The Onex Air-Canada Media Wars

Any media-relations expert will tell you the most sought-after commodity desired by an organization is trust. It does not matter what industry the organization is in, having the trust of key stakeholder groups, whether they are customers, investors or employees, is everything. For much of last year Canadians watched the continuing saga of the survival of the country’s airline industry unfold as the principal players engaged in a herculean effort to gain public trust. Like the public relations exercises in the failed bank mergers, the media campaigns waged by Onex and Air Canada were seen by most observers as an integral part of the contestants’ overall corporate strategies.

A number of legal potholes were, of course, thrown into the mix and in the end a court ruling appeared to settle the matter. But this was not until after a long and bitter fight. Just before Christmas, Air Canada got the green light from the federal government to take over Canadian Airlines which had long been teetering on the edge. Transportation Minister David Collenette and Competition Bureau Commissioner Konrad von Finckenstein both felt the arrangement was preferable to losing a major carrier and the 16,000 jobs that would go with it. Air Canada agreed to concessions that would protect service, fares, employee jobs, and – supposedly – competition. But even von Finckenstein admitted that having one carrier control 80 per cent of the domestic market was “dangerous.” Collenette didn’t go that far, but did say “We’ve got to be very careful.”

This year Ottawa will introduce legislation to keep fares in line and outline penalties for price-gouging, but Tory transportation critic Bill Casey does not buy it. He said it’s mere “pretense” to expect competition in the skies. The man who is largely responsible for all this does not buy it either, but he is no longer in the picture. His name is Gerry Schwartz.

On August 24, Schwartz’s Onex Corporation made a bid to buy Air Canada and Canadian Airlines and merge the two airlines. The $1.8-billion deal was to be largely financed by Texas-based AMR Corp., the parent of hugely successful American Airlines which was felt by many to be Canadian’s de facto controlling shareholder. The announcement hit Air Canada between the eyes and was an early litmus test for its new CEO Robert Milton, who had been appointed only 18 days earlier. Just 39 years of age, Milton had his work cut out for him. Suddenly Air Canada, long accustomed to being the dominant player in Canada’s airline industry, was under attack like never before. Soon it and Onex were engaged in not only a hostile takeover contest, but also a war of words in the media.

Gerry Schwartz is a financier who built a small nondescript company which nobody ever heard of into a big powerful company which many Canadians still had not heard of – at least, until he made his bid for Air Canada. “I really did not know much about Onex when this started,” says Laura Cooke, Manager of Media Relations for Air Canada’s Central Canada office in Toronto. “But I do now.” What she knows is that Onex very nearly took over the airline and merged it with Canadian in the most hostile takeover attempt the Canadian transportation industry has ever seen. It was a forever-breaking story that commanded the news for three solid months. It began August 13 when Ottawa suspended the industry’s competition rules under Section 47 of the Canada Transportation Act, allowing the two airlines to merge or at least co-operate. Collenette also said he would shield any merger from a review by the Bureau of Competition Policy. Onex made its offer 11 days later. Coincidence? Perhaps. Perhaps not. In the month before August 13, Onex was busy buying Air Canada stock. Schwartz had ties to the Liberal Party from way back and some media pundits declared that the fix was in.

With the Onex deal, AMR would own 14.9 per cent of a new Air Canada and have influence over the planned new airline through a series of agreements signed with Onex as part of the merger. It was estimated that at least 5,000 jobs at Air Canada and Canadian Airlines – 10 per cent of their combined work force – would disappear and further, that the number of domestic flights would be dropped. Added to the issues of jobs and service was the fact that American Airlines was lurking in the not-so-distant background of the deal which raised what was for many the emotional spectre of Americans controlling Canadian skies.

Needless to say, over the next 11 weeks Air Canada’s Laura Cooke and her colleagues in media relations got used to working overtime. “We were in a virtual mode because the story was changing every day,” she says. “Reporters kept telling us this was the biggest business story of the year. There were so many players and so many issues, and we were under siege. We were also dealing with fierce competition in the media. It was extreme and while Onex had months to put its offer together, we needed time.”

When it was all over Air Canada emerged as the victor in a technical knockout. On November 5, 1999, a Quebec Superior Court announced that all and sundry must abide by the Air Canada Public Participation Act which provides that no one may own more than 10 per cent of the shares of the airline. The players went back to their corners to lick their wounds, but much blood had been spilt.

