Air Canada's New CEO: What It Means for ACE and WestJet

by: FP Trading Desk

Calin Rovinescu’s appointment as CEO of Air Canada is important for ACE Aviation Holdings Inc. (OTC:ACEAF) shareholders because it may enhance the value of ACE’s 75 million shares (75% equity) in the airline, according to RBC Capital Markets analyst Nick Morton. He noted that ACE has recently been trading below RBC’s estimated cash value per share, reflecting no value for its position in Air Canada.

“For ACE shareholders, a stabilization of the situation at Air Canada (AIDIF.PK) may increase the ‘option value’ of their equity stake,” Mr. Morton said in a research note, adding that a C$.50 change in Air Canada’s share price adds roughly C$1 to ACE’s estimated net asset value.

On March 19, ACE bought back 1 million in convertible preferred shares at C$20 to leave 3.2 million outstanding. The company cancelled its shareholders meeting planned for April 7 and continues to consider alternatives to its earlier liquidation plan.

Mr. Morton believes it may be in the interests of ACE shareholders for the company to remain the controlling shareholder of Air Canada during this tough time for the airline.

He said:

“Should Mr. Rovinescu successfully deal with the negotiations over upcoming labor and the pension funding timetable, Air Canada may find itself in a much improved liquidity position.”

The appointment of Mr. Rovinescu does not signal an impending CCAA filing (bankruptcy protection) for the airline or that an employee strike is a given, according to Chris Murray at CIBC World Markets. But due to the speculation surrounding these issues, he addressed them nonetheless.

In the event of a CCAA filing, the analyst expects Air Canada would continue to operate while financial and legal issues are resolved. He also believes any strike would be short-lived.

Both would be negative for WestJet Airlines Ltd. (OTC:WJAVF), Mr. Murray told clients. While it would generate more traffic, the company’s brand and reputation could be tarnished, and a restructured Air Canada could become a stronger competitor.