Canadian Airlines International Ltd

Canadian Airlines International Ltd. Planning AURORA

Prepared by Ron Murch and Tom Rohleder

SEPTEMBER 1993

John Delaney stood at his office window at Canadian Regional Airlines, looking out at Calgary’s autumn landscape. He had just finished telling Kevin Jenkins, President and CEO of Canadian Airlines International Ltd. (usually called just “Canadian”), that he would accept Jenkins’ offer to join Canadian as the Director of Canadian’s transition to the SABRE reservation system. “It’s done,” he thought to himself, “I may sink or swim, but this next year is bound to be one of the most interesting of my career.”

The transition of Canadian’s systems to the SABRE system would be the largest systems transition in the history of the airline industry. It was also the last step in cementing the strategic partnership agreement signed on December 29, 1992 between Canadian and AMR Corporation, parent of American Airlines. In exchange for AMR investing $246 million in Canadian, Canadian agreed to switch to AMR’s SABRE reservation system as part of a twenty-year system services agreement.

Canadian’s future hinged on a successful switch to SABRE. If the project failed, AMR would withdraw from the agreement and Canadian would lose the needed cash infusion of nearly a quarter billion dollars. The date for the transition was slated for November 5, 1994, leaving John Delaney just over a year to plan and execute the transition to the SABRE system. “Failure is not an option,” thought Delaney, “there’s nothing like unrelenting pressure to get people to succeed.”

Ron Murch and Tom Rohleder, with the assistance of Erin Williamson and Raj Nayak, prepared this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation.

The statements and opinions contained in this case are those of the individual contributors or advertisers, as indicated. The Publisher has used reasonable care and skill in compiling the content of this case. However, the Publisher and the Editors make no warranty as to the accuracy or completeness of any information on this case and accept no responsibility or liability for any inaccuracy or errors and omissions, or for any damage or injury to persons or property arising out of the use of the materials, instructions, methods or ideas contained on this case. This case may not be downloaded, reproduced, stored in a retrieval system, modified, made available on a network, used to create derivative works, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except (i) in the United States, as permitted under Section 107 or 108 of the 1976 United States Copyright Act, or internationally, as permitted by other applicable national copyright laws, or (ii) as expressly authorized on this case, or (iii) with the prior written permission of the authors. Requests for permission should be addressed to Ron Murch, University of Calgary, 2500 University Drive N.W., Calgary, Alberta, T2N 1N4, Canada. Copyright © 2001 by Ron Murch and Tom Rohleder. All rights reserved. BACKGROUND

Canadian Airlines International, Limited was officially formed on March 27, 1987; however, the roots of the airline go back to 1930. Through many mergers and acquisitions since then, including the amalgamation of four separate airlines in 1987, Canadian had assets of nearly $3 billion by 1990. In Canada’s airline industry, Canadian was the only national competitor to the formerly government-owned Air Canada (privatized in 1988). The two airlines competed head-to-head across Canada and were fierce rivals for several reasons. Clearly the fight over market share was a reason, but the rivalry went deeper. Due to the fact that Canadian was privately grown and developed and Air Canada was originally publicly funded and developed, they had very different cultures. Further increasing the rivalry was the fact that Air Canada was based in Eastern Canada (Montreal) and Canadian was based in the West (Calgary). For decades, tensions had been rising between the Eastern and Western provinces in Canada. By the early 1990’s tensions were peaking with Quebec’s desire for special privileges and even independence from Canada.

The four years that led up to the signing of the AMR deal on December 29, 1992 were ones of great turbulence not only for Canadian, but also for the Canadian airline industry as a whole. Deregulation was taking its toll on the industry and the previously highly regulated national airlines were ill prepared for the ensuing battle for market share. The Canadian experience in great part mirrored that of the American industry – deregulation fueled fierce competition between airlines resulting in fierce fare-cutting wars. In Canada, the fallout from deregulation was magnified due to the smaller size of the Canadian market. Air Canada and Canadian went head to head matching each other’s price and number of flights per route in a market where overcapacity was already a concern.

