Air Canada parent plans spinoff

[Rebel]

Air Canada parent plans spinoff
Fri Aug 11, 12:57 PM


By Jeffrey Jones

CALGARY, Alberta (Reuters) - ACE Aviation Holdings Inc. plans to spin off Air Canada, the country's top airline, and jettison its aircraft repair unit to wring more value for investors, it said on Friday as it reported a 40 percent jump in profit.

ACE aims to follow successful initial public offerings of its Aeroplan frequent flyer program and its Jazz Air regional airline by offering a minority stake in its main entity, Air Canada, in an IPO late this year, it said.

That, along with an outright sale of Air Canada Technical Services and the possibility of further offerings of equity in Aeroplan and Jazz, could eventually mean an end to the holding company structure, ACE Chief Executive Robert Milton said.

Investors lauded the plan, driving ACE's B-series shares up C$2.09, or 7.5 percent, to C$29.99 on the Toronto Stock Exchange, their highest level in more than a month.

Montreal-based ACE became Air Canada's publicly traded parent in October 2004 following the airline's lengthy restructuring under bankruptcy protection.

The current plan is to reduce ACE's capital by up to C$2 billion ($1.8 billion) over an indefinite period. Shareholders are slated to meet and review the arrangement in October.

"We have definitely gotten our heads past the possibility that in time there is no ACE, so there is no preconceived outcome there. We're just trying to drive it to get the best result for the shareholder," Milton told analysts.

The various operating entities can benefit from relationships with each other through operating contracts rather than cross ownership, executives said.

Milton said Aeroplan and Jazz, in which ACE still has majority stakes, had become strong stand-alone firms and Air Canada, the world's 13th largest airline, should also thrive in what looks like a "generally good" industry environment.

ACTS, which maintains, repairs and overhauls aircraft, has generated weaker financial results than its sister units.

Private equity companies as well as other aerospace industry players have shown interest in picking up stakes in the entity, he said.

Desjardins Securities analyst Nadi Tadros pegged values per ACE share of C$8-C$12 for the mainline carrier and C$6-C$7 for ACTS, but in a research note said ACE's conglomerate discount could widen to up to 20 percent from about 10 percent.

Meanwhile, ACE said its jump in second-quarter profit was aided by a big gain from the sale of US Airways shares and higher fares, which offset surging fuel costs.

It earned C$236 million, or C$2.05 a share, up from C$169 million, or C$1.50 a share, a year earlier.

The latest quarter included a pretax gain of C$100 million on the sale of 3.25 million US Airways Group shares. Net income also included a foreign exchange gain of C$107 million.

Operating income was C$181 million, up C$3 million from the second quarter of 2005. Revenue was C$2.7 billion, up 8 percent from C$2.5 billion.

It said system-wide yield improved by 3 percent, despite an increase in fuel costs of C$101 million, or 19 percent, as the airline's capacity rose 3 percent. Most of the capacity increase was on international and Western Canadian routes.

On Thursday, Aeroplan reported a 25 percent increase in net income and Jazz Air said profit jumped more than 50 percent.

($1=$1.13 Canadian)

[EI-EIO]

can't help but feel Aeroplan and ACTS will be US or otherwise foreign companies soon - seems to be a trend.

[balls]

can't help but feel Aeroplan and ACTS will be US or otherwise foreign companies soon - seems to be a trend.

Your speculation may be correct. One way to increase foreign ownership of the ACE entity might be to break it up into parts not governed by foreign ownership laws.

Ownership of the "airline" division is regulated. Breaking up the holding company blurs the regulatory lines I think.

[F-16]

Maybe it's because it's too late right now, but i don't really get it....

Can someone shed some light on how it is a good thing to completely spin off parts of A.C.E.

I understand the value and cash for investors, but in the end, for the airline itself, how would spinning off ACTS, etc. affect the operations.

For example, would Air Canada cease to have any maintenance at all? Contracting it out to ACTS? Or would there still be a dedicated Air Canada mtce dept. under the stand alone airline. And what about ground services?

Either this is really brilliant, to stand everything alone, build them up, get extra $$, sell them off, while keeping core parts at Air Canada (like free money in a way), or it's just selling everything off for money and that's it. Air Canada has to then contract everything out.

anythoughts anyone?

[skyhigh]

hey F16 give me a call. i left a message with my new no.

later

[Rebel]

Maybe it's because it's too late right now, but i don't really get it....

Can someone shed some light on how it is a good thing to completely spin off parts of A.C.E.

