Adam Smith

Yes, I know. I've been through a number of these. Perhaps you haven't seen my plethora of posts on this subject here

I'm quoting this out of sequence to the rest of the post because I don't understand what you're saying; it seems somewhat circular. Someone who received a $X credit for future travel has a claim in the amount of $X. That claim can either be satisfied (i) in the normal course, by allowing them to use the $X credit towards future travel, or (ii) with some sort of monetary compensation, which may be less than $X. You can't give something, then take it away, but say that giving it in the first place satisfied the obligation, which is what your wording says.

I think what you were trying to get at is that I'm suggesting that travel credits will be dealt with as per (i), whereas you're concerned they'll be dealt with as per (ii). That's a possibility, but below I'll explain my rationale. (The "TL;DR", as the kids say, is that the liability is likely a lot smaller than most here are thinking and that the costs of trying to cut it down are likely significant).

Part 1 - the amount isn't as big as you think it is

The first part is true - usually vouchers etc would be pretty small.

But I don't think the current magnitude is nearly as big as you (and many others) think it is. Let me walk you through some numbers. At 31/12/19, AC had $2.94B of advance ticket sales outstanding - this is the maximum liability that would exist for what we're talking about here. The actual amount of un-refunded non-refundable tickets sitting at travel credits as of today is going to be a tiny fraction of that. Why?

• AC generally has only about 60-80 days worth of tickets outstanding
• AC will have flown many of the tickets that underpinned that revenue during Q1, while slowing bookings will have significantly cut replenishment
• AC has continued to provide refunds for involuntary cancellations on flights cancelled up to March 19th; also, tickets that are refundable (whether fully refundable like Latitude, or refundable less a penalty like some international tickets) have continued to be refunded
• Some jurisdictions require AC to provide refunds for involuntary cancellations
• Flights have only been cancelled through to the end of April or May in most cases, so anyone holding a ticket for travel after the routes are (currently) scheduled to resume simply has a valid ticket, not a travel credit

So, if AC were to file for insolvency tomorrow, how much in the way of travel credits would be at stake? Any amount stemming from credits issued in the normal before the whole COVID-19 mess, plus travel credits issued between March 19th and today for flights between early/mid-March and end of May.

I can't tell you exactly what the amount would be, but if I had to guess, I'd be thinking $200-400MM. I expect total advance ticket sales on the March 31 balance sheet to be more like $1B than the ~$3B they're typically at. It's a bit of a WAG, but I'm very confident in the direction.

Now, don't get me wrong, when AC is struggling to manage cash in/out today, a few hundred million can be big. The shift to credits over refunds is also probably as much about protecting cash from future sales, so that AC doesn't collect revenue and have to give it right back because it adjusts the schedule, as much as it about the tickets that have already been sold. But when you put that in the context of the $23.4B of liabilities on AC's balance sheet, it doesn't seem so big, does it?

Part 2 - the cost/benefit of trying to haircut the credits in an insolvency may be poor

There are a few reasons why the return on trying to attack the value of the credits in an insolvency may not be worth it.

1. The cash cost to satisfy the obligation is already much lower than its face value
2. Doing so may lead to significantly higher administrative costs in the restructuring, in and of itself
3. It might add time to the process
4. It risks incurring challenges from government/regulatory authorities
5. It's bad PR at a time when bad PR is probably not needed
6. Cost to administer the change could be expensive

1. Cash cost vs face value

Most of AC's costs are not unit-variable costs, i.e. whether you sell one more seat on a flight, the cost of landing fees, pilots, FAs, etc, plus AC's corporate overheard (including airplane rent/financing), is unchanged. Even a decent chunk of the fuel bill is fixed for a given flight. So how much will it actually cost AC to satisfy a travel voucher in the future? 20 cents on the dollar? 30? Plus some of those vouchers would have expired, or been used for tickets worth less than the credits, anyway, so 30% is very generous, I think. Let's go a bit on the high side of my previous estimate of the voucher amount and use $500MM. The historical loss given default for unsecured creditors in North American insolvencies is around 35%, but let's be generous at AC and say that unsecured creditors are looking at a 60% loss. So there's $300MM potentially to be gained from crunching the travel credits.

Let's say again that 30% of the ticket cost is truly variable. What you've actually saved isn't $300MM, it's more like $90MM.

