AC’s Q2 Revenue Up; Profit Down On Lower Domestic & Transatlantic Yields

Open Jaw

AC has reported better-than-expected Q2 profits over its expanding network on lower fuel costs, higher revenues but depressed domestic and transatlantic yields.

AC has reported record Q2 EBITDAR(1) (earnings before interest, taxes, depreciation, amortization and aircraft rent) of $605 million compared to the previous record EBITDAR of $591 million in the same quarter in 2015 (and EBITDAR in the 2nd quarter of 2015 included a special item which improved EBITDAR by $23 million). 

AC recorded adjusted net income(1) of $203 million compared to adjusted net income of $250 million in the 2nd quarter of 2015. AC reported net income of $186 million Q2 2016 compared to net income of $296 in the same quarter last year – a 37% drop.

"I am pleased to report record EBITDAR results for the quarter from both an increase in revenue and traffic, and specifically from our continued strong focus on unit cost improvement," said Calin Rovinescu, President & Chief Executive Officer. "Traffic growth in all 5 of our geographic markets exceeded last year's strong growth. We continued to increase our revenue base in the face of a challenging revenue environment principally in the domestic and Atlantic markets and despite a generally weak global economy. Overall revenue growth included an increase in international-to-international connecting passengers via Canada as we continue to successfully build our main hubs as attractive and efficient options for international travellers.

 "Our continued focus on our strategic priorities, as well as our increased flexibility and our ability to adapt and react to an evolving business environment, unexpected macroeconomic or geopolitical threats or natural disasters, are helping us deliver on the key financial targets established at our 2015 Investor Day, namely annual EBITDAR margin, return on invested capital and leverage ratio, as well as a significant reduction in unit costs.

"In the quarter, Air Canada and Air Canada Rouge launched 10 new international routes and 11 new transborder routes marking the most intensive period of expansion in Air Canada's history. Moreover, on June 30th we served more than 160,000 customers, setting an all-time record which we expect to surpass during the upcoming August long weekend. I would like to thank our employees for their continued focus on taking care of customers and working together to help make Air Canada a global industry leader," concluded Mr. Rovinescu.

 In the 2nd quarter of 2016, record system pax revenues of $3.143 billion increased $61 million or 2.0% from the 2nd quarter of 2015. Traffic growth of 9.3%reflected traffic increases in all of AC’s 5 geographic markets. A yield decline of 6.8% principally resulted from a 4.2% increase in average stage length (reducing system yield by 2.4%) as well as increased market capacity and competitive pricing affecting primarily domestic and European services.

 AC's network strategy for sustained profitable growth involves higher average stage lengths, an increased number of seats at, on average, lower fares in long-haul leisure markets and a higher proportional growth of international connecting traffic, all of which contributed to a decline in yield.

 In the 2nd quarter of 2016, operating expenses of $3.181 billion increased $90 million or 3% from the 2nd quarter of 2015. This increase was due to the impact of an 11.0% capacity growth and the unfavourable impact of a weaker CAD on non-fuel foreign currency denominated operating expenses which increased operating expenses by $51 million in the 2nd quarter of 2016. These increases were partly offset by the impact of lower fuel expense of $141 million over the same period.

 Air Canada's cost per available seat mile (CASM) decreased 7.3% from the 2nd quarter of 2015. The airline's adjusted CASM(1), which excludes fuel expense, the cost of ground packages at Air Canada Vacations® and special items, decreased 1.1% from the 2nd quarter of 2015, better than the 2.0 to 3.0% increase forecast by AC's in late April. The better than forecasted adjusted CASM results were due to lower than previously expected regional airlines expense, aircraft maintenance expense and wages, salaries and benefit expense and to other operating expense reductions.

At June 30th, 2016, unrestricted liquidity (cash, short-term investments and undrawn lines of credit) amounted to $3.449 billion (June 30, 2015 – $3.283 billion).  

For the full year 2016, AC continues to expect EBITDAR to increase 4 to 8% from record full year 2015 EBITDAR.

For the 3rd quarter of 2016, AC expects adjusted CASM (which excludes fuel expense and the cost of ground packages at ACV) to decrease between 5.5 to 6.5% when compared to the 3rd quarter of 2015.

For the full year 2016, AC now expects adjusted CASM to decrease between 2.75 to 3.75% compared to the full year 2015, as opposed to the 1.75 to 2.75% decrease projected in late April, reflecting, in large part, the better than expected adjusted CASM performance in the 2nd quarter of 2016 and, to a lesser extent, the benefit of lower regional airlines expense continuing into the 2nd half of 2016. If the value of the CAD during 2016 were to remain at 2015 levels, adjusted CASM for the full year 2016 vs. the full year 2015 would be projected to decrease 3.75 to 4.75%. 

Air Canada confirmed that it remains on track to meet or exceed the following key financial targets.

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