Letter to and reply from Bob Ayling re: CP
 

I became aware of CP's capitulation to AC on 8 December when flying back from NRT (on CP 4). Fired off this letter to Bob Ayling of BA (also fired off a letter to Don Carty but nothing ever came back):

>letter begins
19 December 1999

Robert Ayling
British Airways Plc
Waterside
PO Box 365
Harmondsworth
West Drayton UB7 0GB

Dear Mr. Ayling,

I am very disappointed that you, on behalf of British Airways, did not take any action at the OneWorld meeting on 2 December to rescue Canadian Airlines. The reasons I understand that no action was taken, other than lack of interest among the alliance partners with the exception of Donald Carty and American Airlines, are 1) Canadian government limitations on foreign ownership and control, and 2) your ultimate responsibility to your shareholders. In response to the first point, I would like to remind you of the level of support that United Airlines and Lufthansa were prepared to provide Air Canada in the Onex bid. On the second point, you are forgetting that premium fare customers provide the revenue that translates into your shareholders' returns.

In addition, it is a long-standing knowledge of other frequent flyers and unofficially of CP's UK marketing staff that your airline is losing premium customers on the UK-Canada route to Canadian Airlines since codesharing began. I am a frequent flyer on both Canadian Airlines and your airline and have flown and personally paid for over 14 premium/full fare trans-Atlantic flights in the last 3 years on CP and BA. Being able to compare the levels of service and comfort, I can confirm that CP's Club Empress product is far superior to your Club World (as is Canadian Business Class to your Club Europe). In addition, your staff at Heathrow are among the most surly, rule-bound, unhelpful and inflexible that I have had to face.

As Canadian Airlines is slowly wound down in the new year, my continued loyalty to the OneWorld alliance will be sorely tested as the best member in the alliance is dismembered. You should not assume that I, and many frequent travellers in Canada, will patronise BA for our trans-Atlantic travel in the absence of Canadian Airlines.

Truly,

<signed>

Terence Liow
>End letter


Got this reply which may of may not have been penned by Ayling (perhaps it cold as I can spot at least 2 basic grammatical errors that a grammar checker would have omitted)

>Being Letter
11 January 2000 Robert Ayling
Chief Executive
Mr Terence Liow
<address deleted>

Dear Mr. Liow

Thank you for your letter of 19 December.

We share your disappointment over the turn of events in Canada which have culminated in Air Canada's take-over of Canadian Airlines. Our three-year partnership with Canadian has brought benefits to both carriers and to customers alike.

As the 2 December meeting BA did offer to take part in a proposed rescue plan for Canadian Airlines. However ultimately the rescue plan was not successful.

I share your admiration for CP's Empress product. Our market research indicates very similar satisfaction ratings for Club World and Club Empress products among BA and CP passengers. You will also be aware of our huge investment in all our premium products over the next three years, and in particular the introduction of flat beds in Club World. Soon you will be able to experience this product on UK-Canada routes.

Finally let me reassure you that BA and oneworld remains committed to Canada and we will be consolidating our schedule and product on Heathrow-Canada routes to meet the challenge of the new Air Canada. I very much hope that we can reward your loyalty to oneworld and you will choose British Airways for your travel plans.

Yours sincerely

<signed>

R J Ayling
>End letter

Was there a credible rescue plan tabled by the oneworld partners? Other than reaching into their pockets for loose change?

We will never know what transpires among senior managers behind closed doors.

Doubtless Carty and Benson would have been the chief proponents of some form of debt/equity assistance. Benson would have been unforgivably remiss had he not had a proposal in hand. Since I do not believe that of him, I posit that he can't be blamed for his partners' failure to pony up.

Of course, neither can the partners be blamed for refusing to throw good money after bad.

I am advised by an AA agent who was very knowledgeable about things oneworld, that there truly was a desire to assist CP.

However, the fact that AA had already maxed out the foreign ownership allowance, precluded any equity assistance. That, combined with CP's crushing debt, led them to believe that any other route to assist CP would be futile, would lose buckets of money, and was destined to fail, simply prolonging the agony.

Having just met the agent, I can't really vouch for the accuarcy. However, the overall knowledge, and the opinions expressed during almost 2 hours of discussion, cause me to give the agent some credence.

Ken hAAmer?

You trying to tell us something?

I can't say I've at any time analyzed CP's financials but I would imagine that oneworld could have at least helped CP by guaranteeing the operating leases which might have resulted in CP saving a few percent. I estimate this might have been worth around C$60m a year pre-tax if the indebtedness was C$3bn as stated.

Some sweetheart lease deals such as the one UA (or LH?) did for AC by subsidising leases on aircraft would have helped further, as would have even passing down some 737s (since BA is going to get rid of its fleet).

Who knows what the details are but I think deep suspicion will remain that somethign viable could have been done.

That will likely remain a mystery for some time.

The red ink was so widespread, however, that no amount of tinkering through lease guarantees, or sweetheard aircraft deals would have amounted to much. I doubt anything short of widespread restructuring could prevented disaster.