(And keep in mind that since the amount of credits at stake here is a small fraction of AC’s revenue last year – $17.2B of passenger revenues – and people would be using these credits spread across thousands of different flights over the course of 24 months, it’s not like eliminating a bunch of these credits will allow AC to cancel any flights, so we really are looking at incremental fuel, some food and beverage, and not much else in terms of true costs to satisfy these tickets)

2. Higher administrative costs

Insolvencies are expensive. Large, complex ones require armies of lawyers and financial advisors. And everyone's advisors get paid by the debtor (i.e. AC would not only pay for its own lawyers and financial advisors, but the bondholders', the aircraft financiers', the lawyers representing voucher-holders, etc). In 2016, I worked on a large restructuring with a much smaller and simpler balance sheet than AC's (albeit more jurisdictional complexity), and the fees on that were around US$10MM a month.

Adding another set of lawyers and financial advisors to the mix would add another set of fees, and would also increase the fees of the advisors that would already be working on the deal, because the advisors spend a lot of time interacting with one another. The more of them they are, the more interactions - it's a very expensive version of network effects.

It could easily cost $1MM or more, per month, in extra advisory fees to try to grind on the travel credits.

3. Lengthen the process

Adding another group of creditors can potentially add a bunch of time to the process - the fewer people sitting down at the table, the less time it takes to hash out an agreement. And it's kind of exponential.

More time = more cost (see point 2).

If the expectation was that a CCAA was going to take 6 months at $10MM/month in fees, and going after the travel credits adds $2MM per month in fees and 1 month to the process, your fee budget has now gone from $60MM total to $84MM total. That's $24MM of those $90MM of savings up in smoke.

Time is also money in and of itself. Whatever firms sign up to back this restructuring probably don't want to see their money tied up on a company that's operating under the straitjacket of insolvency for too long, they want the company to get back to business and earning a return on their capital. Every day their DIP financing (debtor in possession, basically the bridge financing they provide while the company is in CCAA) is being used, their clock is running to make money for their investors.

4. Government/regulatory issues

Governments have so far not been going after AC too hard for issuing credits instead of refunds, but if people found out that their $1,000 flight is now a $500 credit for future travel, when the airline probably should have given them a full refund in the first place, do you think some government might take action? Feds, through legislation? Or the CTA? How about Quebec's very aggressive consumer protection agency? If any of them try to intervene in the process, see points 2 and 3.

Or they may simply legislate that involuntary cancellations must allow customers to get a full refund and that this obligation takes precedence over other claims in an insolvency. Having to pay out 100% of the amount in cash would certainly be worse than simply letting people use up the travel credits and only cost you 30% of that amount in cash costs, wouldn’t it?

5. Bad PR

People are heavily motivated by price when buying air tickets, but it's not the only factor. How many bookings would it cost AC to piss people off by not only not refunding them, but then haircutting their travel credits on top of that? Or think about it another way, how much money would AC have to spend on advertising to offset those lost ticket sales? This is one more hassle that a company coming out of a restructuring probably doesn't need.

6. Difficult to implement

This amount of hundreds of millions of dollars is spread across thousands, or tens of thousands, of tickets. It's already hard for AC to even keep track of the credits. Do you really think they have the technical wherewithal to apply a haircut to the value of unused credits? Gift cards, I might believe they could do that, but I'm sure that programming a way to cut the value of all these tickets - without touching the value of tickets that remain valid, in case those need to be exchanged or refunded - would cost AC millions of dollars and take months.

Bottom line

Putting this problem in context is key. That 2016 restructuring I referred to earlier, with substantially less debt than AC, we elected to exclude (i.e. leave alone) a couple hundred million dollars of claims from suppliers because, in the context of the other liabilities (in the $5-10 billion range), it wasn't worth the time and cost to try to reduce them. And on that deal, creditors were taking a ~60-80% haircut. And in that case, we were only dealing with items 2, 3, and 4 from part 2 of my analysis above.

I’m not saying that someone won’t look at this and think about it, but the way I see it going is that the investment bank or consulting firm that’s acting as some creditor's financial advisor will run some numbers on this, much as I’ve done above (but with real data as opposed to my guesstimates), and weigh the other cons, and come to the conclusion that it’s simply not worthwhile.

Ergo, I think that it is likely that travel credits will survive in an insolvency.

Yes. Or even if airlines avoid insolvency, having to spend time and money litigating this issue.

Stranger

(About Amex rejecting chargebacks.)

Is amex really rejecting chargebacks? Or only when people try to chargeback when they got credits?

I seem to remember that what Amex has said is that they won't chargeback until credits are lost? Which would actually be reasonable, and more to the point would then be the case in a bankruptcy.

