Proceedings of the Standing Senate Committee on
Transport and
Communications
Issue 4 - Evidence
OTTAWA, Wednesday, November 3, 1999
The Standing Senate Committee on Transport and Communications, pursuant to subsection 47(5) of the Canada Transportation Act, met this day at 3:30 p.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.
[English]
The Chairman: Honourable senators, we are pleased to have with us today, the president and chief executive officer of Canadian Airlines, Mr. Benson. We welcome you, and we hope to have an open and frank discussion with you. Following your presentation, and I am sure many senators will have questions. I would ask Mr. Benson to introduce his colleagues.
Senator Forrestall: Do we have an explanation as to why representatives of Air Canada are not here?
The Chairman: Last week we contacted Canadian Airlines and Onex. The representatives of Air Canada asked to be rescheduled due to events of yesterday. Mr. Milton has business meetings today and wishes to appear personally before this committee. He will be here next week.
Senator Kirby: Madam Chairman, I understand that they are coming next week. I know that our policy has always been to accommodate witnesses who, when we initially contacted them, suggested that they wanted to come at a different time. I know that we did that for Canadian Airlines. We did it for Mr. Schwartz. Indeed, had this happened early on, I am sure we would have done this for Air Canada.
However, it is important that we go on record recognizing that Mr. Milton, the president of Air Canada, has criticized the parliamentary process review of this issue numerous times in the past two or three weeks. Indeed, I can give you two examples of that. In testimony last week before the House of Commons Transport Committee, Mr. Milton said that, given the importance of the 10 per cent issue to the current industry restructuring exercise, the matter should receive full and adequate deliberation. He further noted that one might reasonably ask whether Canadians will have sufficient time to offer their views, and whether Parliament will have sufficient time to consider them before the November 26 deadline suggested by the minister.
In an interview published October 30, 1999 in The Toronto Star, Mr. Milton said:
It's up to Parliament and I can tell you Parliamentarians are stunned by what's going on.
Frankly, I am not stunned by the process, but I am stunned by someone who goes on record attacking the parliamentary process, ministers, members of Parliament, and senators, and then shows complete disrespect for the process by cancelling an appearance before this committee at the last moment so that he will now not appear before this committee in advance of the shareholders' vote.
I understand that in a conversation with the committee clerk, that Mr. Milton said that he had to meet with institutional shareholders and had business commitments. That may or may not be true. The media have told me that, in fact, he is doing a number of media interviews this afternoon, including one with the CBC. It is an insult to Parliament, and to this committee, that he would adopt the position that it is more important to meet with media and give television interviews than appear before the committee in advance of the shareholders' vote on Monday.
He should appear to answer our questions and to explain why he has been so critical of the parliamentary process and all of us who are involved in it.
While I realize, Madam Chairman, that we cannot do anything about it, it should be noted that this committee, and certainly speaking for myself, are not happy with the eleventh-hour cancellation, particularly for what would now appear to be a relatively phoney reason.
Some Hon. Senators: Hear, hear!
The Chairman: Senator Kirby, you can tell Mr. Milton himself when he when he appears before the committee.
Senator Kirby: You can rest assured, Madam Chairman, that I will do more than that.
The Chairman: We will now hear from the representatives of Canadian Airlines.
Mr. Kevin E. Benson, President and Chief Executive Officer, Canadian Airlines: Madam Chairman, with me is today is Mr. Stephen Markey, Senior Vice-President, Corporate and Government Affairs; and Mr. Scott Bradley, Director, Government Affairs.
Madam Chairman, I have furnished a written presentation. With your permission, I will take a couple of moments to outline some of the points in that submission.
Much has been said recently about the issues facing Canadian Airlines, in particular, about our efforts to attract and raise long-term capital. I would like to suggest, though, Madam Chairman that the real issue is not Canadian, but the structure of the industry in which Canadian is operating.
I fully acknowledge that Canadian's financial performance at any time in the past nine or ten years has not been satisfactory. The truth is neither has Air Canada's. If you look at their operating margin in the last five years and compare it to that of the major U.S. carriers, you will see that their margin is about half that which the U.S. carriers have been able to achieve. In fact, until the minister opened up the possibility of alternative solutions in August, Air Canada's stock price had dropped some 14 per cent in the past five years, at a time when the stock of the major U.S. carriers had increased by some 300 per cent. Between the two of us, Air Canada and Canadian, we have managed, at the operating line, to lose about $2.5 billion in the 1990s, at a time when many U.S. carriers were achieving record results. Clearly, something is very wrong.
However, in considering change and actions which might be taken to correct this, we need to recognize three fairly unique challenges that apply to our industry in Canada: challenges of geography, duopoly and seasonality.
Canada has a huge geographic area and a relatively small population base in that area. That results in very thin markets from an airline perspective. The proximity to the U.S. border and the narrow population corridor in which Canadians live -- 90 per cent of the population is within 150 miles, or 30 minutes flying time of the U.S. border -- adds to that problem. The result is that much of the domestic flying is east-west within Canada, which makes it very difficult to achieve the economic mass that is essential in a successful hub.
The second challenge is the duopoly that arises from the manner in which Canadian and Air Canada have operated for the past many years. Both the major carriers fly 82 per cent of the major routes in Canada. In the U.S., only 45 per cent of routes would have more than one major air carrier flying it. It is even worse when you consider that up to 80 per cent of the flights are within 10 minutes of each other. Clearly, from the customers' point of view, there are more flights, but not more choices.
This crisis has been complicated by the recent evolution of international air alliances. Often, when a Canadian carrier does not serve a market directly, it would prefer to put its passengers on to a foreign carrier rather than considering using the services of another Canadian air carrier. The result of that is that only about one-third of international travellers from Canada leave North America on a Canadian carrier, either Air Canada or ourselves. If we could increase that to 50 per cent, the impact on revenue would be $800 million to $1 billion which would remain in Canada.
The third challenge is seasonality. We simply do not have many winter destinations in Canada. As a result, we do approximately two-thirds of our business in the four to five summer months. Obviously, then, there are excess seats during the other eight months. There are huge discounts and sales during that period which result in huge losses on the part of the airlines for those months.
As I said earlier, the 1990s have been tough years for the industry. They have eroded Canadian's resources. We truly are at a critical point today. I am constantly asked about Canadian's cash position and our ability to survive. The challenge in answering that is that our ability to meet our cash requirements for the next 12 months depends very much on our bookings and sales in that period. In an industry where an airline's financial health depends greatly on the confidence of customers in that financial health, the time between operating stability and financial disaster can be quite short.
We must act immediately to put the changes in place that will lead to a return in confidence in the airlines and in the industry in Canada. At the moment, time is very much our enemy.
I believe that Air Canada also recognizes that the industry requires major change. Detailed discussions with them in the first quarter of this year demonstrated to both of us the synergies of a combined airline and the benefits for all the stakeholder groups -- shareholders, employees and customers -- that would occur as a result of that combination. It is perhaps only the path, Madam Chairman, on which we differ in order to get there.
