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.  This is certainly an issue, together with the impact of the higher Canadian dollar and the slowing world economies.  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.  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.  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?  Primp it up and dispose of any perceived liabilities, of course.  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 with 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 that I recall CIBC cheif economist Jeff Rubin writing in the early 1990s.  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.  But yesterday’s announcement — and the accommodating media coverage — certainly worked some magic as far as the share price was concerned.  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.


  • Reminds me of these HGTV shows where they show you how spending a couple thousand dollars to fix up your house can increase it’s value by many thousands of dollars because people can’t see past superficial flaws.

    You’d think private equity firms, with their teams of lawyers and their million dollar business skills, would be able to see past the superficial flaws.

    Or maybe, unlike GM, they are anticipating a serious drop off in demand and adjusting accordingly. They have data showing the effects of their recent price increases that we don’t have and probably expect things to get worse from here on.

    Or it could be both and are trying to sell when they are at their peak.

  • My mother (who works for Air Canadaas a passenger agent ) finds the lay offs suspicious as well since the contract negotiations are coming up

  • Darwin wrote:

    You’d think private equity firms, with their teams of lawyers and their million dollar business skills, would be able to see past the superficial flaws.

    I think they generally do see past the superficial flaws, or they would not end up being so consistently profitable. I think the mass layoffs Toby is referring to here are not superficial — they do clip off liabilities and costs in a meaningful way – but the “benefit” is likely to be short term. I read the point here, and I agree, that the layoffs make much more sense from a short-term perspective (juice the share price through proven methods, sell, profit handsomely) than from a longer-term company and industry perspective. But AC has to “sell” the layoffs as urgently required by changed market conditions to ensure “long term viability”.

    Once again, this should be reminding us all of the ideologically driven privatization of AC under the Mulroney government.

  • But why has ACE now dropped 22% in the past 5 days since the share buyback, while AC shares have remained stable?

  • AJE in Vancouver

    Although there are no doubt a great many things to be disturbed about where most corporations are concerned, in this case I, an employee at AC see a lot of sense in tightening up the operation. We all want this company to survive.

    Apparently, the number of American tourists who flocked to Canada for their holidays when our dollar was hovering around .65 is dwindling significantly. If flights don’t have enough bums in seats to make it profitable, then perhaps they should be cut until the situation picks up again.

    Clearly fuel prices have risen, so naturally it is becoming more challenging to make a profit.

    Instead of layoffs there are many other options, such as voluntary leaves of absence, work sharing, voluntary severance packages. Employees can also have some impact on the situation by refusing to work “extra” hours.

    Most workers don’t like to bite the hand that feeds them but along with “profit sharing” should be “sharing the pain” otherwise the company/worker relationship can fast become the worst ship that ever sailed.

    There is little doubt the reverse ratio of compensation of CEOs and their workers over the last years is difficult to explain or accept but this problem is not restricted to the airline industry…

  • It has all been done before..
    With all the mergers of Canadian Air… Cp… Wardair.. Epa
    etc….same scenario…Corporations want to keep as much as possible for themselves…
    Nothing has changed
    W. bacik

  • I just wanted to note that everything depends on the spin you put on it. It seems that the esteemed author of this article is failing to mention that every major airline including the europen once are going through this. Lufthansa is parking its 737 fleet. BA is cutting routes. Oil is not a factor it is the main factor.

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