we will protect the interests of any of those communities that I am not aware of.
There's an interesting market we should look at. Joe Randell, who was in here today, for any of you who know him, is one of the fine airline operators around. He's been involved with Air Nova since day one. Air Nova is a dominant carrier in its geography. It is an 80% of the market player, and is a fine competitive player. I would like to think that's a positive illustration of how an airline can have a very significant market share, do a great job, and deal with communities on a very attractive basis.
Mr. Charles Hubbard: My other point is we have a number of different terminologies we use, in terms of this restructuring. We have the concept of purchasing, we have the integration you talk about, and then we have the idea of a merger or consolidation of the two airlines.
Looking at what's happened, in terms of what Mr. Comuzzi asked, Air Canada now has a proposal out there that will cost you, if goes through, probably a little less than $100 million. You have access to about $300 million. Of course, there are various 10% rules and so forth that are involved with that. It appears that a lot of the financing you have arranged is through the Province of Quebec.
With the arrangements you've made with Quebec, are there any guarantees you're offering, in terms of other parts of this country? I'm looking at Air Canada as a company that has really never paid a dividend. You're looking for a big investment, but if I were an investor and I looked at a company that never paid 15¢ in any quarter in the last ten years, I would have to question my mentality and wonder why I would invest $300 million into such a project.
From the total Canadian concept, are there other guarantees involved in this offer to some group, which haven't been brought to the attention of the Canadian public?
Mr. Robert Milton: First of all, on the question of merger and integration, yes, a lot of words are used. My desire and intention is an optimization of capacity allocation to markets, where an appropriate return can be produced. So we will chart, through this process, a tremendous number of new international routes, whether they're across the Pacific or the Atlantic. There will additionally be a tremendous number of new routes to the U.S.. We obviously want to start this low-fare airline in Hamilton, which is another new area of growth.
Furthermore, as a result of combining the two airlines—something that has not been discussed—I am incredibly confident we will see a bunch of new routes that bypass Toronto. So whether it's Ottawa getting three flights a day to Winnipeg instead of two, or three flights a day on a combined basis to Calgary instead of two, there will be a tremendous ability to bypass Toronto and create new transcontinental or medium-haul routes in this country.
As far as the guarantees or commitments on financing, our liquidity is such that we have actually stockpiled almost $2.7 billion, which we have at our ready access. Part of that will be used to provide to our shareholders $1.1 billion. So the days of saying there's never been a dividend to Air Canada shareholders are over. We're passing tremendous value back to our shareholders.
On the $300 million, it's $150 million, and we have the ability to go $300 million. But it's also important to note that in this recent exercise we also brought in $200 million of value from our partners at CIBC Bank, as well as $300 million from Lufthansa and United, so there are a lot of sources. Air Canada deals with big financial institutions all over the world. We have no qualms about dealing with anyone.
Rob, on the $310 million, there's Citibank, and who else do you have involved with that?
Mr. Rob Peterson: The line of credit, which is guaranteed by our partners, will be funded by a group of Canadian and European banks. So it's not just Quebec money; money from around the world is coming in to help us fund our share of the buyback—the $1.1 billion—as well as the acquisition of Canadian. In addition is a significant liquidity we had on hand as of September 30.
Mr. Robert Milton: I would also just add that the acquisition of Canadian is not just the price of the shares—$92 million. We estimate they are currently, on a bad day, losing up to $1 million a day. So they are hemorrhaging quickly, and we fully expect we will need to provide hundreds of millions of dollars to get them through into a sustainably profitable configuration. So there are cost components. We believe there are also some pension funding issues.
Mr. Rob Peterson: Packages and pension.
Mr. Robert Milton: Yes, there are the packages as well, so the requirements go well beyond this $92 million. We are paying far more than that for Canadian Airlines.
The Chairman: Thanks, Mr. Hubbard.
Mr. Charles Hubbard: [Inaudible—Editor]...to feel that you're going to integrate some money into Canadian, which is really the big....
Mr. Robert Milton: Absolutely.
The Chairman: Mr. Johnston.
Mr. Dale Johnston: Thank you, Mr. Chairman.
I have a couple of labour-related questions for you.
When you become the single national carrier, any kind of work stoppage or any kind of work disruption is going to be a tremendous blow to the Canadian economy and a tremendous inconvenience to the Canadian traveller. How do you anticipate dealing with the possibility of some kind of work disruption?
