Everything came to a screeching halt late on the last business day before shareholders were set to vote on the counter-proposals from Onex and Air Canada. Quebec judge Justice Wery ruled that Onex's offer to acquire 31% of Air Canada and merge it with Canadian was illegal. Without adequate time left to appeal, Onex withdrew. Both airlines cancelled their shareholder meetings. The battle was over.
The legal dispute turned on a 1988 requirement imposed when Air Canada was privatised. That law forbids any one shareholder from owning more than 10% of Air Canada's voting shares. Onex proposed to side step this with a special class of limited voting shares pending a change in the law. In October, transport minister David Collenette hinted he was prepared to recommend such a change if the law blocked an otherwise acceptable restructuring plan. But that was not enough for the judge, who says Onex's mechanism for skirting the 10% rule is "arguably an ingenious one", but still illegal.
American Airlines describes the decision as "technical", while Air Canada hails it as a "victory for the rule of law". Onex chief executive Gerald Schwartz has appealed to parliament to drop the 10% restriction because it serves "neither the shareholders nor the public's interest". That could still happen. Early in December a parliamentary transportation committee will unveil legislative recommendations to facilitate restructuring of the airline industry. Parliament could raise or erase Air Canada's ownership limit, which some observers view as an anachronism.
But it is far from certain that Onex would re-enter the fray. Other obstacles remain. The European Commission will impose stiff conditions on any merger that reduces Canadian transatlantic competition. Any merger also would be subject to full review, now that Canada's competition law is no longer suspended.
All other scenarios focus on Canadian, the financial plight of which started this fight. Air Canada is still prepared to buy Canadian and operate it as a separate carrier. The airline has offered C$92 million ($63 million), but is unwilling to assume Canadian's debts, which ensures that creditors would oppose any restructuring.
The other big obstacle to an Air Canada take-over of Canadian is American Airlines. AMR, the US airline's parent, could veto any major decision and claim up to C$1 billion in cancellation fees. As Calin Rovinescu, Air Canada lawyer, told reporters: "The wild card clearly is American Airlines."
American could rescue Canadian on its own, as it has before. But the transport ministry and parliament seem unwilling to lift the 25% foreign limit on voting rights. American has a clear stake in Canadian's survival as a oneworld partner, but it is unclear how much it would prop up its partner solely as a creditor.
Air Canada has a tactical advantage because Canadian's situation is urgent. Yet there are hints that the transport minister could pressure Air Canada to compromise by threatening significant re-regulation of any airline monopoly if Canadian fails.
This leads to the final scenario - joint ownership of Canadian by Air Canada and American. This could satisfy some of the goals of Air Canada, AMR, and the Canadian Government. Canadian Airlines would remain a oneworld member, but relinquish some Asian routes to Air Canada. AMR might land a contract to manage Air Canada's reservation systems. Robert Milton, Air Canada's chief executive, has hinted he is willing to "cut a deal" with American.
Source: Airline Business
