Proceedings of the Standing Senate Committee on
Issue 3 - Evidence
OTTAWA, Tuesday, November 2, 1999
The Standing Senate Committee on Transport and Communications, pursuant to subsection 47(5) of the Canada Transportation Act, met this day at 9:30 a.m. to consider the order in council authorizing certain major air carriers and persons to negotiate and enter into any conditional agreement.
Senator Lise Bacon (Chairman) in the Chair.
The Chairman: We are meeting today following the order in council authorizing certain major air carriers and persons to negotiate and enter into any conditional agreement.
Our witnesses this morning are from Onex Corporation. Mr. Gerald Schwartz is the chairman and chief executive officer; Mr. Nigel Wright is principal.
Gentlemen, we welcome both of you. We have heard and read much about you, Mr. Schwartz, and we are pleased to have you here this morning. I invite you to make your presentation and then you may both answer questions from the senators.
Mr. Gerald Schwartz, Chairman and Chief Executive Officer, Onex Corporation: Madam Chairman, members of the committee, I appreciate this opportunity to meet with you to explain the Onex proposal and to answer your questions.
Madam Chairman, the Onex plan to merge Canada's two airlines is first and foremost a business plan. It is our best effort to convince shareholders that we have the ingenuity and the creativity to solve the challenges of a chronically troubled industry.
One of the things I have learned in business is that neither shareholders nor legislators buy "smoke and mirrors"; they buy the track record, they buy plans and they buy long-term commitment. However, our proposal is more than just a business plan. It is also a public policy initiative aimed at a compelling public policy challenge.
Airlines are part of the fabric of this country. They are central to our history. In this very century they have helped us to complete the work of the early explorers, and today they overcome the distances that challenge commerce, communication and understanding.
This country deserves the best airline service possible -- an airline industry that is effective, dependable and profitable, that provides stable employment and the prospect of job growth, better prices and more non-stop flights for consumers. I believe we have the plan that will make those objectives a reality.
Until recently, Onex was certainly not a household name. Let me take a moment to tell you who we are. Onex is a Canadian-owned, Canadian-managed and Canadian-based company. We buy businesses -- sometimes businesses that need help -- and we fix them. We increase value for our shareholders and create jobs for our employees by making those businesses successful. Historically, we have been massive job creators. Our priority is building companies. We are in business for the long term.
Let me turn now to the airline industry itself.
There are two major reasons why we wish to merge Air Canada and Canadian Airlines. First, the industry is broken. In the last decade it has lost employees' jobs, raised prices to consumers, and diminished shareholders' value. It has required bailouts from taxpayers, employees and a foreign carrier.
Second, we wish to realize the vision we have for a New Air Canada -- as a profitable carrier that builds strength around the globe. It is a vision based on competitive prices, excellent service and stable airline jobs at home. Moreover, this new vision can be realized without public money.
Since we announced our plan on August 24, I have been travelling across Canada. I have been speaking with shareholders, employees of both airlines and their union leadership, and many other Canadians. I have also had the opportunity to speak with a number of MPs and senators. We have listened closely to what people have been saying. Most Canadians have told us that they support our plan to revitalize the industry; however, many have also expressed the thought that we could do better. Therefore, last Thursday, having acted on what we had heard, we announced a number of significant improvements to the original Onex plan. I wish to tell you about several of those improvements.
First, the revised offer gives shareholders a choice of either $13 a share in cash or one share of the New Air Canada. Second, we felt we needed to address the issue of foreign ownership and control, because we recognize that that issue resonates deeply with Canadians.
For instance, despite the repeated assurances of AMR, the parent company of American Airlines, that they had no interest in controlling a foreign airline, the issue was becoming a barrier to fair consideration of the Onex plan. That was not right. we have therefore removed that barrier. Under our enhanced plan, AMR will have no voting rights in the New Air Canada. It will immediately, after closing, sell its equity to Canadian shareholders other than Onex. AMR has given up any board membership and AMR has agreed that it will never buy shares of Air Canada.
All of that means that there will be no foreign ownership or control involved in the Onex plan. In contrast, the counterproposal made by Air Canada's management, which is substantially financed by Lufthansa and United Airlines, would put enormous control of Air Canada in Frankfurt and Chicago.
Our enhanced plan also increases employee protection. As a result of extensive consultations with union leadership of both airlines, we have agreed that there will be no involuntary job layoffs. That is because analysis has shown both them and us that normal retirement and turnover, plus voluntary severance packages, can cover the full number of job reductions. Another aspect of employee protection is that in most cases the New Air Canada will be able to maintain separate seniority lists for the two companies all the way through to the next Air Canada bargaining dates, which are in the year 2002.
Because we worked closely with the unions and reworked our plans, I can tell you that more than 400 jobs, in functions such as revenue accounting and yield management, will be repatriated to Canada from the United States and put in Western Canada and Montreal. Moreover, the New Air Canada will be fully compliant with the Official Languages Act, and our enhanced offer also removes the condition relating to section 47.
Honourable senators, we welcome reviews by the Competition Bureau and by the Canadian Transportation Agency and the Department of Transportation. We are confident that we will be able to satisfactorily address any issues raised in those processes.
Allow me now to address the matter of the 10 per cent restriction. As you know, we would like the limit to be raised. Raising the limit is really all about the accountability of the board of directors and of management. Raising the limit is critical to the ability of shareholders to hold the board's and management's feet to the fire, making them accountable for the company's success or failure. Today, they are not accountable to anyone. Currently, the 10 per cent ownership restriction serves only to keep in place an entrenched board of directors, a board that has no need to be responsive to its own shareholders or to anyone else.
Canadians are rightly concerned about what will happen when a large dominant airline is created. Although almost every country in the world has that situation, it will be new for us. Therefore, Canadians want to know how they can be assured that they will not be held hostage by that new carrier. Part of the answer to that question will come from you, as you consider the advice you will give to the minister later this month. However, answers can also be found in the competing proposals.
The proposal that Air Canada's management has put on the table claims to support competition; but it does not. In response to a two-carrier system that clearly does not work, Air Canada has proposed four airlines -- all to be owned 100 per cent by them -- Air Canada, Canadian Airlines, Air Canada connectors and a new low-cost company yet to be established. It is widely recognized by competition experts that companies controlled by the same owner do not, and cannot, compete in any real sense. Air Canada's proposal would deny the synergies of merger and cost savings that can be invested in better service and lower prices.
As for the Air Canada management proposal to enter competition in the low-cost sector, that is truly to propose a monopoly. As things stand, competition comes from the charter airlines and independent regionals, but Air Canada wants to end even that. In fact "competition chill" has already started. PemAir/Trillium Air recently cancelled expansion plans in Hamilton. The company's president was quoted as saying that "We trust that the public will understand that we have no other practical choice, knowing that Air Canada will tolerate no competition."
The president of WestJet, a very successful company started in Western Canada, has voiced similar concerns.
Having said that, how would we encourage competition? We recognize our responsibility to help in sustaining a robust, competitive environment in Canada's airline industry. It is in our interest too, because competition sparks innovation and excellence. Competition in the airline industry is about access -- access to routes, to networks, to connections and to services. For that reason, we have committed in writing to provide access to our network for the independent carriers. That includes interline services, frequent flier program participation, access to airport and other facilities, maintenance and other necessary services.
The New Air Canada will also face competition in another important respect: on international routes it will face competition both from competing Canadian carriers and from foreign carriers. That is the situation now. In fact, Air Canada and Canadian, combined, have only 34 per cent of the international travel of Canadians. Competition for international traffic is already robust and will continue that way.
Finally, Madam Chairman, to give further assurance to Canadians, we have made an unprecedented commitment to freeze published fares for travel in Canada for five years, subject only to increases in inflation and non-controllable costs, such as fuel and landing fees. That compares to actual increases of up to 150 per cent of the rate of inflation in the past five years.
That is just one of the many commitments to Canadians that we put in writing a couple of weeks ago when we published this document. This document covers service to smaller communities, the continuation of seat sales, enhanced bilingualism, enhanced frequent-flyer programs and other commitments. No other bidder has made these commitments in writing or offered to be made accountable for them.
Madam Chairman, I am a businessman. I am also a Canadian. I believe deeply in this country. As I said at the beginning, I believe we deserve the best airline industry we can devise -- an airline industry that serves the people of this country and makes Canadians proud around the world. The Onex proposal will do just that.
I thank you for your attention and I look forward to your questions.
The Chairman: In response to the concern raised by some Canadians that your proposal to merge the two major airline companies in Canada would result in the control of our airline industry by American Airlines, and you addressed that in your presentation, you have devised a new plan that would exclude American Airlines from the list of shareholders and from the board. What would you say to those who still argue that your willingness to transfer Air Canada from Star Alliance to oneworld alliance and to connect the new airline to the Sabre reservation system is proof that American Airlines could have de facto control over the new airline.
