Air Canada Rescue Deal Wins Cautious Thumbs Up

Air Canada Rescue Deal Wins Cautious Thumbs Up:

Air Canada’s unions and creditors reacted with guarded optimism on Tuesday to a new rescue plan of the insolvent airline by Deutsche Bank.

The CAD$850 million (USD$628.7 million) agreement will provide creditors with a larger chunk of the carrier once it emerges from bankruptcy protection, but it also requires further cost-cutting efforts from reluctant unions.

“It’s a step in the right direction,” said Harvey Strosberg, an Ontario-based lawyer for Mizuho Financial, a unit of Japanese banking giant Mizuho Financial Group, and an Air Canada creditor.

General Electric Capital Aviation Services, Air Canada’s main aircraft lessor, is expected to back the deal by announcing before the end of the week an extension of a CAD$1.8 billion (USD$1.33 billion) loan package to help fund operations and purchase regional jets, a source close to the restructuring said.

The agreement between Deutsche Bank and Air Canada is seen putting its year-long restructuring back on track after Hong Kong magnate Victor Li walked away from an equity investment of CAD$650 million (USD$480.7 million) because of union opposition to pension cutbacks.

Air Canada is now hoping to emerge from bankruptcy protection by the end of September, nine months later than originally planned.

The Montreal-based carrier originally hoped to raise CAD$650 million (USD$480.7 million) by selling a third of its equity to Li. Another CAD$450 million (USD$332.8 million) was also to be raised by selling rights to its creditors to buy new shares at a discount.

Air Canada made up for the departure of Li with the revised agreement with Deutsche Bank to extend the right offering to CAD$850 million (USD$628.7 million). That leaves the airline looking for a smaller investment of about CAD$250 million (USD$184.9 million) from an equity partner.

“It will facilitate the search for a new investor,” said Captain Jean-Marc Belanger, spokesman for Air Canada Pilots Association.

UNIONS OPPOSE CUTBACKS

The agreement with Deutsche Bank is conditional on cost cut demands already meeting union resistance.

Air Canada says it is CAD$200 million (USD$147.9 million) short of the labor cost reductions of CAD$1.1 billion (USD$813.6 million) its 35,000 employees agreed to last year.

The pilots’ union, the most influential Air Canada employee group but also the most affected by cutbacks, feels they have already done enough.

“We are not convinced yet that we haven’t met our commitments,” Belanger said, adding the union is still willing to talk with airline management.

Unions officials for the flight attendants, baggage handlers and mechanics voiced similar views, but the head of the reservation and ticket agent unions categorically refused any more concessions.

“We delivered exactly what we were asked for and we won’t be delivering any more,” said Gary Fane, head of the transport section of the Canadian Auto Workers.

Air Canada stock continued to defy investment logic and rallied 9 percent on Tuesday to close up 10 Canadian cents at CAD$1.22 on the Toronto Stock Exchange.

“What part of the story do people not understand?” said Harry Koza, senior market analyst at Thomson IFR.

“The bondholders and Deutsche Bank are going to end up with 99.99 percent of the stock in the newly restructured company. The old stock is worthless, but it trades like crazy. It doesn’t make sense to me,” he said.

Air Canada bonds rose 2 cents to about 32 cents on the dollar on news of the Deutsche Bank agreement, traders said.

“I think the market is still reserving judgment on this agreement,” Koza said.
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source: http://news.airwise.com/stories/2004/04/1083100376.html