May 26, 2009
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News: Air Canada Cuts Cash With New Deal
Still facing difficult times, Canada's largest airline searches for new opportunities to send a sluggish balance sheet soaring. Air Canada airlines has partnered with a new credit card processor to be the middleman between the airlines and their customers. Desperately seeking to avoid a second bankruptcy, Air Canada hopes the move will reduce the amount of cash required on the balance sheet. Calin Rovinescu, Chief Executive for Air Canada, said that the partnership is expected to provide financial stability in the wake of a difficult economy. In general, the process provides a fast cash turnover because the credit card processing company will process the customer's online ticket sale and turn the cash over to the airline in a matter of minutes. In actuality, the airline gets paid upfront days, weeks, or sometimes even months prior to the flight. If the airline should go out of business, the card processing company is held liable for the charges. Therefore, contracts between credit card processing companies and businesses typically require that the airline maintain a certain level of cash on the balance sheets. Violations to the agreement could cause delay in payments.
In the wake of a staggering economy, some credit card processors have tightened up the rules by requiring higher commitments. The growing demand is added pressure for an already struggling business which can often send the business into bankruptcy. Frontier Airlines and Conquest Vacations are two examples of businesses that were pushed into bankruptcy after their credit card processing companies placed greater demands on them and began withholding larger sums of money to compensate for ticket refunds. Air Canada's previous card processing company required the airline to hold $900 million open on the balance sheet. The airline has approximately $1 billion in cash on hand which would not give them much leeway if greater demands were placed on them. Under the agreement with the new card processing company, the airlines will only be required to keep $800 million on hold.
Although the new agreement with the unknown credit card processing company is expected to put Air Canada in a better position, they will continue to face difficulty with the pension funding obligations which are currently showing a deficit of $2.85 billion. Mr. Rovinescu stated that they are working with the union groups asking for a moratorium on pension payments. At the moment, it doesn't appear the unions are being very cooperative.