Air Canada in bankruptcy


Aug 20, 2002
Apr. 1, 2003. 04:06 PM

Air Canada given bankruptcy protection
Troubled airline in talks with potential partner for equity investment


MONTREAL - Canada''s once-proud flag carrier Air Canada was granted bankruptcy protection from creditors today as the company promised to remake itself from a money-loser into a leaner, more competitive and profitable airline.
The bankruptcy protection, sought by Air Canada to avoid collapse, will allow the carrier to continue operating while it negotiates a survival plan with employees, creditors and other stakeholders over the next several months.

Air Canada is determined to do all in its power to restructure itself through this process and emerge as a world-class competitive and profitable airline, Robert Peterson, the company''s chief financial officer, said in a sworn affidavit submitted to the Ontario Superior Court of Justice in Toronto.

In its court filing, Air Canada (TSX: AC)revealed it had secured up $1.05 billion (Cdn) in debtor in possession financing from GE Capital - one of the world''s biggest industrial lenders - to keep the airline operating while it restructures.

An Air Canada lawyer said the restructuring could take between three and six months to complete.

In its filing, Air Canada also revealed:

- The airline is in talks with a potential partner for an equity investment.

- Its employee pension plan is under-funded by about $1.3 billion and the carrier has struck a deal with federal financial regulators on how to deal with the shortfall.

- A deal to sell 35 per cent of its Aeroplan frequent-flier rewards program to Onex Corp. has been called off, although Toronto-based Onex will have a 30-day exclusive right to renegotiate a new - and presumably cheaper - agreement.

- It is asking the court for a 60-day moratorium on aircraft lease payments to prevent creditors from grabbing the company''s planes.

GE Capital, a unit of General Electric Co. of Fairfield, Conn., is also a
leading owner of leased aircraft. Since Air Canada has sold most of its aircraft to lease them back, GE Capital would be one of Air Canada''s biggest creditors.

For customers and the travelling public, it will be business as usual while the court process goes on, the Montreal carrier said. Employees and suppliers will be paid as usual and Aeroplan will operate normally.

Air Canada''s customers around the world can continue booking with confidence that their travel plans will not be disrupted, chief executive Robert Milton said in a release.

It has been repeatedly demonstrated that the action we have taken today to restructure will not create a disruption to service nor should it impact in any way our commitment to safety and customer service - this has been demonstrated by US Airways and United Airlines in recent months.

Analysts say bankruptcy restructuring was the only option left for the airline if it did not want to go the way of Canada 3000, the leading charter airline that abruptly went bankrupt and stopped flying in November 2001, leaving thousands of passengers traded in many countries.

Michael Carney, a professor in Concordia University''s aviation management program, said the filing is almost a relief. He said it will give the airline breathing room until the war in Iraq will be over and demand starts to pick up again.

I guess it would make sense to do it as soon as possible before they start having people seizing assets. That would cause chaos in the organization.

Analyst Fadi Chamoun of UBS Warburg said the filing is a good thing for Air Canada. They will be able to restructure much more efficiently than they would have before.

Chamoun said that while the filing will not necessarily mean Air Canada can break open its union contracts, they will have a better chance of reaching deals with unions.

Major wage concessions, layoffs and capacity cuts are widely expected as the carrier tries to shrink its operations to reflect a major squeeze on its revenues and a slump in global air travel the company believes is permanent.

Air Canada''s Peterson said he believes the airline has an exciting future ahead of it if it can get agreement on a way to sharply cut costs.

This (court) application is not intended as a chapter in a management-versus-labour conflict, he said in the bankruptcy filing. The business realities threaten the survival of the company and all of its jobs. Failure to adapt all aspects of the business - capital and labour - to the new realities will result in an avoidable but tragic disaster in which all stakeholders will emerge as losers.

James Farley, the bankruptcy court judge who will oversee the court process, said the company and its unions should work co-operatively to restructure the business.

Everyone should look in the mirror and see whether or not they''re pulling their fair share, Farley said.

While Air Canada has recently faced intense competition from smaller domestic no-frills carriers, particularly WestJet Airlines of Calgary, it typically considers its peers to be other full-service carriers with international routes.

In the United States, they would include American Airlines - the world''s largest airline - as well as United Airlines, currently operating under court-protection from creditors.

Under a restructuring, Air Canada''s shareholders could he badly hurt, with little value left in the company''s shares. The stock was halted before markets opened today and there was no indication when trading would resume.