I understand the value and cash for investors, but in the end, for the airline itself, how would spinning off ACTS, etc. affect the operations.

For example, would Air Canada cease to have any maintenance at all? Contracting it out to ACTS? Or would there still be a dedicated Air Canada mtce dept. under the stand alone airline. And what about ground services?

Either this is really brilliant, to stand everything alone, build them up, get extra $$, sell them off, while keeping core parts at Air Canada (like free money in a way), or it's just selling everything off for money and that's it. Air Canada has to then contract everything out.

anythoughts anyone?

My sediments exactly I don’t think selling off parts of AC is a good thing and is completely driven by the very hedge funds that threw us a life line. The various parts of AC that we are selling off actually helped us turn a profit during the cyclic bad times so how is selling them off a good long term thing for AC?

[Bede]

Milton believes that ACE is underalued. If you look at the stock price and compare it to the assets, it's quite low. If all the units that contract to each other (Jazz to mainline, baggage handling to AC and Jazz, etc.) are spun off AC has an easier way to access capital. Keep in mind ACE keep a majority share in everything, so even though you own Jazz income trust, you don't have any real vote.

[prop2jet]

Bede, not sure about the majority interest in all the "components" once they are completely sold off. You are correct in that for the time being that is the case.

Ultimately in the future, with spun off (100%) entities, AC or Jazz should theoretically be able to shop around for services (the lowest bidder) once their current contracts are up. That could also include AC shopping around for a new deal on the CPA with Jazz once that is done.

An example of realizing untapped shareholder value would be the break up of Canadian Pacific a few years ago.

[CanadaEH]

For example, would Air Canada cease to have any maintenance at all? Contracting it out to ACTS? Or would there still be a dedicated Air Canada mtce dept. under the stand alone airline. And what about ground services?

An AC spinoff would include Air Canada, Canada Maintenance, Air Canada Vacations, and Air Canada Ground (handling).

[Frequent Flier_10]

Canadian Pacific was a series of unrelated businesses, with limited intersegment business. Hotels, coal mines, gas, railway, shipping line -- that is a lot different than airplane operator (plus ground handle, vacation, etc.), airplane maintenance shop, regional airplane operator, and airline loyalty program, all of which operate around a common, interdependent network....


This plan is total short-termism on the part of Milton and a bunch of NY hedge funds. They will get their cash out, then sail away into the sunset.

What will be left?

An airline paying top notch MRO rates, top notch regional rates, and with a high cost loyalty program.

And the best part, it will be loaded to the hilt with debt ---- again, while the cash is long gone. Those nice new planes are expensive, and instead of using the cash windfall to pay for them, they are going to pay out the cash to boost the share price and use debt to pay for the planes......

If Li Ka Shing (spelling ?) had of gotten AC, we would have seen some long term plans (i.e. fix the pension problem, maintain low debt ratios, etc.).

Unfortunately, I foresee problems at AC within five years. Its a shame because despite all its problems, the red maple leaf does carry a bit of national pride for me.

[Panic]

I understand the value and cash for investors, but in the end, for the airline itself, how would spinning off ACTS, etc. affect the operations.

The math suggests that the airline is the dog in the portfolio of assets...which it is.

Part of the reason why the airline has a poor return is that the services it is being provided are too expensive and inefficient. Those that disagree can look at the cost/efficiencies of a hudson general team vs. an AC team. It is not rocket science to unload a plane, so why pay more than fair market rates for it?

Agreements will be drafted to ensure that AC gets fair service from the now spun out parts.

ACE exists to make shareholder's money. If in the long run it makes more sense to divest of the low value portions (ie. the airline), then that is the best thing to do.

[Traf]

This plan is total short-termism on the part of Milton and a bunch of NY hedge funds. They will get their cash out, then sail away into the sunset.

I hear that!!!

[aroundthewing]

Those that disagree can look at the cost/efficiencies of a hudson general team vs. an AC team. It is not rocket science to unload a plane, so why pay more than fair market rates for it?

