Problems at Air Canada and Aveos:

Air Canada is in the news again. Thankfully it is not for an accident or anything involving loss of life. In some ways it is an old story. The longstanding battle between the unions and the management on wages and pensions has come to the boil and the federal government has intervened once more to prevent the shut down by strike or the lockout.

Air Canada has had financial problems and poor employee morale for decades. It was nine years ago, on April 1, 2003, when the airline declared bankruptcy. The company's financial house was restructured over next eighteen months mostly at the expense of shareholders who lost all of their investment. The workers agreed to wage concessions but insisted on preserving the pensions and other benefits. Even with the wage reductions, cost structure at Air Canada stayed higher than at WestJet. More serious was the issue of deficiency in pension fund. Air Canada was allowed to postpone making this up but the liability was not diminished. The company has not
been able to adequately top up pension fund shortfalls since then and pension liability has continued to grow. This is perhaps the most serious of the problems haunting the company now. Air Canada has other so-called legacy handicaps too. They carry the baggage of pension and other agreements made when they were a federal government agency, not to mention the burden of general expectation of quality service from a 'national' airline.

In current economic environment no company, leave alone one barely staying afloat like Air Canada, can guarantee pensions related to incomes at the time of retirement several years from now. The times of economic growth and steady rise in stock market which made it possible are long gone. The companies can contribute to a plan along with the employees but they can not predict the performance of investments in the plan. Workers must recognize this reality. They can negotiate the level of contribution and the age of retirement. But the assured monthly payment for rest of the life after retirement is not a realistic hope any longer and no management can agree to it.

Air Canada employees must also remember that the wage and benefits structure is significantly lower at competing companies, partly because their employees are not unionized; they do not negotiate the working conditions and do not go on strike. The argument of older workers that they made 'sacrifices' in 2003 and it is time they recouped some of those losses does not hold water because the employees did the minimum that was necessary for the company to operate and carry on providing them jobs. Unfortunately, the business environment for airlines has not improved since then even though the traffic has grown. The lower cost structure of the competition in Canada and cut-throat competition from other international airlines fighting for
their own survival has made it difficult to retain the market share. In this environment, and with fuel costs remaining high, the pressure to cut cost has been relentless. Fuel and wages are the biggest cost items and it is only the later that the airlines have any control over. With the best wish in the world, the management at Air Canada can not offer their employees better terms while the competitors are holding their wage costs steady. Their options come down to dying slowly and painfully or quickly after a prolonged strike or lockout and the management can not be blamed for opting for the later. The union negotiators understand this argument, but they have not been able to convince their members. Surely, fat pensions and huge
bonuses in the contracts of the executives and their reluctance to volunteer reductions they are asking of their workers may have a role in the opposition of frontline workers. No one has forgotten the huge bonuses awarded to then CEO Robert Milton and his associates after the company was restructured. This memory may be why the employees twice voted down the negotiated deals. Notwithstanding the grievances the second coming of receivership of Air Canada is very likely and this time new Air Canada, or whatever it is called, will begin afresh with new name, new wage and pension structure, no unions and new workers under new management. Till then, when Air Canada workers are sorry for themselves, they can feel better by pausing for a moment to look at the plight of investors who bought shares in the restructured company at $20 and can not sell them now for a dollar. It may be some consolation to the unions negotiating better pension deals for future employees to realize that the retirement funds who invested in Air Canada are the laughing stock of the industry and their investors can not afford to retire whatever their age.

While the employees have larger share of the blame in problems at Air Canada, the situation is different at Aveos, the company that did the maintenance work for Air Canada and that filed for bankruptcy this week. When I moved in my community thirty years ago, there were three garages repairing cars and selling gas. Now there is only one. Cars being made today are sturdier and do not need frequent repairs as they used to do. I suspect the same is true for aircrafts; they still need maintenance but much less often. To survive in a shrinking market, a company has to acquire new business by diversifying into new services or by attracting new clients. Aveos failed to do either. Even though Air Canada sent almost all of their work to Aveos, it wasn’t enough to keep four plants operating. The company failed to attract other clients and did not reorganize the operations for the reduced amount of work that was available. It carried on with excess capacity and too many employees for far too long. Rather than blame Air Canada for not creating for them work they did not need, Aveos management should focus on how they can adjust the size of operations to the available market. Perhaps the owners have concluded that it is not possible to be profitable under current circumstances and they should cut their losses and leave. If this is indeed the case, it is only fair to the workers and their main customer that they let someone else take over the operations and adjust its size to what will be profitable.