Air Canada Opts Out of Air Canada Pension Plan Funding Regulations, 2014

Published on : Wednesday, May 27, 2015

air canadaAir Canada announced today that it has elected to opt out of the Air Canada Pension Plan Funding Regulations, 2014 (the “2014 Regulations”), effective immediately.  The 2014 Regulations became effective on January 1, 2014 and under their terms, Air Canada was required to make solvency deficit payments of $200 million per year, on average, over a seven-year period. The agreement entered into in connection with these regulations contained several restrictions, including a prohibition on dividends and share repurchases; however it allowed Air Canada to opt out at any time.

 

 

“Our ability to return to normal funding rules for our pension plans represents a highly significant and positive milestone in the execution of our strategy to transform Air Canada into a sustainably profitable company for the long term.” said Calin Rovinescu, President and Chief Executive Officer of Air Canada.  “Our three primary pension objectives were to secure our employees’ and retirees’ pensions, eliminate the pension solvency deficit and ensure that the costs associated with maintaining the pension plans remain affordable, predictable and stable.  We have, over the past six years, achieved all three objectives.  I would like to take this opportunity to thank all stakeholders involved with this complex process, which has ultimately resulted in an immensely positive outcome for our employees and retirees.”

 

 

Air Canada has elected to opt out of the 2014 Regulations as following a detailed risk assessment, it believes the funding risk associated with the solvency of its pension plans has largely been eliminated. The committed deficit funding contributions over the next six years of approximately $1.1 billion under the 2014 Regulations may be redeployed to further improve the competitive position of Air Canada and create substantial value for shareholders and employees.

 

 

The overall risk profile of the pension plans, given the successful execution of a new investment policy and risk mitigation strategy introduced in 2009, is significantly lower.  This is the result of and reflected in the following:

 

 

 

 

 

Three years ago, Air Canada’s domestic registered pension plans had a significant pension solvency deficit of $4.2 billion.  The $5.4 billion improvement in the pension solvency position to the May 20, 2015 estimated surplus of $1.2 billion is a reflection of top quartile investment returns given the new investment strategy introduced in 2009 which created over $3.5 billion in value, negotiated pension benefit amendments which reduced the deficit by approximately $1.0 billion, and past service cash contributions by Air Canada of approximately $900 million over the past six years, which when added to the $1.0 billion contributed in current service costs represents a total contribution by Air Canada of $1.9 billion since 2009 to its Canadian registered pension plans.

 

 

In addition, the pension share trust created in 2009 as part of an earlier pension arrangement, and held in trust for the benefit of the airline’s Canadian employees and retirees, is currently valued at approximately $220 million.  The trust provides that proceeds of any sale of the trust shares will be retained and applied to reduce future deficits, if any should materialize.

 

 

Under normal funding rules, Air Canada will make pension solvency payments of approximately $90 million in 2015 versus the $200 million it would have had to contribute under the 2014 Regulations, saving $110 million.  Based on the solvency surplus as atJanuary 1, 2015 of $660 million, and assuming similar market conditions to the current environment and given its immunization strategy, Air Canada expects its pension solvency payments in 2016 to be zero, saving $200 million in that year alone.

 

 

Normal Course Issuer Bid

 

 

In conjunction with the election to opt out of the 2014 Regulations, Air Canada has reviewed its capital allocation plans.

 

 

 

 

 

As a result, Air Canada believes that a modest normal course issuer bid is consistent with its capital allocation strategy and shareholder expectations.

 

 

Accordingly, Air Canada announced today that it has received approval from the Toronto Stock Exchange (‘TSX’) to implement a normal course issuer bid to purchase, for cancellation, up to 10,000,000 Class A variable voting shares and/or Class B voting shares (the ‘Shares’), representing approximately 3.49 per cent of the 286,846,898 Shares outstanding as of May 14, 2015.

 

 

Air Canada is authorized to make purchases under the normal course issuer bid during the period from May 29, 2015 to May 28, 2016 in accordance with the requirements of the TSX.  Purchases under the normal course issuer bid will be made by means of open market transactions on the TSX or alternative trading systems, if eligible, or such other means as the TSX or a securities regulatory authorities may permit, including pre-arranged crosses, exempt offers and private agreements under an issuer bid exemption order issued by a securities regulatory authority.  The price to be paid by Air Canada for any Share will be the market price at the time of acquisition, plus brokerage fees, or such other price as the TSX may permit.  Any purchases made under an issuer bid exemption order would be at a discount to the prevailing market price of the Shares in accordance with the terms of the order.

 

 

The average daily trading volume of Air Canada’s Class A variable voting shares and Class B voting shares, taken together, was 1,942,943 Shares over the period betweenNovember 1, 2014 and April 30, 2015.  Consequently, under TSX rules, Air Canada will be allowed to purchase daily, through the TSX’s facilities, a maximum of 485,735 Shares representing 25 per cent of such average daily trading volume.  In addition, Air Canada may make, once a week, a block purchase (as such term is defined in the TSX Company Manual) of Shares not directly or indirectly owned by insiders of Air Canada, in accordance with TSX rules.  The Shares purchased pursuant to the normal course issuer bid will be cancelled.

 

 

The Board of Directors of Air Canada believes that the purchase by Air Canada of its Shares represents an appropriate use of funds to increase shareholder value.  Within the past 12 months, Air Canada has not purchased any of its Shares.

 

 

 

Source:- Air Canada

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