Always seems to come down to the Ground Handling. The end all/be all of whatever.
It doesn''t take a "rocket scientist" to fly an aircraft! It doesn''t take a "rocket scientist" to serve beverages and food an an aircraft! It doesn''t take a "rocket scientist" to fix an aircraft.
So WJ pays Globe Ground $40 per man hour under contract to the Parent Company(Globe Ground). Globe Ground in turn pays it's Ground Handlers $7.50/hr. Now that's a good deal for somebody!! That's "fair market rate"? According to who? By who's standards? Air Canada's concern is looking at ways of abolishing the Health, Benefits and Pension costs. That is a concern to everyone.
It's ironic how Canada Post employees (letter carriers, sorters, etc.) make upwards of $22/hr. Yet they sub contract some Rural routes for peanuts. Nothing ever stated about that anywhere.
It's ironic that a Ford or GM assembly plant worker make upwards of $32/hr. Rocket scientists'? Naa!
It's ironic that United, American, Continental, Quantas, and Lufthansa, pay their Ground Handlers the equivalent or more than Air Canada pays it's own.
Could we base industry standard for Pilots salary based on CanJet's pilots' wages? Could we base industry standard for Mechanic's wages based on IMP/CanJet's mechanics? Could we base industry standard for F/A's wages to CanJet/WJA F/As'? Same work! Or is it just a selective process that chooses what it thinks is the easiest prey? To protect themselves? To deflect attention to the the Ground Handler's group?
So, it looks to be a made in Canada solution...sub-contract the Ground Handling at Air Canada, and all will be saved, until the next work group goes on the chopping block.
I believe that most employees are well enumerated for their duties. So if your well enumerated, why stab another work group in the back? So you'll get more rewards? Higher wages? Yeah...in your dreams!!
One group that would have something to complain about, however, would be the P/T employees, who were previously F/T. That's another story.

[KAG]

I don't understand airline economics, but from my ignorant view point it really looks like milty and the crew are selling off all the divisions to raise stock price, and then they'll bail and AC is going to be a near bankrupt former shell of itself with little to no capital/assets to help it get out of the next big down turn.

Will be an interesting next few years.

[2low]

Bingo

[Traf]

You got it KAG! Post CCAA has been all about filling the pockets of the bastard's at the helm.

Milton and that his bum buddy Joe Randall are a couple of thieves who don't give a damn about the long term life of AC or Jazz. Every move they make is to fill the suitcase with as much as it can hold before they leave.

Once everything has been sold off and there is nothing left to sell, we will be left with an airline that can't support itself. When this happens, back to CCAA and another round of cuts for the employees and more bonuses for the fudge packers at the top!!!

[2R]

Nothing new in what is happening .Frank Delorrezo done that at eastern years ago,and then continental ,and then this one time at band camp

[Dockjock]

Milton spends more time thinking about the stock price than thinking about actually running the damn airline. RUN. THE. AIRLINE. The stock price will take care of itself!

[Pratt X 3]

Placing more value on stock/unit prices than running the airline seems to be a common thing amongst Canadian airline CEO's. Might be an ego thing. Easier to showcase a price than it is to have a happy workforce.

[lawndart]

I might be tempted to worry about stock price too:

http://...blogspot.com/2005/12/ace ... tions.html

[tonysoprano]

Wow, so much knowledge, wisdom, experience. This forum is quite educational and, I submit, can also solve the problems of the world. I will endevour to educate myselfe on a daily basis on this forum and I certainly hope Robert is reading this. He can learn a thing or two himselfe. Now can someone tell me if Stella bottles are twist offs or do I need a bottle opener?

[Four1oh]

I get the feeling this is the final act before Milton goes prancing off into the hilly, daisy-covered meadow.

[Dockjock]

You know tony, if you go back and listen to the ACE conference calls for the last few quarters, you'll see what I mean. Precious little talk about execution, lots of babble on about 'monetizing this' and 'unlocking that' and 'realizing gains' and blah blah blah.
I don't mean the company should be run in a vacuum, but as my Grandma used to say, "take care of the pennies and the dollars take care of themselves."

[Panic]

Placing more value on stock/unit prices than running the airline seems to be a common thing amongst Canadian airline CEO's. Might be an ego thing. Easier to showcase a price than it is to have a happy workforce.

It may shock you that an airline is a business and the CEO's job is to make money on that business for the shareholder, either through dividends or increase in stock prices. What you perceive as "running the airline" may be different than what the shareholder wants or what creates profit.

"Happy workforce" is a motherhood phrase - nice to have and should be addressed if it's causing a problem with profitability, but if it's a bunch of employees whining that they should be paid $120K a year to work 50 hours a month, that's not reality, nor does that result in profits.

[Dockjock]

The press release about the imminent investment in Varig bears this out. Milton treats ACE more like he's a wannabe Gerry Schwartz with Onex- invest, turn around, bail out for profit. Don't get me wrong, it's all profit for ACE, but the reality is it's an airline company not a hedge fund or vulture fund.