Air Canada Approaches AMR Levels on Labor Unrest: Canada Credit

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    Dec 04, 2011 5:53 PM GMT
    I posted this as part of a larger post in the travel forum but I thought that it may warrant it's own post in light of the recent happenings at American Airlines.

    http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/12/02/bloomberg_articlesLVKYSG6S972C.DTL


    Dec. 2 (Bloomberg) -- Relative yields on Air Canada bonds are approaching levels of AMR Corp. as the bankruptcy of the parent of American Airlines spurs concern the nation's largest carrier may seek protection from creditors again.

    The spread, or additional yield investors demand above government benchmarks to own Air Canada's five-year bond, surged 200 basis points, or 2 percentage points, to 1,200 basis points on Nov. 30, from a week earlier, Bank of America Merrill Lynch data shows. Spreads on AMR bonds climbed to 1,472 basis points from 1,411 basis points during the same period.

    The Montreal-based carrier, which emerged from bankruptcy proceedings in 2004, is trying to avoid that fate a second time as it battles labor unrest, a sluggish global economy and higher jet fuel prices. AMR Corp. sought protection from creditors on Nov. 29 after failing to secure cost-cutting labor agreements. Chief Executive Officer Tom Horton said the Fort Worth, Texas- based carrier's fleet and network will experience "shrinkage" as it reorganizes.

    "It's investors saying 'if AMR has filed, who else is going to file and how's that going to impact its competitors?'" said Jatinder Mall, an analyst with Standard & Poor's in Toronto, who rates Air Canada's debt six levels below investment grade at B- with a stable outlook.


    Shares Down


    Air Canada's widely traded Class B stock has tumbled 69 percent this year. The shares were unchanged at C$1.07 in Toronto yesterday, down from C$21 when Air Canada began trading again in November 2006.

    The price of the carrier's 9.25 percent bonds due in August 2015 fell to low as almost 93 cents on the dollar on Nov. 29, matching a record low reached in October, according to Bank of America Merrill Lynch index data. The 3.2 percent decline in price last month was the third biggest in the 26-Canadian high- yield index and greater than the 2.1 percent drop in the Bank of America Merrill Lynch High Yield Airline Index.

    Elsewhere in credit markets, the province of Manitoba doubled the amount outstanding of its 2.05 percent, five-year bond to C$600 million ($592 million). The securities were priced to yield 54 basis points above comparable benchmark government debt.

    Quebec issued C$500 million of 3.25 percent bonds maturing in 2022 at 109 basis points over benchmarks, doubling the amount outstanding to C$1 billion.


    Corporate Yields


    The extra yield investors demand to own the debt of Canadian investment-grade corporations rather than the federal government narrowed to 182 basis points yesterday, or 1.82 percentage points, from 184 on Nov. 30, according to a Bank of America Merrill Lynch index. The so-called spread ended last week at 181 basis points. Yields fell to 3.51 percent, from 3.54 percent on Nov. 30.

    Canadian corporate bonds have gained 6.6 percent since the start of the year, compared with a return of 8.3 percent for Canadian government bonds, according to Bank of America Merrill Lynch data.

    Canadian employment unexpectedly fell in November led by cuts in service industries, marking the first back-to-back declines since the 2009 recession. The number of jobs fell by a net 18,600 last month, following October's 54,000 drop that was the largest since February 2009, Statistics Canada said today in Ottawa.

    Yields on 10-year Government of Canada bonds rose four basis points to 2.18 percent. The difference between yields on 10-year Canadian government bonds and U.S. Treasuries of the same maturity narrowed 2 basis points to 6 basis points.

    In the provincial bond market, relative yields narrowed to 71 basis points yesterday, from 73 on Nov. 30. Yields fell to 2.6 percent from 2.62 percent. The securities have climbed 9.1 percent this year.


    Labor Event


    Air Canada averted a fleet-wide strike in October after the federal government forbade its 3,800 flight attendants from walking off the job. Those employees last month had to accept a deal in a binding arbitration process they'd earlier rejected.