It bears noting that the only three serious proposals that ever made it to the public eye (Onex buying out both airlines, AC buying CP's international ops, AC buying out CP) all involved fundamental adjustment to domestic capacity (airline-speak for reducing competition and jacking prices).

I think this strongly suggests that no one believed that CP could continue to operate in the face of ongoing domestic competition from AC. Any viable solution had to be made with AC's participation, or by forcing AC's hand through a buyout.

It was clear that something had to be done in the Canadian market. A company can not lose money in the tune of hundreds of millions year after year and still expect to stay in business. I, however, amd far from convinced that the end result that we got, or the one that Onex proposed, were the only viable solutions.

I remain convinced that the Canadian air travel market is large enough for two carriers. But they can't always try to go head to head. One thing that CP never tried is to sharply reduce its unprofitable routes where it was always losing to AC, and instead use its domestic network as a feeder for its international (profitable) routes. So what if AC had more flights on YYZ-YVR? Also, to make sure that it was using every international route possible to the fullest.

These were not done, and speak to mismanagement at CP.

Sadly, we will never find out what might have been...

MD

I am not sure there was anything that CP's management could have donem other than not to have bought Wardair and put themselves in so much debt in the first place (unless they bought Wardair with stock and not cash).

I don't think CP retreating to supporting its international routes and ignoring domestic traffic would have worked. IMHO, the bulk or business travellers who i presume fly mainly domestically would have avoided CP when flying overseas as all their points would be on Aeroplan.

IT has been widely reported, and held, that AC was out to run CP out of the market using its superior financial position. I don't think anything CP could have done would have saved them given this situation. The federal govt. could have reintroduced regulation on capacity, or preferably, oneworld could have made a commitment to help CP and let AC know that they would ruin themselves trying to run CP out of the market.

Again, we will never know.

And of course, let's not forget that if CP had not bought Wardair, then AC would have.

I think that CP was left with a Hobson's choice--rack up heavy debt and go head to head with AC, or let AC pick up Wardair and remain a niche carrier with more limited route structure.

Oh how the tune does change... look back at this BB about 9 months ago and it was awash with comments about how bad the service was on Canadian and how their service and customer realtions was the worst of any OneWorld member. Now they are in someone else's gang and there is upset!

I have had many a run-in with Bob Ayling and his office, but at least he responded to your letter. He has his own worries at BA remember, they haven't got money to play with at the moment.

I think for us to second guess, what did or didn't happen in the Board Rooms is arrogant in the extreme. All the airlines know how their products compare to their competitors - I think we have all had the pleasure of doing the surveys.

Let's give these guys dredit for doing the job they do!


Nick

Merry

It is in no way arrogant to second guess senior management. For one, these places are full of arrogance and decisions driven strongly by ego (with the restraint of shareholder value). I know. USed to be an investment banker and the breed preys on the weaknesses of CEOs.

Celestar340: Yep. I haven't completely firmed up my FF plans for the coming year, but it would appear the AA figures prominently. It will depend in part on how gracefully AC pulls CP out of oneworld and disconnects from AA. But given recent developments at, and my and others' recent experiences with, CP, combined with exceptional service I've received from AA over the last few months, have caused me to re-evaluate my FF loyalties.

And yes, I smack myself several times a day, to make sure I'm not hallucinating. Trust me, no one is more surprised at this stunning turn of events than I am. Maybe FF actually stands for Fickle Flyers.

Merry: Perhaps it's a case of selective memory but I don't recall any great mass of complaints against CP. But I do like the term "dredit." Sounds like a perfectly cromulent word.

My preferred solution would have been an "either or." Either the government should have gotten out, or it should have gotten in.

If they had gotten out, they should have completely and honestly de-regulated, including removing the 10% cap on AC shares, and the 25/33% cap on foreign ownership. As it was, the 10% cap on ownership effectively removed the "supply" side of AC equity, and the foreign ownership cap effictively removed the "demand" side for CP. Not honest competition or deregulation, no matter how you spin it.

But my real preference would have been for the government to get "in" albeit in a round about way. They simply needed to pass legislation that assserted that no matter what, there would always be at least 2 major airlines with both a domestic and international presence. That is, if either CP or AC folded, wound down, went bankrupt, or whatever, or if one airline aquired the other, then the government would immediately allow cabotage. Had this happened, I'm pretty sure you would have seen a spontaneous "rationalization" of domestic capacity, while still maintaining competition.

This would have precluded any government money, yet would have protected CP from the predatory actions of AC. And if AC started to concentrate on making a profit instead of "eliminating Canadian" then both airlines, and their shareholders and creditors, would have been happy. So would the passengers.

KH: That's quite an interesting idea and would have preserved a true choice for the customers. We would have two Canada-based airlines to choose from, knowing that it is in their best interest to compete by providing good routes, good schedules, and most importantly, good service.

Instead, we now have one airline that has no incentive to provide low fares, good routes and schedules, or good service. They can instead concentrate on shareholder value, whatever good that does for passengers. http://www.flyertalk.com/forum/smile.gif


FewMiles..

You can see my post regarding Milton's single vision investor orientation, to the complete exclusion of passengers, in AC Aeroplan IPO thread, at: http://www.flyertalk.com/forum/Forum5/HTML/000481.html