New Air Canada CEO: carrier will not shrink to profitability

Washington DC
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Air Canada's new CEO Calin Rovinescu has no plans to heed advice from some industry observers to slash its fleet and route network.

A former carrier executive and chief restructuring officer during Air Canada's 2003-2004 reorganization under the Companies' Credit Arrangement Act (CCAA), Rovinescu returned to the carrier on 1 April, replacing Montie Brewer.

Rovinescu is tasked with guiding Air Canada through a confluence of events this year including C$3.2 billion (US$2.6 billion) pension deficit, which could result in a cash funding increase of C$410 million in 2009 versus 2008 if the carrier is not successful in lobbying the government to change pension rules.

Air Canada also faces the maturation of roughly C$660 million in debt during the next six-to-twelve months, Raymond James analyst Ben Cherniavsky explains in a recent update. One of the carrier's credit card processors is also requiring that Air Canada maintain a minimum cash balance of $900 million at the end of each month to prevent payment holdbacks, with that level rising to $1.3 billion during the second quarter.

In addition to those liquidity challenges Rovinescu and Air Canada management face contract negotiations with most of the carrier's major unions that aim make gains from the concessions agreed to during negotiation under the carrier's previous restructuring.

Rovinescu recognizes the challenges he faces in getting Air Canada on solid footing. In a recent internal memo to employees he states: "We not only have a global recession that has impacted travel more severely than SARS or 9/11, but we also face a vigorous domestic competitor whose cost structure is significantly lower."

But he dismisses a suggestion by one Canadian analyst that Air Canada needs to cut one half of its routes and fleet to combat its current situation. "Fundamentally I believe we cannot cut, shrink and slash our way to profitability. Sometimes difficult economic times do impose tough choices; however, my inclination will be to always look first for ways to be creative."

The new chief executive says Air Canada's chief commercial officer Ben Smith and his team are being tasked over the coming weeks to "identify creative new revenue opportunities for routes, frequencies and fares".

Rovinescu's return to Air Canada has fuelled widespread speculation that he was put in charge to navigate Air Canada through a second formal restructuring. But not all Canadian industry observers believe that's a foregone conclusion.

"We believe his [Rovinecsu's] appointment is not a signal the company is intending on a CCAA filing," say CIBC World Markets analysts in a report. They reason Rovinecsu has the proper skill set to handle Air Canada's liquidity challenges and "is most able to prevent a CCAA filing".