CALGARY, Alberta (Reuters) - Air Canada’s new top executives may get a few months to solve thorny labor contract and pension deficit issues as the recession bites before they are forced to do so under bankruptcy protection.
In a surprise move this week, Canada’s biggest airline named Calin Rovinescu as chief executive and Duncan Dee as chief operating officer, sparking speculation that a major restructuring is in the works.
Rovinescu is a veteran of Air Canada’s last corporate revamp under creditor protection, which began six years ago as the carrier struggled with high debt and falling traffic as the SARS crisis hit Toronto, its main hub.
Now, it must navigate union contract talks, a pension deficit topping C$3 billion ($2.4 billion), debt obligations, weak travel demand and brisk competition on fares from its chief rival WestJet Airlines Ltd.
Barry Prentice, director of the transportation institute at the University of Manitoba, said the airline could have about six months to sort out its problems before being forced to do so under court protection.
“They’re going into what is the more profitable season of air traffic -- summertime isn’t going to be when an airline’s going to fail because they’re going to have lots of business,” Prentice said. “But if the economy stays in the doldrums, next fall they’ll be back with the same problems again even if they get through the summer.”
Rovinescu replaced Montie Brewer, who tried to steer the carrier through one of the industry’s worst downturns. Brewer cut staff last year by 2,000 jobs and capacity by 7 percent.
Air Canada lost C$727 million in the fourth quarter. As its cash position worsened, the airline scrambled to raise more than C$640 million in new financing by selling assets.
It has said it has another C$1 billion of assets it could use to raise cash if necessary.
Air Canada shares have lost more than 90 percent in the past 12 months. On Wednesday, the B series shares were off 11 Canadian cents, or 12 percent, at 78 Canadian cents on the Toronto Stock Exchange.
“The company’s facing some pretty significant challenges. The financial and cash requirements they have for this year are pretty well-documented -- I don’t think a change in leadership changes any of that,” said analyst Cameron Doerksen of Versant Partners in Montreal.
“The major challenge they have is with their labor groups and they have to renegotiate all those contracts in the next few months, and it’s not going to be easy based on some of the public commentary by the unions.”
The Canadian Auto Workers union, which represents about 5,000 employees, called the Rovinescu’s appointment “disturbing,” saying the lawyer and investment banker’s efforts in the last restructuring contributed to the airline’s current woes. The unions are particularly worried about the security of their members’ pensions.
A work disruption would hinder Air Canada’s ability to generate cash, which would worsen its financial position, Doerksen pointed out.
Today’s low fuel costs work in Air Canada’s favor, but with no end in sight to the weak economy, the carrier has little latitude to bolster its fortunes by lifting fares, especially with WestJet recently instituting a low-price guarantee.
Canadian Transport Minister John Baird said on Wednesday he is looking closely at the airline’s pension deficit situation and has asked to meet with the new executives.
Air Canada and other companies have been lobbying Ottawa to relax federal rules for topping up pension plans.
“We’re obviously very concerned and we’ll certainly keep a watchful eye,” Baird said.
Additional reporting by Randall Palmer; Editing by Frank McGurty