TRAN Committee Meeting

STANDING COMMITTEE ON TRANSPORT

LE COMITÉ PERMANENT DES TRANSPORTS

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, November 2, 1999

• 1530

[English]

The Chair (Mr. Stan Keyes (Hamilton West, Lib.)): Good afternoon, colleagues. Pursuant to Standing Order 108(2), this is a study on the future of the airline industry in Canada.

This afternoon we have with us as our witness Gerald W. Schwartz, president and CEO of the Onex Corporation, and with him is Nigel Wright, who is a principal of the company.

Gentlemen, welcome to the Standing Committee on Transport. We look forward to your presentation. We're hoping the presentation lasts between 10 and 12 minutes so that there's plenty of time for my colleagues to ask questions of you. When you're comfortable, Mr. Schwartz, please begin.

[Translation]

Mr. Gerald W. Schwartz (Chief Executive Office, Onex Corporation): Thank you, Mr. Chairman.

[English]

The Chair: I'm sorry to interrupt. It's time for the cameras to leave. Thanks, everybody.

Sorry for the interruption, Mr. Schwartz. Anytime you're ready, please begin.

[Translation]

Mr. Gerald Schwartz: Good afternoon, ladies and gentlemen.

Mr. Chairman,

[English]

members of the committee, I appreciate this opportunity to meet with you to explain the Onex proposal and answer your questions.

The Onex plan to merge Canada's two airlines is first and foremost a business plan. It's our best effort to convince shareholders that we have the ingenuity and the creativity to solve the challenges of a chronically troubled industry.

One of the things I've learned in business is that neither shareholders nor legislators buy smoke and mirrors. They buy track record, they buy plans, and they buy long-term commitment.

But our proposal is more than just a business plan. It's also a public policy initiative aimed at a compelling public policy challenge.

Airlines are part of the fabric of this country. They are central to our history. In this very century, they helped us complete the work of the early explorers. Today they overcome the distances that challenge commerce, communication, and understanding.

This country deserves the best airline service possible: an industry that is effective, dependable, and profitable, and that provides stable employment and the prospects of job growth, better prices, and more non-stop flights for consumers. We have a plan to make those objectives a reality.

Until recently Onex certainly wasn't a household word. I'd like to take a moment to tell you who we are.

Onex is a Canadian-owned, Canadian-managed, and Canadian-based company. We buy businesses—sometimes ones that need help—and we fix them. We increase value for our shareholders and create jobs for our employees by making those businesses successful. Historically we have been massive job creators. Our priority is building companies. We're in business for the long term.

Now let me turn to the airline industry.

There are two major reasons we want to merge Air Canada and Canadian Airlines.

First, the industry is broken. In the last decade, it has lost employees' jobs, raised prices to consumers, and diminished shareholders' value. It has required bailouts from taxpayers, employees, and a foreign carrier.

Second, we want to realize the vision we have for a new Air Canada as a profitable carrier that builds strength around the globe. It's a vision based on competitive prices, excellent service, and stable airline jobs at home. This new vision can be realized without public money.

Since we announced our plan on August 24, I've been travelling across Canada. I've been speaking with shareholders, employees of both airlines and their union leadership, and many other Canadians. I've also had the opportunity to speak with a number of MPs and senators.

We've listened closely to what people have been telling us. Most Canadians told us they supported our plan to revitalize the industry, but many also said they felt we could do better. So last Thursday we acted on what we heard, with a number of significant improvements to the Onex plan. I'd like to tell you about several of those improvements.

• 1535

First, the revised offer gives shareholders a choice of either $13 a share in cash or one share of the new Air Canada.

The second issue we felt we needed to address was foreign ownership and control. We recognize this is an issue that resonates deeply with Canadians.

Despite the repeated assurances of AMR, the parent company of American Airlines, that they had no interest in controlling a foreign airline, this issue was becoming a barrier to fair consideration of the Onex plan. That wasn't right, so we have removed that barrier. Under our enhanced plan, AMR will have no voting rights in the new Air Canada. It will, immediately after closing, sell its equity to Canadian shareholders other than Onex. AMR has given up any board representation. It has agreed that it will never buy shares of the new Air Canada.

All this means no foreign ownership or control in the Onex plan. In contrast, the counterproposal made by Air Canada's management, which is substantially financed by Lufthansa and United Airlines, puts enormous control of Air Canada in Frankfurt and Chicago.

Our enhanced plan increases employee participation and protection. As a result of extensive consultations with the union leadership of both airlines, we have agreed there will be no involuntary layoffs of their members. This is because analysis has shown them and us that normal retirement and turnover plus voluntary buyouts can cover the full number of job reductions.

Another aspect of employee protection is that in most cases, where desired, the new Air Canada will be able to maintain separate seniority lists for the two companies all the way through to the next Air Canada bargaining dates, which, by the way, are in the year 2002.

Because we worked closely with the unions and reworked our plans, I can tell you that more than 400 jobs in functions such as revenue accounting and yield management will be repatriated to Canada from the United States and put into western Canada and Montreal.

And of course the new Air Canada will be fully compliant with the Official Languages Act.

Our enhanced offer removes the condition relating to section 47. We welcome reviews by the Competition Bureau, the Canadian Transportation Agency, and the Department of Transport. We are confident we will be able to satisfactorily address any issues raised in these processes.

Let me address the 10% restriction. As you know, we would like it to be raised. Raising the limit is really about board of directors and management accountability. Raising the limit is critical to shareholders' ability to hold the board's and management's feet to the fire and make them accountable for the company's success or failure. Today they are not accountable to anyone. Right now the 10% ownership limit serves only to keep in place and entrenched a board of directors and management that have no need to be responsive to their own shareholders or to anyone else.

Canadians are rightfully concerned about what happens when a large dominant airline is created. Although almost every other country in the world has that situation, it will be new for us, so Canadians want to know how they can be assured that they will not be held hostage to that carrier.

Part of the answer to that question will come from you, as you consider the advice you will give to the minister later this month. But answers can also be found in the competing proposals.

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The proposal Air Canada's management has put on the table claims to support competition, but it doesn't. In response to a two-carrier system that clearly doesn't work, Air Canada has proposed four airlines, all 100% owned by them: Air Canada, Canadian Airlines, Air Canada Connectors, and a new, to-be-established, low-cost carrier.

It's widely recognized by competition experts that companies controlled by the same owner do not and cannot compete in any real sense. Air Canada's proposal would deny the synergies of merger and the cost savings, all of which can be invested in better service and lower prices.

As for the Air Canada proposal to enter competition in the low-cost sector, this is truly to create a monopoly. The charter airlines and the independent regionals are where competition has come from and will come from. Air Canada wants to even control this form of competition.

In fact competition chill has already started. PemAir/Trillium Air recently cancelled expansion plans. The company's president was quoted as saying:

We trust that the public will understand that we have no other practical choice, knowing that Air Canada will tolerate no competition.

WestJet's president has voiced similar concerns.

So how would we encourage competition? We recognize our responsibility to help in sustaining a robust competitive environment in Canada's airline industry. It's in our interest too, because competition sparks innovation and excellence.

Competition in the airline industry is about access—access to routes, to networks, to connections, and to services. So we have committed in writing to provide access for the independent carriers to our network. That includes interline services, frequent flyer program participation, access to airport and other facilities, maintenance, and other necessary services.

The new Air Canada will also face competition in another important respect: on international routes, both from competing Canadian carriers and from carriers based in other countries. That's the situation now. In fact Air Canada and Canadian only have 34% of the international travel of Canadians. Competition for international traffic is already robust and will continue this way.

Finally, to give further assurance to Canadians, we have made an unprecedented commitment to freeze published fares for travel in Canada for five years, subject only to increases in inflation and pass-through costs such as fuel or landing fees. That compares to actual increases of 150% of the rate of inflation in the last five years. That's just one of the many commitments to Canadians we put in writing a couple of weeks ago.

This document covers service to smaller communities, the continuation of seat sales, enhanced bilingualism, frequent flyer programs, and other commitments. No other bidder has made these commitments in writing and offered to be made accountable for them.

I'm a businessman. I am also a Canadian. I believe deeply in this country. As I said at the beginning, we deserve the best airline industry we can devise, an airline industry that serves the people of this country and makes us proud around the world. The Onex proposal will do just that.

[Translation]

Thank you for your kind attention.

[English]

I look forward to your questions.

The Chair: Mr. Schwartz, thank you very much for your presentation to our committee. We now look forward to some of the questions our colleagues have, beginning with Ms. Meredith.

Ms. Val Meredith (South Surrey—White Rock—Langley, Ref.): Thank you, Mr. Chair.

Thank you, Mr. Schwartz and Mr. Wright, for appearing before the committee.

I want to start off by saying the level of debate on this merger has certainly not helped us in the job we have. Whether it's through bankruptcy or through merger, we have to deal with trying to have an airline service that will offer competition to Canadian travellers. I find the level of debate is making that extremely hard for us to accomplish.

• 1545

The Reform Party believes the decision on this merger belongs to the shareholders. It's not the duty of this committee to decide, on behalf of the shareholders, which merger deal is best for them. Our role is to clarify some of the issues we're going to have to deal with in restructuring the airline industry in the future.

One of them deals with promises. Mr. Schwartz, you have made two commitments. One, you state that companies controlled by the same owner do not and cannot compete in any real sense, and you make a commitment to make sure there is a robust competitive environment in Canada's airline industry and that there is access to routes, networks, connections, and services. You make a commitment to the travelling public on airline points, you make a commitment to the employees, and you make a commitment to the shareholders, and you have made the statement that you've made these commitments and offered to be made accountable for them.

My question to you is, how do the government and the Canadian taxpayers hold you accountable for those things you have made a commitment to? You have made a commitment to Canadians, and you have done so in writing. How can the Canadian government hold you accountable to those commitments?

Mr. Gerald Schwartz: Thank you, Ms. Meredith. It's an important question.

As you said, just as the shareholders are going to decide which proposal they want, I can't set out how government will set the framework. But I believe government has the right to set the framework and should set the framework.

When all the issues we've raised in our commitments and all the issues being raised at the transport committee are narrowed down to the ones government wants to see enforced, clearly they have to put a framework in place that does that. It may be that some of it is through the Competition Bureau and some of it is through the Department of Transport or the Canadian Transportation Agency, but it's up to the mechanics of government to set those standards.

