G & M ..AC Pension woes

[Kip Powick]

Brent Jang and Shawn McCarthy

Toronto, Ottawa — Globe and Mail Update, Thursday, May. 28, 2009 06:50AM EDT

Air Canada (AC.B-T1.37-0.03-2.14%) faces an onerous pension payment in nine weeks that could create a cash crunch and place the airline dangerously close to breaching credit covenants.

Based on a soaring pension solvency deficit, the airline's next pension contribution – due on July 30 – could rise to $225-million, double its previous payment, including a “catch-up” portion because of an underpayment for the first quarter, said an aviation official.

Air Canada had a $1-billion cash balance at the end of April. The coming bill for its pension plan could potentially place the company in jeopardy of falling below the $800-million minimum it needs to keep payments flowing from a credit-card processor.

The airline's pension issues have the potential to create a political headache in Ottawa after the proposed government bailout of General Motors of Canada Ltd., a company that is also suffering from a multibillion-dollar pension solvency deficit.

Federal Industry Minister Tony Clement insisted for months that Ottawa would not help cover GM's pension deficit, and that the matter was an exclusively provincial issue for the Ontario government. However, Canadian Auto Workers president Ken Lewenza said last week that GM would use federal-provincial restructuring loans to make a major payment on its pension shortfall.

Air Canada spokesman Peter Fitzpatrick declined comment about the next quarterly pension instalment, but the aviation official, who declined to be named, said on the basis of the current figures it would be about $225-million. The number is subject to change, depending on various factors, and the airline may be able to defer at least part of the payment until the fall.

The airline is urging its unions to support a moratorium on company contributions to the pension plan, seeking to postpone the next payment until Jan. 30, 2011. If the Montreal-based carrier is able to get its unions onside, it would then ask Ottawa to approve the moratorium on past service contributions.

So far, union leaders have been cool to management's proposal, saying employees would be left shouldering too much pension risk if the airline fails to maintain the contributions.

“In the immediate term, obtaining a funding moratorium on our pension payments remains the critical priority,” Air Canada chief executive officer Calin Rovinescu said in a statement earlier this week.

If Ottawa refuses to grant the 21-month moratorium, Air Canada could be forced to embark on a series of asset sales to raise money to make upcoming pension contributions, analysts say. Its assets include new Boeing 777s, but selling off those planes and leasing them back would further weaken the balance sheet.

“It's not a great time to sell 777s because the whole industry is in contraction and there isn't a big demand,” said McGill University business professor Karl Moore.

The cash-strapped airline met its first-quarter pension obligation of roughly $110-million, but that payment was pegged to a formula based on a $1.2-billion pension solvency deficit on Jan. 1, 2008.

The deficit has since surged to $2.9-billion, as investments have been battered by last year's plunge on stock markets.

Robert Milton, CEO of Air Canada parent ACE Aviation Holdings Inc., said in an interview that management wants to preserve the pension plan.

“Yes, I want the employees to have the pension. But the fact of the matter is we've got all-time low interest rates and we've got equity markets that have been crushed, and so that puts a lot of pressure on pension plans and funding, without a doubt,” Mr. Milton said. “We have tried to make it work with a pension plan that is very attractive.”

Federal Finance Minister Jim Flaherty has recently expressed worries about the looming crisis with Air Canada's pension plan, said an Ontario government source.

Federal officials are making a concerted effort to portray General Motors of Canada's pension woes as Ontario's problems, out of concerns that any involvement by Ottawa in addressing the auto maker's shortfall could set a precedent for Air Canada, the source said.

Critics insist the federal government is, at least indirectly, contributing to the GM pension assistance, while Ottawa maintains the provincial share of a GM loan package – should it get approved – will be more than enough to cover the pension contribution.

Liberal MP Frank Valeriote said Ottawa is clearly looking to avoid the perception that it is providing assistance to the GM pension plan, knowing that federally regulated companies like Air Canada have similar funding problems.

Ontario Premier Dalton McGuinty acknowledges that assistance for GM's pension funds has to be part and parcel of Canada's contribution to the aid package, but he has refused to be drawn into Mr. Clement's assertion that the pension shortfall is Ontario's problem.

“I'm not sure it's helpful to get into that kind of a game,” Mr. McGuinty said yesterday.

[DEFCON]

Where is this money coming from?

Should a 50 year old be able to walk away from an automaker with a 100+K buyout, a very low cost new car, medical benefits etc and an indexed cash for life plan while his neighbour of the same age continues to work every day scrimping and saving his way through life in the hope he'll have enough to put his kids through school & fund his own retirement at 65? And yes, it'll be tougher for the neighbour to achieve his goals when the government calls for increased taxes to fund the autoworkers big life win.

I just can't see this concept as being remotely palatable to the working masses?

[planett]

How the masses feel about it is irrelevant, If it makes one person happy, (the right person) it will happen.