The beginning of the 1990s added two more nails to the coffin of airline profitability. The economy suffered a downturn causing air travel to fall. In particular, corporations drastically curtailed the airlines’ bread and butter revenue source  business travel. The second factor was the Gulf War, which resulted in significant increases in fuel prices.

By 1992, the two Canadian national carriers had piled up huge debt loads and the public began to question their financial viability. The long time rivalry between Air Canada and Canadian also took a new turn as the two engaged in a nasty campaign to discredit each other. The rivalry quickly became fodder for the media attention, which played out in Canadian living rooms every evening on the news.

However, by the summer of 1992 the financial situation at Canadian Airlines had become critical with a loss of $543.3 million following smaller losses the three previous years. The company was running out of cash and needed an investor (see Exhibits 1 - 3 for financial information). One obvious solution to the problem was a merger between Canadian and Air Canada. Not surprisingly, management, and particularly, the employees

Canadian Airlines International Ltd. Page 2 of Canadian were against such a joining of the rivals. While it was clear the merger would save Canadian, it would require substantial job reductions and reduce market competition. Thus, there were mixed views from all sides  the airlines’ employees, the passengers, and the government, whether such a merger was a good idea.

In the end, Canadian seemed reluctant to enter into such a merger and its employees even offered wage reductions in exchange for Canadian common stock for a four-year period to help the financial situation. This proposal combined with a debt-restructuring plan and the participation of an outside investor could save Canadian and avoid a merger with Air Canada. Emotions ran very high as Canadian’s top management and board debated what course to take, with employees even arranging a march in downtown Calgary to support their desire to avoid a merger.

THE WHITE KNIGHT

To make the employee proposal work, an external investor had to be found. Canadian made it clear it was looking for some sort of alliance that would allow a cash infusion. AMR, American Airlines finally came to the rescue in early 1992.

Over the next few months, the media chronicled the bizarre courtship between Canadian and its two suitors, Air Canada, and AMR Corporation of Fort Worth, Texas. After months of competition tribunal meetings and apparent deals falling apart at the last moment, Canadian signed a strategic partnership agreement with AMR in late December 1992. AMR agreed to invest $246 million in Canadian in exchange for a voting interest, an economic interest, and a 20-year services agreement that, among other arrangements, would require Canadian to switch its computer systems over to SABRE.

Table 1 lists the major services covered in the Services Agreement. Canadian’s annual cost of purchasing these services from AMR would be $100 million annually. Net savings were projected at $55 to $80 million annually, depending on how well AMR’s services, particularly SABRE, could handle Canadian’s needs. The Services Agreement was expected to result in a direct loss of 1,250 jobs at Canadian and an increase of 500 jobs at AMR.

Canadian Airlines International Ltd. Page 3 Table 1: Services to be Provided to Canadian By AMR’s SABRE System Accounting (Revenue/Corporate) Capacity Planning Cargo Financial Planning Food & Beverage Ground Operations (Airports) International Marketing Performance Operations Planning Pricing and Yield Management Purchasing Reservations Computer Technical Services

Other aspects of the alliance included a shareholder agreement that would now require two board members designated by Aurora. (Aurora was the name given to the entity set up in Canada to manage AMR’s investment in Canadian Airlines.) In addition, a reciprocal marketing agreement was established that allowed frequent flyer point exchanges between airlines. Longer term, this agreement could lead to the sharing of common flights and other joint marketing initiatives.

During the discussion of the alliance, Canadian raised several issues that caused concern. Some of these are:

 Loss of jobs  Impact on Canadian’s technological competency/advancement  Flying inconvenience to passengers  Change in flying routes handling Canadian’s long-haul flights

Both airlines believed these issues had to be managed appropriately for an effective alliance.

