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AC Q3 results are in


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Guest directlaw

"Despite record high fuel prices, third best Q3 operating income before reorganization and restructuring items for third quarter in Corporation's history"

That about says it all.

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What's your take on the results, Dagger? About what you had expected, or better/not as good?

About what I had expected. Actually, I didn't have a clue how much restructuring materials would be thrown into the hopper, but I had assumed it would be everything but the kitchen sink. Every conceivable non-cash writedown. They would want to clean out every cobweb. Had all lower aircraft lease rates been booked as renegotiated, the airline would have had operating income of about $300 million. Had all the staff consolidation been in place that will happen over the winter, it might have been closer to $400 million (an average of $100 million per quarter comes out in 2005). That's with fuel averaging over $40 a barrel, but not as high as it was in September and October. Nice thing is that yields and RASM were up year over year. Part of that is recovery from SARS when 03 results were profoundly depressed, but there is also more discounting going on in most of AC's markets.

Beyond that, it's just wait and see for several other shoes to drop: International fare reform, some dramatic web enhancements, some new international routes, new North American rotues with the Embraers and CRJ-705s, etc. I think 2005 will be a heck of a ride. If Al Queda doesn't do anything too unpleasant to the USA, 2005 will be decently profitable for AC and 2006 significantly better.

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These are the two biggies that were not expected:

Domestic yield grew by 4 per cent in the quarter and

domestic RASM improved by 12 per cent.

Compare that to Westjets two failed attempts to raise Yield and all of the expectations of a severe price depression through out Canada.

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Last time I checked with a bank a dollar=dollar. extraordinary or not it is still a hit and comes out of somewhere doesn't it? no difference there. Hopefully all carriers can find thier niche and now make money. can anyone say stability?

A dollar equals a dollar if you have one and spend it. What accountants do to create non-cash writeoffs as part of a CCAA process do not reflect an equivalent spending of dollars. Air Canada has $1.94 billion in cash. It generated net cash flow in Q3 of $183 million. I also found this paragraph revealing.

"As at November 9, 2004, ACE's consolidated cash balance, measured on the

basis of cash in its bank accounts, amounted to approximately $1.9 billion.

The Corporation's debt and capitalized operating lease obligations, net of

cash, has been reduced from the previously disclosed approximate $5 billion to

approximately $4 billion mainly as a result of the strengthening of the

Canadian dollar."

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I can agree with much of what has been said, but I see the main issues this way:

1. By any normal measure, the Air Canada 3rd Quarter numbers were not good. A loss of $80M in their stongest quarter means they will be in the red for at least the next year.

2. The "extraordinary" expense argument is a red herring. I have been watching airlines (and other industries) for years and they seem to have extraordinary items every year. In the airline biz there are all sorts of things that can go wrong, and they all occaision their own one-time charge.

3. On the other hand, this is, in many ways, the first quarter of a brand new company, so it would be wrong to be too critical right away. The new company has to work its way into shape.

4. The reality is that this new company must become profitable within two years. In fact, I would suggest that net earnings of $400M a year, starting next year, should be the yardstick. Much less than that over a five year period, and I do not think they can survive.

5. I do not trust "operating earnings" or "EBIDTAR" or whatever. These are used to make bad situations look acceptable. This company now needs real earnings.

6. The restructuring has provided the opportunity to make money, but there are lots of things that must happen before this becomes a reality. Their unit costs must continue to decline, and they need good luck (as well as good management) on yields.

7. Finally, this all must happen before any significant expansion takes place. I see that the rumours are flying (?) once again about new routes, aircraft, and staff callbacks. I do not belive that the Board of Directors will listen to any propsals to "grow our way to profitablity". One can read of the ridicule surrouding similar plans suggested to Alitalia.

Having said this, the next 12 months (with the currently announced staff, fleet, and route structure) will tell the tale. This is, of course, just my opinion.

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.... I do not belive that the Board of Directors will listen to any propsals to "grow our way to profitablity". ....

The 15 EMB-175 aircraft are 'extra's' over and above anything mentioned in the restructuring plan.

Stand by for a bunch of 'big' jets to go along with them.

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I can agree with much of what has been said, but I see the main issues this way:

1. By any normal measure, the Air Canada 3rd Quarter numbers were not good. A loss of $80M in their stongest quarter means they will be in the red for at least the next year.

2. The "extraordinary" expense argument is a red herring. I have been watching airlines (and other industries) for years and they seem to have extraordinary items every year. In the airline biz there are all sorts of things that can go wrong, and they all occaision their own one-time charge.

