Air Canada—Challenges and Outlook

MR. ARMSTRONG:

Mr. Minister, distinguished head table guests, ladies and gentlemen: About the time of our winter solstice, when warmer climes beckon, a message rings out over the airwaves encouraging Canadians to go "Sun Living" and later with the arrival of the vernal equinox when spring heralds the approach of summer in the northern hemisphere we are urged by the same sponsor to "Come see what we've been missing". That sponsor is our national airline, Air Canada, which enjoys international patronage and acclaim. It ranks in the forefront among the great air carriers of the world.

Today we are privileged to have, as our guest of honour, the Senior Officer of Air Canada, Mr. Yves Pratte, one of Her Majesty's Counsel, learned in the law, who was appointed its Chairman and Chief Executive Officer in December, 1968.

Mr. Pratte is a native of Quebec City and at the age of nineteen received a Bachelor of Arts degree from College Garnier in that city. Three years later he was granted a law degree "summa cum laude" from Laval University, following which he attended the University of Toronto and took postgraduate studies in Taxation and Corporate Law.

He was admitted to the Quebec Bar and became a member of the law firm of St. Laurent, Taschereau, Noel and Pratte in 1948. These are names of great significance in our Canadian history. From 1954 to 1968 Mr. Pratte was senior partner in the firm, Pratte, Cote, Tremblay, Beauvais, Bouchard, Garneau and Truchon, and if I may be pardoned this observation, a partnership unlikely to be accused of being overtly anglophile.

He headed that firm until his appointment to his present position and from 1962 to 1965 was Dean of Law at Laval University. In 1968 he was honoured by Laval, being named Professor Emeritus. Mr. Pratte served as special Legal Counsel for Quebec Premier Jean Lesage and the late Premier Daniel Johnson, and was a member of the Federal Royal Commission on Security from 1966 to 1968.

Last summer when an airline strike was causing confusion and congestion at Canadian airports, Mr. Pratte experienced on his own airline some of the problems of the ordinary passenger. He was flying from Montreal to Vancouver on a business trip, and the fact that his bags were missing when he reached his destination was a source of no little embarrassment to certain of Air Canada's staff. With his usual candour, Mr. Pratte did not withhold this information from the media and he was the recipient of some additional free publicity. Incidentally, the missing bags were recovered and delivered to his hotel in a few hours.

Prior to his appointment, it was my privilege one afternoon to hitch a ride from Belledune, New Brunswick to L'Ancienne Lorette, Quebec, in an Aerocommander through the kindness of Mr. Pratte and one of his corporate clients. He sat in the co-pilot's seat and I immediately behind. He very graciously shared a set of headphones with me so that I might hear the radio range communications. Little did I suspect that my benefactor on that occasion would be the next head of Air Canada and that he would be our benefactor today.

Ladies and gentlemen, I am pleased and highly honored to present Mr. Yves Pratte, Chairman and Chief Executive Officer of Air Canada who will address us on the subject "Air Canada-Challenges and Outlook".

Mr. Pratte.

MR. PRATTE:

I am grateful for the opportunity to speak to you today because I believe that this is a most appropriate time and place for some comments of a general nature on the transportation industry, its importance to the growth, development and unity of Canada.

Looking back at our history, we find that transportation was a strong Confederative force. In all of the pre-Confederation debates and discussions, one of the predominant themes was the importance of transportation in successfully binding together socially, politically and economically, all the elements of the new nation-to-be. Later, as other parts of the country joined, similar requirements were clearly stated.

Today, that requirement is still a predominant one, and transportation is more vital than ever for the unity of our nation. The continued existence and development of an efficient and economic transportation system is of paramount importance to the country as a whole; it is indeed essential if we are to foster and strengthen our unity and reduce regional disparities so that we can develop fully our potential as a nation.

Transportation in Canada, with our geography, with our relatively thin population, is without doubt a public service which should be developed and provided in the light of stated national goals. In other words, in many areas, transportation becomes, and is, a necessary means for the attainment of national objectives that are from time to time defined by the nation's policy-makers.

The State and its various components must therefore have a very strong interest in the provision and development of transportation services which will permit the carrying out of national policies. Various recent Federal-Provincial Conferences have highlighted again the vital role transportation services perform in the orderly development of various segments of the economy, both from a regional and a national point of view.

If, then, transportation is so vital to the attainment of national goals, it follows that the State has a duty as well to ensure that the required transportation services are developed and provided in as economical a way as possible. While it is true that we are a rich country, nevertheless the demands on our resources are great, and the current energy crisis serves to bring home to us the importance of avoiding waste and duplication.

The task is there to ensure that the orderly and economic development and provision of transportation services is accomplished through an appropriate and rational allocation of national resources. Technological change has created major problems by increasing competition between various phases or modes of the transportation system. The inter-action of technical improvements with the economics of developing and providing transportation services is a force creating continuing complexities, leading to relationships where private interests are dependent upon services provided by public agencies. Operation of transportation systems is therefore a field of business activity involving joint action by all levels of the public sector and individuals or business enterprises in the private sector. Appropriate regulation of all aspects of transportation is therefore a legitimate governmental function.