Ms. Val Meredith: And you would have no problem working with government in making sure your commitments are met through those regulations or conditions?

Mr. Gerald Schwartz: We would like to work with government to do just that. We have always said it's not just good enough for us to publish a book. That's the beginning. That's what we're saying. The government has to pick and choose what commitments it wants and then set up a framework where those can be enforced.

Ms. Val Meredith: Mr. Schwartz, if the shareholders choose to go with the Onex deal, you've made a commitment here that you would have competition and that you would encourage competition, however it may happen. Part of being competitive is having access to airports and having access to gates and to berths at airports. If Onex is accepted and AirCo becomes a reality, will you free up some of the gates in Chicago and New York that are not accessible right now to a new carrier, so that they can honestly provide competition to your new airline?

Mr. Gerald Schwartz: You're absolutely right that gates and slots are important. You can have all the competition and all the people flying around in airplanes you want, but if they can't land and pick up people at gates, they can't do anything. So yes, we would agree that where there are restrictions, there has to be some sharing of those slots and gates.

I can't comment on the specifics of New York and Chicago, but for example at Pearson airport, which is congested at certain times of the week, such as Friday afternoons, if those competitors want to compete and if they want a slot and gate, we can't control them all. We can't keep competition out by controlling all the slots and gates.

Ms. Val Meredith: Thank you.

The Chair: Thank you, Val.

Stan Dromisky, please.

Mr. Stan Dromisky (Thunder Bay—Atikokan, Lib.): Thank you very much, Mr. Chairman.

Thank you very much for being here, Mr. Schwartz. I appreciated your presentation. It was very clear and concise.

However, I would like to deviate from this. I'd like to go back a little time in our history. It wasn't very long ago that clause 47 was presented to the public by two ministers, Minister Manley and Minister Collenette, and within about 10 days, I believe it was, you had a proposal on the table.

People questioned the rapidity with which you came up with a very complex proposal, and there have been all kinds of allegations. Even today in the House of Commons, allegations have been made that possibly there was some communication prior to August 13, and that people had been in touch with you and you had been in touch with other people within the government, possibly key elected government officials. Could you, please, honestly, tell us the kind of involvement you've had with the ministries I have mentioned related to this proposal that you presented in August?

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The Chair: We don't for a second doubt your honesty on this.

Stan, thanks.

Mr. Gerald Schwartz: Thank you, sir. I appreciate your asking the question, because it gives us the opportunity to give an answer and put it on the record very simply and straightforwardly.

Neither I nor anybody at Onex, to the best of my knowledge—and I have certainly inquired—have had any contact with any ministers or any departmental officials of the Department of Transport, the Department of Industry, or any other department on this matter prior to August 23, when Mr. Wright had a meeting with the departmental officials to advise them that we were going to make an offer the next day. That is an absolutely clear statement.

Now, as to the other question you asked, which was about the fact that we made an offer 11 days after the government's announcement, and that it was a very complex matter, we first started looking at this industry almost three years ago, when we looked at the possibility of buying Canadian and decided that this just wouldn't work, that we couldn't make the kinds of returns we expected. Then again this year, we began looking at that in May, maybe earlier than May, but in May more seriously. So we were working on an understanding, particularly with American Airlines, somewhat with Canadian, and financing sources long before the minister's announcement on August 13 and long before our announcement on August 24.

You're quite right, it is a complex matter.

Mr. Stan Dromisky: Thank you very much.

Mr. Gerald Schwartz: Thank you, sir.

The Chair: Is that it?

Mr. Guimond, please.

[Translation]

M. Michel Guimond (Beauport—Montmorency—Côte-de- Beaupré—Île-d'Orléans, BQ): Mr. Schwartz, in response to the question put to you by my colleague, Mr. Dromisky, you said that no one at Onex, neither you nor anyone else, had any contact with officials of the Department of Transport or any other department before August 23rd. Is that correct?

[English]

Mr. Gerald Schwartz: That is accurate, sir.

[Translation]

Mr. Michel Guimond: I would like to know whether you were personally aware, Mr. Schwartz—and I'm not asking you to relate hearsay—of any contact Mr. Kevin Benson might have had with such officials before August 23? Do you have any personal knowledge of that?

[English]

Mr. Gerald Schwartz: Mr. Guimond, I did know at some point certainly that Mr. Benson, representing Canadian Airlines, was dealing with the Department of Transport. I had very little actual personal knowledge of it. In all of the early negotiations through the period, I would say into July, I had very little personal interface or knowledge of it. It was handled by people that I entrusted that to, including one of the principal people, Mr. Wright.

[Translation]

Mr. Michel Guimond: Mr. Schwartz, on June 23, you met with some senior union leaders, including the President of the Air Canada Pilots' Association, Mr. Jean-Marc Bélanger, who will be appearing before the Committee and whom we will be in a position to cross-examine. At that meeting, when you discussed the 10 per cent rule and the increase you were seeking, you apparently said: "This angle is covered". What exactly did you mean?

Did you receive any guarantees that this percentage would be increased? We Parliamentarians, duly elected by the voters of Canada, only discovered that "this angle was covered" on October 26, when the Minister appeared before us. It was only at that time that we were made aware of the possibility of an increase. When did you hear of this? On June 23?

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[English]

Mr. Gerald Schwartz: Let me be very clear. You mentioned June 23, but I presume you meant August 23—the conversation with the pilots?

[Translation]

Mr. Michel Guimond: The information I have is that a meeting apparently took place on June 23. I can certainly verify the accuracy of that information.

[English]

Mr. Gerald Schwartz: I can guarantee you that I never had any meeting with the pilots on June 23 or any time in June or any time in July. The first time that I believe I spoke to the Air Canada Pilots Association president, Mr. Bélanger, was the day before our offer on August 23. I did not meet with him. I made calls to a number of the union leaders as well as other parties interested at that time—associations, things like that—to advise them, give them a heads-up in advance that we would be making an offer the next day. I had brief conversations with them. I certainly never said “This angle is covered”, or anything like it.

[Translation]

Mr. Michel Guimond: Mr. Schwartz, we have in front of us documents that were filed with the Quebec Superior Court, that provide an overview of the process or action plan that Onex was intending to follow in relation to this whole matter. I would just like to read some excerpts from it:

[English]

In the interim it can be assumed that any key information left with the head of the PMO (Jean Pelletier) will find its way into the PM's hands.

[Translation]

A little further on, it says:

[English]

“Another key player is the clerk of the Privy Council, Mel Cappe, who should be brought up to speed” on a confidential basis as soon as possible.

[Translation]

It also alludes to certain meetings:

[English]

“...meetings to be timed with the Minister of Transport, the Clerk of the Privy Council, and the Prime Minister, if requested, others as below.”

[Translation]

The first part of the following page has been crossed out. Reference is made to meetings you were to have with John Manley, Paul Martin and Kevin Lynch.

[English]

The Chair: Michel, you have one minute left.

[Translation]

Mr. Michel Guimond: Did those meetings take place? Were they planned?

A little further on, you deal with the impact of those meetings. You say:

[English]

Our timing of seeking approval during the summer recess will be helpful in curbing that debate.

[Translation]

In other words, you want to move quickly and take advantage of the summer recess, when Parliamentarians are not sitting and are not on hand to play their role. Would you say the action plan I have just described is accurate? Am I inventing things? Is such a situation plausible?

[English]

Mr. Gerald Schwartz: Let me be very clear, Mr. Guimond. The document that you referred to, about meetings with Mr. Pelletier or Mr. Cappe or about strategy, was not our document. That was a document prepared by Canadian Airlines and given to people at a meeting with Onex. In fact, the principal aspect of it, which involved section 47, our people did not agree with, and as I understand it, that document was not discussed. However, if you'd like any clearer facts on that, Mr. Wright was thoroughly involved in all of that, and I would ask him to address any additional point you may wish to raise.

The Chair: Mr. Wright.

Mr. Nigel Wright (Principal, Onex Corporation): The document you're referring to was filed a bit more than a week ago, given by us to Air Canada and filed in the Quebec Superior Court. It was prepared by Canadian Airlines and given to us in mid-May. They were of the view at that time that section 47 represented an appropriate procedure for moving ahead with the transaction that we were in the early stages of negotiating or discussing with them at that time. We had no familiarity with that section at the time; it was really the first time we'd heard of it.

As we now know, but didn't know then, Canadian and Air Canada had engaged in secret merger negotiations and both had discussed section 47 with the government at that time. But because of confidentiality agreements between those parties, we were not aware of that. As Mr. Schwartz has said, we did not agree with the approach of section 47, and therefore never really got past the first point on this page, which raised that issue.

So in specific answer to your questions regarding the meetings that are referred to in Canadian's memorandum, we didn't discuss with them, and they were not planned, certainly not with our knowledge, consent, or information. I think that really answers your question.

The Chair: Thank you, Michel.

Mr. Calder, please.

• 1600

Mr. Murray Calder (Dufferin—Peel—Wellington—Grey, Lib.): Thank you very much, Mr. Chairman.

Mr. Schwartz, in your speech you went to great lengths to assure us that American Airlines has backed away. Yet if you get right to the crux of the whole thing, you'll find that American Airlines, from 1994 to date, has invested about $2 billion in Canadian.

I'm a businessman and you're a businessman—you've already stated that in your speech. Convince me about why a company would invest that much money, and then back away and say it's not expecting any control or any compensation for its returns. Convince me of that.

Mr. Gerald Schwartz: I appreciate the question, Mr. Calder. Let me start by saying that to my knowledge they invested $246 million in Canadian, which has since grown by compound interest to roughly $500 million. It wasn't $2 billion or anywhere near that.

They received very clear special treatment. They have super majority rights, some vetoes, some appointment rights, and a number of rights they bargained for at that time. We've been clear, and it's right in our offering circular, that if we merge these two airlines, all of AMR's agreements with Canadian today will disappear and terminate on the merger of the two airlines.

Mr. Murray Calder: Okay. I'm still working on the point that you're a very successful businessman. For the record, I got this information from Air Transport World; it's the world airline report, July 1999, on page 71. It does a comparison between Star Alliance and Oneworld. Revenue, for instance, for Star Alliance is $52.9 billion and for Oneworld it's $47.8 billion, a difference of about 10.7%. Operating income is about $3.5 billion versus $3.2 billion, or a difference of about 9.4%. Star Alliance carries about 28.2% more passengers, they carry about 38.4% more air freight, and their fleet is about 9.1% larger.

