AF777 From Canada, joined Jun 1999, 223 posts, RR: 0 Posted (14 years 4 weeks 1 day 9 hours ago) and read 1766 times:
A GREAT editorial in the National Post today - It's like a breath of fresh air to read:
Save Air Canada
Robert Milton is one of the top CEOs in the business. It's time for Ottawa to give Air Canada assistance and for regulators to back off
Criticizing Air Canada has been a long-standing pastime in this country, The crescendo of criticism reached a new plateau with the announcement by the Minister of Transportation that the 15% ownership limit would be lifted for Canadian investors. Many in the media cheered and now await a "white knight" to rescue all of us from the "evils" of Robert Milton and his crew at Air Canada (AC). Setting aside the question of whether a white knight will ever materialize. Let me ask two more important questions: Is there anyone who could do a better job than the current Air Canada management team? What have been the failings of Robert Milton and his team?
Let's start with the first question. The management teams of Roots Air, Canjet and Royal are available. But does anyone really believe that any one or combination of these people could do a better job? Not even the media in this country could believe this.
What about the American Airlines-Onex team with Kevin Benson as its leader? I have no reason to doubt Gerry Schwartz when he claims that he no longer has any interest in Air Canada. But what if this group had succeeded -- would AC have been in a better competitive and financial position? To me the answer is an unequivocal "no."
Despite the government and employee financial support shortly after Kevin Benson became the CEO of Canadian Airlines (CAIL), he was unable to prevent CAIL from going bankrupt. Perhaps no one could have prevented this given the weak condition of the company in 1996. But there were three strategic blunders that accelerated its demise.
Shortly after becoming CEO, he spooked the travelling public by warning employees the company could quickly run out of cash unless they were willing to make another round of concessions. He got his concessions; indeed, CAIL had among the lowest cost structures of all the major airlines in the world in its final years. However, the company never recovered from the loss of business travelers to Air Canada as a result of these comments.
While Air Canada was building up its transborder operations, CAIL focused on the Asian routes. Wasn't NAFTA supposed to build up north-south trade and movement of people? A little bit of due diligence would have revealed that a big bet on the Asian markets was not warranted given the fragile conditions of the economies of south-east Asian countries.
Finally, Westjet gained a foothold and grew rapidly in Western Canada during Mr. Benson's tenure at the helm of CAlL. True, American Airlines would have played a greater role in a combined AC-CAIL, so it would not have been a one-mon show. The recent performance of American does not offer much confidence that things would have been better at Air Canada with American in control. The operating margin at American has declined from 10.8%. in 1998 to 6.9% in 2000. In its third quarter of this year, the company reported an operating loss of US$1.4-billion, excluding a payment of just over US$800-million (pre-tax) from the U.S. government, (compared to an operating profit of US$572-million in the same quarter in 2000).
Now, let us consider the second question. What has Robert Milton done wrong? Can he be blamed for weather or air traffic control related delays? Not likely. Can he be blamed for the flight delays caused by the new de-icing procedures at Pearson? No.
Can he be blamed for the service problems stemming from trying to integrate two companies? Again, not likely. Integrating the two companies without the ability to shut them down for a few months is like changing tires on a Formula One race car while it is on the track.
Can he be blamed for the surge in fuel prices in 2000? No, although he could have done a better job hedging fuel prices.
Can he be blamed for the pre-Sept. 11 economic slowdown? Not even Alan Greenspan anticipated the magnitude of these declines. There is no reason to even discuss the impact of Sept. 11.
So where has he failed? The media suggests that he should have lowered fares further, sharply reduced costs and by and large, Westjetized Air Canada. The last time I checked, a full fare economy, round-trip ticket between Toronto and Vancouver cost $3,200. By comparison, American Airlines is charging US$2,370 ($3,700 in Canadian loonies) for a full-fare, round-trip ticket between Chicago and Los Angeles. Air Canada's fares compare very favourably with those of its major competitors throughout the world.
Does the Southwest model, emulated by Westjet, make sense for Air Canada? Southwest has been in business for more than 30 years and only in the few years has the company introduced any flight segment longer than two hours. These longer flight segments today account for less than 10% of its total schedule.
As for the mythical aura that now surrounds Westjet, the following should be noted. Westjet's cost per available seat mile (ASM) is currently 14.4 cents. By comparison. Air Canada's cost is 13.7 cents, Southwest's cost is 12.14 (Canadian) and American's is 16.44 (Canadian).
Westjet grew very rapidly and very profitably between 1998 and 2000 -- revenues increased 165%, net profits increased 366% and earnings per share increased 279%. During most of the time period, Steve Smith was the CEO. I still find it very unusual for a company to fire a CEO who has produced these types of results, admittedly against a very weak competitor in CAIL. By comparison, during the first six months of 2001, Westjet's operating margin of 11% was well below the 15% in the same period in 2000. If ego and the need for public recognition were the reasons for Mr. Smith being let go. then I would temper my enthusiasm for Westjet.
