Air Canada parking 155 aircraft!!

[Clint23]

Skip all the dribble at the beginning of the article, but go to the very end, perhaps it is a good idea to cut back a bit...I don't know, but the numbers do sorta speak for themselves. What else can thy do? Sorry, I can't seem to find who wrote this.


Air Canada: The Numbers Tell the Story

Last week we talked about the first quarter earnings results from the profitable Canadian airline -- WestJet.

This week let's take a look at the recent results from Air Canada.

For the first quarter, Air Canada posted a loss of C$400 million, or C$4.00, compared to last year's loss of C$288 million or C$2.88.

This quarter's results included a loss on foreign exchange. Excluding that, the loss was C$2.99.

Analysts had forecast a loss of $2.37 so these results were worse than had been expected.

Air Canada

• Listen to the earnings webcast
• Earnings Summary
Operating revenue was down 12.3%, while operating expenses declined 5.8%.

Operating income declined 37.2%, while operating margin was a negative 7.9%.

Revenue passenger miles were down 11% while available seat miles declined 10%, resulting in a 0.5% drop in load factor, down to 79.5%.

Yield declined 2.7% to 18.2 cents/mile, while passenger revenue per available seat mile declined 3.3% to 14.5 cents/mile.

Cost per available seat mile increased 5% to 18.66 cents/mile, while CASM ex-fuel shot up 9.4% to 14.37 cents/mile.

The airline ended the quarter with only $1.1 billion in cash and short-term investments. It needs at least $1.3 billion in hand by the end of June to meet its covenants with one credit card company.

(All figures as per Canadian currency.)

I might add that the cash total was aided during the quarter by C$267 million borrowed from General Electric, a loan that is backed by spare parts. An additional C$46 million is backed by 22 engines as collateral. C$136 million was picked up from a financing for one of its 777s. The airline also did a sale-leaseback of one of its 777s -- for a net of C$44 million.

The combined cash from financing and operations came to C$479 million.

As was explained in the airline's call, the airline had capital expenditures of C$107
million partly related to the new Boeing 777 and aircraft interiors. Excluding the remaining amount owed on the 777 that the airline sold and leased back, the airline paid debt of C$309 million which was mostly aircraft-related and included a repayment of the last remaining predelivery financing and a C$99 million repayment of a secured financing.

Yes, the airline did some furniture burning in the first quarter.

In the recent earnings call, President and CEO Calin Rovinescu outlined what he saw as the airline's immediate priorities.

One is the pension fund and "finding alternative pension funding arrangements."

Second is the airline's dwindling cash reserves. "We have to rebuild our cash levels to see us through the downturn and with the longer-term objective of raising cash levels to about 15% of revenues," Rovinescu said in the call.

Third, the airline has to find new sources of revenue. "We are putting creativity at work to generate new sources of revenue during this downturn. I believe that one of the best sources of liquidity for us is our own revenue base. Therefore, at my request,
our Chief Commercial Officer, Ben Smith, and his team are currently putting everything under a microscope," Rovinescu said.

The fourth priority? Addressing the airline's cost structure. Pardon me, but I thought that this was what the airline's not-so-long-ago bankruptcy was supposed to have addressed. Oh, silly me.

Rovinescu said, "Our unit costs are simply not competitive in many respects and we have to do something about it. Our non-fuel unit costs are significantly higher than that of our Canadian competitors who started life without having legacy costs or even the major US network carriers. Our unit revenues have always been much higher than that of our competitors and while premium customers will continue to be a priority market for us, we could not rely on this market segment to fully cover the higher costs in the future."

Speaking of costs -- as Mike Rousseau, the airline's CFO, outlined in his initial comments about the quarter, and about things going forward -- the airline now expects its CASM ex-fuel to be above its 2008 level by between 5.5% and 6.5%.

Just a reminder. The results for this quarter came on the back of fuel expenses that were 17% lower than the first quarter of 2008. Cash cost per liter, net of the impact of fuel hedges set out for the quarter, improved by some 18%.