I have to ask you this question, because I know part of the deal is to bring Air Canada out of Star Alliance. As a businessman, why would you want to do that? Air Canada has been in this. Star Alliance has existed longer than Oneworld. They have their ticket system, their agents, their gates, and everything set up. Why would you want to pull it out?

Mr. Gerald Schwartz: I'm glad you asked me, because the issue of Star Alliance and Oneworld is one that Air Canada has resorted to using regarding the question of why one deal is better than the other. You have to look at what's good for Canada and the business in Canada, not which one's bigger.

I will show you some information, but let me tell you my overall view. They are really Tweedledum and Tweedledee. The two alliances are big and strong, and they have huge airlines in them. United is a little bigger than American, but not by much. British Airways is quite a bit bigger than Lufthansa. But all that doesn't really matter; what matters is what those alliances mean to Canadian travel.

I'm prepared to accept that they're both about the same, but that's not what the big issue is. The big issue for these airlines is the feeder business from Canada into the United States. When you're going from, let's say, Toronto to Kansas City, you'll fly on Air Canada or Canadian or the new Air Canada flight from Toronto to Chicago. When you get to Chicago, American wants you to fly with them to Kansas City, and United wants you to fly with them. That's truly where the big money in this is.

In terms of the alliances, though, Star Alliance is slightly larger, and that's a very fluid situation. Just last week, Oneworld Alliance announced that Swissair and Sabena have agreed to join the Oneworld Alliance. I understand that USAir is looking at it now. If they join, then Oneworld will be bigger.

• 1605

But let's look at Canada. On connections to and from Canada, Star Alliance has 36 connections to Asia; Oneworld has 42. To Latin America from Canada, Star Alliance has 9 connections; Oneworld has 29. To Europe it's about the same—Star Alliance has 141 connections and Oneworld has 143. So just on a connections basis through Canada, Oneworld actually provides more opportunity for a business headquartered in Canada.

Let's look at the transborder feed. Today, American Airlines feeds $60 million a year net positive revenue into Canada. Star Alliance draws out a negative $127 million of feed. So there's almost a $190 million difference in ASMs, or available seat miles, flowing, favourable to being in the Oneworld Alliance. Those figures are on the Asian routes—United and the $190 million difference is on Oneworld versus Star to Asia.

The largest frequent flyer program in the world is the Oneworld program. It has considerably more members than Star Alliance. That means more people around the world are using points to come into Canada and are burning them up on the new Air Canada. I can give you other factors.

The Chair: Murray.

Mr. Murray Calder: On balance, I'm saying it's not a big difference. I can give you lots of things that are better on the Oneworld Alliance. I think it is better overall for a Canadian airline. But that's an obfuscation for Air Canada to try to make people think that's a reason to do or not do this transaction.

The Chair: Thanks, Mr. Calder.

Ms. Desjarlais.

Ms. Bev Desjarlais (Churchill, NDP): Mr. Schwartz, you've indicated that neither you nor anyone from Onex had contact with any of the ministers or anybody from the Department of Transport. You've also indicated this was not an Onex batch of memos, but rather a Canadian Airlines batch of memos that was submitted to the Superior Court.

Mr. Gerald Schwartz: They weren't all Canadian memos. The one Mr. Guimond was quoting from was a Canadian document, but there were also Onex documents in there.

Ms. Bev Desjarlais: They are in this package as well.

Mr. Gerald Schwartz: Yes.

Ms. Bev Desjarlais: Okay. Did you notice whether anyone from Canadian Airlines had any contact with the minister and department officials in regard to this proposal prior to it coming out in August?

Mr. Gerald Schwartz: I don't know specifically. Mr. Wright might.

Mr. Nigel Wright: I think it's an ongoing aspect of running an airline in a regulated industry that both major carriers, and presumably the minor ones, have ongoing contact with the department.

On this proposal, I'm aware that Mr. Benson raised it with Transport Canada around June 25. He told us he would raise it. We specifically asked that he not bring our name into it because at that time we didn't have an agreement with Canadian. We didn't want our name brought in as sort of leverage or pressure, so Canadian would say “People know you're involved, so you have to do a deal with us or move the deal along.” So I think he did raise it at the end of June, upon our request that our name not be associated with it.

Ms. Bev Desjarlais: Okay. But there's no question that although you didn't necessarily, as Onex or representatives from Onex, have contact with the ministers or department officials, Canadian did, and you in turn had contact and discussions with representatives from Canadian.

Mr. Nigel Wright: It's critical to understand that at the same time Canadian had some other agendas going on, so we don't know everything they said or what reaction they got. Earlier in the year, they had been engaged in quite substantive merger negotiations with Air Canada that they did not advise us of. During part of the period you're speaking about now, they were in receipt of a proposal from Air Canada, by which Air Canada wished to purchase their international routes, some equipment and so on. That was also raised by both parties with Transport Canada. We didn't know about that at the time either because of confidentiality agreements between the carriers. So we were not aware, and by agreement between Air Canada and Canadian could not be aware, of the nature of all of their discussions with Transport Canada, simply because we weren't part of all of the plans they were trying to advance.

• 1610

You have to remember the context is that Canadian had publicly announced at the beginning of this year that they were searching for equity investors. Certainly from June on we were the equity investor they had identified. During this period they were following other potential outcomes as well.

Ms. Bev Desjarlais: Do you have a copy of this submission to the Superior Court?

Mr. Nigel Wright: Yes.

Ms. Bev Desjarlais: I'm going by the pages I have. Can you tell me which ones are Onex's and which ones are Canadian Airlines?

Mr. Nigel Wright: I don't know if I have the same document as you have.

Ms. Bev Desjarlais: Okay. Do we have a copy of this document?

The Chair: Well, I think they'll have their document, and this a collection, a potpourri, of different memos.

Ms. Bev Desjarlais: Okay. Well, that's why I want to know if the pages here reflect... He indicated that one was from Onex.

The Chair: I understand that.

Ms. Bev Desjarlais: One might have been Canadian Airlines. I had the impression in his initial comment that this was not an Onex one. It led to some impression that none of it was Onex, so I want to know which ones are.

The Chair: Mr. Schwartz.

Mr. Gerald Schwartz: Would you read what's at the top of the page, and we'll try to identify it.

Ms. Bev Desjarlais: On page 1 it says “Objectives to obtain Ottawa's support for a merger”.

Mr. Gerald Schwartz: That's a Canadian Airlines document.

Ms. Bev Desjarlais: Okay. On another page, it starts:

It is likely that John P. will know enough of planned changes that he could advise us to the best way to approach both the minister as well as the prime minister.

The Chair: He's indicated no, Bev.

Ms. Bev Desjarlais: Okay.

One that's titled “Important Meetings” at the top says:

The support of the following bill will be important to the completion of the initiative.

Mr. Nigel Wright: That's another page of the Canadian Airlines document.

Ms. Bev Desjarlais: There is one that has a number 10, “Issues—Risk Political”.

Mr. Nigel Wright: That one is a draft of an internal Onex memorandum.

Ms. Bev Desjarlais: This one says:

Will need to change the Canada Act in order to remove 10% voting ownership restriction of Eastco's shares. Seeking to do so may result in serious political debate in the House of Commons. Our timing of seeking approval during the summer recess will be helpful in curbing that debate.

This is an internal Onex one, but you weren't in agreement with section 47?

Mr. Nigel Wright: You're right. This document doesn't refer to section 47. It refers to the 10% restrictions. This is one of an iteration of drafts of a memo that we started preparing as early as February this year before we discussed it with anybody.

Ms. Bev Desjarlais: Why would you see the need to curb debate in the House of Commons, since the members of Parliament represent the wishes of all of Canadians and the interests of all Canadians?

Mr. Nigel Wright: Yes, it's clearly an ill-informed and naive sentence, because I imagine it would be in fact impossible to change legislation unless Parliament were in session. So logically it just doesn't make any sense.

Ms. Bev Desjarlais: Okay. That's fine. Thank you.

The Chair: Thank you, Bev.

This is a point of clarification, then. If this is an Onex memo, is it one that was prepared for you for a government relations exercise or is this someone's scribblings in a back room somewhere? Or is this more important than that? Perhaps you can lay out just who would write this kind of stuff.

Mr. Michel Guimond: The concierge.

The Chair: The concierge of what? The Chateau Laurier?

Mr. Nigel Wright: I should point out the context here. This is an early planning memo, the sort of memo where we're considering whether or not to proceed with a transaction.

The full memo in its entirety was provided to a judge at the Quebec Superior Court, who undertook to read the entire document and to provide production of those parts that in any way had any connection with section 47 or the 10% restriction. This is an early-on document that didn't result or come from any detailed planning and was in fact never part of the plan we adopted.

The Chair: Thanks for putting it in that context for us, Mr. Wright.

Mr. Sekora, please.

Mr. Lou Sekora (Port Moody—Coquitlam—Port Coquitlam, Lib.): Thank you very much.

I'm going to get away from who said what a year ago or whatever it was. My main interests here are what's the best service for Canadians and for consumers across Canada, and job creation, job guarantees, and a few other things.

• 1615

How do you handle regional airport service? Is it going to be part of your whole operation, or do you plan to sell off the smaller airplanes and services to small cities and towns?

Mr. Gerald Schwartz: No. We have said in our document of commitments that any community that receives service from either Air Canada or Canadian Airlines or either of its regional airlines will be guaranteed for at least five years to continue to receive comparable service.

One of the things that came out of this was a fear that if you disentangle this overlap...as you know, more than 70% of the flights in Canada go to the same destination within 10 minutes of each other. The whole idea of the merger is to disentangle that not useful and very costly, cumbersome fact.

As I travelled across the country and met with people in very small communities, what I found was that a lot of people are very concerned. They may have an airport where, let's say, two Beech 1900Cs fly in there, one from each airline, and provide a service. You may replace it with a single Dash 8 that carries the same number of seats. The landing fees for the airport will be reduced because there's one landing instead of two.

What we've come to realize is that the new Air Canada has to make deals with these small community airports to make sure they adjust their leases so that the airports will not lose their revenue and they can stay open and healthy. Some of the revenue comes not from landings but from the number of passengers who go through. That won't change. Where landing fees are reduced it has to be made up, because those airports have to be healthy. They're the centre of economic development for those very small towns.

Mr. Lou Sekora: What about salaries? As you know, Canadian Airlines salaries are a lot less than Air Canada. How are you going to deal with the salaries if you are to get this merger going?

