Air Canada is striving to revamp its pension plans for new employees as part of contentious reforms intended to ensure the airline's stability.
Under a groundbreaking tentative labour agreement between Air Canada and the union representing pilots, new hires will join a separate, lower-cost pension plan.
Subject to a ratification vote by the Air Canada Pilots Association, new hires will become members of a defined-contribution (DC) pension, in which retirement benefits vary based on the performance of investments held by each member of the plan. In contrast, under the existing defined-benefit pension plan, pilots are paid at a guaranteed rate once they retire.
"All new hired pilots after April 1, 2011, will be on the DC plan," according to the tentative deal between the carrier and the union. Though few are likely to do so, the agreement also said that "pilots hired after Nov. 1, 2010, will have a one-time opportunity to switch to the DC plan."
Air Canada is seeking to reduce pension costs as fuel prices soar, fearing that its post-recession recovery is fragile. The carrier's combined losses surpassed $1-billion in 2008-09, before it rebounded with a $107-million profit last year as consumers resumed flying during the economic upturn.
Management, which also plans to launch a discount leisure airline to regain market share, will take its pitch for pension reforms to other union leaders representing flight attendants, customer service agents and mechanics in the weeks ahead.
"This is about ensuring the future of Air Canada," an industry official familiar with the airline's pensions said Tuesday. "Most corporations are finding defined-benefit plans to be unworkable. Remember that Air Canada went through near-death experiences with pensions twice already, in 2004 and 2009."
In 2004, while Air Canada was under bankruptcy protection, Hong Kong businessman Victor Li insisted that the unions agree to an array of labour concessions. Mr. Li's Trinity Time Investments Ltd. had offered to bail out Air Canada but later withdrew its offer, after the unions rejected the change.
In 2009, Air Canada survived a cash crunch after it persuaded unions and retirees to back a 21-month pension-funding moratorium.
Some labour leaders have expressed concerns about the switch from a defined-benefit plan to what they view as a less-attractive defined-contribution plan.
The proposed pension changes are among the key issues in the tentative agreement being released to more than 3,000 Air Canada pilots this week. ACPA unveiled details this week in Vancouver and Winnipeg, the first stops in a cross-country tour. ACPA's master executive council has authorized an April 15-27 ratification vote for the tentative labour pact reached last month.
Across-the-board increases of 5 per cent in the first year, then annual wage hikes of 3 per cent, 2 per cent and 2 per cent are proposed in the four-year deal, according to a six-page ACPA backgrounder accompanying the 192-page tentative agreement.
Another highlight of the tentative pact is Air Canada's plan to create a low-cost leisure carrier to compete on routes to Europe, Mexico, the Caribbean and other popular vacation spots. The move will ratchet up the competitive pressure on tour operators such as Transat A.T. Inc., Sunwing Travel Group, WestJet Vacations and Thomas Cook Canada Ltd.'s Sunquest Vacations. The deal provides for a new lower-wage classification of pilots. Management also plans to ask the Canadian Auto Workers union and Canadian Union of Public Employees to support similar changes for reduced wage categories for the proposed low-cost carrier.
Scotia Capital Inc. analyst Turan Quettawala said if Air Canada is able to deploy its planes effectively, the discount division will be competitive, including against WestJet's flights to Hawaii.
Air Canada plans to launch the low-cost carrier (LCC) with four Boeing 767s and six Airbus A319s, then enlarge the fleet to 50 planes, according to a letter of understanding attached to the tentative labour pact between the company and ACPA.
Plans call for 20 Boeing 767s and 30 Airbus A319s in the new division. The Montreal-based carrier wants to reconfigure the low-cost cabin for economy and "premium economy" seating. At the end of last year, under a configuration with business and economy class, Air Canada had 38 120-seat Airbus A319s and 30 Boeing 767s, which seat from 191 to 213 passengers.
The aim is to hire as many as 462 pilots - 238 captains and 224 first officers - by 2015 for the fledgling discount unit. Air Canada "wants to launch its own LCC to stop market share erosion," according to the ACPA backgrounder.
ACPA and Air Canada declined comment.
Air Canada has experimented with discount divisions in the past, notably the Zip Air Inc. fleet, which was launched in 2002, in part as a low-cost rival to Calgary-based WestJet Airlines Ltd. But Air Canada shut it down in 2004, just two years after start-up. With distinctive purple planes, Air Canada also operated Tango as a low-cost carrier for less than two years, closing it in the fall of 2003, though the name Tango lives on as the label for the airline's lowest-fare category.
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