Air Canada Has Loss In First Quarter Due To Looney Plunge

[Kip Powick]

Torstar Article

http://www.thestar.com/business/2014/05/15/loonie_drags_air_canada_down_to_firstquarter_loss_of_341m.html

[Seeker]

Hey, Kip, you gotta spin it....

- improved EBITAR!

- improved revenue!

- increased liquidity (by ($500 million)!

- reduced CASM!

All in all - good news.

[dagger]

Basically, a year over year reduction in the traditional Q1 loss. Last year ended up profitable overall, so the airline is on track to do likewise, even better, this year.

"Moreover, in order to improve the economics of our standard Boeing 777 long-haul fleet and to provide customers with a consistent product to our new Boeing 787 Dreamliners, we are planning on converting 12 Boeing 777-300ER and six Boeing 777-200LR aircraft into a more competitive configuration, adding a much desired premium economy cabin and refurbishing the International Business Class cabin to the new Boeing 787 state-of-the-art standards. The reconfiguration is designed to both lower unit costs and to allow us to compete more effectively with a harmonized product offering across our flagship international fleet. The reconfiguration project is planned to start in late 2015 and be completed in the second half of 2016.

In the first quarter of 2014, Air Canada recorded an operating loss of $62 million compared to an operating loss of$106 million in the first quarter of 2013, an improvement of $44 million.Air Canada's adjusted cost per available seat mile (adjusted CASM⁽¹⁾), which excludes fuel expense, the cost of ground packages at Air Canada Vacations and unusual items, decreased 2.5 per cent compared to the first quarter of 2013. The 2.5 per cent reduction in adjusted CASM was in line with the adjusted CASM decrease of 2.0 to 2.5 per cent projected in Air Canada's news release dated April 3, 2014.

Free cash flow⁽¹⁾ of $34 million declined $113 million from the same quarter in 2013. While operating cash flows improved year-over year, free cash flow was impacted by the addition of the fifth and final Boeing 777-300ER aircraft delivered in February 2014.

For the 12 months ended March 31, 2014, return on invested capital (ROIC ⁽¹⁾) was 10.7 per cent versus 8.0 per cent at March 31, 2013. Air Canada's goal is to achieve a sustainable ROIC of 10 to 13 per cent by 2015.

Current Outlook

For the second quarter of 2014, Air Canada expects its system ASM capacity, as measured by available seat miles (ASMs), to increase in the range of 7.5 to 8.5 per cent when compared to the second quarter of 2013.

Air Canada continues to expect its full year 2014 system ASM capacity to increase in the range of 6.5 to 8.0 per cent and its full year domestic ASM capacity to increase in the range of 3.0 to 4.0 per cent when compared to 2013. The domestic capacity growth will be primarily on transcontinental services. The projected system capacity increase will be achieved at a unit cost which is below historical levels.

For the second quarter of 2014, Air Canada expects adjusted CASM to decrease in the range of 3.5 to 4.5 per cent when compared to the second quarter of 2013.

For the full year 2014, Air Canada now expects adjusted CASM to decrease in the range of 3.0 to 4.0 per cent from the full year 2013 (as opposed to the 2.5 to 3.5 per cent decrease projected in Air Canada's news release dated April 3, 2014). This expected improvement is largely due to lower aircraft maintenance and depreciation, amortization and impairment expenses than previously projected.

Had these initiatives been implemented today with all other cost drivers remaining at 2012 levels, Air Canada would expect to achieve a 15 per cent reduction in CASM within the next five years. Also assuming the value of the Canadian dollar and fuel prices were at 2012 levels, the projected CASM reduction for 2014 would be 5 to 6 per cent.

With respect to the remaining 25 Embraer 190 aircraft in the airline's fleet, after careful consideration, Air Canada has decided to continue to operate the aircraft given their young age, productivity and high customer acceptance on existing routes and to avoid additional capital expenditures and debt.

