Ottawa takes stake in Air Canada with financial aid package worth up to $5.9B

After months of negotiations, the federal government has struck a deal to provide Air Canada with a financial aid package that allows the airline to access up to $5.879 billion in liquidity.

The deal, announced Monday, includes $4 billion in repayable loans at rates starting at 1.5 per cent, as well as a $1.4 billion loan with an annual interest rate of 1.211 per cent specifically aimed at supporting customer refunds for non-refundable tickets. The government will also take a $500 million stake in the airline at $23.1793 per share, a 14 per cent discount compared to Air Canada’s closing price on Monday of $27 per share. The government will also hold warrants for 14.6 million Air Canada shares.

As part of the deal, Air Canada has agreed to provide refunds starting April 13 for passengers who purchased non-refundable tickets but did not travel due to COVID-19 since February 2020. The airline will also resume regional routes that it suspended since the pandemic began and will have to restrict dividends, share buybacks and executive compensation. Senior executive total compensation at the airline will be capped at $1 million each for as long as Air Canada is using the loan facilities. The company will also be required to complete its order of 33 Airbus A220 aircraft and 40 Boeing 737 Max aircraft.

Finance Minister Chrystia Freeland said at a news conference Monday evening that the deal “sets a standard for how such interventions should be designed with the interests of Canadians and workers coming first.”

“Taxpayers aren’t footing the bill. This is a loan facility, and the Government of Canada fully expects it to be paid back,” Freeland said.

Air Canada’s chief executive Michael Rousseau said in a statement released Monday that the agreement “provides a significant layer of insurance for Air Canada” and allows the airline to better resolve the issue of customer refunds while maintaining the company’s workforce and re-entering regional markets.

“Most importantly, this program provides additional liquidity, if required, to rebuild our business to the benefit of all stakeholders and to remain a significant contributor to the Canadian economy through its recovery and for the long term,” Rousseau said.

When asked why the government was taking a $500 million equity stake in the airline, Freeland said it was “very important to get a good and fair deal for Canada and Canadians and… to take part in any upside of this support that we’re offering to Air Canada.”

The federal government began formal discussions with representatives of the airline industry over a highly-anticipated financial relief package in November. Freeland said Monday that the government has been holding “constructive” discussions with WestJet over a potential financial aid package. As part of the discussions, she said the government will continue to prioritize passenger refunds, the restoration of regional routes, maintaining employment levels and restricting executive compensation.

The airline industry has been devastated by the COVID-19 pandemic. Travel demand has cratered, with borders closed and quarantine restrictions in place in regions around the world, including in Canada. With passenger levels down nearly 90 per cent, both Air Canada and WestJet have cut capacity, suspended routes and laid off thousands of employees.

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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