Cabinet fault lines appear over Air Canada
Quebec, western camps said forming
By SIMON TUCK
Tuesday, April 27, 2004 –The Globe and Mail Page B1
OTTAWA -- The federal cabinet is showing signs of a regional split over what to do about troubled Air Canada, increasing the chances that the insolvent airline's problems will cause political turbulence for Paul Martin's government.
Government sources say two camps have emerged within cabinet over how -- or whether -- to respond to the airline's formidable problems, which led to a feisty discussion last week during a cabinet subcommittee meeting.
"This thing has a chance to become huge," said a government source. "There's no way these two groups are ever going to agree on this."
One group, which includes key ministers from Quebec, believes Ottawa shouldn't be shy about trying to save the country's flagship airline, which is based in Montreal. They don't want an old-fashioned bailout, but they would support a range of moves that would help Air Canada by easing the financial load for the entire industry.
One government source said Health Minister Pierre Pettigrew has been among those expressing this view.
The other camp, led by senior western ministers such as Finance Minister Ralph Goodale, has argued against any move that could be seen as the government favouring a particular company, especially one that is widely blamed for many of its own problems. They believe the government should let the market shape the industry. Air Canada's chief rival, WestJet Airlines Ltd., is based in Calgary.
Mr. Goodale said all of Canada's airlines -- not just Air Canada -- are important. "I would really take issue with those that sometimes draw a distinction between regional and national interests," he said during an interview. "I see WestJet in the national interests."
There is widespread agreement within the government, however, that the government should only make moves that affect the entire industry, not just Air Canada.
One senior official said the key question for the government is whether or not WestJet and other smaller airlines can quickly fill in the service gaps, if Air Canada were to go out of business.
The government's response to Air Canada's plight could be the sort of issue that inspires different responses in different regions, Mr. Goodale acknowledged. "I suppose there could be different perspectives depending on which region of the country you come from."
This particular situation is an especially sensitive one for westerners because WestJet has in recent years been outperforming its larger rival.
And Ottawa's involvement in the aerospace industry has been a touchy subject in the West for some time. In 1986, Brian Mulroney's Conservative government lit a political firestorm when it awarded a $1.4-billion contract to maintain CF-18s fighter jets to Bombardier, instead of accepting a cheaper bid from Winnipeg's Bristol Aerospace Ltd.
That decision helped fuel the rise of the Reform Party. Mr. Martin, who has vowed to sooth western alienation, will want to do what he can to avoid reopening one of Western Canada's most sensitive political sores.
But Air Canada's financial problems pose further potential problems for the federal government. Mr. Justice James Farley of the Ontario Superior Court, who is overseeing the company's restructuring, recently extended Air Canada's protection under the Companies' Creditors Arrangement Act to May 21 from April 15.
That raises the possibility that the company would have to make dramatic cuts -- likely including massive layoffs and the elimination of service to many smaller communities -- during the coming election campaign. Many believe the election will be called this spring, perhaps for mid-June.
Even if the situation doesn't flare up into a full crisis during the election campaign, Air Canada has put the Martin government in a no-win situation. It doesn't want to be seen to do nothing, as jobs and services are cut. But it also doesn't want to do a bailout, particularly one that props up a struggling Montreal-based company at the expense of a fast-rising Calgary-based rival.
Ottawa will likely take a key step towards developing its Air Canada strategy this week, as Transport Minister Tony Valeri lays out a series of policy options for the federal cabinet. Those options include raising -- or even moving toward eliminating -- foreign ownership limits in the airline industry.
The limits on foreign ownership could be raised as high as 49 per cent without much difficulty, which would provide Air Canada and its smaller domestic rivals with greater access to capital. Foreign ownership limits on airlines now stand at 25 per cent.
But one senior Liberal said the total elimination of foreign ownership restrictions will also be up for debate when Mr. Valeri appears before cabinet. "I think it has to be part of the discussion."
But that source also said that such a dramatic and complicated move would more likely occur over the longer term, not in the coming weeks or months.
A more likely short-term option to help Air Canada would be for Ottawa to slash airport rents. The airline industry has long lobbied for lower rental fees, believing that it pays large sums for little in return.
If it were to drop those fees, however, the government would want assurances that those savings would be passed on to Air Canada and the other airlines, not simply gobbled up by airports.
"We've got to do the measured thing, which is something for the industry," a senior Liberal said.
Mr. Valeri has said little on the matter, other than the government is hoping for a private sector solution. Ottawa doesn't want to give the impression that it will bail out the airline, thereby removing incentives for the stakeholders to do whatever they must to make it financially viable.
© Copyright 2004 Bell Globemedia Publishing Inc. All Rights Reserved.