Canadian airline downsizing in the age of COVID


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Think it's time to break out this part of the story because in my humble opinion, it relates directly to the type of aid the federal government may ultimately provide everyone. Rather than posting these activities separately, it pays to look at the whole picture in Canada. 

My underlying premise is that the government would not want to throw unlimited support at the industry. The industry in Canada has distinctly different missions, different ownership structures, immediate and long term concerns. 

And above all, the government will not want to subsidize the industry prior to a proper consolidation - otherwise it will be subsidizing over-capacity on a broad basis. In other words, if you want government support, you have to present a business plan based on the outlook for the next 2-4 years. Air Canada is forecasting a three year program to get back to pre-pandemic revenues. In my view again, the reason the government is taking its time with a support package is to ensure each airline takes steps to bring its operations into line with that kind of smaller market perspective.

Ownership models and issues

Each airline is unique - WestJet is owned now by a wealthy conglomerate, and short of a downsizing of the carrier, the government will leave it to ONEX to keep WJA afloat. ONEX won't want to do that, it whacks its own shareholders and there are a couple of other pandemic affected assets in the ONEX portfolio, so WJA will have to identify which parts of its operation to eliminate in order to gain federal support of some kind (beyond the wage subsidy which only lasts into June). Air Canada is a publicly traded company, so its shareholders are diverse, and take a hit directly in terms of stock price and the analysts views of the assets AC has to expend to keep the carrier going. Air Canada's cash, cash drain and financing projects (note interim financing for 18 A220s is set). Transat is being sold to AC - I tend to think that deal will go through in some form, perhaps with government taking a convertible preferred share position in AT that AC will eventually convert at a small premium for the government. AT won't die, that's politically impossible, but it can't make it on its own with the international leisure market essentially non-existent. So expect the government to help AC remove a politically charged issue. The clue today was AC's announcement Rouge will be mainly a narrowbody operator. AC also is retiring its A319s, E190s and 767s.  The E190s are grounded immediately,, rather than as planned the end of 2020.

Sunwing is privately owned, and wants to be a vertically integrated vacation carrier with hotels in Mexico and the Caribbean. The government may be sympathetic to the airline part of this, but it won't subsidize continued construction of foreign hotels by Sunwing's parent. So that has to be clarified.

The next shoe to drop will probably be the long-term plan for WestJet.

Edited by dagger
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Are governments likely to view the survival of TS in some fashion as a political necessity in the way that the government of the day wouldn't allow Canadian Airlines to fail?

It's hard to see why AC would want to complete a TS takeover now.  AC already has far more capacity and far more employees than it needs, and it expects this to be the case for the foreseeable future.

 

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3 minutes ago, FA@AC said:

Are governments likely to view the survival of TS in some fashion as a political necessity in the way that the government of the day wouldn't allow Canadian Airlines to fail?

It's hard to see why AC would want to complete a TS takeover now.  AC already has far more capacity and far more employees than it needs, and it expects this to be the case for the foreseeable future.

 

I think they will end up with Transat. Yes, it's politically a non-starter for the latter to fail, but we have to see the future fleet arrangements. With AC pulling the 767s, there is room for ATvto become a 330 operator, while AC takes over the new 321s, or something like that.

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I'd have to agree, I can see both AC and WJ at 1/2 to maybe 2/3 the size they are today in three years. Sunwing will be about 1/2 but the real wild card is the AT deal.

I can see great resistance from AC now that the demand has collapsed, throw in a very senior bunch of pilots and other than the A321, an aging fleet of all other types. 

The A330's in particular, with the majority being -200's does not fit particularly well in AC's fleet. Their average age is close to 20 years old which is not good. I was just in Marana and the only Airbus wide-bodies on death row were A340's and A330-200's. FWTW... 

AC lost a billion dollars in Q1 and Q2 will be way worse so an almost 3/4 billion investment is not a good investment now or even the future. 

This actually is more similar than dissimilar to the the AC CAIL merger.

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38 minutes ago, dagger said:

. Transat is being sold to AC - I tend to think that deal will go through in some form, perhaps with government taking a convertible preferred share position in AT that AC will eventually convert at a small premium for the government. AT won't die, that's politically impossible, but it can't make it on its own with the international leisure market essentially non-existent. So expect the government to help AC remove a politically charged issue. The clue today was AC's announcement Rouge will be mainly a narrowbody operator. AC also is retiring its A319s, E190s and 767s.  The E190s are grounded immediately,, rather than as planned the end of 2020.

Considering AC’s predominantly negative forecast of the near term air travel marketplace, and the corresponding necessity to match capacity to demand, and a 3 year recovery forecast, as well as making cash conservation a virtual singular priority, I would suggest that the deal as written is d.o.a.