Mr. Robert Milton: We have been through a recent and difficult history in terms of even having a major work stoppage at Air Canada last year. To be honest, our employees have learned a lot about Air Canada in the last three months, about the business we're in, about the interests of the shareholders, and about needing to keep a balanced perspective on what's going on. I think we've learned a lot, and I'm confident in our ability to go forward on a sensible, stable basis.
Mr. Dale Johnston: Well, there's nothing like confidence. If you can stretch it to the point of never having a work stoppage, that will be great. It will also probably be a first.
You're going to be working with a lot of regional pilots, and I know you're aware of the ongoing concern about the lack of merging of the seniority lists. How would you recommend dealing with that?
Mr. Robert Milton: Here again—and I've sent letters to all employees of Air Canada—we are looking at the possibility of entering a brave new world, and we're all going to have to pull together. My firm belief is that the combination of the two is going to be so much better for every employee at both companies, through all the prospects for growth, through providing stability for everyone and fully achieving the potential of both companies, that the willingness and frankly the desire to cooperate and help build a bigger, better airline is going to be there. It will be in the interests of the employees to get on with it, and I believe we will.
Mr. Dale Johnston: So the employees, particularly the pilots, of the regional airlines would then become employees of Air Canada?
Mr. Robert Milton: I can't say that. As I mentioned earlier, though, I want to have an active, open, constructive dialogue with all the unions and employees. Obviously we're dealing with both unions, the Air Canada Pilots Association—ACPA—and ALPA, and there is going to have to be a need for everybody to pull in the same direction. Ultimately, based on the opportunities that exist, I believe that will happen by finally being able to get on with fully achieving the potential of the airline franchise of Canada.
Mr. Dale Johnston: Thank you.
The Chairman: Thanks, Mr. Johnston.
Mr. Fontana, please.
Mr. Joe Fontana: Mr. Chairman, Mr. Milton is good, like the movie Analyze This was good. I'm going to put my questions first, because you're going to go off and make these great speeches and I'm not going to get a chance to even ask my second question. The last time I only had a minute and a half, Mr. Chairman.
A voice: You're just a cry-baby and you love it.
Mr. Joe Fontana: I want to get back to what we've talked an awful lot about, and that's protecting communities, protecting employees, and protecting consumers. I take it, Mr. Milton, that when it comes to writing the report to make sure all these things are in place, the committee would probably reflect those protections. It would make sure that the CTA, the Competition Bureau, an ombudsperson, or even a tribunal is put in place, somebody to make sure everything is going to go well in the next three years, based on the commitments you make. Would you object to that?
Mr. Robert Milton: Are there any more questions?
Mr. Joe Fontana: Oh, yes, I have more questions, but this one should be a yes or a no.
Mr. Robert Milton: Sorry, I can't do that. I look forward to the recommendations, but as I said earlier, please keep a mind on the competitiveness of Canada and its airline industry, and also on how these various regulatory aspects might interrelate in ways that are not being thought through.
Mr. Joe Fontana: Of course.
Now, I have to understand this, because with regard to employees, I think an awful lot of questions have been asked about labour relations and everything else. You are setting up four hierarchies of companies here: Air Canada, Canadian, regionals, and this new discount carrier. All of them have different collective agreements and different classes of employees. You are going to have to be very good to make sure you can manage this apparatus, because it's going to be a monopoly. You are going to control practically everything. I know the independents are going to be there. I know the charters will be, and that we're going to do all those great things. I agree with 80% of what you said about reciprocal cabotage and foreign ownership and everything else, but you are going to control the marketplace, including all four of these different classes of employees.
I have to put the question as to how you are really going to handle these affairs. Why not just treat everybody equally? You already have problems with the regionals. You are a common employer. You're fighting in the courts over that. You have air pilots groups that don't get along or don't respect what each other does. I'm just a little worried about how you're going to do that. And that's just the employees.
Thirdly, I have a concern about this discount carrier. You may be doing that because you want to prevent competition, even though you keep talking about competition. Obviously it's a preventative move so that nobody else gets into the market. If you're serious about getting into the market, I think it's going to hurt your regionals in eastern Canada.
You said at length that you've talked to the Competition Bureau about an awful lot of things. Have you talked to them about this discount bureau? I understand that in fact they unfortunately didn't think too highly of the proposal of the discount carrier out of Hamilton. You might want to come to London—
Voices: Oh, oh!
Mr. Joe Fontana: —but I'll just refer to Hamilton and a discount carrier in eastern Canada in Hamilton. Maybe you can explain it to me. I understand that the Competition Bureau didn't like that at all.
