Air Canada`s Future lies abroad, Milton says

Robert Milton is pegging Air Canada`s future success on international and transborder routes, saying he ``couldn`t care less`` about domestic market share.
Mr. Milton, the airline`s chief executive officer, unveiled fresh details of his vision for a restructured Air Canada in an interview with an aviation magazine, saying the airline would cut capacity in the ``mature`` domestic market and focus more on the international and transborder markets.
“I couldn`t care less” about domestic market share, Mr. Milton told Airline Business magazine. “You will not see us grow in the domestic market.”
The article notes that the airline`s two potential equity sponsors are supportive of the proposed restructuring plan. Air Canada is hoping to finalize a deal with one of the potential investors next week, sources have told The Globe and Mail.

In the article published in the November issue, Mr. Milton is quoted as saying there is more potential for growth and profit on flights abroad than at home, where Air Canada is competing with WestJet Airlines Ltd. and other low-cost rivals. The airline will settle for about 50 per cent of the country`s domestic traffic, the article states.
Air Canada and its subsidiaries currently have about 65 per cent of the country`s domestic passenger traffic, as measured by revenue passenger miles, the most common gauge of market share.
Ben Cherniavsky, an analyst with Raymond James Ltd., said Air Canada`s plans to cut domestic capacity should be good for both Air Canada and WestJet
“I have been saying for a long time—since well before they filed for bankruptcy protection—that Air Canada needs to cut domestic capacity,” Mr. Cherniavsky said. “It sounds ... like Milton now recognizes the domestic market is mature.”

Air Canada spokeswoman Laura Cooke said the article presents an accurate reflection of Mr. Milton`s views.

It quotes the CEO as saying that Air Canada will continue to use its discount subsidiary Zip Air Inc. to compete against its discount rivals.

Mr. Milton told the magazine that Air Canada`s business plan for the future also involves using new, smaller jets to bypass its hubs and to provide more non-stop flights between secondary markets in Canada.

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Air Canada is planning to acquire 85 new jets with between 70 and 110 seats. Mr. Milton said the airline will also use these jets to serve more destinations in the United States, especially along the East Coast and California.

Despite Air Canada`s efforts to reduce its costs, Mr. Milton said Air Canada will not “trivialize the product” by turning itself into a domestic airline.

“It becomes a sweetened products offer ...,” Mr. Milton said. “To the extent it`s sustainable and profitable, we won`t compromise the product. We need some differentiation from our rivals.”

The article says the restructuring will erase billions of dollars in debt and lower Air Canada`s operating costs by about 20 per cent.

“We will have the most attractive balance sheet in the business,” Mr. Milton said.

Air Canada is looking to raise more than $1-billion in new equity through its creditors and a potential new equity sponsor.

Sources say Air Canada is hoping to finalize a deal with a potential equity investor next week. The insolvent airline had originally hoped to choose between competing bids—from Hong Kong businessman Victor Li or Cerberus Capital Management LP—by Friday.

But sources said the two potential investors are still completing their due diligence and have yet to submit their final, binding offers for the $700-million investment.

“Ultimately, they`ve got to come up with their [offer] and that gets discussed and negotiated,” said a person close to the restructuring.

The source said it is not crucial that Air Canada resolve the issue of how it will deal with the $1.5-billion unfunded liability in its pension plans before finalizing a deal with an equity sponsor. If a pension deal can`t be finalized in time, the equity agreement would be conditional on a resolution that is satisfactory to the investor.

“Ultimately, new money is always going to have the final say on what happens to a massive liability like the pension benefit,” the source said.

On Monday, Air Canada presented its unions and retirees with a new proposal on how to recapitalize the pension plans.

Air Canada has asked the unions to respond to the proposal by Friday.

“There has been some movement by the company,” said Hugh O`Reilly, a Toronto lawyer representing the International Association of Machinists. “We, along with other trade unions and the retiree groups, will consider the proposals and expect we will have a response in the coming days,” said Mr. O`Reilly, who declined further comment.

A source familiar with the discussions said that, during the meeting Monday, several creditors warned that the airline`s restructuring plan will not win creditor approval unless the unions back down on their pension demands.

“They said the unions should really grab at whatever is offered while they still had the chance because it was only going to get worse and soon the equity sponsors would come in and beat up the unions and the creditors after that. There was an attempt to get a message across to the unions,” the source said.

All sides have agreed to a variable funding process that would give Air Canada some flexibility in how it funds the deficit over 10 years. The unions and retirees have been pushing for the company to contribute more money to the pension plan in the first three years, while the airline wants to make larger contributions later.

In a note to employees, Air Canada said its revised proposal is based on a 10-year repayment schedule, which allows Air Canada to manage the pension deficit while satisfying the interests of the potential equity investors and other creditors.

 


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