thoughts on AC and govI was just posting something in another forum that was asking something about AC and went through a thought experiment and realized that...
It's actually in Air Canada's best interest to delay this negotiation and draw it out as long as possible with the liberal government.
Why you may ask?
- Currently Canada is in lockdown pretty much for international travel the most lucrative flights for AC, no sense in having additional capital when you can't use any of it and would just borrow money from the government to pay off staff that can't earn money for you anyways on unprofitable routes due to the travel restrictions.
- AC is sitting on a pile of airfare cash from customers that they are paying 0% interest on. Literally 0%. Why would they refund say 1 billion dollars at 0% to replace it by borrowing 2 billion at 8% as stated by the LEEFF from government of Canada? makes no financial sense if you can't even deploy the capital profitably.
- AC's Weighted Average cost of Capital as per their Q3 report is 7.5%. If they refund those customers and have to refinance that cash outflow, it will be done at 7.5% on average, which i guess is still lower than LEEFF but a long ways from 0.
So the ideal play for Air Canada is to draw this negotiation out with the government as long as possible, to get as low rate of a loan as possible from the government. Meanwhile, sit on 0% interest rate customer cash for as long as possible paying 0% over those months of negotiations. Continue doing this either until they run low on cash, or the lockdowns are all lifted and they need an infusion of capital for rapid expansion to capture pent up travel demand.
I'm thinking actually maybe the government may be in on this. If AC and west jet keeps looking like it's hurting the industry, they can later on justify the optics in giving them loans at 0% or something low along those lines. In the mean time they can justify giving letting the airlines merge and create a duopoly. They both know that giving them loans now won't help the airline at all. Then the government will look good in getting refunds back for customers, and sticking it to the airlines throughout all those months. The airlines will look good to their shareholders for lowering the weighted average cost of capital.
The only people hurt partially are the staff of AC who will get some mitigation through the CERB/CRB, and the customers who gave AC their money but they are probalby also getting benefits from the govt anyways.