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(B)(N) AC-B/A Air Canada

April 23, 2013

Drama. The stock of Canada’s largest airline, Air Canada, is in a flight class of its own. It comes with two seats – Class B with 241 million voting shares and Class A with 37 million “variable” voting shares that can only be owned by non-Canadians and has restricted voting abilities – for a total of 278 million shares that trade at about the same price between $1 and $4 at least twice in the past four years, and down from $10 in 2008 and almost $20 in 2007 (please see Exhibit 1 below); after the hard landing of 2008, it’s never been the same, and one wonders why, for $100 million, or less, possibly free, somebody doesn’t buy it, and run it like a business that makes money and doesn’t have to borrow money to pay its employees (Reuters, April 22, 2013, Air Canada sees wider operating loss, shares plunge).

Air CanadaIt’s never paid a dividend, and has total assets of $9 billion and total liabilities of $12.9 billion so that the shareholders equity is negative ($3.9 billion) and the company needs to borrow money this year and every year to re-finance its debt to meet its obligations of $2 billion this year, another $2 billion in each of 2014 and 2015, and then rising to $5 billion per year in 2016 and thereafter (ibid, Reuters). Plus there are the pension obligations in defined benefit plans for active and retired employees that only governments can afford and know how to fund – just pay them, they say, the tax payers are good for it – “Air Canada’s legacy as a national carrier once owned by the government has worked for and against the airline. The government is unlikely to allow it go under, but its past means it is saddled by decades of regulations, crippling labour agreements and pension obligations.” – Reuters, December 18, 2012, WestJet complains in Ottawa about Air Canada pension request.

Air Canada is “too big to fly” and “too big to fail”, and a mean standard for the industry and passengers alike. (Please see WestJet below.) But with revenues of about $12 billion per year, it is better than an ATM for its bankers and bond holders, its 24,000 employees, and well-paid management and board of directors, and for the specialists and volatility players in the stock market. Imagine buying it for $1 in 2009 and selling it for $4 two years later (please see Exhibit 1 below); and then again at $1 in 2012, just a year ago, and selling it for $3 last week or $2.60 today; but we have to be quick and know exactly what we’re doing – there’s no room for sentiment or longer term “investing” – it’s pure “risk” that we’re buying, and the volatility and uncertainty in the stock is so great that no one will write options for it.

Exhibit 1: (B)(N) AC.B/A Air Canada – Risk Price Chart

(B)(N) AC-B/A Air Canada - April 2013

(B)(N) AC-B/A Air Canada – April 2013

Air Canada provides scheduled passenger services in the Canadian market, the Canada-US transborder market as well as the international markets to and from Canada.

(Please Click on the Chart to make it larger if required.)

Air Canada is a full-service airline that provides scheduled passenger services in the Canadian market, the Canada-U.S. trans-border market, and in the international market to and from Canada. The company offers specialty charter service under the AC Jetz brand to professional sports teams, corporate incentive travelers, and executive groups; a range of leisure travel packages, including cruises, tours, car rentals, and excursions to various destinations in the Caribbean, Mexico, North America, Central and South America, South Pacific, Asia, Europe, and the United States; and air cargo services to freight forwarding companies and businesses. As of December 31, 2012, it operated a fleet of 205 aircraft comprised of 89 Airbus narrow body aircraft, 56 Boeing and Airbus wide body aircraft, and 60 Embraer regional jets. The company was founded in 1937 and is headquartered in Saint-Laurent, Canada, and has 24,000 employees.

In contrast, we have WestJet which has been in the Perpetual Bond™ at various times, but most recently at $13 last year and $25 today (please see Exhibit 2 below) and a +25% increase in the stock price since December (please see our recent Post, The Wall Street Put, April 2013). Our estimate of the downside due to volatility is minus ($3) which sets a stop/loss price of $22, which we can afford, but the July put at $24 can be bought for $0.80 today and an offsetting sold or short call at $26 in July can be sold for $0.75 per share today, so that for a net cost of $0.05 per share ($0.80 less $0.75) we can be assured of a stock price of no less than $24 and no more than $26 for the next three months, and also collect our dividends of $0.10 per share per quarter, or $53 million per year, that the airline pays to its shareholders for a current yield of 1.6% or better.

Exhibit 2: (B)(N) WJA WestJet Airlines Limited – Risk Price Chart

(B)(N) WJA WestJet Airlines Limited - April 2013

(B)(N) WJA WestJet Airlines Limited – April 2013

Westjet Airlines Limited is engaged in the airline industry, operating a fleet of aircraft in North America that are equipped with legroom, leather seats and live seat back television.

(Please Click on the Chart to make it larger if required.)

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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