By David Knibb in Montreal
Robert Milton piloted Air Canada through the takeover war; now both he and the airline must adapt to the hazards that go with winning.
No other airline chief executive ever had such a first year. Robert Milton had been Air Canada's chief executive exactly one week when the battle for control of Canada's skies started. It was 13 August 1999 when the minister of transport, David Collenette, announced he was suspending competition laws so that Canadian Airlines and Air Canada could discuss the restructuring of the airline industry in view of Canadian's likely collapse. Eleven days later, a Toronto takeover specialist, Onex Corporation, unleashed a surprise bid to buy Air Canada. Milton was about to be baptised by fire.
When the smoke cleared just before Christmas, Air Canada had fought off Onex and secured its own approval to buy Canadian. Milton emerged victorious from a struggle that, in the words of one of the many parties involved, was a four-month "legal, political, and public relations free-for-all".
But that was only the start. A year after the takeover battle began, Milton has not only seen through the C$3 billion ($2 billion) takeover of Canadian and restructured its C$3.2 billion in debts, but also overseen a C$1.1 billion buy-back of his own carrier's shares and orchestrated the successful defence of a legal challenge by dissident creditors.
Additionally, Milton has made inroads towards making the new Air Canada a cohesive unit. Progress has been made in rationalising the two sets of fleets, routes, schedules and operations, as well as in consolidating the respective regional affiliates, and severing Canadian's ties with the rival oneworld global alliance. Milton has also started the process of integrating the two airlines' mutually-suspicious employees and has successfully navigated through a firestorm of public bashing that produced new competition and consumer laws aimed at Air Canada as the country's now dominant airline. "It was a little adventurous," Milton admits in studied understatement.
Milton recalls that when he joined Air Canada in 1991 after being hired by fellow American Hollis Harris, he felt Canada's two major carriers would one day merge. "Ultimately, I thought it would happen," he explains, "but I had no idea when or how. I sure as heck didn't guess the 'how' right."
As history now shows, the "how" started with the American Airlines-backed bid by Onex to take over Air Canada and create a new airline by merging it with Canadian. Milton insists he would have beaten Onex in a showdown, but at the eleventh hour that contest was called off as a court ruled that the Onex bid violated a law that limits any one shareholder from owning over 10% of Air Canada's voting shares. With Onex defeated, Air Canada proceeded to acquire Canadian and to weather the storms that followed from competition officials, politicians, unions, passengers and political cartoonists who called Air Canada everything from Monopoly Air to Air Cattleprod.
During that turbulent year, Milton came in for his own share of bashings. Variously, critics called him "combative", "abrasive" and "pugnacious". However useful these qualities may been during the takeover battle, they predicted such behaviour would bring him grief when he had to deal with Ottawa. Indeed, Milton had a formidable reputation, but he defends the way he responded to the Onex threat. "When what amounts to your family comes under attack, you react in a certain way. The way I reacted was protective of people and a company I cared about. It was a very strange situation because there was a lack of clarity as to the law," he says, referring to the 10% ownership cap. "Because it was so strange, I think it warranted combativeness."
With a smile, the 40-year-old Milton claims he now is a "kinder, gentler" executive, but he also warns: "Going forward, I'll fight for anything I think is right and when it's appropriate I'll say what I think."
What is apparent now is a man who seems to recognise the responsibilities that go with leading an airline that now employs 40,000, flies 240 aircraft and controls 90% of its domestic market. In world terms, the combined group ranks as the 14th largest in terms of revenues and 12th based on passenger traffic.
The value of Star
Looking back on his first year, Milton recalls two lessons. First was the support Star alliance partners gave Air Canada during its struggle with Onex. Milton recalls that August day when Onex announced its plan to buy Air Canada. Jürgen Weber, Lufthansa Group's chief executive, telephoned Milton to ask how he could help. "I didn't even get to watch the live press conference by the guy who's announcing he's about to take us over because Jürgen is on the phone: 'What can I do - where, when, how?' That's the kind of allies you need," says Milton. "Jürgen, who I consider to be the heart of Star, asking what I needed for help."
