Air Canada, Canadian Airlines stage dogfight over merger

By Staff -- Logistics Management, 11/1/1999

It seems inevitable that sooner or later, there will be only one major airline in Canada. The only question is who will control it?

Since late August, Air Canada, Canadian Airlines, and a third party--Toronto-based Onex Corp.--have been locked in combat over a possible buyout or merger of the two carriers. The conflict will come to a head early this month, when shareholders of the two airlines hold separate meetings to vote on whether to accept Onex Corp.'s proposal to purchase both companies and merge them into a single airline.

A series of proposals and counterproposals, dogged by public accusations of illegality and duplicity, have kept Canadian shippers and passengers in a state of uncertainty for the past two months. In mid-August, Transport Minister David Collenette issued a "Section 47" order allowing the carriers to discuss an industry restructuring without fear of violating antitrust laws. Just a few days later, Air Canada disclosed that in June it had offered to purchase Canadian's profitable international routes and related assets. Under that plan, debt-laden Canadian would continue as a domestic airline and would have code-sharing rights on Air Canada's routes. Canadian publicly rejected that offer.

Just four days later, Onex Corp., a CDN $14 billion publicly owned company with interests in such diverse industries as airline catering, electronics manufacturing, and sugar refining, offered to purchase shares of both airlines through a new subsidiary called AirCo, then merge them into a single carrier. Onex's proposal would retain the name Air Canada, keep the airline's headquarters in Montreal, and eliminate duplicate flights and assets. Air Canada's board of directors rejected that offer.

Last month, Air Canada floated a new plan that included a buy-back of some shares at a higher price than Onex offered. Under that plan, it would also buy Canadian Airlines and operate it as a separate business, create a new, low-cost domestic airline, and receive a CDN $930 million cash infusion from Canadian and German banks and Air Canada's Star Alliance partners, United Airlines and Lufthansa. Not surprisingly, that offer too was rejected.

The conflict has been marked by organized public-relations campaigns mounted by all three parties, including a steady stream of public accusations and countercharges designed to plant doubts in shareholders' minds. Air Canada has accused Onex's plan of favoring Canadian's shareholders; placing too much control in the hands of AMR Corp., parent of American Airlines and a major Onex and AirCo shareholder; and attempting to avoid governmental review of the proposed merger. In September, Air Canada asked a Quebec court to declare the offer illegal. Onex, meanwhile, has accused Air Canada of adopting costly "poison pill" measures to prevent a takeover, giving too much control to United and Lufthansa, and shortchanging shareholders by offering to buy back just 35 percent of its stock. Both sides have denied those charges.

Onex forced a meeting of Air Canada's shareholders in Montreal to accept or reject its offer. That meeting is scheduled for Nov. 8, the same day that Canadian Airlines' shareholders will meet in Calgary, where they are expected to accept Onex's plan. Both meetings are likely to generate plenty of fireworks, but at this point, no one knows who will be left standing when the smoke clears.