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Canada


Airline limits under review

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Feb 21, 2008

The federal government has been actively looking at raising foreign-ownership limits on Canadian airlines, but will wait until the current review of Canada's competition and foreign ownership laws is complete before making a decision, sources in Ottawa confirmed to the Financial Post.

The issue of foreign ownership has once again been thrust into the spotlight with ACE Aviation Holdings Inc. saying it's ready to part with its 75% interest in Air Canada. In addition to holding talks with pension funds and private-equity players, Robert Milton, ACE chief executive, said he wouldn't rule out including the country's largest carrier in the current round of consolidation in the United States.

A major hindrance, however, for any U.S. airline taking a stake in Air Canada is the federal government's requirement that no more than 25% of the voting shares and 49% of the equity in any Canadian airline be owned by foreign interests. The airline's board must also be majority controlled by Canadians.

While the limits wouldn't preclude a U.S. airline or investor from buying into Air Canada, they make a transaction less attractive.

This is why the federal government is considering raising the foreign-ownership limit in Canadian airlines to 49% of voting shares, according to senior sources in Ottawa, who did not want to be identified. The move is aimed at attracting more investment in the airline industry without ceding control to foreign interests.

Keeping Canadian control is pivotal for the inclusion of domestic carriers in any number of bilateral air agreements between Ottawa and countries around the globe.

While Ottawa's current foreign-ownership caps are in line with those of the United States, such countries as India and China have recently raised their limits to 49%. Others, like Australia and New Zealand, have gone one step further, allowing airlines that offer strictly domestic service to be 100% foreign-owned, which is something Ottawa may consider as well, the officials said.

In addition to the airline industry, Ottawa will also be looking at the ownership caps on Canadian National Railway Co., which limit any individual investor to 15% of outstanding shares under the CN Commercialization Act of 1995.

But before any action is taken, the government will wait for the Competition Review Panel, which is currently reviewing submissions from the private sector on modernizing the country's competition and foreign-ownership laws, to submit its report this June.

The Air Transport Association of Canada, which represents 300 companies in the airline and aerospace industry, said in its submission to the panel it would support raising the limits.

"We're always in favour of improving the climate of accessing capital," said Fred Gaspar, ATAC vice-president of policy and strategic planning, although he said it wouldn't be paramount to the long-term sustain-ability of the industry.

Tim Morgan, co-founder of West-Jet Airlines Ltd., says the restrictions do scare off some foreign investors and are a major headache when an airline is seeking approval to fly from the Canadian Transportation Agency.

Mr. Morgan just returned from New York, where he was courting U.S. investors for his latest venture, a new charter and tour company, tentatively named NewAir & Tours.

"Absolutely, it would be easier to raise money if those restrictions were not there," he said

He added that an even bigger issue than finding the funds is the bureaucracy involved in proving to the Canadian Transportation Agency that potential institutional investors are Canadian. The process recently had him submitting a 300-page document to the CTA complete with affidavits signed by each individual trustee and director of the funds investing in NewAir just to verify their nationality.

It was not only laborious to complete, but produced an unfortunately impressive legal bill, he said. "As long as we can keep the airlines operating in Canada running, where the funds come from doesn't matter," he said.

However, Robert Deluce, chief executive of Porter Airlines, said the restriction have done little to keep him from raising capital to launch his airline and financing its fleet expansion. "We look for quality investors, and those foreign-ownership limits didn't restrict our ability to raise funds," he said.

Neither Air Canada nor WestJet would comment, but Mr. Milton has called for the reforms in the past.

financialpost.com

Airline limits under review
media.canada.com



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