Air Canada earns kudos from analysts


Air Canada's cost transformation programme, coupled with its second quarter earnings had analysts congratulating the carrier for a good quarter in which it posted EBITDAR of CAD338 million, up CAD10 million from 2Q2010. Revenues rose 11% to CAD2.9 billion offsetting the 10% increase in expenses to CAD2.8 billion owing to a 46% increase in fuel prices year on year and on a 6.5% increase in capacity with higher aircraft utilisation.

They characterised its progress as impressive and noted its rising margin has not been something US carriers have been able to accomplish. Indeed, US carriers saw a collective drop in net income of 51.5% to USD747 million, despite a nearly 13% increase in revenues to USD34.9 billion. Collectively, the US industry earned USD747 million compared with USD1.5 billion in the second 2010 quarter, a swing of USD803 million largely on rising fuel. Expenses rose USD4.4 billion to USD33.2 billion. Fuel costs alone jumped USD3.2 billion to USD11.4 billion.

Air Canada bested its first half EBITDAR projections of 5% to 14% and expects to increase full-year capacity by 3.5-4.5%, unchanged from its 5-May-2011 guidance. It posted better-than-expected 2Q CASM ex fuel, and is projecting full-year CASM ex fuel to drop between 1-3% from 2010 levels a significant decline from previous guidance of up 2%.

Its new regional service at Toronto City is doing well and the company is already receiving requests to expand to Ottawa and other points. However, it is retaining its current position because it has used up all its slots and would continue to do so given the shuttle-like nature of the operation. However, Continental said it is turning in its Billy Bishop Airport slots which is of keen interest to Air Canada.

CEO Calin Rovinescu pointed to the flight attendants’ recent agreement on its proposed low-cost carrier plans and said he was optimistic it could reach settlements with other unions without incurring further strikes. In addition to the pension headwinds that continue to challenge its results, negotiations with labour groups on pension reform have been difficult and he reported its plan to put new hires on a defined-contribution plan has gone to arbitration.

One of the company's transformation challenges is changing the corporate culture and he characterised it by saying it was like a 75-year-old chasing a 15-year-old. He predicted the new leadership emerging in the future will be much more entrepreneurial and more competitively driven, suggesting it would take the company to the next level. 

He also noted that many legacies around the world were starting low-cost carriers including ANA, JAL, Singapore and Thai Airways but Air Canada must still win pilot approval. Mr Rovinescu was adamant in challenging the disapproval of the Canadian Competition Commissioner for its cross-border joint venture with United Continental.


ASMs will increase 1.5-25% in the third quarter while CASM ex fuel will increase between 1-3% in the quarter. Full-year domestic capacity will rise between -0.5-0.5%, which added a lower projection to its original guidance. Its guidance assumes a continuing recovery of the Canadian economy, not withstanding the troubles south of the border. The Canadian dollar is expected to remain strong at 97 cents per US dollar for the third quarter and 98 cents in the fourth quarter.

It also reported operating income of CAD73 million, a CAD28 million, 11% jump from the CAD47 million posted in the 2010 second quarter.

Strike did not derail profitability

The second quarter report is especially impressive given the three-day strike of call centre and airport customer service agents. The company cited capacity discipline for its strong revenues as well as the CTP which has already earned CAD475 million of the CAD530 million set to be realized this year. In 2010, the CTP achieved annual savings of CAD330 million.

However, rising fuel prompted management to ask management and employees alike to find additional savings that go beyond the CTP in order to keep on its profitability track in view of fuel prices. The company also cited a CAD890 million reduction in net debt to CAD4.3 billion from the end of the Dec-2010 quarter.

It is expecting an CAD800 million in additional operating costs this year owing to fuel, based on 2010 capacity and net of the forex impact. Part of its beyond-the-CTP request will be revenue initiatives such as fare hikes and fuel surcharges where feasible and strict capacity discipline.

Its regional capacity purchase programme costs were up 5% to CAD249 million. It did not break out regional revenues. The company cited increased Jazz/Chorus flying and the launch of its Sky Regional Air Canada Express service at Toronto City airport to Montreal. Executives also said the increased capacity purchase expenses was partially offset by forex on US-currency-denominated Jazz charges accounting for a CAD4 million decline in second quarter CPA expenses.

System passenger revenues jumped 11.7% to CAD2.5 billion on a 6.1% growth passenger numbers and a 5.2% jump in yield to 18.8 cents owing to yield growth in all markets. PRASM rose 4.9% to 15.6 cents.

Regions performing well

Trans-border market revenues rose 20.2% to CAD523 million while the domestic market rose 7.9% to CAD1 billion. Despite the acknowledged over capacity in the trans-Atlantic market and its intentions to grow capacity there, that market posted a revenue gain of 11.5% to CAD546 million. Trans-Pacific was softer, growing only 6.4% to CAD284 million but the carrier reported significant gains in the Chinese market.

Performance metrics for the regions show a 7.9% jump in passenger revenues for the domestic market on a 0.2% drop in capacity and a 0.6% drop in revenue passenger miles. Load factor dropped 0.3% while yield was up 8.4% and RASM up 8%

The trans-border market showed great gains in passenger revenue which were up 20.2% on a 7.8% increase in capacity and a 12.9% increase in RPMs. Load factor increased 3.5% while yield was up 6.4% and RASM up 11.4%.

Atlantic also showed strong gains except in load factor, down 3%, and RASM, down 0.8%. Passenger revenue rose 11.6% on a 12.3% increase in year-on-year capacity and an 8.4% increase in RPMs. Yield was up slightly at 2.7%.

Pacific was weaker with a 6.5% gain in passenger revenues on 7.2% capacity increase and a 5.8% jump in traffic. Load factor dropped 1.1% while yield hardly nudged the needle at 0.4% and RASM dropped 0.8%. 

Cost per available seat mile also rose to 17.2 cents, up 3.8%. It beat its 0.5-1.5% guidance in CASM ex fuel, as that metric made an impressive 3.7% drop to 11.9 cents again on forex gains, higher utilisation and increased stage lengths. Its cost increases were partially offset by a stronger Canadian dollar which reduced operating expenses by CAD64 million in the quarter. It also experienced lower maintenance and labour expenses than forecast.

Its premium cabin experienced 13% traffic gains along with a USD54 million, 11% increase in revenues for the quarter.

It finished the quarter with cash and short-term investments of CAD2.2 billion, 20% of 12-month trailing operating revenues. Free cash flow reached CAD241, dropping CAD54 million year on year owing to pension plans.

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