Player4keeps From , joined Dec 1969, posts, RR: Posted (12 years 2 months 4 days 7 hours ago) and read 4282 times:
Here again are examples of how to make poor business decisions: A look at the past and predicting the future of Air Canada.
Source The Toronto Star
October 5th 2001
Milton hamstrung by history
Old decisions return to haunt Air Canada
Air Canada president Robert Milton may have regrets - may have a slew - but if he does, he isn't talking.
``At this stage we're operating through the perfect storm,'' Milton told reporters recently as he announced 5,000 new job cuts at the financially troubled national airline, bringing the total this year to 12,500.
``I am comfortable with everything we've done; we've done it with conviction and we just fight on.''
But the fight to right Air Canada has proved especially difficult for Milton, a man who prefers to focus on the future but finds himself hamstrung by history.
Air Canada, like most other major North American airlines, already was teetering, having lost $276 million in the first two quarters of this year, when the Sept. 11 terrorist attacks on New York and Washington, D.C., put major airlines around the world into a deadly tailspin.
But decisions Air Canada made in good times are also coming back to haunt it, thanks in large part to skyrocketing fuel prices and collapsing business travel that have conspired to compound problems that had been mounting at the airline for years.
There are some who argue that to understand Air Canada's plight today, you have to go back to the Mulroney government's decision in the late 1980s to deregulate the country's airline industry. As government restrictions on what domestic routes airlines could fly - and how often - were slowly abandoned, Air Canada and its chief rival, Canadian Airlines, engaged in a deadly fight for dominance of Canada's airways.
By the recession-plagued early '90s, both airlines were in trouble, cutting jobs or working hours to reduce costs. As Canadian continued to struggle, Air Canada continued to climb slowly until, in 1999, it offered to buy the lucrative international routes controlled by financially crippled Canadian, setting the stage for profound changes in the airline industry.
`(Air Canada) came into this merger with virtually empty pockets and when you have the downturn in business travel, combined with the events of Sept. 11, they are two knockout blows that Air Canada is having trouble withstanding.'- Captain Rob McInnis, Chair of former pilots' merger committee
Within weeks, millionaire financier Gerry Schwartz, supported by American Airlines, would announce a hostile $5.7 billion - $8.25 a share - takeover bid for Air Canada and Canadian, vowing to merge the airlines and shave 5,000 jobs.
It would be more than two months before Onex would bail out of the intense boardroom and courtroom battle, but not before Air Canada - already more than $5 billion in debt - had decided to buy back 35 per cent of its stock at $16 a share, adding $1.2 billion more to its debt load.
It would add $3 billion more, post-merger, by assuming the debt amassed by Canadian during its almost decade-long fight for survival.
``The myth that's out there that Air Canada is doing poorly because it acquired Canadian is totally wrong,'' says Captain Rob McInnis, chair of the former Canadian pilots' merger committee.
``They wanted to acquire Canadian as a good business decision because it would give them world-wide access (key international routes, especially lucrative business travel into Asia) and it would give them a virtual monopoly domestically.
``But they came into this merger with virtually empty pockets and when you have the downturn in business travel, combined with the events of Sept. 11, they are two knockout blows that Air Canada is having trouble withstanding.''
Yesterday, Schwartz said not acquiring Air Canada ``was the luckiest thing that ever happened to us.''
By January, 2000, Ottawa had approved Air Canada's takeover of Canadian with strict conditions that also would eventually add to Air Canada's woes. Air Canada was required to maintain routes to smaller communities served by Canadian, whether or not they were profitable.
Air Canada also agreed to Ottawa's demands that no workers be laid off until after March, 2002, a commitment Transport Minister David Collenette finally waived last week after the terrorist attacks scared off so many air passengers that Air Canada was forced to ground 84 aircraft indefinitely.
If Air Canada made one tactical mistake to win approval for the merger, it was volunteering to hold the line on fares until after January, 2001, to allay fears it would use its near-monopoly position to gouge Canadian travellers.