We approached Air Canada earlier this year to discuss, in some detail, the prospects for a friendly merger. In the final analysis, I believe they agreed, in principle, to all of the essential terms of a proposed merger. Negotiations were fairly far advanced when they presented their requirement for a fairly substantial cash payment as a part of the deal. That ultimately terminated the discussions.
Subsequently, Air Canada attempted to address the industry challenges through an offer for Canadian's international routes, but were then either unable or unwilling to discuss with us the assumptions behind that offer. We believe that an impediment to an honest and open discussion with them at that time was the constraints, the restrictions, of the Competition Act, hence our approach to the minister to request that he look at ways of facilitating open discussion and innovative solutions for the complex issues that we were facing. We believe that his action in using section 47 required courage and foresight and that his wisdom has been supported in the subsequent proposals that have come forward from both Onex and Air Canada.
I would say a few words about these proposals. I would stress that we have not yet received a formal offer from Air Canada. We have endorsed the only offer we have received, and that is the one from Onex.
We still support this proposal. We believe that the Onex plan addresses the key issues on the part of all three stakeholder groups. It brings $750 million of new equity into the industry. It deals with job losses up front and in an equitable and honest manner. It will create new job opportunities and new service opportunities through its completion. Unfortunately, some of the benefits of this offer have been somewhat clouded in the past few weeks by a fair amount of false information regarding the role of American Airlines in both Canadian Airlines and the new AIRCO.
From the Canadian perspective, I would stress that our relationship with American Airlines has been an extremely positive one. In addition, American Airlines has no ability whatsoever to restrict where Canadian flies, when they fly, or how they fly. American Airlines can only control where we use their code, that is, on which of our flights we put their code.
There have even been some allegations that the Onex offer would lead to American control of our industry. We stressed last week that this is fear mongering, and that this is wrong. The new Onex offer proves this.
As I said, we are waiting to receive a formal offer from Air Canada. I hope when we do that it will answer a number of important questions, some of them with fairly significant ramifications.
We have questions regarding employment. We believe that there is inherent risk that the 2,500 job losses mentioned publicly so far is only the starting point.
We have questions of litigation. We do not understand how the process can proceed when, initially, the creditors and suppliers were told that they will receive less than fair market value for what they are owed. We believe that is inviting bitter and lengthy litigation, which would threaten the company in the process.
We have questions of efficiency. As I mentioned, we have a small market to deal with in Canada, and we do not understand how three airlines, maintaining three sub-brands, can address the demands of international efficiency.
There are questions of confusion from the consumer's point of view. There would be questions regarding where flights depart, arrive, and connect with other flights, and which international airlines are partner carriers. It is a very complicated picture from the customer's point of view.
Madam Chairman, we have an opportunity to address the many issues facing our industry, and to do so in a way that we believe all Canadians will benefit. In the rhetoric of the past weeks, it is sometimes easy to forget the objective here is to drain the lake and not to get drowned in it.
The industry is broken. It is broken, and it is facing a crisis. To find the right solution, I would urge everyone to put aside personal preferences and focus on solving the fundamentals that are in front of us.
We strongly support the concept of a single, national, full-service airline serving all of Canada, and regaining and retaining its fair share of international travel. The Onex offer has presented an opportunity to do this, and we would urge the committee to support the legislative changes that are required for its establishment.
Senator Forrestall: I would associate myself with the remarks made earlier by Senator Kirby. We are somewhat disturbed given the short time frame we have to deal with this matter.
You have answered a question that has been puzzling me for some time. It may be that you previously alluded to this in your pronouncements and I just happened to miss it. I have a special fondness for Air Atlantic and, in fact, I was an officer and a minor shareholder when it was a regional carrier.
I have always believed that the difficulties experienced by Canadian over the past 10 years or so, and even today in raising fresh capital, were "caused" problems that could be corrected. My sense is that there is a basic financial soundness underlying all this. It cannot understand why Canadian Airlines is being seen as the epicentre of this massive shake-up and restructuring. It has always seemed to me that Air Canada's financial structure was much less sound. I thought that they would have received more money for their continental fleet than you attributed to it. If you take that out of the picture, Air Canada is not nearly as healthy as one might think.
Would you please comment on whether Air Canada is healthier financially, and has better management, or potentially better management than Canadian? Would you have made an offer to buy out Air Canada?
Mr. Benson: There are many answers to that question.
Madam Chairman, looking at the financial condition and the amount of debt that we have and that which Air Canada has, we have to consider that it is not so much the total amount of debt that is the issue, but the ability to service that debt. If we then look at operating performance, which is the basis for the ability to service debt, then from a cost perspective, our costs are considerably lower than those of Air Canada.
However, the yield, or the effective average fares, are much higher in the east than the west, in fact they are nearly double on a short-haul flight. There is no doubt that Air Canada has a dominant position in that eastern-based market. Therefore, the yield, or the effective earnings per revenue-passenger mile are considerably higher than ours, as well. As much as I would like to say otherwise, Air Canada's financial picture today is considerably stronger than our own.
In terms of management, we pride ourselves on the airline that we run. We have a fantastic group of people.Anyone who has travelled with us in the last several months, which was a period of intense stress and anxiety for all our employees, might have asked if the employees were aware of what was going because the level of service was so high.
Air Canada won a prize last year as one of the top airlines in the world. Therefore, we must accord that they do a reasonable job as well.
I will respond the question regarding our ability to bid for Air Canada. We sat down with Air Canada, as I mentioned, at the beginning of the year, and we suggested there were strong benefits in a merger of the two airlines. They did some work and agreed with that. In the end, those discussions broke up because of their concern about the impact on their balance sheet. We clearly did not have the cash to launch the sort of bid that would have been required.
In locating and enticing Onex to see the same vision as we had, we felt that we were providing the answer to that concern of impact on balance sheet. If a sophisticated investor was willing to invest at what was then a premium to market, and take upside purely from the stock moving up from that point, surely that would give confidence to Air Canada and to the shareholders. That is why we went after Onex and encouraged them to consider this opportunity. We did not have the resources ourselves.
Senator Forrestall: Have you had any discussions with Onex with respect to management, should they be successful in their bid?
Mr. Benson: Brief discussions were held. Our first discussion was regarding who would head the new airline. It was my feeling, and Mr. Schwartz concurred, that when attempting to merge two airlines successfully, unless there is a clear case of competency difference -- and I will assume there is not -- you need to look to the CEO of the larger airline to encourage the mass of people to follow with confidence. I understood that from the beginning. Thereafter, the only statement made by Onex, and supported by American, is that the team will be picked from the best of both.
Senator Forrestall: If there is no merger, do you have a date in the back of your mind beyond which you would no longer continue to operate?
Mr. Benson: I do not have such a date. I do not have a date like that because if we were to set a date, that date would immediately advance forward. If we were to go out and look at a point in time at which we believed we would no longer have cash, the mere knowledge of that fact would result in immediate deterioration in our forward-booking pattern.
