Air Canada ... Maybe not such a good example
Air Canada's problems pile up
BRENT JANG
February 19, 2009
TRANSPORTATION REPORTER
Despite lining up new lenders, Air Canada is running into investor skepticism about whether its balance sheet will be able to withstand further shocks, sending its stock to a record low yesterday.
Air Canada is facing a host of challenges this year, from funding its pension deficit and addressing cash covenants to dealing with unions and surviving the recession.
ACE Aviation Holdings Inc., which owns 75 per cent of the airline, had an initial public offering price on the airline of $21 a share in late 2006. Since then, analysts have set a wide range of 52-week target prices for Air Canada, but they have been unanimous in sharply lowering their outlook.
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The airline's class B shares fell 10 per cent to $1.16 yesterday - down 94 per cent from the IPO price, with analysts saying there isn't much hope for a recovery any time soon.
Research Capital Corp. analyst Jacques Kavafian reduced his target price for Air Canada to 25 cents from $4 after the airline reported Friday that it lost $1-billion last year.
Mr. Kavafian said it's possible that the airline could file for bankruptcy protection for the second time in six years, especially if it gets hit with a strike by unions still upset about having to make wage sacrifices during the last round of negotiations. Six-year labour contracts expire midyear.
"We're looking for stocks that are going to prosper, and Air Canada isn't going to prosper this year," said Mr. Kavafian, who notes that rival WestJet Airlines Ltd. has been making steady gains on the country's largest airline.
Analysts point to Air Canada's balance sheet, saying that with $1-billion in cash reserves and $1.33-billion from advance ticket sales (considered liabilities), the carrier has been forced to dip into those advance fares to help finance today's operations.
Having $1-billion on hand may sound like a decent cushion, but credit card covenants require that the airline maintain $1.3-billion in cash at the end of June, just as collective agreements expire, said National Bank Financial Inc. analyst David Newman.
Montreal-based Air Canada could reduce its fuel bills by up to $1.3-billion this year. But it faces debt repayments of $663-million, capital expenditures of $249-million and increased pension funding obligations of $410-million, as well as the prospect of bulking up cash deposits by up to $425-million because of minimum cash levels required under credit card arrangements, Mr. Newman said.
He lowered his 52-week target price on the carrier to $1 from $4.50, while UBS Securities Canada Inc. analyst Fadi Chamoun cut his target to $1 from $1.50. While Mr. Newman and Mr. Chamoun also envisage a possible filing for bankruptcy protection, they note that Air Canada could raise money by selling off assets. Over the past two months, the airline has lined up $641-million in new borrowing agreements.
BMO Nesbitt Burns Inc. analyst Claude Proulx played down concerns about cash covenants, saying that even under bankruptcy protection, airline tickets would still be honoured. In its previous filing for creditor protection, Air Canada kept flying through 18 months of restructuring.
"Air Canada is currently sitting on aircraft in which it has significant equity interest that could generate up to $1-billion of liquidity," he said in a research note. Mr. Proulx decreased his target price to $2 from $2.50, while RBC Dominion Securities Inc. analyst Nick Morton chopped his target to $4 from $8.
Air Canada chief executive officer Montie Brewer isn't trying to sugarcoat the seriousness of the financial squeeze. "I wish I could tell you that the outlook is rosier for the year ahead, but that is not the case," he said in a message to employees. "When times are tough and people are watching what they spend, they either don't fly or [they] hold out for a bargain fare."
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By the numbers
$1-billion
Air Canada's loss in 2008
$3.2-billion
Pension fund solvency deficit
2,345
Job cuts announced since last summer
$21
Initial public offering price in 2006 |
