Release: October 19, 1999
AIR CANADA CREATES VALUE FOR SHAREHOLDERS AND ADVANCES
BLUEPRINT FOR INDUSTRY RESTRUCTURING
Highlights:
$800 million share buy back offer at $12.00 cash per share providing immediate tangible
value to shareholders
Enhanced Star Alliance relationship through 10-year commercial agreements
Offer to pay cash for Canadian Airlines Corporation and continue to operate Canadian
Airlines as a distinct brand
Streamlining both carriers' domestic mainline and regional routes and operations
Surplus capacity from streamlining to be redirected to transborder and international
expansion and new carrier
Creation of a new low-fare carrier operated from Hamilton
$930 million financial package provided by Air Canada Star Alliance partners and others
is non-controlling - keeps shares widely held
MONTREAL - Air Canada today announced its blueprint for providing immediate and assured
tangible value to its shareholders and for assuming the lead in solving outstanding issues in the
airline industry in Canada.
As part of a comprehensive and innovative restructuring of Canada's airline industry, Air Canada
plans to offer a substantial cash buy back to its shareholders, offer to buy and operate Canadian
Airlines as a distinct brand, establish a new low-fare airline, and improve efficiencies by
realigning surplus mainline and regional capacity. These transactions are subject to regulatory
approval where required.
"We have taken the time to craft a solution that is realistic, practical and built on the potential of
Canada's airlines," said Robert Milton, President and Chief Executive Officer of Air Canada. "It
is based on opportunities - not opportunism - and it constitutes a dynamic solution for a
sustainable, profitable, competitive and Canadian-controlled airline industry. It is fully compliant
with the existing laws of Canada governing Air Canada and does not require any legislative and
regulatory changes. By any measure, this is the best solution for Canada."
The transactions will be funded through a financial package totaling $930 million. As part of this
package, Air Canada's Star Alliance partners UAL Corporation and Deutsche Lufthansa AG, as
well as the Canadian Imperial Bank Commerce will contribute up to $500 million of value to Air
Canada. These investors, over time, could acquire a maximum of 10 percent equity.
Share Buy Back
Using these proceeds, Air Canada will launch an Issuer Bid, subject to the usual conditions, for
up to 35 percent of its outstanding shares or approximately 66 million shares (42 million
Common Shares and 24 million Class A Non-Voting Common Shares). The price for the share
buy back is $12 cash per share, which represents a premium of 28 percent over the closing
price on Friday, October 15, 1999. As a result, Air Canada shareholders will receive up to
$800 million in cash.
"Our share buy back has three key benefits. Within weeks, we will give shareholders $12 per
share in cash for 35 percent of their shares. Equally important, they will retain initially100 percent
ownership of a financially healthy, expanded company, with powerful partners and proven
strategic alliances. Also, all future earnings will accrue to up to 35 percent fewer shares," stated
Mr. Milton. "This is a far superior option than any other alternative available to them."
The Air Canada Solution
"With a growing share of the transborder and international markets, increased efficiencies, and
the strength of our partnerships, we will increasingly deliver excellent value to our shareholders,
tremendous opportunities for our employees and the best in airline service to our customers,"
continued Mr. Milton. "Air Canada also recognizes that we must exert leadership in helping to
resolve outstanding issues in the airline industry in Canada. That's why we've developed a clear
blueprint that addresses the key public concerns, as outlined by the Minister of Transport, of
Canadian ownership, fair treatment of employees, service to regional communities, competition,
and consumer protection."
As part of its solution, Air Canada will:
1.Offer to acquire Canadian Airlines Corporation and operate Canadian Airlines as a
separate entity. If the acquisition is completed, Air Canada is best poised within Canada
to consolidate the industry if the Government of Canada has determined that it will
abandon its dual airline policy.
2.Streamline Air Canada's and Canadian's domestic mainline schedules and regional
subsidiaries. Service will continue to all regions and communities currently served by either
airline or its subsidiaries.
3.Expand transborder operations and capitalize on opportunities for international growth.
4.Create a low-fare air carrier operating from Hamilton to serve up to 20 destinations in
Canada, subject to the purchase of Canadian Airlines Corporation being completed.