How did the two organizations perform in their media relations? Let’s see. Air Canada has three Media Relations managers in Toronto, Montreal and Vancouver. They talk to the press frequently and report to a Director of Corporate Communications at head office in Montreal. Doug Port, Senior Vice President of Corporate Affairs and Government Relations in Montreal, also gets quoted. After the Onex bid surfaced and Air Canada realized it had a fight on its hands, it went out and hired GPC, a government and media-relations consulting firm, to augment its existing communications capability. GPC participated in strategy sessions, wrote press releases and helped co-ordinate the Air Canada response. Air Canada also pulled from retirement Hughie Riopelle, its former government-relations guru, and assembled a top-notch legal team of takeover strategists from Stikeman Elliott, headed by Calin Rovinescu. But the key man was still new CEO Robert Milton. “He is a very strong communicator,” says Cooke. “His messages are always clear.”

And they were clear. The problem was that those messages were late in coming and this drove the media, always operating from a sense of urgency, crazy. Beginning the last week of August, everyone wanted to interview Milton, but he wasn’t talking. Meanwhile, Onex’s Schwartz was criss-crossing the country in a profile-building PR campaign the likes of which corporate Canada had never seen before. He even appeared online on the Web current-affairs site Canoe.ca.

Air Canada was obviously caught unawares by the August 24 Onex bombshell and needed time to plan strategy. That left Onex as the only player in the media-relations game during those first few weeks and Schwartz was more than obliging. When confronted by the issue of American control, he said: “This whole subterfuge of trying to cloak us in American Airlines’ control is utter nonsense. It’s time we all got on with looking at what the real facts are and evaluating this offer on its merits, not on myths.” And this was perhaps the first serious mistake Schwartz made. For in this battle, myths would be very important. In fact, arguably more important than merit.

Onex was somewhat of an unknown entity and without any in-house corporate affairs capability. It had no media-relations people, no government-relations staff, and not many staff period. It was a takeover specialist built from scratch by Schwartz with a stake in dozens of companies that did billions in sales, most of the revenues generated in the United States. It is active in such sectors as computer goods, airline-catering services and auto parts. Canada’s business community knew who Schwartz was and respected his obvious abilities, but to the Canadian people he was an unknown entity.

And thus, seemingly out of nowhere for most Canadians, Onex embarked on a mission to remake Canadian skies. It retained Shandwick Public Relations, a firm with a strong reputation in public affairs. It also hired Bill Fox, one-time press secretary to Prime Minister Brian Mulroney and the former Ottawa and Washington Bureau Chief of The Toronto Star. Fox is a media consultant who wrote the book Spinwars: Politics and New Media and was a founding partner of the Earnscliffe Strategy Group in Ottawa. He has taught at several universities, including Harvard, and is no stranger to the airline industry. Indeed, back in the 1980s he was an advisor to the federal government in the privatization of Air Canada.

“Nigel Wright of Onex called me,” Fox says. “Why did he call? It was because of the scope and scale of interest and the range of activity they were involved in. It involved three separate journalistic constituencies. First, the national political press. Second, the financial press who saw it as a straight business deal. And third, the local and regional press. Onex Corporation was well known in business circles, but less well known with the public. Part of the challenge for Onex was to answer some questions. Like who are they and are they Canadian.”

Wright, who is a principal of Onex, declined to discuss the proposed Air Canada merger now that it is water under the bridge. In fact, no one at Onex is even speaking to the press these days regarding the matter. Onex has bowed out of the public arena as quickly as it got in. After November 5, Fox was no longer retained as a consultant, but he was happy to speak about his three-month, whirlwind experience.

“This was an important change in airline transportation policy,” Fox says. “Onex had to acknowledge the public’s legitimate interest and explain why the current system wasn’t working, then explain why its solution was the right one. But any time you advocate change you have a challenge. Onex had a challenging message. Look, when you go to the airport the place seems full, the planes seem full, and you have to wait a long time to get your bag. That’s what the public saw and they thought the system was okay. But most people weren’t aware of the serious losses both airlines had incurred over the last ten years.”

