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It's not every day that financial analysts have positive things to say about Air Canada, so Moody's Investors Service's decision to upgrade its outlook on the airline to "positive" from "stable" left us wondering: when exactly was the last time the debt rating agency was so rosy about the company's prospects?
Never, as it turns out – the positive outlook for Air Canada is a first since Moody's first rated Air Canada's debt 18 years ago. In fact, after years of wrenching restructuring, labour challenges, financial pressure and other turmoil, the country's flag carrier faces the clearest skies it has seen since the turn of the millennium – relatively speaking, that is. The risks ahead remain daunting.
But let's start with the reasons for optimism; there are several. First, the airline recently reached an agreement with the federal government to greatly reduce cash payments to cover its huge pension solvency deficit. That should limit the airline's pension payments to $200-million a year through 2021, according to PI Financial analyst Chris Murray. Ottawa has also helped with union agreements that will keep the labour peace until 2016 while allowing the airline to run lower-cost routes and cut some pension benefits.
Air Canada also deserves credit for fixing its own house. The company has done a solid job of keeping its planes full and revenues per seat flown high. Its operating earnings are ahead of expectations. "It's certainly a good news story," said Moody's vice-president Darren Kirk in an interview. "We're signalling the credit risk is improving."
Ah yes, about that credit risk. It's still considerable. Air Canada's credit rating is Caa1 – the agency's fourth lowest rating, although the positive outlook means it could be upgraded by late 2014. Its ratio of debt to operating earnings is an extremely high eight times. Meanwhile, Air Canada and its peers are expanding – Canadian airline capacity next year is expected to be 10 per cent higher than in 2012, and much of that will be added on routes to be served by Air Canada's new Rouge intercontinental leisure banner. Free cash flow is expected to be negative this year , and the company will use up 40 per cent of its $2-billion in cash this year repaying debt, servicing its pension and buying new Boeing 777s.
Of course, that's saying nothing of other potential shocks – say, a sharp increase in the price of fuel, international health scares, terrorist attacks or a drop in economic activity. Cross your fingers, but these remain ever-present external threats. Nobody ever said investing in airlines was for the faint of heart (or, for that matter, those who like to get rich). But at least Air Canada can say for the first time in years that those parts of its business that it can get under control are under control.
Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Sean on Twitter at @seansilcoff .
Sean Silcoff