Air Canada receives pension extension, but with stipulations

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The Canadian government will allow Air Canada to extend its pension funding arrangements to 2021, but the country's finance department says that it "has taken a hard line" with the flag carrier and imposed special conditions as part of the agreement.

The airline faced a Canadian dollar (C$) 4.2 billion ($4.09 billion) deficit in its domestic pension plans at the beginning of 2012 and will now have more time to make up for that gap.

Under the seven-year extension, Air Canada will be required to pay at least C$150 million in payments annually to cover the shortfall with an average of C$200 million per year over the life of the agreement. Between 2014 and 2020, Air Canada will have contributed a minimum of C$1.4 billion in these special payments in addition to its current service payments for the pension.

"In the current extremely low interest rate environment, Air Canada's pension solvency deficit funding payments would be unsustainable without this extension in place," said Air Canada in a release.

The flagship carrier's current funding arrangement expires on 30 January 2014, and the new agreement will last until 30 January 2021. It paid C$433 million to the pension plan in 2012, which was an increase of C$48 million from the previous year, according to information released with its fourth quarter results in February.

Air Canada was required to amend its initial proposal for the funding, shortening the term of the extension and making greater solvency payments over the term of the arrangements.

Under the limitations of the agreement, Air Canada will not be permitted to pay dividends or allow share repurchases. The airline will also be required to freeze executive compensation at the inflation rate and will not be able to disburse special bonuses, Canada's finance department says. The airline will also require regulatory approval to make any benefit improvements to the pension plan.

The airline made modifications to its pension plans through new collective bargaining agreements that it struck with its unions last year, which are subject to regulatory approval.

"It's important to note that Air Canada's unions and retirees have been supportive of the company's request for further solvency funding relief for its pension plans," said Jim Flaherty, Canada's finance minister in a statement. "This regulatory change is not costing Canadian taxpayers a single dollar, but it is providing Air Canada time to pay off the sizeable pension deficit."

Air Canada will have contributed C$1.48 billion in past service payments to the pension plan and current service costs between 2009 and throughout 2013. The government adopted a regulation for Air Canada's pension plan funding in 2009 that outlined maximum past contribution levels for Air Canada's 10 domestic benefit pension plans.

Under the 2009 pension regulations, Air Canada's past service contributions to the pension plan for 2012 was capped at C$175 million, said Michael Rousseau, the carrier's chief financial officer on its third quarter 2012 conference call. The 2013 contributions were capped at C$225 million.

Calgary-based WestJet says it is disappointed with the government's decision to allow its main competitor an extension for the pension funding arrangement.

"While we recognise this has been a difficult decision for the government, we are disappointed with this announcement," said Gregg Saretsky, president and chief executive of WestJet in a release. "We are supportive of a strong and competitive aviation industry in Canada. To that end, we trust this marks the end of special treatment for Air Canada as such treatment at the expense of other industry players has become too common. We look forward to working with the government to create a level playing field and an environment that supports a healthy industry that benefits the travelling public."

The new regulations are subject to government approval.