Air Canada loss widens as revenue falls

Scott Deveau and Jamie Sturgeon, Financial Post
May 8, 2009

An Air Canada passenger walks to catch his plane at the Calgary International Airport in this June 17, 2008 file photo.

Photo by: File

TORONTO — Air Canada said negotiating a deal with unions and the federal government to deal with a massive pension shortfall is the airline's top priority as it struggles to cope with an economic slump that has slashed business travel and widened its quarterly loss.

Air Canada reported a wider first quarter loss on Friday as passenger revenue declined, notably from business travellers as the economic slump deepened. Further, it expects passenger revenue to remain under pressure for the rest of the year.

The national airliner recorded a net loss of $400 million, or $4 a share, in the three months ended March 31 compared with a loss of $288 million, or $2.88 a share, in the corresponding quarter a year earlier. Operating revenues fell more than 12 per cent to $2.39 billion.

The loss was wider than expected among equity analysts polled by Bloomberg, who on average were calling for a loss of $2.37 a share on sales of $2.37 billion.

Passenger revenue declined 13 per cent or $300 million in the quarter. "A weakened economy, a significant reduction in business travel, and competitive pricing activities were factors in the decrease in system passenger revenues," the Montreal, Que.-based carrier said in its earnings release.

Air Canada said it expects its full-year system capacity to shrink by between four and five per cent as fewer seats will likely be required by customers, the carrier said. The guidance, "reflects Air Canada's assumption that the North American economy will remain weak for the second quarter and remainder of 2009."

The carrier said it has identified $250 million in cost savings in "operational efficiencies, better vendor contract management and more effective manpower planning," which it will implement over the next 18 months. The company said it undergoing a two-month review to find additional savings.

Shares in Air Canada have jumped more than 58 per cent since Wednesday to close at $1.80 on Thursday, but fell in early morning trading Friday following the results. At 11 a.m. they were down 18 per cent at $1.44.

On Friday, Air Canada said it was continuing talks with both its unions and government on finding a method to effectively fund a pension shortfall and debt obligations.

Investors and analysts are awaiting on how the battered company — whose share price has lost more than 75 per cent of its value in the last year — will negotiate funding its rising pension and debt obligation. The company said it is not only awaiting some relief from the federal government, which is currently reviewing pension regulations in the country, but that is also seeking a moratorium on payments from its unions on its pension obligations.

The company said its pension solvency deficit currently sits at about $2.85 billion.

Management said that if the federal government changes come through it could reduce its pension funding obligation to $570 million this year, which is about $114 million more than last year. But the company would still need a moratorium on its payments to meet that obligation.

"Priority one is the pension fund, and finding alternative pension funding arrangements," Rovinescu said. "I've said to our employee group that we're firmly committed to find a way to maintain Air Canada's pension plan, if we can, but we need an interim pension funding solution until the federal government enacts more permanent changes to the pension regulations."

Most of the airline's unions have said they are open to discussing the possibility of a temporary moratorium on pension payments. However, the CAW, which represents 4,500 of the airline's customer service and sales agents, said earlier this week it would not support a moratorium without the federal government establishing a pension guarantee fund to backstop their pensions.