The fifth ranking priority that he outlined was a longer term priority. According to Rovinescu, "Longer-term we think a complete transformation of the company to ensure that we create and provide product that customers value and deliver a level of customer service that secures their loyalty at a cost that supports profitability and growth and rewards our shareholders. EBITDAR margins have fallen to under 10% and I would like to see the airline back at a more competitive and financeable 16% once we see the back end of the recession."

When the call was opened up to questions, Mike Linenberg with Merrill Lynch was first on the call. Not surprisingly his first question was about just how much furniture was still available to burn, as he asked, "Mike, you ran through some of the various assets that are unencumbered and could be a potential source of financing. And I may have not heard this, but did you give a range? I think in the past you said that there was something like C$800 million of unencumbered value; there have been a couple of transactions since then. Do you have a number out there that you could give us?"

Mike Rousseau responded, "Mike, we don't. Again, the assets are significant. The largest one being 777 equity and the Embraer 190 equity."

Mike then turned to collateral requirements, as he asked, "...with respect to collateral, I know in the past that you had to post with your counterparties with respect to your hedges. Is there still a chunk of cash there that we should see coming back to you over the next couple of quarters?"

Mike Rousseau responded, "Yes, we have got -- I think at quarter end we had C$181 million in cash collateral with our fuel counterparties."

Mike then asked about the coming months and the CapEx expenditures. The airline has one more Boeing 777 being delivered in July. But it is a lease transaction. As for other CapEx expenditures, Mike Rousseau explained, "CapEx has been reduced to probably over the next three quarters less than C$150 million, maybe C$125 million. A lot of it is technology-based and we are currently in the process of reviewing all our projects to tighten that even further."

And that was it for Mr. Linenberg.

David Newman with National Bank Financial came on the call and wanted harder numbers in terms of competitive costs compared to those of US legacy carriers -- stripping out the "Canadianisms" of Toronto's Pearson Airport and excise fuel taxes.

Good question -- but it was never answered. All Mike Rousseau did was agree that yes, "That by far is the largest difference between our CASM ex-fuel when you compare us against the US airlines. The other major difference would be maintenance and that is because we carry four different fleets -- fleet types.
And of course that gives us flexibility in our scheduling but there is an inherent cost versus carrying one fleet."

Nick Morton with RBC Capital wondered if the airline was looking to members of the Star Alliance for help in paying the bills. No, the airline is not, according to Rousseau.

There were other analysts that came and went on the call -- but the call was rather short and basically dealt with one main topic -- liquidity.

There is no public posting of the airline's first quarter earnings call.

Please click here to access the PlaneBusiness Earnings Summary for Air Canada.

Analysts Take

Michael Linenberg, Merrill Lynch

Mar Q bottom-line worse, EBIT better-than-expected
Air Canada reported a March quarter loss per share of C$4.00; excluding a loss
on foreign exchange, the loss narrowed to C$2.99. Our EPS forecast was at a
loss per share of C$2.50 (vs. the consensus forecast of C$2.37). However, our
forecast did not include any FX impact. On an operating basis, Air Canada
reported an operating loss of C$188 million, representing an operating margin of
negative 7.9% -- this compares favorably with our operating loss forecast of
C$306 million and operating margin forecast of negative 13.1% operating margin.

Cautious outlook
Given the uncertain economic outlook, Air Canada is further reducing its capacity
forecast for 2009; FY 2009 system capacity will be down 4% to 5% (vs. previous
forecast of down 2.5% to 3.5%). Looking forward, the carrier is focused on five
key areas which include: 1) Its pension deficit; 2) its liquidity; 3) un-tapping
sources of new revenue; 4) its unit cost structure and 5) transforming the
company to provide new products of value to customers.

We are lowering our 2009 estimate from a loss per share of C$2.50 to a loss per
share of C$3.50 (vs. consensus loss of C$1.54/share). Our 2010 EPS forecast is
maintained at C$0.50 (vs. consensus EPS of C$0.09/share).