Mr. Schwartz: Madam Chairman, I do not believe that is proof at all of de facto control. In fact, under Air Canada's proposal they will be in the Star Alliance with United Airlines and will be using the Gemini reservation system based in Chicago. Does that prove that Air Canada today is controlled by United Airlines or by the Star Alliance? I do not believe so.
First, let me deal with the Sabre system. All that is involved there is that Sabre will offer its services to the New Air Canada. It is not forced to take those services at all. That choice will be up to the management of the New Air Canada. Fifty airlines around the world use the Sabre system. Indeed, it is interesting that, three months ago, Air Canada itself paid $5 million to Sabre to come in and do an analysis of whether they should use Sabre instead of Gemini. As we sit here today, Sabre people are in Air Canada's office, at Air Canada's request, doing that analysis. I do not believe that indicates in any way de facto control.
Senator Forrestall: May I extend a welcome to you, sir, and tell you that without question you have provided a lively two months for many of us. I gather that that is not over yet; not by a long shot.
I have three or four questions in areas of concern to me. I wish to start by asking whether you have any fundamental objections to the proposals of the Competition Bureau, or are you generally in agreement with their suggestions, or the principles behind them?
Mr. Schwartz: I am in general agreement with their tone, which is that we must have a rich, competitive environment.
Today, the two mainline carriers have about 80 per cent of the domestic traffic. Five years ago, the charterers and the regionals only had 5 per cent. In the last five years, they have grown to 20 per cent. That is where the competition is coming from, not only in Canada but around the world. What must be done is to ensure that those low-cost carriers have the opportunity to succeed and grow. That is good for the industry, and that is the only place competition will come from. That is the major part of the Competition Bureau's view, and I agree with that.
As I said in my opening remarks, it is quite contrary to the Air Canada proposal to start a new low-cost carrier to compete in that exact segment.
Senator Forrestall: Could we hear your extended views on the allocation or sharing of slots?
Mr. Schwartz: I believe the Competition Bureau is on the right track on that. You can talk about all the forms of access you want, but if you do not have slots or gates, you cannot land, so there must be a fair sharing of that.
Senator Roberge: I wish to be more specific and get your views for this committee on the 49 per cent foreign-owned possibility, on the sixth freedom possibility and on the non-Canadian or U.S. carrier, for example, operating in Canada under Canadian rules to create competition for the Canadian public.
Mr. Schwartz: Senator, the 49 per cent and the non-Canadian-owned companies competing in Canada really encompass the same issue. As a businessman, I am not particularly troubled by 49 per cent instead of 25 per cent. On the other hand, I must say that I am a Canadian nationalist and I do believe in some protection of Canadian ownership for Canadians. I would find the current level of 25 per cent restriction very easy to endorse, and let me tell you why. The United States has a restriction of 25 per cent foreign ownership of an airline, and so does every country in the G7 -- in fact, I am told, so does every country in the G20. If that is the case, I do not know why we would want to raise that barrier unilaterally. I would be in favour of staying at the 25 per cent limit rather than raising it to 49 per cent; but it is not a competition issue, it is a policy issue.
As for the sixth freedom, that is a form of cabotage, and I feel very strongly about this. I am perfectly willing to have cabotage in Canada. It is a great way to support competition, so long as we have the exact same opportunity in any country to whom we give cabotage. Why should we allow United States airplanes, with U.S. crews, buying U.S. fuel, doing their maintenance in the U.S., to hop into Canada, carry passengers around in our country, hop back at night to their country, and leave nothing here for Canadian jobs or Canadian employees? There must be a balancing between competition and jobs and the sustainability of an industry that we own in our country. So I am for cabotage provided that it is mutual. I know that that is a little self-serving, because it is not likely to be mutual, but notwithstanding that I think my answer is the correct one.
Senator Spivak: The Competition Commissioner said that the Canadian carrier proposal was more important in fostering competition than all of the other proposals that he made. He is saying that there are serious and significant concerns about competition, that competition will be substantially lessened if there is a dominant carrier, and he points out very persuasively why. I wonder if you agree with that?
There is a mass of legislation and regulations being proposed to make competition a reality. I am sure you know all of them, not only the surrendering of the slots, but returning airport facilities to the proper authorities for allocation; changing the way the airlines pay for airport services; ensuring that any new airline competitors are able to purchase the dominant carrier's frequent flying points; changing the method of calculating agents' commissions; offering to transfer surplus planes to any new entrants; the possible divestiture of regional carriers; ensuring that new or expanding airlines are able to interline and code-share with the dominant airline; and, of course, there is predatory pricing.
What is your view on the commissioner's assertion that the Canadian carrier proposal is more important than even all of those regulations put together, in terms of ensuring competition?
Mr. Schwartz: I have two comments. The Canadian carrier proposal must be taken in context. His view is that only competition counts -- no other issue; just competition counts. I believe there are other issues to be balanced by Parliament. The crux of his view is what you said, that he believes there is a massive lessening of competition if you put these two airlines together. I actually do not think so, because there is competition and then there is competition. Today we have competition between two airlines that bang head-on against each other extensively; but what they do is fly at the same time to the same place. More than 70 per cent of flights in Canada go to the same destination at the same time, to try to keep market share. That is not competition that is good for Canadians. It does not get you choice of departure times, it does not get you more non-stop service to U.S., European and other cities, because you cannot combine the traffic of the two together, and it certainly does not get you better prices.
I have spoken across this country to rooms of five people and rooms of 500 people, and I usually ask, "Put up your hand if you think ticket prices are low or even reasonable in Canada," and I rarely -- almost never -- get anyone who puts up his or her hand. The form of competition we have is not very effective for the consumer.
Senator Spivak: So the bottom line is that you are not in favour of the Canadian carrier proposal, or anything that looks like the Australian system. Is that your view?
Mr. Schwartz: I do not know what the Australian system is, so I cannot comment.
Senator Forrestall: Would it be possible to have a copy of your pro forma balance sheet that would indicate to us how you will work towards the merger of your cash positions and whatnot? It would be helpful for myself at least -- and I am sure for others -- if that could reflect the percentage involvement of the various players. Is that possible at this stage of the negotiations?
Mr. Schwartz: There is a securities law issue there. We have not provided any pro formas or forecasts to the public while we are making this offer. There may be that issue. If we can do it in the privacy of the Senate, I would be more than happy. However, I can answer your question in a very simple way. Onex would own 31 per cent of the airline, and the Canadian public would own 69 per cent of the airline. I am not sure I have answered your question.
Senator Forrestall: No, you have not. However, I appreciate your limitations. My concern is fleet replacement. We have many ageing pieces of equipment out there. How would you intend to merge the existing fleets? Would you try to sell off the older aircraft, looking at total renewal within, say, ten years? How would you face that?
Mr. Schwartz: It would be by putting these two airlines together and pulling apart that duplication of flights. There are excess aircraft. Generally, Air Canada's fleet is much more modern and newer, and Canadian's is older and weaker. We would eliminate two types of aircraft on the Air Canada side that are very old and quite inefficient, and two types of aircraft on the Canadian side.
I can give you the types of aircraft, if you wish.
That process will take about two and a half years, because you will have re-certification of mechanics and pilots and that will take some time. However, when you are finished with that, you will have a more homogeneous fleet than either airline has today, which means lower maintenance costs, and you will be running, on balance, a much newer fleet.
For instance, for a flight from Toronto to Winnipeg, there will be a DC-9 flying side by side with a 737 -- two old, narrow-bodied aircraft. When you get rid of them, you will be putting on a wide-bodied 767, which has a lower fuel burn, a lower crew cost, and a lower ground-handling cost; it is a more modern aircraft available for passengers and has the same, or roughly the same, number of seats as the two inefficient planes combined had.
There is an opportunity to move to a newer fleet without a significant amount of capital expenditure. In the first couple of years, you will be bringing capital back into the airline as you get rid of some of the older aircraft.
Senator Finestone: Mr. Schwartz, I have found the questions and answers today to be of great interest. You have pointed out that your group can stand behind the fact that you are Canadians, that you have a commitment to buy Canadian goods and services, and especially when Canadian products are the best in the world, and here you are speaking about the replacement of the fleet.
I should like to know what has happened with the commitment that Canadian undertook to purchase the Brazilian Embraer jet. I believe that case is before the WTO on predatory financing.
Since Dassault Aviation of France has purchased 23 per cent of the Brazilian aircraft manufacturing company, what implication does that have? As you speak about replacing an ageing fleet and integrating a new and more homogeneous group of aircraft, so that your servicing costs will be better, where and how do you plan to use this Brazilian set of jets? How many are there? What is the cost, and is that included in your price?
Mr. Schwartz: Let me start with the simplest statement. The Bombardier regional jet is the best regional jet in the world today. It was not Canadian Airlines, it was InterCanadian, which is not owned by Canadian Airlines, that bought the Embraer.
