Air Canada’s Q1 Results: “We Couldn’t Have Done This 5 Years Ago”

Open Jaw
by Bruce Parkinson

Strong results in a historically challenging quarter are bolstering the belief of AC executives that the airline is on a flightpath to long-term profitability.

“The transformation of our business model is progressing as planned,” said CEO Calin Rovinescu on a Q1 2016 financial update call with investment analysts. “We are successfully overcoming all challenges. We have a permanently lower cost base. And we are indeed in growth mode.”

AC pleased the market by reporting net income of $101 million in Q1 2016 vs. a net loss of $309 million in the 1st quarter of 2015. Record EBITDAR (earnings before interest, taxes, depreciation, amortization and aircraft rent) was $460 million compared to $442 million in the same quarter in 2015.

Low fuel prices helped drive that success, down 25% year-over-year. But even with that octane boost, AC’s results are a clear sign of growing momentum. As Ben Smith, President, Passenger Airlines put it: “We are experiencing many more tailwinds than headwinds.”

That’s a nice change both for an airline and an industry that has struggled to achieve profitability and shareholder confidence for decades.

The AC execs pointed to several key changes made over the past few years that have enabled resiliency in the face of market challenges. Those include a major focus on international growth, the creation of lower-cost leisure subsidiary rouge, a multi-billion dollar re-fleeting and fleet optimization program, higher ancillary revenues, more 6th Freedom traffic and long-term labour peace thanks to a series of successful agreements.

“We’re in a much lower-risk situation than we’ve been in the past. 5 or 10 years ago we wouldn’t have been able to post these results,” Smith said.

Rovinescu is pleased with the growth in U.S. and international-originating pax travelling through AC’s hubs in YYZ and YVR to take advantage of the airline’s expanding international breadth. “Everything we’re doing is consistent with growing 6th Freedom traffic. For 20 years our business model didn’t work that way. Now we’re able to go back after the share that was ceded to U.S. and European carriers over those years,” Rovinescu said.

Smith says it’s exciting to see a plan come to fruition. “Most of our North American competitors are staying status quo, seeking margin expansion. We are transforming our business. This is a very different company to work with now.”

The domestic market is one area of concern, with WS adding more Eastern Canada capacity to make up for weakness in Alberta, driving fares down and pushing trade incentives up. But Smith says “some rational behaviour is coming back to the market” and he expects slowly improving domestic performance.

AC’s stock price rose 13% Friday, a round of applause from investors who remain wary of aviation stocks with their past history of volatility.

Rovinescu believes that too could change someday. “We’re building a company that shareholders will want to retain for the long-term.”

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