Air Canada Could Be Forced Into Bankruptcy - UBS
Air Canada, the country's biggest airline, could be forced to file for bankruptcy protection if it does not secure additional financing and succeed in renegotiating covenants in credit card agreements, UBS analyst Fadi Chamoun said.
"Notwithstanding lower fuel costs, we believe that cash from operations will be insufficient to meet rising pension funding obligations and over CAD$1 billion (USD$800 million) of debt repayment over the next two years," Chamoun said in a note dated February 13.
Covenants in credit card agreements could tighten further in the second quarter and result in the airline being required to maintain higher cash deposits, said Chamoun, who cut his target price for its shares to CAD$1 from CAD$1.50.
"In the absence of additional financing (sale of assets) and renegotiation of covenants in credit card agreements, Air Canada could be forced to file for bankruptcy in our opinion," he wrote.
Air Canada spokeswoman Angela Mah declined to comment on the UBS report.
Air Canada only emerged from its last round of bankruptcy protection in 2004. But the economic crisis has hammered most international carriers as traffic has dropped, forcing them to cut routes, reduce capacity and lay off employees.
Air Canada last year cut 2,000 jobs and reduced capacity by 7 percent and has made more cuts since.
Chief Executive Montie Brewer said on Friday -- as Air Canada announced an unexpectedly large loss of CAD$727 million for the fourth quarter of last year -- that the airline would seek to reduce costs by another CAD$100 million and shave capacity by a further 3.5 percent.
The company said on Friday it has shored up its balance sheet with CAD$641 million in new financing, but warned that the recession may put more pressure on its revenue in 2009. Air Canada said it has up to CAD$1 billion of assets it could use to increase its liquidity if needed.