Air Canada's Bankruptcy Concerns Breeds 'Sell' on Groupe Aeroplan

Apr. 7.09 | About: Air Canada, (ACDVF)

The growing uncertainty over whether Air Canada (AIDIF.PK) will be forced into bankruptcy has Neil Linsdell, Versant Partners analyst, holding a “sell” on the airline’s frequent flyer partner, Groupe Aeroplan.

The obvious reason to avoid the stock is that Air Canada may be forced to renegotiate its terms with Aeroplan under CCAA, potentially squeezing its profit and driving away other partners, Mr. Linsdell said.

“The less obvious concern is the balance sheet; which many people seem to perceive as strong,” he added. “It’s actually not.”

He notes Aeroplan owes C$1.16-billion to its member in the form of rewards that it doesn’t currently have the cash to support. While it does have a C$400-million redemption reserve, which is part of its C$655-million in free cash, there’s another C$700-million in debt -– C$300-million of which is due in the next 15 months.

He said:

“Nobody seems to worry about the additional liability of all those miles outstanding, the bulk of which will be paid out in the next 12 months. There’s no problem as long as the cash keeps coming in from partners like Air Canada, CIBC, AMEX and Sainsbury’s, but if we get a major partner leaving, or even a major decline in miles sold to one of these partners, then things can get really bad, really quickly.”

While he has a C$7 price target on the stock, he maintains his ‘sell’ rating. “I think the risks outweigh the rewards at this point,” Mr. Linsdell said.