Load factors just clues to the bottom line

[Lazionic]

Load factors just clues to the bottom line

Air Canada's surging numbers largely a result of reduced passenger capacityBy BRENT JANGTRANSPORTATION REPORTER

Tuesday, December 14, 2004 -The Globe and Mail Page B17

To take the pulse of the rejuvenated Air Canada, check its passenger loads.In the first two months after it emerged from bankruptcy protection on Sept. 30, the carrier has enjoyed strong load factors -- the proportion of available seats filled with paying passengers.

Even before its emergence from protection from creditors, Air Canada had been on a roll. November marked the eighth consecutive month that Air Canada has posted a new monthly high for load factor.

Its main rival, WestJet Airlines Ltd., however, is having trouble filling its seats.Montreal-based Air Canada had a load factor of 74.6 per cent in November, compared with Calgary-based WestJet's load factor of 58.5 per cent.WestJet blamed prolonged computer problems for depressing November's on-line bookings as it expanded amid high oil prices and cutthroat competition against Air Canada and Jetsgo Corp.

Equity analysts say that investors looking to play the momentum game still have time for a ride up on Air Canada's new publicly traded parent company, ACE Aviation Holdings Inc.ACE tightens capacityLoad factor isn't the best indicator of an airline's financial health because it doesn't reveal how many of those paying passengers got rock-bottom fares.

But until Air Canada and WestJet release their year-end results, likely in February, load factor provides a glimpse into how well the carriers are managing their daily operations.

In the jargon of the airline industry, load factor is the result of taking revenue passenger miles (RPMs) and dividing it by available seat miles (ASMs), or capacity.

Air Canada has been tightening its capacity and increasing its revenue passenger miles -- the number of paid seats multiplied by the distance flown.

By contrast, expansion-minded WestJet's capacity has surged, but its ability to fill seats has fallen short of expectations.In November, Air Canada's capacity fell 3.6 per cent but its RPMs rose 3.9 per cent, while WestJet's capacity soared 31 per cent but its RPMs couldn't keep pace, climbing 19.4 per cent.

"What will be important for Air Canada is to remain disciplined in terms of how it manages its capacity to make sure load factors remain strong," said Eric Beauchemin, a debt analyst at Dominion Bond Rating Service (DBRS).

Owning just one?ACE class B shares have been star performers since they began trading on the Toronto Stock Exchange on Oct. 4, when they closed at $24.80. They rose $1.38 to finish at $34.25 yesterday, a record for both the closing and the intraday high. WestJet shares have been in a tailspin since reaching a record high of $21.13 in January.

They rose 44 cents to $12.25 yesterday.In this tale of two airlines, fortunes have been reversed in relatively short order.

Air Canada filed for bankruptcy protection in April, 2003, and at the time, it seemed that WestJet could do no wrong, having grown steadily since being founded in 1996.

Times have changed, of course. One Toronto-based portfolio manager, whose fund owns ACE shares, said that the momentum has been in the ACE camp ever since Air Canada emerged from bankruptcy protection 10 weeks ago.

And increasingly, if a manager wants to have a Canadian airline in a fund, the addition will likely be ACE and not WestJet, he said.Awaiting index additionACE's $3.4-billion stock market value easily eclipses WestJet's $1.5-billion market capitalization.

WestJet already is on the S&P/TSX composite index, and it's only a matter of time before ACE is added to that benchmark of Canadian equities.

When ACE does get the nod, that would generate more positive buzz as fund managers who track the index buy ACE shares.Wild cards remain, such as high jet fuel prices and fierce fare wars.

Air Canada must "avoid competing with low-cost carriers through capacity by flooding the market with excess seats," Mr. Beauchemin said.DBRS offers a cautionary note, stressing that demand for air travel is highly sensitive to economic downturns and high oil prices.

Last week, the rating firm released a report on ACE's debt, giving it a single-B rating, also known as speculative grade or junk.

Many former creditors and distressed debt holders, who received less than 17 cents on the dollar on money owed to them by Air Canada, have hung onto their ACE shares.

Just when to take profits is the big question now.For clues, look at two equity analysts who recently boosted their one-year target prices on ACE.Claude Proulx, an analyst at BMO Nesbitt Burns Inc., raised his target price to $40 from $34, while Raymond James Ltd. analyst Ben Cherniavsky increased his target to $40 from $25.

Mr. Proulx and Mr. Cherniavsky forecast that ACE is on track to meet its EBITDAR (earnings before interest, taxes, depreciation, amortization and aircraft rent) goal next year of at least $1.6-billion.They also envisage that ACE will post a profit in 2005.

Mr. Proulx predicts $5 a share in profit while Mr. Cherniavsky calls for $3.75.Such talk of next year's profit being at least $378-million is a big change. Air Canada, which is headed for a full-year loss exceeding $915-million, hasn't posted an annual profit since 1999.

© Copyright 2004 Bell Globemedia Publishing Inc. All Rights Reserved.

[Guest neo]

"Load factors just clues to the bottom line..."

Dude is a freakin' genius. Someone get me a stock broker. I'm gonna bet the farm!

neo