Price War by Canada's Airlines Could End in Monopoly

CANADA'S airline business is a mess. A drawn-out price war has produced over half a billion dollars in losses for the two major carriers. Government interference has raised the prospect of one national airline.

The end result will be higher fares in a country where it is already more expensive to fly than in the United States.

The two airlines that have almost the entire Canadian market to themselves are Air Canada and Canadian Airlines International. Air Canada was government- owned before privatization in the 1980s. Canadian Airlines is an amalgam of Canadian Pacific Airlines, Wardair, and Pacific Western Airlines, once owned by the Alberta government. PWA Corporation is the parent of Canadian.

Both airlines are now in talks aimed at a possible merger to cut their losses. The negotiations follow a failure by Canadian Airlines to reach an agreement on an alliance with American Airlines. And Air Canada had been seeking a partnership with USAir, but last month that airline teamed up with British Airways instead.

Over the past decade Air Canada and Canadian Airlines International have bought up just about every competitor and feeder airline in the country, creating an effective duopoly. The only competition comes from charter carriers, such as AirTransat of Montreal and Canada 3000 of Toronto.

But eliminating most of the competition has not worked. Canadian Airlines International is losing $500,000 (Canadian; US $590,000) a day; last year the Calgary-based airline lost $161.7 million and it lost $74.9 million in the first quarter of this year.

"The status quo is no longer an option," says Canadian Airlines spokesman Jack Lawless. "We can't continue losing money indefinitely."

Air Canada is said to be losing $1.5 million a day. The Montreal-based firm lost $218 million last year and $164 million in the first quarter of 1992.

"We would like to reach a deal as soon as possible," says Denis Couture of Air Canada.

Canadian says Air Canada has been trying to drive it out of business by adding flights and larger planes on some routes. Analysts say the tactic has worked and that Air Canada will be effectively taking over Canadian.

The stock market has seen it that way. After merger talks were announced last week, shares in PWA, Canadian's parent company, were cut by more than half; Air Canada's shares dropped only slightly.

Governments may have partially deregulated air travel in Canada and sold off their interests, but the hand of the government - especially the federal government - can be seen in the crisis.

"The government has opinion polls showing Canadians want one strong national carrier, without too much foreign influence as in the Canadian deal with American Airlines," says Lamont Gordon, chairman of Sprott Securities in Toronto. "The trouble is the government is designing an airline policy for people who don't fly."

Ten days ago, it seemed certain that American Airlines and Canadian would agree to some form of partnership. But the federal government effectively ended the deal when it refused to give loan guarantees for the proposal.

"After some discussion, we all came to the conclusion that, no, the transaction as presented would not be doable," says the federal minister of Transport, Jean Corbeil.

Air Canada has long spoken out against a merger between its domestic competitor and American Airlines.

Critics in Ottawa and in the business community say the government of Prime Minister Brian Mulroney acted to protect jobs in Quebec, its political power base, by not helping Canadian Airlines, which effectively helps Air Canada.

If Air Canada were to become the dominant partner in a merged national airline, many jobs in western Canada - especially Calgary and Vancouver - would likely disappear or be transferred to Air Canada's Montreal headquarters.