My understanding, and this is second-hand and I may not be entirely right, is that InterCanadian had real financial issues before it and Embraer really bought the sale with financing that commercially did not make sense. I have said before, and I repeat again, that I think that was dumb. I think that InterCanadian should do anything they can to not take delivery of those planes, and they should be buying Canadian.
Senator Finestone: I think Senator Forrestall asked you about InterCanadian and whether their purchases implicated Canadian and, if so, where those planes fit in.
Mr. Schwartz: If that was his question, my response is that InterCanadian bought those aircraft. InterCanadian is not owned or controlled by Canadian Airlines. It interconnects with Canadian and Canadian has a significant amount of influence on it. If we were in control of the combined airlines, we would do everything possible to influence InterCanadian to not take delivery of the Embraers but to instead buy Bombardier regional jets, which were the right plane in the first place.
Companies that make decisions on the wrong goods and services for the right financial reason almost always make a mistake. That is exactly what I think InterCanadian did.
Senator Callbeck: Mr. Schwartz, in your document, "Commitments to Canadians", you have made some commitments regarding fares and service. I am particularly concerned about this subject and your commitments to smaller communities, as I come from Atlantic Canada.
You speak about guaranteeing that public fares will not increase in the next five years except for increases in inflation, fuel and landing fees. Does "published fares" mean the regular fare? Are you making a commitment that we will have the seat sales and all the discounted fares? My understanding is that 90 per cent of people travel on the discounted fares.
Mr. Schwartz: We have made two commitments. First, on published fares, as you have said; second, to continue seat sales at the same level of discount that people enjoy today.
Senator Callbeck: After five years, what is to hinder those prices from going sky high?
Mr. Schwartz: Nothing is to hinder them from going sky high except good common sense and good business practice. It is like comparing our proposal for the next five years to perfection. Instead, compare it to reality, which is that, today, there is no protection whatsoever and fares have risen at 150 per cent of the rate that we are trying to protect for five years.
It is impossible to make guarantees that will go on forever without a limit. What we have tried to do is say that there is a two-year integration period and this fare protection will go on for five years, which is well beyond the two-year integration. There is a significant amount of time for government, the Transportation Agency, Parliament, anyone to act in any way that they would feel is appropriate to create new protection as we come up to that five years if that is what people feel is needed.
What we have done is get us through a long transition where we know where we stand. That is the first time in airline history where we will know where we stand for the next five years.
Senator Callbeck: On the other commitment, the quality service, what does that mean? Are you saying that, for example, in Prince Edward Island we would have the same number of flights coming into the island as we have now? What is your commitment?
Mr. Schwartz: It is not just the number of flights, it is the number of available seats and the type of aircraft. In some small communities today, the airlines are flying in Beech 19s, very small aircraft. However, when each of them only has the density to fly a Beech 19, you then combine these two airlines together. You now have a unified airline that has the density to put on a Dash 38, or in a big city, Toronto or Winnipeg, you go from a DC-9/737 to a 767. In the small communities you can upgrade the form of aircraft by combining density and that is a significant opportunity.
I was in Saint John and we were talking about this issue of how many flights. Someone stood up in the audience and said, "Mr. Schwartz, you don't get it. We have 13 flights a day from Saint John to Halifax. We don't need anything like that. What we need is flights at the right times, not wing tip to wing tip. We need to know that we have non-stop to Toronto, that Halifax will have direct access into the U.S. and maybe pre-customs clearance." There are many issues that can help small communities far beyond just the number of flights.
The number of seats available for people to fly should be about the same. There should not be a lessening of service. As you know better than I do, a small community's economic development, or part of it, rests on having aircraft service available.
Senator Callbeck: I understand what you are saying, because on Prince Edward Island we have 12 flights a day coming in and out. Air Nova has six flights and InterCanadian has about five, and they leave about 15 minutes apart. In other words, as long as the traffic is there, there would at least six flights.
Mr. Schwartz: I promise you that if the traffic is there in Charlottetown, or any other community, we want to service it. The only way to make money in this business is to get seats filled. That is what we want to do.
Senator Callbeck: What happens after five years if all of a sudden the flight starts to lose money?
Mr. Schwartz: I cannot give you a commitment beyond five years. We have gone out further than anyone in the industry has ever gone. All of the opportunities for government to make some demands will be as available in five years as they are today.
It is not just a question of flying profitable flights. If you have a national franchise, as we are proposing and as it will end up in any event, no matter how you get to this, you will face that same issue. Air Canada just wants to get there by bankrupting Canadian; but it will end up in one place with one large national airline. Anyone who has a massive franchise in Canada should have an obligation and a responsibility to provide service, profitable or not, to small communities. They are part of the country.
Senator Roberge: In a press conference you answered a question related to the Star Alliance issue. You mentioned that AirCo requires a resolution of this issue to its satisfaction before the transaction is completed. If the shareholders accept your offer of November 9, Air Canada will still be responsible for those termination fees, and so will you. I cannot see how you would resolve that issue other than through legal channels. Can you comment on that, please?
Mr. Schwartz: We have legal opinions which measure one foot high. We have clear opinions that the board of Air Canada has acted improperly, beyond their fiduciary duty, beyond the scope of what is a responsible action for them in entering into that poison pill. They have no right to give away the shareholders' money in order to obtain funding to prevent a shareholder from making an offer.
November 8 is the date of the shareholders' vote. November 10 is the day we take up the shares. If Air Canada's board loses the vote on November 8, we believe they will have the good sense to rescind that before November 10. That is often the way things happen in takeover matters.
Senator Roberge: If they signed contractual agreements, they will be liable.
Mr. Schwartz: Senator, I cannot tell you if they have signed them or not. I cannot imagine that they have paid over the money. There is no breach, so why would they?
If they signed an agreement when they did not have the authority to do so, and even if we had to close, we would refuse to pay it. United and Lufthansa could sue us for it and we would deal with that in Canadian courts.
Senator Roberge: I must admit that Onex has been quite successful in building enterprises in Canada. What is it that has made you so special and unique that will make you successful in this endeavour, especially when others with experience in the airline business have failed?
Mr. Schwartz: That is a good question. It is one I sometimes wake up asking myself.
We went into the airline catering business in 1985. We bought a small company with a couple of hundred million dollars in revenues and 2,000 employees. We did not know anything about the airline catering business, except we thought the food could be improved. We have built that company into the largest company in the world. It has $2.5 billion in revenues and 27,000 employees. We serve one out of every three airline meals around the world every day.
We went into the auto parts business in 1988. We did not know anything about that business. We hired good people. We enthused them. We built an auto parts company that is the largest in the world in its sector. It has plants around the globe.
Less than four years ago, we bought Celestica from IBM. It is a company that makes computer parts and Internet equipment. We did not know anything about that business. It is a very complex, sophisticated high-tech business. It had less than $1 billion in revenues and 1,700 employees. Today, less than four years later, it has $7.5 billion in revenues and 22,000 employees. We have a market cap in that company alone of over $5 billion U.S. That is because we can bring good common sense and entrepreneurial spirit to the enterprises we have. We can clear out the bureaucracy, think strategically and have new financial ideas. Our job is to ensure that the day-to-day management is the right team doing the right things.
The airline industry is a very unsuccessful industry. However, it has pockets of huge success. The Texas Pacific Group bought Continental roughly five years ago. They made $5 billion doing it. The consortium which bought Northwest Airlines five or six years ago made several billion dollars doing it. The Swire Group has built a worldwide empire based on Cathay Pacific. It can be done, and I think it can be done in Canada. We are confident of it. We are prepared to put up our money and try.
Senator Poulin: I appreciate your candour and I thank you for your excellent presentation which has enlightened us as to your objectives and the means you intend to employ to attain them.
This morning, Mr. Schwartz, in every daily paper there was a full-page add showing the word "Onex" in a box with a huge "X" through it. The ad asks: "What experience does this company have in running an airline?" How would you answer that question, over and above what you have just said to Senator Roberge?
Mr. Schwartz: Our job is to get the right management team in place. Onex is a very entrepreneurial company. At the parent level, we have only 30 people -- that is from the receptionist to me. Our job is to have in place the right chief executive with the right support at that senior level. That is to ensure that the plan they are working toward really works.
Often, executives in the airline industry and others are so imbued in their business that they have tunnel vision, and they work, with great effort and great intelligence, toward a goal that may be slightly off kilter from it they should be.
We are good at strategy planning and finances. We have good entrepreneurial spirit. We can get rid of the bureaucracy.
I have had many complaints from people who have told me that when they have a problem, such as missing or lost baggage, they cannot find the person who is supposed to help them with it. One must become customer-centric. The only way to become customer-centric in business is to have respect for your employees and to make that respect evident. It is one's employees who reach the customer. We are committed to those things.
We have changed business after business to do that. So many companies say, "We care about customers. Customers come first." Yet, when you sit down with the chief executive and say, "Let's look at your calendar for the last year. Where have you been?", he replies, "For 200 days, I was in my office doing important work. For 35 days, I was at board meetings. For 15 days, I was doing something else." If this company is so customer focused, how come he did not have 100 days out talking to customers and employees? If you want to know what is happening on the loading dock, you have to talk to the foreman on the loading dock. Don't ask your vice-president of human resources.