Mr. Gerald Schwartz: What we believe is the following. First of all, on January 1, 2001, the wage rollbacks that the Canadian employees generously accepted to keep the airline going snap back to their old level. We're proposing that their bargaining agreements all end on December 31, 2000. The Air Canada bargaining agreements generally end in 2002. Our plan is to bring the Canadian Airlines employees up to the wage levels of the Air Canada employees, which are generally higher, by 2002 so that we go in to the first bargaining session of a combined company with wage parity between the two airlines.

Mr. Lou Sekora: In that vein, lots of travel agents for a few years now have been cut back on their commissions to a point where now there's a cap of $60 for an airfare ticket. If they want to get more money, they have to bill somebody like me who's booking an airline flight. A lot of travel agents in the last few years have gone out of business and jobs have been lost. How do you intend to handle that, outside of saying there's going to be so many job losses?

Mr. Gerald Schwartz: To tell you the facts, it has just got worse. About two or three weeks ago United Airlines in the U.S. cut travel agent commissions from 9.5% to 5.5%. Air Canada followed suit almost immediately and, like its partner, United Airlines, it cut the agents' commissions substantially.

I'm very concerned about that. We've been a supplier in a lot of businesses, and one thing I've learned is that a business only succeeds as a whole when its customers, its employees, its shareholders, and its suppliers all do well. It's one single chain. It's very important that the travel agents make enough money to not only stay alive but also earn a decent return on their time and investment.

Travel agents are the sales department of airlines. Travel agents are why a lot of tickets get booked. If the airlines think they can simply cut them back and get rid of agents, they're going to have to put on a cost structure of a sales department of their own. So I happen to be in favour of making sure all suppliers, including the travel agents, can earn a decent return by being involved in this industry.

Mr. Lou Sekora: My last question is about the employees in each airline. We had Mr. Milton here before us, and he mentioned that they're going to have 2,500 job losses, and yours is going to be way over 5,000. Air Canada has 24,000 employees, and their attrition and retirement rate is about 3%. You have 16,000 employees, sir, in Canadian?

• 1620

Mr. Gerald Schwartz: About that.

Mr. Lou Sekora: Okay. Would theirs be the same, about 3% retirement on a yearly basis?

Mr. Gerald Schwartz: It depends on which category you're looking at. Pilots have lower attrition.

Mr. Lou Sekora: I'm talking about all.

Mr. Gerald Schwartz: Overall, let me give you the numbers. You're about right at 16,000 and 23,000, plus there are 8,000 regionals in it as well, so the total number we're looking at is 47,000. Attrition is running, in total, on average, closer to 5%. In fact in some of the segments it's actually running over 6%.

So we're looking at, say, 5% against 47,000. That's about 2,300 employees a year leaving through turnover and normal retirement. We're looking for 5,000, not more than 5,000. We believe there are 5,000 job reductions to take place when you disentangle this overlapping flight structure. And we believe we can get at all of it through normal retirement and turnover, which would run, in those numbers, to 4,600 or 4,700, plus voluntary buyouts.

Let's say you have a DC-10 pilot who's 58 years old. There's no point spending nine months retraining him to fly a 767 for another year. You're better off to offer him a very good voluntary package to leave and let a younger person come in from the bottom and move up to that 767.

So quite clearly we can have a policy of no job layoffs. Yes, we want 5,000 reductions.

The Chair: Thank you, Mr. Sekora.

Mr. Casey, please.

Mr. Bill Casey (Cumberland—Colchester, PC): Thank you very much.

I've been really uncomfortable with the process through this issue. Perhaps you've detected that. This is one of the biggest public policy changes we will make in a long, long time. It's certainly going to affect every part of our country and every region.

I am troubled that we don't have a policy. When the minister announced that he was going to open this up and we were going to create this 90-day window of opportunity, there was no policy. Until that time, we had kind of a policy of two major airlines, but there was no suggestion that was going to be maintained or changed or what. There was no policy.

I think he said it was going to be entirely up to the private sector. I fundamentally disagree with that. The government should establish a set of policies, and then companies and organizations such as yours should make a proposal within those parameters, and someone else should, and someone else should, in order to have a level playing field. By not doing that, we've missed a lot of opportunities to consider different proposals, other than yours. Maybe yours would be the best in the end, but we should have had more to look at, and we should have had a set of rules.

Another thing that disturbs me is that all of this stuff that's been brought up—the court documents and the timing and everything—gives the appearance that you have an inside track on the government in this proposal. The timing and everything goes along with that. That makes me feel very uncomfortable, because it should be a level playing field. Everybody should have the same opportunity.

If you look through this pile of documents from the court, it looks as if the government is following your public policy. It looks as if you have established public policy. Every single thing in here is happening as you predicted in the beginning. That is not right.

I want to ask a specific question. This note from August 23 is yours, Nigel?

Mr. Nigel Wright: Yes. Those are notes of an agenda I made.

Mr. Bill Casey: In number 4—and this is why I feel uncomfortable—it says “Government Message”. This is on 23 August, the day before you announced your proposal. You've established that the government message will be: one, “welcome the private sector solution”; two, “the solution encompasses the whole industry”; and three, “lots of competition”. I don't know who was at that meeting, but it just sounds as if not only are you establishing policy, but you're even establishing the lines for the government. Perhaps you can make me feel more comfortable.

Mr. Nigel Wright: I hope I can, Mr. Casey.

First of all, let me say who was at the meeting. It was a meeting between me, an individual from Canadian Airlines, and two officials from Transport Canada. The three aspects of the government message you indicated were announced by the government 10 days earlier, before that meeting. It's quite clear in the press release and the background papers that the government was looking for private sector solutions to problems the industry had.

• 1625

What was the third item? I don't have that document.

Mr. Bill Casey: Lots of competition.

Mr. Nigel Wright: If you look at the statements of both Mr. Manley and Mr. Collenette that were made on August 13, you'll see that they spoke about other sources of competition and the need for lots of competition. So it's exactly what the government said 10 days before I wrote that agenda.

Mr. Bill Casey: Do you really think there's lots of competition in your plan?

Mr. Gerald Schwartz: I could answer that. I think, Mr. Casey, you have to look at competition in two respects: international traffic and domestic traffic. The two airlines combined have 34% of the international traffic booked in Canada. Clearly, there's enormous competition. The foreign carriers have more than the domestic carriers, and the charters have a big share of it. So I think in the international market there is a tonne of competition today.

In the domestic market the two airlines together will have 80% of the domestic market. The other 20% is coming entirely from the charters and the independent regionals, such as Air Georgia, InterCanadian, and WestJet, and they've been growing. Five years ago they had about 5% of that market, while today they have about 20%. So they're growing pretty well, and that's where the competition is going to come from.

What we have said is that we'll provide a rich environment for competition to flourish. We'll give them access to code sharing, frequent flyer points, maintenance services, and ground handling facilities so that they can grow. As someone suggested earlier, we'll open up gates and slots. Compare that to Air Canada's management proposal, which says they're going to start a fourth airline to go into the low-cost business, and they're going to compete in the only place where competition can come from. That really monopolizes the business, in very sharp contrast to our proposal.

Mr. Bill Casey: I have just one more question. On that sheet it mentions “guidance on contacts, Bouchard”. Who's that?

Mr. Nigel Wright: The reference was to the Premier of Quebec.

Mr. Bill Casey: What is BCP?

Mr. Nigel Wright: That's the Bureau of Competition Policy.

Mr. Bill Casey: Okay. On the—

The Chair: Thanks, Mr. Casey.

We've gone through the rotation once, so the chairman is going to take some prerogative and ask a couple of questions himself.

Mr. Joe Comuzzi (Thunder Bay—Superior North, Lib.): Am I on the list?

The Chair: Yes, you're on the list, Joe. It's not a problem.

I have to say up front that I disagree with Mr. Casey when he says this is the largest, most fundamental change that has happened in transportation policy in many years, because, quite frankly, we've dealt with the privatization of CN and the commercialization of airports, ports, harbours, and air navigation services. So this government has been very progressive in many areas of transportation.

If Onex or Air Canada were putting together proposals in the private sector that looked strikingly similar to what policy might develop in the future, I might make the attachment to what Mr. Wright just said—that is, when we decided to do something with our proposal, it was only because we talked to MPs, senators, and other individuals in the industry. So if it looks like it's strikingly similar to what government might do in the future, it's probably because they've talked to members of Parliament.

My first question to you, Mr. Schwartz, is as follows. Gerry Schwartz is a financier. Why does he want to own an airline?

Mr. Gerry Schwartz: Gerry Schwartz is a businessman. I remember that at your caucus meeting I said that this question should be subtitled “Gerry, are you crazy?”

Around the world the airline industry has lost a lot of money for a lot of people. It has not been a healthy industry overall. But if you look at pockets, if you look at individual cases, there have been huge value creation opportunities for people. Recently, a private group took over America West. It had $36 million of net worth at the end of the first year. They had a market cap one year later of $360 million. The Texas Pacific Group bought Continental Airlines. They made $5 billion on it in the last five years. Checchi and Wilson bought Northwest Airlines. They made $2.5 billion. The Swire Group has built a worldwide empire built on Cathay Pacific and their success there.

• 1630

I think there are opportunities to create shareholder value in the industry. I think the merger of Air Canada and Canadian is one of those rare opportunities where you can create shareholder value and a stable employment base, you can have no job layoffs, you can have better choice for consumers, and over time you get better prices for consumers.

The Chair: I have just one other question, so I'll be under the five-minute limit. I look at your plan and see that you address ticket prices, fairness for employees, and service to smaller communities, all those things you probably discussed with MPs in order to be on track with what it is this committee is looking to resolve. One of your last items is review and compliance with your ombudsman.

You've already explained, so I won't ask you to explain it again, how you're going to make money if you're limiting yourself to what you're going to do as a new airline vis-à-vis the employees, the fares, etc. My guess is that you're out there in the financial world, and you're going to be able to negotiate with whoever holds the money so that at the end of this two-year process you'll start to see a return for all the reasons you've already stated.

There's another concern Canadians have that I've heard. Just as this committee and others deal with a review of the CTA, the Canadian Transportation Act, would it be possible to have a last bullet by Onex that says that after the two-year period we won't go just like that, as I think you said when we talked about the fees to agents that were cut by United and the other airline, so that it just doesn't happen like that, and there is an actual review at the end of two years?

