Eighteen months after entering a court-supervised creditor arrangement, Air Canada is set to emerge as a reborn airline.

This complex restructuring took half as long again as expected, and involved many showdowns between creditors, unions, management, potential investors and government officials. Some were exercises in brinkmanship; others brought the airline close to collapse.

In the end Air Canada pruned its C$3 billion ($2.3 billion) annual labour bill by more than one-third, cut a further C$1 billion a year in aircraft lease and supply costs, trimmed nearly 7,000 staff and reduced its debt, including off-balance sheet leases, from C$13 billion to C$5 billion. It is relaunching with access to C$2.9 billion of new capital, including a loan of more than $1.8 billion from GE Capital Aviation Services.

The airline's business plan follows previously announced goals to trim its fleet, move to smaller jets on domestic and US routes and allow its domestic market share to slide, while boosting higher-yield overseas flights. Although unit costs are now comparable to those of domestic rivals WestJet, Jetsgo and CanJet, Air Canada will still offer many features of a full-service carrier. It projects next year's revenue (C$9.1 billion) will be only 3% higher than this year's, but net earnings will rise 50% thanks to lower costs. After a loss this year, some analysts predict the airline could post a C$290 million profit next year and a C$470 million profit in 2006.

Air Canada's new ownership will vary depending on how many creditors take up an C$850 million rights offering and how long they keep their shares. Deutsche Bank is underwriting the offering and has actively bought rights from creditors, especially airline unions, who do not want shares.

Together, Deutsche Bank and the creditors will own 88% of the holding company parent of Air Canada, New York hedge fund Cerberus Capital Management will own 9.2%, with the balance set aside for management compensation. Foreigners could hold up to 70% of the new shares. To stay within Canada's 25% cap on foreign voting interests, they will receive variable voting shares - pro-rated to reduce their voting rights. Canada's transport agency says this will satisfy the foreign cap.

The challenge Air Canada faces now is the same as other airlines have faced after restructuring - to avoid stumbling and ending back in bankruptcy.


Source: Airline Business