Roots Air grounded; Air Canada takes stake in parent firm

The Canadian airline industry took another hard turn Thursday as all Roots Air flights were suspended barely a month after the service began.

• BACKGROUND: Canada's Other Airlines

Roots Air said the decision to stop flying came after taking into account the dramatic changes in the airline landscape in Canada.

"Recently, a lot of capacity has been added to the routes we fly, which would mean that we would have had to wage the same kind of competitive war that Canadian (Airlines) did," said Russell Payson, the CEO of Skyservice, Roots Air's parent company.

"Suspending flights was the fiscally responsible thing to do for our customers, shareholders and employees," Payson said.

Roots Air's last flight will leave Vancouver Friday night bound for Toronto.

All passengers with Roots Air tickets after Friday will be switched to Air Canada.

As part of the shutdown, Air Canada will invest in Skyservice.

Air Canada will acquire a 30 per cent equity interest and a 50 per cent voting stake in Skyservice. Air Canada will also pick up a 35 per cent non-voting stake in Skyservice which it will distribute to shareholders over the next 18 months, market conditions permitting.

Air Canada's CEO Robert Milton said at a news conference that his airline's investment in Skyservice will be "below $15 million."

"It's an amazing value," Milton said.

The investment will give Air Canada an interest in Skyservice's low-cost vacation charter service, Roots Air and Skyservice's corporate jet division.

Milton called the deal a "win-win" for the airline's customers, employees and shareholders.

"Shareholder value will be enhanced through expansion in new areas of profitable growth," Milton said.

Roots Air and Skyservice's vacation charter business will be repositioned, giving Air Canada an opening into the discount carrier market.

"Consumers in this rapidly growing low-cost sector of the industry will benefit from more schedule frequency and a greater choice of destinations," Milton said.

Air Canada has long talked about moving into the discount carrier business.

In addition, the relaunched vacation charter carrier will fill a void that currently exists in the market, Payson said. Plans are to launch the service late in 2001 to serve the Caribbean, Mexico, Bahamas and Las Vegas.

The short history of Roots Air

Roots Air was first presented to the public at a splashy news conference last June. Comedian Dan Aykroyd, a close friend of the Roots founders, was on hand to add his support (although he acknowledged that he was not an investor).

• FROM JUNE 7, 2000: Roots Air: new business airline gets a name

The airline had planned to make its maiden voyage in November. But it decided that wasn't a good time to launch a business airline. And besides, its Airbus planes might not be ready. And the paperwork on the $50-million debt offering to finance the venture still hadn't been completed. So the first flight would have to wait.

• FROM AUG. 17, 2000: Roots Air delays takeoff, cites various glitches

Then, less than three weeks before its first scheduled flight, Roots Air filed a complaint against Air Canada, charging it with predatory pricing on two of its planned routes.

• FROM MAR. 8, 2001: Roots Air charges Air Canada with predatory pricing

Finally, on March 26, Roots Air began flying, determined to woo business customers with high levels of service (and above industry-standard commissions for travel agents). But it ran into an embarrassing problem on its inaugural day, as one of its first flights had to be cancelled when the plane didn't show up.

• FROM MAR. 26, 2001: Roots Air makes first flight; first cancellation

Since then, there have been scattered reports that its planes were flying at less than half capacity. And then more airline seats needed to be filled, as industry capacity increased on some routes.

Canada 3000 got significantly bigger by scooping up Royal Aviation and CanJet Airlines, and announced major additions to its national flying schedule. Meanwhile, Calgary-based WestJet has continued its eastward expansion.

Faced with that playing field, Skyservice approached Air Canada about doing a deal.

Air Canada "realized the value of our premier business aviation division and that it would be a good fit to complement Air Canada's leading business class product for premium corporate and individual customers," Payson said.

Skyservice operates 11 aircraft.