Air Transport World

Canadian Airlines International: Canada's new major.

Canadian Airlines International: Canada's new major

Pacific Western Airlines (PWA) always did have big ideas. When it was still a Canadian regional carrier severely limited by regulatory constraints, its operations included six Lockheed Hercules freighters serving Northern Canada and Boeing 707s in international passenger charters. PWA was the first Canadian carrier to order the Boeing 737. It helped launch the Boeing 767 and was the first to operate it in Canada, although PWA sold the two planes when the Canadian recession hit. Last year PWA had its biggest idea yet-- buying Canadian Pacific Air Lines (CPAL)--to create Canadian Airlines International as a serious challenger to government-owned Air Canada.

The move was a surprise to many people. After all, CPAL was in the midst of meshing Eastern Provincial Airways (EPA), acquired in 1985. Vancouverbased CPAL had so recently purchased Nordair that the final papers weren't signed until just before the PWA-CPAL merger was consummated. Also, both CPAL and PWA were still fashioning the wide-ranging feeder networks thought necessary to compete within and outside Canada.

But according to Rhys Eyton, PWA's chairman, it was a matter of survival for his company. "We knew we could make it and show a fair return to the shareholders but the future of a small airline was doubtful,' he says. The only real question was who the partner would be. Air Canada's much-discussed privatization posed too many problems. Wardair didn't give PWA enough new strength. CPAL it was. And despite CPAL's greater size, Eyton earlier in the year had completed an aircraft financing package that gave him the cash to pull off the $ (C)300 million coup.

The story of David and Goliath is not unique in airline annuals. Texas Air Chairman Frank Lorenzo, for example, has shown what can be done with a cooperative financial community. Still, a PWA, with 1986 revenues of $ (C)351.6 million, does not buy a CPAL with 1986 revenues of $ (C)1.5 billion every day.

In this case the owners of the airline, Canadian Pacific Limited, had never recovered from the recession in the early 1980s and had several financially weak subsidiaries. Even though the airline had begun to turn around after several years of losses, CP sold it anyway. Eyton acknowledges that the move surprised the industry. Timing, as people say, is everything.

Before the merger PWA operated 21 Boeing 737-200s, plus five turboprops for contract work. (Two 737s are leased to America West.) PWA also leases 737s for itself in winter for passenger charters. The CPAL acquisition added 48 737s and 12 McDonnell Douglas DC-10s. (CPAL sold the last of four Boeing 747s last year.)

Reducing debt

Before the acquisition, PWA operated schedules outside Canada only to Seattle and apparently didn't even ask for those rights originally. Through its purchase it has instantly become a substantial international airline with routes in Europe, Asia, Latin American and the South Pacific.

Before the deal PWA was essentially debt-free. It inherited $ (C)600 million worth of CPAL debt and injected another $ (C)250 million in cash immediately. The conservative Eyton has already sold some equity and taken other actions that reduced debt at least back to a 1:1 debt-equity ratio.

The rapid financial restructuring, despite a four-airline merger, pretty much sums up Eyton's business philosophy: expansion without sacrificing profitability. …

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