In doing our forecast for 12 months based on the last quarter's results, which were issued a week or so ago, we did recognize that at the end of the first quarter and going into the second quarter of next year there would be times when we would not have sufficient cash to meet our obligations. American Airlines has given us a letter of comfort, exhibiting their willingness to grant us time in order to delay and make certain payments to them in order to get through that period.
Senator Forrestall: I turn now to the subject of equipment and the mix of equipment. You are pleased with the 737s, and Air Canada is also pleased with the DC-9s that they operate. I would have liked Air Canada representatives to be here today to ask them the about the age and the useful life that is left in their 747-100 series because it must be getting fairly long in the tooth. What can Canadians expect in the form of equipment in a merged airline?
The other item, which goes with that, relates to the cost of replacement aircraft. Would there be any difficulty in raising the capital needed to pay for the replacement of equipment over the next 10 years?
Mr. Benson: The work we did on the model would indicate a number of things. First, a number of the older aircraft would be phased out quite rapidly. The DC-10 fleet would disappear quickly; and the DC-9 would be removed just as fast.
The next focus would be on the small jet fleet. Canadian operates, very efficiently and very effectively, a fleet of F-28 jets in a 55-seat configuration. However, they are old jets, and they would be the centre of attention in terms of upgrading and modernizing. The 737 fleet has been an incredible workhorse. It has been a very good fleet. Its reliability factor is excellent. I think even Air Canada has acknowledged in public statements regarding their offer that they have considered moving 737s in as a low-cost carrier. WestJet uses 737-200's. They are an excellent airplane.
Senator Callbeck: Mr. Benson, you spoke about the financial difficulties of not only your airline, but Air Canada's, compared to the airlines in the United States. If you could go back five years, what would you do differently? Is it your opinion that it is simply impossible to have two major airlines in Canada?
Mr. Benson: The challenges of geography, population and size are rendered even more difficult with the additional challenge of having four or five of the world's largest carriers immediately south of our border in six U.S. metropolitan hubs which are within an hour's travelling time, and which are willing to compete aggressively for any business from Canada. I think the probability of two full service carriers operating profitably and efficiently is very, very small.
If I went back five years I would wonder why I did not start this process then, provided there was recognition of the issues facing us.
Senator Callbeck: If there is a merger or restructuring, Canadians are concerned about how will it affect the ticket price. Witnesses who appeared before us indicated that they believed that section 66 of the Canadian Transportation Act should be broadened. What are your thoughts on that?
Mr. Benson: I have some thoughts about that, and I think Mr. Schwartz has more than thoughts. I believe he has given some undertakings in that regard. As we are currently structured, both airlines operate a network. That network is geared toward the prime customer, the full-fare, paying business customer. That means that a flight from point A to point B, that is scheduled to depart at 8:00 a.m. will depart on time even if there are only eight or nine people on board because we must gear our service to the full-fare customer. Our network cannot afford to be inferior to the other airlines because that customer will gravitate to the airline where he or she has more choices.
We try to fill the balance of the seats through sales, discounts and special offers even though we cannot cover costs at the prices that we fill those seats. The impact of that is that we must look to recoup those costs by raising the cost of the full-fare ticket. You see fare increases going through consistently.
However, the average fare per seat mile is not going up, because you are trading away on the one hand what you are trying to grain on the other hand.
I fervently believe that the ability to plan a network based on need instead of need and a mixture of competition allows you to deliver the same product, with more visible choices and more frequently to any one customer and at a lower price. We are aware of that and I think Onex is very aware of the ability to lower the price and stimulate traffic through that lowering of the price.
Mr. Schwartz has pledged no price increases and that is a very achievable solution, with potentially even decreases in certain areas.
Senator Callbeck: He has pledged no increases for five years.
However, to return to section 66, do you feel that section should be broadened and strengthened?
Mr. Benson: Are we talking about more regulation?
Senator Callbeck: As I understand it now, they can roll back unreasonable increases in full fares on monopoly routes. As we have said, 90 per cent of the people travel on discount fares.
Mr. Benson: Personally I would be opposed to it. There are five other airlines in Canada and I think we will see growth in those airlines. You have seen very little against this proposition from them. One of the airlines is already talking about fleeting up to meet the opportunity that will be created. I do not that is necessary and I think time will prove that.
Senator Roberge: I wish to turn to the discussions of the merger with Air Canada. You said that Air Canada demanded a cash payment of $1.7 billion and insisted that American Airlines suffer out-of-proportion financial losses. Would you comment on that?
Mr. Benson: Obviously there were suggestions and proposals backwards and forwards about any discount American Airlines might offer in order to facilitate completion of the transaction.
Just to reiterate, American Airlines had rights. They had preferred shares with a face value of some $350 million. These preferred shares which, if called, had to yield a certain return to American that would require a payment in excess of $500 million to cancel those preferred shares. They had a 20-year services contract with Canadian. They had obviously included in that the recoupment of some up-front costs and there were penalties payable if that contract was cancelled. Any time in this year those would average, again, another $500 million.
Expecting that they would get $500 million or $1 billion as a result of this transaction, we knew we would have to ensure that the transaction would never go forward. At an early stage we visited with American to indicate that and to indicate the fact that they would have to be prepared to discount those amounts in some ways.
They made an offer to Air Canada in the area of $450 million that they would receive for cancellation of all those contracts and all those amounts. The response was that they would have to write-off everything, including that $450 million, and someone would have to pay another $1.7 billion in order for the transaction to proceed.
American was not willing to do that. There was no one else with a chequebook that big.
Senator Roberge: After that they came back and made an offer for your international routes.
Mr. Benson: Correct.
Senator Roberge: Could you expand on that?
Mr. Benson: On June 22 or 23, Air Canada sent us an offer. This offer included a couple of things. It offered to buy our international routes; they would take over our 747 and 767 fleets at the value of the current debt, whatever that happened to be; and they would take over the pilots who flew those planes and the international employees around the world that serviced those planes in the different cities. We do not have many of those people, but they would take them over. They left themselves the option to decide if there were other employees they would want, such as flight attendants or other groups. They would also take up all the spares related to those aircraft. They would pay us $400 million for all that, plus $150 million for the spares and the simulator and various other items that went with it.
We considered it from three perspectives. First, we asked ourselves: Would that cash solve our cash problems going forward? Second, were we receiving fair value for the assets being sold? Third, was the remaining airline, in fact, viable or was it something that would simply peter out? Our conclusion, based on the information that we had, was that the answer to all of those questions was "no".
Senator Roberge: All three questions?
Mr. Benson: Correct. In fact, depending on the assumptions made going forward, that cash would last somewhere between nine and 18 months. Therefore, it did not solve that problem. In terms of fair value, the 767 and 747 fleets are actually worth some $210 million to $220 million, more than the direct bid on them, so we felt we were not receiving fair value for that, either.
Senator Roberge: What about the payment for routes?
Mr. Benson: The $400 million?
Senator Roberge: No, for the routes, themselves. For example, were they paying for all the routes you have right now?
