Milton on the "Bubble"

[Kip Powick]

From The Sunday Toronto Star.

Heading into his make-or-break year as CEO of Air Canada, Robert Milton can at least draw strength from his survivor skills.

Milton, 42, somehow kept his job when the world's 11th-largest carrier filed for bankruptcy protection in April, just two months after he bragged that Air Canada was in much better shape than U.S. peers that had failed to adopt Milton's strategy of creating "mini airlines" to capture specific segments of the travel market.

Milton later not only survived, but was controversially rewarded with millions of dollars in stock in a refinanced Air Canada, when the airline was recapitalized by its new controlling shareholder, Victor Li, scion of Li Ka-shing's huge Hong Kong-based empire of industrial and media holdings.

In a sense, Milton has been vindicated in setting up the likes of Tango and Zip to capture the low-fare business, given that both United Airlines and Delta Air Lines have since come round to the mini-carrier idea (with discount spinoffs Ted and Song, respectively).

It's true that neither Tango nor Zip have been Air Canada's salvation. Tango actually has scrapped its ambitious growth strategy.

But with a replenished treasury, Milton has one last chance to prove that market segmentation can work, even if his mini-airlines end up eating into Air Canada's mainline, full-fare business.

Air Canada isn't quite as weak as it looks. Its huge third-quarter loss of $263 million, compared with a profit of $125 million a year earlier, includes a couple of one-time events — the SARS-driven decline in traffic, and a $273 million charge from the bankruptcy restructuring.

The key factor is costs, as it is with all cost-bloated full-service carriers. And here, Milton has made some progress. In the latest quarter, Air Canada cut its expenses by an impressive 14 per cent, or $366 million.

On the revenue side, Air Canada took a hit this year from domestic business lost to aggressive discounters like Westjet and Canjet. Volume on U.S. routes held up surprisingly well; while other international routes, to Europe and Asia, took the most severe blow, falling 18 per cent.

Milton ranks somewhere near the top of the rankings of Canada's least popular CEOs. But only last year, he looked like a hero for getting the jump on his U.S. counterparts in slashing costs early while the American carriers were content to accept government bailout relief and wait out a storm that worsened instead of easing.

With its enormous fixed costs in equipment, airport slotting fees and the like, the airline business is all about leverage. Even a milder economic recovery than the more robust upturn expected for the U.S. in 2004 should enable Milton to report decent profits again on Air Canada's extensive network of cross-border routes connecting Canadian and U.S. business centres.

Any by year-end 2004, assuming a respite from war jitters and terrorist attacks, Air Canada's monopoly on lucrative trans-ocean scheduled routes should become a cash cow once again.

Milton and his compliant board of directors backed the Li bid for Air Canada last fall on the assumption that Li would prove to be the most management-friendly of the bidders seeking to take over the airline.

But if the Li track record at Calgary's Husky Oil Ltd. is any indication, the incumbent management at Air Canada won't last long if Milton's latest rescue strategy doesn't soon show signs of panning out. The Li family soon dispatched a trusted lieutenant to Calgary to replace the underperforming managers that came with the purchase.

As it happens, Milton has backed away from earlier grandiose ambitions to dominate every market in which Air Canada is a player. That should defang some of Milton's most irksome critics.

Milton can and does brush off employee and customer beefs. But he's not so sanguine about Ottawa's fretfulness over Air Canada's "predatory" moves against domestic rivals, who themselves never tire of labeling Milton a bully.

Milton gets a two-fer with his new focus on trans-border and international routes. The latter are particularly appealing to Milton's new Hong Kong-based patron. And it's a signal to Ottawa that Air Canada is relaxing its scorched-earth policy of retaining domestic business at the expense of its much smaller Canadian competitors.

In late October, Milton bluntly said, "I couldn't care less" about Air Canada's share of its home market. "You will not see us grow in the domestic market."

His airline's future, Milton told Airline Business magazine, lies with the greater revenue-growth potential of trans-border and international routes.

Then again, Air Canada has just ordered a new fleet of commuter jets from Bombardier and Embraer SA to fly "point to point" in Canada, bypassing congested hub airports. That sounds like a threat to the likes of Westjet, which used a point-to-point strategy in expanding to Central Canada.

When he vows to be content with Air Canada's 50 per cent of the Canadian market, in other words, a still-combative Milton is determined to grab the most profitable 50 per cent.

How much time does Milton have? "As long as we perform financially, I don't expect [Victor Li] to look over our shoulder over the long term," Milton said last month.

Given the speed with which big airlines can destroy vast sums of shareholder value, the long term for Milton is not likely to be more than a year.