A year and a half after the start of the COVID-19 pandemic, the only thing keeping Air Canada alive are bailouts from the federal government. They are delaying the inevitable and sensible exit: reducing travel restrictions, encouraging tourism by ensuring effective containment and encouraging vaccination.
In April, the government granted the company another $ 5.9 billion ready to keep it afloat until the passengers can start flying again. Air Canada has pledged to reimburse ticket holders, restore regular airport services and hire laid-off staff when normalcy returns.
Unlike previous loans, the federal government is now a shareholder the company. He shelled out $ 500 million to buy shares at $ 23 each to secure repayment. The price per share before the pandemic was $ 50.
Finance Minister Chrystia Freeland has argued that taxpayers will benefit from stock returns as vaccinations increase and restrictions ease. However, the takeover of Air Canada seems distant. While tourism remains dormant – especially with all the ripple effects on the rest of the economy – taxpayers continue to foot a billowing bill.
In 2020, Air Canada Shrunk its workforce by more than 50 percent, cut wages and received an emergency subsidy to keep the rest of its payroll. In 2021, as the rest of the world overcomes the pandemic and opens up, the unprofitable business will rely on help to survive another year.
The number of Air Canada passengers decreased by 73 percent in 2020, resulting in a loss of $ 4.65 billion for the company. It posted a profit of $ 1.48 billion in 2019.
With a 50 percent drop in revenue, the airline was unable to meet its obligations. Air Canada fired approximately 200,000 workers and reduced the salaries of 3,200 management employees.
The two most senior executives also waived all their salaries for April, May and June 2020 and halved their salaries for the next six months. Three other executives cut their salaries in half for the first three months of 2020 and received a 20% haircut for the remainder of the year.
Air Canada has also delayed the payment of its financial debts. For example, the United States Department of the Treasury recently deposit a complaint against the company due to delays in customer refunds. The US government has requested a fine of US $ 25.5 million for the delays.
Although the company has reached $ 1.7 billion in savings in 2020 and cut its planned capital spending from 2020 to 2023 by $ 3 billion, Air Canada is still on a tightrope.
According to its September 2020 report, Air Canada was $ 26.84 billion debt, of which $ 7.24 billion was due within one year. The liabilities were $ 18.6 billion in excess of Air Canada’s cash and short-term receivables.
Faced with the risky increase in debt, Fitch Ratings downgraded the company’s long-term issuer default score goes from BB- to B +. The rating agency predicts that Air Canada’s debt will increase until 2022 and that revenues will remain below 2019 levels until 2024.
Fitch reviews underline that leisure travel has the potential to trigger recovery. US-focused carriers outperformed Air Canada due to their greater exposure to business, interstate and international travel.
Air Canada’s lesson on how not to communicate with customers by David Fuller
Rather than subsisting on government aid, Air Canada should be urging government officials to ease travel restrictions as the industry can no longer resist grounding most of its planes.
According to Statistics Canada, travel restrictions reduced gross domestic product of the tourism industry by almost half in 2020. Tourism jobs fell by 28.7%.
Travel restrictions have also resulted in significant losses in other industries. They have resulted in a reduction of at least 1.2% of Canada’s gross domestic product and the loss of up to 500,000 jobs.
Issue debts and get new debts without sufficient cash flow from operations only postpones an unavoidable default. If Air Canada managers stand idly by, taxpayers will pay the price.
Thousands of jobs and businesses that have survived so far are also at stake. The authorities can no longer delay the decision because the recovery is not immediate.
Air Canada would first have to pay the impending debts and incur maintenance costs for the immobilized aircraft. Only then can the company begin to see its bottom line increase and benefit shareholders with higher valuations.
A blank check from the federal government is a recipe for stagnation, which is the death knell in a highly competitive industry like aviation.
Unless it can turn the tide before other players resume their normal journeys, Air Canada is set to become another taxpayer-subsidized white elephant.
Paz GÃ³mez is an associate researcher at the Frontier Center for Public Policy.
The Frontier Center for Public Policy is an independent Canadian think tank on public policy. It does not accept any government funding. It relies on diversified funding to maintain its independence.
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