================================================================= AIR CANADA BANKRUPTCY NEWS Issue Number 1 ----------------------------------------------------------------- Copyright 2003 (ISSN XXXX-XXXX) April 4, 2003 ----------------------------------------------------------------- Bankruptcy Creditors' Service, Inc. 609-392-0900 FAX 609-392-0040 ----------------------------------------------------------------- AIR CANADA BANKRUPTCY NEWS is published by Bankruptcy Creditors' Service, Inc., 24 Perdicaris Place, Trenton, New Jersey 08618, on an ad hoc basis (generally every 10 to 20 days) as significant activity occurs in the Debtors' restructuring cases. New issues are prepared by Frauline Sinson-Abangan and Peter A. Chapman, Editors. Subscription rate is US$45 per issue. Any re-mailing of AIR CANADA BANKRUPTCY NEWS is prohibited. ================================================================= IN THIS ISSUE ------------- [00000] HOW TO SUBSCRIBE TO AIR CANADA BANKRUPTCY NEWS [00001] BACKGROUND & DESCRIPTION OF AIR CANADA [00002] AIR CANADA'S CONSOLIDATED BALANCE SHEET AT DEC. 31, 2002 [00003] AIR CANADA'S PRESS RELEASE ANNOUNCING CCAA FILING [00004] AIR CANADA RESTRUCTURING DATABASE [00005] APPLICANTS' PRINCIPAL DEBT OBLIGATIONS [00006] APPLICANTS OBTAIN INITIAL CCAA STAY ORDER [00007] MONITOR'S APPLICATION TO ENJOIN & RESTRAIN U.S. CREDITORS KEY DATE CALENDAR ----------------- 04/01/03 Voluntary CCAA Petition Date 04/01/03 Section 304 Petition Date 04/29/03 Hearing on Extension of U.S. Preliminary Injunction 05/01/03 Expiration of CCAA Stay ----------------------------------------------------------------- [00000] HOW TO SUBSCRIBE TO AIR CANADA BANKRUPTCY NEWS ----------------------------------------------------------------- AIR CANADA BANKRUPTCY NEWS is distributed to paying subscribers by electronic mail. 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Name: ---------------------------------------------- Firm: ---------------------------------------------- Address: ---------------------------------------------- ---------------------------------------------- Phone: ---------------------------------------------- Fax: ---------------------------------------------- E-Mail: ---------------------------------------------- (Distribution to multiple professionals at the same firm is provided at no additional cost.) AIR CANADA BANKRUPTCY NEWS is distributed to paying subscribers by electronic mail. New issues are published on an ad hoc basis as significant activity occurs (generally every 10 to 20 days) in the Debtor's case. The subscription rate is US$45 per issue. Newsletters are delivered via e-mail; invoices, transmitted following publication of each newsletter issue, arrive by fax. Re-mailing of AIR CANADA BANKRUPTCY NEWS is prohibited. Distribution to multiple individuals at the same firm is provided at no additional charge; folks outside of your firm should set-up and pay for their own subscriptions. Subscriptions may be canceled at any time without further obligation. ----------------------------------------------------------------- [00001] BACKGROUND & DESCRIPTION OF AIR CANADA ----------------------------------------------------------------- AIR CANADA 7373 Cote Vertu West P.O. Box 14000 Saint-Laurent, Quebec CANADA H4Y 1H4 Telephone (514) 422-5000 Fax (514) 422-5789 http://www.aircanada.ca CORPORATE HISTORY Air Canada was established by the Parliament of Canada on April 10, 1937, as the national airline to provide essential air transport, cargo and mail services across Canada. Air Canada was originally incorporated as Trans-Canada Air Lines, under the Trans-Canada Air Lines Act as a wholly-owned subsidiary of Canadian National Railway Corporation, which itself was wholly- owned by the Government of Canada. Air Canada was reorganized and continued under the Air Canada Act, 1977 at which time it became a direct wholly-owned subsidiary of the Government of Canada. In August 1988, the Air Canada Public Participation Act authorized the continuance of Air Canada under the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended and the issuance and sale of shares to the public. In October 1988, Air Canada completed its initial public offering of common shares. In July 1989, a secondary offering of the Government of Canada's common shareholding in Air Canada was completed and Air Canada became a fully publicly-owned corporation. BUSINESS & OPERATIONS Air Canada represents Canada's only major domestic and international network airline, providing scheduled and charter air transportation for passengers and cargo. Air Canada is the seventh largest North American airline and thirteenth largest airline in the world, based on Revenue Passenger Miles (total number of revenue passengers carried, excluding frequent flyer redemptions, multiplied by the miles they are flown). Air Canada carries approximately 20,000,000 passengers annually and employs the equivalent of approximately 39,996 full-time employees. Air Canada serves 148 direct destinations (under its current winter schedule) with its fleet of 336 aircraft. Through commercial agreements with other affiliated regional airlines, an additional 20 destinations are served, for a total of 175 direct destinations on five continents. Air Canada is the largest provider of scheduled passenger services in the Canada- U.S. market, as well as in the Canada-Europe and Canada-Pacific Rim markets. Air Canada's cargo division serves numerous destinations in Canada and internationally, with sales representation in over 70 countries. Air Canada operates an extended global network in conjunction with its international partners. Air Canada is a founding member of Star Alliance, the world's largest airline alliance group. Other founding members are United Airlines, Lufthansa, SAS and Thai Airways. They were joined in 1997 by Brazil's VARIG, in 1999 by Air New Zealand and All Nippon Airways, in 2000 by Singapore Airlines, Mexicana, British Midland and Austrian Airlines Aviation Group and in 2002 by Asiana Airlines. Through its strategic and commercial partnerships with Star Alliance members and several other airlines, Air Canada offers service to over 700 destinations. Passenger Operations and Route Networks Passenger transportation is the principal business of Air Canada and, in 2002, represented 83.4% of total operating revenues, while cargo revenues accounted for 6% of total operating revenues. Air Canada's primary hubs are located in Toronto, Montreal and Vancouver, which serve its domestic, transborder and international markets. Toronto's Lester B. Pearson International Airport is Air Canada's largest hub, and in 2002 its passengers accounted for approximately 62% of Pearson's passenger traffic. Air Canada is the principal tenant in Pearson's Terminal 1 and Terminal 2. A new terminal is currently being built, and Air Canada intends to fully consolidate all of its operations in the new terminal by 2005. Air Canada operates a hub at the Montreal International Airport, Dorval, and in 2002 its passengers accounted for approximately 61% of Dorval's passenger traffic. Montreal is a hub for domestic, transborder and international (primarily Trans- Atlantic) traffic. Air Canada also operates a hub at Vancouver's International Airport, and in 2002 its passengers accounted for approximately 56% of Vancouver's passenger traffic. Vancouver is a hub for domestic, transborder and international (primarily Trans-Pacific) traffic. Canadian Domestic Service Air Canada provides an extensive network and product offering across Canada with scheduled passenger service directly to 61 Canadian cities and communities. Domestic passenger revenues accounted for 43% of total passenger revenues in 2002. The most important Canadian routes in terms of operating revenues are the transcontinental routes linking Toronto, Montreal and Ottawa with major Western Canadian cities, including Winnipeg, Calgary, Edmonton and Vancouver. Air Canada operates several short-haul commuter routes, including Rapidair routes. Air Canada operates Tango by Air Canada as a distinct brand in the Canadian domestic marketplace. The Tango network