November 11, 2008 / 11:27 AM / 10 years ago

UPDATE 2-ACE posts loss, says no cash buyout of Air Canada

* Examining share exchange for minority in Air Canada

* Q3 share loss C$3.86

* Revenue up marginally at C$3.08 billion

* Shares drop 12 percent (Recasts to add details, comments)

By Scott Haggett

CALGARY, Alberta, Nov 11 (Reuters) - ACE Aviation Holdings Inc ACEa.TO, the parent company of Air Canada ACa.TO, said on Tuesday it is still looking for ways to wind itself down but that it is unlikely to do so by making a cash offer for the public minority stake in Canada’s No. 1 airline.

ACE, which reported a third-quarter loss of C$135 million, or C$3.86 a share, after posting a year-earlier profit of C$224 million, or C$1.84, said uncertain capital markets and a weak outlook for the airline industry are slowing the process of winding itself down.

While it has already divested its stake in the Air Canada frequent flyer program and in regional carrier Jazz Air JAZ_u.TO, ACE said it is still looking at options for its Air Canada majority stake.

“We are actively exploring options for our 75 percent interest in Air Canada to maximize the value for our shareholders,” Brian Dunne, the company’s chief financial officer, said on a conference call. “These options include a share exchange for the minority shareholding in Air Canada. Discussions with a number of parties are ongoing.”

Some analysts have urged ACE to repurchase the Air Canada minority stake since the airline’s shares have fallen nearly 85 percent from the C$21 price at which ACE floated the stake in late 2006.

However, Dunne said a cash buyout of Air Canada was a “less likely option” for ACE.

“A share exchange might be more appropriate in that that does result in a combination of Air Canada ... and probably results in more cash being available to Air Canada in the longer term,” he said.

Some analysts viewed the statement as a signal that ACE will still move to buy the remainder of Air Canada, but offer shares rather than money for the holding.

“They didn’t reject calls to buy it, they rejected calls to buy it for cash,” said Jacques Kavafian, an analyst at Research Capital.

ACE said its third-quarter loss included one-time items such as C$93 million in fuel hedge contracts and net foreign exchange losses of C$87 million. Without those items, the company said operating income was C$105 million, down 69 percent from C$340 million in the year-earlier quarter.

The drop in operating income was due to high fuel prices and “the effects of an uncertain economy on Air Canada’s results,” it said in a statement.

Air Canada itself posted a third-quarter loss of C$132 million, or C$1.32 a share, last week, compared with a year-earlier profit of C$273 million, or C$2.73 a share. The results spurred analysts to begin fretting about the airline’s weakening cash position.

ACE, which also has a minority stake in aircraft maintenance company ACTS, said it ended the quarter with C$824 million in cash on hand.

ACE revenue rose 1.8 percent to C$3.08 billion.

ACE class A shares fell 52 Canadian cents, or 12 percent, to C$3.94 at midday on Tuesday on the Toronto Stock Exchange.

Air Canada’s A shares fell 77 Canadian cents, or 20 percent, to C$2.96.

$1=$1.21 Canadian Additional reporting by Supantha Mukherjee in Bangalore; Editing by Peter Galloway

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