DBRS Upgrades ACE Aviation Holdings & Air Canada to B(high)

Dominion Bond Rating Service (“DBRS”) has today upgraded the Issuer Ratings of ACE Aviation Holdings Inc. (“ACE” or the “Company”) and Air Canada (the “Airline”), as well as the rating on ACE’s Senior Unsecured Convertible Notes to B (high), from B. The trends have changed to Stable from Positive.

The rating actions reflect the sound performance posted by Air Canada since emerging from bankruptcy protection in September 2004, and expectations of continued improvement going forward. Also supporting the ratings is the tight control maintained over capacity, as well as the progress achieved in the implementation of the new business model and the solid liquidity position of ACE and its subsidiaries.

Despite soaring fuel costs, profitability picked up notably during the first nine months of 2005, driven by 7.2% traffic growth, modestly improved yields due to fuel surcharges and stronger domestic pricing power since Jetsgo’s demise, and prudent management. Several transactions were also completed during the nine-month period, including the monetization of 14.4% of Aeroplan, a Cdn$330 million convertible note issue, and a Cdn$462 million equity issue. Proceeds were used to repay the constraining credit facility with GE Canada Finance Holding Company, but also helped grow the consolidated liquidity position to Cdn$2.5 billion, which, along with Air Canada’s new Cdn$300 million credit facility, provides flexibility to address unforeseen events and the potential payout of Cdn$300 million to shareholders recently approved by the Board. Adjusted debt (including aircraft leases) was up moderately to nearly Cdn$6.8 billion on new aircraft financing and a partial drawdown of Aeroplan’s credit facility to fund the miles redemption reserve. However, improved earnings pushed EBITDAR coverage of interest and aircraft rent up to 2.4 times, compared to less than 1.5 times for the past five years.

Barring an economic downturn, results should continue to improve in 2006, helped by sound demand conditions and sustained focus on cost and capacity control. Nonetheless, the ratings will remain constrained by challenging business conditions, including volatile fuel prices, intense competition among airlines, and challenging employee relations, which maintain uncertainty in labour costs and productivity. In addition, ACE’s pension shortfall remains sizeable, while adjusted debt is expected to grow steadily in the years ahead due mainly to aircraft acquisitions, which is likely to considerably slow future improvement in ACE’s and Air Canada’s financial profiles.

Note:
Issuer ratings apply to all general senior unsecured obligations of the issuer in question.