Air Canada’s decision to give the federal government a stake in the country’s airline in exchange for low-cost loans is putting pressure on rival carriers to cut similar deals, and concede a portion of any postpandemic recovery to Ottawa.
The country’s largest airline announced a $5.9-billion government financing package late Monday that could see Ottawa end up owning a nearly 10-per-cent stake of Montreal-based Air Canada. In announcing the program, which was negotiated over several months, federal Finance Minister Chrystia Freeland said: “It was very important to get a good deal for Canadians.”
On Tuesday, the price of Air Canada shares fell slightly in reaction to the news, closing down 0.44 per cent at $26.88 on the Toronto Stock Exchange. Before trading began, analyst Konark Gupta at Bank of Nova Scotia said some investors “could be negatively surprised by equity dilution and a repayable loan for refunds.”
Rival carriers such as Calgary-based WestJet Airlines Ltd., owned by asset manager Onex Corp. , remain in negotiations with the federal government over potential support packages. Prior to Air Canada’s announcement, there was an expectation airlines would be able to access government-backed loans without giving up any equity in their business.
McGill University professor John Gradek said WestJet chief executive officer Ed Sims and Onex “aren’t going to like the terms, but they are under pressure to cut a deal, to maintain their competitive position.”
Smaller carriers, such as Transat A.T. Inc. and Porter Airlines, said they are still in talks with the government aimed at securing financial support. Every airline is burning through cash during the pandemic and faces growing pressure to rebuild capital quickly.
Air Canada views this financing package as an insurance program that should open up more private funding opportunities, similar to the experience of U.S. airlines, said analyst Savanthi Syth at Raymond James. “While we expect similar negotiations at competitors, the longer things drag on, the tougher it will be on Air Canada’s Canadian competitors,” she said.
In addition to selling $500-million of shares to the federal government at a 15-per-cent discount to where its stock was trading, and issuing warrants to acquire an additional 14.6 million shares, Air Canada made a number of boardroom concessions to win Ottawa’s support. The company pledged to refund passenger tickets, cap executive compensation and restore regional routes.
In return, Air Canada receives a total of $5.375-billion in five loans from the government, the bulk of which carry interest rates far lower than what rival airlines would receive if they borrowed from banks or credit markets. For example, Air Canada borrowed $1.4-billion from the government to pay refunds on tickets. Analyst Walter Spracklin at RBC Capital Markets said this loan “carries a modest fixed annual interest rate of only 1.211 per cent, which we see helping to lower debt financing costs longer-term.”
The airline is expected to use a portion of its new credit facilities to pay off existing loans with far higher interest rates. Analysts said other carriers face the same challenges with trying to borrow money during a pandemic, and will be motivated to follow Air Canada’s lead. Analyst Chris Murray at ATB Capital Markets said by borrowing from the government, Air Canada tapped “a lender with ultimately greater alignment on the well-being of the company than was likely to be found in a private-market transaction.”
Canada’s airports are also looking for government financial support, as the sharp drop in passenger traffic has sliced revenue, while fixed costs must still be paid.
“Support for Air Canada is a positive sign of the federal government’s commitment and confidence in Canada’s air sector,” said Daniel-Robert Gooch, president of the Canadian Airports Council. However, he said: “A plan to restart travel when it is safe to do so and financial support for other parts of the sector are still needed.”
Globally, governments have put an estimated US$183-billion into the aviation industry during the pandemic, according to British-based consulting firm Ishka.
Editor’s note: April 14, 2021: An earlier version of this article included an incorrect first name for John Gradek.
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