    The nation's flagship carrier and its 3,000 pilots are in negotiations with a government-appointed mediator that could result in strike action in early 2012 if no deal is reached.

    Air Canada reported a loss of C$124 million, or 45 cents a share, in the third quarter.

    "It's the labor issues plus their pension hole that contributes to some of the additional spread in the Air Canada bonds," said Geof Marshall, vice president of portfolio management at CI Investments in Toronto, who oversees about C$4.5 billion in high-yield assets and holds Air Canada debt. "It makes you a little bit worried, but then again, this is a tough business."


    Probable Outcome


    Altman's Z-Score, which claims to predict the probability of a company filing for bankruptcy, suggests the odds are high for Air Canada. Scores above 3.0 indicate business failure is unlikely and scores below 1.8 indicate an increased risk of bankruptcy, according to the system developed by Edward Altman, a professor of finance at New York University. Air Canada's score is 0.96.

    Air Canada spokesman Peter Fitzpatrick declined comment on the bonds.

    Air Canada isn't alone in seeing investors demand higher yield after the AMR bankruptcy filing. The spreads on debt of United Continental Holdings Inc. widened to 757 basis points from 714 basis points a week earlier, the Bank of America Merrill Lynch data shows. United Airlines parent UAL Corp., a predecessor to United Continental, emerged from bankruptcy protection in 2006 after more than three years, and the carrier later merged with Continental Airlines.


    Competitive Landscape

    The spread on Delta Air Lines Inc., which sought creditor protection in 2005 before buying once insolvent Northwest Airlines in 2008, also widened to 791 basis points from 750, the index data show.

    Air Canada's debt is a good bet when you consider the carrier's dominant position in the less competitive Canadian airline industry and the quality of the assets that back the securities, said CI Investments' Marshall.

    Its first-lien Air Canada bonds are secured against lucrative landing slots in London, New York and Tokyo, which give it a loan-to-value ratio in the low 40 percent range versus a ratio of about 70 percent for AMR's 10.5 percent bonds, he said. The lower the ratio, the lower the risk, which makes the Air Canada bonds a better value, he said.

    "Air Canada bonds are cheap," Marshall said.




    --Editors: Dave Liedtka, Paul Cox

    To contact the reporter on this story: Hugo Miller in Toronto at hugomiller@bloomberg.net

    To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
  • Posted by a hidden member.
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    Dec 04, 2011 8:01 PM GMT
    They've had 2 or 3 possible strikes this past year...iirc the baggage handlers, then the flight crews and ? however the fed govt always steps in and orders them back to work and binding arbitration basically citing in the national interest since they're the one big main player.

    A couple of months ago when the flight crews were about to strike there was an article in the Toronto paper interviewing one of said flight attendants. I'm going by addled memory here but she was perhaps 35, separated and with 2 small children. She was lamenting the fact that on her wages she could barely make ends meet. Working a Friday flight from Toronto to Australia or something,, and one other flight per week to Hong Kong. She didn't want to work more flights because of the children etc etc.. Ex husband was still in the picture but living elsewhere and paying her child support and having the kids on weekends. Going on about how it had always been her dream job etc... and how other flight attendants were struggling etc... BS I say

    It made me almost furious reading it.. It's like wtf does she want.. she chose that profession,, a profession that doesn't always allow you to be home... she got married and had kids and seprated, now she thinks the company owes her a better living for her choices.. She should have gotten out and found another career.
  • conservativej...

    Posts: 2465

    Dec 04, 2011 11:55 PM GMT
    Perhaps prolonged labor strife will push Air Canada into a debtor-in-possession scenario. That could prove to provide interesting opportunities.
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    Dec 05, 2011 12:46 AM GMT
    @beneful1
    -Although I can sympathize with that lady, she did choose that profession; a profession that requires long periods of travel away from home, which in turn means less time with your children. And although I don't have kids, I know that it can be a terribly expensive decision to incur. The way I see it, being a flight attendant is great if you are single or partnered with no children or a relatively young empty-nester.

    @conservativejock
    -I agree. IF the bankruptcy does go through, it MAY be a good thing and I am hoping that is the scenario that plays out.