Get unions on board: Milton

Air Canada AC.B-T is in a cash crunch partly because the previous management group "lost the plot" as the economy turned last year, according to the man who took the airline through a court-supervised overhaul in 2003-04.

But the company may still be able to avoid a return to bankruptcy protection, Robert Milton said - provided it can strike a deal with its unions that doesn't increase costs and ensures labour peace.

In an exclusive interview with Report on Business magazine, Mr. Milton - who is still chairman and CEO of Air Canada's controlling shareholder, ACE Aviation Holdings Inc. ACE.B-T - said the airline's 26,000 employees shouldn't think they'll regain what they lost during its restructuring under the Companies' Creditors Arrangement Act, when they made $1.1-billion in concessions. But nor should they fear that the company wants to attack their pension plans, which have put a significant strain on the company's cash position after the meltdown in equity markets and decline in interest rates.

"There is no basis for management to do anything harsh with the employees, and I think there is no basis for employees to expect the company is in a position to do anything generous," Mr. Milton said.

"I think it really is best looked upon as a situation where the smartest thing is to aim for the status quo and keep going. Because the status quo doesn't look bad compared to what's happened in the States and elsewhere."

Pensions have emerged as the central issue in the talks with pilots, flight attendants and other unionized employees for new contracts. Air Canada's pension plans have a solvency deficit of $2.9-billion as of March 31, which means the airline will be forced to inject hundreds of millions of dollars into the plans by the end of July.

The company has told the unions and the federal government, which regulates the airline and its pension funds, that it needs short-term relief from that obligation. But the Canadian Auto Workers local that represents about 4,500 customer service agents says it is "tremendously concerned" about that request. The CAW's contract with Air Canada expires on May 31.

Mr. Milton conceded the airline wouldn't be so strapped if not for some "cash management mistakes," including a bad derivatives bet on jet fuel that cost about $400-million and the loss of a $400-million bank credit line.

"Obviously, I'm not pleased by that, because there wouldn't be an issue if there was an extra $800-million there," said Mr. Milton, who supported the decision to oust former CEO Montie Brewer in March and bring back Calin Rovinescu, the former chief restructuring officer, as CEO.

"Always, I want Air Canada to be strong. But it's gotten into a tough phase with a management that lost the plot. Simply, they lost the plot," he said. The addition of Mr. Rovinescu, a lawyer and financier who comes from investment dealer Genuity Capital Markets, gives the airline a "better balanced" management group.

"Right now, if Calin and the gang get the airline turned around and get its feet back under it, for sure, investors can make a fortune. If they don't, different story. But this is not inconsistent with airlines you see everywhere.

"This is a global airline disaster we're in the midst of."

The story appears in June's Report on Business magazine, which is distributed inside The Globe and Mail in selected markets tomorrow.