Air Canada wants Canadian Imperial Bank of Commerce to sweeten its Aerogold contract by at least $50-million a year and to prepay $350-million in fees, court documents show.
In exchange, CIBC would have a secured interest in revenue receivable for 12 months under Air Canada's exclusive agreement to sell Aeroplan frequent-flier points to CIBC, which are distributed with its lucrative Aerogold Visa credit card.
Analysts say the bank probably would be willing to pay more for Aeroplan points to make sure another credit card company didn't get the contract.
"They want the contract in place and they're prepared to pay money to make sure that nobody else gets it," said one bank analyst, who asked not to be identified.
The proposed deal between Air Canada and CIBC is contained in a letter of understanding between the carrier and GE Capital Corp., which is lending the company $700-million (U.S.) to help it cut costs and restructure its balance sheet.
Air Canada filed for bankruptcy protection last week under the Companies' Creditors Arrangement Act, raising questions about whether its existing contracts will be terminated.
Analysts estimate that CIBC's credit card division generates approximately 25 per cent of the bank's profit.
CIBC has a larger share of the credit card market than other Canadian banks, largely because of its contract with Air Canada. It is estimated that CIBC has more than 40-per-cent market share of the "premium" card market.
This would not be the first time that CIBC has come to Air Canada's aid to maintain its Aerogold contract.
The bank helped Air Canada in 1999 when the airline was facing a hostile takeover attempt by Onex Corp.
At the time, CIBC agreed to pay $200-million (Canadian) to Air Canada in exchange for an exclusive 10-year contract.
"When the Onex takeover bid came, remember how much money CIBC put on the table to help Air Canada back then? [Air Canada's]gone back to that well," said a lawyer involved in the filing.
During court restructurings, contracts can be cancelled by a judge and renegotiated.
In a research report published last week, BMO Nesbitt Burns analyst Ian de Verteuil wrote that in an extreme case, the 10-year deal between CIBC and Air Canada could be declared null and void and opened for other banks to bid on.
"We believe that with a CCAA filing, Air Canada could well ask for, and may well receive, more up-front payments and higher per seat mile charges. This would lower the profitability of CIBC's card operation," Mr. de Verteuil wrote.
Air Canada's agreement with GE Capital stipulates that if CIBC advances $350-million and boosts its contract by at least $50-million a year, GE Capital will have no lien against the revenue.
Air Canada's contract with GE Capital also includes an unusual condition, requiring that the airline's current management team remain in place. The agreement prohibits "a direct or indirect change in senior management of the borrower."
A lawyer representing one of Air Canada's creditors said the company appears to be lining up deals with key stakeholders such as GE Capital and CIBC to make sure the restructuring doesn't spin out of control.
"You're going to see people who may do things because this particular management team has offered them a plum. They may buy key allies," he said.
"If you're management, what you want to do is cut some deals with key stakeholders fast and try to present everybody with a quick fait accompli, where you get your way quickly. The longer this case goes on, the more chance of things getting away from you."
Air Canada shares climbed 16 cents or 17 per cent yesterday to close at $1.08 on the Toronto Stock Exchange. It is normal in a restructuring that shares lose all value as debt is converted into new equity.