Adam Smith

In some cases, e.g. the AF one I mentioned, they're rejecting the chargeback. It's not being left open to be processed if/when your credit expires. If your credit does expire unused, you'd have to file a new chargeback at that time, and still be subject to the risk that they deem that issuing you the travel credit constituted the airline fulfilling its obligation to you (i.e. you can't say "goods/services not received").

In an insolvency where tickets were not honoured, the case for a chargeback would be pretty clear in most places, I think, and that's how Moneris ended up as Jetsgo's largest creditor. But if travel credits were left unaffected during a restructuring, that wouldn't give cause for a chargeback.

I don't know whether every card issuer is rejecting all airline chargebacks. It will likely differ from issuer to issuer and even from airline to airline. So Amex France is outright rejecting all chargebacks against AF. But maybe Amex Canada wouldn't reject a chargeback against AF. Or maybe Visa Italy wouldn't reject an AF chargeback.

But as I said in one of the other threads, some people on FT like to throw around chargebacks as a magic wand to wave all the time, and have been thinking they were a golden ticket to get out of this situation, but because the problem has gotten so big, the situation has changed.

skybluesea

delete

skybluesea

delete

Adam Smith

Of course AC says that. And they also tell their investors they're totally fine - see the Financial Update thread for several of their statements. What they would really like to do is get a bunch of interest-free, no-(or few-)strings-attached loans that help them get through this, and they'll undoubtedly be asking for that. But depending on the terms, AC may decide that they can figure this out on their own, or only using private sources of capital.

Take a look at the auto industry during the financial crisis. GM and Chrysler took huge sums from governments to stay afloat, but had to wipe out shareholders to do so, and haircut a bunch of their existing creditors.

Ford, on the other hand, decided the price was too high. They borrowed against every asset they could (including their logo) and rode it out. It was rough for a few years, but their shareholders survived instead of being wiped out.

Now, whether they would have been able to renegotiate their labour agreements without GM and Chrysler going through insolvency is hard to say, but it worked out for them.

So, depending on the terms of the assistance, it's not impossible to see AC rejecting loans/equity.

It will also depend on what other assistance is offered through other channels. If the government offers massive wage subsidies and/or other assistance across most of the economy, and AC benefits from that, I wouldn't call that a "bailout" of AC, that's an attempt to bail out the entire economy.

So, if the government is willing to hand AC a $1 billion interest-free loan with few to no conditions, I agree they'll take it. If the government wants to put a lot of hurt on AC shareholders and creditors in exchange for the money, AC may find some other way to get through.

I've already written to the CTA to object to this statement, as well as Garneau and my MP.

Why would I permanently stop flying AC? Is this credit policy going to be permanent? Neither you nor I know the answer to that. And what about other airlines? If every airline has a similarly crappy policy permanently, what good does it do to stop flying AC and fly WS or another airline instead?

What I will commit to right now is that I am giving little to no money to any airline. If they change their policies, or a government intervenes, I will look at changing my stance (and with US DOT's recent intervention, I'm warming up to the idea of committing dollars to US carriers). But I'm not going to make silly, absolutist statements like "I'm never going to fly AC again" over what may prove to be a short-lived issue.

They've never denied that the seats don't deflate, to my knowledge. They just haven't advertised the fact that their product has a high rate of defects. When the seat doesn't deflate, the product is world-class. And when the seat deflates, they've provided compensation.

That's incredibly different from me buying a ticket that says I get a full refund in the event of an involuntary schedule change and then not getting one.

Stranger

Not good? That's this year's biggest understatement so far.

It's illegal, period. One party cannot unilaterally change anything. Except of course if reaching an agreement with the other party.

Now here airlines can make a case that they are unable to fulfil their obligation because it was imposed on them by the government. But then at the very least they should be returning the money they collected. I cannot imagine AC winning in court. OTOH the CTA is not in the business of enforcing contract law.

codfather

I agree, it will be interesting to see how the lawsuits going through the courts right now will play out! Whether or not they have any significant bearing on future AC behaviour is TBD...

Stranger

Mind you, at this point AC does not really cares about the lawsuits. Which would reach a conclusion way past the end of the current crisis anyway. By then they cold well have gone to a more normal business and they might actually just decide to refund whatever (little) money is left to refund. And presmably leaving te lawyers holding an empty bag...

s0ssos

5.8 billion seems like a lot, but it isn't. They also have liabilities, first of all.
i don't know AC numbers, but Delta is burning through more than 60 million a day. AC is much smaller but it obviously also has significant burn.
And the IATA said in terms of refunding flights it would be something of the range of 35 billion. That's a whole lot of money. How much of the 5.8 billion is AC's share?