“Then,” Fox continues, “Onex had to identify areas of concern. For some people foreign ownership was an issue because Onex was partnered with AMR. That was one story line. For others a bigger issue was monopoly. We would have only one national airline. And for others still the big thing was service and regional variations which in a place like Quebec City is a point of intense irritation. So we had to identify those story lines and speak to all of them. We had to get Schwartz out and about so people would see that he’s a Canadian guy and a success story.”

Three weeks after its initial bid, Onex launched a series of newspaper ads to help get the message across. The business pages and the news pages were already full of the goings-on of Onex, Air Canada, Canadian Airlines and AMR, and now it was time for elaboration – from the horse’s mouth. The first ad ran October 13 and said what Onex was promising: a Canadian-owned airline, holding the line on ticket prices, being fair with employees, maintaining service to smaller communities, continuing seat sales, promoting fair competition. Two days later came a two-page ad with the left side completely blank except for the question: “Who are you guys anyway?” The right side identified Onex as a Canadian company with revenues of $14 billion. It talked about its rapid growth and success, and offered a web site where people could access more information. It also posted a 1-888 telephone number.

Says Fox: “We got Schwartz out to various centres. He went on open-line radio shows, made public appearances, and spoke to Chambers of Commerce and educational boards. I think people were taken with him and came to appreciate how he had thought about these problems and that he had a reasonable solution. But we knew we had a big challenge. We had to speak to consumers about their concerns and also to employee groups and institutional investors.”

The Onex ad of October 19 was particularly hard-hitting. “How’s your airline investment doing these days?” said the headline, followed by: “Are you making money? Not at Air Canada you’re not. Not so much as a dime in the last decade.” It said how for the past 15 years Onex companies had produced an average 33 per cent annual compound growth in the value of invested capital and mentioned companies like Celestica and Sky Chefs as examples. Once again it included the web site and the 1-888 number.

The next day Air Canada came out with its own ad speaking of “Opportunity, not opportunism” and the dye was cast. The gloves were off. Over the next two weeks it ran more ads with headlines like “Making sense” and “Truth or consequences”. The ads warned about foreign control. They even got more aggressive. “Who’s flying the plane?” began one which went on to relate how Onex had no experience running an airline. That was followed by ads with the Air Canada logo front and centre beside the Onex logo, the latter with a prohibitory line running through it. On November 3 and 4 still more Air Canada ads appeared displaying tables showing three columns: Onex says, Onex does, Air Canada replies.

Perhaps the best example of Air Canada’s no-holds-barred approach to Onex was the following Air Canada ad: Onex says – “Onex is an entirely Canadian company.” Onex does – “According to Canadian Business Magazine, Onex once described itself as a U. S. company that happens to be based in Canada, and said that being a market leader in Canada is like being a market leader in Kansas.” Air Canada replies – “Air Canada has always been a proud icon of Canada and remains 100% committed to keeping control in this country.” The plan was clearly to depict Schwartz as the bad guy who represented powerful U. S. interests intent on controlling Canadian skies while Air Canada wrapped itself in the flag. The irony was that Schwartz is a Canadian while Air Canada CEO Milton is an American. To muddle matters even more, the CEO of American Airlines is also a Canadian.

But even before the Air Canada ads started, the public was not entirely buying the Onex message. An Angus Reid survey conducted September 7-12 pegged Onex support at 42 per cent and another one carried out by Corporate Research Associates a few days later said it was only 33 per cent. It seemed support was dropping. At the same time, however, most people did like the idea of a single airline. The Angus Reid survey showed support for this at 68 per cent. So while people did accept some of what Schwartz was saying, they did not accept enough of it to make them like his proposal.

Onex advisor Fox, an acknowledged media-relations expert, does not think the company’s media campaign failed. “Air Canada won on a technicality,” he said. “In the week leading up to the court decision I thought Onex had a great week and we were optimistic. I believed our work was having some effect. But in the end, yes, I was disappointed.” Fox is a media man who knows that perception can be more important than reality. When asked about the Onex messages on foreign ownership and service, he said the strategy was sound. “Sure foreign ownership was an issue, but as consumers we also want choice and in a country this size we can have one or the other. But not both.” The implication is that an industry which is totally Canadian may not necessarily provide the best service. Fox calls these the “hard realities” about the airline industry.

