Cash-rich Air Canada contemplates options
October 3, 2005
Air Canada's parent company is flush with cash, creating both opportunities and headaches as investors await a payout and unions push for wage increases.
Analysts said Monday that ACE Aviation Holdings Inc. should think carefully about other possible uses for its cash hoard before resorting to a special distribution worth up to $300-million.
The sight of an airline with excess cash “seems a little strange,” but Air Canada has managed to build a profitable business model since emerging from bankruptcy protection a year ago, said Steve Garmaise, an analyst with Genuity Capital Markets.
Mr. Garmaise said it's surprising to hear ACE contemplate a payout so soon, given a backdrop where the “pathetic” U.S. airline industry could lose $10-billion this year.
ACE is considering dipping into part of its $2.5-billion war chest to reward shareholders. The difficult part for ACE will be defending its plans for surplus cash while keeping unions onside with a message of fiscal restraint, analysts say.
With ACE hoping to buy new Boeing planes, reducing the pile of cash would potentially mean taking on more debt. At the end of June, ACE had $3.4-billion in long-term debt and capital lease obligations.
ACE disclosed in its management proxy circular on Friday that it will seek shareholder approval to hand out either cash or stock, amounting to $2.64 a share. ACE wants shareholders at its Nov. 10 annual meeting to support a special resolution that would grant directors the authority to approve the payout.
“Any decision to make a special distribution will be based on careful review of our financial position, liquidity requirements and other factors,” ACE spokeswoman Laura Cooke cautioned Monday.
Even if ACE receives clearance for the “tax-friendly” payout, it may refrain from making any actual distribution at the same time it sends out a “positive signal” about its bright financial prospects, Desjardins Securities analyst Nadi Tadros said.
But unions say they aren't impressed by ACE's special resolution, and vow to push for wage increases.
Air Canada agreed to re-examine wages in 2006 as part of a court-approved plan of arrangement. The collective agreements don't expire until 2009, but unions have the option next March of asking for higher wages through a process likely to lead to mediation and arbitration.
“Rather than lining the pockets of investors, ACE should give the money back to the employees who made wage concessions,” said John Amato, national representative for the airline division of the Canadian Auto Workers union.
Montreal-based ACE had $2.5-billion in cash on its balance sheet in August, bolstered by a $462-million equity offering in April and the initial public offering of Aeroplan Income Fund in June. ACE received $160-million from the $287.5-million raised by selling a 14.4-per-cent stake in the loyalty program.
ACE isn't in any rush to raise more money. On Friday, it delayed plans to spin off its regional Jazz airline into an income trust, citing uncertainty in the trust market.
“ACE is cash-rich right now, but what does the picture look like later? All you need is another SARS outbreak or terrorism or hurricane to drag things down,” said Paul Lefebvre, an Ontario local president for the International Association of Machinists and Aerospace Workers. “But if there is money and if Air Canada is doing well next year, that gravy should run down to the employees. Workers have already taken it on the chin.”
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