Mr. Gerald Schwartz: Let me answer that in two parts. You talked about some of the things, such as no job layoffs and yet trying to make a profit. I have found that in business the only way to succeed is when your employees are fully satisfied and believe they're working for the right company and are being treated fairly and paid properly, so I have no problem with the no-layoff proposal. It is consistent with getting profitability.

What is inconsistent, in my view, is the old-fashioned view that we're going to push labour down and give them the least possible and fight them all the time. That just doesn't work. I think we've proven that by having Buzz Hargrove, one of the major labour figures in this country, who is called the moral conscience of the union movement, yesterday completely endorse the Onex proposal as being fair and good not for me but for his workers.

As for an additional bullet, the real answer is that it's not our job, it's Parliament's job, in my opinion. In other words, Parliament, through the Canadian Transportation Agency, the Competition Bureau, the DOT, and all kinds of mechanisms, is perfectly entitled today and in the future to have oversight over those issues and to make sure that what Canadians want the airlines give.

The Chair: Thank you.

Ms. Parrish, please.

Ms. Carolyn Parrish (Mississauga Centre, Lib.): Mr. Schwartz, you're used to functioning in the business world, and this is political intrigue at its best, so you're just going to have to add that to your repertoire. Make sure you put locks on your garbage cans, because people will go through them in order to see what's on your apple peels.

Mr. Gerald Schwartz: They'll find a lot of wine bottles.

Ms. Carolyn Parrish: I hear rumours about you in that department too. You're one of those guys.

Some hon. members: Oh, oh!

Ms. Carolyn Parrish: It's unfortunate, because if you were in the States, you'd be a great hero like Mr. Gates. You do wonderful things for the country.

I think the other problem is that you've listened too well and you've addressed all the concerns, as the chairman has pointed out, so that all we have to do here today is ask you nasty little Inspector Clouseau questions and not ask you the questions you've already answered very clearly.

One of the things I'd like to refer to is that I received a lot of letters from Air Canada pilots. I must point out to you that you've lost the public relations battle as far as those Canadian Airlines guys writing letters to us goes. We've had very few, and the Air Canada people have been most adamant.

One young pilot, whom I won't name because the other guys will throw him out of a baggage chute, said “I'm strongly against the Amex/Onex proposal to purchase and merge Air Canada with Canadian Airlines International. As a relatively recent employee with Air Canada, this may come as no surprise.” He adds, “The general consensus is that Canada should retain control of our domestic aviation policy.” I think that's why the Department of Transport and everybody else is trying to work with your proposal.

• 1635

He does makes an interesting point that I haven't heard from an Air Canada pilot before: “Please do not think that the status quo can continue. It seems we cannot support two international airlines in Canada.” This is actually the most thoughtful piece I've received.

So I'd like to take this back. I happen to agree with Ms. Meredith that the board of directors will make the right decision. Whether I happen to like Air Canada or Canadian is irrelevant. I think our job afterwards is to make sure that what they want fits our criteria and fits our airline policy. I wish this committee could concentrate on those types of questions.

Now, I'm going to be very petty here. I'm worried about the only private people who have called me, a couple of ladies who want to know if you'll honour their air miles. I personally have a MasterCard because I collect air miles, and my husband buys the worst exotic things at the supermarket so that he can get air mile points.

Now, this isn't the stuff you've referred to, but this is the stuff members of the Canadian public who really don't give a damn about this whole project care about. Will you honour the air miles so that the little old lady down my street can fly somewhere someday?

Mr. Gerald Schwartz: Thanks, Ms. Parrish.

We have been very clear. All frequent flyer points and all air miles in both companies will be entirely honoured going forward. The Aeroplan will continue and the Aerogold plan will continue. It's good business and it will absolutely continue, unabated, without any question. We've said that very clearly.

Ms. Carolyn Parrish: If you've hired a lobby firm, I think your next ad in the Toronto Star has to be, “Agree with us and you'll get bonus air miles”, because that's the one question I've been getting.

Mr. Gerald Schwartz: You've already seen our next ad.

Ms. Carolyn Parrish: The other question I wanted to ask you—

Mr. Gerald Schwartz: Ms. Parrish, can I make one other comment on what you said? We're losing the battle in terms of who writes letters to you. We're losing it badly.

Air Canada has gone out and organized, and their pilots in particular have gone out and organized, letters and letters and letters to everybody. I'm not sure everybody's getting many letters from non-airline people.

But you're absolutely right about that. There's a particular reason why the Air Canada pilots are so opposed to what we're doing and why they don't want this to happen. If I can take a minute, I can tell you why.

In all of the other unions, one union represents both Canadian and Air Canada employees, which means CAW, CUPE, and IAM each represent both sides.

Three years ago there was one pilots' union, ALPA. Three years ago Air Canada's pilots broke off on their own and formed ACPA. When they did that, they put a clause in their contract with Air Canada that said the pilots of any merged airline will come at the bottom of their seniority list. So a 747 captain with 25 years' experience would, under that clause, go underneath a three-month pilot at Air Canada.

That won't work. It won't stand up. The pilots know it and the Labour Board knows it and the companies know it.

ACPA's concern is that unlike the other times, when the other unions had one representative for both sides, the Labour Board is going to decide what the seniority is between the pilots, because there are two different unions. So that's their first concern, and it's unique to them.

Their second concern is also unique to them. You have ACPA, with Mr. Bélanger at the head of it—he's been to see you and many other places—and you have ALPA. ALPA has the Canadian pilots in it. It has the Air Canada regional pilots. As well, there is a core—and I'm told it's about 25% of the ACPA pilots—who never wanted to form ACPA in the first place and are still opposed to it.

So one airline means one union. The very high likelihood would be that ALPA would be that surviving union. So Mr. Bélanger is doubly, triply, and quadruply opposed to this taking place.

Ms. Carolyn Parrish: Okay.

I've never seen anybody lay out a five-year plan like this, one that nails you down. The first time you don't stick to just one of those things you're going to have everybody screaming at you.

You talked about no increases in fares except for cost of living and cost of service and so forth, but you don't talk about decreases. If in fact this airline, this one airline, gets rid of the duplication, gets rid of the empty seats flying back and forth across my house and does manage to save some money, is there any point in that five years that you might decrease fares, generally?

• 1640

Mr. Gerald Schwartz: Absolutely. We can't commit to it because we don't know how successful we'll be, but the whole idea is to get fares down. It's not just to be good to Canadians; it's good for the business.

If I may, Mr. Chairman, this business around the world has two economic realities. One, it has a very high fixed-cost structure and a very low variable cost. That means almost every extra passenger you put on a plane is all profit. The revenue is all profit.

The second economic reality is that you have an elastic demand curve. If you put any slight increases in cost—if a lot of people stop flying—together with any slight decreases—if a lot of people start flying—you'll see why around the world, with deregulation, prices have come down. That will happen in Canada. It's in the airline's interest to bring prices down a bit, get a few more people to fly, which is all profit, and take that profit and invest it in getting prices down again. Then more people will fly, which again is all profit.

That's how to build a profitable airline. Get people out to fly. It's the reason they have seat sales.

Ms. Carolyn Parrish: Thank you, Mr. Chairman.

The Chair: Thank you, Ms. Parrish.

Mr. Bailey, please.

Mr. Roy Bailey (Souris—Moose Mountain, Ref.): Thank you, Mr. Chairman.

Mr. Schwartz, I must have a better connection with Canadian Airlines than Air Canada, because I have to differ somewhat from my colleague over there in that I think the last 12 letters that came across my desk were Canadian. It may have been something I said.

Ms. Carolyn Parrish: Maybe they're taking me for granted.

Mr. Roy Bailey: Mr. Schwartz, you've made a lot of promises. For the public reading the papers, it's big stuff. You're going to buy and merge these two airlines.

Let's go down the road five years. As Ms. Parrish has said, I think most Canadians realize there are savings to be made by filling up the planes—not having eight flights but taking the same number of people in six. That means tremendous savings.

Let's say you are very successful in five years. Whoever gets it, Canada needs something very successful up there. I'm concerned, coming from western Canada and having seen the success of airlines like WestJet...

So you're doing well. So is WestJet. I guess my fear would be that you're doing so well, you may start tinkering with that competition. I know that would be fair ball, but you would ruin my concept of what this thing is all about if you see somebody like WestJet and a couple of others do well, provide a service, and then be bumped off five years down the road by the dominant carrier.

What response would you have to that, sir?

Mr. Gerald Schwartz: Well, sir, to begin with, we're offering to establish a very rich competitive environment that no one else has offered to do. In fact Air Canada wants to go right into that business and compete with WestJet. We're saying, no, we'll stay out of that business and we'll provide a rich environment to allow them to succeed and grow.

Now, when we get to the end of five years, I can't tell you what's going to happen. What I do believe is that it's the government, the Competition Bureau, that should set policies and rules that will keep that vibrancy alive.

Mr. Roy Bailey: Canadian taxpayers, as it was mentioned this morning, have paid for all the airports. They've paid for all the runways. I don't believe right now Canadians anywhere are willing in 2000 or 2005 to put one dime more of taxpayers' money into this.

You've made a lot of promises. Can you promise that?

Mr. Gerald Schwartz: I have absolutely no intention, but even more importantly, I have no belief whatsoever that any government is willing to support any private sector business. I don't think they should. We've proposed a private sector solution for a public policy issue.

Mr. Roy Bailey: Thank you.

The Chair: Thanks, Mr. Bailey.

Mr. Comuzzi, please.

Mr. Joe Comuzzi: Thank you, Mr. Chairman. I thought you'd never get to me.

The Chair: It's a long list.

Mr. Joe Comuzzi: Thank you, Mr. Wright and Mr. Schwartz, for coming here this afternoon and trying to shed some light on a very difficult issue.

Mr. Schwartz, I have to congratulate you. You've done something nobody in Canada has been able to do for the last ten years—that is, raise the price of the shares of Air Canada. You've been very successful at it.

Voices: Oh, oh!

Mr. Gerald Schwartz: Thank you.

Mr. Joe Comuzzi: I don't have any quarrel with what you're doing, and I don't think this committee should either. In the corporate world, you're doing what everybody else who is a financier has attempt to do at different times, and you've been very successful.

• 1645

I stretch that particular theory even to the point of how successful or not successful you are in all the lobbying efforts to influence government decisions. That's all part of the equation. I don't have any difficulty with that.

