Air Canada (AC/A)’s customers are becoming collateral damage in a labor standoff between the country’s largest carrier and its biggest unions.
Even after the federal government rushed to Air Canada’s aid with a back-to-work bill, passengers still faced flight cancellations as ground-crew employees staged wildcat strikes on March 23. That was five days after so many pilots called in sick that the airline had to trim its schedule.
The disruptions showed how the bargaining struggle over new union contracts is spilling into operations. Standard & Poor’s Ratings Service said in a statement following the pre-weekend walkout that Air Canada’s debt ratings may be cut and raised the prospect that the labor disputes might erode bookings in the busy summer travel season.
“The long-term viability of the company is in question,” said George Smith, a director of employee relations at the airline from 1982 to 1992 who now teaches labor relations at Queen’s University in Kingston, Ontario. “You’re getting to a tipping point where people will be so uncertain about what they can expect that they may seek alternative means of travel.”
More than 80 flights were canceled during the ground-crew members’ impromptu walkout on March 23, which coincided with the start of spring break in Alberta, Canada’s largest oil-producing province. A government arbitrator ordered an end to the strike.
“We recognize that many customers are being inconvenienced and our focus right now is on getting them to their destination safely, and as quickly as we can,” Chief Operating Officer Duncan Dee said in a statement.
Operations questions dogged Air Canada throughout last week, as the Montreal-based airline sought government aid to end what it called an illegal sickout by pilots on March 18 -- which the union denied -- and endured the shutdown the next day of heavy-maintenance provider Aveos Fleet Performance Inc.
Aveos was spun off from Air Canada after the airline sought creditor protection in 2004, and unions want the carrier to take back the 2,600 workers who lost their jobs when the repair operator filed for insolvency on March 19. Air Canada said it has no intention of buying Aveos or rehiring the employees.
The week was “probably the worst for Air Canada since they filed in 2004,” said Karl Moore, a professor of business strategy at Montreal’s McGill University who specializes in the airline industry. “They are going to take a short-term hit for this. Obviously there will be some labor problems for a while.”
Air Canada’s Class B shares fell 17 percent in 2012 through March 23, to 82 Canadian cents, trailing the S&P Toronto Stock Exchange Index’s 4.3 percent gain. At about C$230 million ($230 million), the airline’s market value was less than one-seventh that of discount carrier WestJet Airlines Ltd. (WJA) -- and less than the C$298 million list price of Boeing Co. (BA:US)’s 777-300, Air Canada’s largest jet.
The carrier’s 9.25 percent notes due August 2015 were unchanged at 98 cents on the dollar on March 23. The yield was 9.96 percent.
Liquidity may deteriorate because of the labor strife and the possibility of having to pay as much as a year’s severance to 1,500 Aveos workers, two S&P analysts said in putting the airline on CreditWatch with negative implications. Air Canada’s current S&P rating is B-, six grades below investment level.
Operations disruptions “will likely affect the company’s financial performance in the first half of 2012,” S&P’s Jatinder Mall and Madhav Hari said in a statement.
Labor’s demands for improved contracts are colliding with a jump in jet-fuel prices of more than 50 percent in the past two years. While most North American carriers have managed to return to profit as fuel prices rebound, Air Canada has posted annual losses starting in 2008.
“The problem for the unions is that they can’t roll back the clock,” said Moore, the McGill professor. “With fuel prices where they are now the airline industry is in tough shape, and there’s not a lot of pie to share.”
Last week’s disruptions from pilot sick calls and the wildcat walkout came even after Labor Minister Lisa Raitt moved to block labor actions at the airline starting last year, when contracts expired for the majority of the union workforce.
Ground workers walked out late March 22 after Air Canada suspended three employees for sarcastically applauding Raitt as she arrived at Toronto Pearson International Airport to board a flight. Delays and cancellations followed the next day.
“Clearly the displeasure the workers were expressing was directed at the government,” said Smith, the former Air Canada executive. “Unfortunately the traveling public ends up being as inconvenienced as if a strike or a lockout had been allowed.”
Letting a strike or lockout occur actually might be a spur to reaching negotiated agreements, he added.
Raitt blocked Air Canada’s (AC/B) planned March 12 pilot lockout by sending the contract dispute between the two sides to a government-appointed arbitrator. She also barred the Machinists union for a strike the same day by mechanics, baggage handlers and cargo agents.
In October, Raitt thwarted another potential walkout by referring stalemated talks with flight attendants to Canada’s labor board. Three months earlier, striking service workers reached a tentative agreement with Air Canada minutes after the government introduced legislation that would have forced an end to that job action.
The government reiterated its opposition on March 23 to any labor action at Air Canada because of the potential impact on the economy and disruption of the country’s transportation system.
“It’s a big hassle,” Ayman Fayez, president of construction company DecoArc Inc. in Toronto, said as he waited for a ride home from Pearson airport after his Hong Kong flight was scrubbed. “I have to be in Hong Kong tomorrow, and I’m also worried about coming back too, whether I’ll be stranded in China.”
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