US embassy cable - 03OTTAWA385

UNCLAS SECTION 01 OF 02 OTTAWA 000385 
 
SIPDIS 
 
STATE FOR WHA/CAN - PATRICIA NORMAN, EB/TRA - SUSAN PARSONS 
 
STATE PASS USTR FOR JOHN MELLE 
 
USDOT FOR JEFF SHANE AND SUSAN MCDERMOTT 
 
FAA FOR KRISTA BEREQUIST 
 
TSA FOR SUSAN WILLIAMS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EAIR, EINV, CA, Finance 
SUBJECT: Air Canada's financial woes may spur GOC to alter fees 
 
 
1.(U) Portions of this message are Sensitive But 
Unclassified, please treat accordingly. 
 
SIPDIS 
 
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Summary 
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2. (U) Air Canada's fourth quarter losses in 2002 are 
significant and have forced that airline to try to sell its 
maintenance, ground handling and commuter-feeder airline 
units. The federal government may reduce the air security 
fee from C$24 to C$18 to boost air travel, but there are few 
other options for federal cost cutting that can be passed on 
to the airline sector and traveling public. In the wake of 
global turbulence in the air travel sector, Air Canada and 
Canada's other airlines will have to adapt and restructure 
to the new market realities rather than rely on GOC 
maneuvering. However, restructuring may prove difficult 
unless the airline can attract foreign capital. End summary. 
 
3. (U) After posting profits in the spring and summer of 
2002, Air Canada, which accounts for more than 70 percent of 
all air passenger travel in Canada, took a beating in the 
last three months of 2002.  The airline lost C$364 million 
dollars (US$239 million) in the period, compared to C$277 
million dollars (US$182 million) in the period in 2001.  To 
stem its losses, the company intends to: 1) sell stakes in 
its aircraft maintenance, ground handling and regional 
airline units; 2) seek changes in work rules and other 
concessions from its 36,000 employees, and 3) turn its cargo 
operation, employing 1,700 people, into a separate 
subsidiary. 
 
4. (U) The troubles of Air Canada have led the Minister of 
Transportation, David Collennette to consider reducing the 
government imposed C$24 a ticket airline security fee and, 
or, reduce other fees such as navigation system charges and 
airport landing fees. 
 
5. (SBU) According to Ministry of Finance officials the 
lowest the security fee could be reduced to, and still meet 
revenue needs given federally mandated aviation security 
expenditures, is C$18.  An official with the Airline Pilots 
Association (ALPA) in Ottawa is confident that the fee will 
indeed be lowered, however, whether it will be reduced 
across the board or will be prorated on distance flown, is 
still up in the air. 
 
6. (U) The Minister's expostulations on reducing Navigation 
fees and airport fees are much less certain. The entities 
that collect these fees and provide the corresponding 
services are private sector corporations that have not been 
under federal government management since the mid- to late- 
1990s.  These non-share corporations cannot raise equity 
capital and must rely on fees and debt to finance their 
activities (and all surplus funds must be reinvested in the 
corporation). NAV Canada, which provides Canada's Air 
Navigation Services, was spun out of the federal government 
in 1996.  It owns its infrastructure assets and sets its 
fees independent of the GOC. 
 
7. (U) The federal government, however, remains the owner of 
Canada's major airports, although they are operated by 
independent local "Airport Authorities" (and the GOC is paid 
rent under sixty-year long lease arrangements). The airport 
authorities' fees and charges are not subject to review by 
the GOC. In particular Airport Improvement Fees (AIF) 
provide an attractive revenue source since passengers are 
largely captive. All major Canadian airports have either 
introduced AIFs or are in the process of doing so. Thus the 
GOC cannot simply force the airport authorities or NAV 
Canada to reduce fees - and unless the GOC provides 
operating subsidies to these entities to make up for any 
lost revenue there would be no incentive for them to do so. 
In a best case scenario the GOC would have only the option 
of reducing the rent it takes from the airport authorities 
and hope that the airports would pass the savings along to 
air travelers, perhaps by reducing AIFs. 
 
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Comment 
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8. (SBU) At this juncture the conventional wisdom among 
airline industry observers is that the GOC is very unlikely 
to engage in direct subsidies of NAV Canada and the airports 
to save money for the airlines.  An overt bailout of Air 
Canada, of the type seen in the United States post 9-11 is 
also not on the table.  The big losses posted by Air Canada 
this past quarter now places all of North America's "full 
service" carriers in the same tough financial straits but, 
despite the serious crisis in the industry, Minister 
Collenette's only real option is to reduce the security fee. 
Indeed, Collenette has inferred there is little the 
government can do in the face of a global decline in air 
travel in the wake of 9-11 - and it will be up to Air Canada 
to continue to adapt and restructure to become profitable 
under the new market conditions.  After all, the "low-cost" 
model airlines (e.g. Southwest, Jet Blue, and Canada's 
WestJet) are managing to make money. Embassy doubts whether 
Air Canada will be able to raise enough cash by selling 
assets to Canadian entities; a significant investment of 
foreign capital in the Canadian aviation industry will be 
vital to Air Canada's long-term health.  However, given the 
current state of the industry, it is not clear where that 
capital will be found. 
 
Kelly