Monday, November 28, 2011

Air Canada may go! TSX Rebalances

The indexes used by all investors as a barometer to the investment strategy is reviewed on an annual basis to make sure that it is representative. The TSX is doing its periodic review and several companies are looking to join the index (huge impact in terms of price as money managers will buy the underlying stock to "re balance" their index -- yeah that's why I pay my guy 1% a year in fees...), and who's about to get kicked-off.  Anyway of the two names on the list for getting kicked out:  Yellow Page Media and Air Canada stick out.

The former is phone book companies that is discovering that the internet is a much quicker and useful search engine that their phone book... call it a technological shift.  The other, is Air Canada, the country's "National Carrier" -- it is still Canada's largest but not the most profitable (WestJet wins that one), and has gyrated from small profits to big losses throughout its existence.   Reminds me of an airline joke:

Q:  How do you make a small fortune in investing in the Airline business

A:  You start with a large fortune.

Now don't get me wrong, by North American standards Air Canada is by far the best customer experience on long haul flights -- its about the same on short haul as West Jet -- and much better than anything on a U.S. airline which is always a dismal experience...  When I was in "the business" a respectable carrier could expect a load factor in the mid 60s.  For the past 8 years Air Canada's load factor has been in the mid 80s -- trust me that's very impressive.  Fuel costs are huge (20/40% of an airline's variable costs), aircraft are not cheap, the latest 787 will set Air Canada back about $120 million each (they also have to train crew, get spares and train maintenance crews).  The job of flying is generally undemanding -- until it isn't.  Commercial flying is hours of boredom punctuated by the occasional crisis (with a huge "pucker" factor)-- where a million things can (and at time do) go wrong.    Dealing with passengers (even if you are a glorified waiter) is difficult -- they cannot leave and sometimes things don't go as plan.

Those who did well are the Private Equity funds that invested early in the restructuring and got a kings ransom out of their short term investments.  They were able to walk away with the goodies will employees pension plan went unfunded (in what universe is this legal?).  However, while Air Canada's stock in 2001 was trading around $20/share it trades around $1/share today.  Its market cap is 1/4 of billion (Westjet's market cap is around $1.6 billion). The airline operates with negative tangible net worth (about -$1.5 billion).  Despite the CEO's best efforts Ac is circling the drain (again).  The TSX has more or less decided that its curtains for AC -- its just now "representative" of Canada's listed companies. 

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