That commitment proved onerous for Air Canada, which didn't lock in its fuel prices like some other airlines, and was hit in 2000 with $400 million in extra fuel costs and almost no way to recoup them.
It's only this past January - as fuel prices continued to hammer the airline's bottom line - that Air Canada was able to institute fare increases and fuel surcharges, although not enough to cover costs.
Shortly after the merger, Milton stunned a crowd of some 500 former Canadian Airlines workers during an information session in the airline's Vancouver hangar when he said he intended to run the two airlines separately. That left Air Canada workers convinced their lives would go on unchanged, and made the Canadian workers - many of whom had been through at least three mergers - rolling their eyes in disbelief.
That, many observers say, was a critical mistake. By not rationalizing the two different aircraft fleets and moving unionized workers toward common contracts quicker - allowing them to do each other's jobs - the airline was hit with higher than necessary costs, experts say.
``In effect, what he's been doing is running two inefficient airlines instead of what he should have been doing, running one efficient airline,'' said Joseph D'Cruz, a finance professor at the University of Toronto's Rotman School of Management.
Not long after the merger, it became clear to Air Canada executives that they had an unforeseen problem. Travellers - especially frequent fliers amassing points - were still so fearful about Canadian's future, they were flooding to Air Canada.
``Suddenly there were long lineups of travellers at Air Canada ticket counters and almost no one at Canadian's counters,'' said one long-time Air Canada staffer.
Air Canada was forced to reverse engines and started pushing hard for integration of the two workforces, along with a common computer system. But as that difficult process was just getting underway, the good-news-bad-news summer of 2000 arrived.
Suddenly air travel escalated out of control and thousands of people converged on a post-merger Air Canada ill-prepared to deal with the sudden and unexpected takeoff in traffic. Customer complaints abounded.
Because the two airlines' customer service staff, both represented by different locals of the Canadian Auto Workers union, didn't have a common contract, they refused to do each other's work. Air Canada hired 2,000 employees, at a cost of about $600,000 a year, to handle the extra Air Canada load.
Many of those workers are still on the payroll, but expect to be laid off when 9,000 job cuts take place in three phases this month.
In a further effort to boost integration, Milton offered a tradeoff to his airline's five major unions - the pilots, flight attendants, machinists, customer service representatives and dispatchers.
In order to ensure labour peace long enough to finish the difficult integration process, Milton offered long-term contracts with the guarantee of no layoffs until 2004.
In exchange, the airline agreed to pay $178 million in ``merger loyalty bonuses'' over three years to Air Canada employees who signed the long-term contracts - both as a reward for helping with the merger, and as compensation for the fact Canadian Airlines employees got a salary boost averaging 20 per cent post merger to bring them up to Air Canada's higher salary scale.
Those bonuses - the pilot payouts reportedly averaged more than $15,000 each - are often referred to by former Canadian workers as the ``Judas bonuses'' because they only added to animosities and feelings of betrayal between the two groups.
The financially strapped airline is on the hook to pay out about $37 million in bonuses this month to Air Canada machinists, mechanics, baggage handlers and cabin cleaners alone.
While many of these decisions and commitments may been small stepping stones along the way to financial instability for Air Canada, the airline could do virtually nothing to avoid the cliff that was looming large as early as December, 2000.
That's when the airline issued a profit warning, signalling that lucrative business travel - until then accounting for 71 per cent of Air Canada's revenues - was taking a sharp and unexpected downturn.
By the second quarter of this year, Air Canada was reporting a $200 million drop in revenues as major clients like Nortel Networks Corp. - which had accounted for about $100 million in revenues in 2000 - cut its travel by 60 per cent. At the same time Air Canada was determined to continue being all things to all passengers, aggressively taking on rival discount carrier WestJet in western and eastern Canada and moving forward with plans to start up its own long-talked-about discount carrier.
Then the truly unspeakable happened: Terrorists hijacked four U.S. planes and turned them into deadly missiles - at the same time destroying confidence in flying.
The ensuing three-day shutdown of North American airspace cost Air Canada $100 million and revenue at the airline fell 60 per cent in the days after the attacks.
