Air Canada Second Trip to C.C.A.A.?

[Raymond Hall]

Hertz filed for bankruptcy in US and Canada this weekend. Numbers. That is what economic performance is about, and Hertz simply didn't have the financial numbers or the forecast of the financial numbers to do otherwise.

So where is Air Canada in that regard?

Although Air Canada reports that it has nearly $7 billion in cash to get it through the next two quarters, it has shut down close to 90% of its operations, parked the majority of its airplanes and laid off most of its employees. The Business Development Bank of Canada predicts that economic recovery won't be sustained until early next year, at the earliest. Tough times. Will Air Canada's cash in hand be enough to get it through until the economy improves and cash flow turns positive?

As I see it, consumer confidence and customer travel plans are going to be on hold for a long, long time to come—longer than after 9/11. And with the Canada-USA border closed indefinitely for non-essential travel, in combination with the 14-day quarantine restrictions in many of the Provinces, it will be some time before business travel picks up at all.

Government bailouts for the airlines are indeed likely, but will that suffice? Where will the stock price be at the end of the summer? AC stock is currently trading at around $17, down from over $50 in January. But it is not inconceivable at all that a more realistic price, given the forecast circumstances, might be in the range of $5.00. And if it is forced to enter C.C.A.A., as it was in 2003? $0.00. Zero dollars! Worthless.

Personally, my biggest stock market investment mistakes have been a result of maintaining a hope that a depressed stock price, showing me a loss on paper, could be overcome by waiting for the stock to recover, and then by failing to bail out before the stock tanked even further.

One has to ask oneself, "As of today", "what are the realistic prospects that any given stock will recover?" "Should I take a loss now, because it is only going to get worse?" My answer? "There is 100% certainty in cash." Cash out now. Buy back in later, after it drops, if you feel comfortable at that point.

I truly wish Air Canada the best. And I fully believe in the magnificent performance of its present senior management. But that is separate from my choice as to in which basket I want to place my investment eggs. Circumstances are truly not good for airlines right now, and holding their stocks is not a good idea, in my mind, regardless of how much I am in love with the companies, and regardless of what they have given me in the past. Investment-wise? It's time to bail.

[Thank me for this, later].

[Squid]

I tend to agree. A lot of other posters base their assumptions that the recovery will be quick. I don’t think it will be. Watching other indicators around the country and world such as tge reluctance to open our own provincial borders. Our burn rate of cash seems to have a consensus of 25-30 mil per day. We have drawn our credits and doing the typical lease back manoeuvres. The loans don’t seem attractive from the government so where does that leave you by the fall? Approaching a very critical bunch of decisions. Our decisions coincidentally seem to lag way behind those of WestJet too. I get it we are larger but we are less reactive and slower to respond. There will be deeper cuts come fall and the pilot MOA will be a target. We haven’t reached the bottom yet and I agree with those who say cost is king and we have never been super at cost. We’ve made huge inroads but still not as nimble as our smaller competitors. Has anyone else notice the confidence eroding from Calin et al as time goes on? We were crowing hard about our cash on hand at the beginning but that tone has changed in recent weeks.

[red 5]

The cash burn will slow with an uptick of bookings however Rousseau (cfo) could not tell when we get to zero . United said in the fall their cash burn would be zero . We still have a cash but yes the pilot group imho will be decimated in the fall ,
Probably 1100 pilots when all said and done for the 25 per cent forecast flying . I have friends who have not flown for almost 5 weeks 787 F/o so one does not need to be an analyst to see what’s in front of them . This will be a slow recovery and the quarantine on each end will kill travel for now . Hope my assumptions will be found wrong however I’m not hopeful .

[rudder]

I would still assign low probability to an AC CCAA filing. Perhaps 20%. And that would only be triggered by a total non-recovery of travel demand by the end of 2020 carrying in to 2021.

Almost none of the same triggers as the 2003 filing exist in 2020. And the benefits that would be derived are certainly less evident.

AC would end up in CCAA only as a last resort with no other options and with a plan to shrink the airline by 50% on a semi-permanent basis. It would involve abandoning a massive amount of international flying. Unlikely but one cannot say out of the question.