covers 14 Canadian cities: Vancouver, Edmonton, Calgary, Regina, Saskatoon, Winnipeg, Toronto, Ottawa, Thunder Bay, Montreal, Halifax, Fredericton, Saint John and St. John's. Tango also serves additional cities in Canada and in the United States on a seasonal basis. Air Canada owns Zip, which is based in Western Canada and is currently operating on three replacement (i.e., Zip has replaced Air Canada on these routes) short haul routes: Vancouver- Edmonton, Calgary-Winnipeg and Edmonton-Winnipeg. Zip contracts some services from Air Canada such as pilots, maintenance, Information Technology, airport check-in and ground handling, but operates independently of Air Canada for many other functions. Jazz, a wholly-owned subsidiary of Air Canada, is Air Canada's regional operator and forms an integral part of the domestic market strategy. A significant portion of Air Canada's passengers either originate from or are destined to small cities and communities. Air Canada has linked its mainline and regional networks in order to serve connecting passengers more efficiently and to provide valuable traffic feeds to Air Canada's mainline routes. Air Canada's mainline and regional operations coordinate marketing, flight schedules, ticketing and ground handling. Jazz provides service throughout Canada and to certain destinations in Northeastern and Northwestern United States. Air Canada has agreements with small independent domestic airlines for destinations that are considered too small for Air Canada to serve directly. These airlines operate flights under Air Canada's designator code and provide service to an additional 21 destinations. Air Canada does not own any equity interests in these carriers. United States Operations With the most non-stop destinations and flights, Air Canada carries more passengers between Canada and the United States than any other airline. Air Canada now directly serves 80 routes to 41 United States destinations, with over 1,423 weekly flights to the United States. Air Canada's U.S. network reach is also augmented by extensive connections and code-sharing with Star Alliance partner, United Airlines. In 2002, transborder passenger revenues represented 24% of total passenger revenues. Approximately 926 of Air Canada's approximately 36,000 employees are employed in the United States, and 75 of those are employed in New York. Numerous other Air Canada employees (including pilots and flight crews) regularly travel to and from New York with Air Canada flights. By a variety of measures (including book value of equipment (other than computer equipment) and investment in leasehold improvements) Air Canada's principal U.S. assets are located in New York. Air Canada has a large presence at New York's LaGuardia Airport, and operates additional offices in New York as well. International Air Canada has a significant international network, which is enhanced by strategic and commercial alliances with other Star Alliance members. Currently, Air Canada provides scheduled service directly to 35 cities in Europe, the Middle East, the Caribbean and Asia, and provides seasonal charter service to 11 additional Caribbean destinations. In 2002, international passenger revenues from the Atlantic and Pacific regions represented approximately 19% and 10% of total passenger revenues, respectively. In 2002, international passenger revenues represented approximately 33% of total passenger revenues. Cargo Operations Air Canada's cargo division provides direct air cargo service to approximately 160 Canadian and international destinations and has sales representation in over 70 countries. Cargo services offered by Air Canada include: guaranteed choice of flight airport-to-airport services for high priority shipments (AC Expedair and AC Priority), and air freight services (AC Air Freight), to Air Canada destinations worldwide. Air cargo services are provided on most scheduled domestic, transborder and international passenger flights. Air Canada is a major domestic Canadian air cargo carrier and is the largest supplier of air cargo services to Canada Post Corporation, which operates Canada's national postal service. In April 2002, Air Canada and Canada Post Corporation renewed their long standing cargo and passenger services contract. This contract, which includes carriage of mail and corporate passenger travel, has been extended for a further five years for domestic service, three years for transborder and international service and two years for corporate travel. Technical Services Air Canada Technical Services, currently a division of Air Canada, is responsible for providing maintenance, engineering and repair for Air Canada's aircraft fleet and for providing maintenance services to third parties. The mandate for ACTS is to enhance shareholder value by profitably growing third party maintenance repair and overhaul business operations. In 2002, ACTS provided these services to 70 customers including Lufthansa, United Airlines, Atlantic Coast Airlines, Department of National Defense, Pratt & Whitney, Airborne Express and America West Airlines. The major maintenance facilities for ACTS are located in Toronto, Montreal, Vancouver, Calgary and Winnipeg. Aeroplan With over six million members in its database, Aeroplan has become one of Canada's leading and largest loyalty programs. Operating as Air Canada's frequent flyer program, Aeroplan's objective is to generate loyalty within its existing membership and attract new members on behalf of over 90 partners across the travel and non-travel market sectors. Aeroplan is a separate entity wholly-owned by Air Canada. Aeroplan has 1,050 call center employees, 730 of which are located in British Columbia. Aeroplan employs people in Montreal, Toronto and Vancouver. On January 27, 2003, Air Canada announced an agreement to sell 35% of Aeroplan to Onex Corporation for C$245 million, subject to certain closing conditions. Other Operations Air Canada also provides passenger, cargo and ground handling services to numerous airlines, including major foreign airlines at Canadian and international airports. These services include airport passenger check-in, ticketing, baggage handling, cargo handling and processing, as well as aircraft ramp handling. THE ROAD TO BANKRUPTCY Changes in the Marketplace The airline industry in which Air Canada operates is an extraordinarily competitive one that has been undergoing significant hardship in recent times. Commencing in the summer of 2000, Air Canada faced significantly increased competition from domestic "low cost" airlines. WestJet, Air Canada's primary competitor in Western Canada, commenced operations in Eastern Canada in April 2000 using Hamilton, Ontario as its eastern hub. By reason of the undertakings given in connection with the Canadian Airlines International Limited restructuring, Air Canada was forbidden from responding to this competitive threat. In August, Royal Airlines was converted from a charter operator into a full scheduled low fare domestic airline. In September, CanJet commenced operations serving Eastern and Central Canada using Halifax as its hub. Canada 3000, another successful charter carrier that was converted into a full scheduled low fare domestic airline, acquired both CanJet and Royal Airlines in early 2001. Following these acquisitions, Canada 3000 became Canada's second-largest domestic air carrier. In late 2000, both the economy and demand for Air Canada's services declined suddenly and precipitously. The most remarkable feature of this decline was the evaporation of demand in the premium corporate and business travel market. Air Canada suffered an operating loss of C$394 million in the fourth quarter of 2000 (compared to an operating income of C$478 million for the first three quarters of the same year), and ended the year with a net loss of C$274 million. In the hope of reducing some of its operating costs in the face of increasing competition and the suddenly reduced demand for its services, Air Canada immediately implemented numerous cost- cutting measures, including closing various ticketing offices, cancelling flights and reducing on-board services. Indeed, Air Canada was the first major network airline in North America to identify and respond to the sudden economic downturn, which put it in a much better relative position in 2001 and 2002 than many of its United States counterparts. However, despite the many cost-saving initiatives undertaken by Air Canada in late 2000 and 2001, it was unable to reduce its costs to the extent necessitated by the reduction in revenues it was experiencing. Air Canada also attempted to reduce its labor costs at the end of 2000 by eliminating many of the employees who were surplus as a result of the integration with CAIL and the subsequent hiring efforts. Because Air Canada was not permitted to lay off employees who were surplus as a result of the integration (or, in the case of some unions, at all), it offered "voluntary separation packages" and voluntary work-sharing arrangements to many of its employee groups. At an average cost of approximately C$54,000 per voluntary separation package, the thousands of these offered by Air Canada came at a significant short term cost but did assist in reducing, but not eliminating, the employee surplus through the first eight months of 2001. 