Air Canada in Trouble (read bottom for my comments)

Battered Air Canada to restructure
Airline to sell Jazz, seeks $650M in contract concessions

MONTREAL (CP) — With losses continuing to pile up, Air Canada said today it plans to sell its Jazz regional airline, restructure other divisions and seek $650 million in labour contract concessions — a move that could cut thousands of jobs.

The news came as Canada’s dominant airline announced a fourth-quarter loss of $364 million, compared with a loss of $277 million a year earlier.

For the year ended Dec. 31, 2002, the company (TSX: AC) lost $428 million or $3.56 a share, compared with a loss of $1.3 billion or $10.95 a share, with an income tax provision of $330 million, in 2001.

Montreal-based Air Canada hasn’t made a profit in three years and is saddled with debts totalling $10 billion.

“In a year of ongoing crisis for the airline industry, Air Canada recorded 2002 results that continued to surpass all North American international carriers with an over $500-million improvement in our operating results and an $887-million improvement in net results for the year,” chief executive Robert Milton said in a release.

“While this represents encouraging progress under increasingly challenging circumstances, these results clearly demonstrate that the existing full-service network airline model is not sustainable without continued fundamental change.”

With revenues under pressure, the airline has been forced to cut costs and sell assets to deal with its crushing debt. A few weeks ago, it sold a stake in the Aeroplan frequent-flyer unit to the Onex Corp. conglomerate.

Today, Air Canada said Jazz may also be sold. The regional carrier based in Halifax has 4,000 employees and operates Air Ontario, AirBC and other regional brands.

To attract new investment, Air Canada said it will also:

— Sell up to 49 per cent of its Air Canada Technical Services division as well as a significant stake in its ground handling services unit, a stand-alone subsidiary with 8,500 workers to be created from the airline’s current airport operations.

— Convert Air Canada Cargo to a stand-alone subsidiary, although it doesn’t intend to sell the cargo unit at this time. The unit has 1,700 employees across Canada.

In aiming to cut labour costs by $650 million, Air Canada could jettison thousands of jobs from its 35,000-member workforce, perhaps as many as 10,000.

Such a move would match similar labour cuts at other North American airlines, which have been battered by the drop in air travel after the terrorist attacks on Sept. 11, 2001.

Since then, Canada 3000 has gone out of business and major U.S. airlines — such as United and US Airways — have sought bankruptcy protection and chopped tens of thousands of jobs to reduce costs. The growth in no-frills competition has also had a major effect on the North American industry.

In Canada, low-cost rival WestJet Airlines poses stiff competition to Air Canada in the West, and its costs are about half that of heavily unionized Air Canada.

“While we can be proud of what we have achieved, we still have far to go,” said Milton. “The fourth quarter, always challenging due to seasonally weaker demand, confirmed that revenue trends and market dynamics have changed irreversibly. The new year is off to a rough start with the overhanging threat of war and escalating fuel prices.

“In Canada, we’re continuing to see growth in competitive capacity from low cost carriers in a flat market,” Milton said.

“There is still no sign of recovery in the regional market, with Air Canada Jazz recording a clearly unsustainable operating loss of almost $90 million in the past year due to a decline in demand on short-haul routes, rising costs and the crippling effect of surcharges and fees on fares.”

Adding to Jazz’s problems, a computer virus infection at an operations centre in Halifax temporarily threatened to shut down the regional airline network Wednesday, affecting about 200 flights.

Stephen’s comments:

When Air Canada bought Canadian (Airlines International) part of the agreement – as approved by the Canadian government – was that services to remote regions had to continue for a number of years. These, if I am correct, are generally carried out by the regional arm, or “jazz”. However, it really seems unsustainable for the major carrier to continue this path. Maybe if a smaller carrier takes over these routes they will be better served, and Air Canada can focus on it’s core operation (major cities and international routes).