[WhatThe?]

I am a low seniority 787 FO and i've flow twice in the last 2 weeks. Your buddy must be passing....

[Doug Moore]

No one knows where this pandemic is taking us and that includes the highly overpaid suits at AC who don’t know either. However, if they are worth their keep then they are burning the midnight oil right now developing plans around different scenarios (for a second wave, or things staying the same, or when things start to get better with the development of a vaccine, or with no vaccine, etc. etc.). Those of us watching and waiting for what happens next are just along for the ride.

It is telling that Warren Buffett sold all his airline stocks just a few weeks ago. He and his team don’t like the outlook for any airline. Ray’s advice above re AC stocks is good advice, albeit a tad late.

I am hesitant to offer any unsolicited advice of my own, but in these unprecedented times I will take a chance and throw it out there anyway - on a different topic. Your employment.

I suspect that significant layoffs are in the cards for many, if not all employee groups. For pilots, it wouldn’t surprise me if the entire bottom third of the list is at risk. If you’re in that group then you have a choice: wait for the lay-off notice or seek alternate employment now. No need to quit, if you do find alternate employment (and it most likely won’t be flying) then ask for a Leave of Absence, which I’m sure the company would be more than happy to oblige. I realize that finding employment elsewhere is exceedingly difficult but it won’t be any easier with a layoff notice in your mailbox.

I’ve been there. With a wife, 2 kids and a mortgage, I was laid off for 2 years and 9 months during the recession of the early ‘80’s. Didn’t fly. It wasn’t easy but we got through it. You will get through this one too.

[FL-200]

We need to stop saying “7 billion in available credit” and start saying $5 billion. Cash burn was about $600mil/month last time I checked in April. The $2 billion in pension over funding I’m sure isn’t there after the stock market tumble, but I can’t confirm that.

AC has a lot of fat to burn. They could sell and lease back some aircraft like United is doing, raid the pension fund or do a high interest public bond offering like Norwegian Cruise did.

bookings will pick up at some point, which will help delay default. I can’t see AC going into bankruptcy protection in 2020. Maybe that’ll be a 2021 thing? Hopefully not.

As for the stock price, I can’t explain why it’s still double digit. We’re trading around 1x book value, if AC starts selling off aircraft for lease backs, the book value will tumble and so will the stock price.

[rudder]

We need to stop saying “7 billion in available credit” and start saying $5 billion. Cash burn was about $600mil/month last time I checked in April. The $2 billion in pension over funding I’m sure isn’t there after the stock market tumble, but I can’t confirm that.

AC has a lot of fat to burn. They could sell and lease back some aircraft like United is doing, raid the pension fund or do a high interest public bond offering like Norwegian Cruise did.

bookings will pick up at some point, which will help delay default. I can’t see AC going into bankruptcy protection in 2020. Maybe that’ll be a 2021 thing? Hopefully not.

As for the stock price, I can’t explain why it’s still double digit. We’re trading around 1x book value, if AC starts selling off aircraft for lease backs, the book value will tumble and so will the stock price.

Couple of things.

In Canada, there is no such thing as ‘raiding the pension fund’. Those funds are inaccessible to the employer and inaccessible to creditors. At last report, the plan is overfunded and that simply means that company ongoing contributions are minimal.

Sale and leaseback? Where aircraft have value (newer), AC has already been doing that. It is in the latest MD&A report as well as discussed during the Q1 analyst call.

AC is currently burning a high amount if cash per day. That must change. AC will set a cash cushion level and it will be that which triggers any potential CCAA filing. That number is probably around $2.5B

And as for stock value - with airlines it is rarely about value. It is about emotion and optimism/pessimism. The airline industry has historically been one of the greatest destroyers of capital.

[red 5]

787 f/O Yul based no flying . He will be time x take off landing soon . Don’t think he’s passing the flights ,
Not what he told me .

[Fanblade]

Personally, my biggest stock market investment mistakes have been a result of maintaining a hope that a depressed stock price, showing me a loss on paper, could be overcome by waiting for the stock to recover, and then by failing to bail out before the stock tanked even further.

