Incorporated: 1937 as Trans-Canada Air Lines
NAIC: 481111 Scheduled Passenger Air Transportation; 481112 Scheduled Freight Air Transportation; 481211 Nonscheduled Chartered Passenger Air Transportation; 481212 Nonscheduled Chartered Freight Air Transportation; 561520 Tour Operators
Air Canada is the only national, full-service airline based in Canada. The corporation ranked as the seventh largest airline in North America and the 13th largest in the world in 2002. That year, Air Canada carried about 29 million passengers. In addition to its flagship full-service carrier, Air Canada also runs Tango, a low-fare air service operating on many Canadian and some U.S. routes; Zip, a low-fare carrier based in Calgary; and Air Canada Jazz, a regional carrier. Overall, the company serves nearly 170 destinations on five continents--but mainly North America--using a fleet of 330 aircraft, 100 of which are part of Air Canada Jazz's regional fleet. Through its membership in the Star Alliance, which also includes United Airlines, Lufthansa, Scandinavian Airlines System, and Thai Airways International, among several others, Air Canada offers service to more than 700 destinations in more than 100 countries. Air Canada provides both scheduled and chartered air transportation for passengers as well as cargo and also owns Air Canada Vacations, a major Canadian tour operator. Aeroplan, Air Canada's frequent flyer program, has more than six million members. Having survived privatization, the threat of scandal, and the industry's usual crises throughout its 65-years-plus history, Air Canada faced a whole host of challenges in the early 2000s that severely affected its financial health and led ultimately to the firm filing for bankruptcy protection in April 2003.
Under the administration of Prime Minister Mackenzie King, the Canadian government created Trans-Canada Air Lines (TCA) as a Crown corporation in 1937 to provide transcontinental airline service within Canada's borders. It was originally a wholly owned subsidiary of the government-owned Canadian National Railway Corporation. From its founding through 1959, the government-owned company had a complete monopoly on all of Canada's domestic air routes; it also had a monopoly on all trans-border routes (routes that crossed the Canadian border with the United States) until 1967. The federal Cabinet of Canada approved all of the airline's routes and fares, and government regulators issued licenses approved by the Cabinet for the airline.
But government sponsorship did not rule out competition. Canadian Pacific Limited, one of the country's railway giants, acquired and combined nine small private carriers to form Canadian Pacific Airlines (also known as CP Air), based in Vancouver, British Columbia, in the 1940s. In 1959 the Canadian government allowed CP Air to provide one flight each day in each direction between Vancouver and Montreal, Quebec. From that small bit of business, CP Air grew through 1965 to acquire an average of 12.7 percent--the total it was allowed by federal regulations--of the domestic intercontinental traffic formerly held by Air Canada. In 1967 the Canadian government further relaxed its regulations and allowed CP Air two flights per day and, by 1970, CP Air was permitted to gain 25 percent of the intercontinental traffic in Canada. Also in 1967 the Canadian government allowed CP Air, which was given the right to establish international air routes across the Pacific Ocean in 1948, to establish a route from Vancouver to San Francisco, California--the first trans-border route not flown by TCA. Despite the encroaching competition from CP Air and that airline's dominance in international routes across the Pacific Ocean, TCA held, by government fiat, a monopoly on all other international routes and intercontinental domestic air travel.
TCA adopted the name Air Canada in 1965. Government regulations set forth the next year prevented regional air carriers from competing with both Air Canada and CP Air, which were directed to work with the regional carriers to establish joint fare and commission arrangements and to cooperate on technical and servicing matters, including service to specific areas that required special equipment. Later, in 1969, the Canadian government established specific regions in which each of the five regional Canadian airlines could operate; those regulations lasted through the early 1980s.
Throughout the 1970s several pressures (many of which arose or were centered in the United States) challenged the Canadian government and the Air Canada monopoly. Larger jets for airline service provided air carriers with roomier vehicles, but high air fares, which were regulated in both the United States and Canada by federal agencies, prevented the efficient use of those vehicles. The power of consumers increased during the decade, and customers used that power to demand lower air fares from more competitive airlines. Information on how deregulated industries would perform was persuading many regulators, airline executives, and consumers that a regulated airline industry was not in the best interest of anyone. In the late 1970s these forces combined to gain the support of leading politicians in the United States. The deregulation process of the U.S. airline industry began, with Canadian politicians watching closely, especially as Canadian passengers increasingly chose U.S. airlines for their international and transcontinental flights to take advantage of lower fares and improved services.