2001 and the Impact of September 11 The economic decline, and its impact on Air Canada, continued through 2001. In early 2001, Air Canada's largest private sector clients slashed their travel budgets overnight. Air Canada continued its cost-cutting initiatives, but as it remained largely unable to further reduce its labor costs, its initiatives were insufficient. Through the first and second quarters of 2001, Air Canada suffered a net loss of C$276 million. It was in this already depressed market that on September 11, 2001, terrorists used hijacked United Airlines and American Airlines aircraft to destroy the World Trade Center in New York City and attack the Pentagon in Washington, DC. As a result of these events, all commercial air traffic in North America was halted for two days; the resumption of service was phased in over several days thereafter. Although the Government of Canada did provide Air Canada with a payment of C$65 million to compensate it for the days its operations were shut down, the payment obviously did not compensate Air Canada for the real and continuing financial impact to it of the events of September 11. Consumer demand plummeted after the events of September 11. Airlines across North America, including Air Canada, began implementing capacity reductions of up to 20% across their systems. However, with only a limited ability to lay off employees, and having an effectively fixed aircraft fleet cost, Air Canada was wholly unable to reduce costs to a level anywhere close to the decline in revenues it was experiencing. The resulting losses were staggering: for the year, Air Canada had an operating loss of C$731 million and a net loss of C$1.315 billion. To put this in perspective, CAIL, which Air Canada acquired in January 2000, suffered losses between 1994 and 1999 in the aggregate amount of C$771 million. In the months following the events of September 11, Air Canada grounded its DC9 fleet, as well as several of its Boeing 767, Boeing 737 and regional aircraft due to the fact that they were excess to the company's needs. However, because most airlines worldwide were experiencing similar overcapacity problems, the ability to dispose of aircraft was greatly restricted. The fair market values of aircraft plummeted, and even today may be only half of what they were on September 10, 2001. Air Canada raised cash to fund its ongoing operations in this environment in part by engaging in sale-leaseback transactions with respect to many of its aircraft. Today, leases account for approximately 75% of the fleet, representing 97% of the aircrafts' fair market value, amounts which represent significant increases over prior years. Adjusting to the New Marketplace As a result of the economic downturn of late 2000 and 2001, and further as a result of the events of September 11, it became evident to management of Air Canada that its historical approach to marketing and delivering its passenger travel services needed to change. Air Canada's historical approach was aimed at maximizing revenue by selling highly restricted (restrictions include advance purchase requirements, Saturday night stay requirements, change fees and non-refund ability) low fares to leisure passengers who plan their travel needs in advance, and reserving unrestricted higher fare seats for business travelers who require frequency, flexibility and close-in booking. However, the emergence and expansion of discount airlines that offer lower fare one-way tickets, combined with a general reduction of business travel (and businesses willing to pay higher fares) in the current economic climate damaged Air Canada greatly and caused a dramatic reduction in revenues and yield. Tango To respond to these market developments, Air Canada introduced its distinct Tango sub-brand on November 1, 2001. Tango operates in the Canadian domestic marketplace as a form of lower cost point-to-point carrier, mainly on long-haul routes. Tango gave Air Canada an entry in the only segments of the air travel market that were growing at that time (and which were not addressed by Air Canada's traditional model): price sensitive business travelers and close-in leisure travelers. Although planning for Tango pre-dated September 11, 2001, its importance to Air Canada increased as a result of the impact of September 11 on the already weakened industry. Tango's lower cost structure is due principally to the underlying product design: Tango operates distinctly branded aircraft in an all-economy configuration, and offers an "all extras are optional" in-flight service where food/beverages and amenities (in-flight entertainment and advance seat assignments) are an additional cost to the passenger and additional revenue to Air Canada. Tango is operated as a self-contained network, meaning it does not provide any connecting traffic to the mainline operation. This allows Tango to hold its planes at the gate for less time and, therefore, provides a fleet utilization that is greater than the mainline's for the same aircraft type. Tango's ticket sales are made exclusively by way of electronic ticketing. Over 80% of Tango flights are booked on Tango's dedicated at http://www.flytango.ca website, thus reducing distribution and call center costs. Tango fares are priced as one-way and do not require a minimum stay or advance purchase. Fares are non- refundable, but changes and cancellation/credit (for one year) can be made for a nominal fee. Zip Air Canada further adapted to the changing market and expanded its lower cost and lower fare offerings when it launched Zip on September 22, 2002. Zip is a wholly-owned, independently operated low-fare carrier based in Western Canada and is currently operating on three replacement short haul routes: Vancouver-Edmonton, Calgary-Winnipeg and Edmonton-Winnipeg. The Zip routes are "replacement" routes because Zip has completely replaced Air Canada's services on those routes, although Zip (unlike Tango) shares an Air Canada code and allows connections. The launch of Zip is a critical component of Air Canada's response to growing consumer demand for low-fare and no-frills travel. Zip contracts some services from Air Canada such as pilots, maintenance, Information Technology, airport check-in and ground handling, but operates independently of Air Canada for many other functions. Zip's labor costs are lower than those of Air Canada due to special agreements with Air Canada's unions. However, Zip's size is currently restricted to a total of 20 Boeing 737 aircraft by the collective agreement between Air Canada and its pilots' union. The implementation of Tango and Zip permit Air Canada to control or reduce certain costs while maximizing revenue in the current volatile environment. Air Canada was ahead of the North American market in its introduction of Tango and Zip. Indeed, the introduction of a lower cost subsidiary or brand also appears to be an integral part of the restructuring efforts (in