POLITICS

Air Canada machinists decision improves prospects of pension stability: analyst

06/18/2012 11:19 EDT | Updated 08/18/2012 05:12 EDT
MONTREAL - Air Canada's prospects for pension stability have improved with an arbitrator's decision in favour of the airline that puts in place a new collective agreement for mechanics and baggage handlers, an industry analyst said Monday.

"The most important disclosure in our opinion is (the union's) agreement to support a new 10-year moratorium agreement on pension solvency funding starting in 2014," Chris Murray of PI Financial Corp wrote in a report.

A combination of funding extensions and lower fixed payments may see past service payments capped between $235 million and $340 million in 2014, a level Murray said is "manageable."

"Ultimately it will be interest rate paths that determine the solvency deficit, however we believe a solution is achievable given a 12-year time frame from today."

Murray said conclusion of agreements with Air Canada's outstanding labour groups remain the most significant near-term catalyst for share prices. Terms of the contract with the mechanics and baggage handlers appear to be in-line with expectations, including moderate wage increases of two to three per cent, he added.

Existing employees will remain part of the company's existing defined benefit plans while new hires will join a new IAMAW sponsored multi-employer defined benefit plan.

Murray said this transfers the funding risk from Air Canada to the new plan, effectively making it similar to a defined contribution plan.

Chuck Atkinson, president of District 140 of the International Association of Machinists and Aerospace Workers, the arbitrator was left with little choice.

"Obviously we're not real thrilled that the arbitrator chose the company's submission," he said.

"However from our point of view it was almost a foregone conclusion the way the labour minister formulated her bill. It didn't give the arbitrator a whole lot of leeway in how he could do things."

The Montreal-based airline announced Sunday that the long-standing labour dispute with its largest union ended with the arbitrator's ruling.

The new five-year deal marks an end to 14 months of negotiations and mediated talks.

The airline's 3,000 pilots are still in the process of working through their dispute with a separate federal arbitrator. A decision is required by the end of July.

Air Canada Pilots Association spokesman Paul Howard wouldn't comment on the machinists decision.

"The arbitrator for the pilots is different and so are the contract and related issues, so I wouldn't read too much into the decision," he said in an email.

The threat of a lockout of pilots, and a strike notice from the Machinists, had prompted the federal government to intervene with back-to-work legislation in both disputes. The law allowed federally appointed arbitrators to impose settlements within 90 days.

Air Canada (TSX:AC.B) has been engaged in an often bitter labour dispute with most of its unionized employees in recent months.

The resolution of outstanding labour contracts is being seen as significant as it could decide Air Canada's ability to launch a low-cost carrier — currently a top priority at the airline.

The decision contributes to the reduction of the pension deficit and establishes a protocol for the sustainability of the pension plan, taking into account any short-term funding pressures on the company, the airline said in a statement.

Air Canada said it won't comment further while details of the new collective agreement are being communicated to its employees.

The IAMAW represents 8,600 mechanics, baggage handlers and cargo agents employed by Air Canada.

On the Toronto Stock Exchange, Air Canada shares closed at their highest level in about four months, gaining two per cent or two cents to $1.01 in Monday trading.