Air Canada makes deal with unions

Air Canada (TSX:AC.B) shares soared Tuesday after its restructuring plan got a boost from tentative deals with the last of its five major unions and news that the cash-strapped airline may be able to tap funds from federal agencies.

MONTREAL — Air Canada (TSX:AC.B) shares soared Tuesday after its restructuring plan got a boost from tentative deals with the last of its five major unions and news that the cash-strapped airline may be able to tap funds from federal agencies.

The company’s shares were 18 cents or 12 per cent at $1.67 in morning trading on the Toronto Stock Exchange. They had been up as much as 19.5 per cent before falling a little in later trading.

Air Canada announced early Tuesday that it has reached agreements with the Air Canada Pilots Association and the Canadian Union of Public Employees, which represents flight attendants. Three other unions had reached similar deals last week.

The tentative contracts include a pension funding holiday and equity restructuring.

The agreements are subject to conditions including Air Canada raising $600 million of financing, ratification by union members and federal approval for the changes to the pension contributions.

The Air Canada Pilots Association represents about 3,200 pilots and CUPE represents approximately 6,700 flight attendants. Negotiations continue with flight attendants.

The deals come a week after Air Canada announced it reached similar deals with the International Association of Machinists and Aerospace Workers, the Canadian Auto Workers union and the Canadian Airline Dispatchers Association.

“This restructuring plan will meet Air Canada’s most immediate financial needs while also putting it on the road to becoming a sustainable business for the long term,” said ACPA president Captain Andy Wilson.

Airline analyst Jacques Kavafian said the deals make it less likely that the company will file for bankruptcy protection, especially since the federal government is rumoured to back a $600 million loan. Reports say that government agencies will provide $200 million.

While the union agreements will improve Air Canada’s liquidity and provide labour stability, the airline will has to make about $617 million in debt repayments this year, along with day-to-day funding requirements, added David Newman of National Bank Financial.

The airline faces deteriorating fundamentals because of the recession, the onset of the H1N1 influenza virus, a competitive marketplace and rising fuel costs, he said, adding that the second-quarter is shaping up to be very tough.

“The fundamentals remain poor, with Air Canada particularly impacted given its operating leverage,” he wrote in a report.

The agreements are also subject to approval by the board of directors of Air Canada.

Air Canada president and CEO Calin Rovinescu said agreements on pension deficit funding and labour contract extensions are “critically important steps that will enhance Air Canada’s ability to obtain additional financing to manage through the recession.”

Following the 21-month moratorium on past service payments, the deals require the airline to pay $150 million in 2011, $175 million in 2012, and $225 million in 2013.

That’s considerably less than the maximum $645 million pension funding obligation that would have been required in 2009, said Newman.

Unions would receive a 15 per cent equity stake in the airline, to be issued to a trust. Proceeds from the sale of the shares would be used to reduce the pension deficit, which at last count stood at $2.9 billion.

Union members would have the right to one representative to Air Canada’s board as long as their stake exceeds two per cent.

“With this issuance of stock, the interests of unionized employees will be better aligned with the interests of our shareholders and I look forward to their active participation in building shareholder value,” said Rovinescu.

Under the restructuring, Air Canada cannot sell certain business units before the end of March 2011.

Air Canada would also not be allowed to make any unusual distributions.

Airline executives will have their salaries frozen with no bonuses possible until 2011 to coincide with the wage freeze of union members. Enhancements to executive pension plan benefits are prohibited through to 2013.

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