By Susan Taylor
TORONTO Jan 22 Air Canada said on
Wednesday that it has eliminated a weighty C$3.7 billion ($3.37
billion) pension solvency deficit and moved to a "small
surplus", prompting some analysts to lift stock targets for the
country's largest carrier.
The Montreal-based airline said preliminary estimates on its
Canadian registered pension plans reflect several factors,
notably a 13.8 percent return on investments last year and
improved discount rate.
Analysts said the funding surplus, estimated as of Jan. 1
2014, reduces risk for the flag carrier and could eventually
free up cash for better uses, such as new planes or debt
The company's more heavily-traded class B shares climbed
more than 3.5 percent after the announcement, to C$9.28 on the
Toronto Stock Exchange. The stock has more than tripled, from
C$2.40 a year ago, as the company sharply cut costs and launched
a low-cost subsidiary.
"This is a significant positive turn in Air Canada's pension
funding situation," RBC Capital Markets analyst Walter Spracklin
wrote in a note, which raised his stock target to C$13 from
C$10. "As of January 2013 the pension solvency deficit was C$3.7
billion and C$4.2 billion in 2012."
Air Canada said the improvement reflects a better return on
investments, pension benefit changes that cut the deficit by
about C$970 million, a company contribution of C$225 million to
the deficit and a higher discount rate.
A 3.9 percent discount rate was used to value pension
obligations, up from 3 percent last year. Each 10 basis point
change in that rate results in about a C$150 million change in
solvency liabilities, the carrier said.
Discounts rates, used to assess a plan's solvency, are based
on long-term government bonds and help actuaries judge how much
assets will earn over time. The lower the discount rate, the
bigger the deficit.
Final pension plan valuations will be completed in the first
half of 2014.
Air Canada is currently required to pay C$150 million to
C$200 million annually toward its domestic pension plans, under
a special funding regulation with the federal government. It
could opt out of that arrangement under certain circumstances,
but the company said it would not do so in 2014.
"Should the company opt out of the regulations ... Air
Canada could free up C$200 million of cash annually that could
be deployed in other value-enhancing initiatives," BMO Capital
Markets analyst Fadi Chamoun wrote in a note that raised his
stock target to C$12 from C$10.
Air Canada also said that 70 percent of its pension
liabilities were matched with fixed income products to reduce
interest rate risk and over the mid-term it wants to raise that
to 100 percent.
"Air Canada's three primary pension objectives are to ensure
our employees' and retirees' pensions are secure, the pension
solvency deficit is eliminated and that the costs associated
with maintaining the pension plans remain affordable,
predictable and stable," Chief Executive Calin Rovinescu said in
a statement. "We have, over the past four years, made
significant progress on all these objectives."