Brent Jang

Globe and Mail Update, Wednesday, Jun. 10, 2009 03:29AM EDT

Air Canada's (AC.B-T1.40-0.05-3.45%) five unions could acquire a 10-per-cent stake in the airline as management tries to repair its strained labour relations, avoid a strike and preserve cash to survive the recession.

Under a tentative deal signed late Monday, three of five unions agreed to accept shares in exchange for supporting the company's proposal to freeze wages and defer most contributions to the employee pension plan for 21 months.

The agreement could represent a novel solution to Air Canada's cash problems and, more importantly, help it escape a $225-million pension payment due during the critical summer travel season. If forced to make that contribution, the airline is at risk of falling below the $800-million minimum cash balance it needs to keep payments flowing from a credit card processor.

But the deal's success now hinges on whether the other two unions, which represent pilots and flight attendants, can be persuaded to sign aboard.

By giving equity to some of its 26,000 staff, Air Canada is taking a page from the government-mandated restructurings of General Motors Corp. and Chrysler LLC, in which unionized auto workers accepted an ownership stake in return for giving up wages and benefits. But it may also be an attempt to help blunt a key competitive advantage of rival WestJet Airlines Ltd., which uses employee ownership as a marketing tool.

In an internal memo to staff, Calin Rovinescu, Air Canada's new chief executive officer, wrote that he is determined to foster “a culture of Just Do It” and invited employees to take an active part in shaping the carrier's future, including encouraging submissions through an in-house website.

“We have launched a new channel on the portal called Creative Juices. My intention is not for this merely to serve as an on-line suggestion box to warehouse your ideas, but to act as a kind of virtual brainstorming session,” he said.

The International Association of Machinists and Aerospace Workers, the Canadian Auto Workers union and the Canadian Airline Dispatchers Association said Tuesday that they're satisfied that the pension funding moratorium is the best route to go, given the recession and Air Canada's cash crunch.

That represents a change of heart from the position they took five years ago, when the airline restructured under bankruptcy protection. Then, the three unions and two others – the Air Canada Pilots Association and the Canadian Union of Public of Employees, representing flight attendants – said they were philosophically opposed to holding equity in their employer. They effectively opted to sell off more than $123-million worth of shares in the Montreal-based carrier's parent, ACE Aviation Holdings Inc., (ACE.B-T5.40-0.06-1.10%) just four weeks before Air Canada emerged from bankruptcy protection.

The number of shares to be granted has yet to be determined, but an industry official said preliminary indications are that the equity stakes for the five unions combined could be 10 per cent – roughly in line with what WestJet Airlines Ltd. employees own of the Calgary-based carrier – though it could also be a little bit higher or lower.

McGill University business professor Karl Moore cautioned that it will be a multiyear process for Mr. Rovinescu, who replaced Montie Brewer as CEO on April 1, to improve Air Canada's labour climate.

“He's going in the right direction and it's a good sign. Contrary to Calin's reputation for being hard-nosed, he's trying to work with the unions and keep the airline going through tough times,” he said.

Should the unions end up holding shares, it would lessen the risk of labour disruptions because workers “are less likely to pull the plug on themselves,” he said, warning that without the pension moratorium, Air Canada will be in danger of filing for creditor protection under the Companies' Creditor Arrangement Act.

Any pension funding moratorium would still require approval from Ottawa. Last Thursday, Ottawa appointed former Ontario judge James Farley as mediator in the pension dispute.

Katherine Thompson, president of the Air Canada component of CUPE, said Tuesday that flight attendants aren't opposed to owning shares, but there are other pension issues that need to be resolved. “We continue to be receptive and willing to receive proposals from the company,” she said. “Mr. Farley is certainly engaged in the process and brought his wit with him. He's been charming and helpful.”

A spokesman for pilots said contract talks are continuing, but declined further comment.

Norma Dawson, president of a retiree group called Air Canada Pionairs, said she's optimistic that a pension pact will be reached with the pilots and flight attendants. “As retirees, we want the airline to be healthy for the rest of our lives and beyond,” she said. There are nearly 22,500 Air Canada retirees and more than 4,700 survivors of retirees.

