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Air Canada erases pension deficit, projects small surplus

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Air Canada (TSE:AC.B), the nation's largest airline, extended a five-year high, after saying it has eliminated a weighty C$3.7 billion pension solvency deficit and moved to a small surplus.

Air Canada rallied 5.5 percent to C$9.44 at 1:53 p.m. in Toronto, after reaching C$9.48, the highest intraday price since mid-2008.

The company said in a statement today that preliminary estimates on its Canadian registered pension plans reflect several factors, notably a 13.8 percent return on investments last year and improved discount rate. 

The announcement prompted some analysts to raise the stock's price target.  RBC Capital Markets raised his stock target to C$13 from C$10. "This is a significant positive turn in Air Canada's pension funding situation," RBC's Walter Spracklin wrote in a note. "As of January 2013 the pension solvency deficit was C$3.7 billion and C$4.2 billion in 2012," he added.

The funding surplus, estimated as of Jan. 1 2014, cuts risk for the flag carrier and could eventually free up cash for better uses, such as new planes or debt reduction.

Air Canada said the improvement reflects a better return on investments, pension benefit changes that cut the deficit by about C$970 million, a company contribution of C$225 million to the deficit and a higher discount rate.

A 3.9 percent discount rate was used to value pension obligations, up from 3 percent last year. Each 10 basis point change in that rate results in about a C$150 million change in solvency liabilities, the carrier said.

Discounts rates, used to assess a plan's solvency, are based on long-term government bonds and help actuaries judge how much assets will earn over time. The lower the discount rate, the bigger the deficit.

Final pension plan valuations will be completed in the first half of 2014.

"Air Canada's three  primary pension objectives are to ensure our employees' and retirees' pensions are secure, the pension solvency deficit is eliminated and that the costs associated with maintaining the pension plans remain affordable, predictable and stable," said Calin Rovinescu, President and Chief Executive Officer. "We have, over the past four years, made significant progress on all these objectives".

Air Canada provides scheduled passenger service directly to 60 Canadian cities, 49 destinations in the United States and 67 cities in Europe, the Middle East, Asia, Australia, the Caribbean, Mexico and South America. 

 

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