[Guest longtimer]

Good news, my wife and I like the Embraer as passengers, the 2 x seating suits us to a "T"

Air Canada to keep 25 Embraer jets in blow to Bombardier CSeries


National Post Wire Services | May 15, 2014 | Last Updated: May 15 8:34 AM ET
More from National Post Wire Services
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Canada's largest carrier had been evaluating the CSeries as a replacement for its Embraer jets, but decided against the new narrow-body aircraft to save money.

National PostCanada's largest carrier had been evaluating the CSeries as a replacement for its Embraer jets, but decided against the new narrow-body aircraft to save money..
Air Canada said it decided to keep 25 Embraer SA jets instead of replacing them with new narrow-body aircraft, dealing a blow to Bombardier Inc.’s CSeries.

Canada’s biggest airline said Thursday it will continue to operate 25 of Embraer’s E190 jets, “given their young age, productivity and high customer acceptance on existing routes and to avoid additional capital expenditures and debt.”

Montreal-based Air Canada had been evaluating the CSeries as a replacement for its Embraer jets since announcing in December an order to buy Boeing Co. 737 Max planes valued at $6.5 billion.Air Canada to roll out WiFi on some flights in May
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At the time, Air Canada said it would review various options for 25 E190s, “including continuing to operate them or replacing them with a yet to be determined number of aircraft in the 100 to 150 seat range.”

Bombardier is counting on the CSeries, its newest and biggest jet, to boost revenue and profit. The plane so far has been beset by delays and cost overruns and has failed to attract many big-name airline customers.

Also Thursday, Air Canada reported a bigger first-quarter loss, mainly due to a weaker Canadian dollar and an unusually harsh winter.

The largest Canadian carrier, which mostly buys fuel and planes in U.S. dollars, said in February that it was looking for ways to boost revenue and cut costs to compensate for a weakening Canadian dollar.

The airline estimated that in 2012 every 1 cent change in the value of the Canadian dollar had a $33 million ($29.7 million) impact on its annual operating income.

The company said its first-quarter net loss included foreign exchange losses of $161 million.

Air Canada said it now expects its full-year systems available seat miles (ASM) forecast to rise in the range of 6.5-8%, down from its previous forecast of a 7-9% increase.
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The company also expects its adjusted costs per available seat mile (CASM) to fall in the range of 3-4%, up from its previous outlook of 2.5-3.5%.
Passenger revenue per available seat mile (PRASM) fell 0.5%, while operating expenses rose 2% in the quarter ended March 31.

PRASM, a measure of an airline’s profitability, is calculated by dividing operating income by available seat miles.

The company, which operates an average of about 1,520 daily national and international flights, reported on Thursday an average load factor – a measure of how full planes are – of 80.3%.

WestJet Airlines Ltd, Canada’s No. 2 carrier, said last week that it would try to cut costs and raise fees and fares as it grapples with a weaker Canadian dollar that is driving up expenses.

Air Canada said early last month that it expected higher first-quarter earnings before interest, taxes, depreciation, amortization and impairment, and aircraft rent (EBITDAR) – an industry gauge of operating profit.

Air Canada said on Thursday that its net loss widened to $341 million ($312.7 million), or $1.20 per share, in the quarter, from $260 million, or 95 cents per share, a year earlier.

Excluding one-time items, the company earned 46 cents per share, narrowly beating analysts’ average estimate of earnings of 45 cents per share, according to Thomson Reuters I/B/E/S.

The Montreal-based company’s revenue rose 3.8% to $3.07 billion, above analysts’ average estimate of $3.05 billion.

The adverse effect of the weak Canadian dollar was partially offset by a 3.8 per cent increase in capacity and a 2.9% rise in traffic.

Air Canada’s shares closed down 0.72% at $8.22 on the Toronto Stock Exchange on Wednesday.
The stock has risen more than 270.3% in the past 12 months to Wednesday’s close, outperforming the TSX-Toronto Stock Exchange 300 Composite Index’s 16.7% increase.
With files from Bloomberg and Reuters

[Zan Vetter]

This makes me happy. My fear was the parking of the EMJ and replacement with Cseries but the company going again after pilot scope and crafting a scenario whereby they would be placed at a regional. So this looks initially like a bit of good news. Also I think it a prudent move to rein in the spending on new airplanes for every fleet particularly, as mentioned to in the release, for fleets still less than 10 yrs old.

