Air Canada posts loss in 3Q2011

Analysts congratulated the company on both a strong third quarter performance as well as the early achievement of savings from its Cost Transformation Program. While it has reached its CAD530 million goal, it is continuing to squeeze out cost savings but would not provide any targeted goals for the future. However, CFO Mike Rousseau said the company was working on 15-20 additional projects centred on productivity, improving turn times, airport check in and gate processes as well as reducing credit card fees, all for delivery in 2012 and beyond. He noted that a 10- to 15-minute reduction in turn time equals two additional aircraft.

LCC unit in the works

Interestingly, although management continues to hail improved labour relations, only one of its unions has ratified collective bargaining agreements and are now in various stages of negotiations or government mediation. The labour dissatisfaction resulted in a threatened flight attendant strike as well as a strike by in call centre and customer service agents. 

On the flight attendants, the situation has been referred to the government. The two parties reached an agreement on 20-Oct-2011 on a final and binding process to resolve outstanding issues, setting terms of the agreement renewal set to be issued 07-Nov-2011.

Air Canada pilots also rejected a tentative agreement. The airline filed for appointment of a federal conciliator in the dispute on 28-Oct-2011 to renew talks and get the parties back to the bargaining table.

The airline’s call centre and airport customer service agents finally ratified their agreement after a three-day strike.

The company is in negotiations with crew schedulers, mechanics, baggage handlers, cargo agents and finance and clerical staff. In addition it is also negotiating with flight dispatchers following a failed ratification vote.

Analysts suggested labour problems related to the company’s efforts to start a low-cost subsidiary. CEO Calin Rovenescu reiterated on how important the LCC plans were to the long-term viability and profitability of the company. However, he said that there was no indication Air Canada could not survive as a strong, stand-alone carrier.

“While there is still a lot of success in the premium brand and we have done a good job in winning in that space, there is a massive market growing in the LCC space, especially in the emerging economies,” he said. “We can’t leave that aside based on the brand and customer we have now. We will look at different models to see what may work best but the success of the LCC model can’t be denied.

“We have also seen what powerful premium legacies such as Singapore Airlines, are planning,” he continued. “It finds it necessary to capture the growth through a low-cost carrier. You see the same with ANA, Japan Airlines and Qantas. We would be putting our heads in the sand if we said that was a segment we didn’t need to pay attention to. This is not a question of subsidising the legacy. Subsidisation doesn’t work long term. This is an attractive part of the market that we ought to be capturing and something we will continue to pursue.”

Fuel rise hurt results

The airline incurred a 47% increase in fuel prices year on year, according to Mr Rovenescu, who noted operating profit resulted from the carriers disciplined approach to capacity management and asset deployment. That resulted in a record, 85.8% load factor for the quarter.

For the fourth quarter, the company plans a 1.5-2.5% increase in system capacity year on year and expects the full year system capacity to increase 4-4.5% year on year ahead of the previous 3.5-4.5% guidance on increased aircraft utilisation.

Domestic capacity for the year is expected to remain fairly flat between -0.5%-0.5% year on year, unchanged from previous guidance. Capacity in 2012 will be flat to up 1.5%.

Fourth quarter cost per available seat mile (CASM) ex fuel is expected to increase 0.5-1.5% year on year and decline 2-3% for the full year. It is facing a maintenance headwind and expects maintenance to increase 4-5% for the full year, more than the decline of -1% to 3% projected earlier.

Air Canada expects the Canadian economy to continue recovery and assumed 1.5-2% GDP growth in 2012.

Mr Rovenescu said the company would continue leveraging its international network while retaining disciplined growth and improving cost structure by addressing the pension deficit and increasing revenue and focus on premium class passengers and products.

Executives said the cost of capital in the third quarter was in the 7.5-10% on a trailing twelve month average.

Results

Revenues rose 7.9% to CAD3.2 billion in the quarter year on year on higher traffic growth and yields in all markets, according to Mr Rousseau, who reported a 3.8% growth in traffic to 16.1 billion and a 3.8% yield increase to 18.1 cents which was experienced systemwide.

He told analysts the premium cabin revenue increased 7.2% on a 5.8% increase in traffic and a 1.3% increase in yield. Unit premium revenue increased 6.2% in all markets except the Pacific where increased capacity and slower Japan recovery from the earthquake put pressure on premium cabin yields. However, Mr Rousseau also reported the CAD10-15 million hit expected from the disaster is actually about CAD5 million on stronger yen.

Pacific RASM was up 3.6% on a 4.2% increase in yield driven by an 11.4% growth in capacity to China. Japan showed steady improvement with double-digit RASM growth in the third quarter on better yield and a strong yen.

