February 17, 2017 / 11:15 AM / 5 months ago

Air Canada expects higher fuel costs to weigh on margins

3 Min Read

An Air Canada plane lands in front of a United plane at the Calgary International Airport in Calgary, Alberta, June 17, 2008.Todd Korol

(Reuters) - Air Canada (AC.TO) reported a bigger quarterly loss and said it expected its margins to halve in the current quarter from a year ago as fuel costs inch up with the rise in oil prices.

Air Canada's shares were down 4.5 percent at C$13.74 in morning trade on the Toronto Stock Exchange, while Canada's main stock index .GSPTSE was down 0.3 percent.

The company, which has been upgrading its fleet with fuel-efficient aircraft, will take delivery of 18 Boeing Co's (BA.N) 737 MAX 8s by June 2018, Chief Financial Officer Michael Rousseau said on a post-earnings call.

The arrival of new jetliners will help Air Canada replace five Boeing 767 planes, and also Airbus (AIR.PA) A-319 and A-320 planes that are currently flying in the North American market.

The move to more fuel-efficient aircraft comes at a time when rising oil prices are pushing up Air Canada's fuel costs, eroding margins.

The company's earnings before interest, taxes, depreciation, amortization and aircraft rent (EBITDAR) margin is likely to be about 7 percent in the current quarter, compared with about 13.8 percent last year.

"Q1 2017 guidance is likely below expectations, but the guidance implies better profitability for the remainder of the year," Cowen and Co analysts wrote in a note.

Air Canada is expected to generate free cash flow of $200 million to $500 million this year, Rousseau said, turning positive after positing negative cash flow of $149 million in 2016.

Air Canada said on Friday it expected adjusted cost per available seat mile (CASM), which excludes fuel costs and unusual items to decrease by 3.25-4.75 percent in the first quarter.

The company's adjusted CASM fell by about 6 percent in the fourth quarter, helping the company post a better-than-expected adjusted profit.

The company also benefited from a 15.3 percent rise in passenger traffic on its routes.

The airline's rival WestJet Airlines Ltd (WJA.TO) also reported a higher-than-expected fourth-quarter profit earlier this month as it flew more passengers and costs fell.

Air Canada's net loss increased 54 percent to C$179 million ($136.8 million), or 66 Canadian cents per share in the fourth quarter.

Excluding items, the company earned 14 Canadian cents per share, above the average analyst estimate of 7 Canadian cents per share, according to Thomson Reuters I/B/E/S.

The Montreal-based airline's revenue rose 7.6 percent to C$3.43 billion, also beating analysts' average estimate of C$3.39 billion.

($1 = 1.3082 Canadian dollars)

Reporting by Komal Khettry in Bengaluru; Editing by Anil D'Silva

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