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 last year.

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 international routes.

“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, Passenger Airlines.

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 marketplace.”

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. 

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