Mr. Benson: That was all included in that price.
Senator Roberge: That is a bargain deal.
Mr. Benson: The result would have been that we would have sold off the one part of the company that was truly profitable. We could not see how what would be left could be profitable.
Air Canada was adamant that, based on their assumptions, it was profitable. I understand they expressed the same opinions to representatives from the Department of Transport.
We asked for a meeting to go through the pro formas and go through the assumptions and they were extremely reluctant to have that without some protection. I think they felt that we would, in our discussions in some way, be violating the Competition Act. I do not know the detailed reasons. They did not give them to us. They were unwilling to sit down at that point in time without some coverage.
At one point they indicated a willingness to have people from the Competition Bureau sit in on the process. Our reaction was that we could not sign on to any process which could be 12 to 33 months given the time available to us, particularly as one of the conditions of Air Canada's offer was that we had to cease all our discussions and negotiations on long-term capital during this process. We said we could not do that.
Senator Kirby: Madam Chairman, I have a question of clarification.
Are the international routes an asset that you can sell? It has always struck me that international routes are awarded by the government and that if you or any airline fails to provide service within a specified amount of time, those routes automatically gravitate back to the Crown. I did not believe that they were an asset that could be traded and sold between airlines once awarded by the government. Am I right or wrong?
Mr. Benson: I believe you are correct, senator. On a number of occasions in the United States routes have been sold and traded. I do not believe that has happened in Canada.
Senator Kirby: I know of no case in Canada where that has happened.
My question is: If I am right in that, what was the substance involved in offering you $400 million for an asset that you could not have sold anyway?
Mr. Benson: We could have sold them the aircraft and equipment. We could have arranged for a transfer of people and we could have committed not to fly those routes. In not flying them, we would have immediately been subject to the use-it, lose-it policy and perhaps would have lost the routes quite quickly. Perhaps indirectly we could have accomplished what directly did not appear possible.
Senator Kirby: That would be on the assumption that there was only one other potential purchaser. I return to the notion that, if one has an interest in competition policy, I do not understand why there was apparently an implicit assumption on the part of both of you, I presume, in these negotiations that if you were not willing to service the routes, the correct public policy would be to give them to Air Canada. Maybe those routes should have been given to WestJet or a charter carrier. It is interesting that two private sector companies were negotiating to sell an asset that they did not own. This is a novel situation
The Chairman: Is that a comment?
Senator Kirby: Yes.
Senator Roberge: To complete the questioning in this area, would you have been left with only the domestic operation?
Mr. Benson: We would have been, yes.
Senator Roberge: Would the domestic operation have been viable, per se?
Mr. Benson: In our opinion, no. The reason that there was a variable time frame in which the money would run out was based on certain assumptions. When people travel overseas with us they also travel domestically. They might go from Toronto, to Ottawa, to Vancouver and then catch an international flight. Would we keep that domestic portion of the revenue going forward, or would it go to the carrier that was carrying them internationally? That is worth, again, some $350 million to $400 million a year additional revenue. That depends on how long your cash lasts.
Senator Roberge: What is the total amount of your debt right now?
Mr. Benson: On balance sheet debt is in the order of $800 million.
Senator Roberge: What is the figure off of the balance sheet?
Mr. Benson: One would have to value each of the capital leases on the different aircraft, but it is probably in the area of $2.25 billion.
Senator Roberge: Who owns those leases?
Mr. Benson: A variety of aircraft lessors. In some cases they are leases, in some cases they just sell lease-backs.
Senator Roberge: Is the other portion of your debt, the balance sheet portion, owned by institutions?
Mr. Benson: A significant portion of the debentures that we issued a couple of years ago, are secured, but some are not. The were issued in U.S. dollars and that would amount to some $400 million. They are owned by a variety of pension funds, institutions and financial funds.
Senator Roberge: Would it have been possible for you to renegotiate a deal with American Airlines to extend the debt or to bring in more cash?
Mr. Benson: We do not have any debt with American Airlines, as such. We did go to American Airlines as part of the re-establishment of our financial base, in 1996, and asked them to accept a four-year, 33 per cent reduction in the amounts that we paid them under their contract, and they did agree to that and that is still in force today -- some $250 million a year.
[Translation]
Senator Poulin: Your answers are testimony to the tremendous respect you have for the company officials who were unable to appear before the committee today.
[English]
I would like to make a comment following on what Senator Kirby was saying. I want you to know that all senators represent different regions, many of us represent different professions, and many of us represent different minorities in society. We hope that, collectively, in our work and with the time that we are taking to review the issue, we can contribute to the public policy on the restructuring of the airline industry. Your presentation here today is extremely important to us.
At the outset of your presentation, you said the industry is broken and you gave the three reasons: seasonality, geography and duopoly, and you explained them well. Many Canadians are under the impression that we are in this situation because Canadian Airlines is nearly bankrupt.
I should like, therefore, to take a step back. Even though we have read all the briefing notes, and thank you for a lot of the information that came from your company, could you draw us a picture of what is Canadian Airlines today; and what would be the impact of a bankruptcy?
Mr. Benson: Today we are the airline with the most potential, but we need something to help realize that potential.
If I can go to the second half of the question and then I will try to come back and address the first aspect. The impact of a bankruptcy on an airline is a fairly dramatic event for everybody, clearly for employees and investors, but just as equally for the customers. We have only to see what happens in a strike to get a real sense of what happens when an airline goes out of business.
There would immediately be insufficient seats to meet requirements on almost every single flight. That shortage would continue, in our estimate, for anywhere between 15 to 18 months. Air Canada could not come in, for instance, and say: "Okay, we will take over the 767 and the 747 fleets." There are creditors involved. The creditors have a choice: Do they wish to continue, or will they decide to move the airplane to another place in the world? These are highly transportable assets. That whole process can take two or three months. Many times these leases are held offshore and the offshore lessors simply do not move quickly. There was an aircraft of a South American airline parked in Toronto for some time. That was a classic example.
Even should Air Canada or another airline then be able to gain control of the aircraft, the next thing that must happen is the plane must be standardized, the cockpit and galleys must be standardized. If the plane arrives in, say, Rome you must be able to load food. The trolleys will not fit in the galleys.
The reconfiguring of an airline typically can cost $3 million to $5 million U.S. dollars. At the same time, you must start training pilots. Even if Air Canada were to hire 100 of our pilots, those pilots would come in at the bottom. They would start flying the smallest airplanes Air Canada has. They retrain each group of pilots. It is called "pyramid" training and it takes time. It cannot happen quickly. In that time there are simply insufficient seats. It is a catastrophic event.
If you study what happened to Eastern Airways, the routes that they flew, and what happened to airfares for 18 to 24 months after they went out of business, you will get a real sense -- even in a country where there are five or six big airlines -- of the impact of a bankruptcy. It is a traumatic event for everyone. For that reason, we say that is the last alternative, and one we must fight hard to avoid.