bankruptcy) of United Airlines and is being examined by other network carriers, including Delta Airlines. Initial Successes In the second and third quarters of 2002, Air Canada reported C$70,000,000 of net income, making it the most successful major North American network carrier at the time. However, due to economic uncertainty and concerns regarding the crisis in the Middle East, Air Canada has seen a significant decline in traffic and advance bookings (particularly by business travelers) since September 2002. The decline in bookings has continued steadily to the present time despite Air Canada's efforts to stimulate demand with almost constant seat sales. As a result, despite its success in the second and third quarters of 2002, for the year ended December 31, 2002, Air Canada had an operating loss of $218 million and a net loss of $428 million. Air Canada believes that its leadership with respect to low cost initiatives is an integral part of its survival and future success, but they are not, in and of themselves, sufficient to overcome its overcapacity and uncompetitive labor costs to achieve profitability. Current Competitive Hardships Air travel has become a commodity where travelers will often choose the airline that can deliver the product most cheaply. Business travelers, who used to represent a significant portion of Air Canada's profit margin, are now increasingly booking with low fare carriers. Air Canada's low cost competitors have added significant new capacity in the Canadian domestic market. Although Canada 3000 went bankrupt shortly after the events of September 11, 2001, the low fare segment of the Canadian air travel market has continued to grow. WestJet has now grown to the size of Canadian Airlines' domestic operations prior to its integration with Air Canada, and has orders for delivery of 14 new Boeing 737-700 aircraft in 2003. CanJet restarted in Spring 2002 utilizing a Halifax hub, and JetsGo, another discount carrier, began offering service between major Canadian cities in 2002. Air Canada's current domestic market share has fallen to approximately 72% as of December 2002, from about 90% at the time of the integration with CAIL in 2000. Furthermore, Air Canada faces competition on approximately 74% of its domestic network. Jazz, Air Canada's regional carrier, has been one of the most negatively impacted areas. The dramatic decline in passenger demand on short haul routes, coupled with escalating costs, has resulted in massive revenue shortfalls. In 2002, Jazz lost $90 million. The Canadian domestic market is a fundamental component of the entire Air Canada network and currently accounts for 43% of its total passenger revenues. The continued erosion of this market (and the corresponding decline in feed traffic to the long-haul, transborder and international routes) together with the existing cost structure, including labor costs, cannot be sustained. Since September 11, United States carriers (which have received considerable support from the United States Government over the past year and a half) have added significant new capacity to the transborder market using regional jets -- many of which were purchased with Canadian government subsidies not available to Air Canada. These regional jets are being operated by feeder carriers that have much lower operating costs and more flexible work rules than Air Canada and Jazz. Air Canada's revenue derived from transborder service has continued to decline: -- C$2.245 billion in 2000, -- C$2.118 billion in 2001 and -- C$1.945 billion in 2002. As a result, Air Canada is facing increasing competitive pressure in all segments of its marketplace - both domestic and international. As the United States competitors restructure, this competitive pressure can only increase. All airlines have experienced a dramatic rise in the cost of aviation insurance since September 11, 2001. For the year 2002, Air Canada's aviation insurance increased by approximately C$70 million compared to insurance costs in effect prior to September 11, 2001. In addition, the previous level of third party war risk liability insurance was limited to US$50 million by aviation insurers shortly after September 11, 2001. The Canadian Government continues to provide an indemnity for essential aviation service operators which, in Canada, include air carriers, airports and NAV CANADA, in order to restore the war risk liability coverage to what existed previously. The government indemnity is a temporary measure, until such time as a longer term commercially accepted alternative solution is found. The replacement of the indemnity is expected to offset savings achieved with the renewal of aviation insurance for 2003. Aircraft fuel is another major expense to Air Canada that is beyond its control. Based on 2003 projected volumes, a US$l per barrel movement in the average price of crude oil would result in an approximate C$31 million change in 2003 fuel expense for Air Canada, net of fuel hedges, assuming flying capacity remains unchanged and that refining spreads between WTI and jet fuel as well as foreign exchange rates remain constant. Since the Iraqi crisis began in September 2002, the price of WTI crude has fluctuated from a high of C$42 per barrel to the current price of C$30 per barrel -- compared with prices within the last twelve months in the low C$20 per barrel range. The price of crude continues to be extremely volatile. Following September 11, 2001, the Canadian Government took control of airport security and passenger screening, which up to that point had been the responsibility of the airlines at each airport. In order to pay for the new initiative, a security surcharge was levied by the Canadian Government in the amount of C$24 per ticket. The effect of this surcharge was to increase the cost for passengers to fly, a move that further eroded passenger demand, particularly for shorter flights. The surcharge was reduced to $14 per ticket for Canadian domestic travel only in last month's Canadian Federal Budget. Finally, Air Canada's operations today are constantly constrained by what appears to be conflicting mandates of the Competition Bureau and the Canada Transportation Agency under legislative amendments promulgated after Air Canada's acquisition of CAIL. While the former has brought an application against Air Canada before the Competition Tribunal alleging that Air Canada matching the competition's fares on some routes are too low and are anticompetitive, the latter has asserted that certain fares are too high and should be lowered. Both regimes restrict Air Canada's ability to market its products in the manner Air Canada may view as being most appropriate. Proceedings involving both entities are ongoing. GOVERNMENT'S PENSION FUNDING DEMAND One of immediate reasons that has compelled Air Canada to seek the protection of the Canadian Court has been a requirement issued by the Office of the Superintendent of Financial Institutions to make certain unanticipated payments into various of its pension plans by April 4, 2003 -- the Government wants C$200 million added to the Pension Funds. Air Canada was and is of the view that the demands were unreasonable and may have exceeded OSFI's authority. Air Canada has at all times been in full compliance with its obligations. Efforts were immediately undertaken to negotiate with OSFI within the time prescribed or to secure funding to meet the demand. Air Canada has now concluded that the requirement will not be stayed any further and efforts to find a compromise within Air Canada's fiscal capacity have failed. Given Air Canada's available liquidity and its inability to obtain further funding in this environment, Air Canada has now concluded that these payments cannot be made and leave Air Canada with sufficient liquidity to continue its operations. FRAMEWORK FOR A PLAN OF ARRANGEMENT As the economic environment continued to deteriorate, Canada Air, in conjunction with its advisors, began to explore the framework of a restructuring under the Companies' Creditors Arrangement Act that would enable them to renegotiate their relationships with various of their