While traffic is slowly picking up, advance bookings, until recently, were still off 30 per cent, with no sign that business will return to normal soon.
One U.S. analyst predicted this week that major airlines will lose a combined $6.5 billion this year, almost triple the $2.2 billion forecast before Sept. 11.
Merrill Lynch & Co. analyst Michael Linenberg said he expects it could be years before air traffic returns to normal, meaning losses of $3.5 billion for major carriers in 2002, up from the $500 million he previously forecast.
One Canadian analyst predicted last month that Air Canada was on track to lose $545 million this year, but that is likely conservative.
``Robert Milton's had just about everything go bad that could go bad - although there's still more that could go bad (depending on U.S. retaliation),'' says York University business professor Fred Lazar who, despite it all, considers Milton one of the top three airline chief executives in North America.
``But if he can't do it (turn ailing Air Canada around), you might as well shut it down and hand over the keys to some foreign company.''
There's no doubt the U.S.-born Milton - renowned for his arrogance - has annoyed at lot of politicians on Parliament Hill who hold the key to his airline's future.
The $160 million aid package to Canada's air carriers, announced by Ottawa this week - about $100 million of which will go to Air Canada - won't even cover the fallout from the Sept. 11 airspace shutdown, let alone get Canada's airline industry back on a solid footing.
And it's unclear how far Ottawa is prepared to go toward the more than $2 billion that Milton has requested.
Despite persistent rumours that Air Canada's chief executive has sold his Montreal home and is preparing to head back to the States, Milton conceded last week that he has ``too much Irish blood'' to run away from a fight.
But this brawl will be unlike any other for Milton - less about who wins and loses, and more about who survives.
Anybody agree or disagree, add your comments.
Spyderz From Canada, joined Apr 2001, 651 posts, RR: 0 Reply 3, posted (12 years 2 months 4 days 2 hours ago) and read 3953 times:
All I need to say is that Mr. Milton should go for the product has put out has decreased drastically. Yesterday I waited an hour in the check-in in Pearson then, had my flight cancelled, then the next flight was delayed two hours, and then two hours more because the tire was burst. Thats soemthing I expect from Air Transat! Worse off for Mr. Milton though, is that he's got a bunch of employees who are not only afraid about their job, but hate him. The employee I was talking to about getting my baggage back (they lost my bags) was just saying how his bosses suck and there's nothing he can do. Air Canada seriously needs to look at the direction its heading in!
Player4keeps From , joined Dec 1969, posts, RR: Reply 4, posted (12 years 2 months 4 days 2 hours ago) and read 3952 times:
I hear u man, don't worry, things cannot continue like this with AC. Your not alone with your frustration towards this poorly managed Airline. Something needs to be done, there only worth 287million and loosing more each day. I don't want tax payers $$$$$$$$$ going into this failing company, they ate enough tax payers money only to let us down over and over and over again.
Marrty From , joined Dec 1969, posts, RR: Reply 5, posted (12 years 2 months 4 days 2 hours ago) and read 3945 times:
Airtransam. Oops! I mean Player4keeps,
The government cannot let AC fail. They are an essential service to Canada and an integral part of our economy. Due to their size, the government has no choice but to give them cash if they need it. If AC fails, the other carriers combined cannot pick up the slack without at least 150-200 extra aircraft and several hundred trained pilots. And no, AC will not let any other carrier use their aircraft or pilots. You don't have to like it, but it is the truth!
Yyz717 From Canada, joined Sep 2001, 16110 posts, RR: 57 Reply 6, posted (12 years 2 months 3 days 23 hours ago) and read 3935 times:
Marrty, AC is not an essential service. They are a competitor like any other...unfortunately a dominant, aggressive & politically connected competitor.
If AC was to fail, there would be a short term vacuum in the market. However, the most lucrative parts of the airline could restart as a slimmed down new AC (just like Swissair this week) if a bank saw fit to lend some bridge loans.
If AC is so short of cash, they can sell off some of their route authority to the highest bidders...for example, I'm sure YYZ-LHR could be sold for C$100M.
