Tighter cost controls start to pay off for Air Canada

Thu Nov 8, 2012 12:04pm EST
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By Nicole Mordant

(Reuters) - Air Canada ACb.TO reported a bigger-than-expected rise in third-quarter earnings on Thursday as it kept a tighter lid on costs that it said would continue in the fourth quarter, lifting its stock price.

Air Canada, the country's biggest carrier, said it expected its fourth-quarter unit costs, known in the industry as costs per available seat mile to decrease by between 2 percent and 3 percent from year-earlier levels, excluding fuel costs.

The results and forecast offered evidence that Air Canada's drive to whittle down its high-cost structure is working, analysts said. Its costs are about a third higher than those at WestJet Airlines Ltd (WJA.TO: Quote), its biggest domestic competitor.

"They were more efficient and ran better cost savings than we were expecting... We were high on the Street and they beat our numbers," said RBC Capital Markets analyst Walter Spracklin.

After more than a year of acrimonious negotiations, Air Canada has reached contract agreements with all its labor unions that allow the company to set up a separate low-cost carrier that will pay lower salaries than the mainline carrier.

"With the concessions that they have achieved out of the unions with regards to the low-cost carrier and so on, the cost-side of the equation should get much better," Spracklin said.

Chief Executive Calin Rovinescu has made reducing costs a key company focus. Air Canada has also won concessions from its pilots to outsource flying to more regional carriers, and has signed new, lower-cost maintenance contracts after its chief maintenance supplier went bankrupt.

Air Canada operating income jumped 56 percent to C$421 million ($421.86 million) in the third quarter from C$270 million a year earlier.   Continued...