We bring those things to a company, and it makes a big difference. I think we can do it here.
Senator Poulin: Mr. Schwartz, in your presentation you repeated several times, "I am a businessman." However, at the outset of your presentation, you spoke about your two concerns, service and affordability. As you said, you heard this from coast to coast from Canadians to whom you listened and spoke. How will your CEO and board merge these two objectives, when sometimes they are in conflict with one another?
Mr. Schwartz: They can seem to be that way, senator. However, I never accept from our executives that they are in conflict. An executive may tell me, "Mr. Schwartz, you are pushing me on quality, but you want more profitability. We cannot do both. Which do you want?"
Either he does not get it or I have to convince him to change, because the only way to get profitability is to get quality and safety in the workplace. Those issues, which seem to cost something, are what drive profitability.
The same is true here. You have a cost structure with overlapping of the airlines because they are flying wing tip to wing tip on all these flights. That cost is being borne in ticket prices. If you pull it apart, you can get costs under control. It is the same as running a household, a small business, or a huge business. If you cannot get your costs under control, you cannot bring your prices down. That is why they are stuck in this paradigm of high costs and high prices. We can change that paradigm; we can get costs down. We can control prices at the beginning, and then start to drive prices down.
Senator Poulin: Mr. Schwartz, I am from the small community of Sudbury in Northern Ontario. I know that people in Northern Ontario are extremely concerned about the accessibility and affordability of the air service that is necessary for all business and public service people.
In the last few years, we have seen a number of small, low-cost carriers fail. What will stop Onex from driving small competitors out of business very quickly?
Mr. Schwartz: Senator Spivak talked about predatory pricing. Predatory pricing is illegal in our country. If a new airline engaged in predatory pricing, it would be stopped and it would pay the penalty for it.
There are a number of things that the government should consider as protection for small communities. Small communities are a significant issue in this country. Many people do not want to move to another place; many people are happy where they are. That does not mean that they are not entitled to have this service.
Senator LeBreton: Mr. Schwartz, you have touched on the issue of foreign ownership. I have no difficulty with lifting the 10 per cent ownership restriction. I know why it was introduced over a decade ago, but I believe the 10 per cent restriction now only serves to keep boards of directors in place forever.
My concern was raised by the Consumers' Association of Canada, when they appeared before this committee, and has to do with regional services and consumers. You have addressed the 25 per cent foreign ownership issue. Do you think the 25 per cent limit on foreign ownership should be raised in order to provide better service to regions that may suffer?
Mr. Schwartz: I would have difficulty with raising the 25 per cent foreign ownership limit if other countries would not do the same for us. In terms of pure competition, letting foreigners have a stake in providing airline service does not bother me. On the other hand, the one place where I cannot envision foreigners doing anything is in the small communities. You often have to operate an unprofitable route to the small communities because you have been given a large franchise. It is very unlikely that foreigners would run those small routes. They want to take the cream off the top, which is the big routes. However, if foreigners would provide service to small communities, I would not be troubled by raising the limit.
Senator LeBreton: I was thinking specifically of the eastern seaboard.
Mr. Schwartz: Yes. I would not be troubled by that.
Senator Fairbairn: Mr. Schwartz, I am particularly interested in the emphasis that you have been placing on regional difficulties. I come from Lethbridge, Alberta, a region of huge distances and very small communities. This complicated merger debate is causing great anxiety in small cities, not just for the travelling public, but for the small airports, which in many cases rely on day-to-day, flight-to-flight, revenues for their existence.
In your statement today, as well as in your paper "Commitments to Canadians", you have indicated that you will maintain air service in the smaller communities at some level for five years. Your statement today also underlined the desire to open up competition, and you mentioned WestJet, PemAir and Trillium Air. If at the end of the five-year period the competition has not moved in, is there a commitment in your proposal that communities that are now served will not be left without the only vital communications link they have left?
Mr. Schwartz: We have not made a commitment beyond five years and I do not think it is reasonable to make commitments beyond that period of time. However, your point is exactly right. Although I do not want to speculate on what the outcome would be if we reached that point, I would be very happy at that time to consider renewal of those commitments or any form of government intervention to ensure that those communities have service.
You touched on another point that most people have not noticed, but I have heard it when talking to airport managers in small towns. With the two airlines combined, you may fly the same number of seats, but you will not fly the same number of flights. Because the airports get paid based partly on the number of landings, they will have less income and, if that happens, some of them will be in danger. I believe that the solution to that is for the merged airline to renegotiate its leases with the small airports so that they will receive the same income, even with fewer flights.
Senator Fairbairn: That is essentially what I was getting at, and I see that you mention it in your paper. We must take into consideration as well that community ownership of many of these small airlines is currently in its infancy, and they are struggling. A disruption without underpinning, such as you are suggesting, could have an unfortunate effect, not only on the communities, but on the airlines that are trying to maintain service. You cannot maintain service if there is no airport.
Mr. Schwartz: You are right. Sometimes airlines are too focused on lower costs. However, if costs go too low, at some point you will have fewer airports, and fewer airports means no passengers.
Senator Spivak: I want to touch briefly on the issue of competition. I find your answers on that soft in comparison to what seems to be required. Mr. Konrad Von Finckenstein said that voluntary commitments are no substitute for the rigours of the marketplace, and that means major competition on domestic routes, transporter routes and international routes.
He believes that, unless this regime is put in place and you have serious, effective competition, you will basically have a monopoly. That is just a comment.
I would like to touch briefly on your commitment to price, a subject which Senator Callbeck mentioned. I wish to ensure that you are committing, as well, that you will not significantly increase prices by reducing the range of the discount fares and the number of seats available at those fares. Are you maintaining that that will be your commitment as well?
Mr. Schwartz: Where that all comes into place, senator, is on seat sales. People have the feeling that that is done for the benefit of the consumers. It is really done for the benefit of the airlines. Seat sales are largely in October, November, April and March, Tuesday to Thursday. When an airline takes off on a flight, all the costs go with it, whether it is full or whether there are 100 passengers or 15 passengers. Therefore, it is in the airline's interest to fill those seats, even at very low cost. That is why they run seat sales. It is not out of the goodness of their hearts. It works for that business.
We absolutely will continue seat sales, with the wide range of discounts that they imply, because it is good for the airline business, as well as being a great opportunity for consumers.
Senator Spivak: You will maintain that level, you will not fool around with any of that?
Mr. Schwartz: I cannot tell you that there will be no change to any fare in any discount category.
Senator Spivak: I wish to ask about two other areas. First, are you really the pot calling the kettle black? There are lock-up agreements that you have with Canadian, that AMR has with Canadian, amounting to, according to your competitor, Air Canada, approximately $1 billion, which would need to be borne by the shareholders if Air Canada were to get into the picture.
The other question has to do with the ownership. The Air Canada pilots talk about de facto ownership. I know the areas that you have pointed out where AMR is retreating, but in the meantime are they correct when they say that AMR has veto rights on principal managerial decisions of Air Canada, that it has a super veto on any proposals for the sale, that it has a monopoly on essential services, that it has an influence on the selection and appointment of senior management, and that American Airlines has the right, based on its contract with its pilots, to patriate profitable trans-border routes, et cetera? Canadian develops these routes, they put in the money, then Air Canada comes in and reaps the benefit. That sounds to me, in spite of the voting rights, like very major control of Canadian Airlines.
Are they relinquishing each and every one of these points?
Mr. Schwartz: First, you talked about AMR's rights at Air Canada, or the New Air Canada, about super majority vetoes, et cetera. Those rights are rights that Canadian Airlines negotiated five years ago. We have said very clearly in our offering circular that every one of those rights of American expire and terminate on the merger of the two airlines. All of those go away. All of those special rights that they have today at Canadian, all of them, terminate on our merger.
With respect to the pilots' rights, somebody has been telling what ain't so. That is not what the pilots' rights are. American has a contract with its pilots. Those two, American and AMR, have no ability to make an agreement among themselves to do something to Air Canada. It is as if you and I were saying that we would make an agreement by which Mr. Wright would give his salary away every year. We cannot do that.
American and AMR cannot make any such contract. They have an agreement with their pilots that, if any trans-border route is profitable, they will either fly it or not code share it with a Canadian company. Fine. We already compete with them across the board. The biggest trans-border international competition is with the U.S. carriers. We already compete with American and with United on virtually every major route there is. So it is not a big change at all.
As well, we will still fly those routes. They cannot make us stop flying a route just because they wish to fly it. If they wish to fly a route and compete with us, good for them, because if they don't, Delta will, and if Delta doesn't, U.S. Air will. Any time there is a profitable route, someone will come in and compete. However, their pilots' agreement with American Airlines can never prevent the New Air Canada, or the old Air Canada or Canadian, from competing.
