Interesting times at Canadian airports these days, but it’s not clear whether the average Canadian understands precisely what the real problem at Air Canada really is.
Charles Adler’s end of week segment with the Globe & Mail’s Dan Cook revealed some startling facts:
> Market Cap: $227 Million = $0.227 Billion
> Pension Liabilities: $13 Billion
In other words, the company owes approximately 57 times in union pension commitments than it is currently worth.
Since many people’s eyes glaze over when they see “millions” & “billions”, another way to look at is like this:
Imagine a 25 year old, living on his own in a rented apartment, tallies up everything he owns and determines it to be worth $10,000. Then he looks at credit card and bank statements and realizes he owes $570,000.
That, in a nutshell, is Air Canada’s predicament today.
Update: The $227 Million market cap and $13 Billion pension liabilities were accurately reported from what Dan Cook said on the radio program. But SDA regular ‘KevinB’ says this may not be correct. His comment is well worth a read.
I’m thinking those union idiots should put their shoulder to the wheel to make it work. Because if they think the taxpayers are gonna bail out their pension they’re effing nuts.
We’ve known for years that this kind of thing was going on and, up to now, no government, especially of the Liberal and NDP variety, has been willing to address it. I guess that’s because they get so many votes from … the unions.
These union thugs need to get it through their thick skulls that you can’t get blood out of a stone, that all of their fancy shmancy salaries and benefits are on the backs of taxpayers who don’t make as much as they do or have anywhere near the benefits they’ve managed to wangle/extort. These thugs live in la-la land.
Who do they think is going to pay for their stuff — Canadians who make far less than they do? On top of being delusional they’re obviously stupid.
Much like GM was a pension that happened to produce cars, Air Canada is a pension that happens to fly airplanes
Why should thinking that taxpayers will bail them out be delusional? It’s always worked before….and the cry goes up “Tax the Rich” “Equality” “Power to the People” and other bullshit statements.
Jaedo, exactly. It doesn’t matter the outcome of any particular union contract negotiations. The pension liability alone will kill the company. We are now in an economic climate of negligible real interest rates and sub 5% investment returns. AC’s pension obligations can only be met with vastly higher rates of return.
What unions don’t yet understand is that the defined benefits pension plan is dead, dead, dead. What’s misleading in Robert’s post is what assets are set against the pension liability, because they won’t be included in the market capitaliztion.
seems like a good thing for the dippers to ask for tonight while the eyes of the nation ie , CBCpravda are on them.
then the world can see what fools they are.
hello Westjet
Maybe Air Canada can pay off their employees with Air Canada shares! I mean if the company is doing so well in the eyes of its employees, they should jump at the chance.
No doubt that the unions are a major problem and the difference is more than obvious when comparing Air Canada to Westjet. What really annoys me is that all the concessions won by the Unions had to be signed by both sides. These incompetent managers and CEO’s take their big year end bonuses even when their decisions to capitulate to union demands severely damage the company bottom line. There are enough idiots to go around and they are certainly not all on the union side. It has always been pay now or pay later. Pay later has arrived but I’ll bet managements bonuses are intact. Like rewarding a ships captain for running his ship onto the rocks.
to continue the private comparion
its like owning a 10 grand apt
but making one billion a year in income
and having a debt of 10 billion..
mrket cap is the wrong comparison..
Oh, good lord..
Air Canada’s Annual Report from 2010 (2011 isn’t on the web yet) lists their “Pension and other liabilities” as $1.059 Billion, down about 10% from 2009. I don’t doubt that AC had a bad year in 2011, but for their pension liability to increase by thirteen times? Not possible, unless they had Bernie Madoff’s smarter brother as their accountant.
And ‘market cap’ is simply the value the stock market places on an enterprise. In Robert’s “25 year old, living in a shoebox” analogy, market cap is the sum opinion of the neighbourhood’s little old ladies: “Oooh, he comes in late at night”, “He plays the loud music”, “I never see him at church”, etc. In the day to day running of an airline, market cap means bupkis unless you’re planning a secondary offering, or your compensation depends on the stock’s level. (Note: years ago, when stock markets weren’t so transparently manipulated, I might have given this number a tad more credence; today, not.)
Much more appropriate to discussion would be the “owner’s equity”, which is the amount left over if the airline were to cease operations, collect everything it’s owed, pay all it owes, and sell off all its equipment. This is, usually, a quite fanciful figure, as no firm could realize the actual value of its hard assets in the event of a fire sale, but it nonetheless makes a useful yardstick. And AC’s shareholder equity is north of $1.7B (all figures conveniently on Page 35 of the Annual Report pdf – AC 2010 AR).