Where I do have a little bit of difficulty... It's with respect that I ask these questions, and I hope you understand that I think that's the role of a parliamentarian. When we as a committee come to discuss issues about the future of the airline industry in Canada, we have particular institutions in place to protect all the elements of Canadian culture and Canadian business, such as the Competition Act, or the Canada Transportation Act, or the Air Canada Public Participation Act. When the information we get, Mr. Schwartz, is “We will make this proposal providing we have some assurance that we will not have to go through the Competition Act”, I think it's incumbent on us to know... And, let me re-emphasize again, that is proper to do, but if you have an influence on people within this government who have given you those assurances, would you be forthright today and advise where those assurances were coming from, if at all they were forthcoming?

Mr. Gerald Schwartz: Thank you, Mr. Comuzzi. I'm very respectful of that question.

We actually disagreed until probably July with even the idea of section 47. We thought it was better to go to the Competition Bureau, and that was our view, as Mr. Wright expressed, given to Canadian Airlines in our discussions with them.

We did not have any influence on any members of the government in any way until August 23, when Mr. Wright went to the government. When the government came out through Mr. Collenette's announcement on August 13 that they would consider a complete restructuring, the real basic signal there was that they were prepared to go away from thirty years of a two-airline policy.

You mentioned lobbyists. We've had our share of them. We didn't hire any lobbyists until August 20, a week after Mr. Collenette's announcement and four days before our own announcement. So we worked on this issue, but not until it had already become quite public.

Mr. Joe Comuzzi: Mr. Schwartz, just recently the 10% rule became an issue and, again, the issue of the assurances that the 10% rule would be changed or the Air Canada Public Participation Act would be repealed. So you have no assurances from anyone within the government that this in fact will be the case.

Mr. Gerald Schwartz: We have never had, and we do not have to this day, any assurances from the government on that issue. But Mr. Wright has had in the last few weeks—and he can speak for himself as to when—discussions on that subject with government officials, as would be appropriate to do given where we are in this process.

But remember this, Mr. Comuzzi: we are not going to ask the government to change the public participation act until after two-thirds of Air Canada's own shareholders have asked to get rid of that 10% provision and its board of directors has requested that the government get rid of that provision.

• 1650

Mr. Joe Comuzzi: Mr. Schwartz, there's a court case that was decided on September 28 by Mr. Justice Blair in Toronto in which, as part of his findings of fact, I think he said on August 11...

When I say “you”, Mr. Schwartz, I don't refer to you personally but your conglomerate. I know you have a lot of people working for you.

It says here:

On August 11th Onex's management advised its Board... Prior to launching the bid,

—so your bid was obviously in place—

Onex will seek assurances from Ottawa that Bidco's proposal would be acceptable...

Mr. Gerald Schwartz: And it goes on to say—

Mr. Joe Comuzzi: It goes on to say specifically:

...we will seek assurances that the government will support the combination of Eastco and Westco by invoking section 47...

Do you want to comment on that?

Mr. Gerald Schwartz: Sure. It's very interesting because I think that memo actually proves my point.

On August 11, we were saying in a memorandum to our board of directors, which was meeting the next day, August 12, we need to get some assurance of section 47 or some other assurance that the government would find acceptable what we're trying to drive to—a single airline. So as late as August 11, for discussion on August 12, we were saying we didn't know what it was but we needed to find some assurance, and two days later is when the minister did come out. So we didn't know on August 11.

In addition, it gets even more interesting, because on August 11 our negotiations with American Airlines totally broke down. We called them off. We and American agreed to stand down all the professionals and start preparing internal information that we needed to provide to employees that we were not going to pursue this.

We had a meeting with American, at Mr. Benson's request, on August 12 to see if there was any chance to save the day. It did get resuscitated on August 12, and then it took from August 12 to 24 to actually get those agreements in principle agreed in writing, because many of the things that were agreed in principle didn't look the same when it came to the writing.

So I think in fact it reinforces the view that we were working on this and didn't have any foreknowledge.

Mr. Joe Comuzzi: Thank you, Mr. Chairman.

The Chair: Thank you, Mr. Comuzzi.

Mr. Gerald Schwartz: Thank you, sir.

The Chair: Mr. Guimond, please.

[Translation]

Mr. Michel Guimond: Mr. Schwartz, I'm going to ask you a rather difficult question. I'm not going to ask you whether you intend to accept Air Miles or Club Z points from Zellers, or whether we'll be able to pay for our tickets with Canadian Tire money. My question will be a little more complex.

Mr. Schwartz, we're talking about a mega transaction here in Canada. Is it logical or plausible that a corporation such as Onex would get involved in a venture like this and devote that much money and energy to it—you are criss-crossing Canada on your private jet, according to what I've been told—when the key to your whole plan is a legislative change to the 10 per cent rule?

My question is quite simple: why would someone get involved in a venture such as this without receiving any prior confirmation from the government that the 10 per cent rule would be changed?

[English]

Mr. Gerald Schwartz: Thanks, Mr. Guimond. I'm glad to have a chance to answer that.

That's what business is all about, taking risks, deciding when to take risks, spend your money and move forward, because you are going to take your chances of getting to the end of the game. If it were all guaranteed, we would get 6% returns. We'd buy savings bonds. We've done a lot better than that for our shareholders, and we've done it consistently for 15 years. It's by taking calculated risks of when it's worth spending the money to take a shot at something. We say that right in the front of our annual report when we talk about our principles. We believe risk taking, carefully done, prudently considered, is worth doing.

So I say to you that it is logical that we would do that. We would do it because we think the facts are on our side. We think we can get past a full review of the Competition Bureau very successfully, where the public will be protected and where we will have an environment in which we can live.

• 1655

The 10% rule doesn't make any sense at all, in our opinion. Why would Parliament want to protect a board of directors and a management team that has produced nothing for its shareholders, nothing for its employees, and nothing for consumers in a decade by keeping them entrenched behind a wall called a 10% ownership restriction, particularly because we aren't going to come and ask for that wall to be removed unless two-thirds of the company's own shareholders have asked for it to be removed and the new board of directors of Air Canada asks for it to be removed? We've seen that at Canadian Airlines, when the board asked for it to be removed, it was removed.

So it's a logical risk for us to take.

[Translation]

Mr. Michel Guimond: Mr. Schwartz, in the Onex document, there is no ambiguity. Mr. Wright referred earlier to steps 10 and 11. I would like to move on to step 13, Selected Next Steps. There it says that Onex

[English]

approach the government to gain assurance that they will support the transaction and that the 10% ownership restriction in the Air Canada Act will be removed.

[Translation]

Did you receive such assurances? Did any of that materialize? You heard Minister Collenette testify before us. Are you denying that you are currently implementing this action plan, as laid out in the Onex document?

[English]

Mr. Gerald Schwartz: I'll let Mr. Wright deal with which document it is.

Mr. Michel Guimond: No, it's an Onex document.

Mr. Nigel Wright: It's an Onex document and we do not have the assurances that you refer to. What we have, we think, is an extremely sound public policy argument to make about the 10% restriction. We have history. We have, in 1994, Air Canada changing its own articles of incorporation in a way that contemplates the 10% restriction being removed. We have that restriction being removed from Canadian Airlines articles when capital was needed for that company. We think the combination of experience and sound public policy arguments allows us to proceed with this.

Since October 26 we have an indication from the government that they will look to the advice of this committee on that, and we're here to make our case on that point.

Mr. Gerald Schwartz: I would add that at the Senate hearing this morning we learned for the first time from the former Clerk of the Privy Council, who was there at the time the 10% provision was put into the act, that it was always intended as a temporary provision to create a transition from public ownership into the private sector. I would argue that this transition has had a lot of time to take place.

[Translation]

Mr. Michel Guimond: Mr. Schwartz, my last question deals specifically with the workers—these human beings we tend to forget when discussing mega transactions. Canadian Airlines' employees have been through a series of mergers, including those involving CP Air, Nordair and Wardair. And I may have forgotten one.

I would like to learn more of the details of the commitment you received yesterday from Mr. Hargrove, who gave you his blessing with respect to maintaining three seniority lists. Before I was elected a Member of Parliament, I worked in labour relations for 16 years. A company generally has only one seniority list, and when a merger occurs with another company, the necessary adjustments are made to that list. What steps will you take when the two companies merge to ensure that those three seniority lists remain operational?

For example, it's possible that a pilot whose name is on one seniority list could end up in the same cockpit as another pilot whose name is on a different seniority list. What kind of arrangement do you intend to make in this respect?

The Chairman: Thank you, Michel.

[English]

Mr. Gerald Schwartz: Mr. Guimond, you're obviously quite knowledgeable about union-labour matters. You're quite right to say that's an issue. It depends in which sector. As for the pilots, I think you're quite right, you have to do that seniority quickly. You have to move at it and merge the seniority of the lists quickly.

In the CAW you don't have to. What the CAW asked us to do, and we were willing to do because it will work, is for two and a half years, until the next full bargaining date, maintain the seniority—one company, two lists, one list for the Canadian people and one list for seniority for the Air Canada people. And there would be a third list, which is the new job postings. In other words, you'd begin a new seniority list on new job postings in that two and a half years. But at the end of the day, you must get to a single seniority list, exactly as you suggested.

• 1700

In the case of pilots and mechanics, I think you have to do it faster. In the case of CAW, I think you probably can do just what they've asked for, which is to allow it to take place over time. The advantage of doing it over time is that you'll have a lot of senior people moving out over that two and a half years, and you'll have a much easier list to merge two and a half years from now than you will today.

The Chair: Thanks, Mr. Guimond.

Somebody had mentioned, though—maybe it was a previous witness—that we were looking at employees who work on a plane. So one plane would carry maybe 120 employees working on that plane, and the other company has somewhere near 160 to 170 employees who work on a plane. Maybe you don't know the details of this, but how does one go about rationalizing, when they merge a company, to say this plane has 120 working on it and this one has 170?

Mr. Gerald Schwartz: Those numbers refer to the total number of people in the company divided by the number of airplanes. But in terms of the people on the airlines who actually work on the airplane, as Mr. Guimond suggested, those lists need to be merged earlier.

I met yesterday with CUPE—CUPE represents the flight attendants of both Air Canada and Canadian—and we had a lot of support at that meeting. I said, “Do you want to keep two seniority lists for two and a half years, the way we're going to do it with CAW?” And they said “No, it won't work. We need to get at it sooner.” You have to have the flexibility, different plans for different places, to make each one work and make employees comfortable.