Secondly, maybe you can explain what kinds of lock-up agreements you have with regard to Hamilton's airport. Does that mean that if somebody else wanted to use Hamilton as a discount, as an example, they would also be able to get into Hamilton to fly? Hamilton would just be the centre of the universe after a little while.
The Chairman: It sounds really good to me, Mr. Milton. What's your answer? I'm on the edge of my seat.
Mr. Robert Milton: On this issue of treating equally, I think it's an important question.
Please think of Air Canada as a $6 billion or $7 billion company next year without any acquisition of Canadian, and worth over $10 billion with Canadian. This is a large company. There are a lot of units. We already have a lot more units, such as Air Canada Vacations and others that you haven't even mentioned. It's already very big and very complex, but it's very simple relative to some of the other leading airlines of the world, like Swissair or British Airways, which have way more units and way more labour agreements than we even have. Please keep in mind the scale relative to the biggest in the world. We are still not in that classification.
Mr. Joe Fontana: That wouldn't be in corporate structures, though, Mr. Milton. I might be wrong, but you are creating four different corporate structures. Regionals are wholly owned subsidiaries. Canadian is going to be a wholly owned subsidiary, owned by a numbered company, a holding company. You have a discount airline that's going to be owned by somebody else. And you're talking about employees here.
Mr. Robert Milton: If I could just refer to Lufthansa or Swissair, they're specific examples precisely configured like what I'm looking to do here. I think it's also important to mention—because I don't know how widely this is known—that we're actively dialoguing with one of the key unions at Canadian on a basis I am fully supportive of, as I mentioned earlier. Those employees and their wages and their common unions, with the exception of the pilots, will be paid what Air Canada employees are being paid within a couple of years of this transaction occurring. We're looking to get them to pay parity on an accelerated basis, which is very significantly beneficial to the employees at Canadian. I am not looking to create tiers of employees.
I think it's also important to make a note about some of the earlier discussions about regionals. One of the reasons for their lower costs is that they're operating 36-seat and 37-seat aircraft. Inherently, those are less costly to operate. The pay scales are lower because you're not operating equipment that is as big. There are some pretty fundamental reasons as to why.
So we will have a straightforward structure, but one consistent with many of the key airlines of the world.
As far as the low-fare airline goes, to reiterate again, no one's doing it, and no one's done it. On Hamilton's airport, I saw a document that was prepared by the Hamilton airport and sent to this committee. And I only saw it recently; I didn't ask for it to be prepared. They've been going around begging people to fly to this airport for the last five years. Nobody has done it. Air Canada wants to do it.
In the polling we are doing with the Canadian public, they are absolutely, wildly supportive of Air Canada doing this low-fare airline. I know there's a lot of opposition; I read about it in the papers. But the public wants Air Canada to do it in a big way, because it's consumer-friendly.
So yes, I've read the Competition Bureau doesn't like it. I have said I am going to dialogue with the Competition Bureau, but that doesn't mean I'm going to agree with everything they say. We're going to have to discuss things through to come to sensible conclusions on what is fair and appropriate and what isn't.
As for this agreement that's been so reported on that nobody else can get a slot at Hamilton, it is absolutely, categorically incorrect. We've gone to the airport nobody else wanted to go to. We signed a deal for facilities in anticipation of doing this, but that is a very uncongested airport. Lots of people, as you say, can make Hamilton the new hotbed of low-fare aviation, and that would be great.
The Chairman: Then you don't have an agreement that would deter other airlines—
Mr. Robert Milton: Absolutely not.
The Chairman: —from taking counter space or taking time to fly out or in?
Mr. Robert Milton: No, there is no restriction from the slot standpoint, and we have signed up the ability to get the facilities to produce the levels of flying that we're committing to do.
The Chairman: But not to the exclusion of anyone else like a CanJet coming in?
Mr. Robert Milton: No. If they want to come in, let them come. The facilities, as you know—
The Chairman: Why would the Competition Bureau be saying they don't like this idea?
Mr. Robert Milton: To be honest, I do not believe we've discussed this with them—have we, John?
Mr. John Baker: No, we've not had a formal discussion with the bureau as yet on this low-cost airline.
Mr. Robert Milton: But we've read what is purported to have been said by them, and again, we disagree. We don't think, given what hasn't happened with low-fare airline creation in this part of Canada, that we should not be allowed to get on with it. We think we should.
