Wednesday Night #912

Welcome new faces included Claude Gagné, who is Science and Technology Counsellor at the European Commission in Brussels and was introduced by Guy Stanley.
Alex’s guest, Gregory Beachman, whose background is in both Electronic Engineering and Medicine.
Brian Morel introduced Achille Michaud, a documentary journalist with Radio Canada (“Zone Libre”) who has also been an anchor on Le Point. He is also the author of a biography of Richard Hatfield published in 1990.

Consumer Spending
David Nicholson conducted a quick tour of the Wednesday-night.com site and pointed out Margaret’s graph, mentioned in the Invitation. Originally published in the Globe & Mail, it shows percentages of GNP spent on various categories over the last decade. The upward trend of spending on Leisure (including Culture and Recreation), is greater than spending on healthcare, and is in contrast to expenditures on durable goods, cars and financial services (all flat) reflecting changes in demographics – an older population of empty-nesters whose nests are nonetheless well equipped can now indulge its own tastes.

Eaton(‘s)
Related to the changes in consumer spending are the changes in shopping habits. Large malls as destinations for entertainment are disappearing. Strip malls are more remote from the centre of cities.
This led naturally to the end of Eaton’s 130 year history in Canada. Less publicized in Canada, Filene’s Basement has just invoked Chapter 11.
Marie-Hélène commented that Eaton as a concept is out of date, and their stores are just too big. People want stores with at most 2 floors.
Roslyn pointed to their recent sponsorship of the tennis tournament to the tune of over $250,000, while on the other hand they were not paying suppliers and staff as an indication that Eaton’s management is out of touch with reality.
Gerald Ratzer pointed out that on Monday some goods were on sale with a 40% discount, while the same item on Wednesday, when the liquidator had taken over, were only subject to a 20% discount.
What will happen to the downtown store? It will have to be split into a multi-purpose building – one suggestion includes residential, offices and retail. Stay tuned.

