Air Canada marks successful turnaround, still a long way to go

The carrier posted an EBITDAR of CAD333 million, a 147% jump from 2Q-2009. The results were in line with guidance issued last month, said the company.

Solid progress on cost reduction

"We have made solid progress on cost transformation programme (CTP) initiatives over the past quarter and, as a result, we have increased our cost-reduction targets for 2010 from CAD270 million to CAD300 million," said President and Chief Executive Officer, Calin Rovinescu. "Our target for the end of 2011 has also been increased to CAD530 million from CAD500 million, on a run-rate basis. We have already achieved, on a run-rate basis, CAD275 million of the CAD300 million CTP target for 2010 and CAD300 million of the overall CAD530 million CTP target for the end of 2011, making it one of our most important priorities."

The net loss included a CAD54 million in interest expense relating to the company's secured term credit facility, and foreign exchange losses of CAD156 million. In the equivalent period last year, Air Canada's net income was boosted by forex gain of CAD355 million.

The company achieved what it called "sustainable cost reductions" despite the fact operating expenses increased CAD107 million or 4% from the second quarter of 2009, owing to fuel price increases, capacity growth and increasing pension and commission expenses resulting in higher premium sales. A strong Canadian dollar partially offset these increases. The company estimated actual operating expenses declined by CAD151 million from a year ago, largely on reduced maintenance expenses. Even so, it cited its CTP initiatives for reducing expenses including wages and salaries, capacity purchase fees with Jazz, airport user fees, information technology, terminal handling, advertising and promotion, and other operating expenses.

Unit cost declined 0.9% compared to the second quarter of 2009. Ex fuel, CASM decreased 4.2% year on year largely owing to the favourable impact of a stronger Canadian dollar on foreign currency denominated operating expenses (mainly USD). Partly offsetting these decreases were increases in employee benefits and commission expenses.

And revenue strengthening well

"I am pleased to report stronger second quarter results that underscore the progress we've made on maximising revenues and reducing costs, and also reflect encouraging signs of a gradual economic recovery," said Mr Rovinescu. "Although we are not at 2008 levels, premium revenue and yields have increased over the past two quarters. While there remains much work to do, over the past 15 months, we have met many of the objectives we set out to achieve - namely to build adequate liquidity and achieve strong revenue management and better cost control while expanding our international network." He cited competition from Porter in the Eastern triangle which was not there before.

As with its US counterparts, Mr Rovinescu noted the company's primary focus is not only on expanding its international network but on rolling out revenue initiatives and increasing premium passenger numbers. Air Canada is also focused on leveraging its Toronto hub as a global transfer point for international travellers en route to domestic, US trans-border and international destinations.

Toronto is "under-exploited"

"Toronto is an under-exploited opportunity," he said. "If you draw a catchment around Toronto most of the population base is in the US. Toronto ought to be competitive with Chicago, Newark, JFK, Detroit - really anything in the Northeast US. It is not even up to full fighting capacity and we expect more good things coming out of it."

Passenger revenues increased CAD256 million or 12% from the second quarter of 2009 on an 8.7% growth in traffic and a 3.3% improvement in yield. The company cited a strengthening economy, combined with revenue generation initiatives attributable to Air Canada's CTP for the improved results.

Capacity increases bear fruit, especially the Pacific

Capacity growth of 5.3% in the second quarter of 2010, driven by increased international and US trans-border flying was achieved through increased aircraft utilisation, something the company has largely maxed-out for now.

"Asian and European markets in which we added capacity are performing well, led by our Pacific routes which recorded a 37% increase in revenue from the previous year's quarter on strong traffic and yield growth," said Mr Rovinescu. "Much of this international traffic growth can be attributed to our added focus on capturing connecting traffic at our Toronto and other Canadian hubs, as well as to our participation in the A++ trans-Atlantic joint venture, which is in the process of being finalised."

PRASM also up 6.6%, but hurt by currency impact; volcanic ash cost CAD20 million

Passenger revenue per available seat mile (RASM) increased 6.6% from the second quarter of 2009, on both yield growth of 3.3% and a passenger load factor improvement of 2.6 percentage points. When queried why the RASM improvement did not match the double-digit improvements of its US brethren, Mr Rovinescu explained the US had a far deeper decline in 2009 and thus US airlines were digging themselves out from a deeper hole.

Air Canada estimates that a stronger Canadian dollar in the second quarter of 2010 versus the second quarter of 2009 accounted for a decrease of CAD102 million in second quarter 2010 foreign currency passenger revenues, on a system-wide basis, and reduced the RASM improvement by 4.8 percentage points. Excluding the foreign exchange impact, Air Canada estimates that system RASM would have increased by 11.4%.