In Milton's judgment, the support that Lufthansa and United Airlines gave in the form of loan guarantees and sale-leasebacks - which he calls "essentially a gift" - proved to be critical. Does this now mean alliances will continue to be more protective of their members? "It depends on the strength of the alliance and the importance of the partner," Milton believes. "In our case, the delta between having Air Canada in Star, aligned with United, versus out of Star and aligned with American, was massive." He illustrates the importance of this case-by-case approach by pointing to oneworld's decision to abandon Canadian.
After Onex had withdrawn and Air Canada was about to buy its rival, Canadian made a final plea to the heads of oneworld at a meeting in New York. They turned Canadian down. "I wasn't entirely surprised," Milton says. "Canadian was in a tough spot. American correctly came to the realisation that without Air Canada participating, they could not fix Canadian Airlines. Oneworld knew that once Air Canada was free of the takeover attempt, they had to fix Canadian Airlines and that was too difficult."
The other lesson Milton takes away from that first year is that the 10% cap on Air Canada's share ownership may have stopped Onex, but it will be back to haunt him. "I am absolutely confident this will be reviewed and revisited many times," Milton predicts. Air Canada is one of several privatised companies that Canada chose to protect from the possibility of a dominant owner. Railroad, petroleum, media and banking enterprises have similar caps. It is more than a fear of US takeovers, because the rules are not only for foreigners. This limit on owning voting shares applies to anyone, Canadian or otherwise.
Ottawa has since raised Air Canada's cap from 10% to 15%. Transport minister Collenette recalls that lawmakers could go no higher for fear Air Canada might view this as a "deal breaker" and walk away from Canadian, leaving it to collapse with the chaos that would bring. Milton admits to no such threat. "It's not up to me," he says of the ownership limits rule. "I can't solely speak for the country."
But he does point to the potential effect of eliminating the cap. Lucio Tan, Carl Icahn, Frank Lorenzo and Tajudin Ramli are all entrepreneurs, says Milton, "who gained control of major or national flag carriers. The interests of the individual can be very different from the interests of the country."
Another effect of the cap, according to others, is to maintain a balance between Canada's English- and French-speaking communities. Given the constant agitation by Quebec separatists and Quebec's amassing of all public pension funds in one powerful investment group, some English-speaking Canadians fear the national airline could fall under control of their French-speaking rivals. Insiders see this as another tacit political motive for retaining the ownership limit.
Milton used his "walk-away" threat more than once. It was most effective when he faced Canadian's creditors. Yet he now concedes it would not have been an easy threat to carry out. "If Canadian were allowed to fail, a big vacuum would have been created, which would have been very difficult for Air Canada to respond to quickly enough in terms of the capacity needed. We would have been in a tough spot. It also might have forced the government to allow foreign carriers in, in ways that really hadn't been needed previously. Who knows what would have happened? I liked the prospect of acquiring an operationally capable, customer service-savvy airline like Canadian and putting it under our wings and growing very quickly."
Buying Canadian has meant a leap in Air Canada's domestic market share from 65% to 90%. "We got to this market share in sort of an unconventional way," Milton admits. "But you've got to do these things quickly and decisively."
Milton adds that he is pleased with how his team effected the acquisiton, especially given the sensitivity in Canada to suddenly having only one carrier, a situation he says "the country isn't comfortable with."
Yet Milton contends the change will allow more real competition. In his view, all the years that the government "artificially perpetuated" Canadian acted as an entry barrier to others. "The government pumped money into Canadian, which then dumped capacity into the market," he argues, pointing out that it has only been in the last couple of years - once Canadian got its last handout - that new competitors like low-fares WestJet began to appear. "And now a lot of people are talking about starting new carriers. I am sure that all these new carriers will not survive. But you have a much more normal competitive market now than you did five or 10 years ago."
At what level will this new competitive market stabilise? "I don't think the notion of 'no choice' will ever be realised," Milton predicts. "And it's not something that we're aiming for." He predicts the domestic market share of the Air Canada family - Air Canada, Canadian, the new consolidated regional carrier, and the low cost airline Milton plans to launch this year - will eventually settle around 75%.
Ottawa threatens to grant foreign carriers cabotage to keep Air Canada honest. So far, transport minister Collenette has deflected those threats, responding that Air Canada needs time to recover from the costs of acquiring and integrating Canadian, and new rivals such as WestJet and Canada 3000 need time to show what they can do. But Collenette welds the threat of cabotage like a stick. Milton is not worried, believing it would hurt rivals more than his carrier, as they lack the networks and alliances that would allow Air Canada to survive a foreign onslaught.
