Mon, Jul 07, 2003
New Deal To Lower AC Lease Costs, Stock Soars
Air Canada is the valiant airline
that just won't die. Last week, the carrier renegotiated its
aircraft leases to lower costs.
The largest provider of leased aircraft to Air Canada, General
Electric Capitol Aviation Services, lowered the rates on 106 of Air
Canada's planes, and agreed to provide the airline with $1.3
billion (US) in operating capital, once it emerges from
bankruptcy.
That deal came just three days after Air Canada reached a
concession deal with its major unions that will cut annual labor
costs by almost $1 billion (US).
Air Canada Stock Flying High. But Why?
News of the recent deals sent Air Canada's
stock climbing 13 percent higher on Friday. But here's the real
question: Since equity investors won't get paid until all
bondholders are paid. Air Canada itself insists that the stock will
be worthless once its financial restructuring is in place. And yet,
Air Canada stock has doubled in the past two weeks.
"The big question to me right
now is why Air Canada trading at a buck and a half when it's worth
zero," said Harry Koza, senior market analyst at Thomson IFR. "In
the restructuring, the bondholders will take a huge haircut but
nothing is supposed to go to equity holders until the bondholders
get paid off in full."
On the other hand, hanging on to Air Canada bonds might be worth
something, said Koza. "Buy the bonds at the right price and you are
making a rational investment. Buy the stock and you are just buying
this impossible fantasy," said Robert Chapman, a small U.S.
bondholder.
"Bill Gates might wake up tomorrow morning and just say, you
know, I've always wanted to own an airline, it's the perfect thing
to integrate with the software business."
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