People focus tremendously on the differences between Canadian and Air Canada. We are committed to service. We have always been committed to service. We have a great reputation and a great history in that regard. In Asia we are recognized as one of the top airlines in the world.
You mentioned earlier my respect for Air Canada. I think they do a good job too. I think one of the greatest challenges any CEO could have is to bring these two groups together and produce the world's very best airline. That is a role I would love to take on, and one I probably will not get. Great opportunities are ahead of us. I hope I have answered your question.
Senator Poulin: Canadians in different regions tell us their main concerns are safety, service and affordability. When you are from Northern Ontario, all three concerns are extremely important. One worries when one hears about a possible merger with a single national carrier. What do you see happening to the regional airlines?
Mr. Benson: The plan that Mr. Schwartz has laid out clearly outlines a merger of the two affiliates of the major airlines into a single airline. It is immediately apparent that, when you take two split customer bases and you put them together, the opportunity to fly any route that you now fly increases. In fact, the opportunity to fly with larger equipment and more frequently increases, also. There are several opportunities that we no longer have. Air Canada and Canadian have both subcontracted routes in the last year to 19-seat Beech aircraft, for instance. We have done that because the communities are demanding that frequency. We do not want to be less frequent than the other guys. We both fly at the same times, but both of us cannot afford 34-seat airplanes on every one of those routes. I think what you will see is, not six planes a day, but four larger planes a day, spaced throughout the day.
In terms of safety and service, in my opinion both of those things will improve. Whenever you go to a larger aircraft, and whenever you can fill the seats on a larger aircraft, the average cost per seat is reduced. The opportunity is there to ensure that airfares do not up, as promised. As well -- and I realize my scepticism in saying this -- there is the opportunity to lower the gross fare without lowering the average fare.
Senator Poulin: When the Minister of Transportation was before this committee, he gave a very good description of his vision into the new millennium. He said that what we want is a safe and healthy Canadian airline industry, one that is owned and controlled by Canadians, that serves all parts of Canada at fair prices, and that is capable of competing with the biggest and best airlines in the world.
If you were the Minister of Transport today and you were trying to ensure that all those goals were met, given your experience in the airline industry what demands, or conditions, would you make on a company that was forming a new single, national carrier in our country?
Mr. Benson: I am not sure I am qualified to answer that question.
First, the minister is dealing with many of the issues that need to be dealt with. He has asked for the issues regarding service, price, safety, and frequency to be put on the table. Some of those assurances have been received already.
I would add only one item, and that is speed of decision. This process is hurting many people. There are 40,000 people directly involved in the industry. There are probably double that number whose livelihoods depend on the industry one way or the other. As well, 26 million Canadians are wondering what the choice will be. I would add only speed of decision to the items that he has already raised.
Senator Poulin: He is certainly trying to speed us up, also.
Senator LeBreton: Mr. Benson, you said in your opening statement that you had no offer from Air Canada, only Onex. Can you explain why that is the case? As well, did you expect an offer from Air Canada?
Mr. Benson: Air Canada announced two weeks ago their intention to make an offer for Canadian at $2 per share. At that time, air Canada outlined its vision. They announced at the time that an offer would be mailed within two weeks. It takes time to put together the documentation, to get the list of shareholders from the company, and then to actually mail out the documents.
What I intended to say is that, to date, we have not received that piece of paper. Until we do, obviously, there are significant questions.
Senator LeBreton: I do not want to appear suspicious, but considering the Onex offer and the situation your company is facing, surely an offer from a company the size of Air Canada should be forthcoming, especially in this climate. I cannot help but wonder if they are just waiting for Canadian Airlines to go under.
Mr. Benson: I cannot speculate on that. I can only give you the facts as know them.
Onex has produced an offer that we have endorsed. We feel that it meets all of the key issues. We think it provides all three stakeholders significant advantages over where they are currently. My personal commitment to Onex comes from their keen sense of the nature of the employee in the industry and their commitment to guard and protect that employee going forward.
I have an obligation under the contract I have signed with Onex not to solicit other bids. On the other hand, as a director of Canadian, I have another responsibility: I must honour my fiduciary responsibility of aggressively and thoroughly examining any other offer that is received. However, I must wait to receive it, and at this point in time, I have not received it.
Senator LeBreton: How have you consulted with the shareholders of Canadian? What is their role at this time?
Mr. Benson: The shareholders of Canadian have probably lowered their expectations in the last three or four years. They see an opportunity. They appear to be enticed by that possibility and want to have a chance to have a share in that new opportunity.
That is one reason we endorsed the offer by Onex. That offer gives shareholders the right to take half in cash and another half as a share of the new Air Canada. In commentary that we have received so far, the shareholders are supportive of the Onex offer. We have a meeting of shareholders next Monday afternoon, at which time we will have a sense of how they feel.
Senator LeBreton: Has all the speculation, the talk, and the newspaper ads had a direct effect on the customers, or potential customers? Has it affected your ability to promote the airline and to sell tickets and packages to the South?
Mr. Benson: Thus far, no. To the contrary, we have seen our total share of the market inch up -- not by much, but every inch up is a positive thing. What I cannot stress enough here is the incredible commitment on the part of every one of our employees. Our employees are determined that you will have the very best experience with us, and I think that is showing.
Senator LeBreton: Perhaps that can be interpreted as a vote of confidence from the public, as well.
Mr. Benson: I would be happy with any positive sign.
Senator Watt: My questions will be related to the North. Is your relationship with Canadian North -- which used to be, in a sense, the same company -- the same today?
Mr. Benson: I believe the relationship is excellent on both sides. Those gentlemen will be meeting with you at some point, I believe, at which time they will be able to give you their views directly.
It has been a good relationship on both sides. The customers have enjoyed the service. We look forward to that relationship growing with the new airline.
Senator Watt: If Canadian International were allowed to go into bankruptcy, what would be the effect of that on Canadian North?
Mr. Benson: Under that scenario, they would find themselves competing with other northern carriers that perhaps have a close relationship with Air Canada. I would think that that would be very negative for them. We rely on their feed to us and they rely on our feed back to them.
Senator Watt: In what areas would that be -- management and air fleet?
Mr. Benson: We provide a number of services -- for example, pilot and other handling services. However, although those services are important, they are not essential. What is essential to their financial health is the flow of customers backwards and forwards. If customers are climbing on a plane to fly to a city and there is no network with which to connect when they reach that city, the number of customers you will be attracting will be limited.
Senator Watt: Does Canadian International still have financial interest in Canadian North.
Mr. Benson: It is a joint venture.
Senator Watt: Could you give us the breakdown of that joint venture, in terms of shares?
Mr. Benson: Your question is probably better dealt with by those people who are intimate with the situation. It is a cooperation; we provide services. The term of our contract is five years. We provide certain in-flight services on a two-year contract. As well, we provide certain ground-handling services. In addition, there is a connection centre, which allows people to give single air fares from point "A" through point "B" on to point "C", even though they are crossing from one airline to another.
