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The health of Canada's airline industry has been distorted by Air Canada’s woes


October 1, 2007
Stacy Bradshaw

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189-fadetoblackWHATEVER HAPPENS with Air Canada over the next 12 months, one thing is
clear: the Canadian air transport industry is going to exit 2004
looking different from when it went in. How different is yet to be
determined. Certainly we are going to witness one and possibly two
major personalities depart the scene.

David
Collenette is a sure bet to be replaced as transport minister by prime
minister-inwaiting, Paul Martin. Despite successes such as shielding
carriers from excessive insurance premiums post 9/11, Collenette's six
years in transport have largely been a disappointment for Canada's
airlines, with the industry appearing to take a backseat to the
minister’s enthusiasm for passenger rail. In October the minister
announced a further $700-million cash infusion for Via Rail, while
airlines struggle over increased airport user fees – fuelled in part by
excessive rents paid to the government by airport authorities.

The
second casualty of change could very well be Robert Milton. Air
Canada's president/CEO and architect of the airline's multi-brand
strategy. While GE Capital of Canada extracted an agreement from Milton
to remain in charge as one of the conditions for a $1.05 billion
Debtor-in- Possession (DIP) bailout after Air Canada filed for
bankruptcy protection last April, the airline's next equity partners
are under no similar obligation.

As Brian Dunn, Wings Airline
Insider reports on page 15, the battle to inject $700 million into the
beleagured airline in exchange for a single majority equity stake has
come down to two principals: Hong Kong resident and Canadian citizen
Victor Li, and New York-based Cerberus Capital Management. The airline
has also reached a tentative agreement with Germany's largest financial
institution, Deutsche Bank, to soak up between $350 million and $450
million of leftover equity once Air Canada completes a
debt-tosignificantly- reduced-equity swap with existing creditors.

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A
decision between Victor Li and Cerberus was expected as Wings went to
press. Approval of the Deutsche Bank agreement will not come until
after. What it means is that Air Canada will have over $1 billion in
fresh equity, plus a further $700 million loan by GE Capital to retool
the fleet with a purchase of 70- to 11- seat regional jets . Will such
a purchase be necessary, or will Air Canada's new equity partners
abandon Milton's money-losing, scattershot strategy, where the airline
has struggled to be all things to all markets?


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