Air Canada to redeploy capital as pension funding gap evaporates

By Euan Rocha

TORONTO (Reuters) - Air Canada (Toronto:AC.TO - News) said on Tuesday it plans to redeploy capital toward share buybacks, debt repayment and increased investment in new aircraft, as its once huge pension fund deficit has now been wiped out much earlier than expected.

Its pension fund deficit stood at C$4.2 billion in 2012, and Air Canada struck a deal with the government in 2013 that gave it more time to fix the funding gap.

At the time Air Canada agreed to not pay any dividends, cap executives' pay and abstain from share buybacks as it worked on erasing the deficit by making annual solvency payments of C$200 million, on average, over a seven year period.

The deal only went into force officially in early 2014 though and by that time, strong equity markets coupled with a revamped investment strategy had already moved Air Canada's pension plan into a small surplus.

The company said it now estimates the total solvency surplus as of May 20 at C$1.2 billion, roughly 13.5 times greater than the C$89 million surplus level as of Jan. 1, 2014.

Air Canada said it has stress tested its pension plans and has decided its previously committed deficit funding contributions of C$1.1 billion over the next six years can be redeployed to further improve its competitive position.

"Our ability to return to normal funding rules for our pension plans represents a highly significant and positive milestone in the execution of our strategy to transform Air Canada into a sustainably profitable company for the long term," said Chief Executive Calin Rovinescu in a statement.

It said over the next several years it plans to spend C$9 billion mainly on new aircraft and equipment, in a bid to boost its operating margins. It also pledged to lower its net debt and leverage ratio and to continue to improve its credit rating.

It also announced a "modest" share buyback plan, saying its board has authorized the repurchase of up to 3.5 percent of its outstanding shares over the next 12 months.

Air Canada's share price has more than quintupled over the last two years, as its pension deficit woes have faded along with some of the pressure from higher fuel costs.

Shares in Air Canada closed down 4 Canadian cents at C$12.58 on the Toronto Stock Exchange on Tuesday.

(Reporting by Euan Rocha; Editing by Chris Reese)