Air Canada was granted bankruptcy protection Tuesday, ending speculation over the ability of the country's biggest carrier to weather its current financial difficulties.
The filing - approved during an afternoon court hearing in Toronto - allows Air Canada to continue flying while restructuring its finances under the protection of the Companies' Creditors Arrangement Act.
"This is a day none of us would ever want for Air Canada," Air Canada chief executive officer Robert Milton told analysts and reporters during a conference call.
The airline made the move after failing to secure agreements with some of its unions over job cuts, which the carrier said were necessary for its continued survival.
War in Iraq, the fallout from the Sept. 11 terrorist attacks and the global economic downturn have also all played a role in putting the carrier in its current position, Mr. Milton said.
"The business model is broken and it must be fixed without burning any more furniture," he said.
"Air Canada and our people need to embrace a culture change and a new way of doing business."
While not the carrier's preferred course of action, Mr. Milton also said it would have been "irresponsible" to push ahead without a process in place to bring costs in line with the new operating environment.
Business model 'broken': Milton
Recent international statistics have suggested the global airline industry has lost $31-billion (U.S.) over the last two years, with the outbreak of war in Iraq resulting in the loss of another $10-billion in international traffic.
"It appears the only successful airlines today are the original low-cost carriers or restructured mainline carriers," Mr. Milton said.
GE Capital, one of Air Canada's largest creditors, has agreed to extend an interim line of credit - known as a debtor-in-possession financing - to the tune of $700-million. GE Capital has made similar offers for other American airlines, including US Airways Group.
The money allows Air Canada to continue day-to-day operations. The financing will be available in two stages, the first worth $400-million as a term loan and the remaining $300-million as a revolving credit facility.
Under the plan, the carrier also said it will create a new holding company, Air Canada Enterprises, with separate units for each of its businesses.
As part of the reorganization all of Air Canada's equity interests in its existing subsidiaries including Aeroplan, Air Canada Technical Services, Jazz, Zip, Air Canada Vacations, Air Canada Capital and Destina will be directly owned, as sister companies by Air Canada Enterprises.
Air Canada has also hired New York-based investment bank Seabury Group - which has also acted for US Airways - to help it determine what shape the company should take as it emerges from bankruptcy protection.
Air Canada's plan to sell a stake in its Aeroplan frequent-flier program to Onex was cancelled, but Onex still signalled interest in snapping up the interest at a later date.
The carrier's shares were halted Tuesday pending news. On Monday, its shares fell 16 per cent in Toronto. Air Canada's shares have lost about 52 per cent of their value in the first quarter of this year.
The latest move comes after the carrier, hammered by a global economic slowdown and the impact of the Sept. 11 terrorist attacks and the current U.S.-led war with Iraq, struck a deal this week to cut another 1,000 jobs after reaching an agreement with the Canadian Auto Workers union but wasn't able to reach similar deals with other unions.
With the exception of the CAW, Mr. Milton described the response from the carrier's unions as disappointing.
"[It]has ultimately compromised the future of their membership," Mr. Milton said.
Unions speak out The Canadian Union of Public Employees said that on Monday afternoon it was handed an "ultimatum" - a 22 per cent cut to wages, a salary freeze and an end to layoff protection - or the company would file for creditor protection. CUPE represents the company's flight attendants.
"Air Canada pretends that its employees are at the root of its problems," the union said in a statement. "We believe that Air Canada management - and federal inaction - are the root of Air Canada's problems."
"Nonetheless, we are prepared to meet with Air Canada and with federal officials at any time to discuss real solutions to the issues facing Air Canada."
Captain Don Johnson, president of the Air Canada Pilots Association, said the group had been in discussions with the company into early Tuesday.
"We are saddened to see our company forced into a CCCA filing by its mounting financial problems, coupled with the turbulence and uncertainty facing the air transport industry world wide," he said.
Heavy debts
The airline is labouring under heavy debts, increased competition from low-cost carriers and declining passenger traffic as a result of the Iraqi war.
Standard & Poor's cut Air Canada's credit rating to default status Tuesday, lowering the airline's long-term corporate credit rating to a single-D from a single-B, and its senior unsecured debt rating to a single-D from a triple-C plus.
The ratings agency said Air Canada's sales would suffer with the start of the war in Iraq and fears related to the SARS virus, particularly in Asia Pacific markets.
A number of North America's biggest carriers have either already filed for bankruptcy protection or are getting ready to do so as travellers again opt to stay home in the face of global turmoil. In the United States, a $3.2-billion (U.S.) federal aid package for the U.S. airline industry is being proposed.
In February, Air Canada - which many had speculated would ultimately follow suit and file for protection - said it had to slash labour costs by $650-million (Canadian). More recently, it said it had to cut another 3,600 jobs in response to declining traffic in the wake of the U.S.-led war with Iraq.
At the same time, Mr. Milton also outlined a plan to fix the airline, calling for it to be carved up, including the possible sale of its regional carrier Jazz.
Mr. Milton had said at that time that selling subsidiaries like Jazz and Air Canada's maintenance division, the carrier could bring in much-needed cash and, possibly, lower costs over the longer term.
The carrier closed out 2002 with a loss of $428-million (Canadian). In the fourth quarter, it lost about $364-million. It hasn't posted an annual profit since 1999.
The carrier's long-term debts and leases total about $12-billion.
Federal sources quoted by The Globe and Mail on Tuesday said Ottawa was prepared to offer Air Canada a $300-million bailout package, which would include loan guarantees, if the carrier wanted it. But sources quoted by the paper also said that Air Canada was in a last-minute scramble to crunch numbers to see if that could be avoided.
Federal Transportation Minister David Collenette has said that Ottawa was committed to the airline's survival, even though it has also been suggested that it wouldn't give the carrier a cash bailout.
Ottawa
In Ottawa, Mr. Collenette reiterated that position again Tuesday during question period.
"I made statements in the house yesterday that the government was not interested in participating in a cash bailout of Air Canada but we would help in the restructuring process," he said. "I have nothing further to add at this time."
Air Canada, by far the country's biggest airline, isn't the first to fall on financial hard times. In the months following the Sept. 11, 2001, terrorist attacks in the United States, Canada 3000 - then the country's second biggest airline - abruptly halted service after it was unable to produce a viable business plan that would have allowed it to access $75-million in loan guarantees from the federal government.
Even before Tuesday's announcement, public interest groups were weighing in on the matter.
In a statement, the Canadian Association of Airline Passengers urged Ottawa to buy back into the flagging carrier.
"Investing in Air Canada could assist in ensuring traditional quality of service is protected and that customers in monopoly or near monopoly routes were not gouged," CAAP president Michael Janigan said.
Terry Weber