Canadian Airlines' Survival Deal

For a Prime Minister who boasts that he has no trouble keeping his hands off issues best delegated to the cabinet, Jean CHRÉTIEN can sometimes be a decidedly hands-on leader.

Canadian Airlines' Survival Deal

For a Prime Minister who boasts that he has no trouble keeping his hands off issues best delegated to the cabinet, Jean CHRÉTIEN can sometimes be a decidedly hands-on leader. Even as he toured the distant capitals of Asia, Chrétien insisted on daily briefings from home about the rapidly deteriorating situation at CANADIAN AIRLINES INTERNATIONAL LTD. And by the time he returned last week from his weeklong trip, the Prime Minister had concluded, according to an aide, "that something had to be done."

Almost as soon as he stepped from his plane on Dec. 3, Chrétien summoned Transport Minister David Anderson and Labor Minister Alfonso Gagliano, asking for options on how to resolve the deepening stalemate between the airline and the leadership of the Canadian Auto Workers union, which represents 3,700 of Canadian Airlines' 16,400 employees. Gagliano responded with a list, topped by the suggestion that the government take unprecedented action by forcing a vote among CAW workers on a restructuring plan for the financially troubled airline, which called for union members to accept the key company demand for wage rollbacks. Such a course would put the government even more at odds with the CAW's combative president, Basil (Buzz) Hargrove, who steadfastly refused to allow his members to vote on the package. But, confided the same Chrétien adviser, "everyone felt that was a pretty small downside compared to the potential loss of the airline's 16,000 jobs."

On Dec. 4, the Chrétien government acted, invoking Section 107 of the Canada Labour Code, an obscure but draconian clause that gives the federal authorities sweeping powers to "maintain or secure industrial peace." Under the terms of the order, the federal labor relations board was directed to organize and hold a vote among the CAW's membership despite Hargrove's opposition. "It was not a measure that we resorted to lightly," Gagliano told Maclean's. "We hoped and waited last Monday and Tuesday, but by Wednesday, when it was clear there was no movement, we acted. Let's not forget that six unions are involved here - five said yes, one said no - and I think in a democratic state we have to allow democracy to work."

The controversial move provoked predictable outrage from the CAW leadership and some members of the rank and file, but it also fuelled a flurry of intense, last-minute negotiations between the union, the airline and Ottawa. The outcome: at a Saturday morning news conference, the CAW announced that it, too, had agreed to the deal, and that it was the bargaining committee's "unanimous recommendation that our members accept this package."

That vote, which will take seven days, was scheduled to begin this week. Meanwhile, Canadian Airlines must lock in concessions from its creditors and from AMR Corp., the parent of American Airlines, its 25-per-cent partner. For the money-losing airline, the big question now becomes, can Canadian survive the new deal? Certainly, few observers appeared to be under the illusion that the package will guarantee the future of Canadian Airlines, which has not turned a profit since 1988 and is currently $2.8 billion in debt. But the airline's president and CEO, Kevin Benson, sounded an optimistic note about the agreement. "It lets us now get word out to our customers that they can fly with us this Christmas and for many Christmases to come," he said in Calgary.

In Ottawa and provincial capitals across the West, there was relief about the outcome of the negotiations. The federal government, with an eye on gains in Western Canada in the next election, could ill afford to be seen as complacent about the fate of one of the region's prized companies - at a time when it had made major financial concessions to Quebec's aerospace and transportation giant Bombardier Inc. For Anderson, who played a central role in the negotiations, the outcome was a much-needed boost in stock after several setbacks. For Hargrove, his tough handling of the issue appeared to have bolstered his stock among the ranks as the most powerful labor leader in the country.

For their part, CAW members will be asked to accept a wage rollback package averaging 3.7 per cent. In addition, Ottawa has agreed to re-examine the future of Canada's airline industry and the troublesome issue of deregulation. Anderson said he would consider the recommendations of a committee, to be made up of airline, union, consumer and industry analysts, that will study what the CAW termed Canadian Airlines' "destructive competition" with AIR CANADA. Said Hargrove: "Too many planes are flying with empty seats, which has led to years of losses at Canadian." He added that the public will not "put up with the government standing idly by and watching two major airlines try to destroy one another in hopes one of them will end up with a monopoly." But while the government will consider the committee's recommendations, Anderson has insisted since becoming involved in the negotiations on Nov. 25 that the scope of re-regulation the CAW leader had in mind is unacceptable to Ottawa.

Canadian's other five unions had agreed already to concessions, bringing the total value to about $32 million. Originally, Benson had sought $70 million in wage rollbacks. But Ottawa, British Columbia and Alberta stepped in with about $38 million in relief - largely in forgone fuel taxes - and that reduced the sting for the labor leaders and their members. Benson's plan contemplates recouping at least another $100 million by moving to smaller jets on some domestic flights and through reductions in the cost of its service contract with AMR.

