Air Canada and its Unions
I always am inundated with calls for interviews whenever something happens with Air Canada. This time the most common question is: “What needs to be done?”
I preface my answer with the following three observations.
First, unless Air Canada (AC) is able to start up and grow two low-cost subsidiaries – one for the North American market and the other for long-haul international markets, AC is doomed. The company will end up in bankruptcy, and will exit a much smaller, and much less important airline on the world stage. Of course, there is no assurance, even if AC does create these two subs, that it will succeed in becoming a major global hub airline. But I can be quite unequivocal regarding the downside of AC not being able to create these subs.
Second, does it matter if AC succeeds in becoming a major global hub airline? Yes it does!
Many studies have highlighted the significant economic benefits to a region and country from having a major hub airline. AC offers the only possibility for Canada to have such an airline. If AC fails, Canada’s productivity problem will be worse, and the competitiveness of Canadian-based companies will continue to deteriorate.
Finally, while I can sympathize with AC’s employees and the concessions they have made over the past decade, unfortunately, they have to yet to realize that the competitive landscape has changed drastically. Since deregulation of the airline industry, airlines have been under continuous pressure to reduce their costs. These pressures will continue. AC’s employees have not yet made sufficiently large concessions to improve AC’s competitive position, and the world they face is one where they will continue to have to make concessions. In the meantime, they should take a close look at the plight of their counterparts with the major US legacy airlines to see the future.
Now, what needs to be done?
There are two easy starting points for the federal government. The government should remove all legal and regulatory shackles on AC. For example, the Air Canada Participation Act mandated that AC have its headquarters in Montreal and maintenance operations in Montreal and Winnipeg. This was and continues to be an absurd piece of legislation that only served to pander to regional political interests.
And now we have the farce of clowns in Quebec City threatening to sue Ottawa and AC because of the collapse of Aveos – a former division of AC and AC’s major maintenance provider.
Aveos failed for two reasons – wage rates were about 50% too high, and productivity levels were about 60% too low. There are important lessons here for AC’s employees.
Nevertheless, Quebec City wants someone else to pay the price to support uncompetitive jobs, Instead of recognizing that the unfortunate demise of Aveos actually will be beneficial to AC – the company will be able to reduce its heavy maintenance costs by 30% to 40% – and thus increase the possibility that more jobs will not be lost at AC, the clowns in Quebec City continue the delusion that AC is subject to the whims of politicians, no matter how stupid they might be.
The government also should deal with ground rents and the Air Travellers Security Tax, both of which increase the costs of air travel within and from Canada.
The remaining two are more difficult. The federal labour law was developed for a different era. It was not developed, nor has it been changed, to deal with global markets and increasing international competition. The law was intended to assist labour share in all productivity gains. Today’s reality is that productivity growth has to increase and all of the gains are passed on to consumers.
Thus, the law needs to be overhauled to give management of companies such as AC much more flexibility in dealing with employee compensation and work rules, and to give management the ability to unilaterally and quickly create new subsidiaries.
The airline industry should be recognized once and for all as an essential service, so the right to strike has to go. The arbitration system has to change as well. Final offer arbitration should be mandatory in order to remove as much discretion as possible from arbitrators. Going forward, three people should be randomly selected to serve as arbitrators in disputes. These people should have business acumen and understand competition. (I believe that three people randomly selected off the street will make better decisions than our current crop of appointed arbitrators.)
Then there are the defined benefit plans. There are two major problems with these plans. The first originated with a terrible decision by the judge in the Dominion Stores case. He concluded that the pension assets belong to employers, and hence any surplus could be extracted by employers. Setting aside the fact that the pension assets belong to employees, he failed to recognize that the realized returns on investment could exceed in some years the underlying assumptions in these plans, hence generating what might appear to be surpluses in some of those years. These so-called surpluses were needed to compensate for those years when the realized returns fell short.
Thus if “surpluses” are skimmed off, the inevitable shortfalls in other years are exacerbated. This problem is compounded further by the unrealistic assumptions made by actuaries. They consistently have overestimated the potential returns on the pension fund assets, thus ensuring systemic underfunding and deficits. Both employees and employers as a result have contributed too little every year.
The federal government should bring together the actuaries, who made a lot of money acting as advisors and consultants, employees and employers and force each group to absorb 25% of the deficiency, with the government picking up the remaining 25%.
These are the starting points.
The opinions expressed in this blog are personal and do not reflect the view of either Global Brief or the Glendon School of Public and International Affairs.