“If the airline does go into CCAA, the unions could lose a lot,” Ms. Dawson said.

Air Canada's pension solvency deficit has soared to $2.9-billion, compared with $1.2-billion on Jan. 1, 2008.

If they're paying guys in shares, wouldn't it just prompt a sell-off as soon as employees can unload em? Or are there some measures/incentives to prevent that.

Im not really sure. I for one think that's it's a good idea. It's worked for us, why not them. Like the article said, it has been turned down in the past but could work with all on board. I for one think that AC has been making a lot of great decisions as of late. It's pleasantly surprising, and more than welcome, as far as I, and most of the people I've had the pleasure of discussing this with are concerned.


We'll will just have to see what the cowboys in ACPA have to say.

...... so if the remaining unions go along with this deal then..... tonysoprano will be an "owner!"

Priceless.

I for one can't wait to hear his response after he finishes ganking bitches in Rome.

Letès see market cap of around 100 million$, underfunded pensions to what 2-3 billion. 10% seems a little low. should be more like about a 50% share

balfour wrote:I for one can't wait to hear his response after he finishes ganking bitches in Rome.

Jesus...... I would rather be a flight crew member on a B767 blasting over to Rome and other points of associated interest, eying the ladies and quaffing excellent Italian classified vintages. Perhaps Geneva would do as well for a change – different scenery for sure. How about a stint down south of the equator, nectar can be good there as well, eying those bronze beauties. Yes sir…. Perpetual sunshine for this old guy.

What else then. Stepping a B737-800 down in YYT when the gales of November come slashing – when afternoon came it was freezing rain in the face of a hurricane west wind!!!

Then again, I have done neither!

I got to admit it is a creative way of settling the union's issues. Pay them off with worthless shares and make the employees believe that they will make money in the long run, after getting a lot of concessions out of them now.

First quarter loss was $4.00/2.88 per share (basic / diluted)! The price of a share stands around $1.60.

Are the "new owners" going to put money to cover the losses? If they don't and AC sells more shares to cover their financial woes, then their 10% ownership will be diluted really fast. Of course, a possible bankruptcy will also erase all value out of those shares.

AC employees should read this very carefully: http://www.aircanada.com/en/about/inves ... FSN_q1.pdf before celebrating too much.

Now, for the union guys that will get nice cushy and well paid jobs managing, overseeing and negotiating the stock options, as well as the very few that will be sitting in the board now that they are "stake holders", well, that is a different story with a possible happy ending for them. Just them.

Balfour.
Is it gettin hard little buddy?
None of this is profit sharing is going to matter. The company will get what it wants, that is they won't be paying into the fund for a while. The employees will get what they want because when the market and economy pick up again the pension deficit will shrink and both sides will move on. You'll have to find some other fetish to jerk off to. My happiness doesn't cost me anything. It's not a cult, it's true and honest.

V1RotateV2 wrote:I got to admit it is a creative way of settling the union's issues. Pay them off with worthless shares and make the employees believe that they will make money in the long run, after getting a lot of concessions out of them now.

First quarter loss was $4.00/2.88 per share (basic / diluted)! The price of a share stands around $1.60.

Are the "new owners" going to put money to cover the losses? If they don't and AC sells more shares to cover their financial woes, then their 10% ownership will be diluted really fast. Of course, a possible bankruptcy will also erase all value out of those shares.

AC employees should read this very carefully: http://www.aircanada.com/en/about/inves ... FSN_q1.pdf before celebrating too much.

Now, for the union guys that will get nice cushy and well paid jobs managing, overseeing and negotiating the stock options, as well as the very few that will be sitting in the board now that they are "stake holders", well, that is a different story with a possible happy ending for them. Just them.

There are a lot of conditions attached to this deal that AC must make good on. I for one wonder if they will be able too. Really the only way for AC to meet the unions demands is to completely restructure the company. If they won't, or can't get all parties, suppliers and such on side, the deal will not happen. It will be done instead in CCAA.

Which IMO, assuming the unions stick to there guns a probability.

