Air Canada stock gained the most in a week after the carrier reached an agreement with the Canadian federal government to extend a cap on pension funding by seven years, vividly demonstrating the impact of pension obligations and the price of publicly traded sponsor’s common stock shares.
The company will pay at least C$1.4 billion over that time frame into its pension fund
under the pact, according to the company. The shares gained 3.1% the day of the announcement, their biggest single-day gain in a week.
Air Canada had faced a January 2014 deadline for restoring pension contributions to their usual levels. That’s now extended to Jan. 30, 2021, and makes funding payments sustainable in the current interest-rate environment, the company said.
The carrier will save more than C$400 million a year in cash outflow, Kevin Chiang, a CIBC World Markets analyst, told Bloomberg. “This is supportive of the company’s initiative to deleverage its balance sheet and re-fleeting opportunities,” he added.
Air Canada had pension liabilities of C$4.7 billion as of Dec. 31, down from about $5.6 billion a year earlier. Had the pension arrangement not been extended, Air Canada’s pension funding obligations would have risen by more than $1 billion a year, more than double the C$471 million that the company expects this year, according to Walter Spracklin, an analyst for RBC Capital Markets.
“Air Canada shares will begin to approach fair valuation” following this agreement, said Spracklin, who rates the stock outperform.
Under its agreement with the federal government, Air Canada is prohibited from paying dividends or buying back shares for the pact’s duration.
WestJet Airlines Ltd., a competitor to Air Canada with a new regional service, said it was “disappointed” with the pension decision. “We trust this marks the end of special treatment for Air Canada, as such treatment at the expense of other industry players has become too common,” the Calgary-based carrier said in a statement
To contact the reporter on this story: Frederic Tomesco in Montreal at firstname.lastname@example.org
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