Let me now turn to Mr. Milton himself. I have stated before that in my opinion he is one of the top airline CEOs today. After making these comments, my friends began to question my mental well-being. I assured them that I am correct, as I have been in analyzing this industry for the past 15 years, and that the critics in the media would be, at best, solid "D" students in economic and business courses.
Two strategic initiatives that he championed stand out. He is the architect of Air Canada's transborder strategy. The company dominates this market and prior to Sept. 11 this was one of the two principal profit drivers of the company. For decades AC and the government blocked Delta Airlines entry into the Toronto market for fear of being crushed. Robert Milton had no such concerns.
Toronto has been developed into a major North American hub. Robert Milton has repeatedly encouraged the federal government to start serious negotiations with the United States to create a real free trade area in commercial aviation. The U.S. carriers, recognizing the inherent advantages AC would have with its Toronto hub and lower costs, have resisted.
Air Canada is in the best of hands at this time. But on one issue I agree with Westjet CEO Clive Beddos: It is time for the federal government and the competition bureau to back off and let market forces determine the winners and losers. The federal government should restrict its role to setting and enforcing safety and security standards and ensuring that there are no artificial (government-induced) barriers to entry.
Finally, if AC is to compete on a level playing field with U.S. carriers who are the beneficiaries of financial help from their government, additional federal government assistance is warranted. Indeed, Air Canada was required to keep 15,000 employees on its payroll for two years. At an average salary of $30,000 (definitely on the low side), this has cost AC close to $1-billion and counting.
Yow From , joined Dec 1969, posts, RR:
Reply 1, posted (14 years 4 weeks 1 day 7 hours ago) and read 1693 times:
The article makes some good points, but Milton can't be branded as being the world's greatest CEO. Milton can't take the credit for the transborder routes. It was Hollis Harris who accomplished most of this. The bought the CRJs, the backbone of the transborder expansion. Milton can take credit for launching a million new routes (including domestic and international) and then discontinuing them a few months, weeks later, or in some cases before they even began.
Milton has to be blamed for not hedging fuel prices. Everyone knew that fuel prices were going to take a huge jump, but Milton did nothing about it. This alone has probably cost AC half a billion dollars.
Don't forget that he spent another billion buying back AC shares to add "shareholder value". Look at what those shares are worth now. I know that was a tactic to stave off the Onex/American takeover. But he shouldn't have even considered a share buyback, before taking Onex to court, to determine the legality of the bid. He won that case to his credit, but he still had to carry-through with that billion dollar share buyback. Isn't it funny that he used the 10% ownership cap as a weapon back then and now pleaded with the feds (albeit successfully) to lift the 10% ownership rule.
Milton can't be blamed for everything wrong with AC, but's he's not the saviour that the article portrays him to be. I also agree that WestJet's successes have been in some ways excessively hyped.
Polaris From Canada, joined Feb 2000, 1165 posts, RR: 1
Reply 2, posted (14 years 4 weeks 1 day 6 hours ago) and read 1682 times:
Was this an editorial or an opinion piece? I ask because the National Post's editorial position is decidedly anti-Air Canada...anti almost everything Canadian, in fact.
This is an informed piece with accurate numbers to back up his article...about all the carriers. Something that is lacking in many other articles. I especially liked this comment:
I assured them that I am correct, as I have been in analyzing this industry for the past 15 years, and that the critics in the media would be, at best, solid "D" students in economic and business courses.
Mcdougald From , joined Dec 1969, posts, RR:
Reply 3, posted (14 years 4 weeks 1 day 5 hours ago) and read 1671 times:
"Robert Milton has repeatedly encouraged the federal government to start serious negotiations with the United States to create a real free trade area in commercial aviation."
I agree with Milton on this point. Political interference has been an ongoing source of trouble for airlines in Canada and around the world as long as the industry has been in existence. Free trade, including the prospect of cabotage and foreign ownership, is one way to curb that interference.
Case in point: Air Canada. It probably would have been a better deal for AC, the industry and all of Canada to have permitted CP to go into bankruptcy, and then allow AC and the other airlines to rapidly pick up CP's useful assets.
This would have brought the supply of seats back into line with demand after a brief shortage, and would have allowed AC to avoid the fatuous, politically motivated promises that came with the merger (such as no layoffs until 2004, in an industry that badly needs all the flexibility it can get if it is to be profitable and competitive).
Instead, we have a sickly Air Canada that, if it goes down, will take a huge portion of the Canadian airline market with it, with no one ready to pick up the slack.
Opening the market once the industry has stabilised a bit -- even unilaterally -- could provide an alternative to propping up Air Canada with taxpayer dollars. The current protectionist model, intended to prevent foreigners from owning any of Canada's airlines or operating domestic flights, limits the number of prospective buyers for a troubled Air Canada or Canada 3000, limits airlines' ability to seek investment from foreign sources, and thus makes them more reliant on opportunistic politicians to whom load factors and ASMs are absolutely irrelevant unless they somehow deliver votes or favourable publicity.
