Air Canada doubles EBITDAR to USD1.3bn in 18-month turnaround

It also recorded earnings before interest, taxes, depreciation, amortization and aircraft rent (EBITDAR) of CAD1.386 billion, up 104% from 2009, setting a record for the Canadian legacy carrier. Operating income improved CAD677 million to CAD361 million, although that was before it took a net reduction of USD46 million provision for cargo investigations prompted by price fixing charges brought by the European Commission, the US Department of Justice and the Competition Bureau of Canada dating back to before the recession.

For the fourth quarter of 2010, Air Canada recorded operating income of CAD85 million (before the cargo set aside) compared with an operating loss of CAD83 million in the fourth quarter of 2009, a CAD168 million improvement. EBITDAR of CAD334 million was up 100% from the previous corresponding period. Air Canada reported net income of USD134 million in the fourth quarter of 2010 which included foreign exchange gains of USD111 million compared with a net loss of USD56 million in the fourth quarter of 2009 which included foreign exchange gains of USD108 million.

"I am extremely pleased to report these very strong results for the fourth quarter and full year 2010, including the highest EBITDAR in Air Canada's history," said President and Chief Executive Officer Calin Rovinescu. "We had a great year, especially considering where we were just one year ago, and I am very proud of the company's achievements. In recognition of [employee contributions for creating a stronger Air Canada and our strong performance] in 2010, our Board of Directors approved a special employee equity grant of CAD14 million to all eligible employees worldwide, where permitted, in addition to the CAD13 million in cash payments we are awarding to Canadian employees according to the terms of the 2009 arrangements. It is my desire to continue to promote and develop a focussed, performance-based organisation where success will breed further success."

The special recognition was in addition to the CAD28 million for achieving monthly customer satisfaction and on-time performance objectives, part of the airline's Profit Sharing Plan. He reported a 20% increase in employee engagement over the past two years.

In mid-2009, Air Canada launched its Cost Transformation Programme to implement both revenue and cost initiatives through contract and operating process improvements as well as productivity gains. For 2010, the company delivered annual benefits of CAD330 million, CAD30 million more than its CAD300 million CTP target for 2010, the result of having completed planned 2011 CTP initiatives earlier than expected. Air Canada has also achieved CAD400 million of its overall CTP target of CAD530 million for the end of 2011, on a run-rate basis.

"Our network strategy to add capacity through more efficient aircraft utilization was successful," Mr Rovinescu said. "Our full-year load factor of 81.7% was the highest in the airline's history. All new routes performed well as we leveraged our international network via our Canadian hubs, in cooperation with our Star Alliance and A++ joint venture partners. Cost transformation is on track, and fourth quarter premium revenues grew 21% from the previous year, the fourth consecutive quarter of improvement in the quality of revenue."

He indicated the company was aware that the increases in capacity was a risk but said it proved out in capturing more traffic. trans-Atlantic was up 6.7%. Passenger revenue on the Pacific was up 41% and 14% on the trans-Atlantic. The system load factor increase of 1%, combined with the yield increases led to the 6+% RASM increase.

The company is remaining disciplined with its growth focused on increasing US connecting traffic over Canadian hubs, growing Sixth Freedom traffic and otherwise leveraging its position as the largest foreign carrier to serve the US. It also pointed to the improvements done by the airport authority at its Toronto hub, saying they were paying dividends with the number of US-originating passengers more than double last year.

Excluding a USD40 million favourable adjustment recorded in the fourth quarter of 2010, system passenger revenues increased 11.2% from the fourth quarter of 2009 to CAD309 million on an 8.0% growth in traffic to 11.7 billion revenue passenger miles and a 2.8% improvement in yield. System capacity increased 7.8% to 14.9 billion from the fourth quarter of 2009 supported by a 9.0% increase in aircraft utilization to 9.4 hours. For the year, utilization increase 6.5% to 9.8 hours with utilization accounting for all capacity increases.

Premium cabin revenues grew USD88 million or almost 21% from the same quarter in 2009, on a 16.9% increase in traffic and a 2.2% improvement in yield. Passenger revenue per available seat mile (RASM) increased 3.0% to 15.1 cents from the fourth quarter of 2009 mainly on the yield growth. For the year, RASM jumped 3.6% to 14.8 cents. Excluding the impact of a stronger Canadian dollar versus the fourth quarter of 2009, RASM increased 4.5% year on year.

In addition to fuel, the challenges for 2011 include the expiration of labor contracts in the first half. Analysts pointed out that unions are looking for large wage hikes, but executives would not take the bait and refused to comment.

"We've been engaged in productive dialogue and have shared information with our unions on a regular basis for the past two years," said Mr Rovinescu in his prepared remarks. "In 2010, we have seen first-hand the results we can achieve when we work together. I believe we have a good foundation to find common ground and achieve a satisfactory outcome."

He noted that the economy, despite encouraging signs, was still fragile and followed his US counterparts in saying that adjustments in pricing and capacity would be used to offset fuel increases.

