Air Canada (TSX:AC) and the federal government have reached a bailout agreement. Worth $5.9 billion, it will help the company covers its costs, invest in its future, and refund its customers. In order to get this bailout, Air Canada had to agree to a number of terms. None of them were particularly severe, but a few pertain to issues the company had been dragging its feet on. In this article, I’ll explore what’s in Air Canada’s $5.9 billion bailout from the federal government, and what it means for investors.
By far the most interesting thing about Air Canada’s $5.9 billion aid package is that it includes an equity stake. The federal government will be giving AC $5.4 billion in low interest loans and buying $500 million worth of newly issued stock. As a result, the federal government will become a major shareholder in Air Canada.
For most Canadians, this little detail doesn’t mean much. If Air Canada recovers, then perhaps the government’s stock could deliver a return that could fund programs in the future. Other than that, it’s not really a big deal for the taxpayer.
It is potentially a big deal for shareholders. As part of the $500 million equity portion of the bailout, Air Canada will be issuing new shares and selling them to the federal government. This means that the proportional ownership share of existing stock will be reduced. That’s not necessarily the end of the world. After all, in exchange for the stock, Air Canada will get $500 million. Perhaps that money will finance growth that will ultimately make AC stock more valuable. But if the money isn’t spent well, then the equity dilution means shareholders will own a smaller portion of an ever-shrinking pie.
Low interest rates
A second feature of Air Canada’s bailout is low interest. No, the federal government isn’t just forking over free money, but the cost of this money is quite low. The loan portion of the aid package includes one credit facility at 1.5% plus the CDOR, and another at a flat 1.211% interest. These are pretty low interest loans, making them a win for Air Canada.
Customers must be refunded
Last but not least, we get to the matter of refunds.
In order to get its $5.9 billion aid package, Air Canada had to agree to refund all of its customers who had been left stranded because of COVID. That was along with a few other “operational” terms, like keeping jobs and restoring service to small communities.
It’s difficult to estimate how many people are still waiting on refunds from Air Canada from the flights cancelled last March. However, it’s known that the Canadian Transportation Agency (CTA) had a backlog of 11,000 refund complaints at the start of this year. If half of those were from Air Canada, then that would be 5,500 people still waiting on refunds from the company. Paying them could cause a significant cash drain, which may be why Air Canada sought aid in the first place.
AC stock has come a long way since the bottom in the 2020 stock market crash. At $25, it has more than doubled from its 52-week low. As for the company itself, it’s a different story. With a $1.2 billion loss in its most recent quarter, it is struggling. So, perhaps, despite all the public outcry it triggered, $5.9 billion from the federal government really was needed to keep Air Canada afloat.
Air Canada stock dipped on its bailout news, but some of these stocks rallied:
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Fool contributor Andrew Button has no position in any of the stocks mentioned.