stakeholders with a view to building an operational and capital structure that was more responsive to the immediate economic marketplace. Through the introduction of initiatives such as Tango, Zip, Jazz, Destina.Ca, as well as the commercialization of Aeroplan, Air Canada has been an industry leader in innovation, in that it has consistently acted before other network carriers and is now being copied by other carriers. Air Canada has been in discussions with a potential equity investor of substantial resources. Hopefully, other players will also wish to become involved. These discussions are continuing, but any agreement clearly will be conditional on a successful restructuring of the business and a viable business plan and balance sheet. Although, despite the carrier's best efforts and intentions, these CCAA filing became necessary, and the accompanying stay of proceedings will provide the Applicants with the "breathing space" and hopefully enough stability necessary to complete their restructuring and with the additional power to clean up their balance sheet. Any successful restructuring of the Foreign Debtors' business models is dependent upon a significant reordering of the Foreign Debtors' cost structure, particularly their labor costs. To this end, in early February 2003, Air Canada announced that it would require at least C$650 million of annual savings from its various labor groups, through a combination of measures including wage reductions and more efficient work rules. At present, Air Canada's labor expenses are not competitive. These savings would reduce such expense to a level of savings consistent with the labor expenses of its competitors, both in Canada and in the United States. Since February, Air Canada has attempted to negotiate various unions ways that could achieve these required costs savings. In March 2003, Canadian Union of Public Employees, Air Canada's biggest union, announced that it did not intend to make any meaningful concessions until Air Canada had filed an application for the commencement of reorganization proceedings pursuant to the CCAA. Air Canada's competitive disadvantage resulting from its extraordinary labor costs are exacerbated by the national scope of its collective agreements resulting in wide discrepancies between Air Canada's costs of labor in certain markets and the going rate for services in those markets. Without this reordering and the necessary concessions from the unions, Air Canada will not be able to survive and become a profitable enterprise. The business model that the Applicants are looking to build a Plan upon is one that it has been developing in response to the changing marketplace. The Applicants have already taken seven significant steps: 1. New Brands and Carriers The creation of Tango and Zip are all part of Air Canada's response to the changing market realities, and the increased demand for lower cost point to point service. 2. Jazz Capacity Costs Effective January 4, 2003, Jazz discontinued service to certain small communities to coincide with the expiry of Air Canada's three year commitment to the Minister of Transport to provide service to communities previously served by Air Canada or Canadian Airlines or their wholly-owned subsidiaries. These changes are in addition to service realignments in Western Canada made earlier in the third quarter of 2002, where routes were transferred by Jazz to smaller local airline operators. 3. Corporate Cost Cutting Efforts Air Canada announced that it was seeking a $650 million reduction in labor costs and has indicated its intention to layoff 3600 employees. 4. Air Canada Technical Services (ACTS) Air Canada has announced a desire to sell up to a 49% interest in ACTS and has had preliminary discussions with various potential investors. 5. Ground Handling Services / Cargo Air Canada has announced a desire to sell a significant stake in Airport Ground Handling Services, a stand alone subsidiary to be created from the airline's current airport ground handling operations and has had preliminary discussions with various potential investors. Air Canada was also considering converting Air Canada Cargo to a stand alone subsidiary although no sale process for the Cargo unit has been undertaken at this time. 6. Aeroplan In 2002 the operations of Aeroplan were transferred to a limited partnership (Aeroplan Limited Partnership), all of the interests of which were held, directly or indirectly by Air Canada. Towards the end of December 2002, Air Canada began discussions with Onex Corporation in earnest with a view towards obtaining a significant investment from Onex Corporation into Aeroplan. These efforts resulted in a binding agreement dated January 24, 2003, with Onex Corporation pursuant to which Onex Corporation agreed to invest C$245 million in Aeroplan. The closing of this transaction was originally expected to occur by March 31, 2003, and was subsequently delayed until April 30, 2003. This transaction remains subject to a number of closing conditions, including the completion of satisfactory due diligence by Onex Corporation and the continued solvency of Air Canada. 7. Sale and Leaseback Air Canada has also raised some liquidity in recent months through the sale and leaseback of various assets including aircraft and real estate. Other similar sale and lease back transactions have been in various stages of negotiation, but instability in the airline industry has made some of these transactions unavailable, and delayed others. ----------------------------------------------------------------- [00002] AIR CANADA'S CONSOLIDATED BALANCE SHEET AT DEC. 31, 2002 ----------------------------------------------------------------- AIR CANADA CONSOLIDATED STATEMENT OF FINANCIAL POSITION at December 31, 2002 (unaudited & preliminary) ASSETS Current Cash and cash equivalents C$558,000,000 Accounts receivable 760,000,000 Spare parts, materials and supplies 367,000,000 Prepaid expenses 86,000,000 --------------- 1,771,000,000 Property and equipment 2,279,000,000 Future income taxes 404,000,000 Deferred charges 1,781,000,000 Goodwill 510,000,000 Other assets 1,071,000,000 --------------- C$7,816,000,000 =============== LIABILITIES Current Accounts payable and accrued liabilities C$1,713,000,000 Advance ticket sales 506,000,000 Current portion of long-term debt and capital lease obligations 373,000,000 --------------- 2,592,000,000 Long-term and subordinated perpetual debt and capital lease obligations 4,314,000,000 Future income taxes 32,000,000 Other long-term liabilities 1,405,000,000 Deferred credits 1,361,000,000 --------------- 9,704,000,000 --------------- SHAREHOLDERS' EQUITY Share capital 977,000,000 Contributed surplus 15,000,000 Deficit (2,880,000,000) --------------- (1,888,000,000) --------------- C$7,816,000,000 =============== ----------------------------------------------------------------- [00003] AIR CANADA'S PRESS RELEASE ANNOUNCING CCAA FILING ----------------------------------------------------------------- MONTREAL, Quebec -- Air Canada announced today that it has filed for protection under the Companies' Creditors Arrangement Act (CCAA) in order to facilitate its operational, commercial, financial and corporate restructuring. The success of this massive transformation is dependent on fundamental labour cost restructuring with amendments to collective agreements, work rules and wages. The CCAA process will allow Air Canada to restructure its balance sheet and costs to complete its transformation into a leaner, more efficient, lower cost airline through savings obtained mainly from aircraft lessors, lenders, bondholders and labour groups. "Clearly, while not our preferred course of action, a CCAA filing is necessary to allow Air Canada to make the required changes to compete effectively and profitably in a changed environment," said Robert Milton, President and Chief Executive Officer. "Air Canada's customers around the world can continue booking with confidence that their travel plans will not be disrupted. It has been repeatedly demonstrated that the action we have taken today to restructure will not create a disruption to