TURBULENCE: AIR & BOMBARDIER Introduction

In recent times two of Canada’s largest Business went from bad to worse. More Focus companies have fallen prey to the layoffs brought the total for the year to Two of Canada’s downturn in the world economy. Both 12 500. In addition, 84 planes were major transporta- grounded to reduce costs. tion companies Air Canada and Bombardier have have suffered incurred large debt loads, which may shares sold for just over $3. greatly since the destroy these Canadian business icons. By early October the government tragedy of 9/11. announced a $100-million aid package Can they weather Air Canada for Air Canada. It was far from the the storm and re- original $4-billion asked for, but was Air Canada’s current financial woes can emerge once again welcome nonetheless. Stock prices as giants in Cana- be traced back to the takeover of Cana- dropped to $1.64. dian industry? dian Airlines in 1999. It assumed a Incredibly, Air Canada launched two massive debt at that time and struggled new airlines within a month. Tango, a to remain profitable. By February 2001 it new discount carrier with limited routes YV Sections was reporting losses of over $200- and no frills sent up its first flight No- marked with this million in one quarter. Following this the vember 1, 2001. Robert Milton said: “In symbol indicate level of competition in the industry the post September 11 world of de- content suitable for increased with the inauguration of new younger viewers. pressed demand, a move in this direction discount carriers. lasted only a is all the more necessary, as we need to month before it ceased operations. Air aggressively promote all consumer Canada, wanting to enter the discount incentives that encourage and stimulate airlines arena, purchased controlling travel” (CBC News Online Staff, shares of Skyservice, Roots Air’s parent Toronto, October 10, 2001). The second company. Within weeks, Air Canada new airline, AC JETZ was designed to was asking its employees to reduce their provide a premium service to sports working hours to reduce costs. Despite teams and executives. this, Air Canada continued its efforts to By February Air Canada showed a loss launch its own regional discount airline. of $1.25-billion for the 2001 fiscal year. Air Canada shares were selling in the Stock prices rallied somewhat though, $12 range. By early September they had settling in at $4.70. dropped to $6.50 a share. The end of March and the beginning September 11, 2001, changed every- of April saw the inauguration of two thing. All air traffic was suspended more regional airlines from Air Canada: immediately after the tragedy of the twin in the east and in the west. By towers of the World Trade Center and April, Air Canada significantly reduced Air Canada accelerated its downward its flights to the Maritimes, citing the slide. Within days, flights across the new federal Security Tax of $24 as a Canada-U.S. border were reduced by 20 contributing factor. By November the per cent. By September 17 Robert new Jazz Airlines was cutting jobs. Milton, CEO of Air Canada, asked the In 2003 the pending war in Iraq drove government for up to $4-billion in cash up oil prices and weakened traveller and loan guarantees. He believed that the confidence. Once again, Air Canada company would falter without aid. He announced an annual loss in February of also knew that even with this aid, there $428-million. Air Canada called for would still be the need for layoffs.

