Stranger

Why are stock buyback so bad? They are not like the big dividends that the auto industry paid to shareholders before they got in trouble, followed by cancelling pensions and getting govt money.

I would merely argue that they only should get govt money when shareholder value goes to zero, and that the govt takes equity position, to resell when things get better.

Mind you, a good deal of stocks are actually held by your and my pension funds. So in a way it's a zero sum game.

skybluesea

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Adam Smith

Governments have offered next to nothing thus far (interest rate cuts aren't a substitute for lost economic activity), so markets have had nothing to respond to. The package announced by Trudeau this morning is really the first attempt at a somewhat comprehensive economic aid package.

It's immaterial as AC's current income tax provision for 2019 was very small ($72MM).

What is your point about that piece of legislation? It's not relevant to a potential bail-out, as I've explained upthread.

skybluesea

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Adam Smith

No, it won't. You've not once explained how the Air Canada Public Participation Act relates to a bailout of AC. You've talked about the location of its HQ and various other factors, but you have not referenced any provisions of that act and how they'd be relevant.

I've never said politics isn't a key consideration; I've agreed that it is. But that particular piece of legislation isn't.

I'm not talking about finely polished policy, I'm talking about not handing out free money to what has been a very profitable business in recent years (and which may or may not even need it).

A transaction will only happen if both sides think there's a need. Both sides are going to want to get the best deal they can. Stranger is unlikely to get his wish that shareholders go to zero before the government puts any money in. But AC is also not going to get a cheque for doing nothing.

So here's a term sheet. The government will lend AC $5 billion in a delayed-draw term loan (i.e. AC doesn't have to take the money right away, it can draw it down over time), with 5-year maturity. Loan will be senior unsecured, pari passu with existing senior debt. No restrictions on use of proceeds other than no dividends or buybacks while the loan is outstanding. Interest at LIBOR + 5%. For every $1MM that AC draws down, the government will receive $200K in warrants at $25 / share (i.e. if AC's share price rises above $25, the government will profit from these). Standby fee of 0.25% on any undrawn amounts. The loan will have a negative pledge over AC's unsecured assets (i.e. it can't go and mortgage planes and other assets ahead of the government's financing) and cross-default to all of AC's material indebtedness - so that if any of AC's creditors try to cause problems, they'll bring the whole thing crashing down. This will incentivize them to play nicely, which shouldn't be an issue since AC should use the proceeds of the loan to keep current on its obligations.

WS, TS, and PD could get packages similar to AC, proportionate to their sizes.

Boom. It took me roughly 13 minutes to come up with that. It would give AC access to a huge chunk of financing to assure both creditors and consumers that it will be around for the long haul. And there's a good chance they won't ever need to draw on the financing, or very little of it, so it won't cost them much (i.e. keeps AC's existing stakeholders happy). But if they do draw on it, especially in a big way, the government will end up with a big chunk of the upside if it ever recovered.

This is obviously a gross over-simplification, but go read Too Big To Fail if you want to see how fast something like this can come together in a true crisis - the bailout of a large number of US financial institutions were finalized over a weekend. But that's an illustration of the type of structure that could be acceptable to all parties.

No legislation would need to be passed to announce this, and passing the legislation shouldn't be too difficult given that the NDP would have a strong interest in supporting the highly unionized workforces at the airlines.

skybluesea

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Stranger

I would be OK with near zero. :-)

But rather than a loan, I would rather see the govt take an equity position at whatever the share price would be, to resell it eventually, hopefully at a profit. While staying away from getting involved in management. Taxpayer should not lose money on this. Granted that they might not in your scheme either, but it' not so clear,

Adam Smith

The taxpayer is much more likely to lose money with an equity position than a loan.

And by taking warrants as I've suggested, the government would retain the potential for substantial profit if the company did well.

pitz

I don't see why the paradigm advanced by the MBA's, of leveraging firms to the hilt so they have no reserve capacity, should be perpetuated. Nor is excessive executive compensation, buy-backs, and overall excess engagement with the financial sector something to be encouraged.

A debt to equity swap, and paying employees in some blend of shares and cash would be a much better idea for resolving AC's probable financial difficulty.

AC should be compensated for the cost of operating an emergency network during the emergency, but their leisure travel business, which is most of their business growth over the past 2 decades, is probably going to be severely impaired for many years to come. Especially with the real estate bubble crash that is inevitable as the credit markets can no longer support insane Canadian big-city real estate valuations.

Adam Smith

That's not a bail-out, that's a restructuring. So are you saying you don't want the government to support AC?

Oh boy. Are you going to start with the nonsense about how all of AC's routes are leisure-heavy again?

You've made an awfully huge leap from the current situation, especially on real estate, since falling interest rates make mortgages more affordable, which drives up valuations.

pitz

There should be partial support for AC operating a network in the national security interest during the time they are under severe restrictions. But that aside, my answer would be no.


