Air Canada Execs Are “Building An Airline For The Long Term”
Open Jaw by Bruce Parkinson
Analysts may remain wary, but an energized AC senior executive team is
convinced it is “building an airline for the long term.”
AC stock dropped yesterday, despite the airline posting the best Q2
results in its 78 yr. history. The financial gurus are worried about
significant capacity growth, a slightly declining load factor as well as competitive pressure on fares, but the AC
execs believe international expansion and the ability to offer lower-cost
leisure travel through rouge are pillars of a winning strategy.
“The market seems to be punishing the North American airline industry
lately,” said Calin Rovinescu, AC President & CEO. “But we remain confident
we have the right plan in place.”
Low fuel costs definitely played a role in the positive results, which
included adjusted net income of $250 million, an improvement of $111 million or approximately 80% over the same period
But Rovinescu says the low cost of fuel, while certainly
welcome, isn’t essential to AC’s future success. “Our plan is not dependent or
conditional on fuel prices staying at current levels,” he told analysts and
media on a Q2 results call.
As AC moves into what is traditionally its strongest
quarter, Rovinescu promised a 6th consecutive quarter of record
results and said the combination of international growth and the lower costs
and flexibility of rouge are positioning the carrier for a bright future.
Just after the 2nd anniversary of rouge, the
AC execs say they are expecting a strong summer season from the leisure
subsidiary and that loads and margins are growing – exceeding both last year’s
results and the airline’s own predictions.
As AC welcomes more 787s to its long-haul fleet and
shifts more 767s to rouge, the economics will keep improving, Rovinescu says.
When 767s transfer to rouge, they are up to 30% more cost-effective than in the
mainline fleet. And more efficient 787s are delivering a similar cost saving on
“rouge is proving to be a profitable tool,” Rovinescu
told analysts. “And it gives us a swing flexibility we’ve never had before.”
rouge is also helping the airline deal with another
factor, the declining loonie, which may discourage Canadians from travelling.
“The ability to match competitors on a cost basis in the leisure market is
making the weaker dollar less of a concern,” said Ben Smith, President,
Executive V.P. & CFO Michael Rousseau added: “The
Canadian dollar has not done as badly against the Euro and some Asian
currencies, although we would certainly prefer a stronger dollar.”
Rovinescu acknowledged that capacity growth is “the
elephant in the room.” But he maintained that demand continues to be robust,
especially on the airline’s international network, which has expanded by more
than 1/3 since 2009.
“We saw traffic increases in all 5 regions this quarter,”
stated Rousseau. “And most of our capacity growth is in long-haul and leisure.” He
acknowledged a 5% decline in domestic yields, which he attributed mostly to
capacity growth by WS, but added that planned domestic capacity increases are
significantly lower than on the international network.
“To compete, we need to grow internationally. But each
new route must be profitable. We’re not focusing on market share. Slightly
lower loads are a natural consequence of these plans,” Rousseau added.
Rovinescu says AC has accomplished a great deal in the
past several years. “We’ve achieved all pension plan restructuring goals. We
have permanently lowered our cost structure. We’ve made
progress on the labour front – our employees are telling us they want to work
with us. And we’ve built a cost-effective product for leisure.”
Ben Smith summed up the enthusiastic presentation to
analysts by saying: “Our plan is weathering all the changes in the
And while AC stock may have dropped yesterday - at
press time it was down over 6% - it remained 37% higher on the year, and 1,400%
higher than in 2009.