Canada 3000's collapse puts intense pressure on Canada's government to relax or abandon its conditions for emergency airline aid, but so far Ottawa is sticking to its principles.

Not only has it resisted the temptation to bail out its number two carrier, despite concerns about the competitive effects, but it continues to insist that Air Canada find a white knight and save itself rather than expect more handouts.

The collapse of Canada 3000 presents a difficult test for transport minister David Collenette. Not only was Canada 3000 the only competitor to Air Canada in much of eastern Canada, but also on many overseas routes.

When Collenette offered Canada 3000 a C$75 million ($47 million) loan guarantee, he attached conditions even though the troubled carrier warned it might be out of cash by Christmas. Collenette's chief requirement was that Canada 3000 cut capacity and costs by 30% and present a plan on how it would return to profitability.

Canada 3000 aimed to meet those targets by closing the division of Royal Airlines it took over earlier this year. But Canada's industrial relations board barred that and all-night talks with unions over voluntary lay-offs failed. Despite an 11th hour grant of court protection from creditors, Canada 3000 ceased operations without warning. It has since entered bankruptcy.

Its collapse poses the classic question about how far governments should go to protect airlines. In key markets, Canada 3000 was the only thing standing between Air Canada and a monopoly. The aftermath of 11 September hit Canada 3000 hard. Air Canada made it worse by targeting Canada 3000 routes with its new discount unit, Tango. Canada's competition bureau was about to issue a cease-and-desist order against Tango, but Canada 3000 collapsed first.

Yet, Canada 3000's condition was fragile even before 11 September and most analysts agree it was overdue for reform. The reasons were airline-specific, but the dilemma is generic. Should the government step in for the sake of saving a competitor that was failing of its own accord? Collenette's answer is clear: "Any assistance by way of loan guarantee has to meet certain conditions, and nothing has changed with respect to the government's position."

He is equally clear that it is too early for Air Canada even to ask for a loan guarantee. Collenette has introduced legislation to relax the rules so that one shareholder can own more than 15% of Air Canada. Beyond that his view is that the carrier is at death's door, it should find private investors and fix itself.

Air Canada complains about "selective subsidies" for Canada 3000, but Collenette insists there are big differences. Canada 3000 is insolvent, but Air Canada, according to Collenette, has C$4 billion in unindebted assets and almost C$1 billion in cash. In his view: "A lot of corporations made money in the 1990s and a lot of them are facing difficulties now, but that's life."

Air Canada's third quarter operating loss of C$57 million, compared with a C$249 million operating profit the year before, dramatises its plight. Chief executive Robert Milton complains that government restrictions - resistance to his proposed western Canada low-cost unit, and restrictions on layoffs - make it hard to attract private capital.

But his complaints fall on deaf ears. Collenette replies that the restrictions imposed on Air Canada's takeover of Canadian were transparent. "There were no surprises here," he says, "everybody had their eyes open as to what the law was." Ottawa has paid C$160 million to Canadian carriers to compensate for air space closures on and after 11 September. It may also decide to cover added security measures. But it is not budging on its opposition to more unconditional aid.

Source: Airline Business