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More difficulties for Air Canada
Question:
The plot thickens: Air Canada Restructuring In Trouble As Li Pulls Out April 3, 2004 Hong Kong investor Victor Li pulled out of a CAD$650 million (USD$495.4 million) deal to rescue insolvent Air Canada on Friday, forcing the airline to seek a new partner and casting doubts about whether it can stay aloft. Li’s personal company, Trinity Time Investments, said it would walk away from taking a 31 percent stake in the airline because of its unexpectedly large losses and the unions’ opposition to further cuts in labor costs. Air Canada, which carries two-third of Canada’s domestic traffic, said its major creditors such as General Electric Capital and Deutsche Bank remained supportive of its efforts to find new sources of cash to keep it flying. The Canadian government believes the airline is not in peril and does not plan to step into the restructuring. "Let’s be clear — restructuring is sometimes a messy business," Transport Minister Tony Valeri said on Friday. "I’m looking for a private sector solution, I’m looking for the unions, I’m looking for the company, I’m looking for the investors to come to an agreement on how Air Canada will come out of the restructuring," Valeri said. Air Canada attracted several bidders when it first sought an equity partner last year, before choosing Trinity over the other finalist, New York investment firm Cerberus Capital. LI COULD COME BACK Victor Li could reconsider investing in the airline if the unions abandon their "confrontational" attitude on cost cuts, said a Toronto-based director of Trinity, Harold Gordon. "Labor cost and productivity savings promised by Air Canada’s unions under Air Canada’s collective agreements are not being fully achieved," Gordon said. Air Canada unions agreed to CAD$1.1 billion (USD$838 million) in job and pay cuts last year, but have balked at demands for changes to their pension plans brought forward by Trinity earlier this year. "The workers have given their fair share," the head of the sales clerk union, Gary Fane, said. "We do have concerns that the airline is far from fixed, the situation is serious, but it’s not the end of the world". The head of the flight attendants union, Pamela Sachs, said she could be open to discussing further cost cuts after reviewing the revised business plan that Robert Milton was to present to the company’s board of directors this week. "I’m really confident that Air Canada is going to successfully restructure, and we will work with the company and other stakeholders," Sachs said. BUSINESS AS USUAL The Montreal-based airline, which lost CAD$5 million (USD$3.8 million) a day last year, said its flights would continue as scheduled and travelers would not be affected by Friday’s setback. Air Canada has been in bankruptcy protection for exactly a year and earlier this week won an extension of the court’s protection until April 15. The airline’s fate is in the hands of Ontario Judge James Farley, who will decide whether to further extend the restructuring or liquidate the company. Air Canada reported on Friday a CAD$1.9 billion (USD$1.45 billion) loss for 2003, adding to last year’s CAD$828 million (USD$631 million) loss. Excluding charges linked to its restructuring, the company said it had an operating loss of CAD$684 million (USD$521.3 million), compared with a comparable loss of CAD$192 million (USD$146.3 million) in 2002. It still had a CAD$910 million (USD$693.5 million) cash reserve as of April 1 and access to CAD$540 million (USD$411.5 million) in debtor-in-possession financing. Chief executive Robert Milton blamed the loss on spiking fuel prices and the aggressive expansion of domestic low-costs rivals such as WestJet and privately held Jetsgo. Its lucrative international routes have also suffered from increased security fears and the SARS outbreak in Asia.
Response:
> It’s time to liquidate AC’s remaining assets. While they’re at it, US >courts should do the same to United. > Apples and oranges. No insult intended to Canadians, but Canada is > not even close to the USA, air market-wise. If AC fails, American > and European carriers will fill in the voids, albeit with a possibly large > increase in fare prices. If United fails, Star develops a huge hole. > United may emerge as a radically different (and smaller) airline, but > Lufthansa & friends need an American carrier as a partner. If United > fails, Star probably fails as well, leaving just oneworld and SkyTeam. > I suppose Continental could replace United in Star, but there would > be a free-for-all competition for gates at ORD.
Chicago travelers would like the competition! 
I won’t even pretend to know the inner business dealings between United and Star. But it seems to me that a highly inefficient business model that from all appearances is an utter failure shouldn’t be propped up by the other members of the alliance. Why should Lufthansa shareholders be responsible for UAL’s incompetence? They were in trouble even before 9/11. Liquidate United and the remaining old-style airlines will be in much better shape, giving them time to evolve into the business models used by Jet Blue and Southwest. Perhaps even develop new business models. They are going to have to anyway. If they don’t, they are toast as well.
Response:
Quantum Foam Guy trolled: > I won’t even pretend to know the inner business dealings between United and > Star. But it seems to me that a highly inefficient business model that from > all appearances is an utter failure shouldn’t be propped up by the other > members of the alliance.
United is in a different situation from Air Canada. Air Canada has self inflicted wounds done mostly by management with a combination from the indigestion of Canadian Airlines, 9-11, growth of Westjet and Jetsgo and it own bad service. And yes, it also has union problems.. Air Canada had artificially grown beyond market demand in the 1990s in order to dominate other carriers with more frequencies. And it made things worse by buying Canadian Airlines which made it even more bloated compared to market demand. Air Canada’s problems began a long time ago, and were "hidden" by the fact that a totally debt free newly privatized AC progressively sold its aircraft to pay for its deficits. It ran out of assets to sell at the same time as it bought CP, 9-11 etc. Its last remaining attempts to sell remaining assets were Aeroplan and its maintenance facilities, and those were cancelled when AC was forced to declare bankrupcy last year. In terms of alliances, they are now essential. They are beneficial to both AC and UA.