Securing the future of Canadian Airlines
Air Canada will offer $2.00 cash per share for a total of $92 million for all of the issued and
outstanding voting and non-voting common shares of Canadian Airlines Corporation
(approximately 46 million shares on a fully diluted basis). This represents a premium of
23 percent over the closing price of Canadian's shares on Friday, October 15, 1999.
The Takeover Bid Circular is expected to be mailed to shareholders of Canadian Airlines
Corporation within two weeks. The offer will be subject to the usual conditions, including that a
minimum of 50 percent plus one of the outstanding Common Shares, on a fully diluted basis, are
tendered. In addition, Canadian Airlines Corporation shall be required to waive its shareholders'
rights plan (or the plan must be otherwise invalidated), and Air Canada shall be satisfied that
AMR will not exercise, or will have been prevented from exercising, any exchange rights into
Canadian Airlines Corporation shares it may purport to have in relation to its shareholdings.
Following the acquisition, Air Canada expects that the subsequent ongoing operation of
Canadian Airlines would be subject to, among other things, an appropriate restructuring of
Canadian Airlines' debt and other obligations.
Air Canada's offer to acquire all of the issued and outstanding shares of Canadian Airlines shall
be submitted by the airline for merger review by the Competition Bureau under the Competition
Act (Canada) and to such other governmental or regulatory consents or approvals in Canada,
the United States or elsewhere as are required to consummate the acquisition. Pending such
merger review, consent and approvals, Air Canada shall seek an agreement with the
Commissioner of Competition under the Competition Act (Canada) so as to enable Air Canada
to complete the acquisition and pay shareholders of Canadian Airlines expeditiously. Air Canada
believes any competition concerns can be effectively addressed and will work closely with the
Department of Transport and with the Competition Bureau to this end.
"Canadian Airlines is an airline with great people that has offered tremendous service," observed
Mr. Milton. "Its true potential has not been realized in recent years. Our solution will unleash that
potential. We intend to take Canadian Airlines to sustainable profitability."
To address the concerns of employees at both Air Canada and Canadian, Mr. Milton stated: "I
want to assure employees that we will take the time to talk to them and their unions before
changes are made. Moreover, our solution only anticipates a net employment reduction of about
2,500 which will be accommodated largely through attrition and, if necessary, early retirement,
alternative employment opportunities and voluntary severance packages. No Air Canada
employee will face job loss as a result of our plan."
Air Canada will propose to the Board of Directors of Canadian Airlines Corporation a plan
which will include the following highlights:
Air Canada and Canadian will not be merged. The airlines will operate as separate
entities, providing choice and distinct brands. Canadian will become a subsidiary of Air
Canada.
Through the subsidiary relationship, Air Canada will be insulated from the risks associated
with Canadian's heavy debt load.
Canadian will retain a smaller head office in Calgary and will be led by a team of
Canadian and Air Canada executives.
There will be a net employment reduction of 2,500 at Canadian Airlines.
With the support of Air Canada, Canadian will initiate a comprehensive financial
restructuring and operational overhaul to increase efficiency and achieve a healthy balance
sheet. It will seek AMR's exit from its ownership and control structure in Canadian
Airlines on a basis that is fair to Canadian Airlines' stakeholders.
Air Canada recognizes that AMR's dominant ownership and control positions in Canadian
present serious obstacles that must be addressed, but which it believes should not be
allowed to prevent, the successful restructuring of Canada's airline industry for the benefit
of Canadians.
That Canadian accept the proposal of Delta Air Lines to code share on Canadian.
Canadian will also code share with United and Lufthansa, and other Star Alliance
partners. The Delta partnership will provide greater opportunities for profitable growth
than any current arrangement.
The domestic schedules of Air Canada and Canadian will be redesigned to meet the
needs of consumers, while addressing the companies' profitability and productivity
objectives.
As soon as possible, Canadian would negotiate the repatriation of commercial and
operational management functions to Canada from AMR in the U.S. Other functions such
as accounting would be similarly negotiated. Both Air Canada and Canadian will assess
their long-term information technology needs.
Canadian Airlines will continue to operate its transborder and international routes.
The frequent flyer points of both airlines will be honored.
