Empty Buildings, Wimbledon Inflation, the Patriotes of 1837..and Harry Steele Makes a Go of Eastern Provincial Airways.
July 10, 2023 Volume 4 # 8
What Work From Home Hath Wrought
A billion square feet of empty office in the United States. All those empty stories would stretch 100 miles up. Work from home might not last forever, but not all of them are coming back. Same empty spaces in other countries.
In London big banks are abandoning Canary Wharf for smaller space closer to the centre of the action. That HSBC sign is not the only one coming down.
In Toronto politicians can’t decide on whether to let office buildings become apartment buildings.
Tech, Oil, Banks and Drugs
That’s where the money is. Rising oil prices helped ExxonMobil; JP Morgan Chase made $37.7 in profit but it would have been higher without losses in corporate banking. Higher interest rates had fewer firms raising money and that hurt JP Morgan’s fees.
World Nukes
This month the province of Ontario announced it is going ahead with a new nuclear power plant. When completed in the 2030’s it would be the largest in the world, enough to power 6-million homes. Ontario will also build three small nuclear reactors.
The world is building more nuclear reactors; perhaps the only hope for net zero.
France’s Troubles in a Chart and a Photo
Vincent Jeanbrun, with his hand on his heart, is mayor of L’Hay-les-Roses surrounded by prominent national and provincial politicos, all calling for an end to rioting.
Jeanbrun’s house was fire-bombed and his wife and a child injured. His town is a suburb of Paris; he represents a right of centre party. The political elite supports him.
Inflation on Steroids: Wimbledon Prize Money
Using the British Inflation calculator, the original 2,000 pounds would be worth 29,000 today. So in real terms the Wimbledon winner’s prize is 81 times greater than it was in 1968. Men’s and Women’s prize were made equal in 2007.
1968 Wimbledon winners: Billie Jean King and Rod Laver.
The 1968 prize money would barely cover airfare from New York or Sydney, Australia. Laver won 11 Grand Slams and his lifetime earnings were US$1.5-million.
Bille Jean King won 12 Grand Slams and earned US$1.96- million. She played several years longer than Laver when the prize money was higher.
Un Billet pour l’Australie
A subscriber sent this story from an Australian publication about one of his kinsmen who was sent to Australia from Canada after a failed uprising in 1837-38.
This month marks the 175th anniversary of the arrival of the Canadian Exiles in Australia.
In 1837 and 1838 there were revolts in Lower Canada (now Quebec) by French Canadian Patriotes who held a number of grievances against British government rule. The uprising was severely crushed with some rebels being executed while others were sentenced to transportation. In 1840 the ship Buffalo transported 91 English speaking rebels to Port Arthur in Tasmania and another 58 French speaking Canadians to New South Wales, who arrived at Port Jackson on 25 February 1840. Originally the French Canadians were destined for Norfolk Island but the intervention of the Roman Catholic Bishop, Dr John Bede Polding resulted in the more humane option of the convicts working in Sydney, although conditions were still harsh. On 11 March 1840 the French Canadians were transferred to Longbottom Stockade, a convict depot near the present site of Concord Oval.
Their presence along the Parramatta River is recalled by the names Exile Bay, France Bay and, our city’s namesake, Canada Bay. A memorial to the Canadian Exiles was unveiled by Pierre Trudeau, Prime Minister of Canada, in Cabarita Park in 1970. The photograph shows some of the descendants of Joseph Marceau who was the only one of the exiles to remain in Australia when pardons were granted to the convicts in 1843-1844.
The memorial is now located in Bayview Park, Concord, close to where the French Canadians stepped ashore in 1840.
A Romanticized Version of the Les Patriotes
A Montreal newspaper on Tech Biggies. The`c’ is for contre, or against.
Essay of Week
It’s been several months since there has been an instalment of the Harry Steele book. This details how Harry turned around the faltering Eastern Provincial Airways, in what was the most important business victory of his career.
Chapter Eight
Making a Go of It
He who has the gold makes the rules.
— Harry Steele
From the start, Harry set about making the airline more efficient.
As the journalist Stephen Kimber points out in a 2014 article in Atlantic Business: “Steele transformed EPA’s $815,000 oper- ating loss the year he bought it into a $4.4-million profit five years later.”