One has to ask oneself, "As of today", "what are the realistic prospects that any given stock will recover?" "Should I take a loss now, because it is only going to get worse?" My answer? "There is 100% certainty in cash." Cash out now. Buy back in later, after it drops, if you feel comfortable at that point.

I truly wish Air Canada the best. And I fully believe in the magnificent performance of its present senior management. But that is separate from my choice as to in which basket I want to place my investment eggs. Circumstances are truly not good for airlines right now, and holding their stocks is not a good idea, in my mind, regardless of how much I am in love with the companies, and regardless of what they have given me in the past. Investment-wise? It's time to bail.

[Thank me for this, later].

Selling into a stock market downturn is a great way to destroy your financial future. If you feel the need to sell into a down market and lock in your losses, your stock choice was in error to begin with.

The airline sector is notorious for cash destruction from black swan events. Terrorism, war, pandemic, oil shock, recession. You name it. If you wouldn’t hold a stock through these types of inevitable shocks then you shouldn’t be holding it at all. The intense capital nature of the sector combined with its inherent inability to adapt to a rapidly changing environment make airline stocks risky. All the time. Not just now.

In fact holding airline stock long enough virtually guarantees pain at some point. With that said with the inherent risk comes short term rapid valuation growth. And that is the enticement.

I’m a long term set it and forget it investor so airline stock is not an appropriate vehicle for me. I have done ESOP in the past but immediately sell after match.

[Fanblade]

787 f/O Yul based no flying . He will be time x take off landing soon . Don’t think he’s passing the flights ,
Not what he told me .

AC is operating at 5% right now. Or at least was. Spread evenly among the pilot group that works out to an average of 4 hours a month per pilot. Yes there are issues with licensing as a result.

But this is May 26. It was a news headline 2 months ago. Judging from the flying I see we are just starting to rebound off bottom. Frequencies on some city pairs starting to increase. I’m domestic though and we should see that rebound first anyway.

[altiplano]

We need to stop saying “7 billion in available credit” and start saying $5 billion. Cash burn was about $600mil/month last time I checked in April.

FWIW, Rousseau said the Federal wage subsidy is not included in the 20-22 million/day cash burn calculation they detailed in the Q1 call.

[rudder]

We need to stop saying “7 billion in available credit” and start saying $5 billion. Cash burn was about $600mil/month last time I checked in April.

FWIW, Rousseau said the Federal wage subsidy is not included in the 20-22 million/day cash burn calculation they detailed in the Q1 call.

Rousseau also said that the CEWS represented approximately $35-40MM per month. That is just $1.1-1.3MM per day.

With AC opting out of CEWS, the subsidy will end June 06.

[FL-200]

I’m a long term set it and forget it investor so airline stock is not an appropriate vehicle for me. I have done ESOP in the past but immediately sell after match.

It’s nice to see how much consensus there is about ESOP. Sell when you get your match. Or sell enough to get your employee contribution out of the market and leave the employer contribution to ride into the sunset.

[Raymond Hall]

...wait for the lay-off notice or seek alternate employment now. No need to quit, if you do find alternate employment (and it most likely won’t be flying) then ask for a Leave of Absence, which I’m sure the company would be more than happy to oblige. I realize that finding employment elsewhere is exceedingly difficult but it won’t be any easier with a layoff notice in your mailbox.

Right now there are lots of jobs available—for Amazon warehouse positions and for bankruptcy lawyers.

[Big Pistons Forever]

CCAA is a game of chicken between a company and its debt holders. Generally everyone loses in CCAA so it is what companies do when they run out of options to service their debt and costs of operations.

Personally I think CR will do his best to not go there but the reality of virtually no revenue with unavoidable continuation of significant costs will absent a significant government bailout or an almost magical return to a reasonable level of operations, inevitably put the company up against the wall....

[Inverted2]

...wait for the lay-off notice or seek alternate employment now. No need to quit, if you do find alternate employment (and it most likely won’t be flying) then ask for a Leave of Absence, which I’m sure the company would be more than happy to oblige. I realize that finding employment elsewhere is exceedingly difficult but it won’t be any easier with a layoff notice in your mailbox.