Lowfareair From , joined Dec 1969, posts, RR:
Reply 4, posted (14 years 4 weeks 1 day 3 hours ago) and read 1643 times:
>>Westjet's operating margin of 11% was well below the 15% in the same period in 2000. If ego and the need for public recognition were the reasons for Mr. Smith being let go. then I would temper my enthusiasm for Westjet. <<
Does he mention the fact that ASMs went up 50% in this time period? Keeping a double digit margin is excellent when going up that much when you aren't a charter carrier.
Yyz717 From Canada, joined Sep 2001, 16493 posts, RR: 55
Reply 5, posted (14 years 4 weeks 1 day ago) and read 1624 times:
This article is a fairly one-sided opinion-piece with numerous 'convenient' arguments that leave too much benefit-of-doubt to Air Canada.
1. He questions whether the mgmt of Roots Air, Canjet or Royal could have done a better job than Milton? The answer is no, hence Milton must be doing okay. --> What a ridiculous analogy. As if only Canadian airline mgmt are the right people to possibly replace Milton.
2. Canadian's focus on growing Asian routes was a big part of its demise --> Wrong. It was Canadian's Asian route network that AC coveted. Indeed, much of the Canadian expansion into Asia was based on VFR...the high Asian immigration into Canada made routes to TPE, PEK, more sensical. These routes were driven by demographics more than the economy.
3. Comparing full-fare AC YYZ-YVR to AA's ORD-LAX. Completely irrelevant point.
4. Comparing WJ's ASM cost to AC's. This is silly.....look how many long haul routes that AC has (which reduces ASM)...a proper comparison would involve only North American AC routes.
5. AC and the Cdn govt NEVER blocked Delta from entering YYZ. The bilateral agreement prevented Delta. When Eastern went under, Delta adopted many of these routes.....prior to the 'open skies' agreement. What is to fear of Delta anyway? It's smaller than AA or UA and it's hubs are farther south....hardly a threat to AC.
6. AC is NOT pushing for cabotage within the US (while US carrriers are resisting it). This is NOT even on a wish list anywhere.
7. He argues that US carriers get US govt support. Well, maybe for Sept 11...but what about the decades that AC benefited from favourable route authority??
This article is no unabashedly pro-Air Canada that it completely reduces its relevance and accuracy to nothing more than ill-informed opinion.
I dumped at the gybe mark in strong winds when I looked up at a Porter Q400 on finals. Can't stop spotting.
Polaris From Canada, joined Feb 2000, 1165 posts, RR: 1
Reply 6, posted (14 years 3 weeks 6 days 19 hours ago) and read 1592 times:
Mcdougald brings up some very interesting points. There are a lot of "what-ifs" and, possibly, lost opportunities because of politics. I don't necessarily agree with all the points but they are certainly worth discussing. I still think, and hope, that there is a way to bridge commercial needs with public policy needs. Unfortunately, as you say, we are reliant on opportunistic politicians to whom load factors and ASMs are absolutely irrelevant unless they somehow deliver votes or favourable publicity.
I'd like to offer additional and, in some cases, alternative perspectives to some of Yyz717's points.
A few weeks ago I read that Milton was considered one of the top 5 aviation CEOs on the continent. I don't recall where I read this. Did anyone else read this and do you recall the reasons given?
Unfortunately, the Asian crisis of the time did impact Canadian Airlines. Even though some of their traffic was VFR, they were still affected by the downturn and had to cut some services. It was one more thing that they didn't need.
I don't understand why you think comparing full-fare AA to full-fare AC is irrelevant. In my view, this was the first full-fare to full-fare comparison of similar carriers. We are usually offered full-fare to deep discount comparisons.
With regards to cabotage within the US, Air Canada has said that they are open to allowing US airlines cabotage rights within Canada if Canada receives the same rights within the US. The US government is not open to these rights because they are not interested in opening this door. Once you open that door, other countries will want to follow.
...but what about the decades that AC benefited from favourable route authority?? You're really stuck on this one , eh? Why? US carriers, indeed all carriers, benefit from international route authorities granted to them by their own governments.
And, finally, as AF777 says, It's like a breath of fresh air to read an article with a different perspective. There is a lot of questionable reporting with incomplete information that one often wonders where some reporters get their info. Are they merely quoting press releases because they have no time to do their own research? Ah, the joys of media convergence - but that's a completely different topic...
Every once in a while, you read a little something about the problems that Canada 3000 is having. This past week-end The Toronto Star had a few paragraphs about the problems WestJet is having. Generally, however, these are glossed over. As Yow says above Milton can't be blamed for everything wrong with AC, but's he's not the saviour that the article portrays him to be. I also agree that WestJet's successes have been in some ways excessively hyped.