Rising fuel costs have been a major factor in Canadian's recent problems, along with setbacks on the previously lucrative Far East runs because of the drop in the value of the Japanese yen. But Canadian also has suffered from the fierce competition of airline deregulation, launched by the Conservative government in 1988, and the open skies agreement signed by the Liberals in 1995.

The financial crisis is also firmly rooted in the company's past. In 1987, following the lead of many world airlines, Calgary-based regional carrier PACIFIC WESTERN AIRLINES formed Canadian after buying CP Air from Canadian Pacific Ltd. Then, it acquired the charter company WARDAIR, establishing itself as a clear rival to Air Canada - but saddling the company with a huge debt. Over the past four years, Canadian has required its employees to absorb wage reductions ranging between five and 17 per cent. Stock that employees bought for $13 a share in the restructuring closed last week at $2.20. Despite the injection of $246 million of equity in the 1994 deal with AMR, the company was back on life support in two years.

The depth of emotion about the talks was evident in the inflammatory rhetoric of the past few weeks. "Some of the union's leadership is still stuck back in the Sixties," Gagliano said. Hargrove and the CAW leadership, declared Transport Minister Anderson last week, were guilty of "hijacking the whole process." And, he said of Hargrove, "every outburst, every interview and every hour that passes is another nail in the coffin of this airline." The CAW's combative president, meanwhile, reacted to the prospect of a federally forced vote with predictable anger, accusing the government of "taking away our right to collective bargaining" as well as "insulting working people" everywhere in Canada.

But in spite of the angry words, the first indications began to emerge late last week that Ottawa's blunt use of force may indeed have helped lead to a breakthrough in the impasse. After an intense round of eleventh-hour negotiations in a downtown Toronto hotel, both the union and Canadian Airlines management at last reported progress. The CAW finally agreed to accept a pay cut well below the company's original 10-per-cent demand. In return, Canadian Airlines agreed to grant greater job security to the CAW's 3,700 reservations and ticket agents. Late Friday, Benson issued an optimistic letter to his company's employees. "How much can a landscape change in 48 hours?" he asked. "Judging from where we were on Wednesday, a lot!" And, he said, after intense negotiations "Canadian Airlines and the CAW resolved all outstanding issues required for the implementation of the company's restructuring plan."

But one problem remained - and it revolved around the increasingly prickly relationship between the CAW and Chrétien's government. The union-company deal hinged upon an agreement between the CAW and Ottawa to review the tangled issue of airline deregulation that Hargrove claims lies at the root of Canadian Airlines' financial problems. As the dust settled, there was agreement on that score as well. Hargrove and Anderson had engaged in a rapid exchange of faxes, all designed to iron out the details for a broadly based committee to examine the marketplace forces and problems at work in Canada's airline industry. While Anderson publicly offered scant hope of fundamental changes in the existing regulatory climate, it soon became clear that both the government and the union had at least agreed to examine the situation.

But throughout the negotiations, tough public posturing continued. If Hargrove was bothered by the potential implications of a government-ordered vote - some Canadian Airlines employees had expressed their dissatisfaction with the union's refusal to let members vote on the airline's proposed package - he betrayed no signs of it as he emerged from a meeting late last week in Toronto of the CAW's 600-member governing council. Casually clad in sweater and jeans, he freely admitted that some of his union's own membership probably welcomed the opportunity to vote on the troubled carrier's restructuring plan. "I'd be less than honest if I didn't tell you that a lot of them are relieved," he confessed.

At the same time, however, he refused to abandon the hard-nosed stance that characterized his handling of the current negotiations over Canadian as well as the similar tough bargaining position he employed in earlier negotiations with the country's auto manufacturers over the thorny issue of job outsourcing. "We are trying to use the time we have - before this forced vote takes place - to say to the government that we are prepared to try to conduct a vote ourselves on a proposal that would satisfy our concerns about the long-term viability of this airline," he told Maclean's.

For Hargrove, there are larger issues at stake than a mere financial restructuring plan for a struggling airline. Canadian, in his view, is in all likelihood doomed to ultimate failure anyway as a result of "the insane destructive competition" that followed upon the heels of airline deregulation. "For months, I've been saying to different levels of government that there is a real frustration among people across the country over what's happening," he said. "The Business Council on National Issues published a document called 'The Global Village' in 1981-1982 that called for privatization, deregulation, free trade with the United States, the goods and services tax, expansion of trade with Mexico and as close to zero inflation as you could get. Governments have followed that to a T - Liberal, Tory and NDP."