We've been through a lot of mergers at Onex. We have acquired almost 90 companies in 15 years and merged most of them together to create the large business units we have.

We have three businesses that are the biggest in the world, that really dominate their industry, and we've been through a lot of mergers. There is SkyChefs. In 1996, we bought the company that was our largest competitor worldwide, Cater Air International. There were totally different unions. Each company had a kitchen at each airport and probably hated each other; they fought for the same business. In 18 months, we had a seamless merger of those two companies. We have 27,000 fully unionized employees, and we never lost a single day of work stoppage with them.

I'm not saying we didn't make mistakes. We made plenty of mistakes in how we did it. But we got there, and the 18 months proved highly successful for the employees—we've now been growing the business—and for the company.

The Chair: Thanks, Mr. Schwartz.

[Translation]

Mr. Drouin, please.

Mr. Claude Drouin (Beauce, Lib.): I want to thank you for your presentation, Mr. Schwartz. You have already answered a number of questions, but I would like to clarify a couple of points.

The offers that you have made, as well as those put forward by Air Canada, are very good news for Air Canada's and Canadian Airlines' shareholders. But what about the debt load? When the new company is formed, will you have sufficient leeway to implement the plan you have proposed and will the money you'll be saving be adequate to ensure that the business is profitable?

Both companies have contracts with sub-contractors. Have you looked at those sub-contracts? Will the sub-contractor companies suffer job losses, and if they do, will those losses be included in the total number of lost jobs? I'm thinking in particular of the major contract Air Canada signed in Quebec with IBM, and all the jobs that are at stake there. I would like to know how you intend to deal with that.

Mr. Gerald Schwartz: Thank you, Mr. Drouin.

[English]

I'll address your first question, the debt load, and the viability of the airline afterwards. In terms of the debt load at Canadian Airlines, their corporate debt is about $1 billion, actually nine hundred something million. And that supports, by the way, a $3.5 billion operating size airline.

Air Canada's debt load is $3 billion, their corporate debt, supporting a $5.5 billion airline. So actually Air Canada proportionately has more corporate debt than Canadian does today.

• 1705

When you put these two debt loads together, you'll have $4 billion in debt load. The real issue with debt load isn't the amount of debt you have, it's your ability to service it. One person can have a mortgage on their home for $100,000 and barely have the income to pay for it. Another person could have a $1 million mortgage, but a $10 million income and can easily pay for it.

When we put these companies together by disentangling the cost structure of the overlap, we believe there is at least $600 million in annual savings. At the end of one year of our model, the service coverage ratio of the debt will be better than it is at either airline alone today. At the end of five years, we believe the debt load can be reduced to close to zero through the enormous cashflow created in this combined business. So the viability of the industry will be even better than it is today, I'm sure of that.

On the second question of subcontracts, there are many businesses that spin off from the airlines. I don't see any reason why any of them would be hurt when you can get to a growth situation that you can't get to today but will get to in the future.

Let me give you an easy example of growth. Today, Air Canada is sending 30% of the Toronto-to-Asia-bound traffic out through United Airlines in L.A. and San Francisco. Bring that traffic back home and put it through Vancouver. On Montreal to Rome, Air Canada sends you on Lufthansa through Frankfurt to connect to Rome. Canadian has the authority to fly seven days a week. Put the traffic of those two together and you'll fly seven days a week from Montreal to Rome. There are dozens of new non-stops that will be created. Each airline, from a particular city, may not have the traffic to do a non-stop. Put the density of those two airlines together and you'll have dozens of new non-stops: Halifax-Chicago, Vancouver-Mexico City, Calgary-Miami, Calgary-Phoenix, Winnipeg-Dallas, a pile of them from Toronto, Montreal-Miami, and hence Boston. That creates growth. That growth will also fall down to the benefit of the people who do business with the airline.

The last point I'll make on this is that I believe in buying Canadian, especially where we make the best products in the world in some categories. For example, I very strongly believe that this combined airline, if it's going to fly regional-sized jets, should be buying Bombardier's regional jets. That will help secondary growth out of Bombardier's plants.

[Translation]

Mr. Claude Drouin: Thank you, Mr. Chairman.

[English]

The Chairman: Thank you, Mr. Drouin.

Bev Desjarlais, please.

Ms. Bev Desjarlais: Given that they're tied to this to some degree, are you aware that American Airlines has had any contact or any lobbyists approaching the government or departments?

Mr. Gerald Schwartz: Ms. Desjarlais, I can tell you that, to the best of my knowledge, I am not aware of any approaches by American Airlines to any government officials earlier than... In fact, I'm not aware of any at all, but I'm certainly not aware of any prior to our offer.

Ms. Bev Desjarlais: Okay, and you didn't have any discussions like that yourself with American Airlines?

Mr. Gerald Schwartz: No, absolutely not.

Ms. Bev Desjarlais: I don't think there's a lot of question out there that it appears the plan that you came forward with just seemed like such a coincidence in that it fell into place right after section 487 came into play. There are probably those out there—and I have to admit that I'm one, to some degree—who sort of feel like this whole process has been manipulated and that the rules have been bent to side with one over the other.

I'll be the first to say that I don't see competition as the answer to everything. I don't agree with that. A lot of my colleagues do think it's the answer to everything, but I don't. However, when we play by the rules, this competition's in place and we have two companies dealing with it, so I expect the rules to be fair for both sides. That's the only way we have a good orderly flow, and I believe the laws should be the same for all those in place.

• 1710

How do you think this Liberal government will go about getting the Canadian people to trust whatever happens in this process, based on all the innuendo and coincidences that are out there?

The Chair: Well, the witness has already answered that question. But, Mr. Schwartz, you can go right ahead and answer it again.

Mr. Gerald Schwartz: I don't agree with the premise of your question, but I certainly don't know the answer to it.

Ms. Bev Desjarlais: That's interesting, because Mr. Keyes said you answered it already.

The Chair: He has already explained—

Ms. Bev Desjarlais: But he just told me he doesn't know the answer.

Mr. Gerald Schwartz: I don't know how the government should go about doing what you're saying.

Ms. Bev Desjarlais: Okay. What will you do if Parliament decides that the 10% rule won't be waived?

Mr. Gerald Schwartz: We'll have to deal with that when we come to it. If that's the case, certainly Parliament is supreme and Parliament can make any decision it wants to. I have no idea in the world why they would do that in the face of the company asking for removal of it, other industries not having it, and the board not asking for it. In the CPR, you have a massive transportation company with no 10% entrenchment rule. We'll take our chances and we'll see what happens when we get there.

Ms. Bev Desjarlais: So you have no plan in place for what you're going to do if that rule or that law never changes.

Mr. Gerald Schwartz: We made a revised and significantly better offer on October 28. That was our plan B.

The Chair: Thank you, Bev.

Mr. St-Julien, please.

[Translation]

Mr. Guy St-Julien (Abitibi—Baie-James—Nunavik, Lib.): I was very surprised to see a statement that appears on page 8 of your brief. You say that you have made an unprecedented commitment to freeze published fares for travel in Canada for five years. On November 2nd—today, in other words—a return ticket between Val d'Or and Montréal, costs $595.83. When you reserve a ticket two days ahead, you receive a discount, so that the ticket costs $475.05. A ticket for the Val d'Or—Montréal—Ottawa—Val d'Or route costs $798.27 and no discount applies.

When he appeared before the Committee on October 26, Minister Collenette tabled his policy framework for restructuring the Canadian air transportation industry. Are you familiar with it?

[English]

Mr. Gerald Schwartz: No, I'm actually not aware of the statistics.

[Translation]

Mr. Guy St-Julien: I would like you to take a look at it since on page 11, it addresses the question of prices. We know that the best way of resolving that problem is to ensure that the air transportation market remains competitive. It is through competition, rather than government intervention, that we will succeed in imposing discipline as regards the prices being charged by the airlines.

The cost of airline tickets is often very high, and you say you intend to freeze published fares for travel starting today. Yet in today's newspapers, the headline is: "Onex sweetens its offer to shareholders by $1.1 billion."

What do you intend to do for people in the Abitibi and other remote areas who travel by plane? If the Onex bid is accepted and you freeze fares, what kind of discounts can travellers expect to see?

[English]

Mr. Gerald Schwartz: It's a good question. I obviously cannot tell you how much the prices are going to drop. I can tell you that I believe the prices are very high. I was in Quebec the other day and I was talking with a gentleman who told me that when a group of businessmen in Rimouski flies to Montreal, that group charters a plane because it's cheaper for them to do that than it is to fly on Air Canada's flight or the regional flight. That doesn't make sense to me either.

I think prices in this country are already high. I think the problem is that we're sagging under the weight of this duplicated system in which either the regionals compete with each other or the main lines compete with each other. By reducing that cost structure, we can finally get at possibly reducing prices.

What we've done is say that prices won't increase. We're at least holding the line. That's never been done in the past. It's a starting point. What I want to do is drive prices down, because then Air Canada shareholders can win. As you drive prices down, you get more people flying. More people flying means more profits. Keep on driving the prices down.

I am very sympathetic to your view about the price of a ticket to Abitibi.

[Translation]

Mr. Guy St-Julien: On October 26, a letter addressed by the Competition Commissioner to Mr. Collenette was tabled before this Committee. Are you aware of that letter?

[English]

Mr. Gerald Schwartz: No, I have not.

[Translation]

Mr. Guy St-Julien: On page 17, reference is made to travel agent commissions. At our riding offices, we receive a great many letters from owners of travel agencies. You mentioned earlier that overnight, United reduced travel agent commissions and that Air Canada would follow suit, although that would probably take another month or two.

• 1715

I hope you'll review the letter written by the Competition Commissioner to Mr. Collenette on October 22 and convey your views with respect to section 1.3, which deals with travel agent commissions. If you haven't received a copy of the letter, I can certainly provide you with the English version.

[English]

Mr. Gerald Schwartz: Are you saying that Onex has suggested doing away with travel agents? They would absolutely never do that. No way.

[Translation]

Mr. Guy St-Julien: No, that's not what I said. I asked you whether you were aware of a letter addressed by the Competition Commissioner to Mr. Collenette. Section 1.3, on page 17, deals with travel agent commissions. I would like you to review the letter and send us your comments in writing.