You are correct. There is no point in owning a worthless share.

Brick.
Sounds like you're pretty much resigned to another CCAA. 3 of the unions have signed on. 2 others will be on side very soon. The demands of the unions won't mean anything when the pension deficit gets reduced with higher interest rates and a better stock market. The pension problem will be a lesser problem, perhaps eliminated in 2-3 years' time and the useless profit sharing scheme will be gone. There is no need to restructure. We already restructured. Labour, leases and services were all restructured five years ago and are still advantageous. Costs have been reduced. AC is running at it's most efficient it ever has.The only reason we lost money was due to hedges (fuel and currency). In my opinion, there is a good chance this company won't have to go to CCAA. If it does, all the better. There's always room for leaner operations. Perhaps it will work out better that way. But like the boss says, we probably won't have to go there. It's not what I personally prefer.

Tony,

Three of the unions signed on yes. Likely because they feel they had no other options. Or because they have left the heavy lifting to others.

This deal only makes sense if a viable airline results. My info is a week and a half old but the companies position going in was really just a hail marry pass using the employees pension money to run the play. Notice they are reluctant to stick their money on the line.

I would disagree that AC's cost are in line. Many of the costs are in line. Some are just closer, but we also have some massive bleeding due contracts with former AC entities created as AC exited CCAA. ACE used this as a method of extracting higher valuations on the sale of these unit's. Those contracts haunt AC today and moving forward for a long time yet.

So let me ask you this. Do you think it is a good idea that the employees pony up the cash. Because that is what we are doing. If AC subsequently fails, we become unsecured creditors in the amount we gave. Do you think we should be ponying up this cash, when no one else is willing, not even ACE, for what appears to be a hail marry play so that ACE's stake in AC can be saved for themselves? So that AC can keep laying golden eggs for former entities?

I don't think so. If the plan doesn't work all you will have accomplished is transferring your pension money to shareholders. These guys are sharks.

What I am saying is that the hard nose bargaining has just begun. The other three agreeing means nothing.

ACPA has stated there will be no agreement unless AC comes up with a viable plan. I believe them because they have no choice. What is the point otherwise?

I have my concerns that all parties can be brought back to the table with success. All it takes is a single hold out.

But yes CCAA is a better option than a bad one.

So that AC can keep laying golden eggs for former entities?

I thought the only one we're propping up is Jazz with the CPA. In our money losing 2008, this wasn't even mentioned as a factor. As far as having a long term viable plan, I don't think there is one yet. I think that one is to be determined down the line and this present management team will not be part of that. All they are trying to do is is buy time to solve the pension problem so that the company can be more attractive for potential future owners. Also, can you please explain how we are ponying up the cash. Thanks.

Hi guys, new to the forum but not the industry, been working for the evil empire as an AME for 10 years and just completed my Cpl, working on the multi and soon the Ifr (still gonna live the dream)

As far as AC's current woes go... its an important distiction to make that the "share ownership" offered will roll into the pension (effectively allowing the employees to turn concessions into further helping to fund their own pensions) these shares will not be able to be actioned on an individual basis. Probably for the best, as in the last Employee share ownership program I lost about $6000 (prior to entering CCAA) I ended up buying a set of nice golf clubs with what was left (the running joke I continue to tell myself is that those Taylor Mades are worth a cool $7500)
The way the agreement was explained to us in the IAMAW (with the little info we have so far) is that the company would be liquidated if it was allowed to fall into CCAA for a second time! This goes to explain the appointment of a mediator by the Finance minister. Once again the employees will be left holding the bag and fear tactics reign supreme in contract negots. It wasn't so long ago that we, (the company) dispersed billions to the shareholders, and paid out huge bonusses to the arhitects of "the new and better Air Canada" as it emerged from CCAA.
Sometimes I wonder if now is the time to be starting my career as a pilot, but truthfully, I'd rather take a job as a F.O. flying for some small company (at this point I'd be more than happy to pay a training bond as well) then watch as this corporation rapes itself from the inside in the guise of "maximizing shareholder value"

I'd be interested to hear how any of the AC pilots feel about what has gone down lately, and what they think their union will come back to them with.

but... hey ... I love aviation, I love flying, I love returning aircraft to service, even with all the crap, I still can't think of a better thing to do with my working life.

any advice for how to find a low time pilot job would be greatly appreciated!

