Still some doubt

[Stickle]

With all the hoopla surrounding AC, I found this surprising

http://www.theglobeandmail.com/servlet/sto...Story/Business/

[Seeker]

Curious to see what the stock does at opening... my bet... it goes up anyway.

[dagger]

With all the hoopla surrounding AC, I found this surprising

http://www.theglobeandmail.com/servlet/sto...Story/Business/

The DBRS analysis is profoundly flawed - again, the fixation with the domestic when AC's biggest profitability opportunities - qualitatively and quantitatively are international. Again the fixation with domestic costs, when AC now has a big cost advantage over most of its international competitors. That being said, the GECAS financing is secured, and until AC repays that - probably by finding substitute debt - it will operate in a paradox. The lack of access to GE-secured assets is what prevents our banks from advancing credit. The minute it buys out the GECAS position, that security is freed up, and it becomes far easier to borrow. You can expect that to happen any time over the next several months, with the funds coming from a foreign syndicate.

[Seeker]

I did catch the focus of the "domestic cost" issue. Another point that is often overlooked is that AC has other revenue streams that contribute to the bottom line and other inducements to our customers than just providing the lowest cost. Thanks for the information about GECAS and the line of credit...fills in some missing blanks for me.

[LongTimer V]

IMHO the cuts are coming again,but this time on the management side since their work does not add anything to the bottom line.Toronto cargo is a prime example of more more management (3 new managers recently) for example,which makes 8 in less then a year yet front line employee's are down 30%.

I'm sure its the same ol same ol in say YUL

[proview]

I hesitate to poke my nose in once again in an area where high emotions seem sometimes to rule, but as far as the Dominion Bond Rating Service announcement is concerned I make the following comments:

1. Rating Services issue ratings regularly so that their customers have a basis on which to measure the risks of lending money to organizations. They do not comment, like many of us on this forum, just to add their opinions to the public debate. They are concerned on how well a company can service their debts, given such factors as the total amount of debt, and the likely cash flow.

2. The new Air Canada is an airline coming out of bankruptcy protection. No one expected a rating higher than 'B'. The company has $6.3B in debt, they are in a traditionally dodgy industry, and there is no evidence yet of profitability. No one should be surprised at this anouncement.

3. The commotion is probably due to the recent euphoria surrounding this company. The stock price has risen, and there has been a lot of 'buzz' about expansion, personnel recalls, new hires, and new routes and aircraft. This DBRS announcement seems to throw cold water on this.

4. I cannot see that the DBRS caution is unreasonable. The only possible improvement in the airline's operation recently is a couple of months of good load factors. This is encouraging, but as the annoucement points out, all the major concerns such as competitive and labour issues remain. Anyone lending money to such a company will have to be careful; that is why landing a line of credit is tricky.

5. A couple of solidly profitable quarters will change everything. Otherwise, lenders might stay away and watch from a distance.

[Super 80]

Not to mention they don’t have much in the way of a fleet or other assets they can put up as collateral for a secured line of credit.

The aircraft actually OWNED by Air Canada, most of which are in the desert (mainline) are not in such high demand that the creditor bank would extend credit on them. In issuing a secured line of credit, the creditor has to perceive some value in the collateral being put up. DC-9’s, timed-out 767s and Fokker 28’s aren’t exactly in high-demand at the moment. If AC could put up A330’s or A320 family jets as collateral, banks would be breaking down their doors offering them secured lines of credit. If AC were to default on its LOC, the syndicate could find new homes for those planes in a matter of hours. But they can’t because those aircraft are leased. It is a weakness all businesses that rely on leasing big-ticket items have. Leasing has some tax advantages and lower upfront costs. But when times are tough, all that leasing means they have very few financing opportunities others would have.

[Fido]

I doubt that AC has any problem getting more airplanes via GECAS or leasing from some other outfit.

The aircraft itself is the collateral and these guys are in the business of managing risk. The issue is with new lenders handing out cash without having any hard asset to secure it against.

[proview]

I doubt that AC has any problem getting more airplanes via GECAS or leasing from some other outfit.

The aircraft itself is the collateral and these guys are in the business of managing risk.  The issue is with new lenders handing out cash without having any hard asset to secure it against.

I am not sure of exactly what measues leasing companies take to protect themselves, but you raise another issue. The company has publicly stated that they want a normal bank line of credit. Mr. Milton has also been going around telling us that the company wants to lease a half dozen additional large airplanes. If the trouble getting the credit line is due in part to the amount of debt they have, this puts them in a pickle. The bond rating companies add the lease commitments into their debt total. If there is trouble getting a credit line now, another lease commitment may make it even harder. The company may be forced to choose between the credit line and the new leased airplanes.

I have no inside information.

[Super 80]

I wasn't talking about getting more planes being a problem, because AC was fairly proactive in dealing with its lessors during bankruptcy, they are quite prepared to work with Air Canada today, as opposed to United who is just pissing its lessors off and has to fight almost constantly as lessors try to goto the courts to get their planes back.

What I was getting at was, Air Canada can not use its fleet to secure general financing, because most their owned fleet is scrap metal, or pretty damn close.

In leasing the bulk of their fleet, the most valuble assets on property, can not be used to secure financing. Which drastically reduces their options.

If you rent your house, lease your car and have a mediocre credit history, you might have trouble getting a loan on favorable terms.