TRANSITION PROJECT: AURORA

AURORA was the name given to the systems migration project (primarily the conversion to SABRE). The scope of AURORA reached all areas and affected every employee at Canadian to some degree. As part of the services agreement, Canadian agreed to outsource 13 corporate services (see Table 1 for a complete list) including business critical functions, such as Pricing and Yield Management1. Some departments, including

1 Pricing and Yield Management’s role is to maximize revenue by effectively managing the fares offered for every seat on every flight and every booking class. A key part of this function is to anticipate the impact

Canadian Airlines International Ltd. Page 4 accounting and computer technical services, would effectively disappear from Canadian’s internal corporate structure. However, the people at Canadian were fully aware that without the alliance with AMR, Canadian’s future looked much more bleak and all 16,000 jobs at the airline were at risk of disappearing.

Prior to John Delaney’s hiring as Canadian’s Aurora Director, it was decided that the transition would be a 100% cutover from Canadian’s old systems to the SABRE reservations systems in one day (actually within a few hours). This approach was chosen because of the high degree of integration in the reservation systems of the airline. However, some thought was given to using phased or pilot approaches. These were rather quickly rejected and a date of November 5, 1994, was selected for the systems cutover.

Prior to the cutover date, John Delaney and his project team would be responsible for arranging the completion of the following activities:

 Swap over 6,000 hardware devices in 400 locations, worldwide;  Train an estimated 10,000 employees in a 96 day “window” leading up to cutover; and  Convert over 800,000 Passenger Name Records2 to the SABRE format.

All of Canadian’s 300 commercial and consumer reservations systems would be transferred from the current environment at Gemini (running a system called Pegasus) to AMR and the SABRE environment. Almost all would switch during the day of cutover. Two thirds of Canadian’s current information systems would be eliminated and replaced by SABRE systems. The remaining systems met specific functionality requirements of Canadian that were not available on SABRE. Even though these 100 systems would survive, they needed to be adapted to work in the SABRE environment.

Information systems are the lifeblood of any airline and Canadian would need to have its systems operational by the day after cutover. In addition, once Canadian switched from Pegasus to SABRE, there could be no turning back if the systems were not functional.

AMR’s SABRE systems comprise the largest non-government computer system in the world. Its travel database has access to 50 airlines, 2700 hotel properties, 35 tour companies, and 50 car rental firms. Over 100,000 workstations are linked to SABRE which handles up to 150 million incoming messages a day during the busy season.

of demand, competition, price, and currency changes in order to decide how many seats to sell at what fare, at what time and in which country. 2 Passenger Name Records (PNRs) contain all the necessary travel details for passengers, such as flight numbers, dates, origin and destination, class of service, and passenger name.

Canadian Airlines International Ltd. Page 5 Switching to the SABRE system would be beneficial to Canadian in many ways. The SABRE services agreement was expected to give Canadian access to substantial research and development resources that otherwise would be unattainable. SABRE was more integrated and had faster processing speeds than Canadian’s current systems. Notwithstanding, Canadian was losing support systems that were tailor-made to its operations and that were perceived as more user-friendly than SABRE.

The systems transition would be a difficult undertaking. American Airlines built SABRE for American Airlines, not for Canadian Airlines. SABRE was not equipped to meet some unique considerations associated with Canadian’s operations such as the range critical (international long-distance) and code-share flights.3 Thus, some customization of SABRE was required before it could meet the demands of Canadian’s operations.

GEMINI: ANOTHER OBSTACLE

In September 1993, the AURORA project was operating under a specter of uncertainty. Over the previous 9 months, Canadian had tried unsuccessfully to exit an existing services agreement with the Gemini Group. The company operated the Pegasus reservation system currently used by Canadian. If Canadian did not untangle itself from Gemini so it could enter the SABRE system, the alliance with AMR would not go ahead.

Canadian, Air Canada, and Covia, a subsidiary of United Airlines Corporation, owned Gemini Group equally. The three had become embroiled in a bitter legal dispute revolving around Canadian’s desire to withdraw from Pegasus. Not only was the dispute before Canada’s national Competition Tribunal, but each side, Canadian/AMR and Air Canada/Covia/Gemini, had launched lawsuits against the other. The parties were seeking damages in the hundreds of millions of dollars.