Maintaining Neutral rating
No change to our Neutral rating given the optionality imbedded in the share price
which on any given day can move up or down 30% or more –i.e. stock has traded
between C$0.75 and C$2.00 over the past two months on fear and hope. Our 12-
month price objective is C$1.85 to reflect a slightly higher Net Asset Value for the
company given the recent downward adjustment in Air Canada’s pension liability
from C$3.2 billion to C$2.85 billion.



Ben Cherniavsky, Raymond James

Action
Given the liquidity concerns prevailing at Air Canada, we continue to view its
shares as unsuitable for all but the most speculative of investors. Our rating
therefore remains MARKET PERFORM.
Analysis
Financial highlights of 1Q09 include revenues of $2,391 mln, EBITDA of $-29
mln, and EBIT of -$188 mln. This compares respectively to $2,727 mln, $159
mln, and -$12 mln for 1Q08, and our respective 1Q09 estimates of $2,328 mln,
-$83 mln, and -$256 mln. Air Canada mildly exceeded our numbers due
mostly to a slightly better than expected yield (our cost forecasts were almost
exactly in-line). Despite this, we have reduced our EBITDA forecasts for the
company (from $702 mln and $732 mln for 2009 and 2010, respectively, to $351
mln and $545 mln) to reflect the current strength in oil prices and the recent
upward revision to our energy team’s WTI forecasts. An increase in Air
Canada’s planned ASM reductions also negatively impacted our estimates.
The operating environment for the global airline industry in general continues
to be extremely challenging and the outlook for Air Canada in particular
remains very precarious. Indeed, the company’s 1Q09 report was littered with
disclaimers about the uncertainties that lie ahead. As expounded in our Mar-
27-09 INsight ‘Analyzing Air Canada’s Fate: Déjà vu?’ (share price $1.20), we
believe that the chances of Air Canada avoiding a CCAA filing this year are
50/50 at best. Nothing in 1Q09 results compelled us to change these odds.
Accordingly, our investment thesis remains unchanged as we continue to take
a wait and see approach to the next few months.
Valuation
Our target price remains suspended (i.e. “UNDER REVIEW”) due to the
highly leveraged nature of Air Canada’s valuation and the company’s extreme
sensitivity to enormous imponderables.



David Newman, National Bank Financial

Free cash flow (FCF) in Q1 2009 improved by $234 million y/y due to a reduction in capital expenditures and fewer aircraft deliveries in Q1 2009, offset by an unfavourable change in operating cash flows (settlement in relation to fuel hedges ($217 million settlement partly offset by return of collateral of $147 million), weaker operating results, and higher cash contribution requirements due to the defined benefit pension plan). For the quarter, Air Canada generated $61 million in FCF versus a usage of $173 million in 2008. Overall, liquidity remains a concern and continues to be strained. As at April 30, Air Canada had $1.0 billion in cash, which represents approximately 9.3% of TTM revenues. Its target is to have cash levels of 15% of annual revenues ($1.7 billion based on 2008 revenues). To improve its liquidity, Air Canada has raised nearly $800 million, net of repayments, over the past six months.

...Minimum Cash Covenants
In 2009, Air Canada is faced with a potentially significant increase in its pension funding obligations (maximum of $645 million y/y), minimum cash balance requirements as specified in its credit facility (CIBC) and one of its credit card (processor) agreements, in addition to its contractual obligations (~$617 million in debt repayments) and day-to-day funding requirements. We believe the cash could run down to $500 million or so by end of Q4 if circumstances remain tough. Triggering events with one of its primary credit card processors remains a possibility, under which payment of funds to Air Canada may be withheld and the airline may be required to post a deposit (minimum of $110 million to a maximum of $425 million in cash) should it fall below the minimum unrestricted cash threshold for the credit card processor of $1.3 billion by the end of June in order to satisfy an unrestricted cash and a debt service coverage ratio.

Reiterate Underperform
After factoring in AC’s contractual and pension funding obligations and our outlook on RASM, CASM and FX in the current environment of recession, (although fuel is expected to provide significant savings (~$1 billion)), declining confidence and air travel, and tight credit conditions, we believe AC will continue to burn cash and run its balances down below that required by one of its lenders and at least one credit card company ($1.3 billion in H2), thus requiring further deposits.

