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Air Canada yields declines as capacity grows, with a focus on strategy instead of short term profits

Analysis

Similar to other North American airlines, Air Canada finds itself in a position of defending its business strategy as capacity increases and unit revenues and yields fall. The company is stressing that it has evolved to a point where it can focus on profits, margin expansion and ROIC. At the same time it is trumpeting progress it has made in meeting or exceeding certain financial targets, and reiterating a recent decision to raise its performance goals in some of those metrics.

Air Canada's yields and unit revenue began their downward trajectory earlier than other North American airlines that have endured a sagging performance in those metrics throughout 2015 due to currency appreciation and lower fuel surcharges in many international geographies. Air Canada's slide started in 2014 as the airline increased its mix of leisure passengers and grew its stage length, pillars of its plan to achieve sustainable profits.

Those same factors along with surcharge pressure have driven Air Canada's unit revenues and yields down for 1H2015. Even as the airline states that its margin expansion will continue, it is not clear if the markets have totally shaken off being spooked by the declines in certain metrics. However, Air Canada does have the benefit of having an increasing stock price during the last year when its yields and unit revenues have trended down.

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