service nor should it impact in any way our commitment to safety and customer service -- this has been demonstrated by US Airways and United Airlines in recent months. Aeroplan members will have continued access to the benefits associated with our frequent flyer program throughout the restructuring process and beyond. Employees, upon whom we depend upon to continue delivering the safe and reliable customer service Air Canada is renowned for around the world, will continue to be paid on their regular payroll schedule. Suppliers will be paid in the ordinary course for goods and services provided going forward after the filing date. "While we were able to generate in excess of $1 billion in liquidity through the DIP facility to finance our restructuring and transformation, in view of falling revenues as a result of world events it would be irresponsible to continue without a process in place to bring costs in line with the new environment. I stress that this is not just about restructuring our balance sheet -- this is about restructuring our operational costs, including labour and fleet; restructuring commercially to better meet the needs of our customers and restructuring the corporation to better focus on the development of stand-alone businesses. The business model is broken and it must be fixed without burning any more furniture. Air Canada and our people need to embrace a culture change and a new way of doing business," said Milton. Filing of Petition Air Canada obtained today an order from the Supreme Court of Ontario providing creditor protection under the Companies' Creditors Arrangement Act (CCAA). The company is also making a concurrent petition under section 304 of the U.S. Bankruptcy Code. The filing includes Air Canada (including all of its divisions such as Air Canada Technical Services), Air Canada Jazz, ZIP Air Inc. and Air Canada Capital. Aeroplan, Air Canada Vacations (ACV) and Destina are not included and these three subsidiaries will continue dealing with their creditors on a normal basis. Debtor-In-Possession (DIP) Financing In conjunction with its filing the Corporation has arranged for a USD$700 million (or an equivalent amount in Canadian dollars not to exceed $1.05 billion) debtor-in-possession (DIP) secured financing facility from General Electric Capital Canada Inc. The facility will be secured by all of the unencumbered assets of Air Canada, and will be available in two stages. The first tranche is a term loan in the amount of USD$400 million. The remaining USD$300 million will be made available as a revolving term credit facility. The loan will have a term of up to 18 months. In addition to our unrestricted cash on hand of approximately $375 million, the DIP financing will provide adequate liquidity to meet all of the anticipated needs of Air Canada and its operating units to continue normal operations throughout the CCAA process. Exit Financing Air Canada is in discussion with major financial investors with respect to permanent financing upon exit from the restructuring process. The outcome of these discussions is contingent upon a number of factors, including labour cost restructuring and the prevailing Canadian regulatory environment. Onex Corporation has confirmed its intent to proceed with its offer to acquire a 35 per cent interest in Aeroplan from Air Canada and has agreed to a 30-day exclusive negotiating period to restructure the transaction, to close upon the airline's emergence from CCAA. Contributing Factors Over the past three years, airlines around the world have faced a number of significant challenges which have battered the industry. The high tech meltdown starting in 2000, the economic slowdown of 2001, the terrorist attacks of September 11, 2001, the growth of low cost competition, high oil prices and, now, the war in Iraq have all contributed to the situation that Air Canada, and several other airlines, face today. While Air Canada has dealt aggressively with many of these issues and outperformed North American industry peers for the past three years, those achievements are not enough to overcome the significant cost and liquidity challenges faced by the airline. Industry Outlook According to IATA, the industry has lost USD$31 billion in the last two years and their most recent analysis dated March 22, 2003 forecasts the armed conflict could easily result in USD$10 billion dollars of losses on international traffic by extending the current traffic slump well into the summer season. In a Global Equity Research report on March 7,2003, USB Warburg provided 2003 loss estimates for the North American industry alone of USD$6.5 billion with full year revenues projected down 4 per cent. The revenue outlook has further deteriorated with the prospect of a longer than predicted war in Iraq and the recent SARS crisis. The report also forecast that absent material change, all surviving North American legacy network majors will enter Chapter 11 within two years. In Canada, the growth in competitive capacity from low cost carriers in a flat market adds further to the revenue erosion. "It is our view that rather than burn more of our resources chasing an outdated business model, we must cut to the chase now," said Milton. Labour "It appears that the only successful airlines today are the original low-cost carriers or restructured mainline carriers. As we are currently seeing with airlines in the United States, the labour costs of most legacy North American carriers are simply untenable in the new airline environment. There cannot be a successful restructuring without a radical wholesale revision to work rules and changes under the collective agreements governing the company's 31,000 unionized employees," said Milton. While the airline has repeatedly outlined to its unions the urgent need to find $650 million in permanent, annual labour savings by March 15, 2003, there has been no agreement on a meaningful course of action to date, with one exception which results in an important temporary saving. The Canadian Auto Workers Airline Division (CAW) has concluded an agreement on a Supplemental Unemployment Benefit Plan that will allow the airline to temporarily reduce its over 1,000 surplus Customer Sales & Service agent workforce and as well has agreed to defer the general salary increase that would have been effective March 30, 2003, saving the company approximately $36 million. "The reaction from union leadership has generally been disappointing and has ultimately compromised the future of their membership. I had implored our union leaders to attempt to be different from some of our U.S. peers and assist in restructuring our costs outside a bankruptcy process, without the assistance of the courts but the impasse gives us no option but to restructure under court supervision with the mandatory consent of creditors," Milton said. "In a CCAA restructuring, the $650 million requested by the company will be off the table and the appropriate labour cost reduction will be a condition to be set by creditors, the monitor and the court." Pension Plans The value of Air Canada's pension plans, like that of nearly all pension funds, deteriorated in 2001 and 2002 due to a convergence of declining interest rates and declining stock markets. As a result of this and coupled with Air Canada's fragile financial position, the Office of the Superintendent of Financial Institutions (OSFI) requested that Air Canada suspend the pension contribution holiday to which it is legally entitled and conduct a pension valuation earlier than the next regularly scheduled evaluation in 2004 to determine the extent of the pension shortfall and to fund any liability as soon as possible. The company has been in a constructive dialogue with OSFI regarding the appropriate means and schedule in which to address its concerns. Depending on the outcome of the restructuring, the company is considering a number of alternatives. These are: -- Reducing accrued benefits to bring its existing pension plans in line with market practice -- Freezing accrual of benefits for a fixed period of time; or -- Moving to "defined contribution" type pension