Consumers and the Airline Battle

By Stacey Pearen*

 

Air Canada is facing an important struggle after the Onex Corporation of Toronto introduced a merger with Canadian Airlines August 24, 1999.  This $1.8-billion deal proposes to buy and merge Air Canada and Canadian Airlines International Ltd. into a single national airline carrier (Wallace, 1999).  Onex will buy the shares of each airline and merge the companies into an airline worth $5.7-billion, including debt (Noble, September 6, 43). This new airline will keep the name Air Canada and continue to have its headquarters in Montreal.

Onex, a Canadian investment and management company, has helped companies grow and succeed. Onex believes it can build and structure this new airline to become successful in Canada and the international market. The Canadian Government “suspended the basic law that regulates competition in the country” (Lewis, October 11) to help Onex design its merger without breaking competition rules.  The Competition Bureau will not have any decision in the deal because of the suspension of the law.  The final decision by the government will be determined after the shareholders have voted on November 8 (Jack, October 20).

The effects of this merger will not only affect the airlines but their workers, shareholders, and consumers.   Groups of Canadians are voicing their concerns about the proposed merger.  Job losses for airline employees are a major concern.  Others believe the deal creates a very monopolistic airline with high fares and low service. Once the concerns and fears are addressed, consumers will find the merger is beneficial.

One of the greatest fears of the airline merger is the change in airfare.  With a monopoly, consumers believe that flights dramatically increase in price because of a lack of competition.  In reality, there will still be competition from regional, short-haul and charter airlines such as WestJet and Canada 3000.  This competition will keep prices steady.  Onex has also guaranteed that fares will stay the same for the next five years and the only changes will be for “inflation and non-controllable costs such as fuel and landing fees” (McNish, MacArthur, & McCarthy, October 9). Onex guarantees to keep prices down but they will also continue to be under the Canadian Transportation Act and the Competition Act. Therefore, they will be subject to fare regulation and competition rules.

Not only will the five-year guarantee keep prices steady, but more efficient and less duplication of flights helps to control costs.  Approximately every ten minutes, Air Canada and Canadian Airlines both have flights leaving major cities to the same cities in Canada (Air Facts, 1999). Most flights are filled below capacity leading to increased costs for each traveler.  After the merger, duplicate flights will be eliminated filling the single flight.  This leads to lower fixed costs per person and results in lower airfares for consumers.

Consumers have other concerns about the new airline.  They are worried about purchased tickets that are for flights after the merger and their frequent flyer programs.  Onex states that purchased tickets will still be valid even after the merged airline takes effect. In addition, both Air Canada and Canadian Airlines’ frequent flyer programs will continue.  The new Air Canada will also have a new reward system that may be combined with the old systems (McNish et al, 1999). Francophone customers wonder about bilingualism and what the new Air Canada will do once the merger takes effect.  The new Air Canada, a national airline, will require workers to be bilingual in all areas where it is required today (McNish et al, 1999). With headquarters remaining in Mont


real, both official languages are needed.  Other concerned customers would like regional service and service to smaller communities to continue.  Onex states in its promise that “Every Canadian community that receives scheduled service today from Air Canada, Canadian Airlines or both…will continue to receive service for at least five years” (McNish et al, 1999).

Canadians want the new Air Canada to stay a national airline and are concerned about a takeover by Americans or American Airlines.  Presently, American Airlines has a twenty-five percent investment in Canadian Airlines.  With the new airline, American Airlines will only have 14.9 percent investment in the airline.  Therefore, American investment in the new airline will decrease and Canadians will own 85 percent of the airline. Schwartz, CEO and founder of Onex, declares that the new Air Canada will remain under domestic control as a national airline.  He believes “that control of the Canadian airline industry must stay in Canadian hands. Onex is a Canadian company in law and in fact, and control of the new Air Canada will be in the hands of Canadians” (Pilots May Make, 1999). Also, American Airlines will only have two seats on the merged airline’s board of directors, which means they will not have a dominant say in concerns with the airline. Onex will have thirty-one percent of the new shares, leaving fifty-four percent for Canadian investors (Noble, September 6, p.43). Therefore, Canadians should not be concerned about American Airline’s investment in the new Air Canada.

Air Canada and Canadian Airlines both have strengths and advantages over each other.  Oum, Professor of Aviation Policy at the University of British Columbia, reports that Canadian Airlines has lower unit costs and higher productivity.  Air Canada, on the other hand, is better at pricing their services and managing their products.  With a strong management team, Air Canada has become more successful than Canadian Airlines (Sheppard, Dexter, Mazankowski & Oum, 1999, p.52). The airline merger will make one very strong national airline because of a combination of strengths and capabilities of both present airlines.  The new airline will have the managing team of Air Canada while keeping the low Canadian Airlines’ unit costs.  This leads to improved productivity as well as reduced overlapping costs such as advertising and flights to the same cities.