While he thinks cabotage implemented unilaterally would be "absurd", Milton is even less worried about Canada and the USA agreeing to exchange cabotage rights. "On a reciprocal basis," he says, "I have no hesitation about our ability with United Airlines to prosper in terms of access to the US market and beyond with fifth freedoms."
Even without United, Air Canada has done well in the transborder market. Milton boasts: "Five years ago when open skies was introduced, a lot of people were predicting that would be the death of Air Canada when the big US gorillas came pouring over the border. Five years later we have started 55 new US routes, and our market share has jumped. Air Canada with Canadian Airlines versus the entire US industry has 50% of the total transborder market, which is an indicator of our ability to compete."
Beyond the USA, Milton sees even more opportunities. "We've seen a significant increase in international market share since acquiring Canadian. We benefit from their strength on the Pacific with our strength elsewhere. With a combined Air Canada-Canadian international market share of around 50% and a rationalisation of routes," Milton says. "Profitability has raced up in all these international markets".
Ottawa plans to complete a review of international aviation policy by winter 2001-02. The rules on multiple designation will be up for review, but Milton is unconcerned. "The days of the two airline policy are over. I'm very comfortable about where we sit in terms of international air policy. I'm comfortable with the markets we serve, the return they're providing."
Oneworld could make a move to fill the void left by Canadian's withdrawal. Milton believes that its member carriers who fly to Canada - American, British Airways, Cathay Pacific, and Qantas - already have the right to add frequencies or destinations. "Oneworld will align itself with one of the emerging domestic carriers," Milton predicts. "That's a big, capable group of airlines. I assume they will do something. We just don't know yet what it is. Ultimately, if others are allowed to compete with us, I'm not bothered by it."
Milton sees plenty of room for international growth. A key point he cites is that there are about 80 non-North America cities to which US carriers fly, but Air Canada does not. Milton says: "Air Canada now holds the route rights to every place that we want to go. There are not many airlines who can say that."
Hence, Milton's biggest challenges are closer to home. They stem from the heightened scrutiny of an already-visible airline which has acquired a near-monopoly. Milton knows that if Air Canada competes hard with an upstart and wins, competition officials will dissect its every move. "It's very difficult. We live in a new world and we have to learn to deal with these issues. I intend for us to compete everywhere that somebody tries to compete with us. But we have to do it right and do it fairly.
"I fear that we are going to look more and more like US airlines in terms of the number of antitrust lawyers around. It was never part of our lives before. But it makes no sense for us to abuse our dominant position, because I think we'll pay for it in spades."
Milton knows it will take Air Canada time to adjust to this new role. "We're looking at a fundamental change in the landscape of the airline industry in Canada. We accept that we've got to behave responsibly. To not do so, we would deserve whatever the regulators do with us. But as long as I can look myself in the mirror and know that we're doing it right, I'll be comfortable with that."
Robert Milton, son of an international banker, grew up in Singapore, the UK, Belgium and Hong Kong. Initially he was an American, but he now holds dual US and Canadian citizenship. He and his family live in Montreal, which he calls home. "I've lived here almost as long as I've lived anywhere in my life."
1983 When he graduated from Georgia Tech with a Bachelor's degree in industrial management, his father gave Milton the money to buy a car. Instead he used it to start an airline. For the next five years Milton built Midnight Express into a southeastern US air courier until he sold it to Piedmont AIrlines.
1988-91 Milton founded and became a partner in Air Eagle Holdings, an aviation consulting firm in Atlanta.
1991-93 Hollis Harris, chief executive of Air Canada, asked Milton to be a consultant to the airline. Milton accepted, moved to Montreal, and advised Air Canada on its courier network. That led to assignments in scheduling, marketing alliances, and Air Canada's purchase of an equity stake in Continental Airlines. During this time, Milton became an Air Canada employee.
1993-96 Milton rose through the ranks quickly, from Air Canada's senior vice president of marketing and in-flight service, to advertising, product design, brand management and cargo.
1996 Milton became Air Canada's executive vice-president and chief operating officer.
1999 Milton, who turned 40 in July, received "Canada's Top 40 Under 40 Award" reserved for executives under the age of 40. In May he was appointed president; on 6 August he became Air Canada's chief executive.
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