3. On the other hand, this is, in many ways, the first quarter of a brand new company, so it would be wrong to be too critical right away. The new company has to work its way into shape.

4. The reality is that this new company must become profitable within two years. In fact, I would suggest that net earnings of $400M a year, starting next year, should be the yardstick. Much less than that over a five year period, and I do not think they can survive.

5. I do not trust "operating earnings" or "EBIDTAR" or whatever. These are used to make bad situations look acceptable. This company now needs real earnings.

6. The restructuring has provided the opportunity to make money, but there are lots of things that must happen before this becomes a reality. Their unit costs must continue to decline, and they need good luck (as well as good management) on yields.

7. Finally, this all must happen before any significant expansion takes place. I see that the rumours are flying (?) once again about new routes, aircraft, and staff callbacks. I do not belive that the Board of Directors will listen to any propsals to "grow our way to profitablity". One can read of the ridicule surrouding similar plans suggested to Alitalia.

Having said this, the next 12 months (with the currently announced staff, fleet, and route structure) will tell the tale. This is, of course, just my opinion.

Usually, I find some agreement with your views, but aside from setting a reasonable yardstick - $400 million in profit for 05 - I believe your analysis is sheer, unmitigated nonsense.

1. If you cannot tell the difference between restructuring charges, which are paper transactions that generate losses that shelter future profits, and other charges which represent an impairment or goodwill or asset value, God help you understand because I sure won't. You might want to become acquainted with the rules of Fresh Start Accounting.

2. You don't understand that the third quarter also did not reflect all restructured leases - about $60 million in lease payments now get deducted in all subsequent quarters. You also don't understand that AC will be realizing a further $400 million annually in labor savings starting in 05. that will be booked this winter as people who have accepted packages now go out the door.

3. AC - and any other airline - will survive if ithas cash in the bank. AC's cash position is strong, and would take at least three years of losses of about $300 million per annum before I would get even the least bit enervated. We are halfway through the fourth quarter - always a money loser for AC - and as of Nov 9, the airline's cash position is the same as it was on Sept 30, which is revealing. To me, it suggests AC can manage to achieve break-even or small losses in winter quarters and probably do $600-750 million in the middle quarters, even with fuel at current levels.

4. Considering that AC has no non-operating expense to speak of, operating income is pre-tax net income. Actually, come to think of it, with almost $2 billion in the bank, AC is likely to have non-operating revenue - interest - next year. So yes, operating income is very relevant.

5. Costs were down and as I have explained to you, will continue to come down. Yields in the third quarter were up.

6. Air Canada is realigning capacity more than it is expanding. It is paring away some of the older A320s, the 737s, BAe146s and of course the 747Cs internationally, and replacing them with a combination of newer, smaller jets and by adding low-cost used international aircraft. From a fuel labor and ownership/lease-rate perspective, there is little expansion. This is, however,a rightsizing exercise.

7. The next 12 months will be instructive, but the airline industry is always changing, and even if AC had a good year in 2005, it doesn't hold that it will always prosper. Similarly, if it has a bad year in 2005, it doesn't mean it won't have a good year in 06. The key determinents of success, IMHO, are fuel prices, global terrorism, the global economy, the Canadian economy, discount competition in North America, the Canadian dollar, domestic market fragmentation, global security, the survival of UA.

If the dollar remains over 80 cents while oil retreats below $40, the airline should do pretty well in terms of cost inputs. We see all Canadian carriers eager to enact fuel surcharges. The same phenomenon has not occurred in the US where certain "hedged" carriers have declined to match fuel surcharges or fare increases driven by fuel prices in order to add market share or perhaps force an end to a struggling competitor.

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A couple of tidbits from the notes in the full MD&A filing on Sedar.com

1. AC paid US$174 million for the two A340-500s. That's breath-taking. That's US$87 million each for a plane that lists at over US$150 million. In the mid-1990s, AC's first owned A340-300s were acquired on terms equivalent to US$86 million per plane.

2. If I read the notes right, AC has a deal in place to sell the two 747-400 combis now in the desert. Details to be announced in Q4. The airline is also making progress payments on the Embraer 190s. If the combis have been written off already, that would suggest a sale will generate a one-time gain. The cash is to be applied against debt secured by the aircraft.

3. The feds paid AC $12 million for cockpit security upgrades. They presumably paid other carriers a commensurate amount.

4. Starting in Q4, AC will book lower lease rates on 47 more aircraft. They were paying lower cash amounts already as I understand it, but couldn't book the lower rates until exiting from CCAA. It's a $60 million difference per quarter.

5. The cash restructuring charges in Q3 were $32 million, mainly professional fees. Now that gravy train stops, too.

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