Air Canada’s Rovinescu Offers Blunt Advice To Short-Term Investors

Open Jaw
by Bruce Parkinson

Is it any wonder AC executives are frustrated with the airline’s stock valuation?

On the day the company announced the best full-year results in its 79 yr. history – “by a country mile” as CEO Calin Rovinescu put it – the share price dropped 12%.

AC shares were trading at $12.60 one year ago. At Tuesday’s close they sat at $7.39.

But the sell-off likely had more to do with Rovinescu’s blunt stand on long-term vs. short-term management, as he curtly advised investors focused on short-term gains to shut the door on their way out.

He was responding to concerns from investment analysts about a decision to report traffic and load information on a quarterly basis, rather than monthly as has been the practice.

In the volatile world of aviation, AC execs including Rovinescu and CFO Mike Rousseau believe “there’s a risk of distortion in monthly reporting.” In other words, they want investors to focus on AC’s determined efforts to build an airline with sustainable profitability.

“To be very blunt, we’re not running this company for the benefit of short-term investors from a day-to-day basis or from a month-to-month basis,” Rovinescu said. “We’ll see what the stock price does. If short-term investors don’t like this, I can encourage them to leave. We’re running this company for the benefit of our-long term stakeholders.”

Rovinescu believes attracting longer-term investors like pension funds will result in less stock volatility, and he hopes investment analysts will also take a longer-term view based on the company’s progress in the past 5 years.

To that end, the CEO and other executives on yesterday’s earnings call continued to hammer home the airline’s recent accomplishments, including:

  • Revenue growth from $10.8 billion to $13.9 billion in 5 years.
  • Massive improvement in return on invested capital -- 18.3% in 2015, just 4.7% in 2010.
  • A pension plan turnaround from a $2.2 billion deficit to $1.3 billion surplus.
  • 2/3 of revenues now coming from international routes, making the airline better immunized against domestic troubles.
  • Unprecedented labour stability with a series of 10 yr. or longer agreements with staff.
  • A fleet much more flexible than in the past, with a blend of wide and narrow bodies. There are also 22 fully-owned planes and leases coming up on 18 others, giving the airline the ability to cut capacity at low cost if necessary.

On an eventful day for Canada’s largest airline, AC also delivered a late Valentine’s Day gift to Quebec, with a deal potentially worth $3.8 billion to purchase Bombardier CSeries planes and a 20 yr. pledge to perform heavy maintenance work on those planes in the province.

Quebec gracefully responded by dropping a lawsuit it filed against AC after Montreal-based Aveos Fleet Performance, which did much of AC’s aircraft maintenance, closed in 2012, laying off 2,600 employees.

There was a little bit of good news on the federal front yesterday as well, as Federal Transport Minister Marc Garneau said the government would alter the Air Canada Public Participation Act to give the airline more autonomy over where its planes are serviced in future.

Rovinescu said the Bombardier deal and settlement of the maintenance litigation was “a good compromise,” and he praised the CS300 as “a very good airplane.”

Whatever the political exigencies of the purchase, Ben Smith, President, Passenger Airlines, says AC is enthused. “We got the right deal and we’re really excited.”

Smith also expressed his belief that AC is a strong bet for the long-term. “For many years, due to internal and external reasons, the Air Canada brand has been held back from achieving its potential. We’re tackling the challenges one at a time with determination and innovation. With all of these new strengths and advantages, Air Canada is extremely well-positioned to profitably expand in numerous markets.”

For a trade angle on AC’s full year results, Open Jaw spoke with V.P. Global Sales Duncan Bureau. He says his team is doing “an amazing job” on its end of building profitable growth. “I am very proud of the work we are doing with some of our key partners to grow the business, rebuild equity and demonstrate that we are industry thought leaders, product leaders and partners.”

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