August 7, 2013 / 10:14 AM / 4 years ago

Air Canada's cost controls boost outlook, shares soar

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

(Reuters) - Air Canada ACb.TOACa.TO reported its best-ever second-quarter results and forecast that costs would fall further this year as it ramped-up capacity for the launch of its Rouge discount airline last month.

Shares soared more than 23 percent to C$2.61, climbing back to levels last seen about six weeks ago.

Canada’s largest airline said on Wednesday it expected costs per available seat mile, a key industry matrix, to fall between 1 percent and 2 percent this year, better than the 0.5 percent to 1.5 percent it forecast in June.

“We’ve seen an important improvement in virtually every metric by which a company is measured. Profit, revenue, operational performance, and customer satisfaction,” Chief Executive Calin Rovinescu said on an analyst conference call.

Rovinescu said first-quarter weakness largely stabilized in the second quarter and he expected the trend to continue.

Air Canada, which is struggling to return to profitability, is boosting capacity as competition heats up. Its low-cost Rouge carrier is aimed at high-volume leisure travel to the United States and other international markets.

Montreal-based Air Canada is looking to add another 10 aircraft by the end of 2014 to Rouge’s start-up fleet of four jets. It expects system capacity, as measured by available seat miles, to increase 2.5 percent to 3.5 percent in the third quarter.

It still sees capacity increasing 1.5-2.5 percent this year.

“We see Rouge’s more competitive cost structure improving profitability on leisure routes, while at the same time allowing for the introduction of new, efficient aircraft on AC’s mainline fleet without adding significantly more capacity,” said Walter Spracklin, an analyst with RBC Capital Markets, in a client note.

Earnings before interest, taxes, depreciation, amortization and impairment, and aircraft rent - a measure common in the industry - jumped 23 percent to C$385 million.

Operating income rose to C$174 million ($167.7 million) in the quarter from C$63 million a year earlier, on operating revenue of C$3.06 billion. Operating margins improved to 5.7 percent from 2.1 percent.

Air Canada’s passenger revenue per available seat mile increased 0.9 percent on better yield growth, and cost per available seat mile, excluding fuel and other items, fell 1.4 percent year over year.

The company’s net loss narrowed to C$23 million, or 9 Canadian cents per share, from C$161 million, or 59 Canadian cents, in the year-ago period.

On an adjusted basis, Air Canada earned 41 Canadian cents per share, compared with a loss of 2 Canadian cents per share. Analysts expected earnings of 10 Canadian cents, according to Thomson Reuters I/B/E/S.

WestJet Airlines Ltd (WJA.TO), Canada’s No. 2 airline, posted a slightly higher-than-expected profit last week, but its yield growth turned negative in the second quarter and it said revenue per available seat mile would decline in the near term as it launches its Encore regional carrier.

Reporting by Solarina Ho and Peter Henderson in Toronto and Bhaswati Mukhopadhyay in Bangalore; Editing by Sriraj Kalluvila; and Jeffrey Benkoe

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