CANADA'S AIRLINE PROFITS SEEN HIGHER
Canada's airline industry, shaken up by
a recent merger that creates a powerful new competitor for
government-owned Air Canada, has begun its first serious drive
for profitability in 50 years, industry analysts said.
    "Now we've got a company that can compete with Air Canada,"
said Thomas Bradley of Richardson Greenshields of Canada Ltd.
"Clearly, it can go head-to-head in any market."
    The new airline, which arose from the 300-mln-Canadian-dlr
takeover of Canadian Pacific Air Lines Ltd by the small but
cash-rich Pacific Western Airlines Corp, was launched last week
as Canadian Airlines International Ltd.
    Canadian Airlines will have 35-40 pct of the
6-billion-Canadian-dlr domestic market, against Air Canada's
50-55 pct. Wardair International Ltd is third with about nine
pct.
    Analysts believe Pacific Western's aggressive and
cost-conscious chairman Rhys Eyton will develop the true
potential of the former CP Air, which floundered for four
decades inside the bureaucracy of conglomerate Canadian Pacific
Ltd.
    They said CP Air's management style had been not much
different from that of Air Canada, formed 50 years ago, because
neither airline was held accountable to its owners.
    "Not that long ago, maybe even just six months ago, these
two airlines were totally fiscally irresponsible. Neither
seemed that concerned about the bottom line," said Bradley.
    "But with CP Air being run by Eyton, it will be very
conscious of profitability and shareholder return. And Air
Canada is on the verge of going that way," he said.
    CP Air, always fighting for market share rather than
profits, was "a perennial money-loser," analyst Wilfred Hahn of
Bache Securities Inc said in a recent report.
    Prior to its takeover in December, it had accumulated
long-term debt of 600 mln Canadian dlrs. From 1981 to 1985, its
losses totaled 87 mln Canadian dlrs.
    Air Canada, widely expected to be privatized later this
year in a public share offering, lost 14.8 mln Canadian dlrs on
revenues of 2.72 billion dlrs in 1985. It has a debt of more
than 2 billion dlrs.
    Although only a minority interest is likely to be sold to
the public, the prospect of privatization at a time of
increased competition is forcing Air Canada to pay more
attention to finances, analysts said.
    It recently disclosed that it expects to report a profit "in
excess of 35 mln to 40 mln dlrs" for 1986. However, this profit
recovery was due less to management skill than the fact that
all Canadian airlines had a good year in 1986, analysts said.
    Tourists came to Canada in record numbers last year,
attracted by the relatively weak Canadian dollar and Expo 86 in
Vancouver, which alone had more than 22 mln visitors.
    For the next few years, most analysts see three-six pct air
traffic growth, and they expect profits will come from
cost-cutting and careful spending.
    Peter Friend of Walywn Stodgell Cochran Murray Ltd said
institutional buyers will be eager to add Air Canada to their
portfolios as a blue-chip investment, but warned that new
competition makes profit growth less certain.
    "The airline with something to lose will be Air Canada. At
one time, it had a fixed system which was theirs and nobody
else's," Friend said.
    Many analysts recommend that investors buy and hold airline
shares for at least a year.
    Analysts said Air Canada's immediate concern ahead of a
public stock offering will be unloading unprofitable air routes
without setting off a political storm.
    It also will be faced with an expensive but necessary
updating of its aging fleet of 111 aircraft.
    Wardair, preferring strong medicine now instead of later,
already has embarked on a one-billion-Canadian-dlr purchase of
a dozen aircraft from Europe's Airbus Industrie.
    Canadian Airlines, which has 81 aircraft, last week ordered
six commuter planes from British Aerospace and said it would
soon buy as many as six wide-bodied aircraft from Airbus or the
Boeing Co.
    Analysts said Canadian Airlines, with its newer fleet,
needs to make fewer replacements and can afford these without
hurting profits.
    Steven Garmaise of Wood Gundy Inc expects Canadian
Airlines' profit in 1988 will more than double last year's 29.8
mln Canadian dlrs by Pacific Western.
 Reuter