[dagger]

This makes me happy. My fear was the parking of the EMJ and replacement with Cseries but the company going again after pilot scope and crafting a scenario whereby they would be placed at a regional. So this looks initially like a bit of good news. Also I think it a prudent move to rein in the spending on new airplanes for every fleet particularly, as mentioned to in the release, for fleets still less than 10 yrs old.

I have no special insight here, but for argument's sake, what is stopping the company from arguing that 25 E-190s will be a stub that should be "regionalized"? On the spending thing, that's true at the narrow body end, but I'd love to see another dozen 787-9s ordered for delivery at the end of the decade. Maybe even 787-10s to replace the 777-200LRs early in 7-8 years' time.

[Zan Vetter]

Granted, but scope to 95 seats (E190) is a different ask than would be scope to 140 seats, which would be required to farm the Cseries out. The thought of pilots, captains, flying a 140-seat jet with AC on the tail and making $80k makes me shudder.

For now, both sides appear to be on the page that pilot pay is now well under control and isn't "the problem." So if some kind of rouge-esque gambit were proposed whereby ACPA pilots still operate the E190 but at a quote/unquote separate company, now we're being creative and truly working together. Wishful thinking maybe, but we've just been put on notice that preliminary talks have begun for a long term contract, and each side has laid out their broad goals. One of AC's goals was additional tinkering at the regional level which I take to mean exactly what you propose- the E190. I'll be interested to see how aggressive the company is on this, and what their interpretation of working together actually looks like. Guys like me were hired exactly because of the EMJ purchase, and not too long ago we had 60 of them! Any kind of "stub" in this regard is directly as a result of the less-than-two-yrs-old contract that was forced on us. Also, we have an have only had 8 A330's for over 5 years now.

The above press release at least seems to take the Cseries out of the equation (for now).

[dagger]

Granted, but scope to 95 seats (E190) is a different ask than would be scope to 140 seats, which would be required to farm the Cseries out. The thought of pilots, captains, flying a 140-seat jet with AC on the tail and making $80k makes me shudder.

For now, both sides appear to be on the page that pilot pay is now well under control and isn't "the problem." So if some kind of rouge-esque gambit were proposed whereby ACPA pilots still operate the E190 but at a quote/unquote separate company, now we're being creative and truly working together. Wishful thinking maybe, but we've just been put on notice that preliminary talks have begun for a long term contract, and each side has laid out their broad goals. One of AC's goals was additional tinkering at the regional level which I take to mean exactly what you propose- the E190. I'll be interested to see how aggressive the company is on this, and what their interpretation of working together actually looks like.

The above press release at least seems to take the Cseries out of the equation (for now).

Okay, I appreciate that POV, I was thinking more of a CS100 replacement for the E-190s but given the drive towards greater density, they might have gone for a CS300 in a replacement scenario. I took from Calin's remarks on the conference call that they felt they had too many 190s (ergo getting Boeing to buy back part of that fleet). But maybe that was a reflection of block hour cost or range limitation, not having too many small capacity aircraft.

[dagger]

Granted, but scope to 95 seats (E190) is a different ask than would be scope to 140 seats, which would be required to farm the Cseries out. The thought of pilots, captains, flying a 140-seat jet with AC on the tail and making $80k makes me shudder.

For now, both sides appear to be on the page that pilot pay is now well under control and isn't "the problem." So if some kind of rouge-esque gambit were proposed whereby ACPA pilots still operate the E190 but at a quote/unquote separate company, now we're being creative and truly working together. Wishful thinking maybe, but we've just been put on notice that preliminary talks have begun for a long term contract, and each side has laid out their broad goals. One of AC's goals was additional tinkering at the regional level which I take to mean exactly what you propose- the E190. I'll be interested to see how aggressive the company is on this, and what their interpretation of working together actually looks like. Guys like me were hired exactly because of the EMJ purchase, and not too long ago we had 60 of them! Any kind of "stub" in this regard is directly as a result of the less-than-two-yrs-old contract that was forced on us. Also, we have an have only had 8 A330's for over 5 years now.