Prior to consummating the alliance with Canadian, AMR stipulated that the airline and its affiliates had to be clear of all liability surrounding Canadian’s withdrawal from the Gemini Group and its Pegasus reservation system. Canadian only had until the December 31st 1993 deadline to resolve the disagreement with its Gemini partners or AMR would pull out of the deal.

JOHN DELANEY: DIRECTOR OF AURORA

John Delaney’s involvement in AURORA was accidental. Canadian Regional underwent reorganization during August and his position became surplus. He was offered another job at Canadian, but decided not to accept. A week later, while he was in the midst of evaluating his career options, he received a phone call from Kevin Jenkins offering him the job of Director of the AURORA Project. He was already familiar with the transition

3 Code-Sharing is an arrangement among at least two airlines in which they both have rights to fly a particular route and arrange to “share” the same physical airplane (operated by one of the “partners”) on the same specific trip by using both carriers’ 2-letter designated code (i.e. CA and AA).

Canadian Airlines International Ltd. Page 6 project and had worked as Regional’s team leader for developing AURORA’s scope with regard to Regional.

Before accepting Jenkins’ offer, John weighed the pros and cons of the opportunity. Although John had no previous experience in the management of transition projects, he had an engineering degree, an MBA, and had demonstrated excellent management skills at Regional in areas including finance, human relations, communications, and strategic planning. Becoming Director of the project was attractive because it was a high profile position, there was a clear, and definable deliverable and it provided the opportunity to get to know AMR. Overall, the position would have a positive impact on his career. However, the time commitment would be high and would impact his family life. Before accepting the position, he had to discuss the matter with his family and prepare them for the next 14 months.

AURORA’S KEY PEOPLE

Another key factor in John Delaney’s decision to accept the position was the people with whom he would be working. He needed access to the most experienced people within the organization in order to make AURORA a success. Jenkins assured him that he would have that access, and had already identified some key people within the company that would be working on AURORA, including:

Brian Lupton, Director of Marketing Services He had a great deal of transition project experience resulting from planning 3 other transition projects at Wardair (which Canadian purchased in 1989). Brian had been involved with the project from the initial planning stage that occurred at the senior management level. Jacek “Jack” Romanowski, Director of System Operations Center All of Systems Operations4 had originally been slated to be outsourced to AMR, but Canadian re-evaluated that approach and decided to keep much of the expertise in- house. Canadian determined that some of their methods and technology were better than SABRE’s for Canadian’s specific needs. Jack had previous transition experience at CP Air and would be responsible for moving the appropriate operations systems to SABRE. Rob Muller, Director of Employee Training and Development He became involved at the initial planning stage and convinced Canadian to do its own training of 10,000 employees on the SABRE systems5. Rob needed to develop a

4 The Systems Operations Center manages the daily operating plan of the airline and includes flight dispatch, crew planning, flight and plane maintenance scheduling, catering and cargo planning. 5 AMR and Canadian had different training philosophies -- AMR believed in centralized training whereas Canadian believed in centralized training planning with local delivery. Canadian decided that its method of training would be more cost-effective and result in $5 million (CDN) savings against original, planned

Canadian Airlines International Ltd. Page 7 training program, which would include over 15 courses on SABRE and coordinate the schedule with the overall project plan.

PROJECT RESOURCES

The critical state of Canadian’s financial situation precluded acquiring additional resources to work on AURORA. Strict budgetary controls were to be enforced and employees were expected to work on AURORA in addition to their regular duties. By the time John Delaney agreed to join the project, AURORA had already earned the nickname “the hobby project.” The only people who would work on AURORA full-time were those in the Project Office, which now included John and three other employees — a manager, a business analyst, and a secretary. This number was not expected to increase during the life of the project. On the other hand, AMR was able to provide substantial dedicated resources to work on AURORA. John was not initially sure how this imbalance of resource allocation would affect the project.