[English]

Mr. Gerald Schwartz: I am completely unaware that Mr. Collenette or anybody in the government has suggested doing away with travel agents. This is literally the first I've ever heard of such a thing. I'm not being disrespectful. If that's what it says, that's what it says. I have just never heard of this.

[Translation]

Mr. Guy St-Julien: Mr. Chairman, it is important that Mr. Schwartz have a chance to review the letter written by the Competition Commissioner and tabled before this Committee on October 26, as well as the policy framework presented by the Minister of Transport.

I would like to ask a third question.

[English]

The Chair: Your time is up, Mr. St-Julien, I'm sorry.

[Translation]

Mr. Guy St-Julien: Can you put my name down for the next round?

[English]

The Chair: Yes.

Mr. Casey.

Mr. Guy St-Julien: Merci.

Mr. Bill Casey: Thank you.

If the shareholders don't support your proposal on November 8, would you invest in Canadian Airlines, buy that business, take on Air Canada and compete?

Mr. Gerald Schwartz: No.

Mr. Bill Casey: Why not?

Mr. Gerald Schwartz: We looked at buying Canadian alone three years ago, and it didn't make sense. The first approach we had from Canadian was to just invest in it. It didn't make sense.

As long as you have two airlines in this country with 30 million people spread out, as we all know, on a long, thin line—kind of two weights at each end and a long barbell in between—this country cannot support two airlines flying against each other, competing for market share, going wing tip to wing tip and wasting all that money. I don't think anybody can make money at it.

Air Canada's proud to say suddenly, when we're making a bid, they're having their best quarter ever. I applaud them for having a good quarter, but the fact is that Air Canada has lost more money in the last decade than it's made. Canadian hasn't made any money. They're both sinking under the weight of the policy we have had in this country for 30-plus years, to have two national airlines. We don't think it works, we don't think it's profitable, and we certainly wouldn't invest in it.

Mr. Bill Casey: Then what happens if a company like WestJet grows and grows and becomes a national carrier and competes with you?

Mr. Gerald Schwartz: It will grow and grow because WestJet has a very different cost structure. They're succeeding with that cost structure, but the main lines are locked into a cost structure, in large part with their employees, that they cannot get out of.

There are the small charters—and they're not so small—Canada 3000, Air Transat and Royal. Canada 3000 flies a fleet of virtually new Boeings. They can compete. That's why they've grown from 5% five years ago to 20% today, and I think they will grow from there. In my own personal view, WestJet will continue to be a profitable, growing company, and so will the charters.

Somebody has already filed for an EastJet, to start a low-cost airline in the east. It's good for the country to have that kind of competition. But to buy either of the main lines alone and keep the nonsensical duplication they have both had until now—I wouldn't invest two cents in that.

Mr. Bill Casey: You say you wouldn't buy one airline, Canadian Airlines, and compete with Air Canada, but what happens if you—

Mr. Gerald Schwartz: Or the other way around.

Mr. Bill Casey: —buy them both and somebody else suddenly becomes your competitor? How will you handle that if you can't compete?

Mr. Gerald Schwartz: There will be strong, vibrant competition. In every business we've been in, we've found that we grow, expand and do better when we have a tough competitor. They make us do our best. They bring out the best in us.

Mr. Bill Casey: It's the perfect reason for you to buy Canadian Airlines—tough competitor.

Mr. Gerald Schwartz: But the structure of the two-airline policy will never work. It will never allow anybody to be profitable over a lengthy period of time. They'll just have little bursts of profitability here and there, and then sink back under that weight.

Mr. Bill Casey: I have one last question, or maybe two if you'll let me.

• 1720

American Airlines will have some money in your new proposal. How much will it be and what's the structure? They were putting in about $225 million, $275 million, and another $125 million before in the first proposal. How much will they have in this one?

Mr. Gerald Schwartz: They were putting in $500 million of their own money and then borrowing $125 million from the TD Bank. Under our current proposal, they will be putting in $175 million of their own money and borrowing $125 million from the TD Bank.

Mr. Bill Casey: Won't they want to have a say if they're going to put $300 million in it?

Mr. Gerald Schwartz: No, they don't want a say.

If I were them, I would want what they want—that trip from a Canadian city to Kansas City. You take the Canadian flight to Chicago, and when you go from Chicago to Kansas City, they want you on American instead of United. That's what they're doing. Follow the profit. Follow the money. That's where all the money is.

The Chair: Thanks, Mr. Casey.

Mr. Dromisky, please.

Mr. Stan Dromisky: Thank you very much, Mr. Chairman.

I'd like to change the topic and get away from money, process, strategies and all that. I'd like to talk about safety. Nobody's talked about that yet. There are two areas I'd like to deal with.

One involves those guys who are sitting at the back of the room there and that young lady with the blue uniform with all the gold stripes. I'm talking about pilots. I received a great number of letters from pilots from both companies. If I had to rate them, I would rate the vast majority with an A-plus because of the content and the way they were written, and so forth, by intelligent people.

But I have also received very disturbing letters from one group. I don't know where they're coming from, but they were written from a very emotional level, chastising each other, with strong negative, destructive kinds of comments being made.

Now, I don't want to fly in a plane with those two pilots—a pilot from one company who can't get along with the representative pilot from the other company—sitting in the same cockpit. You and I know that if they're not working in harmony and there is animosity between them, they won't make effective, quick decisions. They will certainly not behave and respond to stimuli in that environment in the safe way that they should.

The other area I'd like to talk about is what we have seen on TV lately with regard to the airplane that crashed on its way to Egypt. I listened to quite a few commentaries and so-called aviation experts from the United States, from the American aviation safety board and so forth, and other so-called experts from air companies in Canada. They said an attitude prevails that prevents certain safety measures from being carried out.

Now, I immediately think of a monopoly. I think of a company in Canada having complete control and eventually emerging with an “I don't give a damn” attitude, saying “You can't do anything about it. Try to get another flight on another line. Hah, hah, hah, there isn't another one for you to catch. Okay, lump it you don't like it.”

Those two areas are extremely important to me: safety, the maintenance of your planes and so forth, as well as the attitude and personality problems.

Mr. Gerald Schwartz: Let me tell you two things, preceded by saying that safety is number one. You don't fly an airline without safety. The safety records of both Canadian and Air Canada are excellent.

Canadian Airlines has gone through four different mergers—some of them a little distasteful, some of them tough. These pilots will tell you that, merger or not, when they get into the cockpit it's all about safety and following the rules, and it always will be. You know that by looking at the history of it. Never forget that those pilots are on the same flight as the passengers.

The Chair: Mr. Dromisky, very quickly.

Mr. Stan Dromisky: I'm just jumping ahead. Because of the service of your employees, if you are successful in merging these two companies, will there be such a thing as an ombudsman, someone who will listen to individuals regarding the kind of service they might be getting in a monopoly?

Mr. Gerald Schwartz: It wouldn't be a monopoly; it would be a very dominant carrier, without question. The tenth point in our book is accountability. We have suggested appointing an ombudsperson who will report directly to the chief executive and to the independent members of the board, independently. I believe it is the only one in the airline industry. It's certainly the only one I am aware of and it certainly is the only one in Canada. That person will report annually to the public as well as to the company on our living up to our commitments.

• 1725

We think an ombudsperson is a great idea, and we can even see having an office of the ombudsperson to receive complaints from people who find they can't get through the labyrinth of bureaucracy that exists. Some people can't stay on the phone for 30 minutes and listen to that damn message that says “You're very important to us, so wait, please”, and it tells you that another 10 times. We want an ombudsperson to cut through that.

The Chair: Thank you, Mr. Dromisky.

Mr. Johnston, please.

Mr. Dale Johnston (Wetaskiwin, Ref.): Thank you, Mr. Chairman.

I have some questions regarding labour. One of them is on the amalgamation of the two seniority lists. I'm wondering what kinds of plans you have for that, given that this is an item that has been before the CIRB for two or three years and it hasn't been settled yet.

The other part of the question is how you are going to deal with the possibility of a work stoppage when you get into a situation where there is basically one airline in Canada. We had an Air Canada work disruption here not too long ago, but fortunately there were other carriers that could take up the slack. What are your plans to deal with those eventualities?

The Chair: Mr. Schwartz.

Mr. Gerald Schwartz: Thank you, Mr. Johnston.

First on the CIRB, the Air Canada regional pilots have made a request to the CIRB, and I think that is what you are referring to, for a common employer status. The CIRB has not responded yet. Whatever their response is is what Air Canada and the merged airline must legally live with, and will. Our proposal doesn't impact that. Whatever that decision is, it's going to be.

On work disruption, it's a very interesting question. When you look at the market today, you have Air Canada completely dominant in eastern Canada and you have Canadian Airlines with 70% of the traffic in the west. So if you have a work disruption that stops planes from flying in either airline, you massively disrupt either the east or the west and you therefore axiomatically disrupt the whole country because you disrupt the connection. So we already have that problem today.

I don't think it really gets worse, because given the level of the entire country being hostage to that, both the company and the unions have to be much more sensible. A work stoppage would have such a major impact that they would be at risk of the government mandating them back to work the same day.

Mr. Dale Johnston: Thank you, Mr. Chairman.

The Chair: Thanks, Mr. Johnston.

Just before we wrap up, Mr. Schwartz, I have a last question. We had a gentleman before us this afternoon and he said the ideal aviation policy is no restrictions on ownership, no restrictions on market entry, and cabotage. What are your views on market entry and cabotage?

Mr. Gerald Schwartz: Cabotage will create perfect competition. As Ms. Desjarlais said, there are other issues than just competition. I am completely in favour of cabotage. It's principally with the U.S., allowing the U.S. carriers to fly point to point in Canada, as soon as they will allow us the same rights in the United States.

I would never agree that they can take a plane in the United States, buy their fuel in the U.S., do their maintenance in the U.S., put a U.S. crew on it, jump into Canada in the morning and fly point to point, jump back into the United States at night for more servicing, and decimate our jobs, decimate our industry, all in the name of competition. On the other hand, if they will allow us into their 280-million-person market, I'd love to do it. I'll make that trade any day.

The Chair: Mr. Schwartz, thanks very much for your presentation. It was both informative and at times spirited. We thank you for that.

Mr. Wright, thank you for joining Mr. Schwartz.

[Translation]

Mr. Gerald Schwartz: Thank you, Mr. Chairman.

[English]

The Chair: We are adjourned until 6 p.m, colleagues.