And while a concerted effort was made to bang the beggar bowl loudly on the table, there is virtually zero chance that AC will see the scale of taxpayer financial intervention in response to the COVID induced crisis that it’s mentioned comparator global carriers are receiving. So that creates the conundrum of AC being asked to spend money that either does not exist or cannot be reasonably judged to be a prudent expenditure given current financial circumstances.

So I would expect that the new starting point for AC to acquire TRZ would be that it’s net cash outlay can not exceed zero. Further, the acquisition cannot have any negative impact on cash flow for at least 24-36 months. How is that possible? The airline division is closed. The broader business is barely functioning. There is no reasonable expectation that the underlying operation will return to any shred of its former capacity for many months or perhaps even years. 

So seemingly the only prudent math for AC would be that the taxpayer fund 100% of the transaction. Is that going to happen? And in an environment where everybody from employees to vendors to leasing companies to airports are taking a haircut due to the impact of COVID-19, somehow the TRZ shareholders are going to collect a premium and walk away unscathed while the puppy they are selling is in a coma?

Everything changed between when this deal was made and today. That is reality. This is a bad deal if for no other reason than timing.

I would walk away from it and let TRZ figure it out on their own (QC government ownership?) or perhaps go through the CCAA car wash. Unwanted or unfavourable leases can be voided. Assets sold. The whole operation can be “right-sized” for where the market is going to be next summer. That is a much smaller market for a carrier that is predominantly international and who’s business is 95% leisure oriented. If government wants to get involved, they can be the debtor-in-possession lender to bridge the restructuring. TRZ shareholders would be wiped out. Rightly so. And the final phase of the restructuring would be sourcing an equity sponsor or auctioning off the restructured company to the highest bidder. Enter AC. Or maybe ONEX.

It seems delusional to spend time contemplating the optimal fleet mix of a consolidated TS and AC while AC is fighting for its own survival. $20MM/day? Do the math. AC has to have some semblance of a balance sheet when this is all over. RM got pushed in to a merger by the Feds. I don’t believe that CR is going to do anything that negatively impacts AC’s future or AC shareholder value.

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10 minutes ago, Maverick said:

I can see great resistance from AC now that the demand has collapsed, throw in a very senior bunch of pilots and other than the A321, an aging fleet of all other types. 

Resistance from AC probably to proceed with the transaction at $18 per share or without government assistance perhaps, but I think Dagger's hypothesis has merit.

With the removal of the 767 fleet, Rouge has exited all of the TATL routes on which it competes with TS.  The acquisition would keep AC in those markets, many of which are probably suitable for high density A-330s such as those operated by TS or for the 321LR.  AC hasn't been averse to operating old aircraft in its Rouge or mainline fleets.

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7 minutes ago, FA@AC said:

 The acquisition would keep AC in those markets, many of which are probably suitable for high density A-330s such as those operated by TS or for the 321LR.  AC hasn't been averse to operating old aircraft in its Rouge or mainline fleets.

May not be a factor / consideration if leisure travel does not have a quick and large recovery.  Fear of the virus will keep customers away, as will country closures.  There is also an additional factor that has yet to raise it's ugly head and that will / could be a large increase in vacation medical insurance coverage 

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I can’t see the leisure market coming back for at least a year. How do airlines that rely on that market for their bread and butter survive? With The implementation of CleanCare + turn times have to increase. This will be an industry wide issue. That will put more pressure on carriers that rely on high acft utilization. The next 12-18 months are going to be brutal. Gov’t money isn’t going to save everyone and as seen in the US there are going to be strings attached. Strings that may be more than some are willing or able to accept. 

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Air Canada Announces Renewal of Shareholder Rights Plan

From Air Canada

MONTREAL, May 4, 2020 /CNW Telbec/ – Air Canada (TSX: AC) (OTCQX: ACDVF) announced today that its Board of Directors has approved a shareholder rights plan to renew Air Canada’s existing rights plan. The renewed rights plan is substantially unchanged from Air Canada’s current rights plan. It is not being adopted in response to any specific proposal to acquire control of Air Canada, nor is the Board of Directors aware of any pending or threatened take-over bid for Air Canada. The renewed rights plan is similar to plans recently adopted by other Canadian companies and approved by their shareholders.

The renewed rights plan will ensure that Air Canada and its shareholders continue to receive the benefits associated with Air Canada’s current shareholder rights plan, which is due to expire at the close of business on the date immediately following Air Canada’s 2020 annual meeting of shareholders. As with the current plan, the renewed rights plans is designed to ensure that all shareholders of Air Canada are treated fairly in connection with any take-over offer or other acquisition of control of Air Canada.