When Parliament passed the Air Canada Act of 1978, the Crown corporation was finally subjected to the same regulations and regulatory agencies that other Canadian airlines faced, bringing it more fully into competition with CP Air and the other regional airlines that were then operating. That act ended the government's unique regulatory control over Air Canada's routes, fare structures, and services--control the government wielded over the company throughout its first 41 years of business. (The act also reorganized its ownership structure; Air Canada would no longer be a subsidiary of Canadian National Railway, becoming a direct wholly owned subsidiary of the Canadian government.) On March 23, 1979, the minister of transport removed all capacity restraints on CP Air's share of transcontinental traffic, and it was given a license to provide domestic transcontinental flights. CP Air established transcontinental service in May 1980 to compete directly with Air Canada. While these changes were occurring in its domestic competition, Air Canada was also facing increasing competition in international routes from American Airlines, British Airways, SwissAir, and Lufthansa.
By 1984 Air Canada hinted in its annual report that, to continue to compete with other international airlines, it would require a tremendous amount of new capital to replace its aging fleet of airliners with state-of-the-art jets. To upgrade its fleet, Air Canada was considering buying, between the years 1984 and 1993, more than 40 new airliners at a cost of more than C$135 million each; the company also stated that it did not believe it could finance such purchases from retained earnings. At that time, six airline companies were operating in Canada, and Air Canada, which had more than a 50 percent share of the market, owned and operated the country's only computer reservations system. This provided them with access to all of the major travel agents in Canada and enabled them to collect a fee from other airlines when their tickets were sold on the computerized system. CP Air, which was acquired by Pacific Western Airlines (an Alberta-based regional carrier) and renamed Canadian Airlines International Ltd. in the mid-1980s, established its own computerized reservation system, but in 1987 the two airlines' systems were merged into a single network called the Gemini Group Limited Partnership.
In 1985 then Transport Minister Donald Mazankowski said that the Canadian government was planning to allow Air Canada and the Canadian National Railways the freedom to operate as private companies. The Canadian public appeared to support that move. In its annual report for the year 1985, Air Canada said it was determined to resolve the challenges it faced from its competition by managing its own destiny and achieving "a standard of financial credibility that will ultimately enable the shareholder to pursue a course of private and employee equity participation." This statement pointed toward the direction the company intended to move and coincided with further relaxation of regulations that encouraged its domestic and international competitors.
The complete deregulation of Canada's airline industry was first proposed in a policy paper from Mazankowski to Parliament in July 1985. That policy was not enacted until Parliament passed the National Transportation Act of 1987, which became effective January 1, 1988. On April 12, 1988, Mazankowski, who was then the minister responsible for privatization, announced that Air Canada would be sold to the public as "market conditions permit" with an initial treasury issue of up to 45 percent of its shares. When it was announced, the sale was seen as the most ambitious act of privatization that the Canadian government had attempted thus far; Air Canada had assets of C$3.18 billion and revenues of C$3.13 billion in 1987. The sale was subjected to several conditions that were placed into the enabling legislation, which Parliament approved in August 1988.
The legislation stipulated several things: the company's headquarters would remain in Montreal, Quebec; the airline, for the indefinite future, would maintain major operational and overhaul centers at Winnipeg, Manitoba, and in Montreal and Toronto; no more than 45 percent of the company's shares would be sold and the proceeds would go to the airline, not to the government; employees would be given the first chance to buy shares in the company, small shareholders the second opportunity, followed by institutional investors and, finally, foreign investors; no individual shareholder would be allowed to hold more than 10 percent of the company's shares and foreign ownership was limited to 25 percent of the initial offering; and the government's 55 percent holding in the company would be voted in accordance with the private sector shareholders to give the company an arm's length relationship to the government.