arrangements. Commercial Restructuring New Business Model To Better Meet the Needs of our Customers The restructuring is not limited to fixing the company's balance sheet and labour costs. Air Canada will also change the way it does business to better meet the needs of customers. Initiatives underway will allow Air Canada to simplify its pricing, restructure the network to allow greater ease of use through higher frequency and increased connecting opportunities. While the airline adjusts capacity on an ongoing basis to meet demand, there are no immediate plans to discontinue service on any route at this point. The new Air Canada will continue to be one of the world's leading carriers serving all corners of the world. Operational Restructuring - Fleet The operational restructuring calls for a revised fleet plan in addition to a restructuring of labour costs. The revised fleet plan calls for streamlining the fleet by eliminating smaller fleet such as the Boeing 747-400, the Boeing 737-200 and the BAE 146. The plan also calls for the growth of the company's CRJ-50 fleet as well as the introduction of 90-seat Regional Jet aircraft. Corporate Restructuring Air Canada will also undertake a corporate reorganization that will create a new holding parent corporation, Air Canada Enterprises, with separate business units for each of the activities in which the corporation is involved. Air Canada will continue to carry on a domestic, transborder and international airline business as Canada's national carrier. As part of the reorganization all of Air Canada's equity interests in its existing subsidiaries including Aeroplan, Air Canada Technical Services, Jazz, ZIP, Air Canada Vacations, Air Canada Capital and Destina will be directly owned, as sister companies by Air Canada Enterprises. Air Canada will proceed with previously announced plans to create Airport Ground Handling; and that new division as well as Air Canada Cargo business operations will be constituted as stand alone subsidiaries and transferred from Air Canada to Air Canada Enterprises. Provided that the proposed sale of a 35 per cent share of Aeroplan is restructured as intended by Onex and Air Canada, this transaction would close upon the airline's emergence from CCAA. The reorganization will modernize Air Canada's corporate structure. It is a continuation of Air Canada's strategy of focusing on the development of profitable stand-alone businesses. The proposed structure will separate regulated operations from non-regulated businesses and align management and labour interests. It is intended that each of the businesses with a unionized labour environment will have a separate bargaining unit and a separate management team as well as a cost structure competitive within its specific sector. The structure will enhance the operational and financial flexibility of the Air Canada group as a whole as well as accommodate joint ventures with and investments by financial and strategic partners. Chief Restructuring Officer Over the coming months, Air Canada will work with its creditors, union leaders, employee groups and other stakeholders to restructure the airline. Calin Rovinescu has been appointed Chief Restructuring Officer and will temporarily relinquish his day to day responsibilities as Executive Vice-President, Corporate Development and Strategy to focus primarily on the restructuring exercise. Prior to joining Air Canada in April 2000, Rovinescu was the Managing Partner of a major Canadian law firm and over a 20 year career, advised various enterprises in Canada, the United States and Europe on restructurings, privatisations and friendly and hostile takeovers in various industries. "With his background and wealth of experience I can think of no one better suited to the task at hand than Calin," said Milton. "The task before us will be painful at times and the challenges daunting but I am confident that the people of Air Canada have the fortitude to accept that the world has changed. With their goodwill and hard work, and our restructuring plan, I am confident that we will emerge as a strong, efficient company with a low cost structure, higher productivity levels and the ability to compete effectively and profitably while providing our customers with the high service standards they expect of Air Canada," said Milton. The corporation's audited 2002 year-end financial statements will be released prior to May 20, 2003. ----------------------------------------------------------------- [00004] AIR CANADA RESTRUCTURING DATABASE ----------------------------------------------------------------- CCAA Applicants: Air Canada 3838722 Canada Inc. Air Canada Capital Ltd. Jazz Air Inc. Manoir Int'l Finance Inc. Simco Leasing Ltd. Wingco Leasing Inc. Zip Air Inc. CCAA Petition Date: April 1, 2003 CCAA Proceeding Court File No. 03-CL-4932 Canadian Court: Ontario Superior Court of Justice (Commercial List) 939 University Avenue 10th Floor Toronto, Ontario M5G 1E6 Canadian Judge: The Honourable Mr. Justice Farley U.S. Bankruptcy Court: United States Bankruptcy Court Southern District of New York Alexander Hamilton Custom House One Bowling Green, 5th Floor New York, New York 10004-1408 Telephone (212) 668-2870 Monitor's Sec. 304 Petition Date: April 1, 2003 U.S. Sec. 304 Proceeding Case No. 03-11971 U.S. Judge: The Honorable Prudence Carter Beatty Applicants' Solicitors: Sean F. Dunphy, Esq. Ashley John Taylor, Esq. Stikeman Elliott LLP 5300 Commerce Court West 199 Bay Street Toronto, Ontario M5L 1B9 Telephone (416) 896-5662 Fax (516) 947-0866 Applicants' U.S. Counsel: Matthew A. Feldman, Esquire Elizabeth Crispino, Esq. Willkie Farr & Gallagher 787 Seventh Avenue New York, New York 10019-6099 Telephone (212) 728-8000 Fax (212) 728-8111 Canadian Monitor: Brian Denega Ernst & Young Inc. Toronto Dominion Centre 222 Bay Street P.O. Box 251 Toronto, Ontario M5K 1J7 Monitor's Canadian Solicitors: Peter H. Griffin, Esq. Peter Osborne, Esq. Lenczner Slaght Royce Smith Griffin 2600 - 130 Adelaide Street West Toronto, Ontario M5H 3P5 Telephone (416) 865-2921 Monitor's U.S. Counsel: Marc E. Richards, Esq. Heather Aaronson, Esq. Blank Rome LLP 405 Lexington Avenue New York, New York 10174 Solicitors for Canadian Imperial Bank of Commerce: Kevin P. McElcheran, Esq. Blake, Cassels & Graydon LLP Suite 2800 Commerce Court West 199 Bay Street Toronto, Ontario M5L 1A9 Telephone (416) 863-2566 Fax (416) 863-2653 Solicitors for Onex Corporation: Rubert H. Chartrand, Esq. John A. MacDonald, Esq. Osler, Hoskins & Harcourt LLP 1 First Canadian Place P.O. Box 50, Stn. 1st Can. Pl. Toronto, Ontario M5X 1B8 Telephone (416) 862-6575 Fax (416) 862-6666 Solicitors for the Board of Directors: David E. Baird, Q.C. James C. Baillie, Q.C. Torys LLP Suite 3000, TC Centre 79 Wellington Street West P.O. Box 270, Stn. Toronto Dom. Toronto, Ontario M5K 1N2 Telephone (416) 865-7395 Fax (416) 865-7380 ----------------------------------------------------------------- [00005] APPLICANTS' PRINCIPAL DEBT OBLIGATIONS ----------------------------------------------------------------- Creditor and Amount Owed at Nature of Claim Original Debt 12/31/2002 --------------- ------------- ---------- Bank of Nova Scotia US$400,000,000 US$300,000,000 and CIBC for 9 Canadian financial institutions Revolving Credit Line maturing Aug. 17, 2004 Kreditanstalt fur US$300,000,000 US$243,000,000 Wiederaufbau Term Loan maturing Feb. 13, 2007 CIBC Mellon Trust for C$175,000,000 C$175,000,000 9 Canadian financial institutions 6.75% Senior debenture due Feb. 2, 2004 Bayerische Landesbank EUR200,000,000 EUR127,000,000 Girozentrale for 9 financial institutions 6-5/8% Bond due January 14, 2005 Citibank for Citicorp US$300,000,000 US$219,000,000 International and DKB International Floating rate notes maturing July 29, 2005 Citibank (Channel YEN15,000,000,000 YEN95,000,000 Islands) Term Loan maturing October 29, 2007 CIBC Mellon Trust for C$30,000,000 C$204,000,000 6 Canadian financial institutions 7.25% Senior Debenture due Oct. 1, 2007 Maple Leaf Funding US$100,000,000 US$80,000,000 (Snecma) Floating rate guaranteed notes due Dec. 30, 2008 Caisse de Depot et