Transport Committee on June 8th, 2010

[Bonnie Crombie, Liberal, Mississauga—Streetsville, ON]

Oh, for goodness' sake.

Mr. Chairman, Mr. Watson is being obstructionist.

[The Chair, Conservative, Merv Tweed]

I think we just have to temper our comments when we're dealing with all members of the committee and witnesses. I think we're all very proud Canadians.

Mr. Volpe.

[Joe Volpe, Liberal, Eglinton—Lawrence, ON]

Well, thank you for establishing that.

Mr. Henderson, DC-10s went out of production in 1988. The two DC-10s that you claim you needed in order to provide a service, you would not have needed if that contract hadn't become available. But you needed them because each DC-10 replaces four of your 727s, I think you said. So you needed two of them, but they were mothballed in Arizona and had been there for quite some time, and Kelowna Flightcraft went out and purchased them and refurbished them.

Because Kelowna Flightcraft is represented on your board, I can only anticipate that you would have some awareness of why Kelowna Flightcraft would go out there—and this amount is in the public domain—and spend $20 million on two aircraft that have been mothballed for some time. These aircraft are the worst polluters in the world, and yet Kelowna Aircraft felt they needed to make an investment.

Was it on spec, or did they know something from inside the Purolator board that the rest of us are going to be asked to pay for through public funds?

[William Henderson]

Actually, in January of 2008, I and two colleagues in our air operations group met with Kelowna Flightcraft to begin formalizing Purolator's transition from narrow-body aircraft—the 727s—to wide-body aircraft. And this was to accomplish two things: to reduce cost, primarily, and carbon footprint. We reduced the number of aircraft flying. It does save on the number of crew and the number of handlings. And it provides less chance of interruption of service when we can overfly certain airports with the mass of our volume, which is Ontario to British Columbia.

[Joe Volpe, Liberal, Eglinton—Lawrence, ON]

So you were already making a pitch to Canada Post to replace the existing contract with Air Canada, one that hadn't already come up.

[William Henderson]

No, we weren't. The pitch was to Kelowna Flightcraft to start to transition out the narrow-body aircraft into wide-body for Purolator customers, whether they be Canada Post or all the other customers we carry in our aircraft. That would begin well in advance of this.

[Joe Volpe, Liberal, Eglinton—Lawrence, ON]

While you were preparing well in advance of this, this opportunity came up and you were able to convince Canada Post that you already had the service capability. But in your pitch to Canada Post, six members of which already sit on your board—they comprise the majority of your board—you were able to convince them that your proposal of cost plus 15% was better than their trying to negotiate the fuel surcharge with Air Canada, which already had the potential to provide everything Canada Post needed, or indeed that your proposal was much better than the continuing relationship they would have with UPS, FedEx, Cargojet, Morningstar, or anybody else with whom they already had a relationship, to provide timely service.

[William Henderson]

There are a number of questions there, and I'll be pleased to answer them all.

First, on the DC-10 and the age, there are only about two or three carriers in the entire world that buy aircraft, production freighters, new. We're not one of them. We operate on the.... It's a standard model. After an aircraft enters passenger service, following a 20-year life cycle operating as a passenger aircraft, it becomes commercially viable to reconfigure that aircraft for cargo services.

The DC-10s, while they're old, are actually newer than our 727s. Some of our 727 aircraft are 40 years old. But they're refurbished. They're taken right down to the skeletal frame, and they're like brand new aircraft when they come out.

The DC-10 for servicing Canada Post, even above a 767 or an Airbus 300-330, has the lowest cost per pound because of the size of the hull, the thrust capability of the engines, and the range. So for Canada Post—its product is so dense, so heavy—it was the ideal aircraft to operate.

The 20-year life cycle does something else. It actually lowers the capital cost to the aircraft. We lease our aircraft, so that provides a much more competitive pricing arrangement to bid with.

[Joe Volpe, Liberal, Eglinton—Lawrence, ON]

But Kelowna didn't respond to the RFI. It was Purolator and it—

[The Chair, Conservative, Merv Tweed]

I have to go to Mr. Jean. Your time is way over.

Mr. Jean.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Thank you, Mr. Chair. And thank you, gentlemen, for coming here today.

I just wanted to talk a little bit about the contract itself and what I read earlier. I understand the contract is on a cost-plus basis.

[William Henderson]

Yes.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

That's correct. And even though the Auditor General saw some possible concerns with that, it's a norm in the industry. Is that correct?

[William Henderson]

It is. It's actually normal in the air, and it's normal on the ground as well.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

In fact, the Purchasing Management Association of Canada has actually recommended cost-plus as the best return on investment for large contracts to secure over time. You're probably not aware of that, but as a member, I'm aware of that. Syncrude and Suncor and most of the oil sands plants in northern Alberta actually deal on that basis because they get a better return on investment for not only the company but also the vendor. They have long-term relationships that are very secure and very comfortable for everybody. Although there is some opportunity for overcharging in some cases, the reality is that usually there are mechanisms in place to stop that from happening, and an audit function.

[William Henderson]

There are. And on a quarterly basis, Purolator appears in front of Canada Post. We issue and review every single cost, and they'll question costs. It'll go on a day-by-day basis. So the reconciliation takes us, actually, a number of days, and it's based on that reconciliation. If there is a cost, whether it's de-icing or fuel--and jet fuel has been fairly volatile, much more so than diesel or gas—whether the weather plays a part in it, or if there are any restrictions or changes with an airport that would cause us to use different runways or change our operating schedules, they make sure it's all reconciled so we're paying exactly...and they're not paying one penny more than they should be under the terms of the contract.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

In fact in the other contractual mode, which is utilized by house builders, for instance, they usually have to put in a 10% or 15% emergency fund just in case there are discrepancies that are, in essence, beyond their control. In your case that would be the de-icing, etc., that you would have.

So this is a good return on investment, in your opinion, for Canadian taxpayers, for the shareholder of the Canadian government, for Canada Post.

Is that fair to say?

[William Henderson]

Absolutely.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

And even if it's not, my understanding is that approximately 91% of Purolator is owned by Canada Post: the people of Canada.

[William Henderson]

That's correct.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

The other 9% are Canada Post employees. Is that fair to say?

[William Henderson]

The other....

[Stewart Bacon]

They're Purolator employees.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Purolator employees: that means they actually have an incentive to do a better job--more profit and so on--for turnaround.

Ultimately, though, 91% is owned by Canada Post, the majority shareholder, in no small way, which has ultimate control, ultimately, of the board and in fact Purolator. The profits return to the shareholder of Canada Post.

Is that fair to say?

[William Henderson]

That's fair to say.