Eastern Provincial Airways became the first airline in Canada to ban smoking. Along with doing the crew and passengers a favour in the health department, it also saved money. Cleaning ashtrays in every seat took a lot of time, in particular with an airline that was doing a lot of short hops.
Keeping operations tight meant finding a way to cut EPA’s Boeing 737s’ fuel burn. Doing so required finding routes that better suited them. The 737 may have been faster, more comfort- able, and safer than all the other planes that camebefore it, but it was ill-suited for many of the routes in Atlantic Canada. They were too short to allow the jet to get up to a high altitude where it could economically cruise. Many of the short hops meant the planes used too much fuel.
“If you’re flying the planes half-empty or a third full, you’re losing money. On the 737 on a thirty-minute haul, you climb and descend, you hardly have any cruising until you got some long-haul stuff,” says Harry.
In the end, the cost of fuel was cut by 10 percent, saving a million and a half dollars a year.
Under The Commander, EPA had the lowest cost structure of any airline in Canada.
That sunny piece of news hid the reality that the fleet was get- ting older; replacing the aircraft would involve a crippling expense. The person to point that out was Ivan Kilpatrick, the financial guru Harry Steele had brought to EPA. Rather than tackling that problem head on, what Harry Steele did was make the airline a valuable asset, valuable enough for another airline to buy it, before new jet aircraft were needed. That involved a couple of tough battles at EasternProvincial Airways.
First, the big airlines, Air Canada and CP Air, blocked his plans to expand to Montreal and, more importantly, Toronto.He won that battle. Unions blocked his drive for reasonable hours and lower costs. He won that battle as well.
Airlines were a cozy monopoly in the 1970s and early 1980s. Air Canada was a state-owned airline with a bloatedbureaucracy; CP Air, an arm of the giant Canadian Pacific group, the richest conglomerate in the country at the time, wasa solid number two. Neither of them wanted competition.
The Halifax to Toronto route was a lucrative run, the eighth busiest in the country, and Air Canada had it all to itself. Inthe fall of 1979, CP Air applied to the Canadian Transport Commission (CTC) to compete on that route. So did EasternProvincial Airways. The national media had never heard of this upstart airline and the man running it. Maclean’smagazine called him Barry Steele, and the Financial Post had his last name as Steel, without the E. The establishmentsided with CP Air. It looked like a cake walk. Like many government regulatory bodies, the CTC knew the big players;its members underestimated Harry Steele, as did CP Air.
Their mistake. Harry Steele went to work. He played the Atlantic Canada card to the hilt and recruited endorsements from all four Conservative premiers from the region. The hearing was held in January of 1980, right in the middle of a rare winterfederal election, as Joe Clark’s Conservatives were defeated on the issue of Finance Minister John Crosbie’s firstbudget.
At the hearing, there were twice as many people appearing for the EPA side as there were on the CP Air side. It didn’t matter, though. In April of 1980, the CTC came down on the side of CP Air. No surprise there. Ottawa bureaucrats supporting the status quo. The essence of the ruling was that the public would be better served by a large airline than asmall one: “the pres- ent and future public convenience and necessity requires the approval of the CP Air application and the denial of the EPA application.”
Harry Steele characterized it as “a kick in the teeth for all Atlantic Canadians.” While CP Air’s hired hands sat back and congratulated themselves, Harry Steele kept working. It wasn’t over until CP Air jets landed in Halifax.
Just after the hearings ended, the federal election brought back Pierre Trudeau and the Liberal Party. “Welcome to the 1980s,” said a jubilant Trudeau. Harry Steele welcomed the 1980s by lobbying the cabinet minister from Atlantic Canada in the new government.
David Bruce helped Harry acquire stock in EPA before he took control of the airline. The Toronto stockbrokerwatched as Harry built that into a success. It took more than just attention to detail at the airline. Harry also had to fightthe government to make sure EPA acquired the lucrative routes that in the end made Eastern Provincial so attractive to apotential buyer.
“When he had EPA he was really plugged in. He used to be in Ottawa at least once a week. He used to call me fromOttawa,” recalls David. “He’d see the prime minister, the minister of trans- port all the time. He was really plugged in.”
At the end of June, the ruling was reversed. Transport Minister Jean-Luc Pepin made the announcement in the House ofCommons, giving EPA and Harry Steele a major win.