My Take

You all know my take. The airline is going to fight to get the pension laws in Canada changed, and if it is not successful, then it will ask for some type of permanent moratorium on pension contributions to its employee plans. Then the push will be put on Aeroplan to cough up more money in advance for miles. And so it will go.

Meanwhile, the airline continues to pull up the carpets, looking for more floorboards to burn.

But the numbers the airline is looking at are sobering. First the airline's costs remain too high. The break-even load factor for the airline (when you factor in interest payments) in the first quarter was 89%. Load factor was 81%.

In fact, their cost per available seat mile excluding fuel is highjer than WestJet's including fuel.

Secondly the airline is not making the kind of revenue premiums it should be. Their stage length adjusted unit costs are 47% higher than WestJet, but the RASM premium is barely 30%. The gap has never been wider.

Finally -- the operation is simply too big to be profitable. The airline needs to substantially pull back in size, quit fighting WestJet on many of the country's domestic routes, and stick to its longer haul premium product.

Oh, and then there is the matter of the airline having blown through more than $1.8 billion in shareholder equity in just 12 months.

This airline needs radical surgery. Not continued patches and questionable financial transfusions.

[balfour]

That article is from Plane Business.

http://www.planebusiness.com

[tonysoprano]

Original tony.
Negotiations are going on as we speak. The good news for junior guys is there have been no rumors of layoffs. The bad news is still the pension issue. It's a wait and see environment but sounds like the pilot group will be the most co-operative. Again.

[c170b53]

I understand you pain but with the local transit company paying 15 % more to start at least maintenance has some outs. They have been successful in recruiting mechanics who have been underpaid for awhile. At the same time there have been a flood of retirements, so its about to get interesting for a company and an industry that has ignored that side of their business. As usual mechanics are like experts, no one really wants one until they need one.

[torx]

I understand you pain but with the local transit company paying 15 % more to start at least maintenance has some outs. They have been successful in recruiting mechanics who have been underpaid for awhile. At the same time there have been a flood of retirements, so its about to get interesting for a company and an industry that has ignored that side of their business. As usual mechanics are like experts, no one really wants one until they need one.

If that is the case, may I suggest you be first in line for a job fixing transit vehicles for $40+/hr. Whole lotta' hurt coming for mechanics!

[c170b53]

What line? Guys that have had enough are walking through the door. How did WJ get a maintenance dept? They just offered Canadian staff a better deal and good for those that went, last time I looked they doing good.
AC hasn't hired a new Yvr maintenance employee since 1996. They can only get a small percentage of the work done in house so they are trying to get work done on the planes in the states. Love it. As a measure of how out of touch these guys are just look at the number of patches on our new planes. Send a plane to the states to save 10k because you can't manage, receive a 1M bill. They hope someone else can manage for them but the service providers have figured them out and are now billing AC for stuff they don't do. Life is tough, tougher when you're stupid. Oh by the way there's no parts either, worse even when there is a part its placed in a location where it has no strategic value. Last week a Northwest pilot in need of assistance in YVR, commented that he hadn't seen a competent maintenance technician for some time back home. That's probably how the business will end up looking up here.
Should the show end now, what we will lose is a part of our pension. That means if you have put all of your eggs in that basket as apparently Rob hopes you have, then you're screwed. The pension is the only thing keeping the present employees working. The tactics of our new boss is the reason many are bailing out.
As for me leaving, thanks for the tip but I've got a front row seat to watch this unfold. I'm presently training with and for a foreign carrier so its possible I might have another out with them but then again there's always lawnmower repair.

[c170b53]

To be clear, AC has doesn't owe me anything and my fellow employees and immediate managers, the people in the trenches are very good at their jobs.

[c170b53]

Sounds like the their first pitch is a two year freeze, I believe we are 6$ an hour behind AT and a couple behind WJ not including their PS program. We also pay our own medical.

[Disco Stu]

We also pay our own medical.

