Air Canada won’t be taken over, experts say
Ottawa isn’t expected to repeat mistakes from when airline was a Crown corporation
Ever wanted to own shares in Canada’s largest airline? You’re in luck — in a way, now you do.
On Monday, the federal government took an equity stake in Air Canada as part of a $5.9-billion package aimed at rescuing the national carrier. It purchased $500 million worth of shares at $23 apiece, amounting to six per cent of the company — a figure that, according to the terms of the deal, could rise to more than 10 per cent should Ottawa buy the remaining shares it’s allowed to purchase.
To hear Ottawa tell it, the taxpayer now has some say in the company’s decisionmaking. The government maintains nearly a 20 per cent voting interest in the airline, meaning that company considerations typically geared at turning a profit may now have to account for the best interests of the globe-trotting public. With a seat at the table, Canada could help sway the company to maintain flight routes to certain remote regions, for example, regardless of profitability.
The investment has fuelled rumours of renationalization, conjuring up bad memories for some of times before 1988, when Air Canada was a Crown corporation.
Air Canada stock fell on Tuesday over concerns that existing shareholdings could be diluted following the government’s equity investment.
Some investors might be “negatively surprised” by equity dilution, wrote Scotiabank in a note.
But while governmentrun airlines were once all the rage among western countries, airline experts suspect they’ve since learned it’s better to keep those companies private.
John Gradek, a former Air Canada executive who worked at the company when it was a Crown corporation, remembers the era as one marked by declining profitability and lousy service.
“There was a lot of political interference back then. Air Canada was constantly operating routes that were perennially losing money, but the company had to run them anyways because the government said so. There was no competition, no need to make money, no incentive to manage costs,” Gradek said.
“It wasn’t a pretty sight.”
He doesn’t expect Canada to take that route again.
Instead, he sees Ottawa’s move as a way to offer a cash injection to Air Canada that could turn into a valuable investment for the government down the road, when international travel is restored and business is booming.
“This investment could significantly appreciate. The government could turn around, flip the stock in 24 or 36 months and come away with a nice profit,” he said.
“We’re really playing the stock market on this one.”
And there’s little risk involved in that move, Gradek adds. Sure, there’s always the chance a company can’t pay its bills — in which case Canadians will have lost the money dedicated to the deal — but that scenario is unlikely given the kind of support Air Canada has received from the Canadian government.
“Air Canada’s market performance has been very good,” Gradek adds.
“The pandemic knocked the hell out of them, but we’re looking at a situation where travel will be coming back gangbusters soon. It’s not like this is a crazy risk to take.”
Karl Moore, a professor of management at McGill University, says the government’s investment is in line with the types of aid packages received by airlines around the world.
Both Germany and France purchased ownership positions in their flagship airlines — Lufthansa and Air France-KLM, respectively — in exchange for financial relief during the pandemic.
“Certainly their ownership positions allow the government to have a bit of a louder voice when it comes to company decision-making,” he said.
“But it’s more likely that (Finance Minister) Chrystia Freeland and (her deputy) Michael Sabia are seeing that the government can turn a profit if Air Canada recovers quickly.”