Creating a streamlined domestic network
While Air Canada, Canadian Airlines and their respective subsidiaries will continue to operate as
separate entities, their routes and schedules will be streamlined to address surplus capacity. The
number of daily flights to some communities will be adjusted to reflect local demand. This
initiative will preserve service in all communities currently served either by Air Canada, Canadian
Airlines or their respective subsidiaries.
"Air Canada's solution provides communities across Canada with an ironclad guarantee of
continued service. Streamlining will allow us to make optimal use of our resources and maintain
competitive fares," Mr. Milton added. "Moreover, we will use the newly-created relationship
between Air Canada and Canadian to make the domestic air transport system more convenient
for travelers. Canadians living in communities served by only one of the two systems will now
benefit from code-sharing arrangements with the two airlines."
Highlights:
Air Canada and Canadian Airlines will implement new optimal schedules for daily flights
on mainline domestic routes. Changes will target routes where there is substantial surplus
capacity, while continuing to provide access to convenient flights.
AirBC, Air Ontario, Air Nova/Air Alliance and Canadian Regional Airlines will similarly
optimize their schedules. This streamlining will affect a small number of destinations where
the current schedule generates substantial surplus capacity.
Communities served by Air Canada, Canadian or their respective subsidiaries will
continue to be served. Communities not currently served will have the opportunity to
negotiate with the airlines for service.
A minimum of 18 underutilized jet aircraft will be reallocated to address the growth on
transborder routes and for the new low-fare carrier.
Air Canada and Canadian will have reciprocal code sharing arrangements.
Expanding international activity
Air Canada will propose to Canadian that it code share with Delta Air Lines. Canadian would
then begin serving major Delta hubs by reallocating aircraft made available by streamlining the
domestic mainline and regional routes.
"A large part of Air Canada's growth in recent years has been achieved in the transborder
market - a market in which our revenues doubled over the past five years," said Mr. Milton.
"The demand is there, and we are confident that Canadian can generate growth and profits with
Delta and United as its new transborder partners."
On the international front, to better meet consumer demand, the airlines will launch daily
Toronto-Tokyo and Toronto-Hong Kong flights and seek additional authority for flights between
Canada and Mexico. As well, the airlines will seek to use dormant authorities for routes,
including Vancouver-Shanghai, Vancouver-Sydney, Montreal-Milan/Rome, Toronto-Madrid
and Toronto-Amsterdam.
Introducing a new low-fare airline
Air Canada will form and launch a new low-fare airline that will use surplus aircraft liberated by
the re-design of Air Canada's and Canadian's schedules. This is consistent with a growing
industry trend that has seen major airlines introduce low-fare subsidiaries such as British
Airways' GO and Delta Express.
"The establishment of the new low-fare airline has been two years in planning," said Mr. Milton.
"It will create approximately 500 new jobs at a new regional hub in Hamilton and 300 jobs will
be maintained across Canada. Moreover, consumers will now have access to a new low-fare
service."
Highlights:
The new airline will operate from Hamilton and serve up to 20 destinations in Canada.
The new airline will focus on the market segment seeking no-frills, low-cost air travel.
The new airline will be managed by an entirely separate management team, and will have a
clear mandate: to offer low prices for air travel.
The new airline will employ approximately 500 in the Hamilton area and 300 jobs will be
maintained across Canada. It will initially operate 10 jet aircraft.
Creation of the airline is subject to the purchase of Canadian Airlines Corporation being
completed.
A $930 million financing package
To complete this comprehensive restructuring plan, Air Canada has brought together new
financial resources totalling $930 million. Funds will be provided by UAL Corporation and
Deutsche Lufthansa AG, two of Air Canada's Star Alliance partners and CIBC, Air Canada's
Aeroplan partner operating the highly successful Aerogold Visa program. Also participating in
the financing is Bayerische Landesbank.
UAL and Lufthansa will provide a total of approximately $420 million in liquidity to Air Canada,
which includes a value contribution of up to $300 million. In addition, Air Canada, UAL and
Lufthansa have committed to each other for a 10-year period.
"Thanks to the vanguard support of United and Lufthansa, we have not only secured additional
financing, but together we have forged an even stronger bond within the Star Alliance," said Mr.