Senator Perrault: Canada has two great airlines. They are good by international standards and they compare favourably to any of the U.S. carriers. I was on my way to watch winter baseball a few years ago and the experience was similar to an old-fashioned land race. I was glad to get to my seat and get strapped in. In my opinion, the quality of some of the U.S. carriers is down -- I do not expect you to comment; I suppose it reflects the highly competitive nature of the airline business. On the way back, they lost my bags. It was not a good trip for me.
The idea of one airline has a certain appeal. Qantas is the only Australian international carrier, and it is a good one. Competition is assured, however, because Qantas must compete with every other airline in the world. The domestic market is serviced by smaller airlines.
Does that concept have any merit at all? It appeals to me. I am old enough to remember when CP was granted domestic flying rights. Those rotten box lunches that TCA used to serve disappeared in about 10 days. Suddenly, there was competition, so they no longer served those box lunches.
You have excellent in-cabin service on your airline. In fact, I have one of your tickets in my jacket at the present time. Is there merit in the idea of having a gung-ho, single Canadian competitor on the world stage?
Mr. Benson: Yes. However, as I said earlier, Canada's population is relatively small. We have the added challenge of having five large U.S. airlines -- something Qantas does not have to face -- sitting immediately south of the border. Most of them have hubs within one hour of our major cities.
The ideal scenario is one in which there was a single carrier, serving internationally and domestically. It would be a full-service airline. It would offer to customers frequency, choice, attention to detail, lounges, all the amenities that a full-service airline offers, with provision for other carriers to offer service on particular routes. Some may do that nationally; others may focus on the west, the east, the centre of Canada, or simply on transcontinental routes. The basis for that type of service exists. Those carriers are eyeing the market in the event that that opportunity presents itself.
Senator Perrault: You would be competing domestically with WestJet Airlines Ltd., would you not?
Mr. Benson: Yes, with WestJet, with Royal, and with Canada 3000.
Senator Perrault: That is a charter line, but they could run scheduled flights as well, could they not?
Mr. Benson: Yes. They do fly scheduled services today, and they fly them with practical aircraft.
Senator Perrault: There is concern that the competitive nature of the industry have a feel for the traveller.
Mr. Benson: If status quo were an option, we would all be heading in that direction quickly. "Status quo," as we see it, is absolutely not an option. Strong action is required -- hence, the Onex offer.
Senator Perrault: In a conversation that I once had with Ian Sinclair when he was a senator -- Mr. Sinclair was the former head of CPR -- about Pacific Western taking over CP, he said, "Senator Perrault, this cannot happen. There is too much debt in this deal." A great deal of that debt was accrued when he was there.
Do you think it was unsound right from the beginning?
Mr. Benson: Hindsight is always beneficial. There is no doubt that this industry is highly cyclical. To sustain profitability through a highly cyclical industry, substantial amounts of capital are required. It is clear from our balance sheet that we have not had that at any time in the 1990s.
Senator Perrault: I hope that we succeed in getting this deal put together. I have flown with former Cold War fighter pilots and I never want to fly in those planes again.
Senator Kirby: I wish to ask for some clarification, Mr. Benson, regarding your response to some of the questions asked by my colleagues as well as your opening statement. You said in your opening statement that "by not addressing the need for rationalization up front and by announcing their intention to offer creditors and suppliers far less than market value for their positions, Air Canada is inviting bitter and lengthy litigation."
I thought that I had read all the material that had crossed my desk. Perhaps I did not, or maybe you know something that I do not know. I did not see any announcement about Air Canada's intention to offer creditors and suppliers far less than market value for their positions.What are you referring to there?
Mr. Benson: I am referring to the press release and to some of the public statements that Air Canada made when, two weeks ago, they made the announcement about the offer. At that time, they announced the intention to seek compromises from creditors as part of their plan going forward.
Senator Kirby: Only Canadian's creditors, not creditors of Air Canada.
Mr. Benson: If you make an offer for the ordinary shareholders, will you pay them what is perceived to be full market value at the time and then seek compromises from people who would regard themselves as senior in terms of distribution to the ordinary shareholders? How can that be done, without putting jobs at risk? That is the worry.
Senator Kirby: That answers my question. It had been indicated that there would be a loss of jobs at Canadian.
I should like to follow up on your response to Senator Roberge's question regarding what would have happened to AMR -- American Airlines -- under the initial discussions that took place between you and Air Canada last spring.
I understand the historical proposal. You explained why it was unacceptable to AMR at the time. What specifically happens to AMR under the current Air Canada proposal?
Mr. Benson: We do not know the answer to that question. Again, it is one of the things that may be contained in the detailed proposal. American Airlines has certain rights of conversion into ordinary shares.
Senator Kirby: They have said that they cannot do that.
Mr. Benson: They have said that they must not do that all after the parent company. However, whether or not they intend that to apply to not being convertible at the operating company is a question that must be answered.
They have indicated that, as they meet with creditors and attempt to compromise amounts payable to them, American will be part of that as well as a preferred shareholder. However, we do not know the answers to those questions.
The initial discussions with Air Canada included co-chairing with American Airlines, a oneworld membership for the new airline, and an option for the new airline to seek the services of Sabre for the combined carrier while not having to pay penalties for cancelling the old contract.
In fairness, we did not reach total agreement on all those points as to where that would happen.
Senator LeBreton: Therefore, at the time, they discussed the possibility of being part of the oneworld alliance. Air Canada had no problem with that; is that correct?
Mr. Benson: Yes, they did discuss oneworld.
Senator Kirby: And Sabre?
Mr. Benson: Yes, and Sabre.
Senator Roberge: On the Air Canada offer, they are talking about Delta, not American Airlines, becoming a partner with Canadian, if Canadian is to exist. Is that correct?
Mr. Benson: Yes. There are many questions, and we have only public statements and press releases upon which to rely. Also, one of the senior officers indicated a willingness to allow us to continue to co-share or operate with oneworld members. I have no idea how that was put together. As I said in my opening remarks, this leads to confusion. Who is a member of what? If I fly with Canadian, am I earning points that I can utilize on Lufthansa, British Airlines, United, or what? It is very confusing and, therefore, a concern to us.
Senator Roberge: Maybe that is why they are not here to answer those questions.
Senator Kirby: You commented on the consequences of the bankruptcy of Canadian Airlines, including a shortage of seats. You spoke about what happened to fares in the United States when Eastern Airlines went under. You said that that is what would happen if your company goes bankrupt.
There has been much speculation in the media that the Air Canada offer has been structured in such a way as to make the bankruptcy of Canadian, if not inevitable, at least highly likely. I recognize that they have not made you a formal offer, and that, therefore, you have the same limited information as we have, but have you any sense of the probability of a bankruptcy of Canadian under the Air Canada offer?
Mr. Benson: No, I do not. I can only repeat that I must look at what I have. I have an Onex offer. It is a good offer, one that seems to address the key issues. The other thing that worries me as much as anything is time. Time is working against me, and perhaps others.