If you are talking about the $55 fee to Transport, we are reimbursed on our pay. It doesn't necessarily coincide with the month your medical is in, but we do get paid back for it.

[c170b53]

I was referring to our BC medical. Looks like we will be extending our contract with no changes for a year. Don't know how the pilot group feels, we might have to live with it.

[the original tony]

A one year contract without change meaning the pension is still the same?
As well, no layoffs? That may be a better thing than locking into a long term deal with the low outlook as it is now.
Then as the company makes money when things recover, we would be stuck with a contract reflecting how bad our situation was.
Just my take on it,
Then again i'm just happy to be working!!!

Tony

[Squid]

It's gonna get worse by the fall. News to come since our revenues are wwwaaayyyy off. even though the loads are hammered we have zero yield and we are buying time.

[c170b53]

Same contract for the mechanics as the last contract. I especially like the spin " No concessions" Ya, just no raise and just the same continuation of the last concessions is really not a concession at all". Made more money in 92 than I do now. Can't wait until the new talent starts to show up and star in the New and improved Gong show!

[torx]

Same contract for the mechanics as the last contract. I especially like the spin " No concessions" Ya, just no raise and just the same continuation of the last concessions is really not a concession at all". Made more money in 92 than I do now. Can't wait until the new talent starts to show up and star in the New and improved Gong show!

Is it all about the money? Or longevity? If you're so grossly underpaid and perpetually unhappy, than head on down to the bus garage (that you mentioned) and the dream you so desire can be found there!

[c170b53]

Oh thanks for the tip, nice to see some employees with some company spirit. Its something that sets AC apart from the rest. Fortunately I'm not that concerned with moving on, I've had some luck, but that's not the case with some of my fellow employees. Generally we fall into three groups, new employees that know very little and are desperate to learn something. Working for AC means taking a hit but since they have few options they stick with it even when they know better. Then you have the guys who know something and have done some time. They are faced with having to raise families in the face of declining incomes and as well they have not made a large investment in the pension plan. So those guys are slowly leaving with many going to WJ, the sandbox, oil tech or for those with families, something easier like transit. At the end of the day, its what really works for the family that wins. Then there's the high timers like myself, close to getting that pension, trying to get through the day amid the Luddite mentality. For us high timers its not easy, whilst working for years we have acquired the ability to recognize the quality people in this business right away. Its not that its a special trait but rather it's mostly due to our participation in aviation during the Golden years. Leap forward now to the Lead age of aviation, now time works against the us. I see employees giving little consideration to fellow employees, knowledge is not shared and cooperation amongst work groups is deemed a weakness. There's a few quality people left that in spite of the culture still care about the customers first and who continue to speak up in the face of criticism. This is in contrast to the company's idea that a good AC employee is one who quickly learns to keep their head down and eat it just as its customers should.
The reality, if you have had any time in this business you'll have heard all the pitches, and by now know enough to know whether the bullshit that's being fed is high quality or just the cheap stuff.
The pitch from our new old employer and pal of Rob, is to save us by not saving for us, again. Not bad stuff here, bonus for trying to serve up the same plate with minimal disguise. But here's the desert, asking for pension relief and folding in the contract at the same time. What are they really doing? Telling employees to ratify it to save their jobs while at the same time inserting language to further strip out AC divisions. Oh baby! The cream on this pumpkin pie don't come finer. Screwing the employees and screwing the unions while setting up the union as the fall guy and getting them to bite on it on the first offering. Classy!
Now I am a bit ticked that so many good people have put in quality time and may now be hurt by those not willing to do the right thing. For those that can be so easily be mislead, do some time but have an out plan. Don't worry about this maintenance guy, or any other maintenance guy for we will not be with this company for long. The pension plan probably won't be here long either and after all that has been Cals desire all along. In the end I'm not sure who will explain what all the buttons do but that's minor.

