Case Study - Air Canada

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yale case 07-038 october 15, 2007

Air Canada

Selling the Company by the Slice

Jean W. Rosenthal 1 Francesco Bova2 Jacob Thomas3

Robert Milton had been fascinated by flying ever since childhood and dreamed of running an airline. But as he grew up and entered the industry, Milton came to see how poorly the major “legacy” airlines performed financially. The romance of flying could not obscure the difficulty of sustaining a profit in this industry. After a series of jobs in the airline industry, Milton came to Air Canada in 1992. While COO of the airline, he became convinced that the various parts of the airline operated separately could be worth more than the combined company. Milton proposed that the company examine its various functional areas to find unrealized value in divisions that could be stand-alone entities. Then, Air Canada could consider each business for carving out (separately incorporating each subsidiary and selling a fraction of the shares) or spinning off (divesting through a distribution of all the new company’s shares). When Milton became CEO in 1999, he moved to realize his idea. But before Milton set his plan in motion, a series of events rocked Air Canada. Just two weeks after Milton became CEO, Air Canada was the object of a hostile takeover bid that required an unplanned merger with Canadian Airlines, the country’s second largest airline, to resolve. The inability to integrate the two airlines quickly brought some infrastructure and labor inefficiencies in the short term. Then the collapse of the dot-com industries in 2000 curtailed business travel. Just as Air Canada was adjusting to this downturn, the September 11 U.S. terrorist attacks further reduced the number of passengers and required expenditures for security. Meanwhile, fuel prices began to climb precipitously. Then in 2003, SARS (Severe Acute Respiratory Syndrome) hit China and Canada, wiping out travel to the Far East and to Canada, particularly to Toronto, Air Canada’s hub....