In fact, in the last five years, while that clause has been in the pilots' contract in the States, Canadian Airlines' share of the trans-border business has grown 290 per cent, while in the same period of time American's share of the trans-border business has grown only 55 per cent. It has not stopped Canada, in its weakened position, from winning that battle. That is completely disingenuous on the part of whoever is saying that the American pilots' agreement can prevent Canadians from flying any flights.
Senator Spivak: Are you willing to table all of the lock-up agreements that you have with Canadian, and the same goes for AMR?
Mr. Schwartz: We have no lock-up agreement. We have an agreement that we will use the oneworld alliance. We have agreed that, if there is a breach of that agreement by either side, the party that breaches it will pay $750 million. We do not intend to breach it and neither do they.
I do not care if Air Canada has an agreement in the Star Alliance that says whoever breaches it will pay, but, first of all, they have a one-way agreement. It is only an agreement that Air Canada will pay; it is not a return breach payment. Second, and much more important, they are mixing apples and oranges. The agreement that we have will go before the shareholders who will decide if they want us to do this or not. The agreement that Air Canada entered into is by the directors without shareholder approval, entered into solely for the purpose of -- as Jürgen Weber, the Chairman of Lufthansa, is quoted as saying -- repelling a hostile takeover. That is very different. One is to have a commercial agreement, the other is to have a payment entered into for the sole purpose of preventing another bid from being made.
Senator Watt: My questioning will be slightly different from what I have heard up to now, because I will be trying to zero in on the northern continental aspects of the airline industry.
Mr. Schwartz, you mentioned that you had done some figuring and analyzing to see whether it was economically viable to do what needs to take place. You did not go beyond five years in your examination. Did that also cover the North, starting with Northern Quebec, the Northwest Territories, now called Nunavut, and the Yukon Territory? Are they covered?
Mr. Schwartz: Yes, sir, it did. Our five-year analysis assumed that no community would stop being served. In fact, no community would stop receiving service at the level it gets today.
Senator Watt: You are very much aware, I am sure, that northerners, especially the aboriginal people, have only one means of transportation, and that is by way of airline. We do not have much in the way of roads, and certainly no luxuries like railroads or things of that nature. Mind you, those roads that we do have are normally freed up on an annual basis only in the last week of July and in August and September. At any time other than that, we have to rely heavily on the airlines to provide essential services to our remote communities, which are small communities but not so small as not to need services. You cannot simply concentrate on the social needs of those communities; you have to look at the economic viability side.
The Inuit of Quebec under my leadership over the last 20 years have been involved in the airline industry, including the use of small aircraft for bush operations right up to a regular airline company, First Air. We have been doing quite well for the last 20 years in terms of turning troubled airline companies into an economically viable industry. I remember that during my early years we went through a number of bush operation airlines in Northern Quebec before we took over and the industry became stable.
However, in order to become stable, you need a very clear, in-depth understanding of the needs of the communities. When we decided to elevate ourselves to a regional airline, First Air was a very troubled, nearly bankrupt airline company, but it took us no more than two years to turn that company around.
We have been doing very well until now. Before Onex entered the picture, we were still anticipating that we would continue to increase our activities in the airline industry; however, that was before we began hearing of the possibility of merging the two national airlines, Canadian and Air Canada. Unfortunately, we do not have an interline agreement, or any particular agreement, with Canadian, although we do have one with Air Canada.
If your proposal is accepted, and goes ahead, there will be a tremendous economic impact on us. We have invested a lot of our capital in our airline industry. To be exact, I am talking about $50 million invested by us in the airline industry in First Air alone. That is one airline. We have another bush operation airline in which the investment probably ranges from $32 to $42 million. The Crees also have their own airline company, and that will be impacted as well, not only economically, but also socially and culturally. A huge amount of the revenues we generate from those companies are pumped back into our communities. We are afraid that we will lose all that.
Putting my questions on behalf of the Inuit of Quebec, who are the owners of the two airline companies I have referred to, I am concerned about what will happen to those investments. Will the people be able to continue to receive the same kind of services that they are receiving today?
In my early years, we considered ourselves lucky to receive an aircraft in small remote communities once a year. Today, we provide daily service to those communities, regardless of size. If we lose money in one area, then we try to compensate for that in another area, and that relates to the fact of having a clear understanding of what you are dealing with.
I am really worried, Mr. Schwartz, about what will happen to the North, not only as a shareholder of those airline companies, but as a Canadian. What will happen to the Canadian North?
Perhaps I have gone on too long, Madam Chairman, but I thought it was important for me to give Mr. Schwartz some background information in order for him to understand our position. I am simply looking for some answers. I will leave it at that for now.
Mr. Schwartz: Senator, what you have said is critically important. I endorse your view about the need for that service. However, I do not agree that the merger of these two airlines will destroy shareholder value for the owners of those two airlines to which you referred. It will be good for them.
We have committed that this new merged airline will provide total interline access, free code sharing, frequent flyer points availability, maintenance service -- whatever the smaller airlines need in order to have a rich, competitive environment, because we believe that that is, first, right for Canada and, second, good for the merged airline. It brings out the best to have competition.
All of your concerns are certainly legitimate concerns of which I am enormously respectful. I assure you that the merger of these two airlines, under our proposal, will help those airlines to not only maintain what they have but to grow and do better, because they will interline with a much broader, wider, bigger company and they will have access to all of that available to them.
The management proposal from Air Canada is to start a new low-cost air carrier in Hamilton to compete with those very types of companies. So I believe that there is a major distinction between the two proposals and that, if looked at, our proposal is favourable to First Air and to those other companies you referred to.
Senator Watt: Thank you. It is enlightening to hear what you have to say in terms of what your intentions are down the road. What does that all mean, Mr. Schwartz? Would you be prepared to open a dialogue with the people who will be affected prior to going any further with seeking approval from the Canadian government?
Mr. Schwartz: Absolutely, in the same manner as we have gone across the country and tried to open dialogue with union leaders, with employees, with all of the various associations and with everyone who is interested in this issue. We have discussed this with some of the airline executives of WestJet and the charterers. We are completely open to that dialogue. We put in our proposal a clear statement of what we will do to make those accesses available. It is not good enough for us to print a document and merely put it in it. It must be enshrined somewhere, and I fully expect that the Canadian government will take all of those promises and turn them into some kind of legislation, or some kind of oversight, to ensure that they are met.
Senator Watt: Thank you. You are saying that you are open to a dialogue similar to what you have done in the rest of the country, but it seems to me that we will only be dealt with after the fact, and not before the fact. I would like a clear answer to that.
Mr. Schwartz: I would be very happy to deal with the First Air executives and the shareholders of those companies at any time, and especially before the fact. There will be a lot of time. This is not going to be resolved on November 8 or November 10. The government will enshrine legislation that gives protection to various aspects of the aviation industry.
Under your leadership, I hope to be able to have a dialogue with all of those shareholders, and with the executives of First Air and the other airlines in the North, to be able to ensure that what we are promising meets what they want. There is no point in having hollow promises.
Senator Watt: One area that has always been a challenge to me is balancing one shareholder's wish against another shareholder's wish. One may be profit-driven and the other may not. How do you reconcile divergent opinions?
Mr. Schwartz: Most of what we do is related to running a good business. Running a good business, by my definition, includes doing good things. If you have an opportunity to have a big national franchise, there are places where you must overlook profitability in order to arrive at service and the needs of people. We are perfectly prepared to do that and we have said so all along.
Senator Oliver: My question relates to the development of public policy. What we need in Canada, and we learned this from Minister Collenette's statement last week, is a public policy framework for transportation policy for future airline transportation. We do not have a policy at present. We do not have proper legislation or regulation at present. That is really for government to do and not for companies like Onex or others in the industry to do. I think you would agree with that.
I have seen a list of the documents that Onex tabled in the Quebec City case. I read them last night. The documents talk about developing a strategy to influence the choice of a deputy minister and developing a strategy to ensure that we are not burdened with cumbersome regulation at the conclusion of these hearings.
In relation to cumbersome regulation, if you succeed and you have a monopoly, would you not agree that, in order to foster competition, we will have to have some kind of regulation? Of course, regulation is not for you, but is for the government to do.
When I read language like, "We must ensure that we are not burdened with cumbersome regulation," it sounds as if it is subverting the role of Parliament. Should you succeed, would you agree that we need to have a regulated monopoly? If so, what things will you specifically do to ensure that small carriers will be able to compete without predatory pricing and other predatory acts on your behalf?
Mr. Schwartz: That is a good question and I thank you for it. The first memo you referred to that spoke about speaking to government people was not an Onex memo. That was a memo from Canadian Airlines. That was not ours. We did not author it and it is not part of us.