[Super 80]

I am not sure of exactly what measues leasing companies take to protect themselves,

To quote Freddy Laker:

"They can have their f--king plane back"

They get their plane back, and hopefully made enough on the lease up to the point of default to cover depreciation on the asset.

[W5]

Talking about United, what to make of this news release?:

http://biz.yahoo.com/rb/041210/airlines_ratings_sp_1.html

Reuters

Legal Fight Menaces Aircraft Debt Ratings

Friday December 10, 10:59 am ET

NEW YORK (Reuters) - Standard & Poor's on Friday said ratings on about $30 billion of aircraft-backed debt could be threatened if creditors lost a legal dispute with bankrupt UAL Corp. (OTC BB:UALAQ.OB - News) unit United Airlines over the right to repossess aircraft.

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Virtually all U.S. airline aircraft-backed debt would be reevaluated and possibly put on review for downgrade if courts permanently limited the rights of creditors to repossess collateral, S&P said in a statement.

An adverse ruling for creditors also could make it harder for airlines to finance planes because investors would be less willing to buy aircraft-backed debt, S&P said.

United is challenging the right of several creditors to repossess aircraft collateral, alleging that they are colluding with a broader group of aircraft creditors in violation of antitrust law, S&P said. United's bankruptcy court has issued a temporary restraining order preventing repossession, with a hearing set for Dec. 17, S&P said.

"The bargaining position of aircraft creditors would be weakened in their dealings with an airline if they must at all times act completely independently of one another," S&P said. "The airline would, in effect, 'divide and conquer' its various aircraft creditors, playing one off against another."

[better4me]

The basic problem for getting a revolving LOC is that their cash inflow comes well in advance of the transaction/business event occuring. Hence AC does not have any receivables or inventory to margin against.

Here's an example:

The Oil & Gas Drilling Companies can obtain an LOC based upon their receivables, usually 75% of "good receivables" up to a set amount. The good receivables calculation usually happens over one day per month between the CFO/VP of Finance and the banker. The two groups review the receivables list in detail (down to the customer and specific invoice level) and then negotiate what is good and bad. The LOC limit is then set at 75% of good receivables and the Company can pay its suppliers. The bank gets paid in 60-90 days when the receivable is collected.

AC cannot be the drilling company because they recieve cash 3-5 days after the flight is booked and well before the flight is taken. Therefore AC should (in theory) have enough cash to pay the suppliers and employees when the flight occurs.

Given the above paragraph, it does beg the question why AC needs to have LOC if the customers have given credit through advance purchase? AC should be able to use the advance ticket sales to cover the current expenditures and use longterm debt to cover capital expenditures. At least this is how the bankers in Canada see the airline world.

[dagger]

I am not sure of exactly what measues leasing companies take to protect themselves, but you raise another issue. The company has publicly stated that they want a normal bank line of credit. Mr. Milton has also been going around telling us that the company wants to lease a half dozen additional large airplanes. If the trouble getting the credit line is due in part to the amount of debt they have, this puts them in a pickle. The bond rating companies add the lease commitments into their debt total. If there is trouble getting a credit line now, another lease commitment may make it even harder. The company may be forced to choose between the credit line and the new leased airplanes.

I have no inside information.

Yes, Proview, you clearly have no inside information or you would know better. The two ex-Kenya Air 763s and an ex-Air Jamaica 343 have been leased to Air Canada. Negotiations are under way involving two EVA Air 763s. They are being leased to AC because the lessors would rather lease those planes to a carrier with $1.9 billion in the bank than to park in the desert as a Jungle Jim for prairie dogs and rattlers. At least with AC, they know that people like Mitch and Robert will be giving them the best quality service in the world (Did I say it right, Mitch?)

If you had read my earlier post, it did explain AC's current situation with regard to the line of credit. AC's debt with GECAS is over-securitized. AC has to negotiate new debt, at which point it repays GECAS, key assets (Aeroplan, ACTS, etc) are unfrozen and can be offered as security to new lenders. No lender is going to give AC a line of unsecured credit until AC has proven the wisdom of its plan. However, AC can pledge new security when its assets are available. That process is at work as we speak. The value of the assets, even at distressed prices, is far greater than the amount AC owes GECAS.

Meanwhile, AC has guaranteed financings in place for most of its new aircraft acquisitions - the Cdn government, you will recall, is backstopping the CRJ-705 purchase and the Brazilian export credit bank is doing the same for the EMB-175/190. AC had no trouble acquiring its two 345s.

[Fido]

...it does beg the question why AC needs to have LOC if the customers have given credit through advance purchase? ...

As someone from AC Finance said to me recently....

"Never turn down more cheap cash"

[Super 80]

Dagger, do you know if AC has been sniffing around Cathay Pacific for 340's?

[dagger]

Dagger, do you know if AC has been sniffing around Cathay Pacific for 340's?

I have no idea

[Guest ikfu]

AC needs equipment for YVR-Lima, Ho Chi Minh City, Taipei in the west and other routes in the east. Looks like 8 widebodies, but we'll find out tomorrow in any case. It's a matter of whether they can get the furloughed guys: 1. back 2. back fast enough, and 3. train fast enough for next winter, 4. whether there is a willingness to fly 90-100 hours per month - that is not duty time, that is hard time!