On September 26, 1988, Air Canada filed the prospectus on its stock, stating that its net income after taxes was C$101 million for the year ended March 31, 1988. The price of the stock was set at C$8 per share. The company completed its IPO in October 1988, issuing 30.8 million shares--42.8 percent of the company's total. The company netted C$225.8 million on the C$246.2 million sale, with underwriting fees taking C$12.3 million and with the airline absorbing C$8 million in discounts to its employees. By the end of March 1989 the company's shares were trading at C$11.75 per share, and the stock hit a high of C$14.83 in August that same year.
Air Canada's efficacious move to becoming a private company was seen as a result of a successful public relations program directed by the company's chairman, Claude I. Taylor, and its president and chief executive officer, Pierre J. Jeanniot. The executives focused the public relations program on the company's employees, the media, communities, customers, and potential shareholders; this was done in two carefully structured parts--pre-announcement and post-announcement--that were designed to ensure the success of the move to privatization by emphasizing the company's strengths and competitive position as it worked to improve its service and operations.
In July 1989 the company completed its move to privatization with the filing of a prospectus for its second issue of stock. The company sold 41.1 million shares--for a total of 57 percent of its equity in the filing--at C$12 per share. Proceeds from that sale went to the government. As an indication of the issue's success, by the end of the first week after the shares were issued the company's stock was trading at C$12.75 per share. The company subsequently updated its fleet by ordering almost three dozen Airbus A320s jets. (The Canadian government later accused Brian Mulroney, prime minister at the time, of taking "kickbacks" in the deal, a charge that was eventually retracted.)
The company's operating results, however, did not reflect the enthusiastic welcome that its stock had met in the market. Air Canada reported losses of C$74 million in 1990 and C$218 million in 1991, and it reported that it had nearly two million fewer passengers in 1991 than in the previous year. The company blamed its losses and decreased passenger load on the combined effects of the economic recession and the falloff in travel that resulted from the war in the Persian Gulf. It also, however, was seen as being hurt extensively by the pressures of competition with other international carriers.
In July 1990 Jeanniot surprised his colleagues at Air Canada by announcing his retirement. Jeanniot, who spent 35 years with the company, told Traffic World magazine that he believed the time was right for him to retire: "I have done my time. A chief executive should not hang around forever." Jeanniot was replaced in early 1992 by Hollis L. Harris, a former top executive at Delta Airlines and Continental Airlines; he was named vice-chairman, president, and CEO.
The year that Harris joined Air Canada was a difficult one for his company and for the airline industry in general. Air Canada restructured its operations, eliminating five senior management positions, including four senior vice-presidents and the position of executive vice-president and chief operating officer; it also cut 250 other management positions and 100 administrative and technical support positions, all in an effort to save C$20 million a year. The restructuring was part of the move to cut operating expenses by 10 percent--C$300 million a year--by 1993 and was expected to be accompanied by a reduction of nonmanagement union employees later in 1992. The restructuring enhanced Harris's position in day-to-day operations and gave him direct responsibility for the six divisions that were formed in the restructuring. The Harris regimen would make Air Canada more competitive and, beginning in 1994, profitable once again.
The restructuring also resulted in the sale of Air Canada's "En Route" credit card operations to Diners Club of America, the selling of its Montreal headquarters building, and the relocating of its headquarters staff from downtown Montreal to Dorval Airport; in addition, the company enacted a plan to sell and lease back three of the Boeing 747-400s in its fleet. The restructuring was seen as a move to make Air Canada more efficient.
To gain further efficiencies, Air Canada proposed a merger in early 1992 with Canadian Airlines International, its primary Canadian competitor; the merger would have made Air Canada once again Canada's only international carrier. Canadian Airlines rebuffed Air Canada's merger proposal, however, and the idea was viewed as politically unpopular in Canada where it would have likely eliminated more than 10,000 jobs.