So a more accurate statement would be:
Imagine a 25 year old, living on his own in a rented apartment, tallies up everything he owns and determines it to be worth $10,544. Then he looks at credit card and bank statements and realizes he owes $8,804.
Not the healthiest financial position in the world, but hardly the nightmare you’ve made it out to be.
This is not, in any way, to be construed as an endorsement of AC’s current management or their policies. I have considerable sympathy for the mechanic on the news last night who complained “We haven’t had a raise in ten years, and they keep paying themselves multimillion dollar bonuses”, which is partially true. In addition to his salary, Robert Milton collected over $18 million in “other” compensation in 2008-10. Brian Dunne collected $4.7 million during the same period. The CEO and CFO both collected over $1 million in ‘incentives’; no other AC exec topped the $1 million mark over the three year period. Meanwhile, the mechanics who actually keep the planes flying safely get nothing. So I understand their anger, while not condoning their actions.
You gotta know when to hold ’em and know when to fold ’em. Time to fold ’em…again. But this time come back without the unions. Or not at all.
As so many have noted, there is no way that the Pensions demanded by and set up by Unions can be fulfilled by the companies that signed for them, there is only one ‘solution’. Cash them out.
After all, if your future debt load can never be matched by your future assets and income, what else can be done?
The employees at these ‘public’ corporations can go on strike, but, tantrums won’t obliterate reality.
The unions and their greed have done a terrible disservice to societies. I’m not blaming the workers as much as I blame the unions and the union executive. After all, when a worker is told that their employment in such and such a company gives them a job-for-life, who would refuse that?
When the union declares that their employment gives them benefits and pensions, both untaxed, that would add as much as 50% to their salary if they were included in the salary – who is going to complain?
But what slips by is that the actual cost of these jobs-without-accountability, these benefits and pensions that are far beyond the reach of the private sector – is being born by The Future. It’s all borrowed and indebted accounting, and no economy can exist in such a fictional time. An economy must exist now, in real time, and focusing it instead on The Future, is disastrous.
C’mon guys, be fair……hauling bags off a truck and tossing them onto a conveyor belt is a highly skilled profession and merits top wages, long vacations, early retirement at full pay and any other perks one can think of.
There is a huge international demand for this kind of specialized expertise, and if these dedicated workers decide to relocate their skills offshore, why Canada’s economy would be devastated.
Yes, the entitled, greedy CEOs are also to blame. They should be fired.
Someone should think about setting up some international routes for when Air Canada fails as it must. No more defined benefit pensions or lifetime air travel.
The Pension is a “promise to pay”… If Air Canada is able to operate & pay thier liabilities…All is OK, but if they can’t that “promise” is near worthless…. The Union has funds they committed to their members…good luck!
Kevin, thank you for the correction. May I say, in my defense, that I was pretty much quoting what Dan Cook said to Adler but then equivocating the numbers down to more manageable ones.
You might want to consider writing him with what you’ve written here.
KevinB,
Thank you for looking at the financial statements. This post just didn’t look right to me. Have you looked at the pension’s financials? Are they publicly available? The pensions obligations vs current assets plus projected growth (and actuarial black box magic) lead to the shortfall (or surplus) which I think you’ve correctly stated. I think it would be interesting to see the pension plan’s current assets. I’d be willing to be that they’re greater than the market value of Air Canada.
That doesn’t mean, of course, that ET above is wrong. Maybe Jaedo Drax makes the most telling comment. Air Canada would have been better off managing the pension and spinning off the airline. 😉
“C’mon guys, be fair……hauling bags off a truck and tossing them onto a conveyor belt is a highly skilled profession and merits top wages, long vacations, early retirement at full pay and any other perks one can think of.”
Not to mention the most valuable perk of all-stealing from people luggage.
Where do they keep finding idiots to invest in crippled companies? When Air Canada reorganized several years ago, they didn’t solve the fundamental issues driving them bankrupt yet managed to sell a whole whack of new shares. When they go through that money, what’s left? Ditto GMC. What idiot would have bought shares in GMC when they only solved some of their issues?
Never fly Air Canada, let the rotting mess die.
Because Air Canada’s motto. “were not happy until you’re not happy” means they don’t deserve to exist.
Can you say, “taxpayer bailout”?
Not this time?
Just wait and see.
Kevin, I’ve updated this post to draw attention to your excellent comment. I also listened to Dan Cook & Charles Adler again. I was not mistaken, he absolutely quoted the numbers that I posted. In fact, he added “and this is not a mistake” before stating the $13 Billion in Pension Liabilities.
