Transport Committee on June 8th, 2010

[William Henderson]

The CFL provides us with the weight of these--

[The Chair, Conservative, Merv Tweed]

If I may, we are discussing the operations of Purolator, and I wouldn't call it a point of order.

Ms. Brown.

[Lois Brown, Conservative, Newmarket—Aurora, ON]

Mr. Chair, we're talking about their corporate contribution. They are a Canadian company that gives tremendously to our country.

[The Chair, Conservative, Merv Tweed]

Ms. Brown, you have about one minute left.

[Lois Brown, Conservative, Newmarket—Aurora, ON]

Thank you, Mr. Chair.

I just want to get to the third point you talked about, your hybrid vehicles. Again, you're looking at a contribution to the Canadian economy. Can you talk about your program with the hybrid vehicles?

[William Henderson]

Around 2003 we entered into arrangements with Azure Dynamics Corporation, a company that was born out of UBC, to provide the technology. We invested that without government funding. About five years into the program we did receive about $1.5 million in Ontario for funding, but to this day the funding has been exhausted. We still invest in the vehicles, which are probably at about a 20% premium. We keep our vehicles for 10 years, and they save about 40% on emissions and 30% on fuel.

When we go into a lot of the hospitals we serve, our people are able to put the vehicle on full electric to reduce the noise. Our customers are actually pretty pleased at our investment in that. And each year we will grow that fleet.

[Lois Brown, Conservative, Newmarket—Aurora, ON]

So employee buy-in--

[The Chair, Conservative, Merv Tweed]

Thank you. I have to stop there.

Mr. Volpe.

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

Thank you very much, Mr. Chairman.

I'm going to go back, Mr. Henderson, to what you said earlier about always acting in the best interests of Purolator. Canada Post always acts in the best interests of Canada Post. Kelowna Flightcraft always acts in the best interests of Kelowna Flightcraft.

The reason I put all three of them together is that they all converge on your board. So you can appreciate that from our perspective the question of transparency is important.

You also said that in 2007 you had already started to reconfigure your capacity to deliver service. In 2008, Kelowna went out and acquired two wide-bodied airplanes. They must have anticipated, if they were looking out for their best interests, a growth in business that would justify the acquisition costs. In 2009, a contract became available. It was initially resident with Air Canada, but some of the overflow would go to you, Cargojet, FedEx, UPS, and Morningstar. So it wasn't a big deal, but that was part of the contract.

You responded to an RFI, and just a moment ago you said that people south of the border were surprised that you could actually provide appropriate service within 120 days. Acting in the best interests of Purolator, you must have given assurances. You must have given assurances knowing already that Kelowna Flightcraft had the wide-bodied capacity you thought you would need. Canada Post, thinking about the best interests of Canada Post, said, “We're not going to renegotiate with Air Canada. Instead of asking for an extension...so the rest of the world, which thinks we can't provide services within 120 days, can go to pot.”

What percentage of those wide-bodied DC-10s are utilized by Canada Post?

[William Henderson]

The DC-10s right now are used exclusively for Canada Post.

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

Kelowna Flightcraft doesn't use those two airplanes for anything else?

[William Henderson]

They don't right now. In the contract there is a provision that if Purolator or Kelowna wants to use them, we have to return the operating costs and cover those costs, so the aircraft are not used on the backbone of that contract.

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

In your 21-year experience, are you in the habit of giving any of your suppliers a cost-plus contract without keeping track of the limits on those costs?

[William Henderson]

Any contract where there's a cost-plus arrangement is always structured for audit rights. In each quarter we actually sit down with Canada Post and go through that. We also sit down with Kelowna Flightcraft and go through the full audit of all their costs to make sure that neither Canada Post nor Purolator is paying any more to Kelowna Flightcraft than they should.

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

So Canada Post approached Purolator and said they didn't want to pay the additional fuel service charges that Air Canada wanted to impose on them, presumably to reflect the true cost of jet fuel--by “true cost”, I mean, of course, the cost that Purolator or Kelowna would have to pay--but they'd be happy to give you a cost-plus arrangement.

Did that cost-plus arrangement include or reflect the true cost of jet fuel, as indicated or being paid by Air Canada, and now to be paid by Purolator and Kelowna?

[William Henderson]

I can't answer about the contract between Air Canada and Canada Post. I don't know about the discussions Air Canada and Canada Post had regarding the fuel because it was never explained.

It was simple: here's an RFI that was issued into the marketplace. Respond to carry that much product based on this schedule. Here's the timeframe you have to do that.

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

But you would agree that now there are two other companies, Purolator and Kelowna, that incur costs as they try to provide a service. So the overall cost for Canada Post would have been greater than the cost they would have incurred or were incurring with Air Canada.

Now, you might not be able to answer that, but Mr. Bacon, who's on the board, perhaps could.

[William Henderson]

Sorry, sir, I can, because how you structured the question is incorrect.

It's one company. Purolator responded to the RFI; it was not Kelowna Flightcraft. As we outsource, as I explained earlier, both trucking and on the air side, we will use contractors to fulfill our airlift needs and our ground transportation needs with one company.

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

With all due respect, Mr. Henderson, my question was crafted correctly, because you had agreed initially that Kelowna Flightcraft sits on your board. And because they are represented on your board, and own 7%, roughly, of your company, I have to deal with them as a separate company, or I have to deal with them as one integrated company.

I'm just wondering, for Mr. Bacon, because he's the chairman of the board that had to eventually approve such a contract—I can't imagine it would have been an insignificant contract—whether in fact those considerations were brought to bear on the decisions made by the board members, six of whom were at Canada Post, one at Kelowna Flightcraft, and three were independent. I guess you must have been one of the independent ones.

[Stewart Bacon]

Four, including me.

Let me just respond. First of all, I was not there at the time this decision was taken, so I wasn't personally involved. But I would just refer back to the transcript, if I might, about the elements of the Air Canada issue. You've been focusing very heavily on the fuel, and that was one of them, but there were other aspects. There were volume discounts, there were guaranteed commitments for space, and so on, which all add up to the total end cost.

So I think it would be wrong just to say we're talking about how the fuel in a cost-plus agreement was managed.

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

But it's the one that triggered the renegotiation or the desire to renegotiate.

[Stewart Bacon]

Well, according to the transcript, I think there were multiple elements in that discussion. I wasn't in the discussion, but just by reading the transcript....

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

Well, I was here when the transcripts were being transcribed. That was the issue, and all the others were added into the mix.

Now, I realize that you're at a little bit of a disadvantage because you weren't in the room when the board made the decisions, but I think you can appreciate that those of us who are looking for accountability and transparency might have a legitimate question.

The legitimate consequence of those questions, Mr. Bacon, is this. In order to provide for transparency and accountability, would you be prepared, on behalf of your board, to open up the last four years of the contract to a public process, to a public bidding process?

[Stewart Bacon]

Certainly we would be prepared to compete for this business the way we competed and won it the last go-around, when the time comes to do that.

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

You didn't go to an RFP.