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.
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