Air Canada: Building For The Future, Battling In The Present

By Bruce Parkinson

It’s not easy reading the tea leaves of financial results in the perpetually-turbulent airline industry, especially in a volatile and unsettled global atmosphere.

On 16FEB the Financial Post carried a Bloomberg story headlined “How Air Canada Is Sneaking up on Everybody to Become the Newest Global Carrier.” Break out the champagne!

The next day, after AC posted what CEO Calin Rovinescu called “outstanding” 2016 results, an article in the same publication was headlined: “Air Canada Posts Bigger Loss as Airline Cuts Fares to Fill Seats.

Following a conference call with AC execs, financial analysts and journalists on those same results, the Globe & Mail story was titled. “Air Canada to Keep Focus on International Routes.” The Toronto Star wrote: “Air Canada Bookings to U.S. Soar despite Lower Loonie.” But The National, a publication based in the UAE, took a doomsday tack, writing: “Canada’s Biggest Airline’s Losses Widen amid Bleak Outlook.”

So who’s right? Everybody? Nobody? Is it all fake news?

The answer? It’s complicated. And it depends on whether you’re taking a long-term or short-term view. In the financial world it’s mostly a short-term approach. What have you done for me lately? (as in, the last quarter). That doesn’t make it easy to build a company for the future.

“We don’t manage the business for quarterly results,” AC VP Global Sales Duncan Bureau told Open Jaw. “We take a long-term view because an airline is a capital intensive business that goes through many cycles. Our yearly financial results allow us to demonstrate to the market that we can run a profitable airline year after year.”

But a long-term view is difficult too, because you never know what is going to happen next, and airlines are vulnerable to disruption. “Yes, the stock is at risk for volatility because there are things we can’t control. But bottom-line, it’s a long-term play,” Bureau added.

WestJet had a lesson in volatility when Alberta’s economy went in the tank after the global price of oil plunged. And just yesterday, AC announced that it would indefinitely suspend its YYZ-IST route following a series of terror attacks in Turkey and news that a Turkish Airlines flight from IST to YYZ was evacuated on the weekend due to a bomb threat written on a bathroom wall.

Still, it seems somewhat bizarre that Air Canada’s stock price dropped nearly 8.5% Friday following the release of full-year 2016 financial results that featured record EBITDAR (earnings before interest, taxes, depreciation, amortization and aircraft rent), record passenger and operating revenues, the launch of 28 new routes and traffic growth of over 13%.

But the results did carry some warning signs too. The price of fuel has been creeping higher of late. AC’s yield has been declining due to longer stage lengths on its new long-haul routes and increased competition in the leisure market. And, let’s face it, the bombast from south of the border is raising the anxiety level on a wide variety of issues that can impact aviation.

Walter Spracklin, an analyst at RBC Capital Markets, said in a note to clients that while AC’s 2016 results were “solid,” the company’s 2017 outlook “had elements that caused some trepidation and that was enough to bring the stock back down to week-ago levels.”

All that said, Air Canada’s leadership team is confident that it is making the right moves for the long term. CEO Rovinescu made his case in a series of statements during the earnings call. 

  • “We have improved our overall flexibility and competitiveness through careful cost controls and are now well positioned to compete in an ever evolving and dynamic business environment.”
     
  • “Our share price jumped 34% in 2016 more than that of any of our North American airline peers and nearly doubled to 17.5% return of the S&P/TSX composite index. In fact our top-line year-over-year revenue growth and adjusted CASM (cost per available seat mile) improvement outperformed that of all of our North American airline peers.”

  • “Air Canada continues to be the only international network carrier in North America with a four star ranking from Skytrax. In 2016, according to a report on Canadian brands published by UK's Brand Finance, Air Canada's brand value increased 88%, the fastest growing brand amongst large companies in the country.”
     
  • “Our focus continues to be building the business for the long-term. This is a long-term commitment and we are making long-term investments in aircraft, product, and routes. Our principal objective is to be among the best global airlines to continually improve customer service and employee engagement and to create value for our shareholders.”

After dizzying expansion in 2016 – 15 new international routes and 12 transborder routes among the 28 additions, AC will have another busy year with 18 new routes set to take flight. But this is the third year of a major growth initiative and execs say that pace will slow in the second half of this year and through 2018. There will be some time to absorb, reflect and keep planning for the future.

“We are able to grow while generating significant free cash flow this year and building a strong company for the future despite unpredictable external factors,” Rovinescu told analysts and reporters.

There will be bumpy air – AC says it expects Q1 2017 margins to be half of what they were in the year-ago period. But the company’s leadership believes there is “a solid foundation being built on the recent record breaking quarters.”

Only time will tell.




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