Typically it leads to the debt holder owning a bigger part of the company and the company being able to reduce its costs by reducing the interest they have to pay them, explained Chamoun.

On Monday, Air Canada stock hit a new 52-week low of $2.11, down 15 per cent for the day. Its shares used to trade in the low-20s about two years ago, before the industry was battered by a weak U.S. economy and the fundamental changes to air travel after the Sept. 11, 2001 terrorist attacks.

The airline''s bonds have been trading at 18 cents on the dollar.

Air Canada''s granting of court-protection came a day after two major unions said they accepted a total of 2,300 job cuts affecting their members, as part of a 3,600-employee downsizing announced March 20 by Milton. Before the latest cuts, the company employed 35,000.

The bankruptcy-court filing had been anticipated by industry observers as the war in Iraq compounded already deep financial problems due to intense domestic competition, rising costs and a weakening economy in recent months.

As of Dec. 31, Air Canada owed about $12.9 billion in long-term debt and leases. It also lost $428 million last year, bringing the total to more than $1.7 billion since its last profitable year in 1999.

By filing under the Companies Creditors Arrangement Act - a federal law that''s roughly similar to a Chapter 11 filing under the U.S. bankruptcy code - the company hopes to work out new deals with its various creditors, unions and other stakeholders.

On Monday, Transport Minister David Collenette said he won''t provide a cash bailout for Air Canada. But Collenette has also said the federal government is committed to the survival of Canada''s largest airline in some form or another.

Onex said it expects to complete its purchase in Aeroplan on the date on which on which Air Canada''s CCAA plan is implemented following creditor and court approval. Onex and Air Canada remain committed to completing the proposed Aeroplan transaction and intend to work expeditiously to finalize an agreement, it said in a statement.
Aug 20, 2002
This board doesn''t care about foreign flag carriers.

AC''s filing and emergence from BK could be a blueprint for how to keep an airline alive.

The Canadian government has already said they won''t allow the airline to disappear. Foreign investment is an option.
Yes, AC''s market is only one-tenth the size of the US market but AC doesn''t have the competition from other network carriers.

Wouldn''t AC be an attractive investment for an Asian carrier?

Good luck to all, if any, AC employees who are lurking.


Aug 20, 2002
Toronto Star
Apr. 2, 2003. 07:16 AM

Angry Air Canada boss hits at unions
Seeks protection from creditors


For Air Canada''s Robert Milton, the bitter end came about 3:30 a.m.

Distraught and exhausted after hours on the phone pressing union leaders one last time for concessions, the airline''s wunderkind chief executive turned to advisers gathered in his Montreal office and was finally forced to admit that he had failed.

By 6:30 a.m. yesterday Milton was seeking the board''s final approval via conference call to plunge the country''s biggest airline into bankruptcy protection from its creditors.

That filing — in a Toronto courtroom early yesterday afternoon — has started the clock on a massive restructuring that will likely see thousands of layoffs, wage cuts, the grounding of aircraft, the axing of services to small communities and the renegotiation of the airline''s almost $13 billion debt.

If Milton finally has his way, it will end sometime later this year in the most dramatic transformation of the country''s flag carrier in its almost 66-year history and make it a formidable rival to profitable low-fare competitors like WestJet Airlines.

"Air Canada''s customers around the world can continue booking with confidence," said Milton yesterday in a conference call where he blamed the airline''s unions for being too slow to realize that "urgent action was needed."

"The business model is broken and it must be fixed without burning any more furniture. Air Canada and our people need to embrace a culture change and a new way of doing business," Milton said.

Air Canada has assured the 6 million members of its popular Aeroplan loyalty program that it''s business as usual and that they can continue to accumulate and redeem points.

While the filing had been widely anticipated for weeks, it still left thousands of employees stunned.

"They''re blaming the employees for all the problems and not the management," said one Air Canada veteran.

Never before has such a massive Canadian company — Air Canada has about 40,000 employees — been forced to seek protection from creditors under the Companies Creditors Arrangement Act.

The filing adds Air Canada''s name to the list of major carriers, among them United Airlines and U.S. Airways, that have filed for bankruptcy protection since Sept. 11, 2001.

The terrorist attacks on that day sent already troubled airlines into a tailspin which has only been made worse by the downturn in traffic since the U.S.-led war on Iraq and the outbreak of the highly contagious Severe Acute Respiratory Syndrome (SARS).

Rival WestJet chief executive Clive Beddoe predicted the restructuring will benefit Canada''s airline industry in the end, and give competitors room to grow.