Given the nature of the project and the leanness of the operation, careful management of the limited human resources would be vital to the success of AURORA. Canadian had already identified the possible loss of key staff in such areas as computer technical services and the potential burnout of people working on AURORA as high priority items to be addressed by the Project Office. In any event, many of the people involved in AURORA would “transition” themselves out of their jobs.

Financial resources were also very limited – especially from Canadian’s side. Nonetheless, the survival of the airline depended on the successful completion of the project. Thus, substantial funds were made available to support the project. (For confidentiality, an exact project cost was not made available.) AMR did not have the tight financial restrictions Canadian had, but they were still concerned about spending too much on the project and over-relying on their more ample resources.

CUSTOMER SERVICE: CANADIAN’S BUSINESS FOCUS

In 1990, Canadian was coping with the impact of five recent mergers that effectively changed the company. The most recent acquisition, the 1989 purchase of Wardair for $251 million required the elimination of 1,900 jobs (about half of these were at Canadian). The whole company became focused on solving internal organization issues including overcoming cultural differences and eliminating overlapping services. This emphasis on internal matters had resulted in deteriorating customer service – Canadian was failing to meet the service expectations that customers had come to expect from the company. A drop in profits and a rise in customer complaints earned the attention of senior management and they decided to implement a service-quality program in order to refocus the company on the customer. training expenditures.

Canadian Airlines International Ltd. Page 8 The goals of the program were to enhance service standards, reduce costs, and improve core-business processes. A key part of the program was employee involvement. Employees received quality skills training and worked in teams to change the systems and processes associated with their jobs. The resulting productivity gains flowed out from the teamwork of management and front-line employees.

The program was based on the five principles shown in Table 2 (developed by Canadian in conjunction with Zenger-Miller6). Since the time of the program’s inception, the Service Quality principles and guidelines have permeated throughout the entire organization and have become an integral part of Canadian’s corporate culture. Now the key over-riding issue in their corporate decision-making processes is “What is the impact on the customer?”

Table 2: Service Quality Leadership Principles 1. Focus on the issue not the person 2. Maintain the self-esteem and self-confidence of others 3. Maintain strong partnerships with suppliers and customers 4. Take the initiative to improve work processes and partnerships 5. Lead by example DIFFERENCES BETWEEN CANADIAN AND AMR

Many people questioned the wisdom of Canadian’s decision to enter into an alliance with AMR and feared that Canadian would simply become a subsidiary of the much larger AMR Corporation of Dallas, Texas. In fact, that was the major argument used by Air Canada to convince the Competition Tribunal to not let Canadian leave the Gemini services agreement and switch to SABRE.

Admittedly, the two companies were very different and the success of their strategic partnership would depend on both companies learning effective methods of dealing with their differences. AMR Corporation was seven times the size of Canadian and had grown entirely through internal growth. In contrast, Canadian had pursued a merger and acquisition growth strategy as well as creating an international alliance network with other airlines.7 A brief overview of the two companies’ size and structure is shown in Table 3.

While Canadian had successfully wrestled with their recent mergers and had turned the customer service issue around, AMR continued to be strong and generally profitable,

6 The impact and experiences with Canadian’s training program (including their approach to Customer Service) were described in an excellent article, Training For Change, by Rob Muller, in Canadian Business Review, Spring 1995 7 These airlines included Air New Zealand, Alitalia, Japan Airlines, Lufthansa, Malaysia Airlines, Mandarin Airlines, Qantas Airways, and Varig Brazilian Airlines.

Canadian Airlines International Ltd. Page 9 even in the tough U.S. market. However, AMR Corp had recently been involved in a joint venture partnership with Budget Rent-A-Car, Marriott Corp. and Hilton Hotels to develop a new computerized reservation system called Confirm. Between 1988 and 1992 over $100 million had been invested in Confirm, but by 1992, the service was falling far short of expectations. AMR had settled with Marriott and Hilton, but Budget had sued for the return of its original investment of approximately $20 million and additional compensation of an undisclosed amount. Budget had alleged that AMR covered up serious problems with Confirm in order to keep the other partners investing in the project. At the time of this case, AMR had already spent $165 million on the Confirm project and was facing additional costs if Budget’s lawsuit was successful.

