Air Canada faces daunting market challenges despite winning labour peace

Air Canada (TSX:AC.B) can focus on market turbulence that continues to threaten its survival after the carrier secured labour stability by winning approval of new 21-month contracts from all its unionized employees.

MONTREAL — Air Canada (TSX:AC.B) can focus on market turbulence that continues to threaten its survival after the carrier secured labour stability by winning approval of new 21-month contracts from all its unionized employees.

The International Association of Machinists and Aerospace Workers, which represents about 11,000 mechanics and baggage handlers, was the last group to come on board. It announced Wednesday that 60 per cent of its members voted in favour of the deal this week, after initially rejecting the contract by 50.8 per cent.

“The successful conclusion of the ratification process represents an important milestone in achieving the stability required to manage through this difficult economic period,” CEO Calin Rovinescu said in a news release.

“It is an encouraging sign of our employees’ support for working together to build a stronger business in the current economic context.”

While he said many hurdles remain to overcome, including securing government approvals to a pension moratorium and $600 million of funding, Air Canada’s return to profitability hinges on a fundamental restructuring of it business.

This includes significant cost reductions that will require participation by certain suppliers and stakeholders, along with initiatives to generate new revenues.

Industry observers says Air Canada’s task won’t be easy.

Jacques Kavafian of Research Capital Corp. said the cash-strapped airline has bought itself labour peace so it can focus on other issues such as getting more cash and fixing its business.

“The company is not out of the woods at all,” he said in an interview, adding that Air Canada faces two or three years of restructuring.

He said the peak summer season is shaping up to be a disappointment as volumes are down and pricing is depressed. And the fall promises to be even worse with demand falling further.

While the unions’ support of the pension funding moratorium and labour stability agreements are helpful in its bid to survive its cash shortage, David Newman of National Bank Financial said the fundamentals remain poor, with Air Canada dragged down by its operating debt.

He estimates revenues per seat mile are down 4.1 per cent, with domestic revenues off 6.5 per cent and business to the United States down 5.2 per cent.

Analysts polled by Thomson Reuters expect the airline’s revenues will decrease 14 per cent and it will lose $1.03 per share in the second-quarter, down from a $1.22 per share profit a year earlier.

Analysts say Air Canada’s business model is broken as its cost structure makes the company less able to compete effectively with WestJet (TSX:WJA), its Calgary-based rival. Some suggest chopping unprofitable routes or dramatically reducing the size of Canada’s largest carrier.

But Rovinescu promised once again Wednesday to preserve the company’s market share.

“We will remain focused on re-engaging our customers and ensuring that we do not concede market share to our competitors without looking for value added ways to preserve it.”

Nonetheless, contract approvals by mechanics, pilots, flight attendants, customer agents and dispatchers have been considered a critical factor in keeping the money-losing airline out of bankruptcy court.

“The majority of the membership has spoken in favour of this agreement so we can now move forward knowing our pensions, our contract, our benefits and our jobs are protected for the next 21 months,” said IAMAW District 140 president Chuck Atkinson.

The union said turnout in major cities was the highest it has ever had for a contract vote, but it declined to release voting results by city.

Many members, particularly in Montreal, had originally opposed the deal because of concerns that mechanics’ jobs will be shifted by repair and overhaul company Aveos to El Salvador. It is believed they continued to oppose the contract despite efforts by the airline to clarify its intentions about contracting out of work.

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