A Possible Alternative to a Domestic Monopoly

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The scenarios considered so far see the emergence of a near monopoly air carrier with Air Canada and CAI coming under common ownership. But there appears to be an alternative worth exploring, namely, the restructuring of CAI while under protection from its creditors.

We acknowledge that if Canadian does not secure additional financing it may well fail in the next year (see Marotte, 1999b). However, in our view, the economic consequences of such a failure - to the extent they have been considered at all - have been distorted. Even if Canadian does fail, it does not follow that Air Canada should be permitted by the federal government to buy its best assets.

If CAI were to secure protection from creditors it will not immediately fall off the face of the earth. Much of the corporate capability - in its equipment, its organization, and the skills of its people - will remain. And the market is not collapsing - there will still be just as many passengers needing transportation. As the Asian economies improve, in fact, some of Canadian’s best markets will be growing.

The question which merits more attention from policy makers is whether current CAI owners and managers can make more of the airline given temporary protection from creditors. And if not the current team, can someone else take the Canadian assets and use them more effectively so as to create a viable carrier? Note that what we have called restructuring might better be called "re-engineering," since it would likely involve significant changes in CAI’s route structure, target market segments, choice of hubs, and overall scale of the airline. It would also likely require significant changes in the financing of CAI. We do not pretend to have the answers to the questions we have posed, but we do believe that these questions merit careful study.

There are examples in which distressed firms have been successfully reborn, some even from the airline industry. Continental Airlines in the United States has twice sought court protection from creditors and is now a healthy carrier. TWA is also rebounding after a difficult period, as is America West.

Consistent with this approach, the Competition Bureau will not automatically approve mergers in which strong firms buy out failing firms if the failure of the firm could ultimately lead to a more competitive outcome where new ownership of some or all of the failed firm’s assets provides new competition.

We want to stress that we are not advocating a "let Canadian fail" policy,44 we simply think that the "restructuring under protection from creditors" option should be studied. We admit that it will be costly. Bankruptcy proceedings have a way of destroying a significant fraction of corporate value.45 And the experience of Eastern Airlines’ failed attempt at restructuring informs us that other firms in the industry can suffer if the distressed carrier, supported by court protection, ruins the market with below-cost fares (see Weiss and Wruck, 1998). Whatever the costs of this alternative, they need to be compared to the costs of a monopolized industry.

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Last Modified: Thursday, August 5, 1999.