Air Canada Mergers

The airline industry is an oligopoly with low-profit margin and high fixed cost business impacted by government regulations, high taxes, high labor costs, and fluctuations in fuel prices. In addition to revenues from passenger tickets, the industry earns additional revenue from transporting cargo, selling frequent flier miles to other companies and up-selling in flight services. It is common to see alliances and mergers are common in this industry. Air Canada (AC) is Canada’s largest domestic and international airline and part Star Alliance that consists of 28-member airline network, it offers its customers access to approximately 1,300 destinations in 190 countries. AC continues to explore opportunities for revenue enhancement and cost
transformation by expanding Air Canada Rouge(Discount airline) in conjunction with Air Canada’s mainline fleet.
Reviewing Air Canada’s 2016 Annual report, it has approximately $6,722 million in long term debt with a large portion devoted to aircraft financing and it has $1,291 million in equity. The debt-to-equity ratio (D/E) is 5.51 indicating that Air Canada has been expanding its growth through debt. With a current ratio of 0.98, AC is just short of meeting its current obligations with a negative net working capital of $77M. The negative net working capital is mainly due to a cash repayment of $444 million for a $1.25 billion long-term debt in October, 2016. Analysis of the current capital structure, the weighted average cost of capital (WACC) is calculated at 4.73% (Refer to Appendix B “Ratio Worksheets”).