An advantage to AC failing would be that the Air Canada Act passed by parliament would be null and void...one of the provisions of which is that AC MUST be based in Montreal.....what ridiculous discrimination against English Canada.
Panam, TWA, Ansett, Eastern.......AC next? Might be good for Canada.
Mark_D. From Canada, joined Aug 2001, 1447 posts, RR: 5 Reply 7, posted (12 years 2 months 3 days 23 hours ago) and read 3931 times:
Yyz 717--AC is not an essential service. They are a competitor like any other
Maybe so you wish, Yyz717! (Looka, you know how it is. As much part of the political and labour-market and transportation social fabric, as the transcontinental railway was decades ago. It`d be nice to pretend you could sweep all that away and de-politicise everything but.. not gonna happen, not anytime soon at least. And no matter which major party was heading the government)
Having said that though, it is a pretty precarious state of affairs at the moment, for the company and even for Milty ( wouldn't surprise me if he departed, as this is way more than he ever bargained for when he first took the helm a couple years ago). But the same old `solution' is going to be sought for these ills, can't see other realistic outcome to it.
JAT From Canada, joined Feb 2000, 1101 posts, RR: 10 Reply 9, posted (12 years 2 months 3 days 22 hours ago) and read 3909 times:
They are an essential service, yes. But if the government is going to be pumping tax payers' money into the airline then the government should have a say in how it is run. The government should have a member on the board of directors that speaks for the government. If they pump all that money into AC then it should be to buy shares of the company. If that means part-nationalizing it then so be it.
Yyz717 From Canada, joined Sep 2001, 16110 posts, RR: 57 Reply 10, posted (12 years 2 months 3 days 20 hours ago) and read 3897 times:
No way JAT. Govt can never (and has never) been as efficient as the private sector. How could any govt minister or appointee possibly be able to advise AC in a business-like manner? Why should the taxes paid by C3 and WJ employees and customers go to support AC?
Well AF002...let the market decide....let AC be based in its largest city (Toronto) instead of mandating a Montreal HQ, and let French-speaking personnel on routes where French is warranted. You will find there will be very few French speaking personnel needed. Those so-called complaints about the lack of French announcements etc were based on a govt study looking for evidence of bilingualism across Canada, not based on customer complaints.
Panam, TWA, Ansett, Eastern.......AC next? Might be good for Canada.
AF002 From Canada, joined Dec 2000, 74 posts, RR: 1 Reply 12, posted (12 years 2 months 3 days 17 hours ago) and read 3871 times:
Yyz717, I flew on AC from YUL to YYC. One may think that F/As would speak french.. Nope! Security annoucements barely understandable. Who cares?
The problem is to determine where french is warranted. Do you plan to do a survey before each flight?
About AC HQ moving to YYZ, I have nothing against that, we may switch back to YMX for international by then.
Back on topic, I don't think the gov. will let AC go under, whatever the price.. The same happens for SN and SR. That's the problem with flag carriers, they rely a bit too much on their status.
Marrty From , joined Dec 1969, posts, RR: Reply 13, posted (12 years 2 months 3 days 16 hours ago) and read 3858 times:
Due to AC's market share, and air transportation being an essential service, AC is therefore an essential service. As I said above, you don't have to like it, but it is an economic fact of our country.
The government will not let Air Canada fail, because they can't.
Milton had two choices when he took over Canadian, either streamline the company using the best assets of both companies, or expand. As any CEO's main objective is to maximize shareholder value, he chose to expand - not a bad gamble. However, throw in the restrictions the government placed on AC, an economic downturn, and September 11th in to the works and you have a company requiring government assistance.
Milton might take the fall for the situation at AC, but he likely won't need to work again to support his family.
