Air Canada has reached a milestone agreement with AMR Corporation, parent company of American Airlines, on a wide range of issues. This agreement paves the way for Air Canada to purchase Canadian Airlines, operate it as a wholly owned subsidiary and proceed with the restructuring of Canada`s airline industry, pending clarification from the Canadian Government on outstanding regulatory and legislative issues.

After several weeks of negotiations, Air Canada and AMR have today signed a letter of intent providing for AMR`s divestiture of its equity investment in Canadian Airlines. Under the agreement, 853350 Alberta Ltd., a newly formed corporation owned in part by Air Canada, will pay between CAD $55 to $60 million to AMR for AMR`s convertible preferred shares in Canadian Airlines. AMR will therefore relinquish all governance rights. This purchase will be completed concurrently with the take-up of Canadian Airlines common shares.

The agreement between Air Canada and AMR also covers codesharing arrangements and frequent flyer programs that AMR`s subsidiary, American Airlines, currently has with Canadian Airlines. All Star Alliance carriers will have the opportunity to codeshare on Canadian Airlines flights. These codesharing and frequent flyer provisions, beneficial to AMR, Canadian Airlines, Air Canada and its Star Alliance partners, are valid for a ten year period. In addition, the agreement allows Air Canada to select the information technology services provider of its choice.

“Today`s agreement between Air Canada and AMR marks a very positive milestone in the restructuring of Canada`s airline industry,” said Robert Milton, Air Canada`s President and Chief Executive Officer. “I am completely satisfied that we have structured a deal that benefits our respective companies` shareholders, employees and customers. Stakeholders of Air Canada will continue to benefit from our membership in Star Alliance, the world`s largest airline alliance, and in addition will benefit from an expanded network through Canadian Airlines codesharing with American Airlines, one of the world`s premier airlines.

“Our agreement paves the way for orderly change and the development of a viable Canadian airline industry that can compete successfully in the global marketplace. We look forward to receiving clarification rapidly from the federal government on outstanding regulatory and legislative issues.”

Codesharing

American Airlines will maintain its code on Canadian Airlines` rationalized network. American Airlines will therefore maintain its code on all primary North American existing city pair links and certain secondary points. Should Canadian be absorbed fully into Air Canada within the ten year period, certain provisions will allow American to maintain its marketing presence in Canada.

Frequent Flyer Programs

American Airlines will maintain a non-exclusive frequent flyer program relationship with Canadian Airlines. Canadian Plus and AAdvantage members will be ensured continued accumulation and redemption benefits.
Sabre Management Services

Air Canada will migrate the information technology systems of Air Canada and Canadian Airlines to a common environment on a progressive basis. While Air Canada is not obliged to select Sabre as its service provider, it will consider Sabre on a competitive basis. Should the service agreement be terminated, AMR would receive the non-amortized portion of Sabre`s start-up costs, and all reasonable wind-up costs, not to exceed CAD $83 million.
The terms of the overall agreement represent a total amount not to exceed $143 million.
 

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