In 1994 Air Canada won long-coveted entree into the Japanese market (it had been prohibited by law from competing in Asia and South America since 1987) when the Canadian government appointed it to serve Osaka's new Kansai International Airport. The corporation took to warmer climes with relish after the signing of an "open skies" agreement between Canada and the United States in early 1995. Beginning with Atlanta, the carrier opened almost 30 new U.S. routes, mostly nonstop, within the year. They proved enduringly popular and profitable. The airline renovated its fleet of smaller aircraft with Canadair regional transports to provide flexibility on its shorter routes. Montreal and Vancouver airports were opened to U.S. carriers in 1997; Toronto followed in 1998.
Air Canada initiated code sharing agreements with U.S. carriers after gaining access to that market. Its networking took on a much larger scale with the creation of the Star Alliance in 1997, through which Air Canada, Lufthansa, Scandinavian Airlines System, Thai Airways International, and United Airlines (later joined by VARIG of Brazil) linked their routes. Each carrier also agreed to honor each other's frequent flyer miles. International fares accounted for more than half of passenger revenue, and the company continued to expand its services in this area while leveling off domestic growth.
Air Canada had record profits as well as a 60th anniversary to celebrate in 1997. As the company wooed patrons with refinements and innovations such as the Xerox Business Centres located in Maple Leaf Lounges and the Skyriders frequent flyer program for children, it reaped a net income of C$427 million on total revenues of more than C$5 billion. The airline's young fleet of 157 planes boasted one of the continent's best on-time records, carrying 40,000 passengers a day. The positive performance was tempered somewhat by a labor disruption among pilots for its regional subsidiaries. Air Canada divested itself of Northwest Territorial Airways Ltd. in June 1997 and the next month sold most of its interest in Galileo Canada Distribution Systems Inc.
Harris was succeeded by Lamar Durrett as president and CEO in May 1996. Durrett was a protégé of Harris's, having come to Air Canada with Harris in 1992 as executive vice-president and chief administrative officer; Durrett, like Harris, was an American. John Fraser succeeded Harris as chairman in August 1996.
Durrett's stint at the helm turned out to be short-lived and troubled. Despite the cost-cutting efforts of the early to mid-1990s, Air Canada remained one of the least efficient carriers in North America, and Durrett failed to move quickly enough with further efficiency initiatives. Durrett and his managers were also caught by surprise when the company's pilots went on strike in September 1998 to back up their demands for higher salaries. The strike lasted 13 days, costing Air Canada C$250 million and resulting in a loss of C$16 million for the year. Flight attendants, emboldened by their knowledge that management was desperate to avoid another strike, took the company to the brink of a walkout in July 1999, securing healthy wage increases in the process. Durrett suffered two further black eyes in 1999. In January a blizzard shut down Toronto's Pearson International Airport, and Air Canada did not respond well during the crisis, leaving thousands of angry passengers waiting for hours only to find out that their flights had been canceled. Air Canada also refused to pay fee increases that had been imposed at Pearson, and Durrett tried to get other airlines to do the same--an effort that was an embarrassing failure. By July 1999 Air Canada stock was trading at C$6.30, less than half its value 12 months earlier and more than 20 percent below its 1988 IPO price of C$8.
Durrett resigned under pressure in August 1999 and was replaced by Robert Milton, who at age 39 had been named president just three months earlier. Milton, another American, had been involved with Air Canada since 1992 when he was hired as a consultant to assist in reorganizing the airline's cargo division. Almost immediately after being appointed CEO, Milton found himself in the middle of a very public takeover battle.
By mid-1999 Canadian Airlines was in grave financial straits and verging on bankruptcy. Soon after taking the helm as CEO, Milton began pursuing a possible buyout of Canadian Airlines' lucrative international routes, but was quickly turned down. Canadian had already entered into secret negotiations with Onex Corporation, a Toronto-based leveraged buyout firm, and AMR Corporation, the parent of American Airlines and owner of a 25 percent stake in Canadian, about a possible takeover. Gerry Schwartz, head of Onex, soon started pursuing the takeover and merger of both Canadian and Air Canada. Milton responded with his own takeover bid, of Canadian Airlines, backed by Star Alliance partners United Airlines and Lufthansa. He also took Onex to court where he won a verdict that upheld a law stipulating that no single shareholder could own more than 10 percent of Air Canada. This scuttled the Onex bid, and Milton in December 1999 secured an agreement to take over Canadian Airlines at a bargain-basement price of C$61 million--but with a burdensome assumption of C$3.5 billion in Canadian Airlines debt and lease obligations. The acquisition was officially completed in July 2000, although integration moves began even earlier that year.
