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Air Canada upgrades the premium cabin on the rouge Airbus A319s, opts out of the 2014 pension funding regulations

Air Canada Rouge logo

Air Canada (Montreal) has announced a number of product upgrades to benefit customers on its leisure airline, Air Canada rouge (Toronto).

The premium cabin in Air Canada rouge’s fleet of 20 Airbus A319 aircraft will be converted by mid-June 2015 from its current 3×3 seating configuration with a blocked middle seat to two side-by-side Business Class seats in a 2×2 configuration. This new seating provides customers more personal space and generous legroom as well as full power charging capacity with a 110-volt power plug and a high-powered USB port at every seat. Additional customer convenience features include a centre console and pop-out cocktail tray between the two seats and a coat hook at every seat.

Air Canada rouge will also increase carry-on space throughout its Airbus A319 fleet by 30 per cent with the installation of new overhead bin doors – dubbed “pillow doors” because of their curved shape – which allow carry-on items to be stowed more efficiently. The installation takes place this summer.

In addition to the upgrades on its Airbus A319 aircraft, Air Canada rouge is also enhancing its in-flight entertainment system on all Airbus A319 and Boeing 767 aircraft. Air Canada rouge is one of the first airlines in North America to offer a streaming in-flight entertainment system. This system, called player, is available complimentary to customers that have downloaded the free app onto their own laptops or mobile Apple® and Android® devices. Air Canada rouge also provides an Apple iPad® rental program onboard that is now renting out lightweight iPad Air 2® tablets that have been upgraded to feature dozens of the latest Hollywood new releases and popular iPad games for one and two players. iPad rentals are complimentary in the Premium rouge cabin.

Air Canada is Canada’s largest domestic and international airline serving more than 190 destinations on five continents. Canada’s flag carrier is among the 20 largest airlines in the world and in 2014 served more than 38 million customers. Air Canada provides scheduled passenger service directly to 64 Canadian cities, 52 destinations in the United States and 78 cities in Europe, the Middle East, Asia, Australia, the Caribbean, Mexico, Central America and South America. Air Canada is a founding member of Star Alliance, the world’s most comprehensive air transportation network serving 1,321 airports in 193 countries. Air Canada is the only international network carrier in North America to receive a Four-Star ranking according to independent U.K. research firm Skytrax that ranked Air Canada in a worldwide survey of more than 18 million airline passengers as Best Airline in North America in 2014 for the fifth consecutive year. For more information, please visit: http://www.aircanada.com follow @AirCanada on Twitter and join Air Canada on Facebook.

Air Canada rouge is Air Canada’s leisure airline. Together with Air Canada Vacations, Air Canada rouge offers competitively-priced travel to 50 exciting leisure destinations on 68 routes in Europe, Mexico, the U.S., the Caribbean, Asia, South America and Canada.

Air Canada rouge began operating July 1, 2013 with a start-up fleet of two Airbus 319 aircraft and two Boeing 767-300 ER aircraft. Air Canada rouge currently operates a total of 31 aircraft including 20 Airbus 319 and 11 Boeing 767-300 ER aircraft.

Air Canada logo-1

In other news, Air Canada has announced that it has elected to opt out of the Air Canada Pension Plan Funding Regulations, 2014 (the “2014 Regulations”), effective immediately. The 2014 Regulations became effective on January 1, 2014 and under their terms, Air Canada was required to make solvency deficit payments of $200 million per year, on average, over a seven-year period. The agreement entered into in connection with these regulations contained several restrictions, including a prohibition on dividends and share repurchases; however it allowed Air Canada to opt out at any time.

Air Canada has elected to opt out of the 2014 Regulations as following a detailed risk assessment, it believes the funding risk associated with the solvency of its pension plans has largely been eliminated. The committed deficit funding contributions over the next six years of approximately $1.1 billion under the 2014 Regulations may be redeployed to further improve the competitive position of Air Canada and create substantial value for shareholders and employees.

The overall risk profile of the pension plans, given the successful execution of a new investment policy and risk mitigation strategy introduced in 2009, is significantly lower. This is the result of and reflected in the following:

75 per cent of Air Canada’s pension liabilities are now immunized with duration-matched fixed income products, significantly reducing the interest rate risk associated with all pension plans. Air Canada may continue to increase immunization levels, subject to favourable market conditions.

Air Canada utilizes an overall risk measurement called “surplus risk”, measuring the potential variability of the plan assets and liabilities over the period of one year. This surplus risk has been reduced by approximately 50 per cent since 2009, a reflection of a more conservative asset mix policy.

The aggregate solvency surplus as at May 20, 2015, based on management estimates, is $1.2 billion, 82 per cent above the $660 million surplus level at January 1, 2015, and 13.5 times greater than the $89 million surplus level as at January 1, 2014.

As part of its due diligence and risk mitigation strategy, Air Canada, with the assistance of its professional actuaries, simulated 1,000 different economic scenarios on the current plan asset mix to determine what combination of economic factors would have to occur to cause Air Canada to contribute an aggregate of more than $1.2 billion to its pension plans under normal funding rules, over the next six years. Air Canada also simulated the past three economic crises (the 2009 financial crisis, the 2001-2002 technology crises and the 1970 oil crisis) to assess the effect each would have on the pension plan assets. None of those three economic crises would result in payments exceeding an aggregate amount of $1.2 billion over the next six years. With respect to the 1,000 economic scenarios, less than 2 per cent would result in payments of over $1.2 billion; however, none of these scenarios has ever actually occurred.

Three years ago, Air Canada’s domestic registered pension plans had a significant pension solvency deficit of $4.2 billion. The $5.4 billion improvement in the pension solvency position to the May 20, 2015 estimated surplus of $1.2 billion is a reflection of top quartile investment returns given the new investment strategy introduced in 2009 which created over $3.5 billion in value, negotiated pension benefit amendments which reduced the deficit by approximately $1.0 billion, and past service cash contributions by Air Canada of approximately $900 million over the past six years, which when added to the $1.0 billion contributed in current service costs represents a total contribution by Air Canada of $1.9 billion since 2009 to its Canadian registered pension plans.

In addition, the pension share trust created in 2009 as part of an earlier pension arrangement, and held in trust for the benefit of the airline’s Canadian employees and retirees, is currently valued at approximately $220 million. The trust provides that proceeds of any sale of the trust shares will be retained and applied to reduce future deficits, if any should materialize.

Under normal funding rules, Air Canada will make pension solvency payments of approximately $90 million in 2015 versus the $200 million it would have had to contribute under the 2014 Regulations, saving $110 million. Based on the solvency surplus as at January 1, 2015 of $660 million, and assuming similar market conditions to the current environment and given its immunization strategy, Air Canada expects its pension solvency payments in 2016 to be zero, saving $200 million in that year alone.

Copyright Photo: Steve Bailey/AirlinersGallery.com. Airbus A319-114 C-FYNS (msn 572) of Air Canada rouge arrives at Vancouver.

Air Canada rouge aircraft slide show: AG Airline Slide Show