Premium cabin revenue growth accounted for almost half the total year-on-year increase in system passenger revenues in the second quarter of 2010, driven by a 15.8% increase in traffic and a 12.9% yield improvement. Mr Rovinescu cited revenue initiatives improving revenue quality for the improvement premium-cabin yield. However, Air Canada's premium cabin revenues and yield remain below 2Q-2008 levels. RASM in the premium cabin increased 24.1% year-on-year but still remained below 2Q-2008 and was actually down 2.9%. However, said the airline, this was a sequential improvement from the first quarter, when premium RASM declined 5.2% versus the first quarter of 2008.

The volcanic ash airspace closures in mid-April cost the carrier about CAD20 million on its operating income for the quarter.

Balance sheet looking stronger

At June 30, 2010, Air Canada's cash, cash equivalents and short-term investments amounted to CAD1.815 billion and represented almost 18% of 12-month trailing operating revenues. At the end of July, Air Canada's cash balances amounted to approximately CAD1.8 billion. That was boosted 3-Aug-2010 with the completion of a private offering of two series of senior secured notes, consisting of USD600 million senior secured first lien notes due 2015 and CAD300 million senior secured first lien notes due 2015.

On the same day, Air Canada also completed a private offering of USD200 million senior secured second lien notes due 2016. The company received net proceeds of CAD1.075 billion, after deduction of fees, expenses and discounts, using about CAD729 million to repay all of the outstanding debt under its secured term credit facility.

"By accessing both US and Canadian capital markets, we now have current liquidity levels over CAD2 billion, exceeding our previously stated liquidity target of 15% of 12-month trailing operating revenues," said Mr Rovinescu, later adding it was important to take advantage of the opening credit markets now.

"These achievements reflect the on-going transformation underway at Air Canada," he said. They are the result of a tremendous team effort on the part of the people of Air Canada. So far we've accomplished much of what we set out to do - together, we are building a strong and financially sustainable Air Canada that we can all be proud of."

Guidance: full year capacity to rise 6-7.5% and unit costs to fall 3.5-4.5%

Air Canada's cost initiatives are allowing it to increase capacity while cutting costs. The carrier plans to increase its full year 2010 system capacity by 6-7.5% and plans to increase full year 2010 domestic ASM capacity by up to 1.0%, from the full-year 2009 levels by greater fleet utilisation. Air Canada expects its full year 2010 CASM, excluding fuel expense, to decline from the full year 2009 level by 3.5-4.5%. For the third quarter of 2010, Air Canada plans to increase its system ASM capacity by 7-8% year on year and expects CASM, excluding fuel expense, to decrease from the third quarter of 2009 level by 4.5-5.5%.

Billy Bishop startup coming soon - but no slots or schedule yet

Capacity increases will include its proposed service at Toronto's downtown Billy Bishop Airport. It is in negotiations with the Toronto Port Authority for slot assignments but Mr Rovinescu expects to have a "solid operation" at Billy Bishop. The carrier has yet to announce the start-up of the much contested service, or the schedule but it remains a priority to start service quickly.

Last month, federal courts dismissed the latest suits filed by Air Canada in trying to gain better access to the downtown airport. Since 2006, five legal proceedings have been launched either through Air Canada or Jazz. Three were abandoned by the Porter rivals with the federal court dismissing two others in July challenging the disparity in the number of slots awarded to Porter versus Air Canada - which has since been ordered to pay CAD600,000 in legal costs related to the actions.

While Porter was awarded 44 of the 90 new slots at the airport, Air Canada gained 30 and Continental was granted 16. Porter serves Newark from the airport. The awards are expected to clear the way for Jazz to resume service to the airport after a four-year hiatus.

Air Canada Operating Statistics 2Q2010 vs 2Q2009

	Second Quarter
	2010	2009	Change %
Revenue passenger miles (millions) (RPM)	12,896	11,862	8.7
Available seat miles (millions) (ASM)	15,523	14,735	5.3
Passenger load factor %	83.10%	80.5%	2.6 pp
Passenger revenue per RPM (cents)	17.9	17.3	3.3
Passenger revenue per ASM (cents)	14.8	13.9	6.6
Operating revenue per ASM (cents)	16.9	15.8	7.0
Operating expense per ASM ("CASM") (cents)	16.4	16.6	(0.9)
CASM, excluding fuel expense (cents)	12.2	12.7	(4.2)
Average fleet utilization (hours per day)(6)	9.7	9.2	5.4
Average aircraft flight length (miles)(6)	853	837	1.9

Source: Air Canada