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While the largest airline in the U.S. narrowly averted bankruptcy earlier in the week, Canada’s biggest wasn’t so lucky. Air Canada filed Tuesday for protection from creditors after failing to reach the types of agreements on job cuts with the majority of its unions that AMR Corp.’s American Airlines tentatively did Monday. Air Canada is foundering under C$12.9 billion ($8.8 billion) in debt and long-term leases and had been expected to seek bankruptcy protection under the Companies’ Creditors Arrangement Act as a condition of a federal government financing package. The carrier said in its filing with the Ontario Superior Court of Justice in Toronto that it had secured $700 million in debtor-in-possession financing from GE Capital Canada Inc. to keep operating while it restructures. That effort is expected to take several months. GE Capital made similar DIP loan offers to U.S. airlines, including Arlington, Va.-based US Airways Group Inc., which just exited bankruptcy Monday, and United Airlines parent UAL Corp., which remains in Chapter 11. American Airlines reached tentative pacts with all three of its unions and avoided a Chapter 11 filing. But Tuesday, the airline said 2,500 of its pilots will lose their jobs over the next year as part of the union’s $660 million in annual concessions to save the company from bankruptcy. The epidemic of bad economic news in the airline sector has led to a $3.2 billion federal aid package being proposed in Congress to help U.S. carriers. Government help for Air Canada is also likely. On Monday, Canada’s transport minister, David Collenette, said Ottawa wouldn’t provide a cash bailout for Air Canada but added that the government is committed to keeping the airline alive. Reports suggested Ottawa would provide hundreds of millions of dollars in loan guarantees to the carrier. Air Canada was forced to seek bankruptcy protection after negotiations with all but two of its unions collapsed. The Canadian Auto Workers Union and the union representing baggage handlers and machinists said they were losing 2,300 positions. Air Canada CEO Robert Milton said in February the carrier needed to cut labor costs by C$650 million. On March 20, after the war with Iraq began, Milton said another 3,600 job cuts were necessary because of a further drop in passenger traffic. The airline said March 27 it was eliminating 25 percent of the managers at its Halifax-based regional airline called Jazz. Milton also said in February that Air Canada was considering selling Jazz and would divest its 45 percent interest in its technical services division, as well as a significant stake in its ground handling services unit. The airline also said it was selling a 35 percent stake in its Aeroplan frequent flier plan to Toronto-based conglomerate Onex Corp. for C$245 million. Onex said Tuesday following the bankruptcy filing that the agreement had been terminated but that Air Canada has granted Onex the exclusive right to negotiate a deal for the acquisition of the 35 percent interest in Aeroplan. Like other North American airlines, Montreal-based Air Canada has been battered by a drop in ticket sales since Sept. 11 and, more recently, the war with Iraq. Last week, Canadians were warned to postpone travel to Asia because of the outbreak of severe acute respiratory syndrome. Competition from discount airlines such as Calgary, Alberta-based WestJet Airlines Ltd. and Jetsgo of Montreal, as well as higher fuel prices, have also contributed to Air Canada’s woes. Montreal-based carrier Canada 3000 went bankrupt in 2001, leaving Air Canada controlling 85% of domestic air travel. WestJet has since expanded. Jetsgo began operating last spring. Air Canada reported a loss of C$364 million for the fourth quarter of 2002, up from a loss of C$277 million for the same period a year earlier. The carrier lost C$428 million, or C$3.56 a share, in 2002, compared with a loss of C$1.3 billion, or C$10.95 a share, in 2001. The company has lost more than C$1.7 billion since 1999, its last profitable year. At the end of 2002, Air Canada had C$604 million in cash, cash equivalents and committed financing but observers said the first quarter of 2003 was particularly brutal for airlines. Air Canada shares dropped to a new 52-week low of C$2.07 Monday. A team of lawyers at Osler, Hoskin & Harcourt, including Scott Horner, Steven Golick, Lyndon Barnes, Tracy Sandler and Jeremy Dacks advised GE Capital Canada on the DIP financing. Copyright �2003 TDD, LLC. All rights reserved.

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