The Proposed Air Canada/Canadian merger
This was the topic on everyone’s mind – everyone has an airline or airport experience to relate and everyone has an opinion on what should be done. While Robin Wohnsigl, Vice President Technical Operations of Air Canada, became the focal point for most of the evening’s discussion, it was a lively exchange among all participants.
The infrastructure has not kept up to date with the increases in air traffic volumes. It’s no fun to fly, especially when you can’t get to a gate. With more aircraft than gates in many airports including Pearson International in Toronto, Air Canada has even resorted to using Passenger Transfer Vehicles, or Mobile Lounges to ferry passengers between aircraft and terminal!
With the deregulation of airports and transfer of these facilities to private industry or local communities, the cost to airlines has gone up and the level of service has not kept pace. Furthermore, the airlines have no legal recourse against these new airport administrations. For instance the GTAA (Greater Toronto Airport Authority) has doubled its fees from $50 million to $108 million this year. Air Canada would happily use another airport, but as nothing in the area has the capacity, it has paid the fees under protest. Meanwhile, when the Feds ran the airport, they had a $60M profit, now they have no responsibility and get $116M in revenues.
The FAA Trust Fund which is intended to support improvement in aviation infrastructure is oversubscribed, but is not being attributed by the U.S. government – the funds are just rolling into general coffers.|Other problems in North America include the shortage of NavCan and FAA Air Traffic Controllers.
The Air Traffic Control situation in Europe is even worse than that in North America, The total amount of ATC delay in March was 253% higher, and in April 175% higher, than in the same months last year. IATA has taken the lead in calling for drastic corrective measures.
With the infrastructure in gridlock and worsening, safety has not improved. Air traffic has increased and so has the number of the accidents, but the accident rate on a seat-mile basis has been flat. As the traffic and congestion (especially in Europe) continues to increase, the situation will deteriorate. One problem is that passengers and tickets are taxed, but this goes into general revenue and it not all redirected back in the aviation sector.
The ludicrous situation was highlighted by Gerald Ratzer, who recounted the recent story of American Airlines that offered 1.5 Million USD to the City of Chicago for them to acquire an ATC simulator. American had determined that improved taxi-out times, as a result of better trained controller would pay for its investment in just over a year. Even though this would benefit all airlines operating out of O’Hare, the FAA refused to accept this gift, in case it might imply that their controllers were not well trained.
Sadly, the aviation buffs around the table agreed with the suggestion that an obvious way to reduce airport congestion is to encourage the development of high-speed inter-city train travel, thus reserving air travel for longhaul routes. The cost of the infrastructure for trains is high, but may prove to be a very wise investment when one takes into account all of the costs of ever-expanding airports.
The Proposed Air Canada – Canadian merger
What impact has the ONEX announcement had on the share price of Air Canada? It closed this afternoon at $9.50. Previously it rose from $8 to above 12 ½ (where Ron Meisels shorted), went as high as $15, dropped way back to $6 and has been climbing gradually. There are some 200 million shares issued – of these 4% are owned by employees, 16% by the public and 80% by institutions – it is believed that the Caisse is the largest of the institutional shareholders with some 20%. The ONEX offer at $8.50 is based on 50% cash and 50% shares in a new company called AIRCO.
The general view was that the proposed merger would be great for Canadian, but lousy for Air Canada.
Gerry Schwartz has done a helluva job at Onex Corp. But does anyone deserve $60 million worth of options? ] It was conceded that Gerry Schwartz, President of ONEX, puts on a good Press Conference. He pressed the right buttons, saying the passengers would see lower costs and better service, since there would not be two or three flights on the same route within minutes of each other. He also argued that “the low costs of entry” would allow others to compete on the profitable regional routes.
However, his references to an industry in distress are false. This is a carrier in distress. Note that West Jet declared a record profit. But, at the current rate of fees to be paid to American and the cost of interest payments, Canadian may well be bankrupt by October of this year.
The action of the federal government in activating Section 41 of the Transport Act looks like a highly political move by the Feds to try to safeguard jobs in Western Canada and appease western voters suffering from alienation ever since the introduction of the NEP by the Trudeau Liberals.
Could a foreign carrier make a bid now that everything is in play? In fact this is an AMR (parent of American Airlines) bid. What Schwartz did not make clear was that the ONEX offer is based on $250 million of ONEX funds and $750 million from American Airlines. American Airlines would have a 14.9% ownership in the new AIRCO. (This percentage was chosen so as not to violate the scope clause in some of their contracts with their pilots and other employees.)
Also not clarified are the “super majority rights” that American has over Canadian and the exorbitant management service contract ($125 million/year) Canadian has with American. Analysts agree that American has been sucking money and international traffic from Canadian (little advertised statistic: 60% of Canadian international passengers fly overseas with foreign carriers) and would most likely insist on the same type of management contract with New AIRCO. American for instance would like to code-share Canadian’s (or New AIRCO’s) Pacific routes and increase their feeder capability, load factors and revenue per seat. American would also probably impose use by Air Canada of their SABRE reservation systems and would insist that New AIRCO join the OneWorld Alliance instead of STAR with which Air Canada is allied.
What might be the reaction of Air Canada’s alliance partners? Not happy. (Editor’s note: the reaction of United and Lufthansa was swift and they should not be discounted as future financial partners or stakeholders in Air Canada.
Air Canada did its own homework prior to making the offer to Canadian for its international routes accompanied by competition in the domestic market and code sharing for international. In the course of the analysis, Air Canada concluded that an outright merger with Canadian would not be profitable operation. Since the Canadian domestic market is unregulated there is little hope of turning a profit within the local operations. International routes, where Canadian has the lucrative routes across the Pacific, are closely regulated with bi-lateral treaties.
Other problems with the ONEX proposal are the fact that the Canadian fleet is much older than AC, and also Canadian is paying a premium for leasing its aircraft – namely AC pays $1.4 M/month for a Boeing 747 whereas Canadian pays $2.6M. Leasing costs are an off-balance-sheet item and this further hides the serious debt situation of Canadian.
Harry concluded this part of the discussion by pointing out that the national airline is there is serve all parts of the country and is a reflection of the integrity of the country.
This is a national issue and should be placed in context (and not just a financial decision). Unfortunately, government is not prepared to pay the political price for the demise of Canadian. This means that there will be pressure to make stupid decisions and it looks as though they’ve already started by encouraging Schwartz – a well-known Liberal crony and fundraiser to front a bid that benefits American Airlines rather than either Canadian airline. [CA] or Air Canada [AC] (Editor’s note: the media were quick to reverse their initially enthusiastic reviews; overnight, reports changed in tone and more attention was paid to the politics behind the offer.)
So what will be the outcome? This is not a one-day story. There will be many more developments and disclosures over the next days and weeks and finally the decision will rest with the Air Canada shareholders. If they turn it down, which they most certainly will do at the current price, then the Feds are off the hook – they can say that they tried to save Canadian, but couldn’t deny the shareholders’ final decision.
The Economy, Stupid
Latest market report from the floor of the Viet Nam Stock Exchange…