Air Canada’s Laura Cooke thinks Canadians are not ready to give up control of their airlines, but even though the company took a nationalistic approach to its campaign, there was more to it than that. “Everybody talks about good media relations and strategy, but some things you can’t plan for,” Cooke says. “Our media audience was growing. Reporters were calling us who knew nothing about the airline industry and they were getting hostile. But we had never been in a takeover position before. Our problem was we couldn’t make an announcement until October 19. That was the first time you saw Robert Milton do a teleconference to formally reject the Onex proposal. Onex, meanwhile, kept saying ‘where’s Waldo’ as to where Milton was. But that was part of our strategy. Here within Air Canada Milton kept telling us we’re in no rush. In large measure, the legal uncertainties surrounding the Onex proposal drove our communications strategy. Milton himself called it a state of lawlessness.”

Four days after the Onex announcement, The Globe and Mail ran the headline “Will American Airlines dominate Canada’s skies?” Air Canada’s Doug Port was quoted: “Obviously we think ... that de facto AMR will be controlling the company.” But by and large, Air Canada was not saying much and while Milton was keeping mum, newspapers like The National Post and The Globe and Mail were praising Schwartz’s plan. Globe columnist Eric Reguly said Schwartz might not be the best person to rebuild the industry, but acknowledged that his proposal was not bad. “Most countries of middling size can’t afford the luxury of two domestic airlines,” he wrote on August 24, the day the Onex plan was unveiled. “(Schwartz’s) idea has merits. Buying Air Canada and Canadian and putting them under single management could save a fortune for both airlines. They could co-operate on some routes and compete on others.”

Onex was busy sending information sheets – they were called ‘Blastfacts’ – to the media to clear up any misinformation concerning its proposal, but the media is a fickle beast and Reguly was no exception. In a later column he christened the new would-be airline ‘Schwartzflot’ and quickly dismissed Schwartz’s assurances of competition in the skies and no more than 5,000 jobs being lost. He even called the whole proposal “an AMR takeover by proxy.”

When Air Canada finally launched its own ads, the battle looked like a heavyweight fight with both sides pummeling each other. Says Cooke: “We mounted our ad campaign in reaction to theirs. We felt a lot of misinformation was out there about the value of the Onex proposal and their interpretation of our proposal.” Through September and October the airline did regular opinion polling and the public apparently shared its concern over lack of clarity about the Onex proposal. After Milton stepped into the ring, Cooke says he was seen as straightforward and credible. “He helped us so much. I couldn’t imagine this whole thing if we didn’t have him.”

Air Canada’s solution, spelled out in the ad campaign, said the airline would buy Canadian and operate it as a subsidiary, but both Air Canada and Canadian would be distinct entities with separate head offices. Also, a proposed new partnership with Delta Airlines would help Canadian improve its trans-border service. Air Canada promised net reduction in employment of no more than 2,500 and outlined what it called “shareholder’s gain”:
• buy back up to 35 per cent of Air Canada shares at $12 per share, or $800 million in cash
• shareholders would own 100 per cent of an expanded, financially healthy company
• no person or entity would have over 10 per cent ownership
• no foreign control.

David Turnbull, Professor of Public Relations in the Corporate Communications Program at Toronto’s Seneca College, Canada’s largest community college, thought Air Canada won the image game hands down. “A good analogy is doctors and nurses,” he said. “A doctor looks at a patient on the cellular level and a nurse on the human-response level. I think Onex was the doctor. They looked at the cellular point of view and talked about money. They wrongly assumed Canadians want to make money out of their airlines and I don’t think that’s true. They should have done their research to see what approach Canadians wanted. The ads weren’t captivating, convincing or even logical. And they used inflammatory language which offended people. Air Canada did it differently. They were hard hitting, but positive words jumped out and what you saw was a solution. They offered clear logic on why Onex was the enemy of Canadians. I’m not surprised Air Canada won. They did their research and dealt with things on a human-response level rather than a cellular level.” Turnbull says Air Canada scored points with its later ads that said Onex had no airline experience. Indeed, the full-pagers of November 3-4 were called, respectively, “Reality check” and “Exploding the myth”. Of course, the very next day, November 5, the referee in the guise of a Quebec Superior Court raised a hand and counted Onex out.