Whether our national objectives are best attained through competition as between various modes of transport and also as between operators of the same mode, is a matter that should be reviewed from time to time in light of circumstances. It is certainly a matter that should be analysed in order to determine how the various modes should inter-relate for the betterment of Canada and the avoidance of unnecessary duplication. One should not lose sight of the fact that waste has to be paid for and will, in the end, result in either an inadequate or more expensive transportation system.

Having said that transportation is a public service, this raises the question of the financing of that service; in other words, who should pay for it. While the answer is not so simple, one thing is certain: somebody has to pay, and that somebody can be either the Government, which means the country as a whole, the user of the service, or a combination of both. Whatever method is used, it seems clear to me that the State has a very definite interest in ensuring that adequate transportation services are offered at the minimum possible price through a pricing structure that is equitable, conducive to the attainment of stated national goals, and does not lead to inefficiency, which in the end results in higher costs. Therefore, the principle follows-and this has been stated in the National Transportation Act-that the State should pay for services that are essentially required for national purposes and which cannot be justified on an ordinary commercial basis. Also, I believe that pricing formulas should generally be the same throughout the country, irrespective of the volume of business or of the operating difficulties in one particular location.

It is against this general background that we have attempted to define Air Canada's role or mission.

In dealing with this, two facts must be recognized. The first is that we are a Crown Corporation; the second is that we are engaged in a competitive business.

We acknowledge the fact that, as a Crown Corporation, we must in a tangible way, and functioning within our own domain, assist in the attainment of stated national, social and economic objectives. This is the special mandate which we have and which we fully recognize and accept, and which under present conditions, may impose on us some obligations that would not be applicable in the case of an ordinary commercial company.

But we are also a business enterprise. We must therefore operate in accordance with sound business principles, achieve efficiency and ensure a proper use and allocation of our resources; this is required not only to meet the competition successfully, but also to be able to offer our service at the minimum possible price, which is in line with our special mandate as a Crown Corporation. In other words, our status both as a Crown Corporation and as a commercial enterprise demand that we be profit-oriented; but profitability cannot be our sole goal and, contrary to other enterprises, it is not our "raison d'etre" .

It therefore follows that the broad direction of the corporation must, in the end, be determined by reference to the obligations that flow from our status as a Crown Corporation. The profit motive cannot be our main guide. This does not mean, however, that in the absence of specific Government direction we should give no consideration to the cost implications of our actions. Quite the contrary, we must in all cases make a balanced judgment as between the cost of a desired or projected service that may not be commercially justified and the contribution that such service may make to the attainment of national goals. Otherwise, in the absence of specific subsidies-and we are not presently subsidized-we would soon have to increase the price of our product to an unacceptable level. Therefore, it bears repeating in this context that a service that is clearly required for national purposes and cannot be commercially justified should, as a rule, be subsidized by the State. This is the most practical way to ensure efficiency of management, as well as inexpensive transportation across the country. In other words, where services or operations normally would not be undertaken commercially by Air Canada or others, then public funds could be specified and allotted for this purpose. Because of the special inter-relationship between the Government and the Corporation, it would appear to be generally acceptable, and more appropriate in most cases, that such public purpose funds be channelled through a Crown agency.

Our obligations as a Crown Corporation generally have no effect on our day-today operations which must be managed in as efficient a way as possible, with the full recognition that in the business world of today, whether we like it or not, management efficiency is often equated with profitability. In a service industry like ours, management efficiency should result in good service which, in turn, should result in a profit. The managers of our day-today operations are therefore determined to be profit-oriented because they want to provide an improved level of service and continue to work for an airline that is financially viable.

Our task as a Crown Corporation would be difficult under the best of circumstances, but it becomes a real challenge in today's inflationary environment.

I don't want to bother you with statistics but it will give you some idea of the magnitude of the inflationary pressure since 1971 when I tell you that cost escalation for wages, fuel and food since that date will increase our total operating expense in 1974 by $179 million; because of inflation, our labour costs in '74 over 1973 will go up by something like 12% while the cost of food is likely to increase by anything between 11% and 17%. The one area of expense which has shown the most dramatic increase is, of course, fuel. While the fuel issue on a worldwide basis is extremely complex, Air Canada's problem at the moment is not so much one of supply as of price. We do have spot shortages here and there, particularly in Europe, and this has caused us to consolidate and reroute certain flights in this period when the demand is low, in order to conserve fuel for the spring and summer period when the demand increases. However, roughly 65% of Air Canada's capacity is devoted to domestic routes and the availability of fuel to date has had little or no effect on our domestic services and is not likely to as we currently assess the situation. In 1974, fuel will represent more than 20% of our total operating cost, as compared with 12% in 1973 and 10% in 1972. The average price of a gallon of fuel has almost doubled since the beginning of last year from 17.76 in January 1973 to 31 cents early this month. In terms of actual dollars, the increased cost of fuel is likely to represent for us an additional expense of something in excess of $80 million over the 1973 base of $77 million; if we were to do in 1974 the same amount of flying as in 1973, our total cost of fuel would be $149 million instead of $77 million.

