American Airlines Plans International Link : Travel: Carrier will buy 33.3% of Canadian Airlines and provide services, if regulators approve.
American Airlines plans to pay $195 million for a one-third stake in Canadian Airlines International and help administer the struggling carrier under a 20-year contract, the two companies said Tuesday.
The unusual deal, which American valued at more than $2 billion, marks the latest international alliance in an industry that has suffered through two years of economic downturn, weak travel demand and record losses.
Calgary, Alberta-based PWA Corp., parent company of Canadian Airlines, has been pursuing an alliance with American’s parent AMR Corp. since it failed to consummate a merger with domestic rival Air Canada earlier this year.
“The substantial infusion of equity and the services agreement, when effective, will mean a strengthened balance sheet and reduced operating costs for Canadian,” PWA Chairman Rhys Eyton said in a statement.
AMR Chairman and President Robert Crandall noted that the venture will provide Dallas-based AMR with “a steady stream of profitable, fee-based revenue.”
Under terms of the deal, which is subject to a number of sticky conditions, AMR will be issued preferred shares giving it a 33.3% stake and a 25% voting interest in Canadian. PWA will keep a 75% voting stake in Canadian.
AMR would get two of the eight seats on PWA’s board, although the Canadian company would have the right to buy out American’s stake at any time.
American will assume a broad range of Canadian’s administrative services, including accounting, data processing, operations planning and some international station operations and reservations outside Canada.
AMR Executive Vice President Donald Carty said in a telephone news conference that the deal would yield AMR “substantial” revenue and profit. It projects $115 million in revenue from the deal in the first year.
Eyton told reporters that the deal will result in 1,300 job losses at Canadian by mid-1993 but will help the carrier remain viable under its long-term debt of $2.4 billion.
“The temporary bridge financing, the employee support, plus a far stronger cash position at year-end than we anticipated . . . will certainly ensure, if all goes well with the restructuring, that we will be able to restructure successfully,” Eyton said.
Nevertheless, the company--which lost $2.1 million on operating revenue of $664.9 million in the first nine months of 1992--does not expect to be profitable until 1994 “if the economy goes the way everyone says it is going,” said Kevin Jenkins, Canadian Airlines president.
The deal is subject to approval by Canadian and U.S. governments and is not expected to be closed before the fall.
American could begin to provide cash and services in the spring, but Canadian must extricate itself from the Gemini reservation system and switch to American’s SABRE system, a move that already is in litigation.
Canadian must also win approval from its creditors for a major debt restructuring plan, which calls for $400 million in debt to be converted to equity.
Approval from Canadian regulators also is far from certain, as many Canadians may balk at the specter of U.S. influence.
Air Canada, which earlier this year was part of a group that won the bidding war for Continental Airlines, said it was still open to the possibility of merging with its Canadian rival.
Sandy Morrison, an Air Canada vice president, noted that the deal between AMR and PWA is tentative.
“We have made it clear that if they are not able to bring this to a conclusion, we would be prepared to revisit alternative options, and the one we would like . . . to see is a merger,” he said.
Morrison said the proposed merger between the two Canadian carriers this year fell through because of balance sheet problems that Canadian International is now working to rectify.
