Air Canada's unions

[Guest James]

News from The Globe and Mail

Air Canada's unions setting themselves up for a fall

ERIC REGULY 00:00 EST Thursday, March 27, 2003

The truth about Air Canada is that a CCAA bankruptcy protection filing is not imminent, nor is one sitting on a lawyer's desk, ready to be delivered to the courts and the creditors like a hot pizza. The other truth about Air Canada is that a massive restructuring is inevitable, one that is guaranteed to whack the labour unions. So far, through sheer obstinacy, they're winning. That's about to change.

It appears that the unions are gambling that CCAA -- the Companies' Creditors Arrangement Act, the rough equivalent of Chapter 11 of the U.S. bankruptcy code -- can do them no more harm than Air Canada chief executive officer Robert Milton could inflict upon them outside of CCAA (which, to date, has been close to nothing). Indeed, CCAA differs from Chapter 11 in one crucial sense: The former does not give management the automatic right to blow up labour contracts. Doing so is much easier under Chapter 11, as the US Airways case has shown.

The fact that CCAA isn't a guaranteed contract killer isn't the only thing that the unions have going for them. Another -- and it's a biggie -- is their belief that the federal government will not let Air Canada go under because there is little alternative to Air Canada. As fast as WestJet is growing, it has a grand total of 38 aircraft and couldn't possibly fill in the gaps if Air Canada achieved dodo status.

Why do the unions think the feds won't betray them? Because Transport Minister David Collenette and his cronies have said as much. He has said that he's open to "any options that might make the situation better." The options include financial assistance that could range from providing enough liquidity to allow it to keep airborne during a restructuring to an ownership position in the airline. In other words, a bailout with tons of taxpayers' dollars on tap. The unions could be right. Politically speaking, the government would seem to be on their side. There are more Air Canada employees than Robert Miltons. Labour doesn't seem to be acting irrationally by gambling the government will help preserve their jobs, so why give in to Mr. Milton's demands today to eliminate $650-million in annual costs?

Finally, the unions have decided they're giving up nothing unless the other stakeholders -- aircraft and engine leasing companies, suppliers, debtholders -- do the same. Since there is no evidence, at least publicly that, say, the 10.25 per cent unsecured U.S. bondholders are willing to take a nickel on the dollar for their investment (currently trading at 30 cents on the dollar), the unions don't want to make heroes of themselves. The counterargument, of course, is that other stakeholders aren't moving because labour isn't moving. The result is a logjam.

The logjam can be broken. It's only a matter of time, given Air Canada's 190-per-cent debt-to-capital ratio, falling cash flow, vanishing passengers and the hugely important fact that the U.S. airline industry, now restructuring en masse, will emerge with competitive costs. US Airways, a remarkably clean Chapter 11, has agreements that would reduce its annual operating costs by about $1.8-billion (U.S.). Air Canada is an international airline. If its own bills don't match those of its leaner U.S. competitors, it will lose the transborder market in a hurry.

So if the CCAA threat isn't scaring the unions into submission, what is Mr. Milton to do? Air Canada's financial collapse is a work in progress, so no one strategy has been either chosen or discarded yet. CCAA isn't the only way to try to fix the mess. Mr. Milton, if he's lucky, could convince all the stakeholders to reorganize consensually, as Magna International did with great success in the early 1990s. He could use the Canada Business Corporations Act to restructure, as Call-Net did last year. Or do the same under the Bankruptcy Act.

Or he could go nuclear and appeal for special legislation to have the labour contracts broken unilaterally. This scenario is not out of the question. Neither is liquidation. United Airlines, which has been unable to replicate US Airways' labour cost reductions through Chapter 11, is openly talking about permanently grounding what was once the Western world's biggest airline. In spite of what the unions think, Air Canada is a private-sector company that could disappear. It could liquidate, with its assets going to new investors with plans to start new airlines, without the gracious assistance of the current unions.

Mr. Milton is, in effect, already part way down the liquidation track by breaking off separate, lower-cost carriers -- among them Zip and Tango -- from the main carrier. Another scenario would see Jazz, Air Canada's regional airline, buy a bankrupt Air Canada and revive it with lower labour costs in the same way that bankrupt Swissair was bought and revived by its own regional subsidiary, Crossair.

Air Canada's unions will take a haircut, sooner or later. What they fail to realize is that showing some flexibility now might save them a lot of pain later this year.

ereguly@globeandmail.ca

 

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