CTV Report on CCAA Filing

[Guest GDR]

Column by David Akin: Air Canada -- Why Now?

David Akin, CTV Business Correspondent

When Canada 3000 Inc. filed for bankruptcy in 2001, it had little choice. Some of its creditors, notably airport operators, had started to seize its planes, preventing the airline from continuing its operations.

But Air Canada had no such gun to its head, or at least none that it, its lawyers, or its unions know about.

With $375-million in cash on hand, a recent agreement with one of its major unions that would have helped it cut labour costs by more than $40 million a year, and promise of no-strings-attached help from the federal government, Air Canada's rush to court Tuesday seems an odd thing.

Air Canada CEO Robert Milton was, as late as 5 a.m. on Tuesday morning, pleading with his board for more time to find a solution to the airline's financial problems that would not have involved a filing under Canada's Companies Creditors' Arrangement Act (CCAA).

In fact, Air Canada went to court in such a rush, it failed to notify Global Payments, the organization that represents MasterCard and Visa, one of Air Canada's most crucial business partners.

Global Payments wasn't the only one. The Toronto courtroom where Air Canada outlined its dismal state was packed to standing room only with lawyers representing various Air Canada creditors and business partners. They'd shown up for no other reason than to see what Air Canada was telling the judge. Normally, they would have been given the documents ahead of time but, again, Air Canada was in such a rush to get to court, they saw bankruptcy filing at the same time everyone else did.

Sean Dunphy, the lawyer who represented Air Canada in the Ontario Superior Court of Justice hearing, was bleary-eyed and testy, the result of literally staying up all night to put the finishing touches on the filing.

So why the rush? What was the event that precipitated such drastic action?

The issue is an important one as Air Canada begins the arduous process of re-organizing itself and renewing some sense of goodwill with its creditors, unions, and customers.

First, if it's true that Milton was arguing against a filing, then it's clear his stock has been severely diminished in the eyes of his board. It is Air Canada's board of directors and not Milton who will lead the restructuring. The board's reluctance to give Milton more time -- in the absence of any immediate crisis -- speaks volumes about the lack of confidence the board must have in Milton's ability to affect a turnaround.

Second, if Air Canada hopes to conclude productive negotiations with its unions, it must convince them there was a real crisis that precipitated its drastic action. So far, it has not done that.

Finally, shareholders of Air Canada, who will likely be left with nothing upon Air Canada's restructuring, would surely have preferred that the board exhaust every alternative to a CCAA filing.

Buzz Hargrove, president of the Canadian Auto Workers union, which represents about 10,000 Air Canada workers, said it was not until 3 p.m. (ET) on Monday when Air Canada informed it that it was preparing a CCAA filing. Then, a few hours later, Air Canada management presented Hargrove and other union leaders with a demand to take a 22 per cent pay cut. Even if you blame the unions for Air Canada's problems, it seems a bit unreasonable to expect several large unions to accede to demands made at 10 p.m. for a 22 per cent wage cut.

The next day, after filed it bankruptcy protection papers, Air Canada tried to blame union intransigence for failing to accept concessions. That claim is tough to swallow given the fact that some unions had less than eight hours to consider such a demand.

This sort of tactic greatly reduces the credibility of Air Canada's board and managers.

Air Canada hinted that it was pushed into bankruptcy protection by the Office of the Superintendent Financial Institutions, a federal government agency which is responsible for, among other things, making sure Canada's banking and insurance industries are operating within appropriate parameters. But OSFI is also responsible for making sure that company pension plans have enough money in them to support current and future retirees.

In its CCAA filing on Tuesday, Air Canada said that, as of January 30, the pension plan for its employees was underfunded by about 15 per cent or $1.2 billion. That means, if Air Canada were to cease operations at that point, the pension plan would need $1.2 billion. But the value of pension funds, of course, goes up and down with the stock market and with interest rates. Many pension funds have had two 'down years' as the stock market has swooned. And many pension fund managers, presumably including Air Canada's, have taken steps to renew growth in the value of their holdings.

Air Canada said in its filing that it has reached an interim agreement with OSFI -- although it did not provide any details about that agreement.

It did, though, tell Superior Court Justice James Farley it would be back in his courtroom within two weeks with more details about restructuring the pension plans.

Still, representatives of Air Canada's unions say they were never informed about this OSFI deadline and, in court on Tuesday, Air Canada's lawyer Dunphy said the filing was precipitated by the combination of several events.

So, as Air Canada and all those interested in its survival begin considering its alternatives, the airlines board of directors and management have some more explaining to do. In its filing, chief financial officer Robert Paterson said that, "it must be underline that this CCAA application is not intended as a chapter in a management versus labour conflict."

He may wish it to be so. But by failing to disclose the crisis that forced it into bankruptcy court on Tuesday, Air Canada's management has virtually guaranteed that this will indeed be another chapter in its rocky labour relationship.