Then I did some further research and found this. I do respect your input very much but it seems to fly in the face of what Cook and his G&M colleague, Brent Jang, have said/written.
This article from last fall states, “The bottom line is that 26,000 active employees are supporting 29,000 retirees with about $13 billion in total pension liabilities.”
I wonder where the truth lies.
A lot of numbers being thrown around here and misinformation.
According to the annual report for 2010, the aggregate solvency deficit in the registered pension plans was $2,728 million.
The net deficit, on an accounting basis, at December 31, 2010, for pension benefits was $2,077 million. (pages 42-43)
If you want some fun stuff regarding Aveos, check out pages 53-55. The Union was clearly in agreement with the restructuring. There’s even mention of a possibility of insolvency and its scenarios. Not something the lazy media will bother to report.
Horny Toad at 7:45 PM
actually it’s all the drugs they handle, and get paid for by organized criminals, that is their greatest benefit
Just a few facts guys. All union personnel have given concessions every contract negotiation since 2003. Were they overpaid at that period of time? It’s certainly debatable. However, not one manager has missed a bonus in that period of time. Not one. Air Canada has been highly profitable to it’s executives while they run it into the ground. It’s common for an American executive to come up for a year, than leave with two years salary. It’s like an ATM machine. I don’t condone a wildcat strike under any circumstances, however I think as a private company they should have the right to a legal strike. Public services are a different story.
Robert,
After looking at the financial statements and the notes, I agree with KevinB in so far as the pension liabilities likely aren’t $13 billion. I DO however, disagree with his assessment about the actual situation that Air Canada is in. Defined benefit plans are subject to wild swings and are dependant on actuarial assessments on a regular basis (Air Canada does them every 3 years). The set of financial statements he listed shows a deficit of slightly over $2.7 Billion in the pension fund (Page 42 of the report). This is money that Air Canada owes to the pension fund unless the market outperforms the rate the actuary used in order to close the gap.
Personally, if I were a shareholder of Air Canada, I would be scared that 1/4 of 1 year’s revenue is owed to the pension fund in a business where the margin hovers usually around 10%. Just me though.
Hi Robert,
Thanks for the link – this is, I think, the salient excerpt:
As a 75-year-old former Crown corporation, Air Canada has about $13-billion of pension liabilities,” Air Canada spokesman Peter Fitzpatrick said in a statement Monday. “As at Jan. 1, 2011, based on preliminary estimates, the company’s pension deficit stood at $2.1-billion, which was $600-million better than a year ago as a result of a strong fund performance in 2010. However, this deficit is not sustainable and has not been sustainable for most of the decade, as it puts at risk both the viability of the company and the pensions of all employees.
Now, for clarity of discussion, I think it’s important to define some terms: the total pension liability is the net present value of all future projected pension payments. The unfunded pension liability (aka pension shortfall, pension deficit, pension underfunding, etc.) is the amount by which total current investments is less than the total liability. So, let’s take a simple and completely unrealistic example: 5 employees, all going to live for ten years after retirement, zero cost of living increase, 4% interest rates, $30k annual pension both employees and company put in $1000 each for 30 years.
Total pension liability = 5 x 10 yrs x 30k = $1.5 million. Value of pension funds invested = $440k. Pension deficit = $960,000
Now, here’s where all the jiggery-pokery can occur. Increase pension investment return from 4% to 9% (don’t laugh – in the late 90’s, some firms were using this figure). Deficit down to less than $5,000. Increase contributions to $1050/year each. Pension now has surplus. And you can play all the games you want with investment returns, COLA adjustments, life expectancy, contribution levels, etc., and get practically any number you need. During the heady investment years of the late 80’s and 90’s, raiders would take over companies with sound pension funds, play with these figures a bit, announce the pension was “over-funded”, take the excess into earnings, and declare themselves nice fat bonuses.
So, back to the matter at hand: AC’s spokesman is saying the pension is “underfunded” by about $2 billion. That is, if we accept the $13 billion total pension liability, AC’s pension funds are only worth about $11 billion. Three or four years of overachievement in investment returns could wipe this out without AC doing another thing; a severe market crash could increase the figure immensely. Cures for heart disease and cancer, by extending life expectancy, could wreak total havoc with all pension funds, not just AC’s.
The problem I have with jornos like Cook is he throws around numbers like “$13 billion liability” without defining it, or even hinting that AC has $11 billion in pension investments to offset it, leaving the casual listener to conclude that AC owes $13 billion against an empty cupboard.