The Chairman: Mr. Guimond, please.
Mr. Michel Guimond: Mr. Milton, a few moments ago Mr. Johnston asked you a very good question about regional pilots, and you answered with great respect. You have behaved like Elvis Stojko at the height of his career. You are doing superb triple jumps. You bring to mind the Snowbird pilots who fly with in a hair's breadth of each other.
I am going to put very specific questions, and get straight to the point. Why did Air Canada refuse to apply the Picher decision, which would have prevented the case now before the Canada Labour Relations Board?
Tonight, on behalf of Air Canada, are you prepared to commit yourself to apply all aspects of the decision to be handed down in approximately two months, regardless of whether the CLRB comes down in favour of regional pilots or the APAC? That would put an end to the matter once and for all.
Quebec's Intair—and I do mean Intair, not Inter-Canadian—had to wait nine years for a decision. Regional pilots are professionals too, and they have every right to have their problems dealt with once and for all. You must demonstrate leadership. If the decision comes down on the side of the single employer, it is your responsibility to act. Your right of governance allows you to act, and in any case you'll have to act. We should not go on with a process that involves appeal after appeal until all the witnesses are dead. That's what happened with UFFI.
Mr. Robert Milton: First of all, on Picher and this overall issue, there is tremendous history. I said in my opening comments that I believe it is now time to get on with the future. We have so much history, and so much of it is not constructive. I firmly believe that what has gone on between Air Canada's pilots and the regional pilots has been destructive of both groups' interests, and I've told both groups that. I firmly believe it's time to get on with the future, as I say, and that means I'm going to have to work.
I would ask you to remember that in my new job, the regionals only started to report to me about ten days before the Onex bid arrived. So I haven't had a lot of time to focus on that part of the airline. Although I've had much of the airline reporting to me, the regionals never did.
I'm committed to getting on with the future.
John, since you're so intimately involved, do you have any comments to add?
Mr. John Baker: Only on the Picher decision. One must remember this is a conflict between the pilot groups themselves. It's not something over which management can impose its own will. There's an integration issue of the pilots between the two groups and a declaration of a single or a common employer.
We will await, and have awaited for a long time, the determination of the CIRB, and we are hopeful that we'll receive it by the end of next month. Then we will obviously assess what we want to do. As Robert has indicated, we want to move forward with all our pilot groups and all our groups and get a cohesive whole working in tune together. That's our intention.
Mr. Michel Guimond: It's not your lucky day, Mr. Baker. I too am a lawyer by training, and I worked for 16 years in the labour relations field before becoming a MP. I understand quite clearly that there was a fight between the unions or within the union. When the arbitrator tells it to integrate the seniority lists, the employer cannot do as Pontius Pilate did, and wash its hands of the whole affair. What's involved is the seniority of its employees.
In any event, we won't start debating that point, but don't try to slip one past me.
Voices: Oh, oh!
Mr. John Baker: Well, the board as currently constituted has the ability to impose a seniority integration plan. The previous board, under the previous legislation, did not, and that was the legislation under which this application was heard. I would just point that out.
The Chairman: Thanks, Mr. Guimond.
Colleagues, the hour is late. We've had Mr. Milton for an hour and a half. We'll have one question from Mr. Comuzzi, one from Bev, and one from Mr. Casey.
Mr. Joe Comuzzi: You've talked about the 15%, Mr. Milton, but you're quite willing to live with the 10%. You didn't seem too adamant about that.
Mr. Robert Milton: This is an issue for the public, based on public input and parliamentary debate, so I'm fine with whatever the rules are.
Mr. Joe Comuzzi: Yes, it's not that big a thing at this stage of the game.
I want to talk about something. The question is this. In one of my other lives, we were at a director's meeting in New York or someplace, and somebody put up a proposal to sell a product we had at a lower market and call it a different thing. I'll always remember an old-timer at the front—I guess that's what we are now—saying “I don't ever believe in watering the soup”, though he used more vulgar terms.
Why can't we just bring a low-fare carrier and call it Air Canada? Whatever the principles we use with low-fare carriers, why can't we do it and call it Air Canada? You know, that would satisfy the consumer in this country a great deal. Tell me why we can't do it.
Mr. Robert Milton: Well, it is a fundamentally different product in that it is low-frequency as opposed to high-frequency. It's not catered to business travellers, because it's low-frequency at odd times of the day and so on, but ultra-low-fare. The seats are crammed in. There's no business class generally. It's catering to an entirely new echelon of the travelling public. So it's fundamentally different.