The second thing you spoke about was not having overly cumbersome regulation. I would say that here today. I think there has be some form of oversight of the various commitments, and oversight of service and of prices. However, I do not think that a new highly regulated environment is the way to go. When you look around the world, you see that, when there was deregulation, prices were able to come down. They never came down in a regulated environment. So I still do not think cumbersome regulation is appropriate. However, I certainly think that regulation is appropriate, and oversight is appropriate.
Predatory pricing, which you referred to, is illegal today; it will be illegal tomorrow, and anyone who engages in it anywhere should be punished.
Senator Oliver: You have been in business long enough to know that predatory pricing does go on. For instance, when I was on this committee before, we did some work with the telecommunications industry. We had witness after witness tell us about the power of a company like Bell or BCE in committing predatory acts against companies such as Sprint and AT&T, people who were trying to come up and compete with them. You have certainly seen the same thing in business, I am positive. It does take place. Many kinds of predatory acts take place when you have power, monopoly power.
Mr. Schwartz: All I can tell you is that I agree with what I said a moment ago. They should not take place. Predatory actions are illegal. If anyone does something that is illegal, they should be punished for it, whether it is an airline or the examples you gave. I do not believe in predatory pricing. I do not condone it; I do not want it. If I ever see it happen in any of our companies, it will come to one instant stop.
Senator Oliver: If you get your monopoly airline, what will you do with a route such as Ottawa to Toronto or Toronto to Montreal, which are considered to be lucrative air routes. How would you see fostering competition for your monopoly on those very profitable routes?
Mr. Schwartz: First of all, those routes are already flown by a number of other carriers.
Senator Oliver: Are Air Canada and Canadian not the principal carriers now?
Mr. Schwartz: They are easily the principal carriers.
Senator Oliver: I would have thought so. So where will you develop the competition on those profitable routes?
Mr. Schwartz: I do not know if competition will or will not come in. However, if those routes are profitable and our price is too high, someone else will come in. That is why the charterers and regionals have gone from 5 per cent of the business five years ago to 20 per cent of the domestic business today. They are growing.
If you fly a route and you are overcharging on it, someone will come in and eat your lunch, because they do not have to buy an airline; they just lease it and go right up against you with a lower fare. Airline fares are very price sensitive. People fly and do not fly based on price.
In the first part of your question, which I want to come back to, you mentioned international routes. With regard to international routes, the two airlines combined have only a third of that market. The rest is already occupied by foreign carriers and charterers. The international market is already enormously competitive. I do not think it needs any regulation to ensure that it is competitive. It is already there, big time. I think it is the domestic market that needs oversight to ensure that there is a competitive environment. What we can do is provide that competitive environment, through access -- access to frequent flyer, access to code sharing, access to maintenance services. What I cannot do is guarantee that someone else will come in and choose to compete on that line.
Senator Oliver: Do you agree that issues of regulation, legislation and policy are matters for committees like this and for Parliament, and not for you?
Mr. Schwartz: We are entitled to express our views, but the control over those issues lies entirely with Parliament.
Senator Spivak: In regard to the predatory pricing issue, the commissioner has said that the legislation is inadequate. He proposes two recommendations for new legislation, which I am sure you have seen. Are you in favour of that? Would you be happy with that?
Mr. Schwartz: Yes, the legislation on predatory pricing in Canada is inadequate. I agree with Mr. von Finckenstein. He is quite right about that. In Canada, you must prove a criminal test in order to show predatory pricing, whereas in the U.S. it is an anti-trust matter. I think he is quite right about that.
Senator Spivak: With regard to international competitiveness, he disagrees with you on transborder flights. He says that more competition will be needed, otherwise you will not have proper competition.
Mr. Schwartz: I just do not agree with him. I think that having only 33 per cent of the market for Canadians is --
Senator Spivak: I believe it is 55.
Mr. Schwartz: No, the two companies today have 34 per cent of the international market booked in Canada. But even if it was 50 per cent, believe you me, having 50 per cent, and 50 per cent among other competitors, is highly competitive. I do not think that is the problem, but it is 34 per cent.
Senator Finestone: I should like to pursue the question posed earlier in relation to InterCanadian and the Brazilian jets. If InterCanadian does purchase this Brazilian jet, how does that affect your service?
In what way can you ignore an affiliate? And as I see it, it is an affiliate of Canadian.
Mr. Schwartz: I just want to clarify something about those planes --
Senator Finestone: How can you not agree to serve a company that may have aircraft that differ from the mass of your fleet? Where would they then go for service? Under what obligation would they be to change the nature of their flights or their flight paths?
Mr. Schwartz: I just want to clarify that InterCanadian is not owned by Canadian Airlines or by Air Canada; so we cannot control what they do. InterCanadian, however, has not yet taken delivery of any of those aircraft. They have delayed delivery of the first five aircraft that they were supposed to take.
If we get this done, I hope there will be time to put every bit of influence we can on InterCanadian, which we cannot control, not to take delivery of those planes. I say that because I believe strongly in buying at home, especially when there is a world-class product available.
Senator Finestone: They have been bought already, Mr. Schwartz. It sounds like an easy resolution.
Mr. Schwartz: In the airline industry, you do not just buy planes. You take delivery slots, and delivery slots can be bought and sold. If InterCanadian are able to, they should sell their delivery slots to other airlines and go ahead and buy the regional jet from Bombardier. If there is no ability to control that and InterCanadian chooses to do that, notwithstanding any influence we try to bring, I cannot help it. There is nothing I can do about it.
Senator Finestone: I would like to ask a question with regard to hosting and reservations. I have just been involved with the development of an international meeting on travel, which will take place in Rio de Janeiro on November 24 and 25. As you probably know better than I, it is the largest growing industry worldwide. The key to this growth is the relationship between travel agents and food service, an area in which you are quite well known, along with hotel reservations and car rentals. They are all interrelated. I am curious to know how you will protect secondary jobs, which you mentioned earlier, so that those jobs remain here in Canada, our travel agents place their orders through Canadians, and the phones are answered by Canadians, bilingues tant mieux, in accordance with the official languages.
How will you move from this conundrum of the two potential service areas or reservation areas, or whatever you want to call them, into something that will be hiring and using Canadians, perhaps out of Winnipeg? That would make you very happy, Senator Spivak.
Mr. Schwartz: We have said clearly that all the reservation systems that exist today in Canada will continue to be the reservation systems of the combined airlines. I am referring to those in New Brunswick, Montreal, Winnipeg, Calgary and Vancouver.
Senator Finestone: And Dallas.
Mr. Schwartz: No, Dallas does not answer telephones. Nobody is in Dallas doing that even for Canadian today. All the reservation agents are in Canada. They are using a telephone system through Dallas, just as Air Canada today uses the Gemini system based in Chicago, but the jobs are here. In fact, we have said that we will repatriate to both Winnipeg and Montreal some 440 jobs that Canadian sent down to Oklahoma and Texas.
Senator Finestone: There was an interesting chart which we received among all the briefing material, which I have not had a chance to fully digest. It indicates a comparison between Star Alliance and oneworld alliance. In looking at the revenue, the income, the passengers, the flying time and the fleet, I suggest that, in all categories, the oneworld alliance is inferior to that of the Star Alliance. The question that begs to be asked is: How will the Canadian aviation industry and the Canadian consumer benefit from Air Canada's leaving the highly successful Star Alliance and going to the smaller and less effective oneworld alliance?
Mr. Schwartz: I am glad you raised that question, because it lets me answer directly. Air Canada has been putting out the story that Star Alliance is so much better and that it is worth billions more to Canadians than is the oneworld alliance. That is just not the case. The big institutional shareholders who are looking at it and seeing the same material provided by Air Canada understand that that is not the case. I attended a meeting yesterday with about 30 of them who blew right through it.
There is not a huge difference between the two alliances. Today, Star Alliance is slightly larger than oneworld. On the other hand, Sabena and Swissair have just announced that they will join the oneworld alliance, which will probably make oneworld slightly bigger. Both alliances cover virtually everywhere. Each of them has its good points. It is obfuscation by Air Canada to try to make that difference.
Let me give you some simple examples of where the oneworld alliance is actually better that the Star Alliance for Air Canada, since that is the only thing that counts for the New Air Canada. United Airlines flies 15 non-stop flights a day to Asia from the United States. American Airlines flies five flights a day non-stop to Asia. Both airlines are about the same size in the U.S.
That means that United puts its traffic to Asia through L.A., San Francisco and Seattle. American has to put two-thirds of its traffic through Vancouver. That is a lot better for Canadians than is the Star Alliance.
The oneworld alliance has substantially more frequent flyer members than does the Star Alliance. That means more people are using their points coming through Canada. That is good for Air Canada. Of course, there are some things about the Star Alliance that are better.
Star Alliance has Lufthansa while oneworld has British Airways. They all have big connections in Asia and Australasia. It is an obfuscation to try to get away from the real issue before the shareholders, and the shareholders are not buying it.
Notwithstanding the information you have been given, I can show you another study that shows that the oneworld alliance is better. The fact is that, at the end of the day, that is not the issue.
