It has been some time since we checked in with our friends across the border. And last time we took a look at both Air Canada (ACNAF) and Canadian Airlines (CA:Toronto), neither looked very much like an airline we would want to put our hard-earned money into.But money is exactly what Canadian Airlines is looking for, in the version of more foreign investment money.
Lifeboat ProvisionIn addition, last week we ran across a very interesting clause that is included in the current Allied Pilots Association contract with American Airlines. Needless to say, the situation with Canadian has been a sore point with the pilots at American for years, as the pilots have contended that the codesharing agreements that American struck with Canadian years ago were detrimental to the pilots at American. Their reasoning? The agreements effectively slowed further expansion by American. As a result, there is a fairly large section in the contract that deals specifically with Canadian, titled "Economic Support to Canadian."
Neither the company [American] nor an affiliate shall transfer or provide to Canadian, at below market rates, any aircraft assets, loan guarantees or other forms of economic support that could directly or indirectly be used for aircraft purchases or leases, except that nothing in this provision shall prevent the company or an affiliate from infusing operating capital into Canadian for the sole purpose of keeping Canadian solvent.So, the question becomes -- when is it a matter of keeping Canadian solvent? In our opinion, that point could be coming sooner rather than later. And we think AMR shareholders should sit up and take note. Because we don't think the airline needs more money. It needs new management. At PlaneBusiness, when we see that an airline is in trouble financially or when we think a stock could be problematic for an investor, we place the airline on PlaneBusiness Titanic Watch. (This was before the movie.) We placed Canadian on the Watch early last year -- long before the airline lost $150 million in the last quarter of 1998. Since then, earnings have continued to worsen quarter after quarter, yields have continue to drop, costs have continued to increase and we see nothing in management's actions that indicate to us that anything is likely to improve. In fact, management at the airline continues to blame its troubles on a revenue problem. It doesn't have a revenue problem. It has a cost problem. Meanwhile, competitor Air Canada has been busy at work not only increasing its yields, but also cutting its costs. Air Canada has also been working with a number of regional Canadian carriers to build symbiotic feeder relationships, including talks that are going on now with WestJet, the low-fare Western Canadian carrier that we are so enamored with. WestJet is one very well-managed and profitable little airline -- and from what I understand, Canadian was "not interested" in talking to them about an alliance. Yesterday, analyst Jacques Kavafian with Yorkton Securities issued a research report on Air Canada, which was important primarily because of its damning assessment of where he sees Canadian headed. In his research report, Kavafian says he thinks the market doesn't recognize the severity of the problems at Canadian, and that the airline could significantly deplete its cash position this year, even though it had a $302 million cash balance at the end of 1998. Kavafian is estimating the first-quarter loss for Canadian to be $140-$150 million. We think this figure is accurate.