The overall problem is defined benefit plans. These made great sense during the 30 years after WWII, when growth, interest rates, and life expectancy were relatively stable. Cracks appeared in the inflationary 70’s, got deeper during the restructuring 80’s, and then seemed to be papered over during the booming post-Cold War 90’s. But in the modern financial environment, where once boring actuaries have to deal with volatile investment returns, interest and inflation rates, uncertain corporate growth, and varying life expectancy, defined benefit plans are a wild gamble that no sensible CFO would ever sign off on. AC, like many companies, is stuck with them, and is trying to deal with the problem. I don’t envy them the task, but irresponsible reporting from the likes of Cook don’t help.
uurrrp:
irresponsible reporting from the likes of Cook doesn’t help.
And Robert – please don’t think I’m slagging you. You just quoted the figures, and I think your use of the 25-year old analogy was quite appropriate. I try not to shoot the messenger!
Thanks KevinB, you’re bang on.
Dumb question tho, if an airline is a public/essential service, geez, how did mankind manage before the Wright brothers?
Page 114 of the 2010 financial statement shows pension liabilities of $13 billion and assets of $11 billion with a deficit of $2 billion.
The deficit in the various pension plans is $2,106,000,000 and this is unrecognized in the financial statements as stated on page 114. The interesting part is that shareholders’ equity is only $1,740,000,000 so the book value of the company is negative $366,000,000. Dammit, broke again.
Who the hell cares if it doesn’t help .If they go broke, all the better. For all the reasons that have been previously mentioned.
Perhaps I should reword my last sentence. The interesting part is that shareholders’ equity is only $1,740,000,000 so the book value of the company less unrecorded pension liability is negative $366,000,000.
The Canadian Institute of Chartered Accountants does not require immediate recognition of pension shortfalls as they are identified and they can be recognized over time which is of course pure BS.
Scar:
Thanks, I didn’t go through the entire report, so I stand corrected. Still, $366 million is a tad less than $13 billion, wouldn’t you agree?
WinnipegGary:
So much money has been lost investing in airlines that renowned investor Warren Buffet once quipped that if he’d been present in Kitty Hawk in 1903, “in the name of venture capitalists everywhere”, he would have shot Wilbur and Orville.
It’s a fascinating business. You would think that there are considerable barriers to entry – buying planes, staffing, maintenance, and especially getting takeoff and landing spots at capacity controlled airports – and yet, every few years, a new entrant pops up with a variation on the old formula and tries to make a go of it. I like Porter’s approach – use smaller, more convenient airports where possible, focus on short-haul, single segment flights (avoiding the cascading systemic failure caused by one or two delayed flights in the majors’ “hub and spoke” systems), use slightly slower but more fuel efficient turbo-props, and treat your customers slightly better than cattle. I give them a few more years before they succumb to the siren call of trans-ocean flights, big jets, etc., and start going slowly broke like all the rest.
Q4 financials are up.
They have a market cap of $240m as of now (so that is the value of their equity as determined by the market).
Cash, cash equivalents, and short-term investments are $2,099m. Long-term debt (and current portion) is $4,330m. I would generally say that they therefore have net debt of $2,231m, but they indicate in their MD&A that, including capital leases, they have net debt equivalent of $4,576m.
In addition, they have $5,563m in pension and other future employee liabilities.
They have negative book equity of $4,006m.
Against that they have full year EBITDAR of $1,242m (again from the MD&A). So they are levered at like 8x EBITDAR, which is ridiculously high. I don’t know how they emerged from bankruptcy with such ridiculous leverage, but I never reviewed the original deal.
Why ACE did a share buyback a few years ago at $30 a share I will never know… that was nuts. That must have been nearly five years ago now though… fools.
I don’t know why everyone has different numbers… I looked up their reports on the aircanada.com site. Am I missing something? I didn’t spend a ton of time looking for things, so if there is some weird structure whereby the listed company is consolidating for accounting purposes but doesn’t own the whole thing someone tell me…
Any company under THREAT OF SUBSIDY is doomed. Air Canada has lived and struggled under this threat for decades. Now GM and Chrysler are afflicted. If you are an investor, get your money out. If you are taxpayer, prepare to have your pocket picked.
It will be painful for a short while, we must let these poorly run companies die. Will the Conservative hold their ground and let the chips fall?
KevinB at March 24, 2012 6:55 PM
You’re saying the market is wrong big time. That is a very big call. Instead, Ockham’s razor would suggest the financials should bear closer examination.
The statistic that is the most relevant is 26000 active employees supporting 29000 retirees. That alone is a recipe for disaster.
The government can help; slash cigarette taxes and fund commercials showing retiree smokers being attractive to young women. Get rid of drunk driving laws for anyone who is retired and give them a discount on alcoholic beverages. Make it seem important for retirees to be organ donors (a 70 year old kidney is better than dialysis). I’m sure with the right advertising company managing this campaign the number of AC retirees can be cut by 30% in a short period of time.