Milton. "This lays the foundation for closer working relationships and gives yet another clear
signal to global travellers of the strength and benefits of dealing with the Star Alliance."
Highlights:
UAL and Lufthansa have agreed to acquire a new series of perpetual convertible
preferred shares in the amount of $230 million. The shares will only pay dividends if, as
and when they are declared on the Common Shares. At the holders' option, they will be
convertible into Class A Non-Voting Common Shares at a conversion price in the range
of $24-$28 per share. As well, UAL will participate in a lease transaction for three Airbus
A330 aircraft, for which it will invest approximately $190 million.
Additionally, UAL and Lufthansa will provide a 10-year credit guarantee facility to Air
Canada of approximately $310 million. This facility ensures that Air Canada will have
sufficient liquidity for its plan.
CIBC will provide a $200 million up-front payment to Air Canada to deepen and extend
its agreement. Air Canada will provide to CIBC approximately 4.4 million warrants
exercisable for Class A Non-Voting Common Shares at $24-$28 per share over five
years.
The issuance of the shares and the warrants is subject to stock exchange approval. If such
approval is for any reason not available on acceptable terms, the partners have agreed to
binding alternative financing arrangements.
Assuming conversion of the UAL-Lufthansa preferred shares and the exercise of the CIBC
warrants, UAL and Lufthansa would together own approximately seven percent of Air Canada,
while CIBC would own three percent - with 90 percent of the shares remaining in the hands of
the current Air Canada shareholders.
The financial structure fits well within the individual and non-resident ownership limits provided in
the Air Canada Public Participation Act (Canada). "We designed the financial package so that it
will limit dilution for the current shareholders and ensure sustained, unequivocal and widely held
Canadian control over Air Canada," commented Mr. Milton.
Under Air Canada's solution, no single person or entity will have over 10 percent ownership or
voting rights, there will be no foreign control, no service fees will be paid to any airline, and no
new Directors will be named to represent any of the other parties involved in the Air Canada
solution.
Air Canada - a competitive solution
Air Canada has stated repeatedly that any and all solutions advanced to address the outstanding
issues in Canada's airline industry must be subject to Competition Bureau review.
Accordingly, Air Canada will submit its solution for review by the Bureau in the expectation that
any recommendations made are in keeping with international practice in the airline industry.
Air Canada and Canadian will be operated separately, each with its own commercial
management team. In addition, the introduction of a new low-fare airline will strengthen
competition.
The estimated net reduction in employment of approximately 2,500 will be handled largely
through attrition and, if necessary, early retirement, alternative employment opportunities and
voluntary severance packages. In fact, the solution will provide employees at both carriers with a
solid platform for growth and development.
Finally, the Air Canada solution ensures that competition remains among the international airline
alliances. Air Canada will remain part of the Star Alliance and will propose to Canadian that it
code share with Delta Air Lines. Oneworld member carriers will continue to serve Canada on
transborder and international routes.
Governance
Each company will have a separate Board of Directors and management team.
"Air Canada has maintained from the beginning of this process that it would develop a solution to
better meet the needs of shareholders, employees and consumers. Our comprehensive solution
to address the outstanding issues in the industry meets and exceeds that test," said Mr. Milton.
The AirCo Offer
The offer made by Airline Industry Revitalization Co Inc. ("AirCo") to acquire all issued and
outstanding Air Canada shares for a stated value of $8.25, is open for acceptance until 5:00
p.m. (local time) on Tuesday, November 9, 1999. In addition to the AirCo Offer being
inadequate, Air Canada believes it is in contravention of the Air Canada Public Participation Act
(Canada) and Air Canada's Articles. Any Air Canada shareholders who have tendered their
shares to the AirCo Offer must withdraw them by midnight (local time) on November 7, 1999, if
they wish to take advantage of the Issuer Bid being offered by Air Canada, which provides
shareholders with significantly greater value.
This press release shall not constitute an offer to purchase or the solicitation of an offer to sell the
shares of Air Canada or Canadian Airlines Corporation. The offers will only be made by way of
formal circulars. Air Canada intends to extend the offers to United States shareholders in
accordance with applicable requirements. |
