It can't win and it can't lose: The federal government keeps Air

Canada in limbo

Wednesday, April 2, 2003 Page: A1 / FRONT A prediction: In about six months, Air Canada will emerge from bankruptcy protection with fewer employees, a radically different business model, and a bracing declaration of confidence in its ability to tackle "the competitive challenges of a changing market." Another prediction: Two years from now, maybe three, we will be back doing this all over again. Perhaps at that time the federal government will take over the ailing airline. Perhaps WestJet will be dragooned into doing so, on the government's behalf. Anything, rather than allow Air Canada to go out of business. For in this world nothing can be said to be certain, save two things: Air Canada cannot succeed. And it cannot be allowed to fail.

The first is a function of reality. The problems of Air Canada run far deeper than a spike in oil prices, or war in Iraq, or SARS. It is the same crisis that all the world's major carriers face, which Sept. 11 and its aftermath has only laid bare: namely, that they are locked into a high- cost, over-staffed business model that is on the way out, retreating before the low-cost, low-fare model perfected by Southwest Airlines.

It's dinosaurs versus mammals, and it's no contest.

It is an irony that on the very day that Air Canada was seeking protection from its creditors, WestJet, the closest Canadian iteration of the Southwest model, was expanding its service, adding Windsor, Ont., to its growing list of destinations.

While Air Canada has lost $1.7-billion over the last three years, WestJet has enjoyed 24 straight quarters of profitability, thanks to costs that are 40% lower than its larger rival's.

Yet at the same time, politics has decreed the dinosaurs must not be allowed to die. Just last week, the federal Minister of Transport, David Collenette, had announced that the government would do whatever it takes to ensure the survival of Air Canada, "the nation's flag carrier," even hinting that the government might be prepared to take an equity stake.

By this week he had backed off somewhat, insisting he had no plans for a "cash" bailout, but the suggestion was left that some more discreet form of aid was available, even if Air Canada did not choose to take up the offer at this moment.

Something about the idea of going out of business appears to fill politicians with dread. Perhaps they imagine bankruptcy means the company's planes are dynamited, its employees put to the sword, rather than being snapped up by competing airlines, old and new. Something, in particular, seems to tell them that airlines are exempt from the natural order of business life, in a way that, say, department store chains are not.

The mere hint of a bailout, explicit or otherwise, brought squawks from both WestJet and the Canadian Taxpayers Federation, and rightly so, for reasons that hardly need stating: a subsidy to any one firm or industry must necessarily be paid for by others, whether in the form of lost business, or higher taxes, or both.

But here's the thing: it's also not in Air Canada's interest. Part of the reason Air Canada cannot succeed is precisely because it cannot fail.

The company president, Robert Milton, denounced the airlines' unions for forcing the company into bankruptcy protection, noting that all but the Canadian Autoworkers had refused to accept his proposals for job cuts. (That the CAW, Buzz Hargrove, prop., were the moderates in the bunch, tells a good deal.) But why should they? The Minister had as much as told them not to. Whatever happened, he had said, "Air Canada will survive." He was committed.

Then there were those "strict conditions" the Minister insisted would be attached to any offer. What these were I can only guess, but if experience is any guide, they would include some mix of job guarantees, commitments to service small communities, limits on foreign investment, and the like.

The company says it wants to shed some of its larger planes, many of them flying half full, for smaller regional jets. 'Hmmm,' the Minister might say. 'Doesn't Bombardier make those? And isn't it also in a spot of trouble? Mightn't there be a possibility for a little creative arrangement here?' No wonder Mr. Milton turned him down. For now.

We've been this way before, after all. While many of Air Canada's problems, short-term and long, are ones it shares with many other large airlines, there is one that is all its own: its $13-billion debtload, much of it incurred in the shotgun marriage with Canadian Airlines, four years ago. Canadian, too, could not be allowed to fail.

So rather than face up to the industry's problems, they were simply pushed into the future, to fester and grow.

The debt, it was assumed, could be worked off on the backs of consumers, who would put up with the higher prices a near-monopoly Air Canada could charge.

Turns out they won't. See you in two years.