These increases are literally staggering. Since 1971 and before we faced the phenomenal fuel price increases, we have generally been able to offset cost increases to a very large degree through improvement in productivity, steadily achieving more and more efficient use of our equipment and resources by various means. For example, our productivity in 1974, as compared to 1971, will increase by approximately 12% on the basis of available ton miles per employee, and 34% on the basis of revenue passenger miles per employee. In general, however, the aviation industry is considered at or near the end of a long period of very rapid technical improvements which decreased unit costs and increased productivity. What is facing the industry now is general cost pressures on all fronts and all of this indicates the magnitude of the challenge.

The easy way, of course, would be to pass on the full amount of our increased costs to our customers. We feel, however, that because we are a Crown Corporation and because it is part of our mandate to facilitate travel for Canadians, we have to minimize the effect of these higher costs on the travelling public through greater efficiency. We do not, and will not allow ourselves to regard fare increases as the automatic panacea to cost escalation. While the price of our product is likely to increase as all our costs escalate, it should nevertheless be our aim to reduce this increase to a strict minimum. For that purpose we must have a new look at our product and at our way of doing business. We should first determine-which we are doing-what are the essentials that the customers want; the cost pressures that we are under now make it more imperative than ever that as an industry, as well as a company, we make more use of the modern marketing techniques that have made a success of the consumer goods industry. Essentially, we have to find out from the customers what they expect from us. Traditionally, we have too often interpreted the needs of our customers through our own eyes; what is important is what they perceive to be their requirements and not what we perceive to be their wishes. When this is done we undoubtedly will have to make the choice as between the various demands of the market that have to be satisfied.

To me, the situation calls for a basic review with the objective in mind of making more imaginative and innovative use of the resources at our command. It is clear that the cost pressures are such that we will have to attempt to satisfy the basic needs of the various market segments, disregarding some of the frills that we may have become accustomed to and that, in effect, may have more appeal in the eyes of the carrier than in the eyes of the customer. Briefly, we will be required to make a balanced judgment as between the optimum level of service that is desired by the customer and the kind of service we can afford to offer at a price he can afford to pay.

It is in this context and against this background that, barring any unforeseen circumstances, we plan to introduce late this fall a no-reservation, one-class shuttle service between Toronto and Montreal. This expanded and improved Rapid-air service will employ our new Boeing 727-200 jets which will be dedicated to this run, flying between the two cities every hour. This, we hope, will be good sound basic transportation with the accent on convenience rather than on unnecessary extras. The aim is very simple-getting the passenger where he wants to go, when he wants to go, quickly and easily, on time, in good comfort and, preferably, with his baggage.

As we examine our method of operation in the light of the demands of the market, we shall hopefully be able to better respond to the essential of these demands while, at the same time, increasing the efficiency of our operation.

But all of this can be done only through people. It is our employees at all levels who have built Air Canada. It is our employees who will continue to maintain and enhance our reputation at home and abroad. Being in a service industry, our mistakes are indeed quite visible, but it is wrong to believe that they happen because our employees are not loyal or dedicated or because they work for a Crown Corporation.

In spite of the economic pressures, we are devoting many resources to the training and development of our people. Therein lies the future of the corporation. I am determined to create an environment where employees will like their work because they are challenged-because I believe that every human being basically responds well under such circumstances. It is therefore important that our operation be so arranged as to avoid the cyclical, regular and massive layoffs that have been a mark of the industry in the United States. In my view, there has to be a better way of running an airline and dealing with human beings. As a Crown Corporation, I feel that we have a unique role to play in this respect; I believe that we can and should innovate and become an example in the area of personnel matters that others will attempt to follow.

Canada is a strong country-richly endowed. As a nation, like all others, it faces many challenges to attain the fulfillment of human purposes. Its transportation systems are important ties that bind. In the complex road ahead, increased attention shall have to be given to an orderly, planned and inter-related use of its transportation systems and the services they provide. In this regard we can draw useful lessons from what is happening to two important modes in the United States, the railroad and airline industries.

Air Canada is, in the truest sense, a national resource of unique value and importance. It has made and is making a worthwhile contribution to the economic and social well-being of Canada; it has done much to facilitate the exchange of commerce and communications domestically and internationally and to enhance the prestige of our country in the world community.

We are prepared to devote our talents to assisting the policy-makers in designing a set of useful, meaningful and realistic objectives that will carry us forward over the ensuing decades as a strong and unified country.

Mr. Pratte was thanked, on behalf of The Empire Club of Canada by Mr. J. Palmer Kent, Q.C.