There is no airline in "good" shape. I'm absolutely sure if they had no governmental assistance they would not make it through. Nobody can. It is like travel bloggers. Unless they run a lean staff (like Lucky) they are going to be hurting (apparently he says they have basically 3 full-time staff and that's it. For a blog of that popularity it is amazing. Many lesser blogs have way more staff)

24left

"9:32 a.m.

Air Canada plans to rehire laid-off workers

Air Canada says it will take advantage of federal emergency financial help.

From The Canadian Press:

Air Canada, which has cut roughly half its Canadian workforce, says it will apply for Ottawa’s emergency wage subsidy program and retain or return affected employees to its payroll for the program term.

The airline announced last month it would cut about 16,500 jobs as part of a cost reduction program due to the COVID-19 pandemic and imposition of global travel restrictions.

Air Canada says that depending on wage levels, many employees will receive more under the Canada Emergency Wage Subsidy program than they would from employment insurance plus they will maintain their health insurance and other benefits.

The airline has reduced its seat capacity by 85 to 90 per cent due the pandemic crisis and says any near-term recovery will rely on the lifting of domestic and international travel restrictions and return of passenger traffic."

https://montrealgazette.com/news/loc...-69725d96ac66/


And from the CBC

https://www.cbc.ca/news/business/air...sidy-1.5525926
.

YYCCL3

Duplicate... posted by 24left while I was typing :-)

24left

QUOTE from news release:

MONTREAL, April 8, 2020 /CNW Telbec/ - On March 30, 2020, as part of an overall cost reduction program, Air Canada announced that its workforce in Canada will be temporarily reduced by approximately 50 per cent, or 16,500 jobs, as a result of the COVID-19 crisis and the imposition of global travel restrictions.

On April 1, 2020, the Government of Canada announced the Canada Emergency Wage Subsidy (CEWS) in order to help employers keep and/or return Canadian-based employees to payrolls for the Program Term of March 15, 2020 to June 6, 2020 in response to challenges posed by COVID-19. Details of the CEWS are still outstanding, but are intended to generally reimburse employers suffering revenue declines exceeding 30 per cent, which is the case for Air Canada. As a result of the crisis, Air Canada has abruptly reduced its seat capacity by 85 to 90 per cent and is incurring significant revenue losses. Any near-term recovery is reliant on the lifting of domestic and international travel restrictions and return of passenger traffic.

Following an analysis of publicly available information on the CEWS, discussions with Department of Finance officials on certain questions of interpretation, and subject to its adoption into law substantially as announced, Air Canada intends to adopt the CEWS for the benefit of its 36,000 Canadian-based employee workforce. Air Canada's intention to adopt the CEWS has also received the support of all of its Canadian-based unions: ACPA, CALDA, CUPE, IAMAW and Unifor.

As Air Canada (including subsidiaries Air Canada Rouge and Air Canada Vacations) has suffered a drop in consolidated revenues of more than 30 per cent and expects to continue to do so for the Program Term, it will apply for the CEWS retroactively to March 15, 2020 and retain or return affected employees to its payroll for the Program Term.
........

"The Canada Emergency Wage Subsidy is an extremely important program to help employees and employers during this time of crisis, and as one of Canada's largest employers most affected by COVID-19, we want to acknowledge the leadership of the Government of Canada in introducing it," said Calin Rovinescu, President and Chief Executive Officer at Air Canada.

"While our seat capacity and operations have decreased by more than 90 per cent overnight, we are trying to keep as many of our employees as possible during the crisis and this measure will certainly help. Depending on wage levels, many furloughed employees will get a somewhat higher amount under CEWS than they would otherwise receive from Employment Insurance payments plus they will maintain their health insurance and other benefits and stay more connected to our company during the Program Period. Once the crisis passes and passenger demand increases, we look forward to returning as many employees as possible to active status as we resume normal operations," concluded Mr. Rovinescu."

Full release

https://aircanada.mediaroom.com/2020...oyee-Workforce

skybluesea

Let the bail-out begin.

So appears AC is NOT in the strong financial position it claims.

Specifically benefits from this bail-out in the words of AC to retain employees - "stay more connected to our company during the Program Period"

mathemagic

Strong position or not, they'd be irresponsible to not take advantage of this subsidy. Get free $ from the government to pay for 75% of the salaries, and to get good PR and keep their other good employees bring back the other half at a cost of 25%, net 50% reduction in salary costs. Why not?

Now, to seal the deal with the public, let's get those refunds going.