DAVID KNIBB SEATTLE
Air Canada's attempt to start a discount airline with Skyservice - the main owner of now-defunct Roots Air - faces opposition from its pilots, scepticism from Ottawa, and complaints from overseas.
As the complaints mount, this next step in Canada's consolidation may prove to be the hardest to date.
Roots Air's cameo appearance lasted only six weeks, the shortest of any airline in Canadian history. Skyservice, which owns 80% of Roots Air, decided to abandon the venture in the face of intense competition on capacity and fares and a disappointing response from passengers.
"Dramatic changes in the airline landscape in Canada," according to Skyservice, convinced it that a full service airline could not succeed, even though it was aligned with and named after one of Canada's most popular retail brands.
"The war was going to be too costly," explains Russell Payson, Skyservice chairman. Rather than watch Roots die slowly, Payson decided to put the startup out of its misery and seek a deal with Air Canada. Payson approached the bigger airline and negotiated a letter of intent under which Air Canada will acquire 50% of Skyservice's common stock, 35% of its non-voting shares, and 30% of Skyservice's corporate jet division. Robert Milton, Air Canada's chief executive, says all of this will cost less than C$15 million ($10 million). Air Canada will have the right to appoint some directors to the Skyservice board, but no right of control.
Milton insists this is not a takeover or merger, but a "strategic partnership". Skyservice will operate its 11 aircraft - mostly Airbus A320s - as an international leisure charter for Air Canada and a yet-to-be-named domestic discount airline already dubbed Air Canada Lite.
Until now Air Canada's plans for a discount airline have been frustrated. It badly wants such an airline as a way to match low-cost rivals WestJet Airlines and Canada 3000, but has delayed launch several times due to restrictions in the labour agreement with its pilots. Recently Air Canada hinted that it might not start such a carrier itself, but instead seek a joint venture with another airline. Its Skyservice deal clearly fits that mould.
Air Canada's pilots have reacted by filing a grievance. They claim their labour agreement requires union approval of any Air Canada franchise with another domestic carrier, and the Skyservice deal is an attempt to outsource work in violation of their contract. Air Canada disputes both claims, but it will be an arbitrator who decides.
The pilots could gain an ally from Canada's competition bureau, which plans to treat the Skyservice deal as a merger, subjecting it to full merger review. If that view holds, it could strengthen the pilots' claims and might entitle Skyservice pilots to the same wages and benefits as Air Canada pilots.
Air Canada insists this is not a merger, but Konrad von Finckenstein, competition bureau commissioner, disagrees. "If you acquire a substantial interest in another company then, by virtue of the Competition Act, you are deemed to be doing a merger," he says.
Both the bureau and department of transportation must approve the plans. Transport minister David Collenette has expressed disappointment at the Roots Air failure. He warns that Air Canada's plans with Skyservice will require close scrutiny. The competition bureau is more openly sceptical. Commissioner Fincken-stein calls the Skyservice deal further proof that Canada's airline industry is too concentrated. Faced with hostility from all sides, Air Canada is now pondering whether to drop the deal with Skyservice and reconsider starting its own discount carrier.
Source: Airline Business
