February 9, 2012 / 11:43 AM / 6 years ago

Air Canada posts bigger than expected loss

<p>Air Canada aircraft are seen at Toronto Pearson International Airport, September 20, 2011.Mark Blinch</p>

(Reuters) - Struggling with higher fuel and maintenance costs, Air Canada reported a bigger than expected quarterly loss on Thursday, disappointing investors in the wake of strong performances from fellow Canadian and U.S. airlines.

Revenue growth did not keep pace with surging operating costs, Canada's biggest airline said, and its battered stock fell more than 12 percent to close at C$1.15 on Thursday, contributing to a full-year plunge of nearly 65 percent.

"The market is worried about the long-term implications," said independent airline consultant Robert Kokonis. "Why can this company not make money on a sustained basis where other carriers can?"

Canada's biggest airline skidded to a fourth-quarter adjusted loss of 64 Canadian cents a share, worse than the year-earlier loss of 17 Canadian cents and well off analyst expectations of a 49 Canadian cent per share loss.

Unlike its better-performing rivals, Air Canada is saddled with higher costs that spring from richer salaries, benefit and pension plans, said Morningstar analyst Neal Dihora.

"It's the same as all the other legacy carriers we talk about around the world," said Dihora.

"We're in an environment where we have free range for the low-cost carriers to basically pound on these guys and they have a lower cost structure because they ... understood that the business wasn't going to work with the old-school salaries and rules and benefit structure."

Air Canada's results come just one day after No. 2 WestJet Airlines topped analyst expectations as it stoked high-yield revenue growth and kept a tight lid on costs.

"They're having to play the hand they're dealt," PI Financial analyst Chris Murray said of Air Canada.

"It's weaker than expected based on the company and in context of a number of U.S. peers who delivered surprisingly strong results. It makes the gap appear wider."

Montreal-based Air Canada faces a raft of difficulties, analysts say, including global economic uncertainty, high fuel prices, pressure from its unions, a heavy debt load and growing competition.

MULLING LOW-COST CARRIER OPTIONS

WestJet said on Wednesday it would launch a short-haul airline to serve smaller markets in Canada by the end of 2013, further ratcheting up competition between the two airlines.

Air Canada needs to "step up our game," Chief Operating Officer Duncan Dee said in an interview with Reuters in Beijing, where he was taking part in a Canadian trade mission.

It was too early to speculate what effect WestJet's short-haul service would have on Air Canada's financial results, he said.

Air Canada said its plans for a new discount carrier to tap the low-cost leisure market remain important.

It is now evaluating various models to operate a discount vacation carrier, despite vocal opposition to such a plan from labor unions that are currently holding contract talks.

The 3,000-member Air Canada Pilots Association union said Thursday that it will hold a strike vote after talks with a government-appointed conciliator and management failed to produce an agreement.

The key issues are pay, pensions and Air Canada's plan to start a low-cost carrier.

After a 21-day cooling off period ends February 14, the pilots can walk off the job after giving the airline 72 hours notice. The pilots have been without a strike since March 31, 2011.

The company said on a conference call that it is prepared to extend talks beyond the February 14 deadline and has told the union it will not impose a new agreement in the near term.

The airline is also in contract talks with its mechanics, baggage handlers and cargo agents with a conciliator, and is holding discussions with its flight dispatchers and crew schedulers.

BIGGER LOSS

In its fourth quarter, Air Canada reported a net loss of C$80 million, or 22 Canadian cents a share, compared with a year-earlier net profit of C$89 million, or 27 Canadian cents a share.

Quarterly revenue rose 3.2 percent to C$2.7 billion.

Total operating costs rose 8 percent in the quarter, due mainly to higher fuel costs, along with rising maintenance costs and capacity growth.

Unit cost in the quarter, as measured by operating expense per available seat mile, rose 4.9 percent from a year ago.

The carrier said it expects first-quarter unit costs to climb 4 percent to 5 percent over last year, excluding fuel expenses, reflecting a big jump in plane maintenance costs.

In the first quarter of 2012, the airline plans to increase its system capacity by 2.5 percent to 3.5 percent above first quarter 2011 levels. For the year, it expects system capacity to be flat to 1.5 percent above 2011 levels.

Air Canada's more heavily traded class B shares fell 16 Canadian cents to close at C$1.15 on the Toronto Stock Exchange on Thursday.

($1=$1 Canadian)

Additional reporting By Euan Rocha; editing by Rob Wilson

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