Senator Finestone: At the end of the day, who will be the beneficiary? Is it true to say that the question is not who owns the airlines, nor how many aircraft they have, but what routing system, code system and hosting system they have? That is where the money is.
Mr. Schwartz: No, that is not right. All of the functions you are talking about will be done by the New Air Canada. I refer to pricing, scheduling and routing.
Senator Finestone: What system will they be using?
Mr. Schwartz: It will use either Sabre or Gemini. However, it does not matter. All you are doing is buying a sophisticated algorithm. What you do with it -- that is, how you set prices, schedules and routes -- will all be done in Canada. It is no more true to say it would be done by Americans through Sabre or oneworld than it is to say that it would be done through United or the Gemini system. In fact, Air Canada is looking at using some of that system. They have admitted that. In February, Air Canada negotiated with Canadian Airlines about a merger. It has done that a number of times. They were willing to enter into the oneworld alliance at that time as part of a resolution. It did not happen.
Senator Kirby: It is my understanding that whether you are talking about Gemini or Sabre, you are talking about a software issue and not about a group of people.
It has to be realized that Sabre and Gemini are software packages. I understand that there are only two such software packages in the world -- Gemini, developed by United Airlines, and Sabre, both of which have been used by the Canadian aircraft industry for a long time. There are some good things and some not-so-good things about both.
Am I correct, Mr. Schwartz, that this is not a job issue?
Mr. Schwartz: It is not a job issue, because all the jobs are in Canada. It is not a control issue, because all the control functions, the people who make the decisions using that software, are in Canada. Whether you use the software based in Chicago called Gemini or the software based in Dallas called Sabre, you will still make the control decisions here. No one is saying that Air Canada's control of those issues today is run by United Airlines because they use Gemini. It is not. It is run in Montreal by Air Canada, as it will be in the New Air Canada.
Senator Kinsella: Honourable senators, our agenda states that we are examining the order in council authorizing certain major air carriers and persons to negotiate and enter into any conditional agreement. That is the purpose of our meeting. We in the Senate were anxious to have the order issued pursuant to section 47 of the Canada Transportation Act on August 13 tabled before both Houses of Parliament, but the government dragged its feet. It did not want the Senate to study it last September.
I want to focus on the question before us. I have been immensely impressed by your presentation and those of other witnesses. However, although I fly in airplanes, this is not my field of expertise.
I want to talk about how public policy is made in Canada and also about the obstacles that exist for business people like yourself in the private sector.
I have a copy of a letter on Onex letterhead dated October 31, 1999, over the signature of your colleague Mr. Wright. The letter is addressed to Mr. Casey, Member of Parliament. It addresses a number of the questions raised here as well as the documents that Senator Oliver said Mr. Wright was commenting on.
Madam Chair, I would be happy to table this letter from Mr. Wright to Mr. Casey as well as the document to which Senator Oliver referred.
Mr. Wright, on page 2 of your letter you comment on Mr. Casey's desire to have a copy of these documents without the deletions made by the court. You say that the portions that are here are the ones that are "relevant and pertinent to section 47 and the 10 per cent issues."
As the matter before this committee is section 47, suddenly, by your statement, these documents are quite germane and I invite your comment on them.
I am not sure to which document Senator Oliver was referring at the beginning. Is the document headed "Objective" the one that you said was a Canadian Airlines document and not an Onex document? Unfortunately, there is no date on it. I will read a few lines.
To obtain Ottawa support for a merger that permits:
1. Completion of the merger without the delays inherent in a long Competitions Board review.
2. A change to the Moco Act --
I would be interested to know whether Moco refers to Air Canada were it based in Montreal.
Mr. Schwartz: They all start with the name of the city.
Senator Kinsella: Thank you.
2. A change to the Moco Act altering the clause that restricts single person ownership in Moco to 10% of the voting equities.
3. If necessary, a change in foreign ownership limitations for airlines allowing Dalco to participate in the initiative.
Could you first comment on that? It is your testimony that this is not your document, but do you have a view on those objectives?
Mr. Nigel Wright, Principal, Onex Corporation: Senator, you are right. This document was not prepared by us. It was prepared by Canadian Airlines and delivered to us.
With respect to your question about the objectives, it was Canadian's objective to complete the merger without the delays inherent in a long Competition Board review. It was not a view with which we were in agreement at the time of this memorandum, which was mid-May, or for a considerable period of time after that.
A change to the Air Canada Public Participation Act removing the 10 per cent limit on voting equities is not a matter we discussed with them at that time, but this memo was given to us to introduce that topic for discussion. We have a similar objective, about which we have been very forthright.
Finally, we did not and do not agree that an increase in the ownership limitations was a part of our transaction. This memo was provided to us in the very early stages of our negotiations, and was exploratory on those issues.
Senator Kinsella: There then follows:
A change to the Moco Act will require the passing of a bill through the House -- timing is 3 to 4 weeks if ALL parties are supportive and the issue is not seen as a political one. Can be months if all parties are not supportive.
What was your take on that when you read it?
Mr. Wright: We read this document in mid-May. Because we had a disagreement with Canadian Airlines as part of these negotiations at that time on the very first point under "Objective 1", we never got to the other aspects of this memo.
Senator Kinsella: At the top of the next page it says:
It is likely that Jean Pelletier will know enough of planned changes that he could advise us of the best time to approach both the Minister as well as the PMO.
What do you make of that?
Mr. Wright: I will repeat that we did not get to these parts of the memo because we never got past the first objective on which we disagreed with Canadian.
As I understand it, Air Canada and Canadian had had some negotiations between themselves over merger and, subsequently, a route proposal. Both had been to the Department of Transport with respect to those negotiations. Because of confidentiality agreements between Canadian and Air Canada, we did not know of those negotiations at the time. I suspect that anything Canadian knew, it knew from its discussions with Air Canada and the department.
Senator Kinsella: Mr. Schwartz, have you held discussions on this matter at any time with Jean Pelletier, the Chief of Staff of the Prime Minister?
Mr. Schwartz: I have never met Mr. Pelletier, and that includes speaking to him on the phone or anything else.
Senator Kinsella: Mr. Wright, have you?
Mr. Wright: Neither I nor anyone else at Onex has ever had a conversation with Mr. Pelletier on this matter.
Senator Kinsella: Another document in the package was commented on and referred to in your letter. The page starts with the number 10; the heading is "Issues/Risks" and the subheading is "Political".
Will need to change the Canada Act in order to remove 10 % voting ownership restrictions on Eastco's shares.
Can you tell us who Eastco is?
Seeking to do so may result in serious political debate in the House of Commons. Our timing of seeking approval during the summer recess will be helpful in curbing that debate.
Notwithstanding that we have a parliamentary democracy based on the Westminster model, and notwithstanding that Parliament and debate is what is all it is about in our system of governance, as a proud Canadian, what is your comment on treating Parliament that way?
Mr. Wright: My comment is that, if anything, it shows a naivete about the process. Legislation cannot be changed when Parliament is not in session, so it is obviously a meaningless statement.
Senator Kinsella: On the next page, under the heading "Selected Next Steps", we see the line:
Approach the government to gain assurance that they will support the transaction and that the 10 % ownership restriction in the Canada Act will be removed.
Is that still not your document but rather Canadian's document? Or is that your document?
Mr. Wright: This is an early draft of a document prepared within Onex.
Senator Kinsella: This was prepared within Onex.
Mr. Wright: That is correct.
Senator Kinsella: Those are Onex's words. Do you have a sense as to the time line? When was this a view expressed within Onex?
Mr. Wright: This was a draft of a document that was not in final form until August. The fact of the matter is that no approach was made to the government until the eve of the public announcement on August 23, at which time I visited some departmental officials at Transport Canada. This was after the August 13 announcement referred to on the agenda.
Senator Kinsella: Then there is another document which reads:
Prior to the Moco offer, Bidco --
Who is Bidco?
Mr. Schwartz: That is the company now called AirCo.
Senator Kinsella: Thank you.
Prior to the Moco offer, Bidco already has:
[Received satisfactory assurances [from the government] that the section 47 order will be granted, providing the transactions are approved by Moco and Caco shareholders;]
Is this your document or someone else's document?
Mr. Wright: This is a draft of a press release prepared at the end of July.
Senator Kinsella: So it was before August 13.
Mr. Wright: Yes. It was after a request had been made by Canadian Airlines for a section 47 order but some weeks before the order was granted, at a time when we had no knowledge either way. As you can see, what actually came about was not as was reflected in our thoughts here. It reflected that before we would be able to make a public announcement, we would want an understanding of the process that we were going under. As it turns out, that understanding came to us on August 13, and our announcement followed a week and a half after that.
Senator Kinsella: The documents refer to Mr. Mel Cappe, the Clerk of the Privy Council, saying that Mr. Cappe ought to be met with because he could influence deputy ministers. As a former deputy minister in this town, I found that of particular interest. What was your take on that?
