U.S. Airlines in Tussle to Dominate Canadian Industry
A dogfight over Canadian skies heated up this week when United Airlines joined American Airlines in the fray, raising the odds that Canada will be left with a single, monopoly carrier dominated by U.S. interests.
The battle--which originated in a takeover struggle between the country’s two main airlines, Canadian Airlines and Air Canada--could mean higher ticket prices and fewer air industry jobs for Canadians if the two merge, analysts say.
The two U.S. giants are minority partners of the smaller Canadian carriers--American with Canadian Air, United with Air Canada--and one of them stands to be cut out of the Canadian market altogether by the merger.
American Airlines parent AMR, which bailed out Canadian Airlines in 1994, came to the rescue again in August by putting up half the cash in a $1.2-billion bid to buy the stronger Air Canada and merge the two.
This week, United jumped to the defense of Air Canada by orchestrating a $491-million finance package to help fend off the takeover bid.
“It’s looking more and more like an American proxy war,” said Peter Bleyer, executive director of the Council of Canadians, a public-interest group. “They seem to be restructuring the Canadian airline sector to be an add-on to American airlines one way or another. I’m convinced they don’t have Canadian interests in mind.”
The feud began domestically when a Toronto-based investment group, Onex, persuaded AMR to join a David-and-Goliath move to take over Canadian Airlines’ arch-rival, Air Canada, and merge the two. AMR would put up more than half of the $1.2 billion in exchange for 14.9% of the merged airline and most of the service contracts.
The deal-maker is Onex Chief Executive Gerry Schwartz, known as an astute financier with a talent for restructuring undervalued companies and selling them. A Canadian magazine, Maclean’s, described him as a political insider with “more connections than an airport hub.”
Currently, AMR doesn’t make much money directly from its share of ailing Canadian Air, which has lost a reported $371 million in the last five years and needs a massive cash injection just to make it through the winter.
But the Dallas-based company places a high value on its marketing alliance, which draws Canadian travelers onto American’s U.S. routes and allows it to place passengers on Canadian Air’s international routes that American doesn’t have.
“The U.S.-Canada trans-border market is the biggest [such] market in the world,” said Ted Larkin, an airline analyst at HSBC Securities in Canada. “Most of the traffic originates in Canada and a large part of it is the highly profitable business traveler.”
AMR’s ties with Canadian Airlines generate a reported $141 million in revenue and funnel 750,000 passengers annually onto its own jets.
Air Canada, by comparison, takes in about $942 million a year in cross-border passenger revenue.
On Friday, it announced its best-ever earnings, boasting its highest operating margins since 1988 and a 43% share of all cross-border traffic.
A takeover by Onex would cut United out of that lucrative market and disrupt shared routes.
Other members of the Star Alliance, a group of international airlines that share marketing costs and frequent-flier benefits as well as direct passengers to each other, have put about $155 million into Air Canada’s $491 million package. The Star Alliance includes such carriers as Deutsche Lufthansa, Thai Airlines and SAS.
That leaves the two U.S. airline giants circling each other while governments in Canada, the U.S. and Europe review antitrust laws and Canadians fret about losing a key strategic industry to foreign interests.
“Every country has a national airline,” said a government official. “If ours is run by Americans, where does that leave us?”
Air Canada shareholders will vote on the Onex offer on Nov. 8.
That leaves Canadian airline workers and travelers wondering what will be best for them. Analysts predict that the lack of competition could raise air fares 30% over the next few years.
A merger would also mean job losses--Onex predicts 5,000 layoffs, but industry workers suspect it will be twice that. Most of all, workers fear that a foreign owner will be less sympathetic in slashing costs, and so Air Canada has been careful to craft its counteroffer as a “Made in Canada” solution.
“We believe in our industry,” said Peter Foster, a spokesman for the Air Canada Pilots’ Assn. “But we know, he who pays the piper chooses the tune.”