On a 5.3% increase in capacity, the unit revenue to Australia, Mexico, South America and the Caribbean was up over 11% driven by a 10.4% improvement in yield, reflecting growth on all major services, Specifically Sydney and South America experienced double-digit yield growth while yield and load factor in leisure markets showed strong improvement resulting in strong RASM growth year on year.

System-wide, unit revenue was up 5.1% on a 3.8% increase in yield on increased fares and fuel charges despite a CAD18 million headwind from foreign exchange.

Its domestic system delivered solid RASM growth, up 4.3% on a 2.4% increase in yield and a 1.5-point increase in passenger load factor. These were driven by price initiatives and a more favorable fare mix. It’s best performance came from regional routes in central and western Canada capacity into the maritimes where capacity was down 2% year on year.

Routes linking Toronto and Montreal suffered from capacity increases as WestJet expanded into the market and Air Canada launched service between Toronto and Montreal from Billy Bishop airport. Mr Rovenescu expressed disappointment that more slots went to Porter despite the fact it operated the vast majority of slots at Billy Bishop.

“We are speaking to the airport authority to understand their thinking better and whether this is an indication of future decisions,” he told analysts.

See related story: Porter Airlines win surprisingly shuts Air Canada out of downtown Toronto airport slots award

However, this was offset by strong US trans-border unit revenue increases of 8% on strong traffic benefiting from Virgin America’s abandonment of California-Toronto. Yield increases of 3.4% reflected an increase in all major trans-border services. US short-haul traffic to and from Eastern Canada turned in the best results as US load factor rose 3.5 points reflecting growth of sixth-freedom traffic flows from the US.

Executives said there is no sign corporate customers are cutting back, although banking is softening, as has been indicated by the airline’s US peers. They noted the Canadian economy was strong than that in the US meaning it was less damaged by the turn down.

Atlantic RASM was up 4.3% on strong North American demand. Fuel surcharges partially offset high fuel and gains in the premium cabin. Yield increase 38% on the Atlantic. Executives attributed the increase to the first year in the Star Alliance A++ programme since the alliance was not selling on a metal neutral basis in which Lufthansa provides lift in Europe and United provides it to the US. It has also gained access to Lufthansa’s corporate customers giving it increased reach into interior Europe. Finally, Canadian hubs are given equal footing with US hubs for itineraries between Asia and Europe.

Echoing his US peers, Mr Rousseau reported a decline in cargo on a declining economy and a shift from air to sea transport.

Other revenue was up CAD3 million or 2% including a CAD10 million increase in ground package revenue from Air Canada vacations. That was partially offset by a decline in aircraft sublease revenue.

Ancillary revenue from passenger services was up 16% per passenger over the first nine months of 2010 on higher revenues from higher bag fees and change fees as well as higher upgrade and seat-selection fees.

Higher fares and fuel surcharges offset high fuel which was also helped by increased premium traffic.

Passenger revenue per available seat mile (RASM) jumped 5.1% to 15.5 cents year on year resulting from a 1.1-point growth in load factor to 85.8% as well as growth in yields.

Expenses rise

Expenses also rose, at a rate of 9% in the quarter on a 47% increase in fuel prices and on a system capacity growth. This was partially offset by favourable foreign exchange on the continuing strength of the Canadian dollar resulting an operating expense decline of CAD96 million year on year.

Unit costs in the quarter increased 6.6% year on year to 15.8 cents but cost per available seat mile (CASM) ex fuel declined 0.4% year on year to 10.8 cents on the stronger dollar, capacity growth, increased aircraft utilisation and the CTP program. The company beat its 1-2% projected increase in CASM ex fuel owing to lower maintenance expense than expected in addition to wage, salaries and benefits as well as higher average stage length.

Fuel represents 32% of operating expenses, rising 34% in the quarter or CAD242  million

Capacity purchase expenses rose CAD4 million, up 2% on increased rates and flying for Jazz and its Billy Bishop services. these were offset from favourable forex and a CAD7 million charge in Q32010.

CASM ex fuel for the full year 2011 are expected to be down 2-3% and .5-1.5% in the fourth quarter.

Air Canada ended the quarter with CAD2.1 billion in cash, cash equivalents and short-term investments, representing 19% of trailing-twelve-month (TTM)revenues. Free cash flow totaled CAD4 million declined CAD108 million year on year on a decline in net cash from operations.

Total debt and finance lease obligations reached CAD4.7 billion, declining CAD116 million from the end of 2010 on debt repayment totaling CAD705 million offset by the stronger dollar. Adjusted net debt at the end of the quarter was CAD4.6 billion, up CAD283 million from the June quarter on foreign exchange. However, adjusted net debt declined CAD493 million year-on-year.