International service will also improve with the proposed new Air Canada.  International flights will increase because the airlines will share the routes and not compete for the same international travelers.  Presently, both airlines pass their international travelers on to their airline partners but with the merger they can fly their own passengers.  For example, instead of having one flight leaving from each airline around the same time, the flights can expand to include more destinations avoiding duplication.  Benson, Canadian’s chief executive, comments,  “A merged airline under the name Air Canada would be one of the world’s top 10 airlines” (Airline Made, 1999).    The goal of the new Air Canada is to increase international traffic, to and from Canada, from thirty-four percent of international travel bookings made in Canada to non-U.S. destinations to fifty percent of their flights (Commitments to Canadians, 1999). With an increased number of flights, the new Air Canada will see an increase in revenue of $800 million, (Noble, October 11, p.51) resulting in job growth for Canadians.

The most important reason for an airline merger is that it will save the economy from a more devastating, unplanned monopoly.  Canadian Airlines International Ltd. could fail in the next year without the help of Air Canada, another airline, or the government. Transport Minister David Collenette, neutral on the merger, agrees the deal came at a good time when Canadian Airlines was to be “either dead, or its hand outstretched for more federal cash” (Wallace, 1999, p.19).  In the past five years, Canadian Airlines’ stocks have dropped ninety percent in value (McMurdy, Geddes & Laver, 1999).  Canadian Airlines has not been doing financially well for several years now.  Schwartz insists, “Ottawa will never let Canadian fail” (Wallace, 1999, p.19) by always giving it financial help when needed.  Canadians agree that the government should not be using federal money or time to keep supporting this failing airline. Heather Sutherland, Canadian Airlines employee, comments that employees have been “giving a percentage of [their] salaries to keep the company going” (Divided Allegiances, September 6, 1999). There have also been talks that the government may transfer Air Canada’s Asian routes to Canadian Airlines and make Canadian Airlines a stronger airline in Vancouver (McMurdy et al, 1999).  With these routes, it can gain more control of international flights.  A solution is needed to prevent Canadian Airlines from going into bankruptcy.

If Canadian Airlines fails, it will be a devastating loss of an entire airline and its seventeen thousand jobs.  Under the proposed merger by Onex, five thousand jobs will be lost. These five thousand jobs will be lost through attrition and voluntary severance packages before other layoffs will occur.  In the long run, increased sales and international flights will lead to new job growth in Canada.  If Canadian Airlines fails, the economy will be drastically disrupted because there will be a sudden stop of services as well as job losses.  The merger allows them to work together to gain profits and grow strong as a united airline.

The Onex victory may also lead to more competition.  “Ottawa may have to ease current restrictions on airline foreign ownership so as to encourage more competition,” says David Gillen, business professor and aviation expert at Wilfred Laurier University (Laver, 1999, p.55).  This will lead to an open market and competition within Canada.  More competition from foreign carriers will lead to reductions in airfare to attract customers on its flights.  This competition will be beneficial for air travelers.

On October 19, 1999, Air Canada presented its counterproposal.  In their restructuring plan, they addressed many of the similar concerns discussed when Onex made their bid and guarantees.  One of the major differences of their proposal is to keep Canadian Airlines and Air Canada as separate airlines.  While service to cities will continue with one of the two airlines, Air Canada will not have to take on the heavy debt load of Canadian Airlines.  By having two airlines, consumers are still given a choice on which airline they travel.  Air Canada also proposes a new low-fare air carrier from Hamilton that provides airfare with no extras.  The aircrafts for this new air carrier will come from the discontinuation of duplicate flights within the two airlines. The Air Canada proposal also promises a loss of only twenty-five hundred jobs.  Shareholders of Air Canada receive a better deal with the Air Canada proposal by receiving twelve dollars per share instead of the $8.25 guaranteed in the Onex proposal.  Canadian Airlines’ shareholders will receive two dollars per share with each offer (Airline Players Peddle, October 20, 1999).  The Air Canada proposal helps to emphasize that there is a need for a change in the present airline industry in Canada.

The merger will affect and benefit all Canadian consumers of the air industry.  Their concerns and fears have been discussed by Schwartz and the Onex Corporation as well as by Air Canada to make sure that consumers do not lose from the merger.  Both proposals have found solutions and commitments to these concerns.  Schwartz’s bid is to help keep Canadian Airlines from failing and disrupting the Canadian economy dramatically.  Schwartz has guaranteed airfares and regional service for five years while Air Canada plans to leave the airlines as separate identities.  Schwartz has looked at all aspects of the merger and the effects it will have on the country and international world. There are only half as many job losses with Air Canada’s proposal and there is an addition of a low-fare air carrier but they did not guarantee prices as Onex did. Canadian Airlines is in need of a solution and a merger will provide this solution. The proposals from Air Canada and Onex show that Canada needs to change its current airline industry soon.   Whichever merger is chosen, a strong, united airline will be built and will become a powerful player in the international market.

 

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                [1] An earlier version of this paper was prepared for J. Bruneau (Economics 213.3) at the University of Saskatchewan.