Since the weekend, Ottawa had been in almost constant touch with Air Canada executives and standing by with a more than $300 million package of loan guarantees, much like those offered to Canada 3000 Airlines before it went bankrupt in November, 2001. But in the end, Milton and the board opted for a hastily organized $1.05 billion package of court-protected financing from General Electric Capital Canada Inc., whose sister company owns about 100 of mainline Air Canada''s 232 aircraft.

"We are in a fight for survival in which all the stakeholders have the same interest," Air Canada lawyer Sean Dunphy told an Ontario Superior Court of Justice yesterday.

"Failure is not an option.

"Air Canada absolutely realizes it must transform itself into the company Canadians want and need."

Air Canada revealed yesterday that:

It is in talks with potential equity investors "of substantial resources" for an equity investment in the troubled airline.

Its employee pension plan is under funded by about $1.3 billion, which some fear could result in reduced benefits for employees.

It has to renegotiate a critical, $245 million deal with Onex Corp. for a 35 per cent share in its loyalty program Aeroplan, a move likely to result in either less cash from the deal or a bigger stake for Onex.

It will review its fleet of aircraft and renegotiate leases over the next 60 days, given that the market value of aircraft has dropped as much as in half since the Sept. 11 terrorist attacks sent air travel into the biggest tailspin in its history.

It has $375 million in cash on hand and owes suppliers about $200 million.

"This (court filing) almost gives Robert Milton a blank piece of paper on which he can redesign Air Canada from scratch," said industry expert and University of Toronto business professor Joseph D''Cruz.

"I think Robert Milton''s got what it takes to come through this."

Mr. Justice James Farley stressed yesterday that remaking Air Canada has to be "a team effort," which could prove difficult given the deep animosities between the carrier''s management and unions.

Pam Sachs, head of the union for Air Canada''s flight attendants, accused Milton of issuing a "13-hour ultimatum" to employees at dinnertime Monday night, giving them until 6 a.m. yesterday to come up with a 22 per cent across-the-board cut in wages, with no assurances that would avoid a bankruptcy filing.

"Both (labour and management) will have to look at themselves in the mirror to see if they are truly pulling their own load," said Farley, who set a date of April 22 to hear from concerned creditors in the case.

"This is not a situation where one (side) sits back and asks the other to do the sacrifice."

Ottawa had made it clear to Air Canada executives that the government would step in if needed to keep the company solvent.

"We would have been there to backstop them, but it would have been a fully secured loan (with) no risk to the taxpayer," Transport Minister David Collenette told a news conference.

But, instead, the airline began intense talks just days ago — "we negotiated over three days and six nights," quipped one lawyer — for private sector help from GE Capital, a move that avoids stringent conditions such as keeping unprofitable service to small communities, that would likely have been part of a federal bailout.

"Let''s put this in perspective," said Dunphy of the talks with GE Capital.

"It took US Airways three months to negotiate (a loan package of) $1.5 billion (U.S.) We took less than three days."

Collenette described a day of dramatic developments on Monday as the government waited to see if the private funding would come through, or if Ottawa''s help would be needed. Ottawa first asked the airline for an answer by late Monday afternoon, but later extended that to 10 p.m. In the meantime, a Toronto bankruptcy courtroom had been quietly set aside under the name "X vs. Y."

Air Canada is likely to emerge from bankruptcy protection a smaller airline with fewer domestic routes, Collenette acknowledged.

"They''ve got a very good business internationally. There''s no reason why they can''t expand into new markets if they get their costs under control," the minister said.

"If (Air Canada does) withdraw from smaller communities, I think people in those communities should not have a great fear. There will be others that come in to fill the capacity."

Despite Ottawa''s increasingly hands-off attitude toward Air Canada, Collenette said he cares a great deal about the company''s survival.

"I understand the stress that this situation is placing on the employees of Air Canada and their families as well as their suppliers, shareholders, lenders and, of course, the travelling public." he said. "But Air Canada remains a world-class airline and I''m confident that it will find long-term solutions to its current challenges."

Opposition MPs were harshly critical of Collenette''s handling of the airline industry, which has expressed continued frustration that Ottawa supports the concept for a $3 billion high-speed train in Central Canada, but continues to cripple the country''s air carriers with hefty fuel taxes and airport rents and charges airline passengers for airport security.

"We can see now Air Canada has been left very weakened because of the policies adopted by Mr. Chrétien and his team in the last 10 years," NDP leader Jack Layton told reporters.