The decision was cheered on by members of the federal cabinet from the Atlantic provinces: Finance Minister Allan J. MacEachen, a fluent Gaelic-speaking intellectual from Cape Breton, Nova Scotia; Minister of Labour Gerald Regan, an MP from Halifax; and Minister of National Revenue Bill Rompkey of Newfoundland — a politician who was also alieutenant in the Royal Canadian Navy reserve.
When Bill Rompkey announced the government decision at a press conference in St. John’s, Harry Steele was sittingbeside him. The press switched sides and cheered the story of the unlikely victory of the underdog. “As the smoke settlesfrom the political bombshell that blew CP Air out of the skies over Atlantic Canada, the airline may be forgiven forwondering what hit it,” wrote Southam News correspondent Brian Butters after the Cabinet decision. “What [CP Air]may eventually come to realize is that it was the unsuspecting victim of a devilishly effective piece of lobbying by some wily politicians from the east coast.”
The Halifax journalist and author Stephen Kimber says most of the lobbying was done by none other than HarrySteele.
When the EPA service to Montreal and Toronto started, there was a reception for five hundred people at the SheratonCentre in Toronto, including 115 people flown in from Atlantic Canada.
Harry’s stock market mentor, Seymour Schulich, was on the board of EPA and would soon be chairman of the holding com- pany, Newfoundland Capital Corporation; William Sobey, one of the most prominent businessmen in Atlantic Canada, joined the board; and Harry pinched an Air Canada marketing guru, William Verrier, moving him fromLondon, England, to Gander. Ivan Kilpatrick was the financial and managerial genius Harry brought on board to makesure things ran smoothly. As in the navy, Harry believed a commanding officer needed to serve with people he could trust.
Route map of Eastern Provincial Airways after its victory to expand to Montreal and Toronto.
Harry Steele was beefing up the board and management team of the once sleepy airline, and at the same time spreadinghis ten- tacles into the boardrooms of corporate Canada. It may not have been a plan, but in the rear-view mirror, it surelooks that way.
The stock price of EPA, trading around $1.85 when Harry was accumulating stock before the takeover, was trading at $18 in what investors lovingly call “a ten bagger.” That meant Harry Steele was free of the personal debt he took on to buy EPA and he had a war chest to expand.
The CTC decision resulted in EPA running numerous flights to Montreal and Toronto. With that development, it nolon- ger made sense to maintain the company’s base of operations in Gander. There was quite a kerfuffle, however, whenthe decision was made to run the airline from Halifax rather than Gander.
Discussing the issue, Rob Steele says, “EPA stayed in Gander when the airline had all those milk-run routes. Ofcourse, the airline was very high profile and a big employer in Gander at the time, but once he got those routes toToronto in the evolution of EPA, it didn’t make sense to be in Gander because he’d have to re-position aircraft toGander and it’s costly to do that. It made more sense to have a base more centrally located for his routes in Halifax. Sothat was quite a controversial thing to take the airline out of Newfoundland to Halifax. It created some real PR issues.”“But we survived,” interjects Harry, who is clearly annoyed at the suggestion that he is in any way disloyal to the town where he had a home for fifty years. “It was a tempest in a teapotfor six months or a year. Catherine [has] stayed in Gander to this day. Gander is where I do my business and Gander iswhere I vote.”
Many people would have basked in the glory of victory. Harry set about making friends with the enemy. His big rivalwas Air Canada; it was by far the dominant player. The state-owned air- line was also CP Air’s worst nightmare. It had bottomless amounts of cash. To fight Air Canada, Harry employed the old military strategy that he had seen used soeffectively in the Cold War: The enemy of my enemy is my friend.
On September 10, 1982, CP Air and EPA held a joint news conference to announce a deal that had been a year in themaking under the code name “East Meets West.” The news conference was held via satellite link from Halifax and Vancouver. Though the dual-location news conference gave the impression that it was an announcement of equals, infact, EPA had the upper hand.
“It was clear to EPA employees and anyone else who analyzed the deal that their little company had emerged as the unques- tioned winner in the battle for Atlantic Canadian skies, and that CP Air was simply being allowed to skulk quietly out of the east with its corporate tail between its legs,” wrote the author and journalist Stephen Kimber in ananalysis of the company.
There was a bonus to the agreement: in its routes to Montreal and Toronto, EPA could do a “codeshare” with CP Air, which meant passengers could fly seamlessly into the CP Air system.