After discovering that Canadian Airlines was losing C$2 million per day, Milton and his managers put the integration of Canadian into Air Canada on a very fast track. The speed with which the two carrier networks were brought together triggered a period of mass chaos, particularly during the summer of 2000, when many customers were driven irate by canceled flights, departure delays, lost luggage, unhelpful agents, and other difficulties. The situation got so bad that Milton took to the airwaves in early August, promising in a series of ads that within 180 days, or by January 2001, the integration of the two carriers would be complete and the problems plaguing Air Canada would end. He did in fact meet this goal, and service gradually began to improve. Meanwhile, during 2000, the regional carriers of Air Canada and Canadian Airlines--AirBC, Air Nova, Air Ontario, and Canadian Regional Airlines--were merged into a single entity called Air Canada Regional Inc. (which was relaunched as Air Canada Jazz in April 2002).
Although Air Canada was now the sole Canadian full-service air carrier--controlling 80 percent of the nation's air-travel market and about 43 percent of the traffic between Canada and the United States--it was not without competition, and stiff competition at that. WestJet Airlines Ltd. had been operating out of Calgary since 1996, bringing to Canada the low-cost, no-frills airline concept pioneered by the very successful U.S. firm Southwest Airlines Co. Like Southwest, WestJet was a nonunion outfit, giving it a tremendous cost advantage over Air Canada and its heavily unionized workforce. It was in fact competition from WestJet that had brought Canadian Airlines to the brink of insolvency. WestJet, which also quickly established itself as one of the most profitable airlines in North America, expanded throughout western Canada during the late 1990s and then seized upon the opening offered by the Air Canada--Canadian Airlines merger to move into the eastern part of the country in the early 2000s. Milton responded in turn by launching two separate low-cost airlines. Tango began operations in November 2001 and was operated alongside the flagship Air Canada line, sharing its fleet. Zip, a low-fare carrier based in Calgary, began serving western Canada in September 2002; it was operated independently with its own management and fleet.
Competition was far from the only challenge facing Air Canada in the early 2000s. The company along with the entire North American airline industry was battered by an extremely negative operating environment. Business travel slowed down quite suddenly in late 2000 in concert with the faltering global economy and the implosion of the technology sector. The events of September 11, 2001, took a serious toll on the airline industry, and during 2002 air travel continued to be curtailed because of the ongoing economic slowdown and the threat of a U.S. war against Iraq. Air Canada consequently posted net losses of C$1.32 billion in 2001 and C$828 million in 2002. The launching of the Iraq war by the United States in early 2003, coupled with an outbreak of a different sort--that of sudden acute respiratory syndrome (SARS), which seriously affected Air Canada's Asian routes and operations at its Toronto hub--placed the company itself on the brink of bankruptcy, C$13 billion in debt. On April 1, 2003, Air Canada was forced to file for bankruptcy protection, despite several cost-cutting and capacity-reduction initiatives undertaken throughout this period of crisis. Air Canada's filing followed that of several major U.S. carriers, which had entered bankruptcy proceedings in 2002.
Air Canada initiated a host of restructuring efforts while moving toward an emergence from bankruptcy. Perhaps most crucially, the company attempted to reduce its annual operating expenses by 25 percent, or C$2.4 billion. New labor agreements were reached with the unions that involved wage cuts, layoffs, and more flexible work rules. One-quarter of the workforce, or about 10,000 workers, were likely to lose their jobs. Another important move was Air Canada's seeking of an infusion of at least C$700 million (US$517 million) in new equity from an outside investor. In September 2003 the corporation announced two finalists in the bidding for a major Air Canada stake: Victor Li, a powerful Hong Kong businessman with Canadian citizenship, and New York private-equity firm Cerberus Capital Management, L.P. Putting aside the pending emergence from bankruptcy, Air Canada faced the longer term challenge of finding a new business model under which it could successfully compete with WestJet and other discount upstarts.
