DAVID KNIBB SEATTLE Star Alliance has won the battle with oneworld for control of Canadian Airlines. Under a deal hammered out between American Airlines parent AMR and Air Canada, American will retain certain codeshare rights, but Canadian will effectively withdraw from oneworld.

This ends a five-month see-saw battle in which oneworld first had the upper hand with a proposal from Onex to buy and merge Air Canada and Canadian. Momentum shifted to Star after a court rejected Onex's plan. Air Canada then launched a bid to take over Canadian, whose fate was sealed when oneworld's executives failed to produce a counter-bid at a New York summit meeting.

Fearing they had no option, Canadian's directors had already recommended that shareholders accept Air Canada's C$92 million ($62 million) offer. They were pushed to this conclusion by falling reserves and the opinion of financial advisers that Air Canada's offer was fair.

One legacy of the aborted Onex bid was Air Canada's counter-bid to buy Canadian at C$2 a share. Air Canada has honoured that, offering Canadian's shareholders a 24% premium over current market prices. The other legacy of the Onex bid was Air Canada's commitment to buy back C$1.1 billion of its own shares.

Thanks to Star members United Airlines and Lufthansa, plus Quebec's pension and insurance manager CDP, Air Canada will need to fund from reserves only just over half of its buy-back and takeover bid. United and Lufthansa kicked in C$730 million in share purchases and soft leases, and CDP agreed to buy C$150 million in debentures.

Air Canada proposes to acquire Canadian, restructure its C$3.5 billion debt, retain its name and operate it as a subsidiary. Together, the two carriers would be the world's 14th largest, with 40,000 employees, annual sales of C$9 billion and a route network covering most of the globe. If all governments approve it, the result will bring far-reaching change to Canada.

AMR could have been a stumbling block. Under the terms of an earlier bail-out of Canadian, the company had share conversion and contract cancellation rights that together could have boosted the takeover price by C$1 billion. Instead, it settled for C$60 million, with the addition of continuation of some contracts and the right to compete for others.

Air Canada retreated from its earlier demand that Canadian shift from oneworld to the new Delta-Air France alliance. AMR also withdrew its insistence that Canadian should stay with oneworld. Under the compromise, American may continue for at least 10 years to codeshare and reciprocate with Canadian on frequent flier programmes, but on a non-exclusive basis.

Unless Canadian's shareholders change their minds, Air Canada could complete its takeover by early January - but then it faces other hurdles. Canadian's creditors could balk and the European Commission, which put stiff conditions on Onex's plan, could be equally sceptical of the transatlantic competitive effects of Air Canada's takeover.

The plan must also pass muster with Canada's competition bureau, which will make a recommendation to parliament. Konrad von Finckenstein, competition bureau commissioner, is sceptical. He says: "Two companies owned by the same shareholders - why would they compete against each other?"

Air Canada has threatened to walk away from this deal if Ottawa imposes too many conditions. But some analysts think it hardly has room to complain. By leaving the law in place that limits one owner to no more than 10% of Air Canada's voting shares, Ottawa thwarted Onex. By dragging its feet on higher foreign ownership limits, it discouraged any rescue of Canadian. Now Ottawa's proposed bill to restructure aviation has been delayed until February. By then, it may not matter.

Source: Airline Business