Canada's Minister of Labour Lisa Raitt issued (08-Mar-2012) a referral pursuant to the Canada Labour Code, preventing both the International Association of Machinists and Aerospace Workers (IAMAW) from commencing a strike and Air Canada from locking out pilots, originally scheduled for 12-Mar-2012. Air Canada previously announced plans to lock out its pilots after the Air Canada Pilots Association (ACPA) failed to accept the carrier's recent offer regarding contract negotiations which commenced 18 months ago. Meanwhile, WestJet announced plans to add extra flights to accommodate passengers that will be otherwise stranded in the event of strike or lockout at Air Canada. [more - original PR - WestJet] [more - original PR - Air Canada] [more - original PR - Canadian Government] [more - original PR - ACPA]
Air Canada and IAMAW stopped from commencing strikes and lockouts
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WestJet’s plans for a ULCC subsidiary do not have a clear goal
Canada’s first LCC WestJet has always been vocal about competing with potential startup ULCCs ever since the current crop of aspiring ultra low cost airlines made their ambitions known, starting in late 2013. Since that time, only one of three would be ULCC competitors, NewLeaf Travel, has actually launched operations, and represents a fraction of Canada’s domestic market.
WestJet has pledged to match the pricing levels of the new ULCC competition, and in 2017 has driven NewLeaf from proposed transborder markets even before the startup launched services. The move illustrated WestJet’s ability to leverage its scale to create significant pressure on the new crop of competitors.
But now WestJet is going one step further by opting to create its own distinct ULCC at a time when it is still digesting long haul international growth and continued expansion by its regional subsidiary, Encore. The airline is also working to restore ROIC to historical levels and faces a unionisation vote by its pilots for the second time in two years. All those factors make WestJet’s decision to add more complexity to its operations somewhat puzzling.
Air Canada’s 1Q2017 margin pressure and lower ROIC targets trigger market trepidation
Canada’s largest airline, Air Canada, is working through a multi year effort to grow its international footprint and cut costs. The company’s strategy has entailed higher than average capacity growth compared with its North American global network airline peers. Its long haul push has resulted in growing stage lengths and yield pressure; but Air Canada’s EBITDAR margin, the preferred metric in which the company measures its performance, has remained well within its established targets.
The company’s capacity should continue to expand in the double digit range during 2017 as it adds more Boeing 787 widebody jets and plans additional new route introductions. Its stage length should continue to grow in 2017, which means yields will remain under pressure. Air Canada’s capacity growth should moderate in 2018 as several initiatives it has undertaken during the last few years reach maturity.
Air Canada has been reasonably successful in growing its valuation during its large scale capacity growth, but a downward revision in ROIC targets and warnings of lower EBITDAR margins for 1Q2017 are triggering some pressure on its stock price. For now, markets are not quite reassured by Air Canada’s pledges that it will still meet its stated annual EBITDAR margins in 2017.