On Air Canada Caution Remains

Aug.11.09 | About: Air Canada (ACDVF)

Despite announcing plans to improve its balance sheet by C$500-million over the next three years, the Street remains cautious on the long-term prospects of Air Canada (AIDIF.PK).

In recent weeks, the carrier has managed to negotiate a 21-month moratorium on part of its pension obligations and extension on its current labour contracts, in addition to raising more than $1-billion in additional liquidity.

But the Street continues to question what it all means for the airline.

Cameron Doerksen, Versant Partners analyst, said in a note to clients:

Air Canada’s balance sheet remains fragile with total estimated debt (including operating leases) of around $7.5B and cash equivalent to only 13% of trailing revenue. The company could easily be pushed back to the brink if fuel prices rise back to the levels of last summer or if air travel demand does not rebound or worsens for some unforeseen reason.

Of the nine analysts covering the stock, five have a “hold” rating or equivalent on it after its second quarter result Friday, while four have a “sell,” according to Bloomberg, including Mr. Doerksen.

David Tyerman, Genuity Capital Markets analyst, noted Air Canada currently has a huge annual cash outflow obligation, including debt repayments in the range of C$800-million to C$1.1-billion range with interest of about C$300-million per year.

Its operating leases also exceed C$350-million annually, and its pension funding is about C$240-million in 2010 and escalating thereafter.

Against the backdrop of a projected EBITDAR of C$1-billion to C$1.4-billion, Air Canada remains “mired in a debt trap,” Mr. Tyerman said in a note to clients.

He has a “hold” rating on the stock and target price of C$1.75 a share.

He said:

We remain agnostic as to whether the company can generate meaningful shareholder value for existing shareholders. AC’s long-term profit-generating potential remains murky and debt and pension liabilities remain extreme.

On the other hand, we may be underestimating AC’s earnings power. Until AC’s prospects become clearer, the shares remain a very risky bet.