Airline deal means taxpayers once again take a risk on corporate Canada
But unlike in some previous bailouts, we'll all make money if Air Canada shares rise
Once again taxpayers have stepped in to throw a multibillion-dollar lifeline to corporate Canada, but this time it looks as though Canadians may actually make money on the deal.
After a long and contentious negotiation, the federal government announced this week that it had struck a bargain to bail out Air Canada, imposing a strict series of conditions. It will provide refunds to ticket holders, support the aerospace industry, return service to regional airports and help ensure that the country's biggest air carrier can survive financially until Canadians start travelling again once the COVID-19 pandemic is over.
You could see Deputy Prime Minister and Finance Minister Chrystia Freeland's eyes light up at Monday's late-night news conference when she heard the wording of a reporter's question about why taxpayers were "footing the bill" to refund Air Canada ticket holders.
"Taxpayers aren't footing the bill," Freeland said almost gleefully. "This is a loan facility, and the government of Canada fully expects to be paid back."
The impression that this was mere corporate welfare was not just held among reporters suddenly coming to terms with the surprise deal, rumours of which only began to emerge late Monday afternoon. A Tuesday morning search on Twitter for "Air Canada" showed many angry tweets demanding why some other more worthy causes — from universal basic income to urban public transport — did not get the generous handout instead.
Of course, as in any government bailout — this one worth about $6 billion — taxpayers are taking a risk. In the uncertain world of commerce, there is always at least a small chance that a company will not be able to pay its bills, in which case Canadians will indeed be on the hook.
But having a backer like the Canadian government makes a corporate failure that much less likely. And along with offering repayable loans to the company, Canadians took a half-billion-dollar stake, buying shares in Air Canada at $23 each.
Despite a decline in share prices to about $26 when markets opened on Tuesday as investors assessed the deal, taxpayers were still in the money. And if, as most people expect, air travel returns to levels before COVID-19 once everyone has been vaccinated, taxpayers will see a windfall if shares head back toward a pre-pandemic $50 each.
While Freeland and Transport Minister Omar Alghabra fronted the news conference and soaked up the good publicity, people in the know say the hard-bargaining mastermind behind the deal was no politician. Like a poacher turned gamekeeper, deputy finance minister Michael Sabia used to be on the other side of the bargaining table, holding powerful corporate positions that include chief executive officer of Bell Canada and head of Quebec's giant pension fund, the Caisse de dépôt et placement du Québec.
"I think a lot of the credit does go to Michael Sabia," said Goldy Hyder, president and CEO of the Business Council of Canada, noting that when Sabia was named deputy minister in December, Hyder sent him a note in the middle of the night offering advice.
'Michael gets it'
"His arrival there actually triggered a real negotiation and a real discussion and conversation that led to the successful conclusion of the agreement," Hyder said in a phone conversation on Tuesday. "I would say Michael gets it."
But it is clear that it's not just the business side of the deal that Sabia gets. By hammering out a bargain specifying that the money would have to be paid back before shareholders got dividends and before the executives could return to their multimillion-dollar salaries and bonuses, Sabia proved to be a shrewd political operator as well, cutting a deal that voters are likely to accept just before what many expect will be a federal election.
Not all previous corporate bailouts — including a purchase of shares in a troubled General Motors in 2009 by the federal Conservative government at the time — have been as successful as this one promises to be.
Times were different then, as a global financial meltdown created a persistent recession and industries had trouble climbing out of the hole. Also, taxpayers may not have got the best price when the government sold the shares before the 2015 election in a murky deal with Goldman Sachs to help bolster its claim of running a balanced budget.
According to Canada's auditor general and according to Mark Milke in a report for the Fraser Institute, taxpayers lost billions of dollars on the GM share deal.
But as in the GM deal, Hyder said, the government's calculation is not to make a short-term profit on shares, but, in this case, to support an entire air transport sector and aerospace sector and the many good jobs they provide. And while, like many in the private sector, he doesn't want to see long-term government ownership of the airline, there is a benefit to the government having "skin in the game" and a seat at the corporate table, Hyder said.
WATCH | Refunds to passengers part of deal between Air Canada and Ottawa:
According to the International Monetary Fund, this recession really is different, and it recently altered its gloomy forecast made last autumn that the pandemic would cause lasting damage. Last week it predicted there would be few scars, especially in the world's richer economies.
As Sabia and Air Canada both recognized, the airline's problem was not a bad business model but a classic cash-flow problem, and by acting to plug that temporary shortage of cash, taxpayers and the national carrier are both very likely to benefit.
While Hyder sees the Air Canada deal as a good one, he believes that Sabia and Freeland have plenty more work ahead with other airlines and other sectors to help business restart the Canadian economy and return to profit.
"There's still much more to do here," he said.
Follow Don Pittis on Twitter @don_pittis