Senator Kirby: I have two questions, both of which deal with the tough public policy problem of competition. If you look at the evidence that has been presented to us, two things become clear. The first public policy issue is that the country will have one dominant airline. The related question is whether we arrive at that via a merger or a bankruptcy. The second public policy issue is this: Once we get to one dominant airline, how can adequate competition be assured, so that consumers have good service and are not taken advantage of by virtue of the position of the dominant carrier?
The Air Canada proposal says that consumers will continue to benefit from competition on fares and service at all levels; that Air Canada and Canadian will not be merged; that the airlines will operate as separate entities providing choice and distinct brands. They clearly argue in their written material that competition will continue to exist even though both airlines would be owned by the same parent.
I know it appears that I am anti-Air Canada, but I am not. I have been an Air Canada customer for a long time. This committee has asked a number of witnesses, including the Canadian Association of Airline Passengers, the Consumers' Association of Canada, and the Competition Bureau, if they had any examples of a parent company owning two subsidiaries and the two subsidiaries providing adequate competition for each other. So far, no one has been able to give us an example of that. Can you give us an example in the airline industry? Are we missing something, or is the reality that two airlines owned by the same people will not compete?
Mr. Benson: It goes beyond that. Air Canada has indicated a desire to quickly rationalize flights between the two carriers -- in other words, to take out some of the unnecessary seats.
Senator Kirby: Which you agree is a necessary objective?
Mr. Benson: That absolutely has to happen. We must be efficient and we must be able to compete internationally. The obvious question is: Why not save some overhead?
Senator Kirby: If that is the case, are you not in fact better to merge the airlines, since you said that they will not compete with each other, on the basis of your assessment -- which, by the way, is literally what every other witness has said to us? Have you any idea why they would not get rid of the two head offices?
Mr. Benson: I do not. In our discussions with them in the first months of the year, the intention was a complete combination, a genuine merger.
Senator Kirby: I have one last question for you -- and if you cannot answer it now, I should like you to give us an answer in writing before we write our report.
In the letter from the Competition Bureau to Mr. Collenette, there is long list of proposals for helping to maintain competition in an environment in which there is a dominant carrier. I am not dealing with my second public policy problem. It would be helpful for us to have your views on which of those are practical, in the sense that they would be effective, and which are not. Some of them have other public policy problems. There is the issue of cabotage, for example, which gets us into a different public policy field. However, I am interested in your views, as someone in the airline business. Certain steps would create an effective competitive market strategy, some would not. Regardless of the outcome of the current battle between the two proponents, the minister has clearly indicated that he will have to change the legislation. He has clearly indicated that steps will be taken to ensure that a dominant carrier cannot take advantage of consumers.
The committee would be interested in your views on which of the various proposals in the letter from the Competition Bureau are likely to be more or less effective. You may want to comment generally now, but if you could give us a detailed response within the next 10 days, that would be useful.
Mr. Benson: We will respond in writing. My only comment at this time is that we are in a highly competitive industry; that Canada is more exposed than most countries because of the location of the major hubs and the ease with which U.S. carries can provide a single link from any one of those hubs to Canada, and back through that hub again, competing effectively and aggressively.
The market itself stimulates traffic at certain numbers. WestJet has grown and has done very well in the last three or four years, in the face of both carriers competing with it -- perhaps because of both carriers competing. They have certainly proven that when there is a niche that the major carrier is not filling there is an opportunity to get in and grow. The charter carriers have done the same thing. We will see that opportunity will accelerate after the formation of the single airline.
We will be happy to give you a more elaborate written response to that letter.
Senator Kirby: Just to comment on the witness's last comment, Madam Chairman. The Senate Banking Committee studied this issue in a completely different context; it looked at how to encourage the growth of small financial institutions. In the U.S., in every case where two large U.S. banks have merged and become the dominant player in a community, in the ensuing 24-month period the growth of second-tier institutions has been amazing. Those second-tier institutions always seem to be able to go in and take 20 to 25 per cent of the market away through people who just do not want to use the big players. It may be that one positive outcome of this will be the growth of second-tier airlines. The analogy may not be perfect, but it is interesting in that it would appear to be a parallel.
Senator Roberge: Today in Quebec there are six or seven small, regional carriers in the North that have decided to merge because of the opportunity that will be created.
Senator Finestone: If at the upcoming Air Canada shareholders' meeting the shareholders decide that they do not wish to proceed, how will that affect your wish for speed of decision?
Mr. Benson: The major exposure that Canadian Airline shareholders have under the current Onex proposal is that it is conditional upon the Air Canada side proceeding. Clearly, to the extent that Air Canada shareholders decide on Monday that they do not want to proceed, our offer is somewhat at risk. Hence, the process would likely be delayed. We would have to study the response to that and, indeed, what other offers might come forward.
Senator Finestone: Would you like to see this go forward?
Mr. Benson: We would like to see this proceed with all haste. Financially, it would be a good thing. From a customer point of view, it would take away a significant amount of stress, particular over the next five or six weeks. From an employee point of view, it is important to bring closure to this issue. A merger would result in the finest airline in the world. The sooner that process can start, the better, in my opinion.
Senator Finestone: I was listening to your discussion with Senator Forrestall. You were discussing your F-28s. You indicated that they were old and in need of replacement; is that accurate?
Mr. Benson: I indicated that they were old. I also tried to indicate that they do a great job for us. However, in a combined fleet, you would certainly look to modernize the entire fleet, and the F-28s would be one of the three types you would look at.
Senator Finestone: In a cost analysis, do you separate out cost of maintenance from the cost of sale of tickets in your operating budget?
Mr. Benson: Yes, we do. We separate out each cost. We do lump together what we call ownership costs, but we certainly separate out maintenance, and we watch them carefully, by air time and by fleet time.
Senator Finestone: What percent of total cost is maintenance cost?
Mr. Benson: That would be in the order of 10 per cent of total costs. There are two types of maintenance. The first is what we call line maintenance, the small things that are addressed daily as the aircraft is on the line and working. The second type of maintenance cost is that associated with taking a plane out of service, the A, B, C and D checks. Maintenance is a mixture of those costs, in the order of 8 to 10 per cent of total costs.
Senator Finestone: I would presume that the cost of maintenance is less with a homogenous fleet than it is with a very highly diversified fleet.
Mr. Benson: That is correct. Clearly, the newer the fleet, the lower the maintenance cost -- the higher the cost of the plane, also, of course. Secondly, the fewer fleet types you have, the fewer different sets of spares you need to maintain in every base that you fly into. As well, the fewer the fleet types the fewer the number of pilots on reserve, of crews on reserve. There are considerable efficiencies to be had by reducing the number of fleet types. That would be one thing a new airline would strive to do as quickly as possible.
Senator Finestone: Do you service all your affiliates?
Mr. Benson: When you say "service", we perform a variety of physical services.
Senator Finestone: "Maintenance" is the word.
