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Ottawa Perspective: April Was Cruel Indeed

Many airlines — and their unions — are victims of their own ambition.


October 2, 2007
By Ken Pole

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When T.S. Eliot began his poem, The Waste Land, by declaring that
“April is the cruellest month,” he wasn't talking about airlines. That
was in 1922 and although modest commercialization of aircraft had
begun, airlines didn't exist back then. But it's important to remember
that the roots of April's troubles, particularly in the debt-strangled
wasteland of Air Canada, have been growing for years.

Many airlines — and their unions — are victims of their own ambition.
Most carriers expanded capacity in anticipation of a market boom,
yielding to labour demands that were questionable even in a healthy
environment. And then there are governments that see airlines and their
passengers as a herd of milch cows, to be sucked dry by an array of
levies, fees and taxes. When the telecommunications sector imploded and
business travel evaporated, the fallout was exacerbated by 9/11/01, the
invasion of Iraq, and SARS.

The April Fool's Day announcement
that Air Canada was protected from creditors – through a judicial order
under the aegis of the Companies' Creditors Arrangement Act (CCRA) –
simply added it to a growing list. American Airlines confirmed the same
day that its “precarious financial position” forced it to invoke grace
periods in some of its debt and lease payment schedules while it
negotiated “restructuring agreements.” Cathay Pacific, Continental
Airlines, KLM, Qantas, Scandinavian Airlines, Singapore Airlines and
others followed suit.

CCRA protection is analogous to Chapter
11 protection in the US but is not as protective. There is no automatic
nullification of union contracts but in this case, Ontario Superior
Court Justice James Farley permitted Air Canada to suspend contract
provisions. It can be argued that Air Canada effectively had no option;
its already constrained traffic and cash flows, which had begun to show
signs of modest recovery from 9/11, were doublewhammied by the Iraq and
health situations. Meanwhile,Air Canada's $428-million loss last year
forced it to try to auction off its out-of-tune Jazz commuter service
and 49% of Air Canada Technical Services.With some $375 million in cash
left at the time of the 2002 annual report, Air Canada was burning
through $2 million a day prior to seeking CCRA protection. At the same
time, it secured US$700 million interim financing for 18 months from GE
Capital, negating the need to seek loan guarantees from Ottawa, which
undoubtedly would have tried to micromanage the airline. Then it
announced plans to slash $650 million from its annual payroll by
cutting 10% of unionized employees and 20% of non-unionzed
counterparts. CEO Robert Milton, a principled but aggressive manager,
sought further concessions, evidently taking his cue from American
Airlines' success in getting US$1.8 billion in payroll cuts from its
unions, which seem awake to the reality that they otherwise might have
no jobs at all. Shortterm pain for long-term gain? The Canadian Auto
Workers (CAW) and the International Association of Machinists and
Aerospace Workers (IAMAW) had already agreed to approximately 2,300
layoffs. The CAW had also agreed to defer a 2.5% wage increase.