Naming it something else—and we look to announce the name very shortly—is completely consistent with what United has done, as I mentioned earlier, with United Shuttle, and USAir with Metrojet. They are different, and if you get on the airplane, you know the product is different. That's the reason. They are fundamentally different types of airlines.
The Chairman: Thanks, Mr. Comuzzi.
Mr. Joe Comuzzi: [Inaudible—Editor].
Ms. Bev Desjarlais: Well, I can't start until he stops.
The Chairman: He doesn't have a microphone. Your microphone is on, Bev; his is off. He's talking to himself.
Ms. Bev Desjarlais: I have a couple of short questions. I'm going to ask them first, and then you can reply.
I notice in your letter it states “No current unionized employee at Air Canada, Canadian Airlines...”. Are there any non-unionized employees who are going to lose their jobs as a result of this, and what are the numbers?
Secondly, should this monopoly situation not go through and we're in a situation where two airlines are operating much along the same status quo, how long can Air Canada survive financially in view of the increased debt they have now put themselves in?
Mr. Robert Milton: I'll give you quick answers.
The non-unionized I intend to protect in precisely the same way. The letter went to the heads of the unions.
I don't agree that we're talking about monopoly, and I think it's important to look at the definition of and the levels of competition that exist particularly from the charters, low-fare airlines across the border, and so on.
Air Canada is a very strongly profitable airline, adequately handling its debt. If I look at the results we had in October, the results through September, now October, and we're looking at a strong November, Canada will be proud when Air Canada announces its year-end results for this year. We are on an incredibly positive trajectory.
Ms. Bev Desjarlais: That was really quick. Can I get one more in?
The Chairman: One more.
Ms. Bev Desjarlais: In regard to the $1.2 billion, did you say, that you're going to paying back to shareholders—
Mr. Robert Milton: $1.1 billion.
Ms. Bev Desjarlais: I'm surprised that you've never been able to pay them out before and you're now able to do that. I'm seeing this as being money that was borrowed in order to pay them back. Is there a term that's used when companies do that?
Mr. Robert Milton: As I mentioned earlier, $500 million of what we achieved through this process was value. It was, in essence, a gift from partners of ours to continue their associations with one of the great airlines in the world, Air Canada. But I think rooted in that question is a very unfortunate story: that Air Canada was forced to contend with an offer that was against the laws of Canada and there was not clarity as to what the rules of the game were and we had to go out and do what we did on a basis we would not otherwise have done. And that is unfortunate for business in this country.
The Chairman: Mr. Casey.
Mr. Bill Casey: This may be the last question for this committee, and none too soon.
The Chairman: No, Val Meredith has one. Let's be quick about it.
Mr. Bill Casey: After having said all that and gone through all this, Canadian Airlines sent a note out today saying don't tender your shares to the Air Canada offer because we still have other alternatives to consider. What happens if they get refunded? Was this all for nothing? Was there no crisis?
The other thing is the big question I don't think anybody feels really comfortable with is that in the event your project does go ahead, there really will be competition.
There you go.
Mr. Robert Milton: So Canadian has come out with this release. They recommended a few months ago accepting a $2 offer. We have a $2 offer on the table. It is my hope that through dialogue with Canadian Airlines they will see merit in our offer as we both work to further define precisely how it's configured. We are ready to go with the money to support and fix Canadian Airlines. It is my hope, because we're ready to go on an expeditious basis, that their board comes to support this on an expeditious basis, because the rate at which they're losing money makes the situation more and more difficult to deal with every day that goes by because there's $1 million less on the table each day that goes by.
As to whether there was no crisis, I leave it to the country to speculate, but clearly it would seem that the situation remains grave, so we'll see where we go.
As far as somebody else coming forward, American Airlines is clearly the unknown aspect of this equation. American might well come forward. I think it's unfortunate for Canada if Canada has gone through this and American Airlines all along was willing to fix Canadian Airlines. If American is simply talking about keeping Canadian alive, I predict we will be back at this exercise within a couple of years.
To the extent that all American Airlines advocates doing is keeping Air Canada out, fine, may the employees of Canadian and American be happy and proceed on a secure basis. But I would ask Parliament, the Minister of Transport, and anybody who has influence to let Air Canada once and for all get on with flying these routes that we are not allowed to fly around the world that Canadian Airlines does not fly, because what's gone on is ridiculous from the standpoint of underachievement by Canada. That's what we'd like to get past.