[c170b53]

Whew, for a while I thought I was typing to myself but now I see in another thread that someone else smells a rat. Simply put employees might want to ask themselves why the company suddenly chose to face an issue that had been brewing for sometime and at the same time chose to throw in the collective agreement. As I mention, I'm too old to save, I'm jaded but that doesn't mean I can't point out that nothing is changing for the good here, not a surprise as I can't think of what has changed for the better in our workplace since we were last here. For those just wanting to hang on to a job, in these times that's understandable but this gun to our heads tactic has been carefully played just as it was used before.

[torx]

*

[teacher]

Mr. Kavafian is at it again.................

Air Canada faces restructuring, including layoffs
Updated Tue. Jul. 21 2009 11:46 AM ET

The Canadian Press

MONTREAL -- Air Canada requires drastic restructuring, including significant layoffs, to weather declining revenues, an industry analyst said Tuesday.

Jacques Kavafian of Research Capital said Canada's largest airline needs to undergo a more severe restructuring than previously anticipated to respond to a worsening outlook for the airline industry this fall.

That means costs have to be cut by at least 25 per cent just to break-even.

Air Canada has previously rejected Kavafian's suggestion that it much cut its capacity by half.

Analysts expect Air Canada will post larger losses over the coming quarters. Kavafian said the second-quarter loss will exceed $260 million, rising to $1.1 billion for the year and $672 million in 2010.

Securing union approval for 21-month contract extensions and a moratorium on past service pension contributions was the easy part, he said.

More challenging is undoing the damage caused by parent company ACE Aviation Holdings (TSX:ACE.B) unbundling strategy that removed Air Canada's flexibility to weather the economic storm, Kavafian said in a report.

Air Canada CEO Calin Rovinescu, who helped devise this strategy, has said spinning off feeder airline Jazz Air Income Fund (JAZ.UN), loyalty rewards program Aeroplan (TSX:AER) and maintenance division Aveos provided the airline with $2 billion to pay pensions and purchase modern aircraft.

But Kavafian said the airline got long-term pain for short-term gain. And addressing this situation may require a second round of bankruptcy protection in six years.

He said Air Canada must fundamentally restructure and not rely on tweaking contracts for short-term savings.

In addition to removing a quarter of the consolidated capacity, he advocates:

-- increasing seat density by reducing business class seats,

-- removing aircraft, including some new Boeing 777s,

-- cutting the number of employees,

-- reducing the head office,

-- terminating the relationship with Air Canada Jazz,

-- renegotiating terms with Aeroplan,

-- re-acquiring AVEOS (formerly Air Canada Technical Services),

-- lower labour costs by dramatically changing employee work rules while paying higher salaries.

Air Canada's shares were unchanged at $1.53 in morning trading on the Toronto Stock Exchange.

http://www.ctv.ca/servlet/ArticleNews/s ... hub=Canada

[yycflyguy]

Actually this is great news! Everything he says turns out to be 100% inaccurate!

[scopiton]

-- lower labour costs by dramatically changing employee work rules while paying higher salaries.

work less for more
is this the beginning of changing AC's management culture ?

I wonder if some of you air canada guys will have the balls to make Mr montie PAY for his planned bankruptcy. you shouldn't ket him go like this.

[the original tony]

These analysts, atleast this one is a fucking idiot.
If I owned shares in WJ, i'd like the competition to go away by 99% too.
Why these people are allowed to speak on anything, and get paid, is absolutely astonishing.
Oh, i am an expert in aviation too. Planes will be, hear me now.....planes will be taking off from several airports today in Canada. As a professional analyst, that is where my money is today.
If you need any more expert aviation advice, just ask.

Tony

[yycflyguy]

-- lower labour costs by dramatically changing employee work rules while paying higher salaries.

work less for more
is this the beginning of changing AC's management culture ?

I wonder if some of you air canada guys will have the balls to make Mr montie PAY for his planned bankruptcy. you shouldn't ket him go like this.

Montie has already ridden off into the sunset with his pockets full. I wish the same could be said for CR and RM. It is the BoD that determines whether or not an executive gets the hatchet and as these crooks continue to make the select few a lot of money they wont be going anywhere anytime soon. Does anyone know of another CEO that has bankrupted his company 2 times, or is this just an aviation thing?