Canadian Airlines Struggles

When he stepped into the job of president at Canadian Airlines International Ltd. four years ago, Kevin Jenkins decided to learn the ropes the hard way.

Canadian Airlines Struggles

When he stepped into the job of president at Canadian Airlines International Ltd. four years ago, Kevin Jenkins decided to learn the ropes the hard way. The fuzzy-cheeked graduate of the Harvard School of Business served drinks on a flight from Calgary to Toronto, nearly froze to death sorting baggage and even cleaned the toilets on a Boeing 747. Since then, the energetic 39-year-old has spent most of his time plotting strategy in Canadian's continuing struggle against archrival Air Canada. Lately, things have not been going well. The Calgary-based airline lost money for the seventh consecutive year in 1995. Now, embittered shareholders and some of Canadian's unionized workers - who pumped $200 million into the company in 1992 to keep the airline flying - are demanding the president's resignation. Jenkins, however, says his critics should show more patience: "There will be a vast improvement this year."

Unfortunately for Jenkins, that is exactly what he told investors last year when he boasted that his airline was poised to make money in 1995. Instead, when the company reports its latest annual results next month, it is expected to add another $185 million to the more than $1 billion in losses it has piled up since 1990. With pressure on Jenkins growing, the airline's 10 directors felt compelled to issue a statement last week in which they strongly, and unanimously, expressed support for their young president. Said Harry Steele, Canadian's chairman: "Jenkins has the full confidence of the board - no ifs, ands or buts."

Nor is Jenkins allowing his airline's massive losses to temper his competitive instincts. In October, Montreal-based Air Canada invaded its rival's lucrative western base, offering low fares and dozens of new flights between Calgary and Vancouver. Last week, Canadian retaliated with an all-out bid to capture a larger share of the lucrative business-travel market in Air Canada's backyard. Called The Canadian Shuttle, the new program offers two-for-one tickets, wide seats and bistro-style meals on 74 shuttle flights a day between Toronto, Montreal and Ottawa.

The latest skirmish is a continuation of a power play that intensified after Ottawa and Washington signed a so-called open skies agreement in February, 1994. The treaty allows U.S. and Canadian carriers to compete head-to-head in any market in North America. Since its implementation, both airlines have added dozens of new domestic and international routes. According to Gregg Saretsky, Canadian's vice-president of passenger marketing, the airline believes that business travellers who use the new shuttle services will be more likely in future to take long-haul flights on Canadian. "Where the real battle is won," he says, "is winning customer loyalty."

Canadian needs all the loyalty it can inspire. Traffic on the airline increased by 4.6 per cent last year, up from 3.7 per cent the year before. But Air Canada, which expects to post a profit of $50 million in 1995, saw its passenger traffic climb by 11.7 per cent. Investors, meanwhile, apparently believe that both airlines are in a fight to the death, and have dumped their holdings with abandon. Canadian's shares have fallen from a 52-week high of $8.12 to last Friday's close of $2.52, while Air Canada's stock is down from $8.24 to $5. "The tape tells all," said Ted Larkin, an airline analyst with Bunting Warburg Inc. in Toronto. "The market's concern is about the domestic scene, where there is an ever-increasing level of competition."

Like many investors, Air Canada president Hollis Harris is convinced that the Canadian market is simply too small to support two international airlines. In an interview last week, Harris was still fuming about Canadian's decision last August to launch a nationwide seat sale (on the Calgary-to-Toronto route, for example, return fares were as low as $219, compared with a regular economy fare of $1,224). The Air Canada president calls the seat sale an act of desperation by an airline that needed to raise emergency cash. Air Canada matched the discounts, but, in the end, the sale sliced deeply into both companies' revenues. In fact, Harris maintains his company would have earned $150 million in 1995 had it not been for the price war: "We were forced into discounting fares in 1995 to keep Canadian from skimming our markets."

Now, Harris is pushing Transport Canada, which still dictates which routes the two airlines can fly outside North America, to step aside and let the two carriers slug it out in the offshore market. There would be a loser, but Harris says it is time to let the market decide which company deserves to survive. "We fully intend for Air Canada to be that airline," he adds.

Federal regulators have, in fact, allowed increased competition on some international routes. The latest showdown began at Vancouver International Airport in December when an Air Canada Boeing 747 emblazoned with "Maple Leaf Airlines" in Chinese characters (a name chosen to avoid confusion with Canadian Airlines) took off for Hong Kong. Air Canada, which for decades was shut out of the Asian market, now operates 18 flights a week to the Far East, and is lobbying Ottawa for the right to fly more often. Canadian, however, has countered with an array of new international flights to cities also served by Air Canada, including Chicago and New York. The competition for passengers appears certain to become even more intense in 1996. "We're going to be very aggressive against Canadian in their big [Asian] markets," says Harris. "We will do what it takes to get our share."

But the focal point of the air war has now clearly shifted to the heavily travelled domestic corridors in Eastern and Western Canada. Harris says Air Canada is competing not only against Canadian for traffic on those routes, but also against American Airlines - which owns 25 per cent of Canadian. And he insists that American, which has three representatives on Canadian's board of directors - including Ontario-born Don Carty, the president of American Airlines - is now calling the shots. "Canadian is turning over their operations more and more every day to American Airlines," said Harris, an American citizen who speaks with a pronounced Georgian drawl.

Jenkins retorts that Harris's accusations are part of a well-orchestrated plan to undermine his airline. He notes that while Harris complains about unfair competition, Air Canada has many more U.S. routes than Canadian has - 50 compared with 14. "Harris appears to be prepared to say just about anything that will harm Canadian Airlines," Jenkins complains. "He believes there should only be one international carrier out of Canada. That has to be bad for customers."

Jenkins also suggests that Harris was partly responsible for the fare war. Although it was Canadian that kicked off the battle by reducing fares last summer, Air Canada continued to slash prices into the busier fall season. Since then, Canadian has kept cutting in an attempt to build traffic during the winter months, traditionally a slow period. "The most expensive seat is an empty seat," says Jenkins. "This is something Canadians have been asking for for a long time."

That may be so, but Jenkins still has many enemies among his company's investors and employees. On Jan. 26, a group identifying itself as the Canadian Airlines Shareholders Action Committee placed a small advertisement in The Globe and Mail to complain about the company's performance. The ad called on Canadian to address the "credibility of its top management," and urged disgruntled shareholders to send their complaints to post-office boxes in Vancouver or Toronto. Larkin is not surprised by the gathering opposition. He points out that an investment of $1,000 in the company nine years ago, when the stock was at its peak, would be worth a mere $4.20 now - a 99.6-per-cent drop.

David Park, president of the International Association of Machinists and Aerospace Workers in Vancouver, is also complaining loudly. The union's 5,300 members at Canadian were among 16,000 workers who swallowed steep pay cuts and invested $200 million of their own money to keep the airline flying when it neared bankruptcy four years ago. (As a result of that agreement, 20 per cent of the company's shares will have been turned over to Canadian employees and managers by August, 1997.) Park said with Canadian sinking further into the red, Jenkins should accept responsibility and resign.

For now, that appears highly unlikely. "We believe that the criticism is ill-informed, ill-advised," the airline's directors said in their statement last week. "If it continues, [it] will have an adverse effect on the company." Jenkins himself brushed aside the shareholders' protest, noting that the source of the advertisement remains unclear. As for the unions, the Canadian president said their complaints likely have more to do with the fact the airline is currently in contract negotiations with the machinists. But if the airline continues to lose money, the criticism is sure to become harsher - and Canadian's young pilot may soon need a parachute.

Maclean's February 12, 1996