CBC News in Review • May 2003 • Page 44 wage concessions by employees. Said meeting its financial obligations. CEO Robert Milton, “The outbreak of In January 2003 a new CEO, Paul war confirms our pressing need to Tellier, arrived and the restructuring of achieve our target of $650-million in Bombardier began. Dealing with a loss labour-cost savings in addition to the job for 2002 of over $615-million, Tellier reductions announced today. I regret the organized a re-evaluation of the impact of this decision on the many loyal company’s assets. With the downturn in employees affected, but we need to the economy, company assets were $2.2- accelerate our transformation into a billion less than originally expected. This leaner, lower-cost carrier” (CBC News loss of asset value plus the loss of rev- Online Staff, , March 2, 2003). enue from the previous year resulted in On April 1, 2003, Air Canada filed for the need for the company to make some bankruptcy protection. With the suspen- hard decisions. Tellier said: “We have sion of stock trading and putting, Air good products, good people, loyal cus- Canada had to either resolve its financial tomers, and good technology. We can difficulties or fold. On May 2, 2003, Air also rely on a strong backlog of orders, Canada asked its workers to accept a which provides our manufacturing further 10 per cent reduction in wages facilities with two or three years’ work” for 60 days while still negotiating job cuts. (Globe and Mail, Weber, 3 April 03). Tellier issued new stock to generate a Bombardier cash influx of $800-million. Acknowl- Bombardier Inc. began as a family edging the decisions of the past, Tellier business building and selling snowmo- stated, “This company has had perhaps biles in the 1940s. Over the past two too much growth over the last decade. decades it has expanded and diversified It’s not a question of selling more air- frequently. It now has four major divi- craft or more trains, but of making sure sions—aerospace, transportation, recre- these sales are profitable” (The Globe ation, and finance—which produce and Mail, Marotte, April 4, 2003). It was billions of dollars in revenue each year. decided to sell off portions of the com- The most significant portion of the pany to further solidify the revenue base industry is its aerospace division. Over for future operations. The recreational the years it bought out Canadair, de section of the company, which was its Havilland, and Lear, becoming a world historical core, will be sold. Other force in regional and executive air travel. divestitures include Bombardier’s de- The events of September 11, 2001, were fence services operation and the Belfast devastating to the company. Within City Airport holdings. All together the weeks, over 3600 employees had to be sale of these assets is expected to raise released, and orders for future aircraft $1.5-billion. Unfortunately, this restruc- construction fell significantly. The assets turing also includes the layoffs of 3000 of the company declined and the sol- employees in the aerospace division. It vency of the company deteriorated. With remains to be seen whether these efforts the loss of revenue the debt load became will succeed in saving this major Cana- severe. Bombardier faced difficulties in dian company. Responding Why might the demise of Air Canada and Bombardier be important to Canada and Canadians?

CBC News in Review • May 2003 • Page 45 TURBULENCE: AIR CANADA & BOMBARDIER YV Video Review

1. Which industry was most severely damaged by the events of Septem- As you review the video for this story, ber 11, 2001? carefully respond to these questions. 2. When air travel resumed a few days after the tragedy, what was the first reason for a reduction in passengers? Further Research To learn more 3. By September 19, 2001, how much money was estimated to have been about current conditions at these lost by the world’s airlines? two national corporate giants, visit 4. What happened to Canada’s second largest airline? www.aircanada.ca and www.bombardier.com 5. What was the result for Air Canada of its takeover of in 1999?

6. What is the difference between Air Canada and discount airlines like Westjet?

7. To counter the low-price economy airlines, what two new subsidiary airlines did Air Canada create?

8. How large a cut did Air Canada have to make in its payroll?

9. What is CEO Robert Milton’s goal for Air Canada?

10. What happened in March 2003 to make air travel even less desirable for people?

11. What was the result for Air Canada?

CBC News in Review • May 2003 • Page 46 12. Why is Bombardier affected by the downturn in the air industry? Did you know . . . In spite of all the recent failures in the airline industry world-wide, one Canadian company, Westjet Airlines, 13. What was the original product produced by Bombardier? based in , stands out as a solid success? 14. What problems did its rail division face with Amtrak?

15. What measures has CEO Paul Tellier taken to address the loss of profits in Bombardier?

16. How much does the Bombardier company owe?

17. What technologies have made air travel less necessary?

18. What reasons since 9/11 have caused a continued reduction in air travel?

CBC News in Review • May 2003 • Page 47 TURBULENCE: AIR CANADA & BOMBARDIER Backgrounder