SafeFlyer From Canada, joined Jan 2001, 624 posts, RR: 5 Reply 14, posted (12 years 2 months 3 days 16 hours ago) and read 3855 times:
Yyz 717, there is not enough AC planes in T.O that you would like to see ir based there. And yes, they should have more french-speeking FA. Perhaps it is not important for people in T.O, but people in Montréal and Ottawa deserve services in French. It is one of the rare time that I agree with Québec separatists (I'm not one of those), why are people of English Canada so self-centered? I always thought that you were open guys! When you go to Montreal or Quebec City, would you like I'f the receptionist at the hotel told you, oh sorry sir, we don't speek English, it's not important, you know English is a ridiculous language... Even I'f you tried, you couldn't understand what it is to be the only people to speek French in North America.
What a foolish post.
I would like to remind you that Montreal is a 3 million people city, there is place for the airline business, and AC's got a very, very big engineering facilitie in Montreal.
Mcdougald From , joined Dec 1969, posts, RR: Reply 16, posted (12 years 2 months 3 days 6 hours ago) and read 3831 times:
JAT wrote: "But if the government is going to be pumping tax payers' money into the airline then the government should have a say in how it is run. The government should have a member on the board of directors that speaks for the government."
If they are going to provide any further funds, I'd much sooner see the government provide the funds through a third party, such as one of the major banks. In other words, the funds would be provided as an emergency loan, repayable with interest, with the job of collecting those payments over 25 years (or more) contracted out to a bank or other financial services company. If need be, arrange for the first repayments to start in 2006, by which time the company will have had five years to get its affairs in order.
If it involves a seat on the board of directors, I'd sooner see that delegated out as well so that at least AC will be getting professional advice instead of having to deal with a patronage appointee.
Direct government ownership, in whole or in part, isn't a satisfying alternative. Take the federal government's other foray into intercity transport, VIA Rail, as an example. It can't get the financing to upgrade its aging stock. It suffers from lousy marketing. It offers a product that I've almost never heard anyone speak cheerfully about. It can't be sold because it's effectively worthless and can't be shut down because of political considerations.
Fallingeese From Canada, joined Apr 2001, 2097 posts, RR: 19 Reply 19, posted (12 years 2 months 2 days 21 hours ago) and read 3788 times:
Well said McDougald.
I believe that Air Canada is an escential service. Without it many towns would be further isolated. Then there is the fact that there is no airline capable of replacing Air Canada, both in routes and type of aircraft needed. Other than Air Canada the smallest plane used by another large carrier in Canada is the 737-200. Which i don't think you'll see flying into a town like Lethbridge!
Yow From , joined Dec 1969, posts, RR: Reply 20, posted (12 years 2 months 2 days 20 hours ago) and read 3783 times:
Places like Lethbridge will see 732s as soon as WestJet starts flying there and the 25 other cities of about 50,000 in Canada. Heck, back in the days of regulation, most small Canadian cities had jet service.
As for AC, somehow they will eventually get back on track, but I think Milton has to go. Maybe it's time again to have a Canadian as AC's CEO or maybe try and get Hollis Harris back. Hollis sure turned things around at AC in a hurry after the last recession.
Fallingeese From Canada, joined Apr 2001, 2097 posts, RR: 19 Reply 21, posted (12 years 2 months 2 days 19 hours ago) and read 3774 times:
I agree that at some point cities like Lethbridge will get jet service from Westjet. Westjet actually has an impact in Lethbridge as I have seen their billboards around the city.
In MacLean's Milton was quoted as calling Westjet irrelevant, and having their 25 or so little 737's hoping around domestically. They don't even fly across the border. Then that Air Canada needs a stabilization and not a bailout!
Mcdougald From , joined Dec 1969, posts, RR: Reply 22, posted (12 years 2 months 2 days 19 hours ago) and read 3769 times:
YYZ717, Marrty and Fallingeese: Thank you.
On the same note as YOW's post, Allan Fotheringham was recently the guest speaker at a Canadian Club luncheon here in Winnipeg. After his speech, there was a Q & A session. During the session, a woman asked for his thoughts on the airline industry in Canada. Fotheringham's opinion was that AC should "get rid of the guy at the top." He added, "And that's guy's name is Milton, Robert Milton."
