INDEPTH: AIR CANADA|
CBC News Online | Updated May 14, 2004
In the early 1930s, Canada was one of the few industrialized countries without a national airline. There were a number of regional bush airlines scattered across the country, and Canadian Pacific had part ownership in Canadian Airways, a group of regional airlines that served mining communities and transported mail. However, there was no air service linking the Atlantic and Pacific oceans. R.B. Bennett's Conservative government was interested in launching an airline, but couldn't afford to do so during the Great Depression. It wasn't until 1935 when Mackenzie King came to power that the idea became a reality. King created a Department of Transport and appointed Clarence Decatur Howe, the man who would be Air Canada's architect and most passionate defender, as minister.
C.D. Howe intended for the airline to be under government control, but also initially wanted private enterprise to take a role in it. He proposed collaboration between CP Rail, CN Rail and Canadian Airways. Although Canadian Airways badly wanted to operate the airline, political manoeuvring got in the way and it was shut out. Trans-Canada Air was legislated into existence April 11, 1936, a subsidiary of CNR, which was in turn owned by the federal government.
Trans-Canada Air Lines started up with $5 million in seed money. It bought three airplanes from Canadian Airways, and hired a number of executives from U.S. airlines, such as United and American. TCA set forth on its inaugural flight July 30, 1937. C.D. Howe boarded a Lockheed aircraft in Montreal at dawn, and more than 17 hours later landed in Vancouver at dusk, after touching down in five cities across the country. TCA's first regular route was between Vancouver and Seattle, a flight that cost $14.20 round trip. Travel was quite a bit less comfortable back then. Pressurized cabins were a thing of the future, the planes were drafty and no oxygen was provided during flights.
In 1942, Canadian Pacific suggested to the government that Canadian Airways, now known as Canadian Pacific Airlines, merge with TCA. Mackenzie King refused and soon after declared TCA to be Canada's only international airline, as well as the only carrier allowed to provide transcontinental service in Canada. This was the basis of legislation that would regulate the aviation industry for the next 40 years. It also permanently changed the tone of TCA's relationship with Canadian Pacific from competitive to combative.
The market for air travel increased after the Second World War. The romance of the RCAF and the booming post-war economy made Canadians less afraid and better able to afford to fly. TCA expanded quickly over the next 30 years adding routes to the U.S., Europe, Asia and the Caribbean. The company changed its name to Air Canada in 1965 to reflect the fact that it no longer flew solely within Canada. CP Air was granted an occasional overseas route, but Air Canada always got first dibs. Its dominance domestically began to wane in the late 1950s when CP Air was granted one daily flight across Canada. By 1979, there were no longer any controls on domestic competition between the two national airlines, and the drumbeat of privatization was starting to sound.
Deregulation and increased competition
The 1980s were a difficult time for airlines. Air Canada had increased its debt in order to upgrade its fleet, and to buy regional airlines that could feed into its national network. It had to deal with a recession early in the decade and suffered a loss of $15 million in 1982. Air Canada fought deregulation tooth and nail, but by 1987, Canada's skies were fully open, and Air Canada was for sale. Its shares initially sold for $8 each, but weren't fully subscribed. Its share price hovered below $8 until Pacific Western Airlines bought WardAir in 1989, removing a competitor that had long aggravated Air Canada. At the end of the decade there were two national airlines competing freely.
By 1992, Air Canada and Canadian Airlines were battling toe-to-toe for market share in a fight that left the two airlines losing more than a million dollars a day during the depths of a recession that severely affected the travel industry.
With both companies hurting, several attempts were made to negotiate a merger. In 1992, Canadian Airlines accepted a merger proposal from Air Canada, which later backed out over concerns about the $7.7-billion debt the merged firm would have to carry.
The prospect of a merger didn't resurface in earnest again until August of 1999, after the federal government suspended the competition rules to let the companies talk about restructuring.
Within days, financier Gerry Schwartz and his company, Onex Corp., unveiled a plan backed by American Airlines parent AMR Corp. to buy and merge Air Canada with Canadian Airlines. Air Canada rejected Onex's offer and countered with its own $92-million bid for Canadian. After several sweetened offers, a Quebec court ruled Onex's bid illegal, prompting the company to abandon it. By the end of the year, Canadian accepted the Air Canada offer, leaving Canada with a single dominant carrier.
But as events would prove, that wouldn't be enough to ensure Air Canada's future. In the wake of the merger Canada's new mega-carrier went on to face numerous pressures, including competition from new discount airlines, such as WestJet, and the drop-off in air travel after the terror attacks of Sept. 11, 2001.
Now struggling under $12 billion of debt, Air Canada faces declining passenger traffic and higher operational costs. Between April 2001 and April 2003, the carrier lost more than $1.6 billion and had to take drastic action. On April 1, 2003, Air Canada followed the path taken by many other large airlines post-September 11, and filed for bankruptcy protection.
Since then the company has battled to restructure itself and come up with a plan to deal with its ballooning debt. In December 2003, Air Canada accepted a bid from Hong Kong investor Victor Li for a $650-million equity stake in the airline. The deal faced opposition from existing creditors, but was later given the nod by an Ontario judge as part of a restructuring package designed to help the company emerge from bankruptcy protection by April 2004.
However Li demanded concessions from the airline's unions. Negotiations stalled and Li made good on a threat to withdrew his offer on April 2.
On April 26, Deutsche Bank AG stepped in with an offer for the airline. Under the Deutsche Bank deal, the German company agreed to underwrite a $850-million rights offering to Air Canada creditors. That was up from a previous agreement to back a $450-million rights issue.
Less than a month later, a judge agreed to extend Air Canada's protection from creditors by four months. That came at the end of a week that saw the airline reach cost-cutting agreements with all its unions.