May 4, 2012 / 10:30 AM / 6 years ago

Air Canada results hurt by fuel costs, Aveos

TORONTO (Reuters) - Air Canada’s ACb.TO loss ballooned in the first quarter as the country’s largest carrier grappled with wildcat strikes, rising fuel costs and charges from the shutdown of its aircraft maintenance contractor.

Air Canada travellers wait at the check-in area as baggage handlers at Pierre Elliott Trudeau airport walked off the job, causing cancellations and delay, in Montreal March 23, 2012. REUTERS/Olivier Jean

Air Canada’s shares, which have dropped about 60 percent over the past year, edged higher on Friday after the company posted the results. Air Canada, last profitable four years ago, had provided estimates for some of the quarterly metrics last week.

Despite its recent performance, Montreal-based Air Canada sounded an optimistic note, saying it expected a sharp reduction in maintenance costs and efficiency gains from upcoming labor negotiations with its two biggest unions.

Still, with the airline still facing a swelling pension deficit, fractious labor relations and tougher competition, it conceded that a return to profit won’t happen overnight.

“What you’re seeing is the chipping away, through a transformational process, of many, many, many, many inefficiencies that are built-in and inherent in a legacy environment like this,” said Chief Executive Calin Rovinescu during a conference call.

“Achieving it, through what you have seen in the last quarter, is not done without many, many bumps in the road.”

LOSS WIDENS

Air Canada’s first-quarter net loss widened to C$210 million, or 76 Canadian cents a share, from C$19 million, or 7 Canadian cents, a year earlier.

Excluding a foreign exchange-related gain, a noncash loss on investments and other one-time items, the loss widened to 64 Canadian cents from 45 Canadian cents.

The smaller adjusted loss reflects stronger revenue and lower maintenance costs, said National Bank Financial analyst Cameron Doerksen.

Operating revenue rose 7.6 percent to C$2.96 billion.

Quarterly earnings before interest, taxes, depreciation, amortization and aircraft rent came in at C$175 million, in line with last week’s projection.

Air Canada’s load factor, or the proportion of seats filled with paying customers, rose to 79.2 percent from 77.9 percent.

RBC Capital Markets analyst Walter Spracklin said strong gains in premium cabin traffic was encouraging.

“Traffic growth there was 11.8 percent, well ahead of system wide traffic growth of 4.8 percent. This bodes well in our opinion as it points to the strength in the high yielding corporate travel segment,” Spracklin said in a note to clients.

Cash reserves rose C$135 million to C$2.25 billion.

BRUISED BRAND

Three wildcat strikes in the quarter hurt Air Canada’s bookings and brand, but booking trends have improved now that the government has forced the labor disputes with its pilots and machinists unions into arbitration, the airline said.

The unions are worried that Air Canada’s plan to start a low-cost carrier will hurt their job security and wages, while the airline has said the start-up is critical to sustained profitability.

Air Canada hopes the labor negotiations will produce deals that cut costs, through increased efficiency, and make pension adjustments that will reduce its C$4.4 billion pension deficit by an estimated C$1.1 billion.

While Air Canada generated more revenue than Canaccord Genuity analyst David Tyerman had expected, he said the company must stop posting losses or it would eventually go bankrupt.

“Ultimately, revenues have to rise faster than the costs. Pure and simple,” he said.

COST CONTROL

To that end, the company said it expected a sharp decline in long-term aircraft maintenance costs as it seeks a replacement contractor after Aveos Fleet Performance Inc shut down in March.

The Aveos shutdown allows Air Canada to shift maintenance costs to future periods and reduce those expenses through increased competition for the work, analysts say.

Aveos halted operations and laid off some 2,600 workers in March, prompting the province of Quebec to sue Air Canada, saying the airline breached a legal obligation to keep the facility open.

Under a 1988 law in which Air Canada was privatized, the company is required to keep maintenance and overhaul operations in several Canadian cities. Air Canada and the federal government’s legal opinion say the airline is complying with the law.

Air Canada took a C$120 million charge in the first quarter related to the creditor protection filing of Aveos, but the closure also reduced its maintenance costs.

The company withdrew its estimate for 2012 maintenance expenses, which it previously said would increase 10 to 14 percent, due to the Aveos closure.

Shares of Air Canada were up 2 Canadian cents to 94 Canadian cents at mid-session on the Toronto Stock Exchange.

Reporting By Euan Rocha and Susan Taylor in Toronoto; Editing by Frank McGurty

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