Air Canada seeks bankruptcy protection

Troubled airline has secured $700 million (U.S.) to finance restructuring

ALLAN SWIFT
CANADIAN PRESS

MONTREAL – Debt-laden Air Canada asked an Ontario court today for bankruptcy-protection, which would allow it to continue operating while negotiating a survival plan with employees, creditors and other stakeholders.
“Air Canada is determined to do all in its power to restructure itself through this process and emerge as a world-class competitive and profitable airline,” Robert Peterson, the carrier’s chief financial officer, said in a sworn affidavit submitted to the Ontario Superior Court of Justice in Toronto.

In its court filing, Air Canada revealed it had secured $700 million (U.S.) in possession financing from GE Capital – one of the world’s biggest industrial lenders – to keep the airline operating while it restructures.

The airline also said a deal to sell 35 per cent of its Aeroplan frequent-flier rewards program to Onex Corp. has been called off, although Toronto-based Onex will have a 30-day exclusive right to renegotiate a new deal.

For customers and the travelling public, it will be business as usual while the court process goes on over the next several months, the Montreal carrier said.

“I firmly believe Air Canada has an exciting future ahead of it and will continue to lead its peers in establishing a stable and profitable network carrier servicing Canadians and the world in the new low-cost competitive environment,” Peterson said.

While Air Canada has recently faced intense competition from smaller domestic no-frills carriers, particularly WestJet Airlines of Calgary, it typically considers its “peers” to be other full-service carriers with international routes.

In the United States, they would include American Airlines – the world’s largest airline – as well as United Airlines, currently operating under court-protection from creditors.

Under a restructuring, Air Canada’s shareholders could he badly hurt, with little value left in the company’s shares. The stock was halted before markets opened Tuesday and there was no indication when trading would resume.

On Monday, Air Canada stock hit a new 52-week low of $2.11, down 15 per cent for the day. Its shares used to trade in the low-20s about two years ago, before the industry was battered by a weak U.S. economy and the fundamental changes to air travel after the Sept. 11, 2001 terrorist attacks.

The airline’s bonds have been trading at 18 cents on the dollar.

Air Canada’s request for court-protection came a day after two major unions said they accepted a total of 2,300 job cuts affecting their members, as part of a 3,600-employee downsizing announced March 20 by Air Canada president and chief executive Robert Milton.

The bankruptcy-court filing had been anticipated by industry observers as the war in Iraq compounded already deep financial problems due to intense domestic competition, rising costs and a weakening economy in recent months.

As of Dec. 31, Air Canada owed about $12.9 billion in long-term debt and leases. It also lost $428 million last year, bringing the total to more than $1.7 billion since its last profitable year in 1999.

At the end of last year, the airline had $604 million in cash, cash equivalents and committed financing. However, analysts have said Air Canada’s cash resources have likely dwindled substantially in the first three months of this year – a tough period for all airlines, particularly those with international routes – and probably won’t be enough to meet its needs.

By filing under the Companies Creditors Arrangement Act – a federal law that’s roughly similar to a Chapter 11 filing under the U.S. bankruptcy code – the company hopes to work out new deals with its various creditors, unions and other stakeholders.

On Monday, Transport Minister David Collenette said he won’t provide a cash bailout for Air Canada. But Collenette has also said the federal government is committed to the survival of Canada’s largest airline in some form or another.

One possibility would be hundreds of millions of dollars in loan guarantees. That would help the company borrow money since lenders would be reassured that Ottawa would guarantee the repayment if Air Canada cannot.

Such an offer was made by Collenette in late 2001 to Canada 3000, after the Sept. 11 terrorist hijackings in the United States resulted in a staggering drop in passenger traffic.

However, Collenette also attached conditions that Canada 3000 was unable to meet. The Toronto-based airline, at the time Canada’s second-largest but only one-tenth the size of Air Canada, abruptly stopped flying in November 2001.

Hopefully AC can pull out of this. I think the head of the company, Robert Milton, has to go.