Canada's Airlines Fight for Traffic

Air Canada is opposed to a possible deal between Canadian Airlines and American Airlines

AIR Canada is offering business travelers to Europe a limousine service with pickup and delivery at both ends. It's a welcome perk for the tired passenger facing London traffic after an overnight flight.Canadian Airlines, the country's other major carrier, is offering lower fares and complimentary tickets to passengers who buy a full fare ticket. There's a reason for this largesse: Canada's two big airlines are desperate for business. Both are losing money: PWA Corporation, the parent company of Canadian Airlines, will lose $91 million (Canadian; US$78 million) in 1991; Air Canada's nine-month loss is running at C$126 million. But it is the talk of an alliance between Canadian Airlines - the smaller of the two carriers - and American Airlines that has the opposition spooked. Air Canada says it will fight any sale or merger that would bring it head- to-head with American. "Such a prospect would mark the beginning of the end for the Canadian airline industry," said Claude Taylor, chairman of Air Canada in an internal memo to employees. "We do not believe this would be acceptable to the great majority of Canadians." Any arrangement involving a foreign airline buying into a Canadian carrier would require approval of the federal government. Further, federal law restricts foreign ownership of Canadian airlines to a maximum of 25 percent and no single shareholder can own more than 10 percent of Air Canada or Canadian Airlines. Canadian Minister of Transport Jean Corbeil has said he is willing to listen to any proposals to help Canada's ailing airline industry, but he hasn't said whether the government would allow a deal between Canadian Airlines and American Airlines. "I'm guessing the government will permit it," says Lamont Gordon, chairman of Sprott Securities in Toronto. He predicted such an alliance almost a year ago. "It would make sense for PWA both financially and from the point of feeding passengers into its routes from American Airlines," he says. Canadian Airlines and its feeder subsidiaries account for about 43 percent of the domestic air travel in Canada; Air Canada has 54 percent of the market and independents have 3 percent. Jack Lawless, manager of corporate affairs at PWA in Calgary, says the airline makes half of its income from domestic routes, half from international. Except for the London route there is no overlap between Air Canada and Canadian Airlines. While the Far East may not have seemed the most lucrative destination when the globe was carved up by the two carriers more than a quarter of a century ago, that is not true today. "Our routes to the Orient are the strongest, followed by Europe, the South Pacific, and South America," Mr. Lawless says. Analysts say American wants access to Canadian Airlines' profitable routes to the Far East, where it has had trouble expanding in recent years. American would also be able to make Toronto's Pearson Airport a major hub, taking advantage of Canadian Airlines' modern but underused Terminal 3, which opened earlier this year. This would allow American to increase its capacity in the crowded northeastern United States. American already uses five of the 24 gates at the new terminal; Canadian uses 13. The two airlines already have a working relationship and funnel passengers into each other's networks. The advantage of a more formal relationship for Canadian would be better access to the US domestic market. Experts, such as Mr. Gordon, say a 49 percent stake in PWA Corporation would be worth $250 million or more. The two airlines are using cut-rate air fares, even over the holidays, in an attempt to lure Canadians back onto planes. But airline analysts in Canada say that the fares are going too low. "My feeling for the matter is that for the industry to remain viable, air fares have to go up and capacity has to be reduced," says Fred Larkin, an analyst with Bunting Warburg in Toronto. John Tretheway, a professor at the University of British Columbia, says the problems faced by Air Canada and Canadian Airlines are a worldwide phenomenon. "We're in the midst of what appears to be a longer recession than we thought, and the airlines are still suffering the effect of the Gulf war, and they need a traffic recovery in order to recover their finances," he says.

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