Blood in the aisles = black in the boardroom?
Was it just me or did others get a nagging feeling about the intent behind Air Canada’s surprise announcement of 2,000 layoffs yesterday?
The media coverage played along the lines of their press release, with a strong focus on the rising cost of fuel.Â This is certainly an issue, together with the impact of the higher Canadian dollar and the slowing world economies.Â Other airlines particularly in the US have also recently announced layoffs.
But Air Canada has experienced record load factors and reported better than expected financial results recently.Â Air Canada’s main parent company, ACE Aviation Holdings made a profit of $1.4 billion last year, a 242% rise since the previous year and is in the midst of buying back half a billion of its own stock (closing today).
My suspicions come becuase just earlier this month there were news stories about how Robert Milton, ex CEO of Air Canada and current CEO of ACE, made $43 million in compensation last year and is slated to collect another payment of $10 million when ACE is wound down as a holding company this summer.Â Milton has been complaining that its share price doesn’t reflect the fundamentals and they have been activey shopping Air Canada around for sale to private equity and pension funds, just as they have sold off other ACE assets.
What to do before you sell?Â Primp it up and dispose of any perceived liabilities, of course.Â Â ACE’s operating income last quarter was lower because they took a $125 million provision for an EU probe into anti-competitive cargo pricing, which fits into this plan.
The high profile of the announcement withÂ its heavy emphasis on job cuts (which included the impact of some already announced and future actions) while the company is getting primped up for a sale reminded me of something thatÂ I recall CIBC cheif economist Jeff Rubin writing in the early 1990s.Â If I remember it correctly, he wrote that investors want to see blood on the floor in terms of job cuts to pump up the stock price — and the more the better.
We know that massive job cuts don’t help the long-term viability of companies.Â But yesterday’s announcement — and the accommodating media coverage — certainly worked some magic as far as the share price was concerned.Â As the Toronto Star reported today “Shares of Air Canada closed yesterday at $9.15 (Canadian), up 21 cents, on the Toronto Stock Exchange.”
We’ll see later this summer how well this generous sacrifice of thousands of workers jobs has appeased the market gods of capitalism– and how much profit it generates for the stockholders of Air Canada and ACE when they sell off their shares.