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."

FMI: www.aircanada.ca