Table 3: Canadian’s and AMR’s Corporate Structure (as of 1994) Canadian Airlines International Ltd. AMR Corporation (and its partners) (American Airlines) Headquartered in Calgary, Alberta Headquartered in Ft. Worth, Texas 16,000 Employees 118,980 Employees 80 Planes 650 Planes 121 Destinations 176 Destinations 2,408 Flights per Week 17,360 Flights per Week Hubs in Vancouver, Calgary, Toronto Hubs in Chicago, Dallas/Ft. Worth, Miami, Nashville, Raleigh-Durham, San Juan Revenues - $3 Billion CDN (1993) Revenues - $15.8 Billion US (1993)

THE KEY TASK: PROJECT PLANNING

John Delaney looked out the window for a few more minutes before returning to his desk. He only had a week to clear up everything at Canadian Regional before moving to the AURORA Project Office at Canadian.

He was looking forward to the challenge of his new position. The first order of business was to bring AURORA down through the organization to the people who would be implementing the project. Canadian’s senior management team had already established the high-level planning framework for AURORA. In particular, a parallel reporting structure had been established. At the top level, Kevin Jenkins represented Canadian Airlines, and Don Carty (AMR’s CFO) represented American Airlines. From the Canadian side, John’s major task was to develop the detailed project plan (in conjunction with his AMR counterpart).

Immediately after tying up the loose ends at Canadian Regional, Jenkins and Carty asked John to make a short presentation on how he would lead the Aurora Project to success

Canadian Airlines International Ltd. Page 10 from the Canadian side. In his presentation Jenkins and Carty asked John to address at least the following key issues:

 An appropriate structure for Canadian and American to work together on the project. This structure should recognize the different cultures, motivations and resources.  In general, how should the project be structured? What are the major objectives of the project and how will success of the project be measured?  How will project control and communication be managed?  In terms of how people will be managed and treated over the course of the project, what major values will be emphasized?

Jenkins and Carty also wanted John to present his thoughts on any additional issues that he felt were particularly important.

AURORA’s success was critical to the future of Canadian Airlines International and John knew that the planning would be the determining factor of the project’s success. “How does one plan for the largest systems transition in history?” said John Delaney to himself. “Success may not mean perfection, but in this case it had better be awfully close.”

Canadian Airlines International Ltd. Page 11 EXHIBIT 1. CONSOLIDATED BALANCE SHEET (In $Million CDN)

Canadian Airlines International Ltd. Page 12 Consolidated Balance Sheet for Canadian Airlines (Figures shown in millions) 1989 1990 1991 1992 Assets

Current Assets Cash & Short term investments 74.30 179.60 185.80 107.60 Accounts Receivables 211.60 247.00 237.20 218.00 Materials and Supplies 114.10 134.80 163.60 153.90 Deposits and Prepaid Expenses 35.60 31.10 Other Current Assets 36.50 117.40 436.50 678.80 622.20 510.60 Other Investments 123.80 130.50 109.50 2.20

Property and Equipment, at cost Flight Equipment 1,968.10 1,854.70 1,672.90 1,706.90 Land, buildings and Ground Equipment 387.60 413.70 472.80 464.30 Deposits on Flight Equipment 172.40 146.70 120.00 15.40 2,528.10 2,415.10 2,265.70 2,186.60 Accumulated Depreciation (261.50) (371.60) (339.70) (402.90) 2,266.60 2,043.50 1,926.00 1,783.70 Other Assets 84.70 111.60 153.40 165.40 2,911.60 2,964.40 2,811.10 2,461.90