The renewed rights plan will be effective at the close of business on the date immediately following its confirmation and approval by shareholders at Air Canada’s annual meeting of shareholders scheduled for June 25, 2020. If so approved, the renewed rights plan will remain in effect until the close of business on the date of Air Canada’s annual meeting of shareholders in 2023 and would be renewed in accordance with its terms for an additional period of three years (from 2023 to 2026) provided that the shareholders ratify such renewal at or prior to the annual meeting of shareholders to be held in 2023.

A complete copy of the rights plan will be filed and available on SEDAR at www.sedar.com.

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1 hour ago, Fido said:

There is a whole fleet of 737-MAX that Air Canada does not need and likely does not want now.

There is a also a big cheque coming from Boeing for the MAX fiasco, either before or after (threatening?) legal action.

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3 hours ago, dagger said:

There is a also a big cheque coming from Boeing for the MAX fiasco, either before or after (threatening?) legal action.

Between current load factor and capacity numbers, re-training costs, and a guess on when there might be some recovery, what’s your estimate on pilot layoffs tomorrow?

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14 hours ago, dagger said:

There is a also a big cheque coming from Boeing for the MAX fiasco, either before or after (threatening?) legal action.

“Air Canada has concluded its discussions with Boeing to settle the terms of an arrangement in relation to the grounding of the Boeing 737 MAX aircraft. The settlement payments contemplated by the arrangement were made to Air Canada during the fourth quarter of 2019 and during the first quarter of 2020. The compensation is accounted for as an adjustment to the purchase price of current and future deliveries and will flow through Air Canada’s consolidated statement of operations as reduced depreciation expense over the life of the aircraft, and as a reduction to additions to property and equipment on the consolidated statement of cash flow.”

https://www.aircanada.com/content/dam/aircanada/portal/documents/PDF/en/quarterly-result/2020/2020_MDA_q1.pdf

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Air Canada Warms To A321LR After Cancelling 737 MAXs

News from Forbes – link to story

Will Horton Senior Contributor, Aerospace & Defense | 20 May 2020

The Airbus A321LR may have an opening to replace Air Canada’s cancelled Boeing 737 MAX 9 aircraft.

Air Canada cancelled 11 737 MAXs in March so it could have flexibility to order other aircraft, according to CFO Michael Rousseau. The change reduced Air Canada’s firm MAX order from 61 to 50.

“It gave us some optionality on potentially some other planes we might want to look at in the middle of the decade,” Rousseau told the Wolfe Global Transportation Conference. “Those 11 were basically being delivered in the middle of this decade.”

Air Canada Registration number C-GEHV which had just come in as Flight AC 758, from San Francisco, a 737 Max 8, is rolled out of the gate after being grounded, TORONTO, ON- MARCH 13 – Air Canada Registration number C-GEHV which had just come in as Flight AC … [+] TORONTO STAR VIA GETTY IMAGES

Rousseau did not specify the candidates to replace the MAX 9, but he was upbeat when asked about the A321neo.

“The LR would be more interesting to us than the neo,” he said. The A321LR has been increasingly out-performing the 737 MAX 9 on payload and range. “We’ll see how the market evolves.”

Air Canada operates 15 A321s. “They’re good, cost-efficient planes for us,” Rousseau said. “We like A321s.”

Air Canada’s 2013 selection of the 737 MAX over the A320neo family was a major win for Boeing BA since Air Canada never operated the 737 NG and has no A320neo family aircraft on order.

08/26/08 - MISSISSAUGA, ONTARIO - Ahmad Shah, 21, a serviceman with Consolidated Aviation Fueling of 08/26/08 – MISSISSAUGA, ONTARIO – Ahmad Shah, 21, a serviceman with Consolidated Aviation Fueling of … [+] TORONTO STAR VIA GETTY IMAGES

Rousseau is positive about the 737 MAX 8, of which it has received 24. “We still like the plane,” he said. “It’s very good for Air Canada.”

The 737 MAX can help re-build traffic after COVID-19, Rousseau said.

“We think North American markets come back first,” he said. “Planes like the Airbus A220 and the MAX are the two most efficient planes to support that market.”

Air Canada expects the 737 MAX grounding to be lifted later this year, improving financing options.

“Once ungrounded, we believe the market will finance the MAX,” Rousseau said. “Also EXIM is back in business.” Air Canada will finance future MAX deliveries via EXIM, EETC or sale and lease back.

737 MAX customer Southwest Airlines LUV noted it is hard to argue for MAX grounding compensation while COVID-19 grinds most traffic to halt. This dilemma is not applicable for Rousseau.

“We’ve come to terms with Boeing already,” he said. “There won’t be any more adjustments from what we had already negotiated.”

The MAX reduction was not because of the start of the coronavirus outbreak, Rousseau said. “It was a purely independent fleet decision we made to give ourselves a little more fleet flexibility.”

© 2020 Forbes Media LLC. All Rights Reserved.

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