Sorry about the long topic, but these are all newsworthy, and I'm not going to make four separate posts.
Air Canada reports growing cash deficit, delay in picking equity investor
TORONTO (CP) - Air Canada has run up an additional cash deficit of almost $400 million and will put off selecting a $700-million equity investor until the end of October, the insolvent airline's court-appointed monitor said late Wednesday.
In its 10th report to Ontario Superior Court, accounting firm Ernst & Young also reported that the carrier has cut 5,500 jobs since it obtained protection from creditors on April 1, crushed by a huge debt load during the travel industry downturn. The monitor said the airline needs to extend its bankruptcy-court protection under the Companies' Creditors Arrangement Act until Dec. 15 but has "made substantial progress in the first six months of the formal restructuring period."
- Canada's biggest airline (TSX:AC) has saved $66 million by repudiating 23 aircraft leases. It plans to cut its fleet by 40 aircraft.
- The annual premium for Air Canada executives' liability insurance coverage will increase by $9.5 million. The current policies cost $175 million US a year.
- 49 property leases have been repudiated or not renewed, for a forecast saving of $25.6 million in 2004.
- Renegotiating or repudiating various other contracts, including those for telecommunications, fuel and technology, has produced annual savings of $100 million.
- All known potential creditors will be sent a proof-of-claim package by Sept. 30.
Ernst & Young said the airline had a "post-filing" deficiency of $393.7 million on Aug. 31. That is the deficiency occurring after April 1 and is $91 million worse than it was on June 30.
"When combined with the amount of post-filing advance ticket sales of $489 million, the overall deficiency is significant," the monitor said in its report.
"In the event the company's restructuring is not successful and the company is liquidated, there will be limited assets available from realization to fund these post-filing deficiencies."
Air Canada had once been expected to select an equity partner by this Friday. Sources say non-binding bids were submitted last week by groups led by Texas Pacific Group of Fort Worth, Tex., and Cerberus Capital Management LP of New York.
A group of 14 financial creditors led by Mizuho International has also proposed to bid on the airline's equity. The Mizuho proposal did not say what percentage of the airline is sought for the $700-million infusion.
Sources say creditors holding $1 billion in Air Canada bonds and bank debt will likely seek less than 25 per cent of the equity, while other investors are believed to be asking for 25 to 50 per cent.
The company has in place about $600 million in financing from GE Capital.
Ottawa seeks input on Air Canada plan
The federal government has hired Deloitte & Touche as a financial adviser to provide an opinion on whether Air Canada's restructuring plan will fly.
Sources say Deloitte is working on behalf of Transport Canada, studying the proposed business plan that the insolvent airline has provided to potential equity investors. "Deloitte & Touche's role is to give us a professional opinion on the financial viability of Air Canada today, as it goes forward and as it is being proposed in any new arrangements," a government source said.
When Air Canada finalizes its plan of arrangement, Deloitte & Touche may also deconstruct the airline's proposed ownership structure to ensure that control of the airline remains in Canadian hands. "Anything to deal with the finances and financial structure, Deloitte & Touche would be involved in. How that applies to foreign ownership comes to us," the source said. Federal officials are concerned that Air Canada may try to close a deal that will run afoul of foreign ownership regulations.
"If this were to happen, Canada would be vulnerable and Air Canada's entire business plan could be undermined by this," a government source said.
Air Canada is in talks with a number of potential investors over a plan to raise $700-million in new equity.
It is understood the airline is focusing on what one insider described as "three serious bids." A shortlist of bidders could be announced as early as tomorrowafternoon.
But foreign ownership restrictions could pose a challenge because much of the interest has come from south of the border.
Canadian law states that foreign investors can't own more than 25 per cent of the voting shares in a Canadian airline. It also states that "effective control" must be in Canadian hands.
Air Canada's new ownership structure must follow a strict interpretation of this law, government officials say, because Canada's bilateral aviation agreements stipulate that airlines using Canada's international route rights must be owned and effectively controlled by Canadians.
Federal officials say these international agreements leave them no room to alter the limits on foreign control.
"If, as a result of the restructuring, Air Canada were not owned and controlled by Canadians, we would do our best to attempt to ensure its acceptance as a Canadian airline, but this is pretty tough. And I'm not really optimistic that we'd get away with it," one source said .
"In the worst case scenario, Canada might have to pay exorbitant sums of money just to ensure that Air Canada can continue to serve its current international network. We would really have a problem."
Transport Minister David Collenette told reporters last week that he has received assurances from officials at Air Canada that the restructuring will involve a "made-in-Canada" solution.
"They are well aware of what the law is and they have given us no grounds to believe that they feel there should be a change, so I'm heartened that whatever happens will happen within government policy and the law as it exists," the minister said.
Sources close to Air Canada said the airline is considering a dual-class share structure in order to abide by the equity limits. The bigger issue is how to abide by restrictions on foreign control.
It is normally the job of the Canadian Transportation Agency, a federal regulator, to ensure that the foreign ownership rules are followed.
But Air Canada's bankruptcy protection under the Companies' Creditors Arrangement Act raises questions about when and if the CTA will be able to study the restructuring plan.
