Air Canada wipes out pension deficit, sees small surplus

Wed Jan 22, 2014 11:56am EST
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By Susan Taylor

TORONTO (Reuters) - Air Canada ACb.TO said on Wednesday that it has eliminated a weighty C$3.7 billion ($3.37 billion) pension solvency deficit and moved to a "small surplus", prompting some analysts to lift stock targets for the country's largest carrier.

The Montreal-based airline said preliminary estimates on its Canadian registered pension plans reflect several factors, notably a 13.8 percent return on investments last year and improved discount rate.

Analysts said the funding surplus, estimated as of January 1 2014, reduces risk for the flag carrier and could eventually free up cash for better uses, such as new planes or debt reduction.

The company's more heavily-traded class B shares climbed more than 3.5 percent after the announcement, to C$9.28 on the Toronto Stock Exchange. The stock has more than tripled, from C$2.40 a year ago, as the company sharply cut costs and launched a low-cost subsidiary.

"This is a significant positive turn in Air Canada's pension funding situation," RBC Capital Markets analyst Walter Spracklin wrote in a note, which raised his stock target to C$13 from C$10. "As of January 2013 the pension solvency deficit was C$3.7 billion and C$4.2 billion in 2012."

Air Canada said the improvement reflects a better return on investments, pension benefit changes that cut the deficit by about C$970 million, a company contribution of C$225 million to the deficit and a higher discount rate.

A 3.9 percent discount rate was used to value pension obligations, up from 3 percent last year. Each 10 basis point change in that rate results in about a C$150 million change in solvency liabilities, the carrier said.

Discounts rates, used to assess a plan's solvency, are based on long-term government bonds and help actuaries judge how much assets will earn over time. The lower the discount rate, the bigger the deficit.   Continued...

An Air Canada plane lands in front of a United plane at the Calgary International Airport in Calgary, Alberta, June 17, 2008. REUTERS/Todd Korol