Mr. Benson: No, not all. We do not even do all the maintenance on our own fleet types. For example, we only have four 747s. Four is too small a number to justify the cost of a maintenance line. Therefore, our 747s would be serviced by outside parties. We do do certain work on other aircraft, 320s and 737s, for instance. We probably have one of the world's best teams on F-28s.
Senator Finestone: I heard from my colleague that the F-28 is a delightful plane, comfortable and efficient, but that it is getting old and tired.
I am interested in the purchase by InterCanadian of the Embraer small jet. I understand that InterCanadian bought at a much discounted price. How do you perceive those jets fitting into the fleet needs in a merged airline?
Mr. Benson: We no longer have any ownership interest in InterCanadian. One of the challenges of the competition is that the management team at their particular airline gets to decide what works best for them.
Clearly, there is a preference to keep to Canadian aircraft whenever possible. I believe that some of those Embraer purchases may have been delayed or cancelled. I believe that InterCanadian is reconsidering those purchases. In the end, if you have free competition, they will decide what works best for them.
Senator Finestone: Given a world of free competition, does signed and sealed mean to be delivered, as signed and sealed? Or can you revert in the air industry?
I am told that there is some flexibility, that there is a way in which a company can buy and have delivery in different slots; is that accurate?
Mr. Benson: That is correct. There is a significant amount of freedom. Companies will buy and sell positions, depending on the need for their airplanes. Companies will swap positions if they discover that their need is for a bigger airplane or a smaller airplane. Sometimes there are simply options where you put money down and you either try to delay the option or you lose the money that you have put down. There is a fair amount of freedom, in terms of dealing, yes.
Senator Forrestall: A quick observation: WestJet succeeds because they do not violate the hunger line. The price of their tickets is slightly lower.
If this merger goes ahead, will there be any loss to the taxpayers? Is there a loss from Canadian's point of view? Taxpayers will not have to absorb any of your debt, will they?
Mr. Benson: No, they will not.
Senator Forrestall: I ask that question because one of the most fascinating figures in Canadian government economics is $800 million. I do not know what is magic about it, but on three occasions we converted debt to equity for Canadian National. On at least one occasion -- in fact, more than once, I believe -- we converted debt to equity for Air Canada.
Does the debt get out of hand? You said that a major problem of operational income was servicing your debt. Is that the magic number?
Mr. Benson: It starts at the point where you look at the yield, what you are able to earn per mile, and compare it to your costs. If what you are able to earn exceeds costs, you have an ability to service debt.
In our case, it has not. As we have tried to build our way back up -- we have had an incredible amount of debt to service -- the two lines have simply crossed. I am not sure that $800 million is the magic number. When we looked at our numbers, we felt that if we were able to attract $500 million of equity during this business plan it would form the basis for moving forward.
Senator Forrestall: I wish to turn to another area now. Please accept my sincerity about this. Are you a registered lobbyist in Canada?
Mr. Benson: Yes, I am, for Canadian Airlines.
Senator Forrestall: For what purpose?
Mr. Benson: Clearly, I have Canadian Airlines' interests at heart. I meet frequently with people and talk to them about Canadian Airlines, and I am advised that it is best to disclose right up front that I do that.
Senator Forrestall: Did you lobby only for Canadian?
Mr. Benson: I am not sure I can answer that question. I certainly have lobbied primarily for Canadian Airlines. If at different times my lobbies benefited others -- the initial intention was always Canadian Airlines.
Senator Forrestall: Whom did you lobby?
Mr. Benson: At different times, many people. The Department of Transport would be our primary area.
Senator Forrestall: Was it primarily with government public servants as opposed to government members?
Mr. Benson: I met primarily with government public servants, yes.
Senator Forrestall: Did you at any time have meetings with Jean Pelletier, of the Prime Minister's Office.
Mr. Benson: Yes, I have had meetings with him.
Senator Forrestall: Did you meet with Mel Cappe, of the Privy Council Office?
Mr. Benson: Yes, I have met with Mr. Cappe
Senator Forrestall: I should like to ask you what you were lobbying about and whether or not you were successful. I might want to hire you some day, if I decide to start an airline.
Have you done any lobbying for Mr. Schwartz, of Onex?
Mr. Benson: To the extent that Onex and Canadian's interests are aligned, I am sure I have. My lobbying has been entirely as to how to address the issues facing Canadian Airlines and, in the process, the airline industry.
Senator Forrestall: There is no hanky-panky here at all, is there? That is pretty straightforward.
Mr. Benson: There is certainly no hanky-panky on my part or on the part of any of the parties that I have dealt with.
Senator Forrestall: Thank you for answering that question. It was my intent to get that response on the record.
I now turn to the subject of the Competition Bureau. On the general question of a regulated air industry, a re-regulated one, do you see any need for a regulated industry? Do you see a need for government to move in forcefully?
Mr. Benson: That certainly would not be my first choice. I said earlier that I thought that the minister had taken a courageous step, and a step with a lot of foresight, in moving down the path that he has. What he has really done is he has given the industry and the private sector a chance to come up with a solution that he and others can look at and vet.
I should like to applaud him for that, whatever the outcome is. I would hope that that sector would be given a chance to see if it can resolve the issues before we went to the very drastic step of re-regulation. I do not believe that history has shown us that regulation has necessarily produced efficiencies or lowers prices.
Senator Forrestall: I tend to agree. However, what about your simulators? Are they part of the deal? Were they always somewhat at arm's length?
Mr. Benson: The simulator and its related training is run as a business. We obviously train other airline pilots, as well. We also use other airline simulators in our own training. It is certainly included. All the assets would be included in whatever the process is.
Senator Forrestall: Were you ever registered as a lobbyist before the early part of this year, January or February?
Mr. Benson: No, I was not.
Senator Callbeck: Mr. Benson, I wish to return to one area that you spoke about, namely, regional airlines.
It is something that is important where I come from; Air Nova and InterCanadian fly into Charlottetown. Yesterday when Mr. Schwartz was here, I understood him to say that, if the merger of Air Canada and Canadian went ahead, he felt these regional airlines would grow and prosper and help to provide healthy competition.
In answer to a question by my colleague Senator Poulin, I thought I heard you say that you felt that regional airlines would probably merge. Could you clarify that for me?
Mr. Benson: What I was trying to indicate is that with respect to the two regional carriers that are right now the subsidiaries of the two major carriers, Canadian and Air Canada, I believe the intention is that those two would merge and that Mr. Schwartz would ensure that they are run as a single carrier. There will still be other carriers running in competition to them locally, and InterCanadian is likely to be one of them.
Senator Callbeck: Would it not be very difficult for other regional airlines to compete with that?
Mr. Benson: The major regional carrier has the advantage, perhaps, in that they are owned by the major carrier and their services can be closely aligned with the major carrier. The negative is that their costs reflect that. They become full-service carriers. They operate a frequency whether or not their seats are filled at the time. That always leaves the opportunity for the lower-cost carriers to provide a different cost service. Businesses such as WestJet have proven that.
The Chairman: Thank you, Mr. Benson, for your presentation today.
The committee adjourned.