Canadian Airlines has been given three months to find a financial lifeline, with Ottawa suspending competition rules for 90 days from 13 August to help the ailing carrier find a saviour. The Calgary-based airline seems unlikely to emerge from the period in its current form.

Ottawa's move allows Canadian to share financial information with its rivals, so that the launch of a rescue mission by Air Canada becomes a possibility. The government may also raise a cap on foreign ownership of a Canadian airline from 25% to nearer 50%. This would in theory allow AMR, parent of the carrier's oneworld ally American Airlines, to add to its 25% equity and 33% voting stakes - although it has shown little interest in doing so.

Any alternative investment in Canadian - which needs C$300-500 million ($200-340 million) to get through the winter - would almost certainly need AMR's approval. The US giant says it will support any plans that "secure the future of Canadian Airlines and its assets". Another oneworld carrier, British Airways, is considered a possible investor.

Canadian admits it has been talking with potential partners at home and abroad, but it will not name them.

The carrier has little room to move: it is almost C$1 billion in debt and expects to suffer its tenth loss in 11 years during the current 12 months. Ottawa is unlikely to come to its aid again after allowing a C$100 million tax break in 1996, which was repaid last year.

Analyst Ted Larkin of HSBC Securities, Toronto, sees three possible scenarios: a merger with Air Canada, a cash infusion from a foreign investor, or a major reduction in Canadian's route structure - the latter perhaps featuring the sale of profitable Asian routes to Air Canada (services to Japan and Hong Kong represent about 20% of Canadian's capacity).

Larkin, who does not envisage investor interest in Canadian "without a significant change in its business model", traces the airline's woes to its late-1980s acquisition of Wardair, which saddled it with tremendous debt. The slide of the Canadian dollar then worsened the situation.

Larkin points out that Canadian's load factor of 76% is roughly equal to that of Air Canada, but says the former's passengers pay less per kilometre, which has led to its revenue problem.

Source: Flight International