Fallingeese From Canada, joined Apr 2001, 2097 posts, RR: 19 Reply 23, posted (12 years 2 months 2 days 17 hours ago) and read 3752 times:
His airline goes into a coma and he takes a small wage cut, then it takes a turn for the worst and he's screaming NO WAY!!! I already gave up a penny? He's making too much money at a time when he wanted 4 billion dollars? This just doesn't work for me!
Lowfareair From , joined Dec 1969, posts, RR: Reply 24, posted (12 years 2 months 2 days 11 hours ago) and read 3742 times:
>>Even I'f you tried, you couldn't understand what it is to be the only people to speek French in North America.<<
There are now several million people in Louisiana and MSY who are pissed that they are not part of N.A. anymore. Yes, they speak a dialect of French, but so do you guys. Yet, unlike Canada, they don't require every flight into the LA airports have French announcements.
25 Fallingeese: Has anybody ever realized that the french announcements on Westjet 737-200's are the same as on Air Canada?
26 AC183: Nice analysis, McDougald. A few things to add... First off, I want to address all the anti-Milty rhetoric that's been floating around in the last 18 m
27 Fallingeese: AC183 - well spoken and I'd have to agree on almost all of your points. The Canadian government is going to have to seriously look at what approach it
28 Yyz717: Good comments AC183, although you're more charitable to Robert Milton than I would ever be. I think Milton must go, simply because of the poor financi
29 AC183: I agree Flyingeese. Chucking money at a problem doesn't fix it. Any solution involving the government will have to be sustainable. I'm a little less h
30 Fallingeese: It's time to change the direction of Air Canada. It's time to stop going down,a nd time to go up. In my humble opinion Milton should step down and let
31 Yyz717: Good comments AC183. However, Milty had a fiduciary responsibility to AC's shareholders to make the right decision regarding CP. He made the wrong dec
32 Mark_D.: Yes with Sept 11. happening, Milty's in tougher than maybe anyone could've dreamed, having to still adjust for the Canadian takeover, which even at t
33 Yyz717: AC should be based in Toronto, its operational hub. The Air Canada Act was discriminatory in requiring AC to be based in Montreal after privatization.
34 Mark_D.: Yyz717--AC should be based in Toronto As the Common Man says --to his wife, as it turns out-- in A Man for All Seasons, "I wish rainwater was beer, I
35 Yyz717: If Torontonians walked with their feet (and stopped flying AC) since the AC HQ can't be in Toronto, AC would sink overnight.
36 Mark_D.: Yyz717--If Torontonians walked with their feet Who's askin' 'em to. Sheesh. (now who's maybe taking things personally..) Anyway, way too late already
37 Yyz717: Air Transat should be based in Toronto as well. YYZ is their biggest operational base. Good night Mark. Neil
38 Mcdougald: Didn't Don Carty raise the issue of moving AC's headquarters to Toronto when the airline was trying to interest him in the top job back in the early '
39 Yyz717: AC would be able to attract more senior airline management from Canada & the US if they were based in Toronto. Quebec's language laws limit the willin
40 Flygirl: I've read this thread with interest and throw in my appreciation along with many others for the postings by McDougald and AC183. As an employee here i
41 Yyz717: AC is NOT an essential service!!! How arrogant! The Canadian airline industry IS essential. But AC is not. Ultimately, as long as Canadians have air s
42 Flygirl: Yikes, settle down! You must have missed some of the wording of my post. Let me try and explain it this way. Take a pie graph and allocate the percent
43 Yyz717: I apologize Flygirl, I didn't mean to jump all over you. Having observed this industry for decades, and the federal $ that used to be thrown at AC whe
44 Flygirl: No need to apoligize. Your reference to Ansett leads me to ask. Are you aware that 3-767s from AC are working down under on a 3 month wet lease to Qua
45 Fallingeese: Yyz717 - Air Canada is an essential service to many smaller Canadian towns, those without any other scheduled air service. International routes would
46 Yyz717: Flygirl.....you are correct, QANTAS damp-leased 3 767-300's from AC (flight crew only) to help keep up w demand following the Ansett collapse. The AN