Canada Post has, first and foremost, a very big mission and a mandate to deliver the mail to every Canadian in every part of Canada every business day. It’s a huge operation. About 45 million pieces of mail have to get to 15 million mailboxes every day.
This is an immense country, and we therefore rely on a very extensive and complex transportation network in order to deliver on that mission. In fact, it’s probably the biggest and the most complex transportation network in the country operated by any provider of service, and transportation by air is a critical component. Without planes, the mail does not get delivered and our service obligations to Canadians do not get met.
For decades Canada Post has had a business relationship with Air Canada to transport domestic and international mail. On April 30, 2008, we received an e-mail from Air Canada. I have copies of that e-mail that I’d like to share with you, and you can read it the way I did. The e-mail demanded that we change the existing agreement that Air Canada had with Canada Post to include five new provisions: first, to change the fuel surcharge from 25% to 100%; second, to increase base rates by 2.5% annually; third, to discontinue a well-established volume rebate that had been in place; fourth, to guarantee them 75% utilization, meaning that they wanted us to pay for space on their planes whether we used it or not; and finally, to increase international volumes on Air Canada.
We were told to “respond, agree, or negotiate” by May 16, or Air Canada would give Canada Post a notice of termination. These demands would have driven a significant cost increase in our air network system; in fact, there would have been about $15 million in additional costs per year. This is, of course, prohibitive. As our shareholder, you know the financial condition of Canada Post.
On May 16, 2008, we received a fax from Air Canada. The fax began, “Dear Sir/Madam”. It was to formally advise that we were being given 120 days’ notice of termination of the contract, so we had until September 13, ladies and gentlemen, to recreate the entire air network that we need to get the mail out every day. Normally, something like this would take well in excess of six months, maybe even a year, given the breadth and scale of Canada Post’s operation.
We met with Air Canada. Our people discussed and tried to extend the notice period, but it became obvious from the tone and specifics of our exchanges that Air Canada no longer wanted Canada Post’s domestic business.
An interim extension of our Air Canada contract would have required significant additional financial commitments. This was neither reasonable nor viable, and it was pretty clear that our differences were irreconcilable.
As a company, we have an obligation to Canadians to get them their mail. It is up to us to work out how to do it, but our obligation to them is plain, and it is understood by all: deliver the mail. We had to act very quickly and we had to act appropriately to avoid a major disruption in mail service. It is very important to note, Mr. Chairman, that when this actually happened, we were headed into our busiest time of the year, which is from September to the peak of the Christmas season.
We turned to Purolator Courier. Purolator Courier is a very important member of the Canada Post group of companies. It is 92.96% owned by Canada Post. It has already been an established and well-regarded supplier of transportation services to Canada Post; in fact, it’s been a supplier since 1993, and we had a great deal of confidence in our subsidiary's ability--Purolator's ability--to keep the mail moving.
Because Purolator is part of the Canada Post group of companies, its profit is, of course, consolidated into Canada Post. Purolator continues to contribute very significantly to the overall business of Canada Post. It is not just the air network, which is a critically important component in our ability to fulfill our mission; Purolator also has access to tarmacs, and its air network management capabilities are excellent. They can actually orchestrate a lift of this magnitude every business day. We're talking about 150,000 pounds of mail every business day, going all across the country. Canada Post transports 72 million pounds of mail by air every year, and we need aircraft that are large enough to meet those needs.
It is standard business practice for companies to enter into business transactions with their subsidiaries. That is commonplace. These transactions provide efficiencies, economies of scale and cost savings to one or both parties and can be a source of value-creation for shareholders.
Before we entered into the contract with our subsidiary, Canada Post engaged in a request for information. We are in the business. We have been in this business for decades. We know who participates in this business and we know who can supply to these very demanding requirements that we have to get the mail out. Nevertheless, we like to update our market intelligence, so we engaged in a request for information to investigate whether other solutions were feasible in the very short timeframe that we're talking about here.
The request for information was sent to four qualified air cargo suppliers: Cargojet, Esposito Logistics Services, First Air, and Purolator. Because we were in a high-risk situation, we selected companies that we do business with now. This is a major component of our ability to fulfill our mission.
Our conclusion at the end of this process was that Purolator could best meet all of our operational requirements within these restricted timeframes.
I'd also like to remind the committee, Mr. Tweed, that we have been moving mail by air for a very long time, so we have a lot of experience that enables us to first articulate our demanding requirements and then assess who is going to be capable of meeting them. I'm pleased to report that the transfer from Air Canada to Purolator was handled seamlessly. I don't think any of our customers knew what an extensive change in our operation we managed to orchestrate, and it was a very big change indeed. We were dedicated to doing it properly because of our obligation to get those 45 million pieces of mail out every day. We were able to reconstruct our entire transportation network inside the 120 days. I cannot really imagine the implications for Canadians if there had been disruptions in mail delivery as a result of the break in this air services contract.
It is now six months into the operation of our new air transportation network. The movement of domestic mail by air is more efficient, and Canada Post's overall costs are now lower than they would have been with Air Canada. We now have control over our whole lift process.
I believe that the process we followed in this contract with Purolator was appropriate, as was the outcome. They resulted in continued excellent service and value for Canadians. We're very satisfied with the result. We feel our approach has created value for Canadians; value for our shareholder, the Government of Canada; and value for Canada Post.
Thank you, Mr. Chairman.
