November 4, 2011 / 10:34 AM / 6 years ago

Air Canada operating profit drops on fuel costs

<p>A man checks into an Air Canada flight at the Toronto Pearson International Airport in Toronto, September 20, 2011. REUTERS/Mark Blinch</p>

TORONTO (Reuters) - Surging fuel prices contributed to a sharp drop in operating profits at Air Canada and the airline posted a net loss for the third quarter on Friday.

The slide in operating profit came even though Canada’s largest airline completed its cost-reduction program in the quarter, reaching C$530 million in annual savings.

“We experienced a strong revenue performance in the quarter, however the revenue growth did not keep pace with the increase in operating costs, given a higher price of fuel,” said Chief Executive Calin Rovinescu on a conference call.

Operating profit dropped to C$270 million ($266.6 million) from C$306 million a year earlier. Operating revenue rose 7 percent to C$3.24 billion, but operating expenses rose 9 percent, thanks to a 47 percent increase in fuel prices.

“All and all I’d call it an in-line quarter, with reasonable expectations to move forward,” said PI Financial analyst Chris Murray in an interview. Murray highlighted the cost-cutting program, calling the savings “substantial.”

Independent airline consultant Robert Kokonis was also positive about cost-cutting, and said it means Air Canada is better about to handle a possible economic downturn.

For 2011, the Montreal-based airline said it expected system capacity to increase by 4.0 to 4.5 percent, but citing the economic environment, also said it will aim to raise capacity no more than 1.5 percent in 2012.

Air Canada’s net loss came in at C$124 million, or 45 Canadian cents a share, compared with a net profit of C$317 million, or C$1.10. Adjusted for foreign exchange losses, it earned 55 Canadian cents a share.

Passenger revenue per available seat mile, an industry performance benchmark, rose 5.1 percent from the same quarter last year, due to yield growth and higher load factors.

Higher yields came thanks to higher fares, fuel surcharges and more premium traffic, the company said. Rovinescu said the quarter’s load factor of 85.8 percent set a new record.

DREAMLINERS DELAYED

The company also said the delivery of its first seven 787 Dreamliners, previously scheduled for late 2013 and the first half of 2014, has been delayed until 2014.

Air Canada said Boeing is still considering the delivery schedule for its remaining 30 firm orders.

Kokonis said the 787s will help reduce fuel costs and open up routes that have not made economic sense in the past.

“But that’s on the operation side of the equation. The bigger side of the equation is that they would be taking on more debt,” he said. “I think this Dreamliner delay may be a blessing in disguise.”

Labor TALKS CONTINUE

Despite months of labor strife, Rovinescu said he was determined to bring the airline’s pension deficit under control, calling pension reform critically important to the company’s prospects.

The airline’s check-in and call-center staff went on strike in June over pensions for new hires. Their union threatened further job action in October, after the airline appealed an arbitrator’s ruling on the issue, and the company subsequently withdrew its appeal.

Rovinescu also spoke about the airline’s decision to ask the government to appoint a conciliator for its negotiations with the Air Canada Pilots Association. That move started the clock toward a legal strike or lock-out position.

“We cannot have an open-ended timeframe, with labor uncertainty overhang indefinitely,” said Rovinescu. “We have to act responsibly for our customers and other stakeholders.”

Air Canada’s stock was up 0.7 percent at C$1.41 in early trading on Friday on the Toronto Stock Exchange.

($1=1.01 Canadian)

Additional reporting by Bhaswati Mukhopadhyay in Bangalore; Editing by Frank McGurty

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