Perhaps Onex should have learned a lesson from the banks and their failed 1998 attempt at merger. That too was a huge media-relations exercise and one which many observers feel the banks managed badly. The proposed mergers involved Royal Bank of Canada with Bank of Montreal, and the CIBC with the TD. The banks ran ads that talked about everything from reducing service charges to increasing branch access. The idea, the banks said, was to make them stronger and more competitive. But the public had a hard time seeing the banks as suffering. In 1998 the Big Six (including Bank of Nova Scotia and National Bank of Canada) ran up a combined $7.13 billion in profit. In 1999 their profits were even higher, a combined $9.1 billion. And with those profits came staff cuts. The story behind the story is that, in the international scheme of things, the banks really are falling behind. In a ranking based on shareholder equity, UK-based Euromoney rated Canada’s five biggest banks from 49th to 69th. Compare this to 14 years ago when Royal Bank was 22nd while CIBC, then the smallest of Canada’s five biggest banks, was 39th.

Still, the general consensus is that we should all be in as rough shape as our banks. As for the airlines, Air Canada won, but will it be able to successfully manage the expectations created during its contest with Onex? Some think not. And did its battle with Onex even produce a clear result in the image wars? Again, some think not. Air Canada is repeatedly under attack these days as the heavy-weight which will monopolize the skies, raise ticket prices and cut service. And what about Schwartz and Onex? Here’s the last word from Air Canada’s Cooke: “Well, if it was their intention to become a household name, they certainly achieved that.”

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Jerry Amernic is a Toronto-based freelance journalist.



AND In this corner ....The air wars lawyers

As one would expect there were a number of top-tier legal teams heavily involved in the Onex-Air Canada contest. Law firms and lawyers acting for either the frontline players or for other interested parties included:

Stikeman Elliott acted for Air Canada. The Stikeman team was comprised of Calin Rovinescu (lead corporate and M&A), Jean-Marc Huot, Edward B. Claxton, John M. Stransman, Simon A. Romano and Margaret E. Grottenthaler on corporate and M&A matters; Louis P. Bélanger, R. Michel Décary, Q.C., Sean F. Dunphy and Eliot N. Kolers on litigation matters; and Lawson A.W. Hunter, Q.C., and Randall J. Hofley on competition and regulatory matters.

James C. Baillie, Q.C., of Torys was counsel to the Air Canada independent committee of directors.

Davies, Ward & Beck acted for Onex. The Davies team included William Ainley, Patrick Barry, Andrea Daly, Carol Hansell, Vincent Mercier and Patrick Moyer on corporate and M&A matters; Mark Connelly and Berl Nadler on corporate commercial and finance matters; Paul Crampton, Calvin Goldman and Mark Katz in competition matters; Neil Finkelstein, Sandra Forbes and Jeremy Freedman on litigation matters; and David Smith on tax matters.

Bennett Jones acted for Canadian Airlines. The Bennett Jones team consisted of John Gulak and John MacNeil, on handling the Arrangement Agreement with Onex and American Airlines with strategic input from Martin Lambert and Marty Kay, Q.C.; Patrick J. Brennan, Alan W. Rubin and David M. Lennox on financial instruments; Darcy D. Moch on tax; Debbie E. Bryden and Bryan C.G. Haynes on due diligence and disclosure; Bradley D. Markel and John Kousinioris on proxy matters; Marty Kay, Q.C., Anthony L. Friend, Q.C., Beth Riley and Robyn M. Bell on court applications; Neil H. Stevenson and Christopher A. Brown on pensions and employment issues; and Marty Kay, Q.C., and Beth Riley on competition and other regulatory matters.

McCarthy Tétrault acted for American Airlines. The McCarthy team consisted of René R. Sorell and David M. Armstrong on corporate matters, Lorne P. Salzman and Oliver Borgers on competition matters, R. Paul Steep and Eric Gertner on litigation matters. In the Montreal office of McCarthys, Gérald Tremblay, Q.C., was responsible for litigation matters and in the Calgary office Bruce MacPhail was responsible for litigation matters.

Blake, Cassels & Graydon LLP acted for UAL Corporation and Deutsche Lufthansa AG. The Blakes team consisted of Alan Bell, Pamela Hughes, Warren Grover, Q.C., Bill Mugford, Andrea Freund, Mario Josipovic and Daniel Bernstein (corporate/securities), Glenn Leslie (competition and litigation), Leslie Morgan and Kathleen Penny (tax), Greg Kanargelidis (international trade), Sam Principi (aircraft leasing) and Anne McNeely and Kathryn Podrebarac (litigation).