Toronto — Air Canada and the Canadian Auto Workers union pulled back from the brink and reached a tentative deal on $45-million in cost reductions last evening, clearing the way for the company to emerge from bankruptcy protection later this year.
"This is, as difficult as this has been, a defining moment in moving forward to the completion of the restructuring of Air Canada into a truly competitive global carrier," the airline's chief executive officer, Robert Milton, said of the tentative agreement, which was reached just hours after the airline's key financiers issued their toughest threats yet to cancel a crucial $2.65-billion in financing the airline needs to stay airborne.
"I am incredibly bullish about the future," Mr. Milton told reporters in the downtown Toronto hotel where the negotiations took place.
"Based on the progress that we have made, I am very confident that [Air Canada] is on a sound footing to be the first legacy airline to have transitioned itself from what I view to have been a broken model to the new place where we can compete with the low-cost carriers and the most profitable carriers in the world."
CAW president Buzz Hargrove is questioned by reporters in Toronto on Thursday, after Air Canada and the Canadian Auto Workers union reached a tentative agreement on cost cuts that were crucial to saving the airline. (Christopher Pike/CP)
The deal came a little more than a day after the airline broke off talks with the CAW when the union said Air Canada had failed to demonstrate that more than $18.3-million in cost cuts from its members were justified.
However, CAW national president Buzz Hargrove acknowledged that standing pat was not an option.
"We all knew that we couldn't come out of this in the position that we had been holding for the last several days," he told reporters. "Compromise was in the air and compromise we did."
Mr. Hargrove said that although the union did not stick at $18.3-million, it did not go all the way to $45-million either.
However, Mr. Milton maintained that the target had indeed been reached, although only $40-million of it in wage cuts. The balance, he said, would come through other types of savings.
Mr. Hargrove even had kind words for Mr. Milton, saying he was "a serious businessman" and he hoped he would remain with the airline.
Mr. Justice Warren Winkler of the Ontario Superior Court, who got the negotiations back on track by ordering Mr. Milton and Mr. Hargrove to meet Thursday morning, also welcomed the agreement.
"Hopefully a lot of people in Canada are going to be very relieved," Judge Winkler said. "This was the cliff hanger," he added of the agreement, "because without this one the whole deck of cards fell down."
Judge Winkler said he was curt with both Mr. Milton and Mr. Hargrove when they arrived at the hotel at 10 a.m. on Thursday.
"I told them that everybody knew each other, they knew what the stakes were and I wasn't going to say it any more and let's get down to business."
The judge added that he sat in on all the negotiations throughout the day.
The union represents about 6,300 of Air Canada's approximately 30,000 employees.
The CAW deal means Air Canada has reached a $200-million target for cost savings demanded by the financiers, Deutsche Bank and GE Capital Aviation Services, and that the airline should be able to emerge from bankruptcy protection later this year.
Customers who may have been booking away from the airline because of the uncertainty will likely feel more confident now about travelling on the insolvent airline.
Getting the full $45-million or very close to it was essential from Air Canada's point of view, because it would otherwise be obliged to open up the deals it already has reached with its six other unions.
This is because they all have a clause in their agreements requiring Air Canada to attest in writing that every union has reached its cost-cutting target. If the company is unable to do this, one union lawyer said, "then everyone's target gets adjusted accordingly."
Like those reached by the other unions, the CAW agreement must be ratified by its members, a process likely to take until the middle of June.
The breakthrough came against the background of the strongest threats to walk away yet made by the financiers. GE Capital Aviation Services has agreed to lend it $1.8-billion and Deutsche Bank has agreed to backstop an equity rights offering of up to $850-million. Cutting $200-million in labour costs is one of the conditions they have imposed.
Air Canada is due to appear in Ontario Superior Court in Toronto at 10 Friday morning to seek another extension of its bankruptcy protection — in effect since April 1, 2003 — which is set to expire Friday.
However, GECAS is understood to have written to the airline saying that unless it and the CAW reach an agreement by 10 a.m. Friday, it will oppose a lengthy extension. GECAS is also understood to have told Air Canada that in this event, it wants to begin discussions about how a wind-up of the airline might proceed.
One person familiar with the matter said that Deutsche Bank and GECAS had both told Air Canada's court-appointed monitor that if the one withdraws from the deal, the other will, too. "It's all or nothing," the source said.
Late in the day, GECAS spokesman Eric Jones welcomed the airline's deal with the CAW. "We're very encouraged and we're looking forward to getting the details."
Air Canada says the labour deals, and related management cuts, should allow it to cut its $3.1-billion labour bill by about $1.1-billion a year. The company has also cut hundreds of millions more in aircraft rent, supplier costs and interest payments.
While Air Canada's skies are looking brighter, analysts say its too early to say if the airline has fixed its problems over the long term. They say it's possible that Air Canada — which still has to contend with record-high fuel costs and cutthroat competition from its domestic rivals — could be forced to file for bankruptcy protection again in a year or two.
With a report from Keith McArthur