Except its not nonsense. I used to travel in the early 1990s on what was a major business route in Canada on CP or AC's then new A320 -- it was all balding middle-aged men, dressed up, obviously looking like they were heading to legitimate business on every flight. I was, at the time, quite a young person and quite out of place. I'd even get the occasional upgrade and cockpit visit /jumpseat landing invite because it was so rare to have any young people aboard on non-weekends, non-school holiday flights.

Today...board a contemporary AC plane or even check out the MLL (which they've opened to practically anyone with $100 a year to spend on a credit card) and its obviously not the same 'crowd'. If the people are travelling are business travelers, they sure aren't paying business fares either. AC's growth since the 1990s has almost entirely come from the leisure/discretionary segment, and they've more than doubled capacity since the 1990s between aircraft reconfigurations and additions of aircraft.

You are confused between "policy interest rates" which apply to central bank lending secured by collateral (such as pledged GoC securities, etc.) in support of the execution of monetary policy, and that of risky asset backed retail lending such as mortgages made by commercial banks and various other lenders. Interest rates on mortgages are exploding at the moment because lenders perceive a lot more risk, especially with the likelihood of payments stopping as this crisis deepens and people are unable to make their mortgages. Also valuations were at record highs, so they probably will fall, as they did in previous hyperdeflationary episodes such as the Great Depression (1929-193x). Long term interest rates have also started to rise as well, a response to increasing inflationary expectations and falling bond prices -- also highly correlated to real estate historically.

I'm sure you've read about the Great Depression -- it was extremely toxic to leisure/discretionary spending, so if the scenario repeats, which it is likely in the process of, AC and the global industry is in for some pretty tough times until new demand sources emerge.

Adam Smith

And that's fine.

It is nonsense. You've said that essentially every route in the AC network is "leisure-heavy", which simply isn't true.

AC has certainly grown leisure traffic significantly, and there are plenty of destinations that would see little to no business traffic - many of the routes flown by rouge.

But business travellers have changed. They're much less likely to be balding, middle-aged men, and much less likely to be dressed up. The business world has gotten far more casual in general, and a lot more people travel for business. On >95% of my business flights, you would look at me and assume that I'm a leisure traveller, based on my clothing. And that's true of many of the people I know who travel frequently for business, as well as random people that I talk to on the plane.

As for business fares, many companies no longer pay for business class, or only do so when travelling over a certain length of time or internationally. Many business travellers get stuck back in Y for domestic/TB travel. Most companies that I've worked for or where friends of mine have worked have had this type of policy.

There are plenty of people who are not balding middle-aged men, dressed casually, sitting back in Y, who are flying for business.

I'm going to disregard, and not bother to correct you on your frequently incorrect, off-topic economics lecture (degree in economics and over a decade of capital markets experience here, so don't tell me I'm confused about things you clearly don't understand). All I will reply to is the quoted portion and say that my belief is that your scenario is incredibly unlikely, because the public won't tolerate the economic ruin that would be imposed, given that it's essentially self-imposed, unlike past recessions. At some point, I think that society will decide that losing a few million more people to COVID-19 is better than having us all locked up in perpetuity, and things will return to closer to normal, including travel. And who won't want to take a break on a beach in Mexico, or go visit Disneyland with the kids, as soon as they're able to? Airlines are definitely in for pain, but I see it as being much shorter-term than what you're implying.

Fiordland

The fact the government is willing to make the loan in the first place should be sufficient compensation.

I would say the loans to both AC and WS should be conditional on:
- AC and WS within two weeks are able to interline in Toronto, Calgary and Vancouver.
- Give AC a list of cities it must connect to one of its hubs.
- Give WS a list of cities it must connect to one of its hubs.
- Stipulate that both airlines must offer priority space to medical isotopes, pharmaceuticals at its normal commercial cargo rates.

The list of destinations that AC announced looks to be a good start and maybe that is all that is needed. I think the government should limit its involvement to ensuring there is a bridge into key economically and logistically important airports but stay out of deciding on routes, frequency etc.

skybluesea

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RangerNS

Mostly agreeing and elaborating on Adam:

Having traveled from s*holes like Halifax and Moncton to Toronto, and from Toronto to s*holes like San Diego and Orlando, I can say without question, people being "forced" by their jobs to travel Rouge are occasionally, at least, business travelers.

Sales goons can make sales over a phone call. My REI/MEC wardrobe actually makes money when it shows up and does productive work, because the content of fugly knows more than how not to lose at golf.

I'd have to read it in detail, but for napkin purposes, my understanding of "paid business" requires me to either be a Canadian Senator, or literally fly far enough in a single flight to investigate obelisks on the moon. I'll be sit up front, but that is because I know the game well enough to be sent up front on my way to the feedlots at Goose Island. My employer, thus far, isn't run by accountants and lawyers.