Air Canada loss widens 39 per cent

Air Canada needs to borrow more money to help it survive a cash crunch and weather the recession, the airline's chief executive officer said Friday.

"Even after the airline's success in raising $641-million last year in the midst of the tightest global credit markets in living memory, we will have to raise more financing," Calin Rovinescu told shareholders at the company's annual meeting in Montreal.

Mr. Rovinescu, who replaced Montie Brewer as CEO on April 1, made the remarks after the country's largest carrier announced that its first-quarter loss widened by 39 per cent to $400-million.

Montreal-based Air Canada also cautioned that it expects a weak economy for the rest of year. Its latest shortfall grew from last year's $288-million first-quarter loss, with the loss per share increasing to $4 from $2.88. Revenue slipped to $2.39-billion from $2.73-billion.

Mr. Rovinescu said after the meeting that several government agencies have indicated an interest in helping the cash-strapped carrier, noting that they "understand that we have assets that are available for financing. We will have to talk to some government agencies. At this stage we haven't advanced the discussions sufficiently with any one government agency."

He said the airline still has numerous options open, emphasizing that it's premature to talk about another filing for bankruptcy protection. The carrier emerged from court protection from creditors in 2004.

Air Canada had $1.09-billion in cash at the end of March, and needs up to $1.3-billion in cash by the end of June to avoid breaching credit covenants.

"The corporation is currently renegotiating certain terms and conditions, including relating to triggering events, with the credit-card processing company," Air Canada said in a statement Friday, reiterating an earlier caution about credit covenants.

Mr. Rovinescu said the recession has been long and unrelenting, but to help fill more seats, there will be initiatives aimed at wooing passengers.

"We think that the customer needs to be re-engaged," he said. "We know what our competition is doing and frankly we have to do a better job for our customer to re-engage with him."

Prominent red letters and a red logo formed the backdrop on the stage at the hall where the meeting was held.

"The return to red in our marketing communications defines and communicates who we are," Air Canada chief commercial officer Ben Smith said in a recent message to staff. "Red has been part of Air Canada's heritage for over 70 years, and it is the colour that defines the strong core attributes and the brand equity built into our rondelle."

Mr. Smith said blue colours, which had been promoted in marketing campaigns since 2004, will remain on plane interiors and employee uniforms.

Besides battling WestJet Airlines Ltd., other challenges facing Air Canada include negotiating new labour contracts and reducing its pension deficit.

As Air Canada's six-year labour contracts expire May 31 and June 30, the carrier is seeking pension relief from Ottawa and concessions from its unions. The pension deficit has been revised to $2.85-billion from the previous estimate of a $3.2-billion shortfall.

"During the first quarter of 2009, demand for the corporation's air travel and cargo services continued to weaken in both domestic and international markets, and the corporation expects demand to continue to be a challenge for the remainder of the year," the airline said in a statement.

"In addition, the credit markets continue to be constrained, raising concerns about available funding for a number of companies, including Air Canada."

Asked about the possibility of job cuts, Mr. Rovinescu replied: "Having massive layoffs is a somewhat simplistic way to tackle the crisis. That doesn't mean we won't cut capacity and have some reductions, but we are not looking at massive layoffs, we are not looking at cutting the airline in half, we don't believe that shrinking to profitability has ever been done in the airline industry."

In a research note, Versant Partners Inc. analyst Cameron Doerksen said even if the carrier avoids a filing under the Companies' Creditors Arrangement Act, "we believe its balance sheet will remain a significant burden and competitive disadvantage. Until the company solves its immediate balance sheet issues and successfully renegotiates its labour agreements, we see no compelling reason to own Air Canada shares."

Air Canada's stock price, which nearly doubled earlier this week on speculation of increased foreign investment in the carrier, fell 25 per cent Friday afternoon on renewed concerns about the cash crunch, pension deficit and labour strife.

ACE Aviation Holdings Inc. , created in 2004 after the airline exited bankruptcy protection, owns 75 per cent of Air Canada. ACE had $373-million in cash at the end of April and has been seeking to dissolve itself.

"If ACE subsequently does not proceed with the liquidation of its net assets, ACE will revert to a going concern basis of presentation," the holding company said in a separate release, without elaborating.

Air Canada's unions have been pressing ACE to earmark the remaining cash to help pay down the airline's pension deficit instead of distributing the money to ACE common shareholders.