Facing a cash crunch brought on by a difficult economy, Air Canada has bought itself more breathing room with one of its credit-card processors as it seeks to avoid a second bankruptcy protection filing in less than six years, according to Business Reporter.
The country's largest airline said yesterday it has struck a preliminary agreement with an unnamed credit-card processor that will reduce the amount of cash Air Canada is required to hold on its balance sheet.
Chief executive Calin Rovinescu said in a statement the deal is an "important step in providing financial stability" for Air Canada in a challenging time.
Credit-card processing companies act as middlemen between airlines and their customers. When a customer books a ticket through Air Canada's website or a travel agent using a credit card, the processor generally hands money over to the airline within minutes, even though the product – the flight – may not be delivered for up to a year.
Since the card processor can be on the hook if the airline goes out of business, the agreements generally require the airlines to maintain a specific level of cash on their balance sheets or face having payments withheld – money that can be used to reimburse customers whose flights may get cancelled.
There have been concerns that card processors are tightening up their covenants as the weak economy raises the risk of airline failures. That, in turn, can put further constraints on an airline's cash situation, creating a downward spiral.
Denver-based Frontier Airlines, for example, filed for bankruptcy protection in April 2008 after its credit-card processor moved to start withholding significant proceeds from the sale of Frontier tickets. As well, Toronto-based Conquest Vacations cited "unreasonable demands" by its credit-card processor in its decision to shutter the company in mid-April. Conquest has since filed for bankruptcy.
Air Canada has been hit hard by the downturn. Business and economy-class ticket sales have slumped, with the airline posting a $400 million loss in the first quarter. That's on top of a $1 billion loss in 2008.
At present, Air Canada has about $1 billion in cash on hand and is required by its current credit-card processing agreement to maintain cash levels of $900 million.
Under the new agreement the amount will be reduced to $800 million. Furthermore, if Air Canada can boost its cash levels to $1.2 billion for two consecutive months, the new agreement would increase the airline's required cash levels to $1.1 billion instead of $1.3 billion.
Air Canada is required to have more cash on hand during the summer months because more tickets are sold during the busy travel season, according to airline spokesman Peter Fitzpatrick.
But Air Canada isn't out of the woods yet, warned David Newman, an analyst at National Bank Financial, in a note to clients yesterday.
He said the airline faces pension-funding obligations of up to $645 million and about $617 million in debt repayments this year. Air Canada's various pension plans have a combined deficit of $2.85 billion.
Rovinescu yesterday reiterated his focus on obtaining the support of Air Canada's unions for a moratorium on pension payments, calling the measure "critical."
But the unions have so far said they are unwilling to agree to a moratorium, noting employees agreed to more than $1 billion in concessions during Air Canada's previous restructuring.
Shares of Air Canada closed up thre cents at $1.30 in Toronto.