Air Canada to Restructure Under CCAA

2nd Apr 2003

Air Canada announced today that it has
filed for protection under the Companies` Creditors Arrangement Act (CCAA) in
order to facilitate its operational, commercial, financial and corporate
restructuring. The success of this massive transformation is dependent on
fundamental labour cost restructuring with amendments to collective
agreements, work rules and wages. The CCAA process will allow Air Canada to
restructure its balance sheet and costs to complete its transformation into a
leaner, more efficient, lower cost airline through savings obtained mainly
from aircraft lessors, lenders, bondholders and labour groups.
“Clearly, while not our preferred course of action, a CCAA filing is
necessary to allow Air Canada to make the required changes to compete
effectively and profitably in a changed environment,” said Robert Milton,
President and Chief Executive Officer. “Air Canada`s customers around the
world can continue booking with confidence that their travel plans will not be
disrupted. It has been repeatedly demonstrated that the action we have taken
today to restructure will not create a disruption to service nor should it
impact in any way our commitment to safety and customer service - this has
been demonstrated by US Airways and United Airlines in recent months. Aeroplan
members will have continued access to the benefits associated with our
frequent flyer program throughout the restructuring process and beyond.
Employees, upon whom we depend upon to continue delivering the safe and
reliable customer service Air Canada is renowned for around the world, will
continue to be paid on their regular payroll schedule. Suppliers will be paid
in the ordinary course for goods and services provided going forward after the
filing date.
“While we were able to generate in excess of $1 billion in liquidity
through the DIP facility to finance our restructuring and transformation, in
view of falling revenues as a result of world events it would be irresponsible
to continue without a process in place to bring costs in line with the new
environment. I stress that this is not just about restructuring our balance
sheet - this is about restructuring our operational costs, including labour
and fleet; restructuring commercially to better meet the needs of our
customers and restructuring the corporation to better focus on the development
of stand-alone businesses. The business model is broken and it must be fixed
without burning any more furniture. Air Canada and our people need to embrace
a culture change and a new way of doing business,” said Milton.
Filing of Petition:  Air Canada obtained today an order from the Supreme Court of Ontario
providing creditor protection under the Companies` Creditors Arrangement Act
(CCAA). The company is also making a concurrent petition under section 304 of
the U.S. Bankruptcy Code. The filing includes Air Canada (including all of its divisions such as
Air Canada Technical Services), Air Canada Jazz, ZIP Air Inc. and Air Canada
Capital. Aeroplan, Air Canada Vacations (ACV) and Destina are not included and
these three subsidiaries will continue dealing with their creditors on a
normal basis.
Debtor-In- Possession (DIP) Financing:  In conjunction with its filing the Corporation has arranged for a USD
$700 million (or an equivalent amount in Canadian dollars not to exceed
$1.05 billion) debtor-in-possession (DIP) secured financing facility from
General Electric Capital Canada Inc. The facility will be secured by all of
the unencumbered assets of Air Canada, and will be available in two stages.
The first tranche is a term loan in the amount of USD $400 million. The
remaining USD $300 million will be made available as a revolving term credit
facility. The loan will have a term of up to 18 months. In addition to our
unrestricted cash on hand of approximately $375 million, the DIP financing
will provide adequate liquidity to meet all of the anticipated needs of Air
Canada and its operating units to continue normal operations throughout the
CCAA process.
Exit Financing: Air Canada is in discussion with major financial investors with respect
to permanent financing upon exit from the restructuring process. The outcome
of these discussions is contingent upon a number of factors, including labour
cost restructuring and the prevailing Canadian regulatory environment. Onex
Corporation has confirmed its intent to proceed with its offer to acquire a 35
per cent interest in Aeroplan from Air Canada and has agreed to a 30-day
exclusive negotiating period to restructure the transaction, to close upon the
airline`s emergence from CCAA.
Contributing Factors: Over the past three years, airlines around the world have faced a number
of significant challenges which have battered the industry. The high tech
meltdown starting in 2000, the economic slowdown of 2001, the terrorist
attacks of September 11, 2001, the growth of low cost competition, high oil
prices and, now, the war in Iraq have all contributed to the situation that
Air Canada, and several other airlines, face today. While Air Canada has dealt
aggressively with many of these issues and outperformed North American
industry peers for the past three years, those achievements are not enough to
overcome the significant cost and liquidity challenges faced by the airline.
Industry Outlook:  According to IATA, the industry has lost USD $ 31 billion in the last two
years and their most recent analysis dated March 22, 2003 forecasts the armed
conflict could easily result in USD $10 billion dollars of losses on
international traffic by extending the current traffic slump well into the
summer season. In a Global Equity Research report on March 7,2003, USB Warburg
provided 2003 loss estimates for the North American industry alone of
USD$6.5 billion with full year revenues projected down 4 per cent. The revenue
outlook has further deteriorated with the prospect of a longer than predicted
war in Iraq and the recent SARS crisis. The report also forecast that absent
material change, all surviving North American legacy network majors will enter
Chapter 11 within two years. In Canada, the growth in competitive capacity
from low cost carriers in a flat market adds further to the revenue erosion.
“It is our view that rather than burn more of our resources chasing an
outdated business model, we must cut to the chase now,” said Milton.
Labour:  “It appears that the only successful airlines today are the original low-
cost carriers or restructured mainline carriers. As we are currently seeing
with airlines in the United States, the labour costs of most legacy North
American carriers are simply untenable in the new airline environment. There
cannot be a successful restructuring without a radical wholesale revision to
work rules and changes under the collective agreements governing the company`s
31,000 unionized employees,” said Milton.
While the airline has repeatedly outlined to its unions the urgent need
to find $650 million in permanent, annual labour savings by March 15, 2003,
there has been no agreement on a meaningful course of action to date, with one
exception which results in an important temporary saving. The Canadian Auto
Workers Airline Division (CAW) has concluded an agreement on a Supplemental
Unemployment Benefit Plan that will allow the airline to temporarily reduce
its over 1,000 surplus Customer Sales & Service agent workforce and as well
has agreed to defer the general salary increase that would have been effective
March 30, 2003, saving the company approximately $36 million.
“The reaction from union leadership has generally been disappointing and
has ultimately compromised the future of their membership. I had implored our
union leaders to attempt to be different from some of our U.S. peers and
assist in restructuring our costs outside a bankruptcy process, without the
assistance of the courts but the impasse gives us no option but to restructure
under court supervision with the mandatory consent of creditors,” Milton said.
“In a CCAA restructuring, the $650 million requested by the company will be
off the table and the appropriate labour cost reduction will be a condition to
be set by creditors, the monitor and the court.”
Pension Plans: The value of Air Canada`s pension plans, like that of nearly all pension
funds, deteriorated in 2001 and 2002 due to a convergence of declining
interest rates and declining stock markets. As a result of this and coupled
with Air Canada`s fragile financial position, the Office of the Superintendent
of Financial Institutions (OSFI) requested that Air Canada suspend the pension
contribution holiday to which it is legally entitled and conduct a pension
valuation earlier than the next regularly scheduled evaluation in 2004 to
determine the extent of the pension shortfall and to fund any liability as
soon as possible. The company has been in a constructive dialogue with OSFI
regarding the appropriate means and schedule in which to address its concerns.
For full details visit Air Canada website.


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