The above press release at least seems to take the Cseries out of the equation (for now).

Calin seemed to infer the CSeries is out for quite some time. It sounds like the 190s will be around beyond the duration of the next ACPA contract.

[rudder]

I have no special insight here, but for argument's sake, what is stopping the company from arguing that 25 E-190s will be a stub that should be "regionalized"? On the spending thing, that's true at the narrow body end, but I'd love to see another dozen 787-9s ordered for delivery at the end of the decade. Maybe even 787-10s to replace the 777-200LRs early in 7-8 years' time.

It is not a question of whether or not it makes sense to transfer an orphan fleet of 25 190's to an Express operator, it is a question of what is AC willing to pay ACPA to permit it to happen. It also may have to do with how far CHR is willing to go to gut the current CPA in order to access the E190's which are a fleet type that will likely be obsolete within a decade. My guess is that the current offer does not meet the asking price so status quo will prevail. Somewhat ironic that at a time when AC is aggressively transferring mainline assets and routes to the Rouge subsidiary in order to capitalize on lower labour costs and higher seating density that it will maintain the operation of the fleet type with the lowest gauge and highest CASM indefinitely. With the expansion of Rouge capacity both internationally and within North America, the role of the remaining 25 190's will likely fall to increasingly shorter stage lengths on city pairs that still have a demand for J-class inventory. This will only serve to exacerbate the CASM disparity vs the NB Airbus and B737MAX. Not sure that RASM on those routes will result in a yield that is otherwise typical for AC.

[feather]

It will indeed be interesting to see where the E190's eventually 'land'. Somewhere along the line CR got the green light from a questionable little group to draw a sword and slice the AC brand right in half. The junior bidders flocked to Rouge and have in essence their own comfy little airline with a sudden massive growth in individual seniority and won't be ready to relinquish that anytime soon. The senior players are hanging on to the edge of the cliff with their legs dangling in shark infested waters. ACPA should have avoided the big chop-chop at all costs and kept the same tent over everybody. You have to wonder what the odds are of ACPA being able to manage their way out of this but it really does look like they've outsmarted themselves yet again.

[rudder]

The obvious quid for ACPA is to attempt to achieve a fleet increase beyond the current plan for mainline WB and 737MAX aircraft, in addition to rectifying the pay grid deficiencies in the existing LCC/Rouge LOU. The combination of these improvements would result in career gross earnings improvement for the overall AC pilot group that would exceed projected career earnings under status quo. It would also remedy the inverted seniority dilemma that is presently occurring as a result of the increasing volume of transfer of existing mainline flying to Rouge and pilot pay level penalties associated with the LCC/Rouge LOU. AC's cost savings at Rouge are largely driven by non-pilot labour savings so it is not an unreasonable outcome that would materially affect the viability of the Rouge commercial initiative.

Will that happen? Who knows. Obvious outcomes have eluded the parties on many, many occasions.

[FA@AC]

AC's cost savings at Rouge are largely driven by non-pilot labour savings

AC has hinted strongly that it will seek to change that. I'd be surprised if CUPE and IAM members who work the Rouge operation now will be working it after the current contracts expire. If they do retain the work I'm sure it will be under different pay and working conditions to what they now have.

[Fido]

AC's cost savings at Rouge are largely driven by non-pilot labour savings

The rouge cost savings are primarily by squeezing in more seats.

The labour savings are just icing on the cake.

[rudder]

The rouge cost savings are primarily by squeezing in more seats.

The labour savings are just icing on the cake.

Squeezing in more seats is not cost savings - it is revenue enhancement (albeit resulting in lower CASM but not lower absolute costs).

Having 6-8 FA's on board at new-hire pay is labour savings. Expect that theme to be expanded upon beyond the FA's.

[Seeker]

ANALYSTS' RECOMMENDATIONS

• Air Canada (ACb). Canaccord Genuity raises target price to C$11.50 on the company's in-line first-quarter results, says second-quarter and 2014 guidance look positive.

[CanadaEH]

What were AC's results for the past few quarters?