Air Canada unions face headwind on defined pension benefits?

Unions will ultimately need to find a compromise with Air Canada's management over reforming the company's pension plan if the airline is to compete with rivals in the longer term, analysts said.

The Canadian Auto Workers Union, which represents some 3,800 sales and customer service representatives at Air Canada, downed tools at midnight on Monday after failing to reach an accord after 10 weeks of negotiations. Concessions demanded by management over the company's pension plan proved the main sticking point.

Air Canada wants to move new workers to a defined-contribution plan, rather than a defined-benefit plan which guarantees pension payouts for workers.

The union claims management also wants cuts of as much as 40% to existing benefits.

It's a problem that many large corporations, including auto giant General Motors, are grappling with after finding their liabilities toward former employees are outweighing the value of money invested. Air Canada had a pension deficit of $2.1 billion at the beginning of January.

The company has 26,000 active employees supporting 29,000 retirees with about $13 billion in total pension liabilities, according to company documents.

The deficit "swings around a lot and requires significant financing from the company," said Canaccord Genuity aviation analyst David Tyerman. "That's funding that could be used for other things, such as better airplanes, or that could improve the performance of the company.

"Overall, a company has to make a decent return on capital -- otherwise it will not remain in business," he said.

Air Canada's pension schemes date back to when the airline was a Crown corporation, whereas its newer rivals, such as Calgary-based WestJet, have a significant advantage because they do not have the same liabilities.

Tyerman said Air Canada's return on capital is about 3%, compared with 10% at WestJet.

The CAW, which claims its members have agreed to significant sacrifices in recent years to help the airline return to financial health, said the pension plan concessions being demanded by the company will create a two-tiered workforce.

Pension experts said the defined-benefit schemes are proving costly and corporations are seeking to shift the risk back to employees.

"The defined-benefit plan is a form of deferred compensation that helps bind employees to the company," said Paul Halpern, professor of finance at the University of Toronto's Rotman School of Management. "The trouble is they have turned out to be very expensive, and companies are moving away from them."

In Air Canada's case, new workers know the pension scheme they would be offered and can choose not to work for the company, he said.

According to Statistics Canada figures, the number of employees covered by defined-contribution plans in the private sector rose from 14% in 1991 to 27% by 1996. The number covered by defined-benefit plans in the private sector decreased by 279,200, bringing that sector's share to 73%, down from 86% in 1991.

The strike comes at a time when the airline has been making headway in its turnaround efforts. It had a record passenger load factor of 81.7% last year and says it's well on target to achieve cost savings of $530 million by the end of this year. It had trimmed expenses by $440 million as of the end of March.

Tyerman said impact of the strike on the airline's financial performance would depend on how long the disruptions last and, more importantly, on how it affects customer loyalty in the longer term.

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