Liabilities and Shareholders Equity

Current Liabilities Short Term Debt 25.90 19.90 9.70 Accounts Payable and Accrued Liabilities 573.80 576.10 514.00 563.90 Deferred Salaries, interest and operating Lease payments Accrual for restructuring costs Advance Ticket Sales 164.40 179.70 171.20 166.00 Current Portion of Long Term Debt and Capital Lease Obligations 108.40 131.90 846.60 913.60 705.10 739.60 Long Term Debt and Capital Lease Obligations, Others 1,097.30 1,068.10 1,196.70 1,322.10 Deferred Gain on Sale-Leaseback of Aircraft 21.70 13.30 Deferred Credits 8.00 19.00 Preferred Shares of Subsidiary Deferred Income Taxes 74.40 37.50 2,040.00 2,032.50 1,909.80 2,080.70 Subordinated Perpetual Debt 76.70 76.70 103.30 Minority Interest 4.80 3.10 Convertible Debentures and Shareholders equity Convertible Subordinated Debentures 249.80 249.80 249.80 249.80

Shareholders Equity Capital Stock First Preferred Shares, Series A 44.50 43.40 42.60 41.80 Common Shares 427.50 431.10 562.30 563.40 Retained earnings 149.80 130.90 (34.90) (580.20) 621.80 605.40 570.00 25.00 871.60 855.20 Total Liabilities and Shareholders' Equity 2,911.60 2,964.40 2,811.10 2,461.90

Canadian Airlines International Ltd. Page 13 EXHIBIT 2. CHANGES IN FINANCIAL POSITION (In $Million CDN)

Canadian Airlines International Ltd. Page 14 Changes in Financial Position (All figures in millions)

Years Ended December 31 1989 1990 1991 1992

Cash provided by (Used for) Operating Activities Loss (56.00) (14.60) (161.70) (543.30) Add(Deduct) items not involving Cash Depreciation and Amortization 95.70 81.50 127.80 125.30 Deferred Income Taxes (69.40) (24.00) (53.50) Employee Share entitlement contributions Gain on Sale of Property and Equipment (18.60) (51.40) (23.50) 6.30 Restructuring Costs 236.50 Annual Premium on preferred shares of subsidiary Other (22.90) (34.50) (13.10) (14.60) Funds From Operations (71.20) (43.00) (124.00) (189.80)

Change in Non-Cash Working Capital Items Related to operations 73.80 (60.40) (96.00) 83.40 Net Cash Flow from Operations 2.60 (103.40) (220.00) (106.40)

Financing Activities Issue of Common Shares 218.90 3.60 131.20 1.10 Issuance of Long Term Debt LongTerm Debt and Capital Lease Obligations (181.00) (14.30) (192.70) 82.30 Subordinated Perpetual Debt 76.70 58.40 (0.20) Issuance of preferred shares of subsidiary Retraction and Purchase of Preferred Shares (30.00) (1.10) (0.80) (0.80) Dividends on Preferred Shares (6.50) (4.30) (4.10) (2.00) 1.40 60.60 (8.00) 80.40 Investing Activities Disposal of Property and Equipment 113.40 367.50 451.90 207.80 Purchase of Property and Equipment (101.40) (222.60) (497.60) (293.30) Sale - leaseback of aircraft 333.60 Deposits on Flight Equipment (53.10) 20.40 31.00 76.50 Acquizition of Subsidiary (219.80) 35.80 Investments (12.30) (26.30) (6.80) Other 29.90 (16.80) (36.10) (33.00) (243.30) 122.20 240.20 (42.00) Increase(Decrease) in Cash (239.30) 79.40 12.20 (68.00) Cash at the Beginning of Year 313.60 74.30 153.70 165.90 Cash at End of Year 74.30 153.70 165.90 97.90

EXHIBIT 3. CONSOLIDATED STATEMENT OF LOSS (In $Million CDN)

Canadian Airlines International Ltd. Page 15 Consolidated Statement of Loss Year Ended December 31 1989 1990 1991 1992

Balance at beginning of year 212.30 149.80 130.90 (34.90) Loss (56.00) (14.60) (161.70) (543.30) 156.30 135.20 (30.80) (578.20) Dividends on Preferred Shares (6.50) (4.30) (4.10) (2.00) Balance at End of Year 149.80 130.90 (34.90) (580.20)

Canadian Airlines International Ltd. Page 16