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.