Air Canada over $12-billion. The company was in Both Air Canada this financial position when the tragedy and Bombardier Air Canada began its life as Trans have long been Canada Air Lines in 1936. With $5- of 9/11 struck. Since that icons in Canadian million in seed money it purchased Canada has struggled to survive, laying industry. How did three planes from off thousands of workers and grounding they develop and (later known as Canadian Airlines) and whole fleets of aircraft. Finally, in April grow? began its first flights in 1937. Trans 2003, Air Canada filed for bankruptcy Canada Air Lines (TCA) was a subsid- protection, adding it to the list of com- panies devastated by the World Trade Definition iary of CN Rail, a crown corporation. A crown corpora- TCA was given exclusive rights to trans Center disaster. Many observers fear tion is a corpora- Canada and international travel, making that in the restructuring to come, many tion that is owned it “Canada’s airline.” Air travel became jobs will be lost, planes grounded, by the federal or more accessible, even romanticized, routes cut, and Air Canada shares provincial govern- and over the next 30 years, TCA ex- reduced to pennies or even nothing at all. ments of Canada. panded routes to places like the United States, Europe, Asia, and the Caribbean. Bombardier In 1965 the company name changed Bombardier began as a private com- to Air Canada. Canadian Pacific Air pany, established in 1942 by Joseph- was also given the right to fly outside Armand Bombardier, an inventor who Canada, allowing full competition developed a way to travel quickly over between the two carriers. snow. He produced the first snowmo- Air Canada continued to expand, biles. The company expanded to pro- buying out small regional carriers and duce industrial vehicles and by 1959 purchasing more planes. This led to an was producing the first Ski-Doos. increasing debt load. In 1987 Air By 1974 the company again ex- Canada went public, selling its first panded to begin production of under- shares at $8. By the end of the 1980s ground rail cars for Montreal. This led Canada had two major carriers: Air to the development of a full-fledged rail Canada and Canadian Airlines. For the stock industry. Bombardier is currently next several years these two companies one of the largest rail stock producers in battled for supremacy in the skies, the world. resulting in significant losses for both. In 1986 Bombardier bought out By 1992,with each losing $1-million Canadair, entering the aerospace indus- per day, the two companies began to try. It followed by purchasing Lear Jet discuss a merger. These talks collapsed, and Ireland’s Short Brothers. Included but were restarted in 1999 when Cana- in these expansions was the acquisition dian began to falter. After battling of de Havilland, making Bombardier against American Airlines and Onex the third largest civil aircraft manufac- Corporation for control over Canadian turer in the world. Airlines, Air Canada purchased a By 1988 Bombardier was manufac- controlling interest for $92-million. turing Sea-Doos and had begun to buy After assuming the debts of Cana- out small water-engine manufacturers dian, Air Canada’s a debt load soared to like Johnson and Evinrude. The com-

CBC News in Review • May 2003 • Page 48 pany even entered the world of ATVs leaves Bombardier in a tough position. Did you know . . . with its own four-wheeled vehicles. Its stock price has plummeted from the Across the globe By the end of January 2001 the mid 20s to less than $4 in early 2003. In over 300 aircraft have been company showed sales of over $13- January 2003 the company hired a new grounded by major billion. September 11 changed all that CEO, Paul Tellier. He came from airlines because of drastically. With the downturn in air Canadian National Railways where he the loss of business travel, there were fewer demands for earned a reputation for toughness, since 9/11? new aircraft. Sales declined, orders cutbacks, and success. Investors seemed were cancelled or postponed, and the to welcome his appointment. He has company began to have trouble. Now, initiated a series of asset sales, staff with over $13-billion in debt, Bombar- cuts, and new strategies to reduce the dier is experiencing serious difficulties current debt load and launch a new path and is looking to divest itself of a for the beleaguered company. Recently, number of its non-core assets. Com- the stock price has stabilized and new bined with significant layoffs, this contracts have been won.

To Do 1. In your notebook create a timeline that shows the comparative devel- opments of Air Canada and Bombardier from their inception to the present. Start with the birth of TCA (1936) and continue to the present day. Leave enough space to write in important developments.

