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Air Canada's (AC.B-T) business model is broken and its employees must be "open to change" for the airline to stay competitive, its top executive warns in a stark internal memo that compares the carrier's challenges to those of insolvent American Airlines Inc.
Last week, American and its parent, AMR Corp., filed for bankruptcy protection in the United States, citing the need to cut costs and reduce its debt load. In a letter to employees, Air Canada chief executive officer Calin Rovinescu said this country's largest airline faces many similar problems.
The Chapter 11 filing by Fort Worth, Tex.-based American "is sobering news, especially for those who work in this industry," Rovinescu said. "You cannot help but compare American's struggles with our own.
"While we have made good progress in such areas as fleet renewal, improvements to our liquidity and balance sheet, and some areas of cost transformation, we must still achieve more on culture change and we are still not as competitive on costs as we need to be."
In first nine months of this year, AMR lost $884-million US, compared with Air Canada's loss of $189-million Cdn.
Investors have been nervous about Air Canada's prospects. The carrier's stock price has plunged 69 per cent since the beginning of 2011, and its corporate bonds due in 2016 are yielding 14.75 per cent.
American's Chapter 11 filing "underscores both how broken the legacy airline model is and the necessity of changing with the times," Rovinescu wrote.
Air Canada, which emerged from bankruptcy protection in 2004, has been battling Calgary-based WestJet Airlines Ltd. in North America and Toronto-based Porter Airlines Inc. on regional routes.
As well, competitors such as Transat A.T. Inc., Sunwing Travel Group and Sunquest Vacations have been making gains in Mexico and the Caribbean at Air Canada's expense, and there are concerns that new competitors will emerge on routes to Europe and Asia.
"We are increasingly challenged by the rise of low-cost carriers, the expansion into our markets of aggressive international airlines, strengthening of rival alliances," Rovinescu wrote in his memo. "It is said of the European financial crisis that in order for things to stay the same, everything must change. That applies to our industry and to our company too, as the troubles at American Airlines painfully remind us today."
Montreal-based Air Canada is in talks with its pilots over a new contract, with the launch of a discount leisure airline being one of the main topics at the bargaining table. In May, members of the Air Canada Pilots Association rejected a tentative agreement that would have cleared the way for the creation of a low-cost carrier with a reduced wage scale.
"We must be open to new ways of doing business, we must control our costs and we must work together if we are to succeed," Rovinescu said.
PI Financial Corp. analyst Chris Murray said in an interview that Air Canada's current plight isn't as dire as American's, but the Canadian carrier still has much room to improve labour relations.
In June, Air Canada sales and service agents staged a three-day strike. And last month, a federal arbitrator imposed a labour contract on the Canadian Union of Public of Employees, which represents Air Canada flight attendants.
"Air Canada is in a highly competitive business," Murray said. "It wants to move to a lower-cost model. One of Rovinescu's goals is to change the corporate culture, but there's no hiding from the fact that there are issues."
Murray noted that the airline's pension payments are forecast to soar in 2014 because a cap on contributions previously negotiated with unions will lapse at the end of 2013. But he added that Air Canada still boasted $270-million in operating profit in the third quarter and, based on its financial statements, the carrier isn't in danger of again filing for bankruptcy protection.
Air Canada envisages its low-cost division having 30 Airbus A319s and 20 Boeing 767s within four or five years.
"Air Canada is losing market share. Either Air Canada develops a true low-cost arm or it's going to have its growth curtailed and sputter along," said Rick Erickson, an aviation consultant who heads Calgary-based RP Erickson & Associates. "Mr. Rovinescu is providing a reality check. He's saying Air Canada is uncompetitive."