BUSINESS/ECONOMY

Financial flight plans

JOHN DALY September 12 1988
BUSINESS/ECONOMY

Financial flight plans

JOHN DALY September 12 1988

Financial flight plans

The federal government’s longawaited plans to privatize Air Canada finally lifted off last week. Fuelled by one of the largest advertising campaigns ever for a Canadian stock issue, the Crown corporation hopes to raise about $300 million by selling 45 per cent of its shares to the public. Nine Canadian investment dealers began distributing more than 500,000 copies of a glossy preliminary prospectus. At the same time, full-page color advertisements splashed across more than 100 newspapers, announcing that “History is now being made.” The share price, to be fixed by the end of this month, will be between $8 and $10. Canadians appear willing to buy. Last week, potential investors flooded dealers’ offices with phone calls and coupons requesting information and application forms for the 30 million shares.

The Mulroney government’s action was modelled after British Prime Minister Margaret Thatcher’s privatization of such companies as British Gas PLC in 1986, in which shares were offered at modest prices to attract small investors. As in the case of the British sell-offs, officials in Ottawa say that they hope the shares will increase in value shortly after the issue takes place, probably early this fall. For Air Canada, the success of the offering is critical. The company is still recovering from labor strife last fall that resulted in a $29.1-million first-quarter loss. And it is facing tough competition from Canadian Airlines International, the aggressive Calgary-based

company created last year by the merger of Canadian Pacific Airlines and Pacific Western Airlines. The proceeds of the issue will help Air Canada reduce its $l-billion debt and replace its fleet of 33 Boeing 727s with 34 more fuel-efficient Airbus A-320s.

But Steven Garmaise, an airline analyst with First Marathon Securities Ltd. in Toronto, said that investors should be cautious. Even if the initial offering price is set as low as $8, there is no guarantee that the price will later jump. Said Garmaise: “I am somewhat concerned at the lack of knowledge of some of the people looking at this. Airlines are the most volatile industry group in the stock market.”

In a move that could increase share sales, Air Canada officials said that the airline’s final 1988 performance will be outstanding. They predicted a profit of $100 million on the expectation of a strong third quarter, even though the corporation earned only $8 million in the first half. Last year’s profit was $46 million. The company also assumes that operating costs will decline, even though wages—about a third of the company’s total costs— have risen. But last week, Air Canada announced a strong $37.1-million profit for the second quarter. And judging from the flood of requests for information that investment dealers have already received, it appears that many Canadians share management’s optimism.

-JOHN DALY