Before you read I would like to mention that absolutely nothing I am writing is new to ACPA. I am absolutely astounded at how prepared these guys are for what is before us. For those that may not know ACPA has hired a team of advisor's. Two of which are former investment bankers/Hedge fund managers with a wealth of experience. Sharks in their own right. But they are our sharks.

Sorry for the length.

Tony,

A lot of questions in that paragraph. Jazz/Aeroplan and Aveous were all sold off at higher valuations using excessive contracts with AC. The sale of those proceeds went to ACE. AC is still holding the bag on those contracts today. Yes it has been mentioned on several occasions that contracts with certain "service providers" are excessive. If you remember Kavafian even recommended stopping almost all regional flying due to the cost gap difference AC is faced with on that front. Over kill as usual from him. Like, what? He never thought of just renegotiating? But he at least saw the problem. Montie, many times, referred to getting lower costs from "service providers". Who do you think he was speaking? Montie tried. He took the Jazz CPA rate renewal to arbitration and lost. Employee costs at AC were driven down during CCAA however the cost of Heavy Maint, Regional feed, and the points program all went up. Way up as these companies became "service providers" for AC with very lucrative contracts.

No plan you figure eh? Really. They are sharks buddy. If you recall signing on to a plan during CCAA, that we didn't have the full picture on, is what got us into this mess now. Of course they have a plan. They just want us to sign on the dotted line before they reveal it. I mean really, you think we should do it again?

Our sharks think the plan goes like this. ACE didn't get AC sold in time. So how do they extract cash without putting more in. They get the employees to take all the risk, disguised as protecting our pension, by giving AC a pension moratorium. That will stave off the bankruptcy threat and give the stock a pop. When the stock pops, ACE sells. Every $1 dollar increase in AC's share price is worth 75million to ACE. We have been burned by the same sharks once already. There doesn't have to be a "buyer". They could just unload on the open market.

The problem with the plan?

1) It doesn't look toward long term viability.
2) All risk is on the employee and none on the shareholder. The pension moratorium money is considered a loan. Essentially a loan from the pension plan to the company. If CCAA happens again that money becomes unsecured debt. It is not treated as owed pension money. Your pension will get smaller guaranteed.

You are ponying up your money here Tony. Your future pension income. If we go ahead with this and AC still ends in CCAA the only thing you will have accomplished is.

1) The ability for ACE to sell and bail.
2) The ability for some service providers to continue milking the cow for a while longer.
3) Giving yourself a smaller pension.

We must be absolutely certain that a viable plan is in place before we give a penny.

With that said. If we can force ACE off of their quick buck plan. Remember they get nothing if AC fails. Make it clear. You want money? We want a real plan. Come up with a long term viable transparent plan. Then, and only then, are we in. Oh and by the way considering who is taking the risk. 10% of the equity is not enough.

Again this is why I initially responded to your apparent optimism over the present situation. I'm not sure if AC will be able to get those "service providers" successfully back to the table. I am fairly sure however that ACPA will not sign if they don't. They can't. A bad deal is worse than no deal.

A perfect example of how competing interests can spiral this out of control came from the CEO of Aeroplan a few days back. In a speech he basically stated that instead of Aeroplan giving up its contract with AC it would be more interested in providing DIP financing during an AC CCAA on the condition it was spared any haircut.

Saber rattling? Brinkmanship? Feeble attempt at trying to throw cold water on any idea of forcing them into a renegotiation? Attempt at giving the impression of leverage in the situation?

To keep everything to a simple concept. AC has to be able to make money. The business plan must be viable or there is no point.

There are two very obvious things missing from the deal the other three unions agreed to that were mentioned in our ACPA brief. One of them is ACE putting money back into Air Canada. I'm hoping our union is witholding support until ACE demonstrates some concrete interest and investment in the long term viability of the airline. The other I won't mention because I don't know how sensitive it is or the state of the negotiations.

