Victor Li's reputation on the line in Air Canada gamble

PUBLISHED : Tuesday, 20 January, 2004, 12:00am
UPDATED : Tuesday, 20 January, 2004, 12:00am

Last year, Canada and Hong Kong shared the dubious distinction of being two of the worst Sars-affected areas outside the mainland.

Perhaps ironically, the resulting fallout sent Air Canada, Canada's largest airline, into bankruptcy protection and now into the arms of white knight Victor Li Tzar-kuoi - deputy chairman of the Cheung Kong Group and a Canadian citizen.

And the rainbow on the horizon could be the potential for more flights into a deregulating Chinese aviation market.

That might be mere speculation but the deal allowing Mr Li's Trinity Time Investments to acquire a controlling 31 per cent stake in Air Canada for C$650 million (HK$3.87 billion) is now a step closer after Canadian court approval.

Despite the ignominy of bankruptcy protection since April, this acquisition remains high profile and comes with considerable patriotic baggage attached. Mr Li has very publicly put his reputation on the line to resurrect the debt-laden airline.

It is too early to tell if the transaction represents a masterstroke of timing, the acquisition of a distressed asset at a rock-bottom price, or is a case of biting off more than one can chew.

The exact commitments included in the deal are, as yet, undisclosed. But what is known is that the airline had C$12 billion of debt outstanding in April, including $1.5 billion in unfunded pension liabilities. Flipping this asset for a quick gain looks unlikely.

Air Canada's problems began well before Sars hit. The digestion of Canadian Airways brought a transpacific network but also a less valuable domestic franchise. New budget carriers led by WestJet have aggressively taken 40 per cent of the domestic market.

Air Canada introduced a new low-cost brand, then dropped it, before discounting fares en masse. A substantially higher legacy cost structure meant this proved an unsustainable strategy.

The international routes are where Mr Li will be hoping easier improvements can be made, especially in North Asia. As the Canadian flagship carrier, the carrier's international franchise is harder to dislodge. Also, on these routes, there are customers at the front of the planes paying the higher fares crucial to profitability.

Some omens are positive. Air Canada has resumed its twice daily Hong Kong-Toronto service, in addition to its existing routes to Shanghai and Beijing. Plus, China's air travel deregulation looks poised to give the whole industry a boost.

Deregulation means that new provincial airports are now opening up direct bilateral flight access and fifth freedom onward travel rights. The Li family connection may help secure a few more landing slots.

It is interesting to note that another Hong Kong/Canadian tycoon, Hong Kong Tobacco scion David Ho, is already tapping into the new growth opportunities in the Canada-China air travel market. His new start-up independent airline, HMY, an acronym for Harmony, has added flights to Hainan to its existing service to Beijing and expects to add Macau to its list of destinations soon.

Now in its second year, further mainland flights are promised. Mr Ho has even enlisted Jackie Chan as a free promoter of the company.

If Vancouver-based HMY expects to get access to multiple mainland cities, Air Canada must surely be ahead of it in the queue.

That is only one part of the jigsaw but if this deal does go well, shareholders of Hutchison, a Cheung Kong Group member, may well begin to wonder whether the stake will be folded into the public arm one day.

If Mr Li's gamble does not pay off, the downside risk will be poignantly symbolised by the almost worthless scrip Air Canada shareholders are expected to be left holding after this latest restructuring.