Predicts Credit Crunch, Lack Of Investment Could Force Issue

Canadian flag carrier Air Canada may be soon forced to file for bankruptcy protection, according to UBS analyst Fadi Chamoun.

Reuters reports the drastic move could come if Air Canada is unable to attain additional financing, as well as renegotiate existing contracts with credit card companies.

"Notwithstanding lower fuel costs, we believe that cash from operations will be insufficient to meet rising pension funding obligations and over C$1 billion ($800 million) of debt repayment over the next two years," Chamoun wrote in an investor's note last week.

The need to renegotiate credit card terms is particularly important, as credit card providers clamp down on terms of use in the face of the global economic crisis. That would require Air Canada to maintain higher cash balances on hand to honor those covenants... cash the airline may not have as the year wears on, unless Air Canada is able to borrow more.

"In the absence of additional financing (sale of assets) and renegotiation of covenants in credit card agreements, Air Canada could be forced to file for bankruptcy in our opinion," wrote Chamoun, who also downgraded shares in the airline from "neutral" to "sell."

A spokeswoman for Air Canada declined to comment on the report, which came the same day Air Canada announced a loss of $589.7 million US in the fourth quarter of 2008. That loss was larger than analysts had expected.

In response, Air Canada CEO Montie Brewer said the carrier would further cut costs and shrink capacity by another 3.5 percent. That comes on top of the 2,000 jobs cut by the airline last year, due to an initial 7.5 percent cut in available seats.

Not all analysts' predictions were so dire. Canaccord Adams investment analyst Tom Varesh admits times are tough for Air Canada, but he still expects the airline to weather 2009 without the need to declare bankruptcy. On Tuesday, he lowered his rating on Air Canada shares from "buy" to "speculative buy." 

Most analysts, however, expect the airline to weather the economic storm. Tom Varesh, an analyst at Canaccord Adams, lowered his rating on Air Canada on Tuesday to "speculative buy" from "buy" and cut the price target to C$4 from C$6 per share, but he said Air Canada will likely be able to make it through 2009.

FMI: www.aircanada.com, www.ubs.com