“Mr. Steele said he expects the integration [with CP Air] to produce a significant increase in profit and load factor,” said an article in the Globe and Mail. “The merger should mean a big increase in EPA’s presence in the Montreal andToronto market and a renewal of its request for access to Ottawa.”
The Globe said the only benefit for the loser, CP Air, would be that EPA would funnel passengers into its routes fromMontreal and Toronto.
The future was looking bright for EPA, but, in fact, there were dark storm clouds on the horizon. Ever since Steele had bought the company, it had, in effect, been operating at two lev- els. On the public level, Eastern Provincial was the epitome of the upbeat but unlikely corporate success story so loved by jour- nalists. Eastern Provincial itself helped foster that image, which, after all, was not only truthful as far as it went but was also good for investor confidence.
That perception of the company was reinforced in the 1981 NCC annual report, which read like a glowing statistical sam- pler: “In every month, [reduced fuel use] producing an [annual] $835,000 saving to the company, while flight crew utilization improved by 9 percent in the cockpit and 6 percent in thecabin,” the report notes with pride, “we improved our boardings over last year, with an overall margin gain of 4.6 percenton boardings. We added sixty-seven million seat miles (10 percent) to our capacity and slightly increased the load factorto 56.9 percent. Boeing 737 daily utilization increased from its already high 1980 level of 9.05 hours per day to 9.29 hours per day in 1981. For the Hawker Siddeley 748, utilization improved dramatically from 3.56 hours per day to 5.16 hours per day.” And on and on.
The rate of fuel burn had been reduced. Most important, of course, was the fact that the airline’s net income had increased nearly four times over its 1980 level of $1,242,000 to $4,402,000 in 1981.
At the private level, within the upper reaches of corporate man- agement, there was a frightening recognition that the journalists’ and analysts’ rosy forecasts of future prosperity were based on a kind of smoke-and-mirrors illusion that there would simply be a continuation of the present. In fact, Eastern Provincial was already operating on borrowed time.
Shortly after he arrived at the company in 1979, Ivan Kilpatrick had discovered what he called “an absolute bomb thatwas about to go off, two bombs, in fact, one was a nuclear bomb, probably hydrogen, and the other was just an ordinarynuclear bomb.”
The ordinary nuclear bomb threat involved the company’s fleet. EPA’s jets, which had been obtained back in 1970, would soon have to be replaced. EPA had originally purchased one of these planes outright; it leased five others. When they were put in service, they were worth five million dollars each, with interest calculated at 7 percent over a fifteen-yearamortization period. Based on an estimation that the planes were flying an average of three thou- sand hours per year, the company determined that the planes were costing the airline $182.99 per hour to operate. That figure was used by EPAas a guide in setting the fares it charged passengers.
The cost to replace those airplanes, however, was three times as much as it had been in 1970, and interest on the new fifteen- million dollar price tag would have to be calculated at more than twice the 1970 interest rate, or 15 percent, and the loans them- selves would probably have to be paid off in ten years instead of fifteen.
The long and short of all the fancy number-crunching was that a plane costing $182.99 an hour to run today would soon have to be replaced by an aircraft that would cost $996.26 an hour — nearly five and a half times as much. The airline,therefore, would either have to tightly squeeze its other costs to hold down fares or push fares through the roof.
There was another solution, it seemed: EPA could sell the one plane it had purchased outright and purchase two of its five leased jets for their depreciated value of one million dollars each, thereby reducing the real replacement cost of thoseplanes. However, that seemingly attractive option was, in fact, not an option. The reality was — this was Kilpatrick’shydrogen bomb — the three remain- ing leased planes contained an option clause that virtually forced EPA to buy them back at the end of the lease period for “fair market value.” What that meant was that when the leases ran out on December 31, 1984, EPA would have to buy its own used airplanes again for more than they had originally paid for them. By the time it finished “buying” each airplane twice, it would have spent millions and it would have wound up with a twenty-five-year-old jet.
Despite those twin time bombs, Kilpatrick and Steele were undaunted. All we have to do is get the guys onside,Kilpatrick con- vinced himself at the time. They’ll see the problems. There’s lots of scope here for winning. Business looks good; we’ll simply re-finance the airline and keep going.
He had one other problem to solve first: work rules and pay for the pilots of EPA.