THE AIRLINE’S NEW SHARES HAVE SO FAR DISAPPOINTED THOUSANDS OF HOPEFUL BUYERS
AIR CANADA FLIES LOW
THE AIRLINE’S NEW SHARES HAVE SO FAR DISAPPOINTED THOUSANDS OF HOPEFUL BUYERS
When the federal government announced its 45-per-cent sell off of Air Canada last August, the multimillion-dollar advertising campaign promoting the sale came under sharp attack. Former Ontario Securities Commission chairman Henry Knowles, for one, said that the blitz “crossed the line between acceptable and unacceptable marketing techniques.” And many financial experts were cool toward the stock, citing uncertainty in the airline industry. But, enticed by the attractively priced shares, thousands of Canadian investors decided to buy. The sale generated $225.8 million for the airline—but shareholders have been less lucky. Originally priced at $8, the stock rose briefly to just under $9 when trading between stockbrokers began in early October. Since its stock exchange listing in mid-October, it has fallen, closing last week at $7.50. Now, investors are anxiously awaiting Air Canada’s thirdquarter results this week. If they differ significantly from the company’s optimistic projections, the price could drop even further.
Some observers have placed blame for the stock’s disappointing performance on the uncertainty surrounding the Nov. 21 federal election. If the Conservative government of Brian Mulroney fails to win a majority or is not reelected, the fate of the government’s remaining 55-per-cent holding will be unclear. That prospect unsettles some investors, who say that they are wary of government intervention in the company’s affairs.
Before the stock issue, some investors said they anticipated that the price would be fixed at a low level to promote its quick appreciation. A similar strategy benefited the image of the British Conservative government of Margaret Thatcher after the privatization of such British Crown corporations as British Gas Corp. Six months after their issue, British Gas shares had doubled in value, to $2.10. But Air Canada has so far been unable to emulate that success. As well, the investment dealers who underwrote the issue kept the price from falling even further by purchasing shares that were resold quickly by speculators.
Market analysts say that that practice is normal and provides price stability for investors. One portfolio manager, who requested that his name not be used, said that no one would acknowledge a specific request by the government to prop up the share price. But he added that the Air Canada underwriters are “probably feeling a lot of pressure to support the price because the government is the biggest issuer of securities in the country,” providing dealers with much of their business.
But most analysts say that intense competition in the airline industry is the primary reason for the depressed share price. According to Frederick Larkin, analyst for broker Alfred Bunting & Co. Ltd. in Toronto, industry deregulation means more competition among airlines. That is forcing all major Canadian airlines to increase service and cut prices.
Like Larkin, many financial advisers have avoided the stock. Gary Canlett, senior vice-president of Toronto-based Jones Heward Investment Management Inc., said that Air Canada was “not worth buying in the first place.” Canlett pointed to Air Canada’s plans to spend $2.4 billion for new capital purchases in the next five years, including 34 French-built Airbus A-320 aircraft and the remaining payments for seven Boeing 767s. That kind of outlay “scared the pants off of us,” Canlett said. He also dismissed the lavish advertising campaign as “hype.”
.. In addition, events in the < industry have depressed the 9 stock of most major Canadian 1 airlines. Wardair Inc. is mov| ing strongly into the lucrative z business-travel market with i more regularly scheduled
flights. Wardair is now offering 37-per-cent discounts on blocks of 10 one-way tickets. At the same time, it is spending $1 billion on new planes and is not expected to earn a profit this year.
Competitors Canadian Airlines International Ltd. and Air Canada are fighting to keep up. Last week, Air Canada increased the number of bonus points for frequent flyers so that they now earn four miles for every mile flown. But Donald Reed, president of Toronto pension fund adviser Reed Monahan Nicholischen Investment Counsel Inc., noted that high sales do not necessarily mean high profits. Discounted seats and frequent-flyer programs, which reward customers with free tickets, mean lower revenues for each seat. Meanwhile, Canadian’s parent, PWA Corp. of Calgary, reported poor third-quarter earnings at the end of October, creating a ripple effect in the industry. When such negative results are reported, said Reed, “very often you will see stocks fall off in the same industry.”
Still, many individual investors were persuaded that the shares were an attractive purchase. The sale was a sellout, an unusual event for new issues since the stock market collapse on Oct. 19, 1987. Although precise figures have not been released, most observers estimate that the majority of buying was done by small, so-called retail investors, while many large institutions, including pension funds,
lines, waiting to assess the stock’s performance.
Larry Lunn, chairman of Vancouver-based pension fund adviser Connor, Clark & Lunn Investment Management Ltd., added that because of concern about another stock market crash, and the stock’s poor showing so far, subsequent purchasers who might have helped to support the price are likely to stay away, at least until after the federal election or until there are signs of improvement in the overall industry. As a result, the shares are expected to stay below the issue price of $8. And that could mean unhappy investors, who could become unhappy voters. Investment dealer Murray Anderson, of Andras Research Capital Inc., said that as Air Canada shares have dropped in recent weeks, “there are people who will think they have been taken by the government.”
Investor caution is also rooted in concerns that a Liberal government may take an interventionist stance with Air Canada. The Conservative government has stated that it would vote its 55 per cent as though it were a nonparticipatory investor. Liberal transportation critic Brian Tobin told Maclean’s last week that a Liberal government would probably not change the present ownership structure, but that it would ensure Air Canada was responsible to the transportation needs of the country—as well as to its shareholders.
Meanwhile, the ordinary investor is caught in a bewildering cross flow between market forces and political instability. Pension fund manager Robert Krembil, chairman of Toronto-based Trimark Investment Management Inc., said that the share price reflects several factors. “They may have had politics in mind, but the company had to raise a lot of money.” On the other hand, said Krembil, people bought because “the shares were billed as something cheap that were going to go up.”
Despite the disappointing losses, no investors have so far complained to the federal government. Said Thomas Van Dusen, a spokesman for Donald Mazankowski, deputy prime minister and privatization minister: “Most people are sophisticated enough to realize that the price can go down.” For thousands of optimistic Canadian investors, that is an unpleasant reality they have already learned to face.
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