All That JazzIn my October 29, 2020 post, Thoughts on the Non-Binding Arbitration (see link below), I made the case for the acquisition of Jazz as one of Calin’s final steps before retirement. I still believe this is the case, and one reason for the delay in this acquisition could be the longer than expected negotiations with the federal government.
https://stockhouse.com/companies/bullboard?symbol=t.ac&postid=31810792 Here are my reasons for why this acquisition is still likely in play:
- Negotiations with the federal government are in its advanced stage and certainty now exists around no/low interest loans including lending amounts. Although loans will likely come with some restrictions on how the funds are to be used (no share buybacks, dividend payments, etc.) companies will be able to use the funds as they see fit. In the case of Air Canada, the acquisition of Jazz.
- Late last year, the executive position at Air Canada that oversaw regional airline operations appears to have been cancelled. The position was created in 2013 to oversee the three express carriers. With Jazz back under the Air Canada umbrella, the President of Jazz would report directly to a senior executive at the Airline with other responsibilities.
- Air Canada recently announced that it is transferring Embraer aircraft from Sky Regional Airlines to Chorus Aviation. Sky Regional which began operations in 2011 as a feeder airline for Air Canada, subsequently announced it is shutting down. Jazz, a subsidiary of Chorus, will become the lone operator of Air Canada Express flights.
- Chorus announced last week that an unnamed suitor was still in talks to invest in the company, despite a takeover offer being rejected.
AwareInvestor reported yesterday on Stockhouse that BMO reinstated coverage of Air Canada with a target price of $33 with an outperform rating. Further to his/her comments, on Feb 26, 2021, BMO reported it had increased its holding of AC by 5.62 percent. BMO now holds just over 1.9 million shares.
There will of course be other benefits of no/low interest loans.
At end-2020, Air Canada’s long-term debt totalled $9.56 billion at a weighted average interest rate of 4.36 percent. In 2021,
$1.24 billion of this total will mature. Most of the matruing debt is in USDs including $400 million ($509 million in CDN dollars) in senior secured notes at 7.75 percent and an undisclosed amount (more than $400 USD) in fixed rate notes. The average interest rate for all the fixed rate notes (final maturity 2021 to 2030) is 4.86 percent but given that the debt maturing this year was acquired perhaps 10 years ago or longer, it is likely the actual rate on this debt is much higher than 4.86 percent, probably closer to 8 percent. A much smaller portion of this debt is in Canadian dollars with a current floating rate of 2.5 percent (end-2020). Converting this higher rate, mostly USD denominated debt into Canadian dollar debt (for example, at one percent interest) would reduce the
weighted average interest rate to about 3.6 percent, well below Air Canada’s end-2019 weighted average interest rate of 4.07 percent.
Foreign exchange and interest rate risk would also be reduced.
OTB has commented in recent posts that a government package will be broad in scope comprising rollbacks in fees (airport landing and gate fees, airspace fees, etc.) and fuel taxes, grants to restore marginally profitable regional flights (and possibly enhancements to CEWs to encourage airlines to recall staff). I agree and this is likely a main reason why negotiations have dragged on much longer than expected. The fee/tax structure imposed on Canadian airlines is
excessive compared to other countries, and airline CEOs have made this known to federal authorities over the years.
Montie Brewer, Air Canada’s CEO in 2007, commented in an interview that the airline’s expenses would be about
$1 billion less if it operated under the same fee and tax structure that U.S. airlines were/are subject to. At the time, the landing fee at Toronto’s Pearson Airport for a narrow body aircraft carrying 150 passengers was about $2500. The fee for the same aircraft landing at Detroit Metropolitan Airport was $400.
Airline CEOs will no doubt be demanding some form of relief on fees and taxes over the next few years in order to accelerate the financial recovery of the Canadian industry. Justin….
It's showtime!
– Joe Gideon (Roy Scheider), All That Jazz