2. What appears to be the most important recent development for the companies?

3. Explain your choice.

4. Describe the major similarities and differences in the development of these two Canadian companies.

5. What do you think is the likely future for both companies? Explain.

Bombardier ______

Air Canada______

CBC News in Review • May 2003 • Page 49 TURBULENCE: AIR CANADA & BOMBARDIER Hard Landing

The Air Canada Problem Since 9/11 Air Canada has tried to Both Air Canada restructure itself, creating low-cost and Bombardier Air Canada, as Canada’s premier air- have suffered as a line, found itself embroiled in a price carriers like Tango and Zip. These were result of the 9/11 war with its biggest competitor, Cana- created to reduce costs and compete tragedy. Were their dian Airlines. The two companies had with other low-cost carriers like current situations been rivals since the 1930s. Each had Westjet. Even these airlines have inevitable? Could struggled, finding the competition they have been routes across Canada and beyond. Each better prepared to believed they were entitled to be num- difficult. weather the eco- ber one. Price wars through the 1980s The war in Iraq, started in March nomic storm? and 1990s contributed to consistent 2003, has had a further impact on air losses quarter after quarter. Air Canada travel. Fewer and fewer people are bought out smaller competitors and the choosing to fly. They find it too expen- Did you know . . . “national” carrier assumed a growing sive, inconvenient, and unnecessary. Air Canada, in a bid debt load. Conference calls and the Internet have to boost air travel By 1999 Canadian Airlines could revolutionized world-wide communica- and support To- tions, making face-to-face meetings less ronto, launched a compete no longer. It was forced to special discount accept a merger with Air Canada. In the important. Complicating the situation program for travel process of negotiating the merger, Air more is the current SARS outbreak in to Toronto? It was Canada promised to absorb the employ- Toronto, , and other parts of called “Canada ees of Canadian. As well, Air Canada Canada. The situation in Toronto, with Loves Toronto” and the ban on travel recommended by the offered major assumed the debt of Canadian, bringing reductions for air its total debt up to $12-billion. This led World Health Organization, has yet travel to the city. to layoffs and reduced working hours. again impacted on air travel. People are Labour negotiations became difficult. now afraid to fly, not because of a Air Canada was barely surviving when possible terrorist attack, but in fear of the twin towers of the World Trade catching a disease. Center were brought down. It is no great surprise that Air Canada Immediately after the collapse of the was forced to seek bankruptcy protec- twin towers, Air Canada had no choice tion. but to suspend its flights. With the world in shock, air travel came to a The Bombardier Problem standstill. Losses ran into the millions Bombardier has been a victim of its for each day grounded, and once flights own success. Over the past two decades resumed a widespread fear of flying it expanded continuously, incurring a caused even further losses. debt load, always confident that future Air Canada requested aid from the earnings would cover it. The original government, but only a fraction of what division, recreational snowmobiles, was asked for was given. Labour strife expanded to include Sea-Doos, out- ensued. The unions were reluctant to board motors, and all-terrain vehicles allow layoffs or salary reductions. The (ATVs). Another division builds under- CEO, Robert Milton, insisted that it was ground rail cars and whole rail systems the only way to weather the storm, but for surface travel. Bombardier has even there was little agreement. developed its own bank, to assist cus-

CBC News in Review • May 2003 • Page 50 tomers in buying its products. More- able to meet its financial obligations. over, the company also owns the airport Bombardier was forced to find a way in Belfast, Ireland, and has plants in 12 to restructure itself to survive. A different countries. Its largest division smaller, leaner company might well is the aerospace industry, the most return to favour with investors and vulnerable to the impact of the losses at lenders. As well Bombardier is a leader the twin towers, the war in Iraq, and the in the regional jet industry. Smaller SARS epidemic. When airlines are airlines may well prefer to purchase collapsing, the need for new aircraft is these jets for more profitable shorter eliminated. The events of 9/11 hurt routes. This is a niche in the air industry Bombardier badly. Within weeks 3000 that has the potential to grow in these employees had to be laid off. Profits leaner times. dropped and the company became less

Responding 1. What might Air Canada have done over the past 20 years to reduce its vulnerability to the aftershocks of 9/11?

