Air Canada to Restructure Under CCAA
- Business as usual for airline and subsidiaries; all operations and
customer programs, including Aeroplan to continue without interruption
- $1.05 Billion (CDN) DIP Financing arranged from General Electric
Capital Canada Inc.
- New holding company to be created for Air Canada family of companies
MONTREAL, April 1 /CNW Telbec/ - Air Canada announced today that it has
filed for protection under the Companies' Creditors Arrangement Act (CCAA) in
order to facilitate its operational, commercial, financial and corporate
restructuring. The success of this massive transformation is dependent on
fundamental labour cost restructuring with amendments to collective
agreements, work rules and wages. The CCAA process will allow Air Canada to
restructure its balance sheet and costs to complete its transformation into a
leaner, more efficient, lower cost airline through savings obtained mainly
from aircraft lessors, lenders, bondholders and labour groups.
"Clearly, while not our preferred course of action, a CCAA filing is
necessary to allow Air Canada to make the required changes to compete
effectively and profitably in a changed environment," said Robert Milton,
President and Chief Executive Officer. "Air Canada's customers around the
world can continue booking with confidence that their travel plans will not be
disrupted. 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. Aeroplan
members will have continued access to the benefits associated with our
frequent flyer program throughout the restructuring process and beyond.
Employees, upon whom we depend upon to continue delivering the safe and
reliable customer service Air Canada is renowned for around the world, will
continue to be paid on their regular payroll schedule. Suppliers will be paid
in the ordinary course for goods and services provided going forward after the
filing date.
"While we were able to generate in excess of $1 billion in liquidity
through the DIP facility to finance our restructuring and transformation, in
view of falling revenues as a result of world events it would be irresponsible
to continue without a process in place to bring costs in line with the new
environment. I stress that this is not just about restructuring our balance
sheet - this is about restructuring our operational costs, including labour
and fleet; restructuring commercially to better meet the needs of our
customers and restructuring the corporation to better focus on the development
of stand-alone businesses. 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," said Milton.
Filing of Petition
Air Canada obtained today an order from the Supreme Court of Ontario
providing creditor protection under the Companies' Creditors Arrangement Act
(CCAA). The company is also making a concurrent petition under section 304 of
the U.S. Bankruptcy Code.
The filing includes Air Canada (including all of its divisions such as
Air Canada Technical Services), Air Canada Jazz, ZIP Air Inc. and Air Canada
Capital. Aeroplan, Air Canada Vacations (ACV) and Destina are not included and
these three subsidiaries will continue dealing with their creditors on a
normal basis.
Debtor-In- Possession (DIP) Financing
In conjunction with its filing the Corporation has arranged for a USD
$700 million (or an equivalent amount in Canadian dollars not to exceed
$1.05 billion) debtor-in-possession (DIP) secured financing facility from
General Electric Capital Canada Inc. The facility will be secured by all of
the unencumbered assets of Air Canada, and will be available in two stages.
The first tranche is a term loan in the amount of USD $400 million. The
remaining USD $300 million will be made available as a revolving term credit
facility. The loan will have a term of up to 18 months. In addition to our
unrestricted cash on hand of approximately $375 million, the DIP financing
will provide adequate liquidity to meet all of the anticipated needs of Air
Canada and its operating units to continue normal operations throughout the
CCAA process.
Exit Financing
Air Canada is in discussion with major financial investors with respect
to permanent financing upon exit from the restructuring process. The outcome
of these discussions is contingent upon a number of factors, including labour
cost restructuring and the prevailing Canadian regulatory environment. Onex
Corporation has confirmed its intent to proceed with its offer to acquire a 35
per cent interest in Aeroplan from Air Canada and has agreed to a 30-day
exclusive negotiating period to restructure the transaction, to close upon the
airline's emergence from CCAA.
Contributing Factors
Over the past three years, airlines around the world have faced a number
of significant challenges which have battered the industry. The high tech
meltdown starting in 2000, the economic slowdown of 2001, the terrorist
attacks of September 11, 2001, the growth of low cost competition, high oil
prices and, now, the war in Iraq have all contributed to the situation that
Air Canada, and several other airlines, face today. While Air Canada has dealt
aggressively with many of these issues and outperformed North American
industry peers for the past three years, those achievements are not enough to
overcome the significant cost and liquidity challenges faced by the airline.
Industry Outlook
According to IATA, the industry has lost USD $ 31 billion in the last two
years and their most recent analysis dated March 22, 2003 forecasts the armed
conflict could easily result in USD $10 billion dollars of losses on
international traffic by extending the current traffic slump well into the
summer season. In a Global Equity Research report on March 7,2003, USB Warburg
provided 2003 loss estimates for the North American industry alone of
USD$6.5 billion with full year revenues projected down 4 per cent. The revenue
outlook has further deteriorated with the prospect of a longer than predicted
war in Iraq and the recent SARS crisis. The report also forecast that absent
material change, all surviving North American legacy network majors will enter
Chapter 11 within two years. In Canada, the growth in competitive capacity
from low cost carriers in a flat market adds further to the revenue erosion.
"It is our view that rather than burn more of our resources chasing an
outdated business model, we must cut to the chase now," said Milton.
Labour
"It appears that the only successful airlines today are the original low-
cost carriers or restructured mainline carriers. As we are currently seeing
with airlines in the United States, the labour costs of most legacy North
American carriers are simply untenable in the new airline environment. There
cannot be a successful restructuring without a radical wholesale revision to
work rules and changes under the collective agreements governing the company's
31,000 unionized employees," said Milton.
