Air Canada rated 'B' on sufficient liquidity and improving cost base

This story is sourced from

Fitch Ratings has assigned an initial issuer default rating (IDR) of "B" to Air Canada, reflecting the company's leveraged balance sheet, adequate liquidity position and "high, but improving cost structure" mitigated by the carrier's extensive global network.

The ratings apply to $1.1 billion of outstanding debt, says Fitch.

The outlook is positive.

The ratings agency notes Air Canada has been "steadily" reducing balance sheet debt since the credit crisis, with total debt declining to C$4 billion ($4 billion) by year-end 2012 from C$5.3 billion at the end of 2008.

Although management intends to pay down scheduled maturities, the potential refinancing of its high-yield bonds and entrance into the enhanced equipment trust certificates (EETC) market is expected to keep debt levels elevated in coming years, says Fitch.

Air Canada plans to add five new Boeing 777-300ERs by February 2014, and induct its Boeing 787s starting next year to replace older Boeing 767s, which are being transferred to its new low-cost carrier Rouge. The carrier expects to commence service with Rouge in July 2013.

Fitch is "somewhat concerned" about this initiative as the concept of starting an airline-within-an-airline "has failed" for North American carriers, including Air Canada's Tango in 2001 and Zip in 2002. Fitch says the execution risk is mitigated by Rouge's "experienced leadership at the helm, and a business plan, which includes several of the key factors that made Qantas successful" in launching Jetstar.

With a fleet of 10 aircraft by year-end 2013, Rouge will provide "immediate" international growth opportunities at a higher margin, says Fitch.