2. What makes Bombardier so vulnerable to the problems facing air carriers?

3. Which of these two companies is most likely to survive? Why?

4. Do you personally care if either of these Canadian companies survives? Explain your opinions fully.

CBC News in Review • May 2003 • Page 51 TURBULENCE: AIR CANADA & BOMBARDIER Flight Path

Air Canada is clearly fighting for its business in a different form. In an effort Did you know . . . very survival. Having accepted bank- to reassure creditors and shareholders, Air Canada’s 40 000 ruptcy protection, it is now in the the company has chosen to admit that employees have been asked to help position where it must develop a viable its assets had been previously inflated. out the struggling plan to restructure its future existence. Now it claims to be worth $2.2-billion airline by agreeing Costs must be significantly reduced and less than before. Part of Tellier’s plan to thousands of job value must be increased to promote air requires layoffs. Part requires a signifi- losses, heavy wage travel. Smaller planes will fly shorter cant roll-back in salary. Yet another cuts, and loss of distances. Major routes will remain. involves the sale of portions of the benefits totalling $1.17-billion? In Unprofitable routes may have to be company. The recreational division, your view, should dropped. Unions will have to be flexible which makes snowmobiles and Sea- employees do this? in order to maintain the company. Doos, is up for sale and should bring a Layoffs will likely occur and wages very good price. The proposed sale of cannot remain the same. All must work the airport of the City of Belfast and together to find the funds necessary to other non-core assets will bring in much survive. In the long run this approach needed funds to reduce debt. The sale can work for the benefit of all. of these portions of the company is Bombardier’s plans are very clear. designed to raise about $1.5-billion. In The new CEO, Paul Tellier, has devel- addition to this, a new share issue oped a plan designed to instil confi- brought in about $800-million. All this dence in the company, raise significant should significantly improve the cash operating income, and re-establish the flow of the company.

To Consider 1. Working in pairs, review and evaluate the courses of action proposed by each company. You may wish to visit www.aircanada.ca and www.bombardier.com for more details on these restructuring plans. Which is most likely to succeed? Why?

2. What role might the unions play in the success or failure of these efforts? What would you recommend to the labour leaders at Air Canada and Bombardier? Why?

CBC News in Review • May 2003 • Page 52 TURBULENCE: AIR CANADA & BOMBARDIER Crisis CEOS

Robert A. Milton, Air side of the border, there is none.” Did you know . . . Canada — Robert Milton, The Globe and Mail, has had to Chase, April 2, 2003 help out Air “We are in a fight for survival.” Canada several — Toronto Star, April 4, 2003 times in the past, Robert Milton graduated from the “The business model is broken and it including in 1992, Georgia Institute of Technology in 1983 must be fixed without burning any more 1996, 1999? with a Bachelor of Science Degree in furniture. Air Canada and our people Industrial Management. He founded need to embrace a new way of doing and was CEO of an aviation-related business.” — Robert Milton, The Globe consulting company. Later, in 1988, he and Mail, Reguly, April 2, 2003 established an overnight package ser- vice that was sold shortly thereafter. He “I would fault him on his relationship joined Air Canada in 1992 as a consult- with the unions. But it’s hard to have a ant. Working his way through the good relationship in the context of the hierarchy of the company, he was terrorist attacks, war in Iraq and—most appointed as a Senior Director in 1993 fundamentally—Air Canada’s shift and a Senior Vice President in 1995. By from a full-service model to a Westjet 1999 he was President and CEO of Air type of model.” — Karl Moore, The Canada, just in time to oversee the Globe and Mail, Marotte, April 2, 2003 merger with Canadian Airlines. “I’m just fascinated we got to this point What They Say About Robert without a lot more dialogue. Everyone Milton tells me he knows how to run an airline, “I think Robert Milton is a genius. He but in terms of management of people, has pursued a brilliant and innovative there’s no rapport. It’s a gun-to-the- strategy. If there is any criticism, it is head approach.” — Buzz Hargrove, The that he hasn’t been tough enough with Globe and Mail, Marotte, April 2, 2003 unions.” — Stanley Hartt, The Globe and Mail, McNish and McArthur, April Paul Tellier, Bombardier 5, 2003 A graduate of the universities of Ottawa and Oxford, Paul Tellier has managed a “Robert is very principled. He is not successful career as a federal civil going to take a sweetheart deal when he servant and held a number of public is about to ask the unions to make portfolios such as deputy minister of painful cuts.” — David O’Brien, The Indian and Northern Affairs (1979), Globe and Mail, McNish and deputy minister of Energy, Mines and McArthur, April 5, 2003 Resources (1982), Clerk of the Privy Council and Secretary to the Cabinet of “There needs to be comprehension that the Government of Canada (1985). you cannot operate in an integrated In 1992 he was appointed CEO and North American market where on one President of Canadian National Rail- side of the border there is massive way. In that capacity he revamped the government support and on the other scheduling and service of the railway,