All of this, according to Hargrove, is part of a rapidly accumulating anti-trade-union philosophy that is sweeping Canada as well as much of the developed world. "No question about it," he stoutly maintained. "It has undermined the strength of working people and dramatically shifted the balance of power. It is forcing wages down, benefits down and it threatens economic security. People are starting to react to that and they are angry." He argued that the government itself is unwittingly fuelling a developing public backlash "by forcing this Canadian Airlines issue onto newspaper front pages and TV screens."

As far as Hargrove's future as a union leader is concerned, there is not much evidence that his position has been threatened by the lonely battle he has been waging over Canadian Airlines. "I think Buzz will be around for a long time," said Robert Swadinsky, a professor of labor in the economics department of the University of Guelph. "He has taken the right attitude. Both sides know that the concessions being demanded will not save the airline. It was a smart move because the holdout certainly reduced the concessions he had to make. This might cause problems for the CAW among the general public, but Hargrove's job is safe because union members know he is fighting for them. They see him doing his job."

In fact, far from harming Hargrove, Ottawa's resort to coercive measures may, in fact, have strengthened his position. "My sense is that this is very likely to backfire for the government and for Canadian," said Simon Fraser University professor Mark Leier, an expert on the history of the Canadian labor movement. "People in labor are horrified about what this means in terms of a possible precedent. It seems to me that rather than frightening trade unionists into toeing the line, it is more likely to provoke them into trying to mobilize to resist these kinds of efforts in the future. It is just a matter of self-defence."

Certainly, Ottawa appears to be under no illusions that the restructuring plan will miraculously save the troubled airline. "I can't guarantee that Mr. Benson's plan will lead to profitability," Anderson acknowledged in an interview last week with Maclean's. "I just can't guarantee that - I don't know. All I do know is it's the only game in town." And for Jean Chrétien's government and Buzz Hargrove's union, the stakes have been high enough that both have been more than willing to gamble on the outcome.

Contingency Plans

Canadian Airlines officials have warned repeatedly that without pay concessions from all its unions, the carrier will have to shut down. That leaves a number of questions for would-be travellers:

What should Canadian Airlines ticket-holders do if they are booked to fly during the Christmas period or in the new year?

Holiday travellers should sit tight, says Hugh Campbell, president of the Alliance of Canadian Travel Associations, a 3,100-member organization made up of travel agencies, tour operators, airlines and other travel-related companies. "I can't see any problem whatsoever over the holiday season," he says. In a worst-case scenario, Canadian would not cease operations until at least February, says David Lee, vice-president of Toronto-based GIANTS Travel Ltd., a consortium of about 800 independent agencies across Canada. That may be cold comfort for those who have tickets booked later in the year. But those tickets often do not have to be paid for until they are picked up, says Campbell. Canadian has not decided on the refund policy it would adopt in the event it were grounded, says France Poulin, a spokeswoman for the airline. But Glynn Williams, an industry analyst with Newcrest Capital Inc. in Toronto, says there is only a slim chance Canadian will fold. "The odds are the airline will continue to provide service," he says. "The question is, who's going to own it?" If the company does not survive, its operations would wind down over a period of months, he expects. Travellers who want to take extra precautions can purchase default insurance for an extra $6 to $12 a ticket, says Campbell. But there is no guarantee they would receive a full refund since most insurance companies impose limits on the amount they will pay out if a major carrier or tour operator goes under.

What about Canadian Plus frequent-flyer points?

"If the airline did shut down, they're gone," says Campbell. The points would not even be accepted by Canadian Airlines' frequent-flyer partners - American Airlines, British Airways, Air New Zealand and Qantas Airways. But there are some options for Canadian Plus members, he adds. One is to use the points now. A lot of people are already doing that: Canadian has "been swamped" with redemption requests, says Campbell. For a fee, Canadian Plus points can also be transferred to one of the programs run by its partners. It may also be possible to purchase insurance for points. Poulin says that, to her knowledge, the only company offering such a service is Frequent Flyer Services Inc. of Colorado Springs, Colo., which charges $161 a year for points insurance.

What will happen to Canadian Airlines routes if it stops flying?

In Canada, others will likely fill the gap, says Ted Larkin, an analyst with Bunting Warburg Inc. in Toronto. On domestic routes, there are no regulations limiting carriers from picking up or dropping routes, says Robert Greenslade, a spokesman for Transport Canada. Airlines need only be licensed by the Canadian Transportation Agency, which requires an operating certificate, adequate insurance and majority Canadian ownership. In the case of international routes, carriers must apply to Transport Canada. But a carrier may apply for routes in a competitor's territory if the designated carrier is no longer operating or is "under-utilizing" the route. If more than one carrier applies, Transport Canada makes its choice based on the best service proposal and the airline's track record.

Maclean's December 16, 1996