The federal Liberals have struck a special committee to look into how to help the struggling airline industry (for "industry" you can read "Air Canada").
The chairman of the House of Commons transport committee says he likes the idea of the government buying back some or all of Air Canada's equity -- and Transport Minister David Collenette says he is willing to consider that and any other option the airline might come up with. If there's a better recipe for disaster, it's hard to imagine what it is.
The head of the Commons transport committee, Joe Comuzzi, said Monday that having the government take control of Air Canada again might be just what the doctor ordered.
"I like that idea," he said. "There's something fundamentally wrong with whatever the hell is happening over there." Mr. Comuzzi added that the government should "find out if we can't get back to our core values: Air Canada used to serve Canadians."
The chairman is right about one thing -- there is something fundamentally wrong with whatever the hell is happening "over there." But will some kind of investment by the federal government (otherwise known by the more colloquial term "bailout") fix what is wrong with the company? That seems unlikely at best, unless the Liberals plan to wave a magic wand and make some of its $12-billion in debt disappear, or pass a law that forces Canadians to fly on Air Canada whether they want to or not.
A decade ago, it was Canadian Airlines that was on the ropes, after expanding too quickly and piling up debt in order to buy Wardair. The airline begged its shareholders to accept a debt-for-equity deal, beseeched its unions to agree to cuts -- not to mention thousands of layoffs -- and pleaded with Ottawa for tax breaks and loan guarantees. All of these were delivered, and American Airlines also bought a 27-per-cent stake.
Did that help in the long term? No. It merely prolonged the eventual damage. Three years later, Canadian was once again on the ropes. The shares that its creditors and employees had accepted in lieu of debt payments and salary hikes were once again worthless, and the airline was pleading with bondholders, asking for concessions from its unions, and pulling every string it could to squeeze a package out of Ottawa.
In the end, the Liberal government cobbled together a bunch of tax breaks and low-interest loans so that it wouldn't be accused of a bailout, and Canadian kept flying.
Less than two years later it became clear that this last series of Band-Aids could not stop the bleeding, and Canadian started waving the white flag again. Onex Corp., with help from American Airlines, proposed a merger with Air Canada, but Robert Milton raised the ante -- with a little help from the federal government, of course.
If the airline business was any other business, Canadian would have gone under in 1992, or at the very least in 1995.
After striking a deal with its creditors and wiping out its common stock (which eventually happened anyway), the airline would have either emerged as a smaller entity or its assets would have been picked off by Air Canada and others.
If Canadian foreign ownership laws had been changed in time, an American or a European buyer might even have been enticed into the Canadian market.
Now Air Canada has hit a financial wall. Its fans argue this is solely the result of the Sept. 11 attacks and war fears, but they are wrong.
Air Canada's books were in pathetic shape long before the attacks on New York, a result of the hoops it had to jump through to make the takeover of Canadian work and the assumptions it made about the market. Its multibrand strategy, designed to cut costs, has done anything but -- and meanwhile it has engaged in a brutally painful price war with WestJet.
Just as Canadian Airlines did, Air Canada is now asking its unions to accept massive layoffs, trying to invoke force majeure clauses in its contracts, and no doubt hoping Mr. Collenette decides to inject some much-needed cash so that it can make its debt payments.
Otherwise, analysts believe bankruptcy is a very real possibility for the airline. Just as Canadian did, Air Canada is counting on the kindness of the government.
If Ottawa wants to help manage the process as Air Canada files for bankruptcy and restructures, fine. Better still if it decides to loosen foreign ownership rules in order to broaden the field of prospective asset buyers.
But to even think about a cash injection by the government -- for a company whose stock is virtually worthless because of its debt and massive losses, and whose business model is hopelessly out of sync with its costs -- is the kind of madness that only a government could consider.
Mathew Ingram writes analysis and commentary for globeandmail.com.
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