August 7, 2009 / 10:38 AM / 9 years ago

UPDATE 3-Air Canada to cut costs, sees no imminent recovery

* Adjusted loss C$1.29/shr

* Revenue falls to C$2.33 bln

* To cut C$400 mln in costs

* Class B shares down 4.8 percent (Adds details from conference call, analyst comments, updates stock)

By Susan Taylor

OTTAWA, Aug 7 (Reuters) - Air Canada ACa.TO ACb.TO posted a big operating loss on Friday and, with no sign of a recovery in sight, the country’s biggest airline said it will cut capacity and C$400 million ($370.4 million) in costs to cope with the ailing economy and weak demand.

Faced with sector-wide problems, including a sharp drop in high-fare business traffic and stiff price competition, the carrier said quarterly passenger revenue had plunged 16 percent.

Like other airlines, in a sector forecast by its top industry body to lose US$9 billion this year, Air Canada said it will cut capacity and pare expenses to ride out the recession.

The company will act quickly, management said, because it now has breathing room thanks to C$1.02 billion in financing, fresh labor deals and extra time to top up its pension fund.

“Raising the new liquidity provides us with a window of opportunity to make structural changes which we cannot and will not squander,” Chief Executive Calin Rovinescu said on a conference call.

With “no imminent sign of a recovery in sight”, Rovinescu said the airline is targeting C$400 million in cost cuts and C$100 million in “revenue enhancing” measures by 2011. That is up from a May target of C$250 million in savings.

Long-time industry analyst Jacques Kavafian said that still does not go far enough to address Air Canada’s problems.

“It’s just not sufficient because they’re going to lose about C$1 billion this year, or C$900 million,” the Research Capital analyst said in an interview.

“They’ve got to cut more and they’ve got to cut it faster,” Kavafian said.

The company generates healthy revenue but it must reduce the size of its fleet, and cut routes and infrastructure to make lasting expense reductions, he said.

Air Canada will scrutinize all aspects of its operations in the short term, Rovinescu said, including routes, schedules, its fleet, supplier relationships and revenue activity.

The company should already know which routes make money, Kavafian said, but it may be deferring an announcement on route cuts until autumn, when the market slows.

“Air Canada is a big complicated company, so what you’ve got to do is you’ve got to cut it in size. Keep your higher, profitable business, don’t squander it at the bottom end, cut off that bottom end that wastes all your money,” he said.


Air Canada expects the North American economy to remain weak throughout 2009. Consequently, it will cut its 2009 capacity, measured in available seat miles, by 4.5 percent to 5.5 percent. That compares with a May forecast of a reduction between 4 percent and 5 percent.

In the third quarter, it expects capacity to decline by 3 percent to 4 percent.

The company sees unit cost, excluding fuel, climbing between 4 percent and 5 percent. That is less than a previous forecast of a 5.5 percent to 6.5 percent increase.

Quarterly financial results were largely in line with expectations, said Kavafian, adding that forecasts are more relevant for markets.

Quarterly net profit rose to C$155 million, or C$1.55 a share, compared with a profit of C$122 million, or C$1.22 a share, in the same period a year earlier.

The adjusted loss, of C$1.29 a share, strips out a C$355 million foreign exchange gain and a C$71 million loss on capital assets, which includes a C$67 million charge to suspend development of its Polaris reservation system.

Revenue fell 16 percent to C$2.33 billion.

Analysts, on average, had expected a loss of C$1.24 a share on revenue of C$2.38 billion, according to Reuters Estimates.

Air Canada, whose main domestic rival is WestJet Airlines (WJA.TO), said its passenger load factor, or the number of seats filled, fell by 2.2 percentage points to 80.5 percent. System revenue per available seat mile fell 11.3 percent.

Passenger revenue fell by 16 percent to C$2.05 billion and system yield decreased 8.9 percent. Traffic declined 7.9 percent in the quarter.

Unit cost dropped 7 percent, but after stripping out fuel expenses, the cost increased 2.6 percent.

Air Canada’s class B shares were down 9 Canadian cents at C$1.79 on the Toronto Stock Exchange on Friday while the class A shares dipped 2 Canadian cents to C$1.86.

$1=$1.08 Canadian Reporting by Susan Taylor, additional reporting by Chakradhar Adusumilli in Bangalore; editing by Rob Wilson

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