Air Canada may be protecting bottom line by abandoning appeal, say experts

MONTREAL – Air Canada’s decision to abandon a legal challenge of an arbitration ruling with one of its unions may win it some labour goodwill, but the ultimate goal is to preserve the airline’s bottom line, industry observers said Wednesday.

“The last thing that Air Canada needs at this point is more negativity. The whole issue of challenging the pension ruling just optically didn’t look good,” said Robert Kokonis of airline consulting firm AirTrav Inc.

With the economy souring and the key holiday period approaching, the national carrier could ill afford to scare off potential customers amidst a threat of disruptions by customer service workers represented by the CAW union, he said.

The customer service agents represented by the Canadian Auto Workers were the first of Air Canada’s major unionized groups to reach a collective agreement in the current round of contract negotiations.

The deal included a provision to send the difficult issue of pension reform to an arbitrator for what was intended to be a binding resolution.

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Air Canada’s original plan to challenge the arbitrator’s ruling unsettled not only the CAW, but also a hard-won agreement with the Canadian Union of Public Employees – which had agreed to abide by the arbitrator’s decision as well.

Kokonis said Air Canada’s (TSX:AC.B) brand could have been tarnished for several months until case against the CAW arbitration was heard by the Federal Court and Ontario divisional court.

Chief executive Calin Rovinescu said Tuesday the airline would abandon its judicial review “to create a climate of stability so that the company can move forward.”

The move came after he had a telephone conversation with Canadian Auto Workers president Ken Lewenza, who had threatened major disruptions.

Kokonis said more negativity at this point would create a snowball effect for the travelling public.

“As the snowball gets larger and the more the public hears about labour instability as Christmas is coming up, there is a real danger of seeing a material impact.”

Air Canada’s flight attendants union said the airline’s decision to abandon the judicial review brings relief for all bargaining groups.

“I would hope that Air Canada does want to forge peaceful times with the unions and the employees. It has been a rough go,” said CUPE national representative Daniela Scarpelli.

The head of Air Canada’s machinists union, whose members handle aircraft repairs and maintenance and baggage transport, said he was disgusted by the judicial review, calling it ridiculous.

“There was no common sense to that decision so who knows why they came to their senses,” Chuck Atkinson, district chairman of the International Association of Machinists and Aerospace Workers said from Ottawa.

The Machinists union resumes negotiations next week with eight days of talks.

Atkinson doesn’t believe the arbitration rulings for customer service agents or flight attendants will set precedents for his union’s members.

It doesn’t accept a two-tier wage system for new hires and opposes a hybrid pension model favoured by the CAW and CUPE.

“We have a separate proposal that we think will meet the needs of the company and the union guys that’s not the hybrid plan.”

The company has put a low-cost carrier on the bargaining table, but the key issues for the Machinists is money. Like other workers, they want to recoup losses from the airline’s 2003 bankruptcy protection and 2009 wage freeze.

And it’s prepared to fight back, possibly through a legal challenge, if Labour Minister Lisa Raitt threatens back-to-work legislation to prevent a strike, Atkinson said.

“We are there to get a deal, to move forward for our members, and we would not like to have a disruption in service but we’ll do what we have to do.”

Air Canada faces intense competition from lower-cost WestJet (TSX:WJA) and Porter Airlines, along with charter operators such as Transat A.T. (TSX:TRZ.B) and Sunwing.

Ian Lee, who teaches strategic management at Carleton University, said Air Canada likely miscalculated when it launched the legal challenge.

But it faces the daunting challenges of an unfunded pension liability exceeding $2 billion, low margins and intense competition.

“I think that they decided from a rational, strategic point of view that going to judicial review on the pensions was not good for their bottom line,” he said in an interview.

Just the noise about possible disruptions – even without a strike – could have affected bookings and further eroded its relationship with customers, added George Smith, a former Air Canada director of employee relations and fellow at Queen’s University.

“If you’re running a fragile business and a highly competitive one…you’ve got a lot of pressure without adding the pressure of labour unrest to the travelling public’s thought about whether and when they travel.”

He said the airline may have been trying, through the legal challenge, to send a message to the flight attendants arbitrator to stay within the bounds of their jurisdiction.

The airline has found itself in a difficult position by having a pension ruling it can’t afford, which now serves as a precedent for other labour groups, he said.

“It’s a little hard after that milk has been spilt to scoop it back into the glass.”

Air Canada’s pilots will return to the bargaining table in the fall after previously rejecting a tentative agreement.

On the Toronto Stock Exchange, Air Canada’s shares closed down two cents to $1.32 in Wednesday trading.

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