Good Times For Canada’s Big Airlines

By Bruce Parkinson

AC CEO Calin Rovinescu

WS CEO Gregg Saretsky

If these aren’t the best of times for Canada’s two major airlines, they’re pretty darn close.

Air Canada and WestJet released quarterly results within minutes of each other yesterday, both eager to share their good news and hope that the stock market took notice. It did.

AC shares had already risen nearly 50% in the past year, leading all Canadian industrial stocks (which averaged 6.4% growth), and they climbed nearly 10% yesterday to $21.74. WestJet shares rose just over 3% to $25.60.

The second-quarter 2017 results for WestJet were impressive, beating analyst expectations with a 32% increase in net earnings, a record-for-the-quarter load factor of 82.8%, 28% growth in premium revenues and a remarkable 49th-consecutive profitable quarterly report.

But AC’s Q2 was spectacular, described by BNN commentator Andrew McCreath as “a slam-dunk, blowout quarter.”

CEO Calin Rovinescu had taken the unusual step of improving guidance earlier in the three-month period – which many analysts respected by raising expectations – and AC still blew the predictions out of the water, with record Q2 net income of $300 million, up from $186 million in Q2 2016.

Rovinescu told financial analysts on an earnings call that the results “are clear evidence of the successful execution of our business plan.” The analysts appeared to agree, using words like “excellent,” “tremendous,” and “very good numbers” in praising AC execs on the quarterly report. The number-crunchers are rarely so effusive.

Some things are just going right for Air Canada, and they helped produce the positive results: demand is higher than anticipated, both from Canadians travelling abroad and foreign citizens wanting to visit Canada, which has risen from the tourism doldrums like a rocket. Our national economy is performing better than the experts expected too.

But AC has achieved its success mostly through the robust, thorough and patient execution of its business plan, and despite obstacles like higher fuel prices year-over-year and foreign exchange challenges.

An aggressive, years-long cost-cutting program has been successful, revenue management has become much more sophisticated, fleet investments are paying off with lower flying costs and a greatly expanded route map is attracting more pax and connecting traffic through hubs in YYZ and YVR.

At WestJet, the quarterly results weren’t quite as jaw-dropping, but still impressive for the carrier that has weathered a withering recession in its home base of Alberta and is on the cusp of great change as it continues to mature and evolve.

Net earnings were up 32% to $48.4 million in the quarter. Both overall revenues and revenues from the critical Alberta market rose by over 10%. WestJet now boasts 46 ‘unencumbered’ – debt-free -- aircraft, up from 38 a year ago. Ancillary revenues are higher than ever, reaching nearly $20 per pax during the quarter. More positives: new, more fuel-efficient planes are on the way and value-conscious business travellers are responding well to WS’s Plus product.

“We have great tailwinds for this year and into next year,” said CEO Gregg Saretsky.

Great challenges too. WestJet’s go-forward strategy is to expand at both ends of the flying spectrum. It will launch a 10-plane ‘ultra-low-cost’ domestic subsidiary next summer – a little later than originally planned – and is moving forward with a wide-body expansion plan that will include a traditional business class product, uncharted territory for the airline.

WestJet is also facing a renewed unionization effort that potentially threatens the corporate culture that has earned the airline considerable praise and loyalty over the years.

“We’re the largest non-unionized entity in the country,” said Saretsky, suggesting that $17 million in potential annual union dues represent the prize unions are seeking.

He argues that WS “leads the pack in all regards,” on employee compensation and culture, and questions whether staff would want “a third-party to get in the middle.”

There’s never a dull moment in aviation, and new threats and shocks are always lurking around corners. But for now at least, Canada’s two major players are enjoying a moment they’ve worked very hard to achieve.

Bruce Parkinson

Bruce Parkinson Editor-in-Chief

An observer and analyst of the Canadian and international travel industries for over 25 years.

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