Air Canada (
TSX: AC,
Forum) mollified the government of Quebec when the company announced this morning that it had entered into a letter of intent to purchase up to 75 Bombardier C-Series aircraft as part of its narrowbody fleet renewal plan.
According to the
news release, the LOI outlines 45 firm orders for Bombardier’s CS300 aircraft plus options to purchase up an additional 30 aircraft and includes the substitution rights to CS100 aircraft in certain circumstances. Delivery of said aircraft is to commence in 2019 and run through 2022.
The deal is still subject to the creation of a definitive agreement and satisfaction of certain other closing conditions precedent.
Replacing its current Embraer E190 aircraft narrowbody fleet is intended to make Air Canada one of the world’s youngest and most fuel efficient airlines.
The Bombardier purchase is meant to augment the acquisition of 61 Boeing 737 MAX aircraft announced back in December 2013 to replace the larger end of the airline’s narrowbody fleet with the Boeing agreeing to buy up to 20 of the 45 Embraer E190 aircraft in Air Canada’s hangers and the first 25 C-Series to replace the remaining E190s. Delivery of the Boeing MAX 737s is to commence in 2017 and extend to 2021.
As a result of Air Canada promising to carry out heavy maintenance of the C-Series aircraft in Quebec for a period of 20 years after delivery, the Quebec government has dropped a long-standing suit against the airline.
The case which was making its way to the Supreme Court of Canada accused the airline of breaching legal obligations under the federal Air Canada Public Participation Act that privatized the airline in 1988. The breach was claimed to have occurred when the 2007 spin-off of Air Canada’s in-house maintenance, repair and overhaul unit, AVEOS, filed for bankruptcy protection in 2012, leaving 2,600 employees without a job and allegedly violating Air Canada’s promise to keep its heavy maintenance operations in Quebec, Ontario and Manitoba.
MARKET REACTION:
Air Canada shares were down 11.89% to $7.41 per share while Bombardier B-Class shares were up 6.19% to $1.22 per share.
OUR TAKE:
This is the latest in a rather long saga since Air Canada privatized. The company has been fighting to have the Air Canada Public Participation Act lifted since it was penned in 1988, claiming that the field of competition has changed to the point that the airline is no longer able to compete under the constraints the Act has placed upon it.
Short of getting the necessary support to make this happen, the airline moved ahead on its own and attacked the alleged problem sideways by spinning off its in-house maintenance and repair operations into a separate entity in 2007. Union representatives and some government officials eyed the move to create AVEOS with suspicion, but became vocal in 2011, when Air Canada, despite a legal challenge, began transferring Air Canada workers against their will into the unit.
Matters became worse when Air Canada began taking work away from AVEOS and sending it to places like Germany and China, claiming AVEOS wasn’t cost competitive. This dealt a pretty hard blow to AVEOS as its sole reason for existence was to repair and maintain Air Canada aircraft. As a result, AVEOS closed its doors in 2012, leaving 2,600 people without work.
In February 2013, the Quebec Superior Court handed down a 139-page ruling which found Air Canada was guilty of violating the Air Canada Public Participation Act. The fight continued and in January, Air Canada had asked the Supreme Court to overturn the ruling.
This one is messy. Yes, the playing field has changed and Air Canada attempted to make a go of it for almost twenty years before it split off its maintenance. It is a privatized institution and therefore is responsible to its shareholders, but there should be a modicum of responsibility to its employees, especially when there is an Act of Law involved.
It isn’t that Air Canada didn’t deserve to try and reform in order to survive, but the creation and resulting active dissolution of AVEOS was a clear side-stepping of the legal responsibilities it had been given when it privatized in 1988; a move that probably wouldn’t have been made if the Harper administration had been firmly in place.
Then on the heels of
the company reporting a record full year with an adjusted net income of $1.22 billion or $4.18 per diluted share compared to a record 2014 adjusted net income of $531 million or $1.81 per diluted share, the company made another sidestep to placate the Quebec government by announcing the proposed Bombardier deal.
Not a bad play, considering that the Quebec government backed down in the wake of the announcement as the deal, if it goes through, promises a 20-year maintenance contract for the purchased C-Series aircraft post delivery in Quebec. In all reality, a portion of a certain segment of its fleet is nowhere near the scale of an entire fleet-wide maintenance contract, but it is a political bone that the Quebec government has latched onto, knowing that it could spend years in legal battles with the company and still not find satisfaction.
It’s a bit of a win-win for Air Canada as well, as all the company had to do was sort of promise that it might buy some aircraft from a failing enterprise like Bombardier who has yet, despite billions in loans, to deliver one of its C-Series aircraft since 2009. If this proposed deal goes like Bombardier’s recent contract debacle with Toronto, Air Canada may never have to worry about following through on its letter of intent.
With this issue finally abated, Air Canada will now find it much easier to extricate itself from an Act it claims is hampering its ability to succeed in today’s competitive domestic airline landscape, even with its record full year earnings. In the end, the Act should probably have been rewritten in the company’s favour, but that doesn’t make what it has done to sidestep its responsibilities any more ethical.
I have no interest in any company mentioned in this article, long or short.
--Gaalen Engen
https://twitter.com/gaalenengen