Air Canada Defined Benefit Pension Plans Case Solution

2. Analysis

Air Canada’s pension plan is weak compared to its competitors given the enormous size of workforce i.e. 23,000 full-time employees. This resulted in the airline having the largest collective pension plans, but solvency issues remained a key issue for the airline in terms of funding. The airline, in 2011, also ended up with an aggregate pension deficit. Other competitors such as WestJet had not been able to receive state funding or protection but due to their low-cost structure, they had not faced a major pension crisis. Costs for competitors were far lower than that for Air Canada.

Due to the lack of funding, Air Canada has been facing issues in terms of pension payments and, therefore, is proposing a new defined benefits pension plan that employees are resisting. The fixed amount results in a lack of financial leverage for Air Canada in terms of for e.g. how the company’s investments perform or the volatility in profits. To counter this, the airline is offering a new defined contribution pension plan that would have that flexibility in terms of performance. The key problem in the current plan is that no matter what the performance, the pension plan is fixed and takes a heavy toll on the financials of the company.

Given the defined pension plan, the company is facing an aggregate deficit in pension payments. Clearly, the company can’t afford this at the moment given the slow recovery in the airline industry. The financials of the company revealed that it is not in the position to pay and is already under pressure due to the interest expense on its loans. The state has also agreed for some funding over the next three years but adding on to its liabilities is not the solution for the airline, hence the request for a concession.

The proposed defined contribution pension plan would have a negative effect on attracting and retaining new employees since it would be applicable to new employees. Primarily, the new plan would not guarantee any level of payout since such plans are not indexed for inflation. Moreover, retirement income is based on how the organization’s investments perform. Although such a plan is favorable for Air Canada since it would not be liable to pay in case of shortfalls, employees would suffer in such a case. Due to these factors, the new plan would have a negative impact on attracting and retaining new employees.

3. Alternatives

Given the situation, Air Canada has two main alternatives to deal with the crisis and sustain its operations in the long-term.

Continue the Existing Plan

Given the amount of existing employees, the company can continue with the existing plan and develop a strategy to compete more effectively in the industry. The company could res-structure its operations, eliminate loss-making routes, and invest efficiently.

• Pros: Enable growth in profits that would result in timely payments of pensions.