UPDATE 1-Air Canada wipes out pension deficit, sees small surplus

Wed Jan 22, 2014 11:53am EST
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By Susan Taylor

TORONTO Jan 22 (Reuters) - Air Canada 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 Jan. 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.   Continued...