One thing I can’t understand about AC is why they don’t pay their mechanics well? Mechanics are the people who keep the planes operational and one would think their pay would reflect that. Sounds like AC could use a change in management as the managers appear to feel entitled to their entitlements.
Scott:
AC doesn’t pay a dividend. Like most airlines, it faces an uncertain future, and the prospects for imminent recovery are low. Why would anyone hold the stock? It’s been dumped so much, the only holders now are those hoping/praying/expecting a future turnaround.
Back in March 2003, Apple stock (NASD: AAPL) traded at $7.07 (split adjusted) per share. It didn’t pay a dividend, either, and the only people holding it were those hoping/praying/expecting a turnaround that Wall Street experts sneered at. In the 9 years since then, Apple shares are up about roughly 8500%, making them easily among the best investments available. Yep, that old market cap is certainly a solid predictor of future performance.
I’m not suggesting for a moment that AC’s going to do anything similar. I’m just saying the stock market is no longer a valid assessor of corporate value – look at C, JPM, WaMu, the old GM, etc., etc., ad nauseum as examples of extreme over-valuation. Check out David Einhorn’s excellent work at Greenlight Capital, where he has ferreted out numerous firms that were Wall St darlings (Green Mountain Roasters, e.g.) but have since crashed and burned.
On the flip side, Smith & Wesson was about $2.50/share last September; it’s since tripled. (did your broker get you in on that?) Nothing fundamental has changed, except now people think investing in gun makers is a good idea.
The stock market is just a popular opinion poll, although it’s backed up by money. How smart that money is an open question.
And who is this “Ockham” fellow to whom you refer?
@ Posted by: Loki at March 25, 2012 12:08 AM
I like your way of thinking. My grandfather died at 83 still smoking his pack a day. He died peacefully in his sleep, not screaming like the other passengers in his car. Seriously though, longevity is far costlier to retirement funds than any diease caused by lifestyle. These health nuts will feel really stupid someday when they are lying in bed and dying of…..nothing. By then we will have spent billions of dollars trying to convince seniors that living long is better than living free to enjoy the vices many had through most of their life.
Kevin – why even bring up the Apple comparison. Air Canada is in the transportation business, whoever has the cheapest rates with the most reasonable service wins.
Same as trucking.
Air Canada is not going to create a miracle for shareholders even if they cut all corporate bonuses for executives to zero.
It will add shareholder value once the unions are busted. Same as virtually any other entity that has the union cancer.
Can’t add much, except that A/C was worth $17.35/share just 5 years ago. Today, it’s $0.85/share – and has not paid dividends.
I’ve held some crappy stocks in my time, but I’d never invest in a company that would abuse me as a customer.
Returning from out of the country, my wife and I missed the last scheduled float plane flight to Nanaimo from Vancouver. Air Canada said they could get us home the same night…. for just $435 each. It’s a fifteen minute flight in a Dash 8.
And no, we caught the ferry instead.
The stock market is just a popular opinion poll…
That’s all any market is…any evaluation of an asset is an opinion. The bottom line is what someone will pay for the asset.
The sharp pencil crowd naturally want the sale of their opinion to be preferred.
At least AC sells something besides opinion.
Do not assume that future generations will be on the hook. In the event of deflation, all assets will fall in value – dramatically. When there is no money to pay the unfunded liabilities, guess what? People do not get paid.
New organizations will pop up without any past obligations. Think of a farmer who had been working around the manure pile. When he heads to the house, he will scrape the “residue” from his boots and hose them off before he gets to the door and will remove his boots before entering. None of the $h1t ever gets carried into the house.
Now Skweeker, you would be correct if it were not for the Praetorian Guard standing there forcing SOME of that “$h1t” to be carried into the house. Most specifically, that which supports them and their Masters. But have no fear! “Law Enforcement” is surely there only to protect Mere Citizens!
KevinB@10:21,
How does one make a million dollars?
Invest a billion in an airline.
Call me a cynic, but I think the Feds will never let AC die until Westjet begins offering Business Class in their fleet.
Hell will freeze over before your local MP is forced to sit in Coach.
I didn’t have time to read all the comments but you guys gave some serious confusion over the difference between the pension deficit and the pension liability. Keep in mind the pension has assets that are separate from company assets. Whoever it is that is comparing market cap to the pension is a moron. The deficit will sink them or get bailed out….. by conservatives….. again. Just put it on Flaherty’s tab.
they say the Air Canada motto is
We;re not happy ’til you’re not happy