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Dow Jones Business News

Court Monitor Reports on Air Canada Finances

Thursday May 29, 11:13 am ET

TORONTO (Dow Jones)--Air Canada will have slashed C$766 million in labor costs if all the tentative agreements reached with its unions go through, a court-appointed monitor said in a report Thursday.

But Ernst & Young warned that those agreements are at risk if the airline fails to hammer out a deal with the Air Canada Pilots' Association, or ACPA, and suggested liquidation is still a possibility.

The report said Air Canada's financial obligations are still well above the company's cash on hand.

"The expected ongoing increase in the Post-Filing Deficiency as a result of incurring further operating losses (absent the achievement of significant labor and other cost reductions) increases the exit financing requirements and further jeopardizes the prospects of a successful restructuring of Air Canada and its emergence from CCAA," the Ernst & Young report said.

It noted the airline is burning through C$5 million a day.

Air Canada filed for bankruptcy protection on April 1 under the Companies' Creditors Arrangement Act, or CCAA. It obtained US$700 million in debtor-in- possession financing from GE Capital Canada and has said it expects to emerge from CCAA by the end of the year.

Air Canada is expected to update Ontario Superior Court Justice James Farley on its restructuring progress at a hearing later Thursday.

The company had hoped to trim C$770 million from its annual C$3 billion labor bill through management cuts and agreements with its nine unions.

According to Ernst & Young, the court-appointed monitor for Air Canada in its bankruptcy restructuring, the airline has reached deals with eight of its nine unions to reduce labor costs by C$609 million.

Cuts in management and non-union staff add another C$157 in cost reductions.

The monitor's report indicated that:

-the Canadian Union of Public Employees, or CUPE, which represents flight attendants, agreed to C$136.8 million in cuts;

-the International Association of Machinists and Aerospace Workers (News - Websites), or IAM, which represents technical, operations support and clerical employees, agreed to C$221.7 million in cuts;

-the Canadian Auto Workers, or CAW, which represents customer agents and crew schedulers, agreed to C$152.4 million in cuts;

-the Canadian Airline Dispatchers Association, or CALDA, agreed to C$5 million in cuts;

-unions affiliated with the Jazz regional subsidiary agreed to C$93 million in cuts.

Discussions with the pilots' union continued late Wednesday, according to the monitor. It said no response to the company's final offer had been received by the publication of the report.

Ernst & Young also noted that lawyers for the pilots' union, known as ACPA, delivered a notice of motion appealing Justice Farley's appointment of Justice Warren Winkler as facilitator in the labor negotiations.

The lack of a deal with the pilots puts in peril the other agreements, it said.

"The labor cost realignment cannot occur notwithstanding the agreements reached with eight unions unless ACPA has also agreed," it said.

Ernst & Young said Air Canada's cash position was becoming increasingly critical and that the airline would "require access to substantial amounts of new capital."

The report noted that on May 26, Air Canada had cash on hand of about C$492 million, about C$237.9 million less than its financial obligations following its bankruptcy filing.

The "Post-Filing Obligations" on that date totaled C$729.9 million, consisting of C$254.9 million of trade credit, C$148.2 million in accrued and unpaid aircraft lease charges, C$106.7 million of trust amounts not remitted, and C$ 220.1 million in accrued and unpaid payroll and other employee-related charges.

In addition, deferred ticket revenues representing advance ticket sales collected, rose to C$570 million on May 26 from C$566 million on March 31.

The monitor said the cash flow forecast for Air Canada indicates that on Aug. 22 it will have a cash balance of C$546.8 million prior to aircraft lease payments, or C$187.9 million after aircraft lease payments including financing from Canadian Imperial Bank of Commerce (BCM).

As reported, Canadian Imperial agreed to provide Air Canada with a C$350 million credit in exchange for extending its lucrative Aeroplan credit card contract. An unnamed credit card company is negotiating access to that contract under the new agreement between the bank and the airline.

Between May 24 and Aug. 22, Air Canada expects to have net cash inflow of C$ 54.8 million and net cash outflow of C$336.3 million including payment of aircraft leases.

Ernst & Young also reported that it has advised Air Canada not to set aside C$ 165 million in unpaid pension contributions until ordered by the bankruptcy court.

The flight attendants' union, CUPE, had requested such a move, but the monitor said those monies comprise a substantial portion of the airline's available cash, and taking that step "could well have a material adverse effect upon the full availability of the GE DIP Facility and potentially other material contracts."

Ernst & Young said the difference between Air Canada's new financial obligations following bankruptcy filing and its cash on hand "is significant and will continue to increase unless the company's cost structure is immediately reduced."

-Monica Gutschi, Dow Jones Newswires; 416-306-2017; monica.gutschi@dowjones.com