Response:
> It’s time to liquidate AC’s remaining assets. While they’re at it, US >courts should do the same to United.
Apples and oranges. No insult intended to Canadians, but Canada is not even close to the USA, air market-wise. If AC fails, American and European carriers will fill in the voids, albeit with a possibly large increase in fare prices. If United fails, Star develops a huge hole. United may emerge as a radically different (and smaller) airline, but Lufthansa & friends need an American carrier as a partner. If United fails, Star probably fails as well, leaving just oneworld and SkyTeam. I suppose Continental could replace United in Star, but there would be a free-for-all competition for gates at ORD. Pete
Response:
> Star airline in bankruptcy and another bidding farewell. European > airlines like Lufthansa might help United, as Lufthansa has a lot of > business in the USA, but would any European airline be likely to help > AC?
Both United and Lufthansa had provided substantial help to Air Canada when it was fending off the Onex/CP takeover battle. Also, Lufthansa isn’t exactly very healthy either,. They recently announced big losses. However, it is likely that LH might increase frequencies or gauge for its flights from Frankfurt to Canada. The big question is whether anyone would honour AC tickets if AC is liquidated. Remember that a company that bleeds real cash every month will most likely have to shut down the day of liquidation and that means no more phone lines, no staff at airports, aircraft instantly seized, and battles between airports and other creditors to decide who has the right to seize the aircraft. What will be interesting is whether the backroom stuff like accounting and reservation computer systems will be kept operating. If there is going to be someone who will want to start a new airline form scratch, getting access to AC’s operations infrastructure would provide a turn-key solution.
Response:
> It is possible that the announcement by Li is a final bargaining tool > to get the pension changes; however because of the other problems, it > is quite likely that he is happy to let the deal die. > If the deal dies, AC are in serious difficulties. Any other bidder > will bid less, and demand more. There is speculation about liquidation.
Li wouldn’t have gone this far without a good idea on how to make AC work. He may be the principal investor, but he is not the only one. Lots of big guys like GE lent money or moromised to lend money on the condition that AC emerge from bankrupcy (read: condition that unions agree). So Li pulling out may in fact cause a chain reaction, unless Cerebrus or some other comes in VERY fast. However, consider the mistake AC made when it purchased CP: it inherited the debts, excess staff, excess planes etc. Any investor on the sidelines would be far better off to wait for AC to be liquidated, all staff fired, and then buy AC’s assets at much reduced prices, buying only what they need, and re-hiring staff from scratch with competitive wages (and only hiring what they need). Now, consider that AC has very little assets left. Mostly maintanence facilities and office furniture. It has 0 planes. So the new airline might be able to get good deals on aircraft leases. Interestingly, I suspect that the new carrier would go for the 747s first, opting for fewer flights at larger capacity to be more cost efficient. There would be a big void to fill.
Response:
> If the deal dies, AC are in serious difficulties. Any other bidder > will bid less, and demand more. There is speculation about liquidation.
If United were in good financial shape, it might try to work a deal with AC. But North America might soon face the situation of having one Star airline in bankruptcy and another bidding farewell. European airlines like Lufthansa might help United, as Lufthansa has a lot of business in the USA, but would any European airline be likely to help AC? Pete
Response:
> Victor Li, who had been expected to inject $650 million to Air Canada, > to restructure the airline out of bankruptcy, is likely to drop out of > the process.
It’s time to liquidate AC’s remaining assets. While they’re at it, US courts should do the same to United. These companies have no one to blame but themselves due to years of stupid management practices. Dump these two lead weights (and maybe US Air in the near future) and the remaining airlines will be much stronger.
Response:
Victor Li, who had been expected to inject $650 million to Air Canada, to restructure the airline out of bankruptcy, is likely to drop out of the process. The immediate trigger is the refusal of some unions to change the pension benefits. Other factors are that the changes already made by AC have not created the expected savings, and the size of the loss for 2003, which at $1.9 billion is almost twice the 2002 loss. Also increased competition and higher fuel prices make future profitability harder to reach. It is possible that the announcement by Li is a final bargaining tool to get the pension changes; however because of the other problems, it is quite likely that he is happy to let the deal die. If the deal dies, AC are in serious difficulties. Any other bidder will bid less, and demand more. There is speculation about liquidation. —
Response:
>>If the deal dies, AC are in serious difficulties. Any other bidder >will bid less, and demand more. There is speculation about liquidation. > If United were in good financial shape, it might try to work a deal with > AC. But North America might soon face the situation of having one > Star airline in bankruptcy and another bidding farewell. European > airlines like Lufthansa might help United, as Lufthansa has a lot of > business in the USA, but would any European airline be likely to help > AC? > Pete
AC doesn’t deserve help. The unions dug the grave for them. The best help the star alliance partners could give is to pick up the slack on the routes and work with people who’ve bought tickets or packages with AC to reduce the fallout when they liquidate.