Helium was up, feathers were down; paper was stationary.
Fluorescent tubing was dimmed in light trading.
Knives were up sharply.
Cows steered into a bull market.
Pencils lost a few points.
Hiking equipment was trailing.
Elevators rose, while escalators continued their slow decline.
Weights were up in heavy trading.
Light switches were off.
Mining equipment hit rock bottom.
Diapers remained unchanged.
Shipping lines stayed at an even keel.
The market for raisins dried up.
Coca-Cola fizzled.
Caterpillar stock inched up a bit.
Sun peaked at midday.
Balloon prices were inflated.
Scott Tissue touched a new bottom.
And batteries exploded in an attempt to recharge the market.

3 new bonds are being issued:
Lewinsky bond Has no maturity
Gore bond Has no interest
Clinton bond Has no principle

Jacques Clément gave his usual in depth analysis of the Canadian and North American financial situation. The good news is the US economy where the GDP was 4.3% and 2.3% for the first two quarters. Canadian growth is in the 3.5 to 4% range, while inflation is running at 1.8% – this data being the basis for rating the Canadian economy as number one in the world. The strong US economy is obviously helping the Canada, but more important, the strong exports to the States are in Canada’s favour and stand in the $2-3 billion/month. This is leading to a surplus in the current account. Added to this:
a 10% recovery in commodity prices, increase in auto sales;
a 7-8% increase in consumer spending;
a 3% increase in corporate profits.
At 67 cents the Canadian dollar is undervalued. See our chart

While the federal government has been able to repay some $20 billion on the national debt, which now stands at $572 billion, Quebec has not been able to repay any of its debt. In Quebec we should expect a tax reduction in March 2000 and a call for a referendum in May 2000. Other data presented included the strength of the housing market, with 15% increase in new home starts and a reduction in the number of people looking jobs from 400,000 last year to 200,000 this year.

Despite this rosy news, there is still room for improvement in the Canadian business scene. It was suggested that many corporations are overloaded with debt, and their productivity is too low (an increase of only 0.7% in Canada – compared to 4.0% in the US). The important qualities to be encouraged are Ingenuity and Innovation (and not internal fighting). As we all know the debt/capita is high and the tax rates are too high to encourage people to really get ahead.

At this point there was a round of applause for Jacques!
Margaret asked if the saving rate include funds put into RRSP & RIFs. The answer was yes.

The evening ended with a gracious thank you from Allan Mass to Robin for setting some of the record straight and for his usual patience in countering the frustrations with the aviation industry expressed so freely around the table.

Notes by Professor Gerald Ratzer
Edited by Diana Thébaud Nicholson

THE INVITATION

It is obvious that one of the hot topics this week is the proposed take-over of Air Canada and Canadian by ONEX. We are expecting Robin Wohnsigl of Air Canada to be with us and look forward to an interesting debate of the how’s, why’s and how muches.

The developments at the Supreme Court will no doubt attract some comments – and perhaps some well informed conjecture.

Also on the agenda is the slight increase in the interest rate announced by the Fed today. Jacques Clément, our favorite Central Banker will comment and Misha is also to be with us for a world view. We also may touch on the future of retail stores in the wake of the Eaton’s débacle.

You are encouraged to check out last Wednesday’s synopsis – it is an excellent overview of the debate on the sale of water and the International Joint Commission recommendation. Judith Patterson contributed expert editing. Also in that page is an up-date on Amalgamation, as delivered by our good Mayor. (Does anyone ever refer to “our bad Mayor”?)

We would also call your attention to the chart at the bottom of the page which was obtained for us by Margaret Lefebvre – it is interesting in that it breaks out consumer spending on entertainment and culture.

NATO, Russians try to persuade Albanians to allow Russians in
ORAHOVAC, Yugoslavia (AP) – Despite fierce heat and international pressure, ethnic Albanians say they are prepared to maintain barricades around this Kosovo town indefinitely until Russia gives up trying to station peacekeepers here