Rockie wrote:There are two very obvious things missing from the deal the other three unions agreed to that were mentioned in our ACPA brief. One of them is ACE putting money back into Air Canada.

Rockie,

That is exactly the point. Why is ACE reluctant to invest their money in this plan?

The other point we really need to understand is that the selling point, pension protection, is an illusion without viability. The only thing that will protect our pension is viability.

What they are really doing, is asking employees to throw their future pension income at an unsustainable business plan so they can create the conditions to bail. Sharks. Snake oil salesmen.

With all that negativity. It is not like we have no leverage. We actually have a lot.

ACE looses everything if AC fails. Jazz will loose its CPA if AC fails. Aeroplan will get hammered if people think their points are in jeopardy. Especially with WJ starting up a loyalty program.

Hold their feet to the fire. And remember a bad deal is worse than no deal at all.

One would think these parties would step back from the brink if they truly believed it was coming. Never know though.

I agree that we hold the cards over ACE. Milton, ACE and the greed mongers at Cerberus screwed up and left it way too late to abandon ship. They were so intent on stripping the ship of everything of value that they failed to notice how fast it was sinking, and now they can either help keep it afloat or lose everything.

Poetic in a way isn't it?

Rockie wrote: the greed mongers at Cerberus screwed up and left it way too late to abandon ship.

I believe they got out. They held the preferred shares at ACE. The ones that had a guaranteed floor of $17.50. When ACE proposed its windup the preferred shareholders were offered $17.50. The other shareholders were offered the market value of $5. All the preferred shareholders took the money and ran. (Suspected to be Cerberus) It is why ACE's bank account dropped drastically from 875million. It was the other shareholders that revolted on Milton. It is them that are demanding more than $5 bucks return on investment. Keep in mind they too are hedge funds. They may feel they got screwed over by ACE but it does not mean they are our friend.

Lesson from this? Own the same shares as them or you get screwed.

Brick.
Thanks. Very analytical. I have a much more simplistic view of our problems. Analise this: A couple of years ago we made money. Last year we didn't. The difference? Apparently fuel and currency hedging. Not operations, not Jazz, Aveos, Aeroplan etc. not even our pension. Again, operations wise we are doing a good job. Currency and fuel hedging I'm told is a crap shoot. I believe as airline professionals our guys should have done a much better job as did other execs at other airlines. Our pension needs fixing but I still believe we will not be discussing this issue in a couple of years or so. When the vultures are gone and a real airline is chosen to run this airline, most problems will disappear.

Tony,

You think a company with a 3% margin at the peak of the economic cycle is viable?

Last years numbers didn't even represent much effect from the slowing economy. The Q2 09 number will be a disaster.

Seen it before Brick. I'm not shocked.
Cheers.

tonysoprano wrote:The only reason we lost money was due to hedges (fuel and currency)

Please, read the financial statements. Yes, AC bet and lost on hedges, adding fuel to an already hot fire, but no, sorry Tony, this is not the only reason AC lost money.

In the first quarter (and the second one will probably be MUCH worse), AC's operating loss was $188m and $297m with interest and other charges. Foreign exchange loss and other litems brought the grand total to $400m.

Sadly the company is bleeding money. You can look at it through different crystals, but the bottom line is that AC, as it stands, is not viable. A loss of $1.2 billion last year and probably close to $1b in the first half of '09 will not change unless some major surgery is performed. Nobody will like it, but reducing routes, fleet, size and personnel will eventually be the outcome of all this.

If the company cannot be turned into a much leaner and efficient machine, the end result will be more of the same.

Would love to se WJ ops cost to operate secondery canadian market....yam(nomore) ysb yyb yqt never mind the other ones out west... or east.... chery pick is always good as long are cherry are good...

pilotbzh wrote:Would love to se WJ ops cost to operate secondery canadian market....yam(nomore) ysb yyb yqt never mind the other ones out west... or east.... chery pick is always good as long are cherry are good...

You mean like Comox, Kamloops, Prince George, Abbotsford, Kelowna or Deer Lake, Sydney, Thunder Bay...?