Out of options and quickly running out of cash, Canadian Airlines moved quickly today to clear the way for its merger with Air Canada, leaving the Western Hemisphere's most expansive country with a single full-service airline.
The decision, reached over the weekend by Canadian's board of directors, ends a bitter takeover battle that began this summer when Canadian, backed by American Airlines and a politically connected Toronto buyout firm, launched a daring takeover bid for its larger and more profitable rival.
By the time a Quebec court had blocked the bid in early November, however, Air Canada had already committed $650 million to buying back its own stock and was launched on its own counter-bid for Canadian. A last-ditch effort to salvage Canadian's independence collapsed last week in New York when the other members of the Oneworld alliance--American, British Airways and Hong Kong's Cathay Pacific--refused to invest another $300 million to help Canadian restructure and stave off bankruptcy.
The modest $60 million price for Canadian shares reflects the dire financial condition of the airline, which is carrying $3 billion on its books and is expected to run out of cash sometime next spring. The struggling upstart, operating from its base in western Canada, has made a profit only once in the past decade.
Air Canada, which until a decade ago was a government-owned corporation, still has several hurdles to overcome to claim its prize.
The federal Competition Bureau will have to review it under an expedited procedure. And Parliament is debating legislation to reflect the one-airline reality that it had tried to avoid since deregulation of the industry a decade ago.
In an effort to maintain some competition, government officials are considering taking away gates and landing slots from Air Canada at Toronto's Pearson Airport or spinning off some of its regional carriers in the hope that they might compete head-on. But, hewing to the government's nationalistic approach to the airline industry, Transport Minister David Collenette has ruled out allowing U.S. carriers to provide point-to-point service within Canada.
More immediately, Air Canada says it will not proceed with the buyout if it cannot complete a satisfactory side deal with American, which holds one-quarter of Canadian's stock and would be due $650 million in the event of any change of control. American is said to be demanding that Air Canada continue to honor its code-sharing arrangements on Canadian's international routes while shifting the contract for operating the combined airline's reservation system to American's Sabre subsidiary.
Should the combination clear those hurdles, Air Canada would become the 10th-largest carrier in the world, with 250 jets, 40,000 employees and sales of $6 billion a year.
Air Canada officials said today they would continue to run Canadian as a separate, if somewhat trimmed down, subsidiary for at least a year before fully integrating the two operations. After years of bitter rivalry, getting the employees of the two carriers working, they acknowledge, will be particularly difficult. Air Canada employee groups have already said they will resist allowing their new colleagues to cut in front of them on the all-important seniority lists that determine who flies which routes.