Right now there are lots of jobs available—for Amazon warehouse positions and for bankruptcy lawyers.

Yep, and repo companies are going to be busy. I don’t know how those who are mortgaged to the hills and have 2 brand new vehicles on the driveway are going to make it. I am fortunate to have paid off my mortgage early and drive 15 year old junk for vehicles.

[L39Guy]

Some may think that declaring bankruptcy and filing for CCAA is a casual process. It is not. One has to prove to a judge that the organization is indeed incapable of meeting its obligations, is running out of cash and needs to restructure under a court-supervised process.

Long before AC gets to that stage it will be seeking shedding costs as it has been (fuel costs are obviously a fraction of what they used to be because of both virtually no consumption combined with a low unit cost). Layoffs are the second item which is now being implement - 20,000 of the 38,000. Contract concessions from the remaining employees is a likely next step just like BA and others are doing.

As far as aircraft lessors are concerned, I am sure that they are in discussions with them too and the lessors are not in a great negotiating position as AC is not the only airline with surplus aircraft. It is not as if AC can miss payments, the airplane gets seized and leased to another airline - nobody needs these aircraft anywhere in the world right now. So the leasing companies know that they are far better getting a fraction of what they are getting now rather than 100% of nothing.

So the cash burn/CCAA risk will decrease over time as costs decrease and revenue starts to build; AC is a long ways away from reaching that point things to the foresight of CR and Mike Rousseau to squirrel away cash.

[altiplano]

We need to stop saying “7 billion in available credit” and start saying $5 billion. Cash burn was about $600mil/month last time I checked in April.

FWIW, Rousseau said the Federal wage subsidy is not included in the 20-22 million/day cash burn calculation they detailed in the Q1 call.

Rousseau also said that the CEWS represented approximately $35-40MM per month. That is just $1.1-1.3MM per day.

With AC opting out of CEWS, the subsidy will end June 06.

I didn't know the numbers, but I know salaries are their largest cost after fuel. I'm surprised it's not somewhat more.

I believe they are opting out of cews for surplus employees so they can lay off and right size and staff the operation for the foreseeable need of the mid-term. There is little sense paying other associated costs of keeping someone if you don't plan on keeping them on after the cews program. They will still qualify for and continue to see the subsidy for the remaining staff I believe.

[sanjet]

Looks like AC will issue new shares and debt to raise around a billion.

https://aircanada.mediaroom.com/2020-05 ... nior-Notes

[rudder]

UAL issued equity in April (fully subscribed) but a debt solicitation (bonds) was withdrawn due to lack of subscription.

The AC debt piece is convertible so may not face the same fate.

AC is absolutely pulling out all of the cards to improve liquidity and avoid CCAA.

[FL-200]

Looks like AC will issue new shares and debt to raise around a billion.

https://aircanada.mediaroom.com/2020-05 ... nior-Notes

The good news is they are doing this early. But overall, not a good sign.....

[L39Guy]

I interpret it as not wanting the government support which comes with too many onerous conditions.

[goldeneagle]

I interpret it as not wanting the government support which comes with too many onerous conditions.

One of the statements during the announcements, companies need to consider government as 'lender of last resort', and they stated a company should exhaust all regular avenues of financing first. A secondary offering is a regular means of financing for a public company. Without reading the details of the act, I would expect the company is required to try a secondary offering before approaching the government for last resort financing.

[rudder]

I interpret it as not wanting the government support which comes with too many onerous conditions.

One of the statements during the announcements, companies need to consider government as 'lender of last resort', and they stated a company should exhaust all regular avenues of financing first. A secondary offering is a regular means of financing for a public company. Without reading the details of the act, I would expect the company is required to try a secondary offering before approaching the government for last resort financing.

I think what the airline industry is looking for from the Feds is not a repayable loan facility, but rather an acknowledgement that status quo of paying significant portions of (now limited) revenue back in to the coffers of CRA and a multitude of other public agencies and not-for-profit former public institutions is not sustainable until full or near full travel demand recovery.

That acknowledgement has not happened, and probably will not. The airlines are on their own. Survival of the fittest.

There will be several less cash cows left when this is over.