CBC News in Review • May 2003 • Page 53 cutting numerous positions in the “My first priority is changing the cul- process. He took a weak company and ture of the company. This is not a made it one of North America’s most criticism of the past, but we are facing powerful firms. changing times and, as a result, Bom- He was appointed President and CEO bardier is moving into a new era. of Bombardier Inc. in January 2003. He Tighter accountability and financial has won numerous honours, including discipline are being applied across the Companion of the Order of Canada. corporation. Bombardier today is Tellier assumed the role of CEO with focused on value creation.” — Paul Bombardier while it was in the throes of Tellier, Toronto Star, Acharya and financial distress. He has come up with Yew, April 4, 2003 a plan of action designed to minimize the impact of the heavy debt load “Mr. Tellier has huge credibility so I carried by the company and to return wouldn’t count the company out. This the company to growth and profitabil- is perhaps what they need to do to pare ity. down and cut costs.” — Patricia Croft, Toronto Star, Acharya and Yew, April What They Say About Paul 4, 2003 Tellier “We will rebuild our credibility with “If Paul Tellier sold Fords, we’d all be investors with the action plan we are driving Edsels.” — Andrew Willis, The announcing today. The sale of our Globe and Mail, Willis, April 4, 2003 recreational products business provides a good balance between our asset “This (plan) does not give me any divestitures and the equity offering. comfort. All they’ve achieved is a Combined with our cost reduction deferral of the covenants for three programs, it gives us the financial quarters.” — Bay Street money man- flexibility we need going forward.” ager, The Globe and Mail, Marotte, — Paul Tellier, The Globe and Mail, April 4, 2003 Dixon, April 3, 2003

Responding 1. Would you want to be the CEO of either Bombardier or Air Canada? Explain.

CBC News in Review • May 2003 • Page 54 2. Consider the backgrounds of the two CEOs. Which do you think is better suited to his role? Why?

3. Compare the quotes concerning the two CEOs. What similarities and/or differences exist?

CBC News in Review • May 2003 • Page 55 TURBULENCE: AIR CANADA & BOMBARDIER YV Government Help?

Further Research Group Activity Canada’s federal Form into groups of three or four and discuss the following: political parties have strong views “Should the Government of Canada actively support , through financial on the survival of grants and loan guarantees, the recovery of Air Canada and Bombardier?” Bombardier and Air Complete a list of Pro and Con arguments for the chart below. Make sure Canada. Visit their you have good arguments supporting your positions. After the discussion, Web sites to deter- share your responses with your class. mine the most current position: Example: Pro – The United States Government provided a $15-billion pack- Bloc Québécois, age to support their airline industry. This makes international competition www.bloc unfair because Canadian air carriers did not receive a comparable package. quebecois.org, Canadian Alliance Con – Both Air Canada and Bombardier are private companies with stock for www.canadian sale on the stock exchange. Why should the government pay with our tax alliance.ca, Liberal money to resolve the results of poor money management in these companies? Party of Canada, www.liberal.ca, New Democratic Pro Arguments Con Arguments Party of Canada www.ndp.ca, or the Progressive Con- servative Party of Canada, www.pcparty.ca.

Extension 1. After a vigorous discussion of the issue, record a straw vote on the issue. Results: Pro______Con______

2. Consider passing on the results of your analysis and discussion to your local member of Parliament.

CBC News in Review • May 2003 • Page 56