Principal Subsidiaries
Jazz Air Inc.; ZIP Air Inc.; Aeroplan Limited Partnership; Touram Inc.; Wingco Leasing Inc.; Air Canada Capital Ltd.; Destina.ca Inc.
Principal Divisions
Passenger Operations; Cargo Operations; Air Canada Technical Services.
Principal Competitors
WestJet Airlines Ltd.; AMR Corporation; Delta Air Lines, Inc.; Continental Airlines, Inc.; UAL Corporation.
Further Reading
"Calling the Tune," Flight International, September 2, 2003, p. 37.
Came, Barry, "'Straight Out of Kafka': Mulroney Lashes Out at the Federal Government's Allegations," Maclean's, April 29, 1996.
Collins, David H., Wings Across Time: The Story of Air Canada, Toronto: Griffin House, 1978.
Dawson, Phil, "Air Canada: Sixty Years of Innovation and Progress," Airways, January/February 1998, pp. 19-27.
DeCloet, Derek, and Sean Silcoff, "Be Nice for a Change," Canadian Business, October 8, 1999, pp. 37-38, 40.
Enchin, Harvey, Geoffrey Rowan, and Stephen McHale, "An Airline Merger Fails to Fly," Globe and Mail, August 24, 1992, p. A1.
Flint, Perry, "The Business Is Actually Fun Again!," Air Transport World, June 1995.
------, "The World Has Changed Forever," Air Transport World, March 2003, pp. 22-24, 26.
Foster, Cecil, "Air Canada Searching for a New CEO After Jeanniot's Surprise Retirement," Traffic World, August 13, 1990.
------, "Tough Guys Don't Cuss," Canadian Business, February 1995.
Gibbon, Ann, "Harris, Managers Take Pay Cut," Globe and Mail, February 23, 1993, p. B1.
Goldenberg, Susan, Troubled Skies: Crisis, Competition and Control in Canada's Airline Industry, Whitby, Ont.: McGraw-Hill Ryerson, 1994.
Libin, Kevin, "Hard Reign," Canadian Business, May 26, 2003, pp. 107-10.
Macklem, Katherine, "Air Rage: After Months of Chaos, Air Canada's Tough-Guy Boss Insists the Worst Is Over," Maclean's, November 6, 2000, p. 68.
McKenna, Edward, "Air Canada Restructures," Aviation Week and Space Technology, May 4, 1992.
McMurdy, Deirdre, "The Style of Dixie," Maclean's, July 6, 1992, p. 96.
Millan, Luis, "Can No. 2 Fly Higher?," Canadian Business, May 29, 1998, pp. 50-53, 55.
Nicol, John, "Unfriendly Skies," Maclean's, May 22, 2000, p. 34.
Ouellet, Francine Vallee, "The Privatization of Air Canada," Canadian Business Review, Winter 1989, pp. 19+.
Oum, Tae Hoon, W.T. Stanbury, and Michael W. Tretheway, "Airline Deregulation in Canada and Its Economic Effects," Transportation Journal, Summer 1991.
Pigott, Peter, National Treasure: The History of Trans Canada Airlines, Madeira Park, B.C.: Harbour Publishing, 2001.
Shiffrin, Carole A., "Aggressive Start for Canadian Carriers in Open Skies Pact," Aviation Week and Space Technology, March 25, 1996.
Smith, Philip, It Seems Like Only Yesterday: Air Canada, the First 50 Years, Toronto: McClelland and Stewart, 1986.
Tower, Courtney, "Air Canada Charting Its Own Unique Flight Path(s)," Journal of Commerce and Commercial, August 13, 1997, p. 14A.
Turner, Craig, "Air Canada's Aboot-Face," Los Angeles Times, August 8, 1996.
Van Velzen, Andrew, and Craig Turner, "Canada Settles Suit, Apologizes to Ex-Premier; Courts," Los Angeles Times, January 1, 1997.
Verburg, Peter, "Dogfight," Canadian Business, September 17, 2001, p. 23.
— Bruce Vernyi
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