C$150,000,000 C$131,000,000 Placement du Quebec 7.25% Convertible subordinated debentures due Nov. 1, 2009 KFW, UAL Corporation and US$195,000,000 US$277,000,000 Deutsche Lufthansa AG (guarantors) Guaranty Term Loan maturing Dec. 23, 2009 Bayerische Landesbank EUR150,000,000 EUR214,000,000 Giozentrale for 4 financial institutions 10.00% Bond due January 6, 2006 Bank of Nova Scotia Trust US$300,000,000 US$442,000,000 Company of New York plus 2 paying agents for 7 financial institutions 10.25% Senior Notes due Mar. 15, 2011 Bank of Nova Scotia Trust EUR100,000,000 EUR166,000,000 Company of New York plus 2 paying agents for 7 financial institutions 10.25% Senior Notes due Mar. 15, 2011 CIBC Mellon Trust for C$250,000,000 C$248,000,000 7 Canadian financial institutions 9.00% Senior Dedentures due June 1, 2006 Bayerische Landesbank EUR20,000,000 __________ Giozentrale Letter of Credit expiring Dec. 21, 2004 Province of Manitoba C$2,000,000 C$2,000,000 Term Loan German Perpetual Bond EUR200,000,000 EUR169,000,000 5.5% Perpetual Bond Swiss Franc Perpetual SFR300,000,000 SFR343,000,000 Bond 6.25% Perpetual Bond Swiss Franc Perpetual SFR200,000,000 SFR228,000,000 Bond 5.75% Perpetual Bond Japanese Yen Perpetual YEN60,000,000,000 YEN453,000,000 Bond 2.60% Perpetual Bond ----------------------------------------------------------------- [00006] APPLICANTS OBTAIN INITIAL CCAA STAY ORDER ----------------------------------------------------------------- Air Canada and its affiliates filed their initial application for protection under the Companies' Creditors Arrangement Act with the Canadian Court on April 1, 2003. The Stay To give Air Canada a breathing spell from their mountain of debt, Mr. Justice Farley entered a stay prohibiting Canadian Creditors from collecting debts that arose prior to April 1, 2003. Mr. Justice Farley's Initial Stay Order will remain in place until May 1, 2003. The Monitor Mr. Justice Farley approves Air Canada's request for appointment of Ernst & Young LLP to serve as the Monitor in the CCAA proceedings. The Monitor will monitor Air Canada's business and financial affairs while a Plan is being prepared and while approval of such Plan is being sought. Among other things, a Monitor will assist Air Canada in developing a Plan, assist in holding and administering creditors' and shareholder meetings (including chairing such meetings) and inquire and report to creditors and shareholders at or prior to meetings to consider any Plan. The CCAA requires a debtor corporation to provide a Monitor with access to its property, including its premises and financial information, including books, records, documents, and electronic data, to the extent necessary to adequately assess the debtor corporation's business and financial affairs. The Monitor is required to file a report with the Canadian Court forthwith after any material adverse change in the debtor corporation's projected cash flow or financial circumstances. Additionally, the Monitor is required to file a report at least seven days before any meeting of creditors or at any other time ordered by the Canadian Court. GECC Financing Air Canada projects that cash disbursements will exceed cash receipts by more than C$350,000,000 between now and May 2, 2003: Air Canada Consolidated Cash Flow Forecast For the Period April 1 through May 2, 2003 Receipts Ticket Sales C$431,100,000 Other Receipts 62,600,000 ------------- Total Receipts C$493,700,000 ------------- Disbursements Payroll & Benefits C$295,300,000 Fuel 83,300,000 Airport related charges 49,100,000 Aircraft maintenance 52,500,000 Food, Beverages & Supplies 25,300,000 Other Operating Costs 165,700,000 Tax Remittances 88,900,000 Professional Fees 2,500,000 ------------- Operating Disbursements C$762,500,000 ------------- Capital Expenditures C$34,700,000 Aircraft Lease Payments 84,400,000 ------------- Non-Operating Disbursements C$119,100,000 ------------- Plus: Cash Flows from Non-CCAA Applicants C$36,500,000 ------------- NET CASH OUTFLOW C$351,400,000 ============= To bridge this shortfall, Air Canada has obtained permission from the Canadian Court to borrow new money, secured by first priority liens on all otherwise unencumbered assets, from General Electric Capital Canada, Inc., under the terms of a to-be-documented post- bankruptcy financing facility providing the Applicants with access of up to US$300,000,000 of revolving credit and a US$400,000,000 term loan. ----------------------------------------------------------------- [00007] MONITOR'S APPLICATION TO ENJOIN & RESTRAIN U.S. CREDITORS ----------------------------------------------------------------- Marc E. Richards, Esq., at Blank Rome LLP, appeared before Judge Beatty in the U.S. Bankruptcy Court to obtain a Preliminary Injunction enjoining and restraining U.S. Creditors from seizing Air Canada's U.S. assets or repossessing aircraft landing in United States airports. Mr. Richard's appeared in the U.S. Court on behalf of Ernst & Young Inc., in its capacity as the Foreign Representative of Air Canada. Irreparable Injury and the Need for Injunctive Relief Mr. Richards explains to Judge Beatty that the CCAA proceedings in Canada should result in a restructuring plan that provides for: (i) a restructuring of Air Canada's capital structure, and (ii) an improvement in the carrier's financial performance and long-term outlook. Accordingly, Air Canada needs a "breathing spell" to negotiate and implement an appropriate Plan. To achieve this result, Air Canada must be able to protect its assets, wherever situated, thereby maximizing the value of the estate to be reorganized, for the benefit of creditors worldwide. Part of this process is to reduce the costs of litigation by funneling all claims to the Canadian Court for adjudication. This goal would be seriously undermined if creditors were permitted to proceed outside the Canadian Court to pursue actions against the Debtors in the United States. Accordingly, injunctive relief is necessary to enable the Debtors to devote their limited time and resources to achieving a successful sale or reorganization of their businesses, to prevent the dissipation and piecemeal distribution of the Debtors' assets, and to prevent certain creditors from gaining an advantage over other creditors, including other creditors in the United States. Considering the Monitor's request, Judge Beatty finds that entry of an injunction in the United States against U.S. creditors will contribute to an economical and expeditious administration of the Debtors' estates under the CCAA consistent with the relevant factors set forth in section 304(c) of the Bankruptcy Code. Judge Beatty finds that the CCAA provides for: (a) just treatment of all holders of claims against or interests in the estate; (b) protection of claim holders in the United States against prejudice and inconvenience in the processing of claims in the Canadian proceeding; (c) prevention of preferential or fraudulent dispositions of property; and (d) distribution of proceeds of the estate substantially in accordance with the United States Bankruptcy Code; and principles of comity militate in favor of cooperation with the Canadian Court. Accordingly, Judge Beatty directs that all persons subject to the jurisdiction of the U.S. Court are enjoined and restrained from commencing or continuing any action to collect a pre-petition debt without obtaining relief from the Court. Judge Beatty will convene a hearing on April 29, 2003 at 2:30 p.m., to consider whether to continue the terms of the Preliminary Injunction beyond that date. *** End of Issue No. 1 *** ------------------------------------------------------------------------- Peter A. Chapman peter@bankrupt.com http://bankrupt.com ------------------------------------------------------------------------- Recommended Reading: Professor Stuart Gilson's newest title, "Creating Value Through Corporate Restructuring: Case Studies in Bankruptcies, Buyouts, and Breakups." List Price: $79.95 -- Discounted to $55.96 at http://amazon.com/exec/obidos/ASIN/0471405590/internetbankrupt -------------------------------------------------------------------------