Mr. Wright: You are taking us back to the first document, the Canadian Airlines draft. As I say, we did not have a take on that. We did not agree with their objective and therefore did not discuss with them the balance of the memorandum.
Senator Kinsella: Have you ever discussed any of this with Mr. Cappe?
Mr. Wright: I had a meeting with Mr. Cappe on the day of the Speech from the Throne, about three weeks ago, for the first and only time.
Senator Kinsella: I thank you for that.
Madam Chair, if the honourable members of this committee are in agreement, I would be happy to table these documents.
The Chairman: Is it agreed?
Hon. Senators: Agreed.
Senator Kirby: We seem to have skirted around the infamous 10 per cent issue. I want to explore that in a few ways, but largely in the way in which it has been discussed previously a number of times by the Standing Senate Committee on Banking, Trade and Commerce over at least a decade.
It also seems to me, after Mr. Milton's testimony last week before the Transport Committee, that this may be the only area on which the two sides agree. I say that because in his statement today Mr. Schwartz said the following:
...the 10 % ownership limit serves only to keep in place an entrenched Board of Directors, a Board that has no need to be responsive to its own shareholders ...
In testimony before the House of Commons Transport Committee last week, Mr. Milton said he personally believes that the 10 per cent rule contained in the Air Canada Public Participation Act is shareholder unfriendly.
There seems to be some agreement that shareholders are not particularly well served by the 10 per cent rule. Senator LeBreton commented earlier on the reason for the 10 per cent rule being put in place. Many of us -- certainly, those who have been involved in early privatizations of Crown corporations -- understood that it was important to make an attempt to distribute the shares as widely as possible, but it was intended as a launching vehicle, not as permanent public policy. It has been true for Crown corporations federally and provincially.
The Standing Senate Committee on Banking, Trade and Commerce has been looking at the 10 per cent rule for a long time, since it is one element of the Bank Act that has received much critical comment over the years. We looked at it from the perspective of corporate governance and how you ensure that management is responsive to a board and that a board is in turn responsive to all shareholders, not merely a majority shareholder. That led us to conclude that there were merits in having an element of concentrated ownership but not majority ownership. We saw problems in having 51 per cent, and we saw problems in having a small enough number that management was not responsive at all to a shareholder with some considerable influence but not control.
Our Banking Committee, over a least a decade, and on three occasions, pronounced itself very strongly against the 10 per cent rule and in favour of a number in the order of one-third. The number has moved around, but it has basically been around that number.
Senator Oliver: They have close to 31 per cent.
Senator Kirby: I thought I ought to give you that background, because the Senate has looked at this issue on at least three occasions in the past.
First, what do you see as the benefits or the liabilities, and there are both, related to concentrated ownership but not control? I am talking about some number under 50 and over 25, so there is some inclusion.
Second, on the role of management equity, the view of the Banking Committee has long been that management of public companies ought to be required to have some not insignificant stake in the company that they are managing.
Third, in your response to a question from Senator Finestone, you talked about the three U.S. turned-around examples. As I recall, they also had concentrated ownership, but I cannot remember whether they had majority control. Would you comment on what impact significant shareholding had in those three cases, if any?
Mr. Schwartz: I can try to address those points.
On the benefits and liabilities of concentration of ownership, the issue is not whether it is 10 per cent ownership or 100 per cent ownership. The issue is that government has many means at its disposal to deal with public policy issues. The government need not do that by limiting ownership to 10 per cent, 50 per cent or any other number. We have asked to have that 10 per cent ownership limit removed in order to let the company be like most other companies, simply a company with shareholder ownership.
You mentioned between 25 and 50 per cent. I feel the only issue is absolute control over 50 per cent. I personally am not opposed to that. I believe that that should be allowed, as it is in other companies. I look at CN, which has a limit of 15 per cent ownership and it has 70 per cent U.S. ownership. Does that satisfy a Canadian public policy issue? I do not know.
You asked about management equity. That is a big issue. Onex has been enormously successful. We started with $2 million of our own money 16 years ago, with three people sharing two offices with no windows. Today we have a $14 billion company that is among the 10 largest in the country. One of the absolute principles we have believed in is that the people who run our businesses should have an equity ownership in those businesses. They should not just get the rewards; they should also take the risks. Every year our annual report includes a list of principles in which we believe. One of those principles is that managers should be owners.
Part of the problem at Air Canada today is that you have a board of 13 people, plus the senior management, who own less than $800,000 of stock among all of them -- and there are many important people on that board; but they have almost no financial stake in the company. I believe we have been successful at Onex because our board and management has a significant financial stake in the company; and on the subject of management equity, I believe that is important, and it also helps to drive an entrepreneurial environment with management. Many good things come from that.
On the subject of concentration and the impact that has on successive companies, we have provided you with a report that we requested from LECG and Company, of Cambridge, Massachusetts, a well-known company looking into these issues. That report gives clear and unequivocal evidence that companies that have concentration of ownership get better results. In the examples we used of the U.S. carriers, each of them had a very substantial concentration of ownership <#0107> the Texas Pacific Group, Wilson, and the group that resuscitated America West, which went from $36 million of value to $360 million of value in less than a year.
I believe that businesses, like every other organization, need someone at the helm who is responsible, who is pushing, is demanding and is driving it forward. When you get a management team on a board that sits behind an ironclad fence, like 10 per cent ownership, no one -- no shareholder, no owner of the company -- can tell them what to do or tell them that they are not doing good enough. Then you have exactly what you have had at Air Canada. I do not believe that is good in this economy.
Senator Kirby: I have a supplementary on your comment on not being opposed to more than 50 per cent, that is, the control. A number of us in the Senate, when we have looked at that issue in the past, have felt there were other potential downsides in the sense that you also want some constraint on the significant shareholder, which can in fact be applied if they are under 50 per cent and thereby do not have complete control of the board. The reason we came down with a number between 25 and 50, typically around one-third, was on the grounds that you balanced the pressure on the significant shareholder from the one side by keeping them under 50 per cent and the pressure on management from the other by in fact having the significant shareholder. I do not know if you want to comment on that. I understand why control is much easier.
Mr. Schwartz: Senator, we asked to have the 10 per cent limit removed entirely. Senator Oliver, jokingly, suggests that we already have 31 per cent. I do not want 33 per cent. We want it to be unlimited. That is what we have been asking for. I am not sure that that addresses your question.
Senator Kirby: I do not necessarily agree with you, but I guess it addresses the question.
Senator Adams: Mr. Schwartz, I know you are from Manitoba. I live in Keewatin, Rankin Inlet. We have small airlines who do business up there in our community. I believe you are concerned about the future in regard to your bid going through. In the meantime, the small airlines, mostly based in Manitoba, do quite a bit of business in the Keewatin area. We have six airlines coming through one small community. That creates competition. Some cannot compete up there because everything is costly and everything is flown in, with the airlines catering to the small business, motels and small stores. It is very costly. Nevertheless you have some competition there.
How do you plan to work with them? Will you buy them out or will you connect with them under your own company, Onex?
How do you plan to deal with the small airlines that have just enough business to keep operating? If there is a big merger in the south, how will that affect competition in our communities?
Mr. Schwartz: Our proposal is to ensure that there is a robust competitive environment that will make it easier for those companies to compete than is the case today, by giving them complete access to any facilities that the mainline carrier has so that they can have all the benefits of the big airline but still be the size that they are.
They can offer frequent flyer points. If, for instance, you wished to go from Keewatin to Europe, you might fly Keewatin to Winnipeg and on, but you will be able to get frequent flyer points now starting in Keewatin. The small airlines will be able to get a code share wherein a travel agent in Keewatin will give you a code designation that will take you as one code all the way through to Heathrow.
Things like maintenance facilities are the things that, if the small charterers have access to them, they can grow and thrive. That is what we think should happen. We will offer every one of those northern airlines that you are talking about, small as they are, that opportunity.
Senator Adams: Most of the flights that go up there are carrying more than 50 per cent cargo rather than passengers. How are you planning to deal with that?
Mr. Schwartz: We do not care whether it is cargo or passengers on the airplane. The airplane needs access. If it is only cargo, it may not need frequent flyer points, but it needs maintenance and ground handling and it needs interlining for cargo so that cargo coming from far away, such as India, can be interlined right into Keewatin on one code.
Senator Adams: Right now some of the airlines in the North connect to Canadian Airlines. What about other northern airlines that are connected through Air Canada? Does it make any difference?
Mr. Schwartz: Since the mainline would all be one company, every airline, every charter company, would have access to the entire system. In fact, that is better than today. Today some have access to the Air Canada system and some have access to the Canadian Airlines system. In a merger, each of those small companies would have access to the entire system. It is actually a better environment for them.
The Chairman: Thank you, Mr. Schwartz, for coming here. If you have any other documents to share with us, particularly ones pertaining to the North, we would be happy to get them.
The meeting is adjourned.