Cablegate: Air Canada's Financial Woes May Spur Goc to Alter Fees

This record is a partial extract of the original cable. The full text of the original cable is not available.









E.O. 12958: N/A
SUBJECT: Air Canada's financial woes may spur GOC to alter fees

1.(U) Portions of this message are Sensitive But
Unclassified, please treat accordingly.



2. (U) Air Canada's fourth quarter losses in 2002 are
significant and have forced that airline to try to sell its
maintenance, ground handling and commuter-feeder airline
units. The federal government may reduce the air security
fee from C$24 to C$18 to boost air travel, but there are few
other options for federal cost cutting that can be passed on
to the airline sector and traveling public. In the wake of
global turbulence in the air travel sector, Air Canada and
Canada's other airlines will have to adapt and restructure
to the new market realities rather than rely on GOC
maneuvering. However, restructuring may prove difficult
unless the airline can attract foreign capital. End summary.

3. (U) After posting profits in the spring and summer of
2002, Air Canada, which accounts for more than 70 percent of
all air passenger travel in Canada, took a beating in the
last three months of 2002. The airline lost C$364 million
dollars (US$239 million) in the period, compared to C$277
million dollars (US$182 million) in the period in 2001. To
stem its losses, the company intends to: 1) sell stakes in
its aircraft maintenance, ground handling and regional
airline units; 2) seek changes in work rules and other
concessions from its 36,000 employees, and 3) turn its cargo
operation, employing 1,700 people, into a separate

4. (U) The troubles of Air Canada have led the Minister of
Transportation, David Collennette to consider reducing the
government imposed C$24 a ticket airline security fee and,
or, reduce other fees such as navigation system charges and
airport landing fees.

5. (SBU) According to Ministry of Finance officials the
lowest the security fee could be reduced to, and still meet
revenue needs given federally mandated aviation security
expenditures, is C$18. An official with the Airline Pilots
Association (ALPA) in Ottawa is confident that the fee will
indeed be lowered, however, whether it will be reduced
across the board or will be prorated on distance flown, is
still up in the air.

6. (U) The Minister's expostulations on reducing Navigation
fees and airport fees are much less certain. The entities
that collect these fees and provide the corresponding
services are private sector corporations that have not been
under federal government management since the mid- to late-
1990s. These non-share corporations cannot raise equity
capital and must rely on fees and debt to finance their
activities (and all surplus funds must be reinvested in the
corporation). NAV Canada, which provides Canada's Air
Navigation Services, was spun out of the federal government
in 1996. It owns its infrastructure assets and sets its
fees independent of the GOC.

7. (U) The federal government, however, remains the owner of
Canada's major airports, although they are operated by
independent local "Airport Authorities" (and the GOC is paid
rent under sixty-year long lease arrangements). The airport
authorities' fees and charges are not subject to review by
the GOC. In particular Airport Improvement Fees (AIF)
provide an attractive revenue source since passengers are
largely captive. All major Canadian airports have either
introduced AIFs or are in the process of doing so. Thus the
GOC cannot simply force the airport authorities or NAV
Canada to reduce fees - and unless the GOC provides
operating subsidies to these entities to make up for any
lost revenue there would be no incentive for them to do so.
In a best case scenario the GOC would have only the option
of reducing the rent it takes from the airport authorities
and hope that the airports would pass the savings along to
air travelers, perhaps by reducing AIFs.


8. (SBU) At this juncture the conventional wisdom among
airline industry observers is that the GOC is very unlikely
to engage in direct subsidies of NAV Canada and the airports
to save money for the airlines. An overt bailout of Air
Canada, of the type seen in the United States post 9-11 is
also not on the table. The big losses posted by Air Canada
this past quarter now places all of North America's "full
service" carriers in the same tough financial straits but,
despite the serious crisis in the industry, Minister
Collenette's only real option is to reduce the security fee.
Indeed, Collenette has inferred there is little the
government can do in the face of a global decline in air
travel in the wake of 9-11 - and it will be up to Air Canada
to continue to adapt and restructure to become profitable
under the new market conditions. After all, the "low-cost"
model airlines (e.g. Southwest, Jet Blue, and Canada's
WestJet) are managing to make money. Embassy doubts whether
Air Canada will be able to raise enough cash by selling
assets to Canadian entities; a significant investment of
foreign capital in the Canadian aviation industry will be
vital to Air Canada's long-term health. However, given the
current state of the industry, it is not clear where that
capital will be found.


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