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Air Canada faces daunting market challenges

July 20, 2009, Montreal - Air Canada can focus on market turbulence now that it has secured labour stability.


July 20, 2009
By Ross Marowits

July 20, 2009, Montreal – Air Canada can focus on market turbulence that
continues to threaten its survival after the carrier secured labour
stability by winning approval of new 21-month contracts from all its
unionized employees.

The International Association of Machinists
and Aerospace Workers, which represents about 11,000 mechanics and
baggage handlers, was the last group to come on board. It announced
Wednesday that 60 per cent of its members voted in favour of the deal
this week, after initially rejecting the contract by 50.8 per cent.

"The
successful conclusion of the ratification process represents an
important milestone in achieving the stability required to manage
through this difficult economic period," CEO Calin Rovinescu said in a
news release.

"It is an encouraging sign of our employees'
support for working together to build a stronger business in the
current economic context."

While he said many hurdles remain to
overcome, including securing government approvals to a pension
moratorium and $600 million of funding, Air Canada's return to
profitability hinges on a fundamental restructuring of it business.

This
includes significant cost reductions that will require participation by
certain suppliers and stakeholders, along with initiatives to generate
new revenues.

Industry observers says Air Canada's task won't be easy.

Jacques
Kavafian of Research Capital Corp. said the cash-strapped airline has
bought itself labour peace so it can focus on other issues such as
getting more cash and fixing its business.

"The company is not
out of the woods at all," he said in an interview, adding that Air
Canada faces two or three years of restructuring.

He said the
peak summer season is shaping up to be a disappointment as volumes are
down and pricing is depressed. And the fall promises to be even worse
with demand falling further.

While the unions' support of the
pension funding moratorium and labour stability agreements are helpful
in its bid to survive its cash shortage, David Newman of National Bank
Financial said the fundamentals remain poor, with Air Canada dragged
down by its operating debt.

He estimates revenues per seat mile
are down 4.1 per cent, with domestic revenues off 6.5 per cent and
business to the United States down 5.2 per cent.

Analysts polled
by Thomson Reuters expect the airline's revenues will decrease 14 per
cent and it will lose $1.03 per share in the second-quarter, down from
a $1.22 per share profit a year earlier.

Analysts say Air
Canada's business model is broken as its cost structure makes the
company less able to compete effectively with WestJet (TSX:WJA), its
Calgary-based rival. Some suggest chopping unprofitable routes or
dramatically reducing the size of Canada's largest carrier.

But Rovinescu promised once again Wednesday to preserve the company's market share.

"We
will remain focused on re-engaging our customers and ensuring that we
do not concede market share to our competitors without looking for
value added ways to preserve it."

Nonetheless, contract approvals
by mechanics, pilots, flight attendants, customer agents and
dispatchers have been considered a critical factor in keeping the
money-losing airline out of bankruptcy court.

"The majority of
the membership has spoken in favour of this agreement so we can now
move forward knowing our pensions, our contract, our benefits and our
jobs are protected for the next 21 months," said IAMAW District 140
president Chuck Atkinson.

The union said turnout in major cities
was the highest it has ever had for a contract vote, but it declined to
release voting results by city.

Many members, particularly in
Montreal, had originally opposed the deal because of concerns that
mechanics' jobs will be shifted by repair and overhaul company Aveos to
El Salvador. It is believed they continued to oppose the contract
despite efforts by the airline to clarify its intentions about
contracting out of work.

Former Ontario Superior Court justice
James Farley, who was appointed by the federal government to mediate
negotiations, met with union workers in Montreal and Toronto to answer
their questions and allay their concerns.

A second ballot
concerning a strike vote wasn't counted because the contract was
approved. Even if members had rejected the labour contract, the union
had the power to order it accepted if the strike vote was less than
two-thirds of ballots cast.

The new labour contract include no
wage adjustments and a suspension of special payments towards
eliminating the airline's pension deficits.

The agreements are
contingent on government approvals for the pension deferral and on the
airline getting $600 million of new financing. Both steps are believed
to be mere formalities, said Newman.

Federal government agencies
have been asked to provide $200 million. Additional support is expected
to come from loyalty rewards partner Aeroplan and Air Canada
parent ACE Aviation Holdings (TSX:ACE.B).

The only group that
potentially stands in the way of the airline's quest for pension relief
and additional funding are retirees, who have until Saturday to oppose
the moratorium. The moratorium is rejected if at least one third of
them vote in opposition.

The Canadian Press