While the airline has repeatedly outlined to its unions the urgent need
to find $650 million in permanent, annual labour savings by March 15, 2003,
there has been no agreement on a meaningful course of action to date, with one
exception which results in an important temporary saving. The Canadian Auto
Workers Airline Division (CAW) has concluded an agreement on a Supplemental
Unemployment Benefit Plan that will allow the airline to temporarily reduce
its over 1,000 surplus Customer Sales & Service agent workforce and as well
has agreed to defer the general salary increase that would have been effective
March 30, 2003, saving the company approximately $36 million.
"The reaction from union leadership has generally been disappointing and
has ultimately compromised the future of their membership. I had implored our
union leaders to attempt to be different from some of our U.S. peers and
assist in restructuring our costs outside a bankruptcy process, without the
assistance of the courts but the impasse gives us no option but to restructure
under court supervision with the mandatory consent of creditors," Milton said.
"In a CCAA restructuring, the $650 million requested by the company will be
off the table and the appropriate labour cost reduction will be a condition to
be set by creditors, the monitor and the court."
Pension Plans
The value of Air Canada's pension plans, like that of nearly all pension
funds, deteriorated in 2001 and 2002 due to a convergence of declining
interest rates and declining stock markets. As a result of this and coupled
with Air Canada's fragile financial position, the Office of the Superintendent
of Financial Institutions (OSFI) requested that Air Canada suspend the pension
contribution holiday to which it is legally entitled and conduct a pension
valuation earlier than the next regularly scheduled evaluation in 2004 to
determine the extent of the pension shortfall and to fund any liability as
soon as possible. The company has been in a constructive dialogue with OSFI
regarding the appropriate means and schedule in which to address its concerns.
Depending on the outcome of the restructuring, the company is considering
a number of alternatives. These are:
- Reducing accrued benefits to bring its existing pension plans in line
with market practice
- Freezing accrual of benefits for a fixed period of time; or
- Moving to "defined contribution" type pension arrangements.
Commercial restructuring
New Business Model To Better Meet the Needs of our Customers
The restructuring is not limited to fixing the company's balance sheet
and labour costs. Air Canada will also change the way it does business to
better meet the needs of customers. Initiatives underway will allow Air Canada
to simplify its pricing, restructure the network to allow greater ease of use
through higher frequency and increased connecting opportunities. While the
airline adjusts capacity on an ongoing basis to meet demand, there are no
immediate plans to discontinue service on any route at this point. The new Air
Canada will continue to be one of the world's leading carriers serving all
corners of the world.
Operational Restructuring - Fleet
The operational restructuring calls for a revised fleet plan in addition
to a restructuring of labour costs. The revised fleet plan calls for
streamlining the fleet by eliminating smaller fleet such as the Boeing 747-
400, the Boeing 737- 200 and the BAE 146. The plan also calls for the growth
of the company's CRJ-50 fleet as well as the introduction of 90-seat Regional
Jet aircraft.
Corporate Restructuring
Air Canada will also undertake a corporate reorganization that will
create a new holding parent corporation, Air Canada Enterprises, with separate
business units for each of the activities in which the corporation is
involved. Air Canada will continue to carry on a domestic, transborder and
international airline business as Canada's national carrier. As part of the
reorganization all of Air Canada's equity interests in its existing
subsidiaries including Aeroplan, Air Canada Technical Services, Jazz, ZIP, Air
Canada Vacations, Air Canada Capital and Destina will be directly owned, as
sister companies by Air Canada Enterprises. Air Canada will proceed with
previously announced plans to create Airport Ground Handling; and that new
division as well as Air Canada Cargo business operations will be constituted
as stand alone subsidiaries and transferred from Air Canada to Air Canada
Enterprises. Provided that the proposed sale of a 35 per cent share of
Aeroplan is restructured as intended by Onex and Air Canada, this transaction
would close upon the airline's emergence from CCAA.
The reorganization will modernize Air Canada's corporate structure. It is
a continuation of Air Canada's strategy of focusing on the development of
profitable stand-alone businesses. The proposed structure will separate
regulated operations from non-regulated businesses and align management and
labour interests. It is intended that each of the businesses with a unionized
labour environment will have a separate bargaining unit and a separate
management team as well as a cost structure competitive within its specific
sector.
The structure will enhance the operational and financial flexibility of
the Air Canada group as a whole as well as accommodate joint ventures with and
investments by financial and strategic partners.
Chief Restructuring Officer
Over the coming months, Air Canada will work with its creditors, union
leaders, employee groups and other stakeholders to restructure the airline.
Calin Rovinescu has been appointed Chief Restructuring Officer and will
temporarily relinquish his day to day responsibilities as Executive Vice-
President, Corporate Development and Strategy to focus primarily on the
restructuring exercise. Prior to joining Air Canada in April 2000, Rovinescu
was the Managing Partner of a major Canadian law firm and over a 20 year
career, advised various enterprises in Canada, the United States and Europe on
restructurings, privatisations and friendly and hostile takeovers in various
industries. "With his background and wealth of experience I can think of no
one better suited to the task at hand than Calin," said Milton.
"The task before us will be painful at times and the challenges daunting
but I am confident that the people of Air Canada have the fortitude to accept
that the world has changed. With their goodwill and hard work, and our
restructuring plan, I am confident that we will emerge as a strong, efficient
company with a low cost structure, higher productivity levels and the ability
to compete effectively and profitably while providing our customers with the
high service standards they expect of Air Canada," said Milton.
The corporation's audited 2002 year-end financial statements will be
released prior to May 20, 2003.
This discussion contains certain forward-looking statements, which
involve a number of risks and uncertainties. As a result of many factors
including acts or potential acts of terrorism, international conflicts,
government regulations and government mandated restrictions on operations
and pricing, fuel prices, industry restructuring, labour negotiations,
the economic environment in general including foreign exchange and
interest rates, the airline competitive and pricing environment, industry
capacity decisions and new entrants as well as external events, actual
results could differ from expected results and the differences could be
material.
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