Ottawa has granted Air Canada more time to meet its pension funding obligations, but with tough conditions that include the airline's executives taking a hit to the wallet.
Ottawa needed to act to ensure the carrier's fiscal health, Finance Minister Jim Flaherty said in a statement Tuesday. "Air Canada is the country's largest airline and contributes significantly to the Canadian economy," he said.
In what appeared to be a message to other organizations that might want financial aid, Mr. Flaherty made it clear that this is an extraordinary case that required imposing strict conditions in exchange for the pension funding extension. The Finance Minister is slated to present the 2013-14 federal budget within weeks.
The Montreal-based carrier will freeze executives' compensation at the rate of inflation, ban special bonuses and limit management incentive programs.
The airline's chief executive officer, Calin Rovinescu, had a total payout of nearly $4-million in 2011, including $1.4-million in salary and $1.2-million in share-based awards.
The federal government also said the airline won't be able to declare any dividends and embark on share repurchases.
Faced with a $4.2-billion pension solvency deficit at the start of 2012, Air Canada had originally sought permission to limit its payments to $150-million annually over 10 years. In Tuesday's deal, the company must pay at least $150-million a year, with an annual average of $200-million spread over seven years.
"During lengthy discussions with the company, the government demanded that Air Canada strengthen its initial proposal with tough new conditions such as greater solvency payments, a shortened term and measures that will ensure that employees and executives of Air Canada are part of the solution," the Finance Department said.
The conditions suggest Ottawa wants to ensure that, after giving Air Canada an extension, it won't be faced with the poor optics of big executive bonuses. And one Finance Department official said the government believes the tough conditions will be an incentive for Air Canada to pay off its pension deficit faster and return to business as usual.
The Air Transport Association of Canada, whose members include smaller carriers such Porter Airlines Inc., complained last month about the prospect of Ottawa helping the former Crown corporation. "The cap requested by Air Canada would barely cover the deficit's annual interest and would do absolutely nothing to tackle this crippling deficit," the association wrote on Feb. 12 to Mr. Flaherty, Prime Minister Stephen Harper and Transport Minister Denis Lebel.
Mr. Flaherty defended the decision. "It's important to note that Air Canada's unions and retirees have been supportive of the company's request for further solvency funding relief for its pension plans," he said. "This regulatory change is not costing Canadian taxpayers a single dollar, but it is providing Air Canada time to pay off the sizable pension deficit."
Air Canada obtained pension funding relief in 2009, but that arrangement was set to expire on Jan. 30, 2014.
The new agreement means that for the period from 2014 through 2020, "Air Canada will contribute an aggregate minimum of $1.4-billion in solvency deficit payments, in addition to its pension current service payments," the airline said, adding that for 2009-2013, it will have contributed nearly $1.48-billion in past service contributions and current service costs.
Air Canada doesn't currently pay any dividends, but rival WestJet Airlines Ltd. does. Calgary-based WestJet has complained in the past about Air Canada gaining an unfair competitive advantage through pension relief.
"In the current extremely low-interest-rate environment, Air Canada's pension solvency deficit funding payments would be unsustainable without this extension in place," the company said late Tuesday. "Air Canada will submit to the Office of the Superintendent of Financial Institutions all communications materials it intends to send to pension plan beneficiaries prior to funding the plans in accordance with the new regulations."
With a report from Bill Curry