Air Canada Hits 23-Month High After Pension Pact

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Air Canada gained the most in a week after the carrier reached an agreement with the federal government to extend a cap on pension funding by seven years.

The company will pay at least C$1.4 billion ($1.4 billion) over that time frame into its pension plan under the pact, according to a statement yesterday. Finance Minister Jim Flaherty confirmed the extension in a separate statement on his department’s website.

The shares gained 3.1 percent to C$2.65 at the close in Toronto, their biggest single-day gain since March 5. Canada’s largest airline earlier touched C$2.76, the highest intraday price since March 21, 2011.

Air Canada had faced a January 2014 deadline for restoring pension contributions to their usual levels. That’s now extended to Jan. 30, 2021, and makes funding payments sustainable in the current interest-rate environment, the company said. The carrier will save more than C$400 million a year in cash outflow, Kevin Chiang, a CIBC World Markets analyst, said.

“This is supportive of the company’s initiative to deleverage its balance sheet and re-fleeting opportunities,” said Chiang, who has a sector outperform rating on the stock.

Air Canada had pension liabilities of C$4.7 billion as of Dec. 31, according to a Feb. 7 quarterly filing. That’s down from about C$5.6 billion a year earlier.

Had the pension arrangement not been extended, Air Canada’s pension funding obligations would have risen by more than C$1 billion a year, Walter Spracklin, an analyst at RBC Capital Markets, said in a note today. That’s more than double the C$471 million that the company expects this year, he said.

‘Fair Valuation’

“AC shares will begin to approach fair valuation” following this agreement, said Spracklin, who rates the stock outperform.

WestJet Airlines Ltd., the discount carrier which is stepping up its challenge to Air Canada with a new regional service, said it is “disappointed” with the pension decision.

“We trust this marks the end of special treatment for Air Canada, as such treatment at the expense of other industry players has become too common,” the Calgary-based carrier said in a statement. “We look forward to working with the government to create a level playing field and an environment that supports a healthy industry that benefits the travelling public.”

WestJet is gearing up for a mid-2013 start of its Encore regional unit, which will compete with Air Canada on short-haul and trans-border flights.

Under its agreement with the federal government, Air Canada is prohibited from paying dividends or buying back shares for the pact’s duration, according to the company’s statement.