Air Canada Latest To File For Bankruptcy Protection

Air Canada today joined Star Alliance partner United Airlines in bankruptcy but plans to continue normal operations during restructuring. The company concurrently filed for protection under the Companies' Creditors Arrangement Act in Canada and a petition under section 304 of the U.S. Bankruptcy Code.

"Clearly, while not our preferred course of action, a CCAA filing is necessary to allow Air Canada to make the required changes to compete effectively and profitably in a changed environment," said CEO Robert Milton.

Air Canada's financial woes have continued despite its near-monopoly position in the domestic Canadian market. Last year, it lost C$428 million (US$271 million) and finished with only C$558 million (US$354 million) in cash and cash equivalents.

Air Canada blamed labor unions, in part, for the company's current financial state. "The reaction from union leadership has generally been disappointing and has ultimately compromised the future of their membership," Milton said. "As we are currently seeing with airlines in the United States, the labor costs of most legacy North American carriers are simply untenable in the new airline environment."

The carrier also cited economic decline, high oil prices, the Sept. 11, 2001, terrorist attacks, the ongoing war in Iraq and revenue erosion stemming from low-cost carrier growth.

"The company has been weakened financially by declining demand and low yields, as well as the burden created by debt generated in the course of its acquisition of Canadian Airlines Inc.," according to Moody's Investors Service, which today downgraded Air Canada's unsecured debt ratings. "The company faced a continued poor revenue environment and an inability to reduce its cost base meaningfully."

"The business model is broken and it must be fixed without burning any more furniture," Milton said.

Air Canada aims to transform itself "into a leaner, more efficient, lower cost airline" by eliminating its fleet of Boeing 747s and older 737s, adding regional jets, seeking improved terms from lessors and lenders and negotiating with labor unions. The carrier said initiatives also are underway to simplify pricing and restructure its network but noted that no routes will be discontinued in the immediate term.

Air Canada lined up C$1.05 billion (US$700 million) in debtor-in-possession financing from General Electric Capital Canada Inc. The company continues to work on exit financing that would become available once restructuring is complete.

"The task before us will be painful at times and the challenges daunting," Milton said.