On your last point, I want to leave you with the request that you please study the competitive dynamics of the Canadian marketplace, because it is far more competitive than I believe most people believe. As I said earlier, the charters even have more seats than Canadian Airlines. In our scenario, we're talking about re-optimizing the capacity and producing a great story for Canada.
The Chairman: Val Meredith, please.
Ms. Val Meredith: You talk about American Airlines being the big bad guy, but I'm probably even more concerned that we're now dealing with United Airlines, which is the largest airline in the world. You just made the comment: Let Air Canada fly the routes that Canadian has not flown and cannot fly. But Canadian is going to be a company that you've told us is going to be flying internationally. Now you're telling me and this committee that Air Canada is going to fly the routes that Canadian has the right to fly.
I'm really concerned that you have signed a ten-year agreement with United Airlines. I'm looking at a flight chart here or flight path, and I don't see United even coming close to Vancouver on any of their flights from eastern United States or eastern Canada. I am really concerned that you've tied us up with the largest company in the world, which doesn't connect at all to western Canada, whereas American did. American did bring passengers through Vancouver and American did use a Canadian airline to fly their American passengers out of Vancouver to the Orient.
I'm sorry, sir, but I am really afraid that American may not be the big bad guy but maybe United is going to be the big bad guy. I want assurances from you that Canadian Airlines will be able to fly some of these routes that they haven't been able to before because you're supposedly going to restructure and make them a profitable competitive airline, and that United isn't going to control the Canadian airlines industry.
Mr. Robert Milton: I must not have been clear on a few issues that I'd really like to clarify.
Ms. Val Meredith: No, you weren't.
Mr. Robert Milton: First of all, when I said that Air Canada be allowed to fly the routes that Canadian doesn't fly, that is if American Airlines invests in Canadian and fixes it and it does not involve Air Canada. So you have two independent airlines, because I can't say what American will or won't do in this scenario.
So I am talking about if Canadian remains independent of Air Canada, and is further invested in by American Airlines. Then I think it is inappropriate that American Airlines and Canadian Airlines don't fly Toronto-Tokyo, Toronto-Hong Kong, to Australia, to Thailand, to Italy in sufficient service, and we not be allowed just because they have the route and they don't feel like flying it. So that's the first issue I'd like to state.
If American are such good guys and United are such bad guys, I'd like to point out that United rallied in support of Air Canada with a cheque, in conjunction with Lufthansa, of $300 million to support us.
Ms. Val Meredith: That's part of the ten-year agreement.
Mr. Robert Milton: It's a ten-year agreement with the leading alliance in the world. The other guys are in disarray. The two key airlines, British Airways and American, can't even work together.
As far as the route map you're looking at, United does fly from Chicago, which is pretty far to the east in their key hub, and from Denver, which is also a key hub. There has been limited purpose because Air Canada is restricted from flying across the Pacific, so what's the point in them feeding into Vancouver? If you lift the restrictions and let Air Canada loose or let Canadian loose under the wings of Air Canada, you will see a tremendous increase, absolutely, by United Airlines in activity over Vancouver, as we've seen throughout our entire system.
The interpretation you have, with all due respect, I would argue is 180 degrees off. United is the greatest thing that could happen to Vancouver because of their incredible strength across the Pacific, and American has absolutely none. Again, if you look at American and what they've done, in terms of signing up relationships with Asian airlines, buying equipment that flies right over the top of Vancouver, in five years they've added the grand total of one flight a day to Vancouver from New York. That is not supporting Vancouver.
Ms. Val Meredith: Why would United use Vancouver and bypass their hubs of L.A. and San Francisco? Why would they do that?
Mr. Robert Milton: Because it's routing options. How often has anybody in this committee gone across the Pacific into one city, come back from another, or across the Atlantic? It is options, and it's an option associated with the biggest airline the market. Beyond that, we have All Nippon Airways and Singapore Airlines. In terms of Vancouver, if you talk to Michael Tretheway, the economist at YVR, I guarantee, without talking to him, that he will tell you that what we're advocating for Vancouver is absolutely phenomenal.
The Chairman: Gentlemen, Mr. Milton, thank you very much for returning to our committee and making your presentations.
Colleagues, we're going in camera for two minutes. Please don't leave. Two minutes, that's all, I promise.
Gentlemen, thank you very much again for your presentation. Mr. Milton, thanks for taking the time.
[Proceedings continue in camera]