Another challenge is finally gaining access to Toronto City Island Airport. Company executives said they were prepared to start up at any time, having acquired the Bombardier Q400 aircraft and contracted with Sky Regional Airlines to launch 15 daily flights. However, they have not been able to reach terms with the City Centre Terminal Corp (CCTC) owned by Porter Airlines owner Robert DeLuce on airport space pushing back its planned February start date. Air Canada and Continental were granted access with 30 and 15 daily flights per day, respectively, as Porter grew its position at the airport adding 44 slots to the 112 it already has.

Air Canada was blocked from developing its own terminal by the Toronto Port Authority which cited its exclusive agreement with CCTC prohibiting new carriers from using any but the new terminal.

The cost side

Partially offsetting cost increases was the impact of a stronger Canadian dollar on foreign currency denominated expenses (which reduced operating expenses by approximately CAD56 million when compared to the fourth quarter of 2009), a reduction in aircraft maintenance expense and, to a lesser extent, a decrease in food, beverages and supplies expense.

Unit cost in the fourth quarter of 2010, as measured by operating expense per available seat mile (CASM), decreased 3.4 per cent to to 17 cents compared to the fourth quarter of 2009. For the year, CASM declined 3.1% to 16.4 cents. Excluding fuel expense, CASM declined 4.1% year on year. The company cited the stronger Canadian dollar, capacity growth, CTP initiatives, increasing aircraft utilization and average stage length for the CASM declines.

Operating expenses increased 4% in 4Q-2010 to compared with 4Q-2009 on the 7.8% capacity growth, coupled with higher fuel and wages. CFO Michael Rousseau also said that its greater use of distribution systems resulted in higher costs for commissions, information technology and distribution costs. The company had planned to begin developing a new reservation system but tabled the project after it reach its crisis. It is tweaking its current system having deferred the development of a new reservations system indefinately.

Interestingly, executives said it has been able to achieve what American Airlines has been trying to achieve in its new contract with Travelport, announced in January. Chief Commercial Officer Benjamin Smith indicated the company is watching the global distribution system (GDS) spat.

"It addresses a lot of the issues that concerned us," he told analysts. "We have a direct link from Travelport into our booking system like all GDSs do. That is not something Sabre is interested in doing. We definitely want to move the same way American is moving but we have to see what happens in the US first."

The airline and Travelport, which operates Apollo, Galileo and Worldspan global distribution systems (GDS), signed a new multi-year agreement. Through the agreement, Air Canada provides all Travelport travel agency customers, both offline and online, access to all fares, seat availability, fare families and optional services offered by Air Canada.

The new agreement calls for Travelport to enhance Travelport Agencia -- a desktop tool specifically designed for the Canadian market -- through which it aggregates traditional content and optional sources through multiple sources, including the Travelport's interface with Air Canada's ac2u API -- in the first half of 2011.

Calling the Air Canada agreement a model, Travelport President for the Americas Travis Christ said the system answers airline issues on merchandising, optional ancillary sales and product differentiation.

"Working collaboratively with Air Canada we have developed an industry-leading, end-to-end solution capable of merchandizing Air Canada's content along with the aggregation of the GDS content, saving agents time when pricing, shopping and booking," he said. "Integration of this content into a single screen is an industry first and allows the agent to offer the traveler a fully informed travel choice. Travelport and Air Canada have developed the means to achieve full content for all subscribers, merchandising Air Canada's full line of products and services through APIs and there is no bypass of either the GDS or of our travel agency partners."

Earlier last week, Air Canada extended its Amadeus contract in a further bid to strengthen its e-commerce strategy. The company said the extension of the six-year-old contract offers the benefit if Amadeus' e-Retail Booking Engine, web design services and innovative Flex Pricer faring solution. Under the terms of the extension, Air Canada will continue what it calls one of the world's most innovative online strategies that include flexible travel date searches, 'a la carte' ancillary services, third party ancillary products, such as insurance, and online services including re-booking and upgrades. It continues offering more innovative pricing and customized travel options on its own website.

At December 31, 2010, Air Canada's cash, cash equivalents and short-term investments amounted to USD2.192 billion which represented 20% of 2010 operating revenues.

Outlook

Air Canada plans to increase its full-year 2011 system capacity by 5.5-6.5% while increasing domestic capacity only 1.5%, again by increasing utilization rather than adding shells. It is taking two 747s in the second quarter, but they are to replace 767s. The company expects its full-year 2011 CASM, excluding fuel expense, to decrease by up to 2.0 per cent from the full year 2010 level.

For the first quarter of 2011, it plans to increase its system ASM capacity by 7.5-8.5% compared with the first quarter of 2010 and expects a decline in CASM, ex fuel to decline from the first quarter of 2010 by 4.0-5.0%.

Air Canada's outlook assumes that the North American economy will continue to recover in 2011. In addition, Air Canada expects that the Canadian dollar will trade, on average, at parity with the US dollar in the first quarter of 2011 and CAD1.02 per US dollar for the full-year 2011 and that the price of fuel will average 76 cents per litre for the first quarter of 2011 and 80 cents per litre for the full-year 2011.