AC Execs Confident Amidst WS Expansion & Pax Rights Furor

By Bruce Parkinson

Analysts had a couple of things on their minds after hearing Air Canada CEO unpack Q1 results.

The first was how the airline would deal with rival WestJet’s moves into both ultra-low-cost flying in North America and an enhanced international presence with its 787 order.

The second was what kind of impact the CEO expects from new passenger protection legislation expected to be tabled later this year.

On both questions Rovinescu responded with the equivalent of a Pierre Trudeau shrug.

On WestJet’s 787 order that will take it into direct competition with Air Canada for international long-haul flying, Rovinescu had this to say:

“When we look at the international market, we compete with a very, very large number of carriers to Europe to Asia to Latin America, et cetera and so to be very, very frank the addition of incremental competition is something that at this stage is not troubling to us.”

The CEO also didn’t seem overly concerned about WS plans to offer ‘densified’ planes with rock-bottom fares on some domestic and sun vacation routes:

“On the ULCC dynamic, look we’ll wait and see how that plays out. With Rouge we have certainly built a very powerful tool that we didn’t have before. We have the capability of deploying Rouge if it was appropriate domestically. We have no restrictions on deploying Rouge domestically if that’s what we decided to do. And so, we’ll look to see how the marketplace evolves.”

AC President, Passenger Airlines Ben Smith said that if the ULCC model were to prove more popular than expected with Canadian travellers, Canada’s largest carrier could quickly react.

“What we have on the Rouge side is because of the way we integrated Rouge with mainline for customers with the ability to make connections and interline bags and the fact that we have quite a premium customer base, we do have a premium cabin on all of our Rouge cabins in the form of Premium Rouge.

“We have the ability to remove that and make any of those aircrafts all-economy, which would match the densification of the ULCC, so that is one of the options, a very easy one. And our mainline it’s a similar opportunity there. Right now, we have the cabin set up for our optimum mix, but if the marketplace were to change, we could do something similar there as well.”

On the subject of passenger protection legislation, Rovinescu also passed the mic to Smith. And despite the hue and cry over the United incident south of the border – and some recent Canadian examples of poor treatment of paying customers -- he told analysts and media on the earnings call that he believes Canada’s upcoming legislation will be fair.

“My expectation is that legislation is not made based on yesterday’s headlines in the United States. And so, I would expect and I’m fairly confident that legislators take into account a perspective that includes operating history and the reality of the marketplace that the individual companies operate in.

“Our sense is that this has been in the works for some time, there has been a lot of discussion about it, including by the previous government to the current government. So, we knew this was something that’s coming for a period of time. All-in-all we expect to have a reasonable and measured dynamic, which should not materially impact our operation.”

Despite posting a $37 million Q1 loss, AC exceeded the expectations of analysts in what is typically its worst quarter. Execs were positive looking forward.

“In the first quarter of 2017, we continued to deliver on our long-range plan, in what is typically one of our more challenging periods of the year,” said Rovinescu. “We achieved 14% system traffic growth and record passenger revenue of $3.1 billion. Every major market we served showed an increase in traffic, underscoring the global penetration of our brand. Our adjusted CASM reduction of 6% represents a better cost performance than all of our North American peers, including our main domestic competitor.”

One thing AC executives are not happy about is the recent disruptions at YYZ due to runway resurfacing, a disruption that has affected all airlines using the facility.

“As far as Pearson is concerned, we’re very disappointed to be very blunt,” said Rovinescu. “It has resulted in much disruption for our passengers, much disruption to our operation and of course, it has cost us something incremental. At this stage, we chose not to provide any particular number or guidance as to what that cost is. We don’t expect it in the overall scheme of our second quarter to be a material number that would otherwise disrupt our cost performance. But for sure from a logistical perspective and operational perspective, it is something that is not making us happy.”

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