August 1, 2017 / 10:38 AM / 4 months ago

WRAPUP 2-Air Canada, WestJet beat earnings estimates; shares surge

(Adds executive comments from conference calls)

By Allison Lampert and Muvija M

Aug 1 (Reuters) - Canada’s two major airlines on Tuesday reported quarterly earnings that beat on profits as more passengers flew and indicated an improved operating environment for the rest of the year.

Shares of Air Canada and smaller rival WestJet Airlines surged after the carriers benefited from strong air travel demand and generated lower-than-expected costs during the quarter.

Airlines have been cutting costs and upgrading their fleets with fuel-efficient aircraft amid higher fuel costs after oil prices rebounded from multi-year lows in 2016.

Montreal-based Air Canada, which reported a 13.6 percent rise in passenger traffic during the second quarter ended June 30, said it continues to expect robust demand during the next three months of 2017, but will shift some seats away from its Pacific service.

“Starting in June, we began to reduce the total number of seats to China, on services from Vancouver to Beijing and Shanghai and redeploy some capacity to the Atlantic where we see stronger booking development,” Benjamin Smith, Air Canada’s president, passenger airlines, told analysts.

The carrier also revised its 2017 guidance upward on free cash flow (FCF), return on invested capital (ROIC) and its margin for earnings before interest, taxes, depreciation, amortization and rent and restructuring costs (EBITDAR).

Free cash flow is now expected in the range of C$600 million ($478.89 million) to C$900 million, up from a previous forecast of C$200 million to C$500 million.

The carrier is planning to use some cash to purchase aircraft on order and reduce gross debt levels, Chief Financial Officer Michael Rousseau said.

Air Canada's cost per available seat mile (CASM), a key measure of how much an airline spends to fly a passenger, fell 3.5 percent in the quarter. Calgary-based WestJet now expects full year CASM, excluding fuel and employee profit share, to be up 1.5 percent to 2.5 percent, compared with an earlier forecast of a rise of 2.5 percent to 3.5 percent. (bit.ly/2whnGV9)

Analysts have raised concerns that a decision by WestJet pilots to join a union could raise labor costs for the carrier, which has plans to boost international service and launch an ultra-low-cost-carrier.

WestJet said it will begin negotiating its pilots’ first collective agreement in September.

Canaccord Genuity analyst Doug Taylor described WestJet’s results as “strong” but said the push to unionize the low-cost-carrier’s employees remains a possible headwind.

“I think there is still concern in the medium term as to what the evolving situation in relationship with their (WestJet’s) employees is going to have on their margins, profitability, flexibility and also their ability to go up market and down market at the same time,” Taylor said.

Air Canada shares surged more than 10 percent to C$21.71 in midday trading while WestJet jumped 4.6 percent to C$26.00. The benchmark Canada share index fell 0.6 percent.

WestJet’s net quarterly earnings rose to C$48.4 million ($38.63 million) or 41 Canadian cents per share, from C$36.7 million, or 30 Canadian cents, a year earlier.

Air Canada’s net earnings rose to C$300 million ($239.44 million), or C$1.08 per share, from C$186 million, or 66 Canadian cents per share, a year earlier.

$1 = 1.2529 Canadian dollars Reporting by Allison Lampert in Montreal and Anirban Paul in Bengaluru; Editing by Martina D'Couto and Bill Trott

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