"We're in a bit of uncharted territory because we haven't gone through this with a major airline before," said another government source.
The source said that after Deloitte & Touche studies the proposed plan of arrangement, government lawyers may make representations in the restructuring proceedings "to make sure that the court understands what the law is. The court doesn't have the competence to make a ruling on effective control."
Air Canada also filed court documents yesterday requesting that the Ontario Superior Court extend its bankruptcy protection period until Dec.15. The motion will be heard in court on Monday.
Air Canada plans to expand extra-cost meals
MONTREAL -- Air Canada says its pay-as-you-go, on-board meal service has been so successful it wants to expand it to short flights and transborder routes.
Passengers travelling up to one hour 45 minutes on Air Canada and travellers to the U.S. could soon find their free pack of pretzels replaced with a mini restaurant-style menu, said Brad Moore, director of inflight services for Air Canada.
"We want to explore expanding it," Mr. Moore said in an interview.
He said the next step is introducing restaurant-style service on the shortest routes "because that's the place where customers are identifying the most need." After that, the airline will look at widening the offering to all short and midrange flights to the U.S. He provided no timeline for the changes.
"Customers have reacted very positively to the meals on board," Mr. Moore said.
American Airlines said Tuesday it has started a test program selling meals to passengers at some airport gates. An official with Air Transat, Canada's biggest charter airline, said it is also evaluating changes to its meal system.
Two months ago, Air Canada introduced what it calls "restaurant-quality" fare -- such as $8 chicken wings -- that passengers can buy on medium-range flights of between one hour 45 minutes and three hours 30 minutes. The service replaced free sandwiches the airline handed out or, in some cases, no food at all.
Cara Operations Ltd., a Toronto company that owns the Swiss Chalet, Harvey's and Second Cup chains, was contracted to make the new meals. The company is believed to be taking at least some, and possibly all, of the financial risk associated with the service.
Still, some industry watchers are questioning Air Canada's new food system, arguing none of its low-cost domestic competitors has restaurant food.
They also note that several major U.S. carriers tried buy-on-board meals with mixed results. The main problem is how to predict how many meals to dedicate to each flight, losing money if you've got too much, and dealing with angry customers if you've got too little.
America West, which has tested the system but hasn't yet decided whether to adopt it, said it struggled with unpredictable passenger behaviour that made it impossible to determine how much food to put on a flight. Sales varied from eight per cent to 80 per cent of passengers buying the meals, said a spokesperson. "There wasn't really any rhyme or reason to the variation."
Air Canada claims it's having success with its forecasting.
The airline does weekly evaluations of its meal requirements, Mr. Moore said. It knows, for example, that passengers on the Toronto-Halifax route are always hungry for lunch. And it knows that customers almost never go for food in the midmorning.
Air Canada probe taking 'too long': watchdog
The acting head of the Competition Bureau admits its case against Air Canada for predatory pricing is taking "way too long" but dismissed suggestions those delays are making the federal watchdog irrelevant.
Gaston Jorre acknowledged Wednesday that the case has been before the competition tribunal for about two years because of delays linked with the Sept. 11 terrorist attacks and one of the tribunal panelists falling ill. Now the case is stalled once again after Air Canada filed for bankruptcy protection in April.
But Jorre said progress is being made, with a preliminary ruling this summer setting out the ground rules for airfare pricing.
"It took way too long," Jorre said during a meeting with the Calgary Herald's editorial board.
"But at least we're very pleased with the outcome because I think it's a very clear guideline to a dominant carrier on how we measure predation."
WestJet Airlines Ltd., which is intervening in the case, said the latest delay is especially frustrating, since the ruling can't currently be enforced.
"It's a hopeless process," said Clive Beddoe, chief executive of the Calgary-based discount carrier.
"Because of Air Canada's bankruptcy protection it appears that the judge has said they are exempt from any interference from the competition bureau while this bankruptcy is going on -- essentially they've got free rein to do what they like."
In July, the federal Competition Tribunal ruled Air Canada cut prices below its cost on two routes in Atlantic Canada in the first phase of an application by the Competition Bureau
accusing the airline of predatory pricing.
In a preliminary report, the tribunal found Air Canada operated or increased capacity at fares that did not cover "avoidable" costs of providing service on flights between Toronto and Moncton and between Halifax and Montreal from April 1, 2000 to March 5, 2001.
Avoidable costs refer to items that would not have cost the company if there was no flight, such as jet fuel or certain staff wages. Unavoidable costs are items such as salaries for executives that the company has to pay to run its business.
However, the tribunal said this was not in itself enough to prove Air Canada abused its position.
The tribunal has stayed application of the order pending the resolution of the reorganization of Air Canada, Jorre said.
Once the stay is lifted, Air Canada can appeal the decision before the hearing can enter its second phase, in which the tribunal must decide if the airline is dominant and if Air Canada's actions resulted in a substantial lessening of competition.
Jorre also noted the delays faced in the Air Canada case were unusual, pointing out the bureau has a much faster turnaround on the vast majority of complaints. Litigation is always a lengthy process, he added.