When Canada's transport minister, David Collenette, took the extraordinary step of suspending the nation's antitrust laws last month, his hope was to spur a "market-driven restructuring" of the troubled Canadian airline industry.
So far, what he's got is a legal and political donnybrook.
A hostile takeover bid has been launched for the country's leading carrier, Air Canada, by a group that includes its only major rival, Canadian Airlines, plus American Airlines and Gerry Schwartz, a high-powered Toronto takeover artist.
Schwartz is suing Air Canada in one court while Air Canada is busy suing Schwartz and Collenette in two others. Securities regulators have launched an investigation into whether Collenette helped Schwartz engage in insider trading.
Airline unions, fearing the loss of as many as 10,000 jobs and hard-won seniority rights, are threatening an illegal strike that would bring air traffic in Canada to a halt.
Meanwhile, Collenette is coming under heavy attack by opposition politicians and even members of Parliament from his own party for appearing to open the door to Schwartz, at one time his party's chief fund-raiser, to create an unchecked airline monopoly that could run roughshod over consumers and employees.
Like most imbroglios in Canada, however, this one gets its real juice from widespread anxiety about American domination.
Last week, Robert Milton, the president of Air Canada, who happens to be American, charged that the hostile bid for his company was nothing more than a backdoor attempt by American Airlines to gain control of the Canadian airline industry. The next day, Donald Carty, American's Canadian-born chairman, flew home to declare it wasn't so--and chide the American Milton for cynically wrapping himself in the Canadian flag.
"There is nobody in Dallas interested in running a Canadian airline," Carty said, standing before a bank of Canadian flags.
Running one, no. But with more than $1 billion a year in airline traffic between the two countries, plus $500 million worth of feeder traffic flying south from Canada, U.S. carriers have a keen interest in making sure that they don't get shut out of the Canadian market when the restructuring is completed.
At the moment, Air Canada and United Airlines are partners through the Star alliance, which allows them to list each other's flights as their own on airline schedules as part of an elaborate "code sharing" arrangement.
Even closer bonds tie Canadian with American, dating back to 1993, when American invested $246 million in Canadian to keep it out of bankruptcy. In exchange, American got 15 percent of Canadian's stock, a lucrative contract to run Canadian's reservation service and a Vancouver hub from which it can serve the Pacific. American also received the power to block any major corporate decisions made by Canadian--in effect, a veto over any plan to restructure Canada's airline industry.
"What appears to be a dogfight between two Canadian rivals is really just an extension of the war going on south of the border between United and American," said Douglas Reid, a professor at the Queen's School of Business in Kingston, Ontario.
It is likely to be months before the whole thing is sorted out. Air Canada is preparing to launch a hostile bid for Canadian, perhaps backed by United. And the government's independent Competition Bureau is expected to issue an advisory report on how to salvage some form of competition in a market that, so far, has proved too small and spread out to support two profitable national carriers.
But many aviation experts believe, in the end, that Canadians will be forced to make the unpleasant choice of either accepting a national airline monopoly with some form of re-regulation, or opening up their skies to U.S. carriers.
"What Canadians are going to have to decide is whether they want to pay higher fares in order to have a maple leaf on their airplanes--because that's the real choice they face," said Roderick White, a professor at the Richard Ivy School of Business in London, Ontario.
Ever since privatizing Air Canada in 1988 and deregulating the airline industry, the government has taken extraordinary measures to sustain competition on domestic routes by propping up Canadian Airlines. The upstart was given special tax breaks, loan guarantees and even cheap deals on airplanes, as well as lucrative routes to the fast-growing Asian market. But every time Calgary, Alberta-based Canadian tried to move out of its base in western Canada to pick off some of Air Canada's lucrative business in the more populous eastern half of the country, Air Canada responded with new flights of its own along the same routes at the same times, which guaranteed that neither company would make money.
As a result of this ruinous competition, the two companies together have lost more than $1 billion over the past decade and Canadian now faces the prospect of running out of cash sometime next year.
Earlier this year, Air Canada proposed that it buy all of Canadian's profitable international routes, along with accompanying planes and crew, in exchange for $350 million in cash that Canadian could use to continue operating as a trimmed-down domestic carrier. But Canadian rejected the offer as "frivolous," saying the routes were worth five times that amount and, in any case, the shrunken carrier would be out of business within a year.
Instead, Canadian sought out Schwartz, a brilliant financier who has amassed a $5 billion empire of auto-parts makers, electronics companies and an airline caterer, to enter the fray. His $5.7 billion bid for both Canadian and Air Canada would create a monopoly airline with $6.5 billion in annual sales that avoids the messy prospect of a bankruptcy for Canadian. Although Schwartz proposed that the new entity would retain the Air Canada name, management and Montreal headquarters, Air Canada's directors rejected it as a backdoor effort to transfer $1 billion in corporate value from its shareholders to those of a failing competitor.
Schwartz's Onex Corp. has offered guarantees that, if successful in merging the two carriers, he would not abuse his monopoly position by raising air fares or cutting service to rural areas--and is even open to having some sort of mechanism for government to hold him to his promise.
But Schwartz, who started out selling freezers in Winnipeg and schooled himself on finance at Harvard Business School and the Wall Street investment firm Bear Stearns & Co., makes no bones about the fact that he and other investors would reap the benefit from the hundreds of millions of dollars in annual savings that would result from combining the two overlapping airline operations. Industry analysts now calculate that Schwartz could triple his initial $165 million airline investment within two or three years.
Based: Dorval, Quebec
President / CEO: Robert Milton (an American)
Main U.S. partner: United Airlines
1998 revenue: $3.8 billion
1998 loss: $10.3 million
Web address: www.aircanada.com
Based: Calgary, Alberta
President / CEO: Kevin Benson
Main U.S. partner: American Airlines
1998 revenue: $2.1 billion
1998 loss: $89.5 million
Web address: www.cdnair.ca
SOURCES: The companies, Hoover's, Bloomberg News