VANCOUVER, British Columbia (Reuters) - A tentative agreement with most of its unionized staff will help ease an immediate cash crunch at Air Canada but it is not enough on its own to fend off the specter of bankruptcy, analysts said on Tuesday.
Canada’s largest airline still needs to secure “substantial” financing to help it ride out one of the worst downturns in the industry’s history, and stiff competition at home, a difficult task given its already heavy debt load.
Late on Monday Air Canada said it had struck agreements on pension funding and contracts with the Canadian Auto Workers (CAW), the International Association of Machinists and Aerospace Workers (IAMAW) and the Canadian Airlines Dispatchers Association. The three represent about 16,500 employees or more than 60 percent of the airline’s unionized workers.
The Air Canada Pilots Association, representing about 3,200 pilots, and the Canadian Union of Public Employees (CUPE), whose members are flight attendants, were not part of the deal but are still in discussions with Air Canada.
The airline’s stock rose on the Toronto Stock Exchange on Tuesday. Its B shares gained 9.9 percent to C$1.55 and its A shares rose 2.9 percent to C$1.44.
Monday night’s pension agreement calls for a moratorium on past service contributions for 21 months -- something Air Canada began pushing for last month -- and fixed payments after that between 2011 and 2013.
Genuity Capital Markets analyst David Tyerman estimated that an agreement with all its unions on a moratorium will reduce cash outflows by about C$575 million ($523 million) over the 21-month period.
But he said Air Canada still faces about a C$900 million net cash outflow over the next 12 months and needs to secure “substantial” additional funding to remain solvent.
“It is a challenge for the company to get financing, given its high leverage and the problems of the airline industry as a whole,” Tyerman told Reuters.
In addition, Monday’s agreement with the three unions hinges on Air Canada obtaining new financing.
Should the airline be forced to file for bankruptcy it would be the second time in six years it has sought court protection from its creditors.
As part of the agreement, each union will also be granted an equity stake in the company.
Union officials declined to comment on the size of such a stake, saying the final details were still being worked out.
Leslie Dias, president of CAW Local 2002, said her union, which represents 4,500 customer service and sales agents, wasn’t interested in being a long-term shareholder.
She said the issue of unions getting an equity stake came about as a trade-off for Air Canada wanting employees to agree to a moratorium on funding its C$2.85 billion pension deficit.
“When a company doesn’t have a lot of money they have to be creative,” Dias told Reuters.
Chuck Atkinson of the IAMAW union said the plan was now to do cross-country roadshows to discuss the details of the agreement with its members, who include the airline’s mechanics and baggage handlers.
“Of course, the deal is positive. But the main issue is more fundamental. It is the issue of them selling tickets,” said Jacques Kavafian, an analyst at Research Capital in Montreal.
“The economy and overcapacity in the industry are bigger concerns,” he said.
The Canadian government appointed a mediator last Thursday to try to settle the disagreements between Air Canada and its unions and retirees.
In terms of Monday’s agreement, the three unions agreed to extend their collective agreements for 21 months, with a provision for no strike or lockout.
There will be no changes to wage rates and pension benefit levels during the extension period, the company said.
“These agreements with three of our unions represent an important milestone in providing stability for our company during this challenging period,” Chief Executive Calin Rovinescu said in a statement.
Additional reporting by Esha Dey in Bangalore; editing by Rob Wilson