May 5, 2011 / 10:27 AM / 7 years ago

UPDATE 4-Air Canada cuts operating loss as fuel costs surge

* Q1 operating loss C$66 mln vs C$136 mln yr earlier

* Adj loss C$0.45/shr

* Raises first-half EBITDAR

* Higher fuel prices to add C$800 mln to 2011 oper costs

* Shares end up 3.98 pct on TSX (Adds closing share price)

TORONTO, May 5 (Reuters) - Air Canada Inc ACa.TO ACb.TO narrowed its quarterly operating loss as higher passenger revenue helped offset a big rise in fuel costs, sending its shares up around 4 percent.

Canada’s No. 1 airline said on Thursday that higher fuel expenses were a significant drag in the first quarter, rising C$120 million ($124 million). For the full year, higher fuel charges are expected to add about C$800 million to operating costs.

Including foreign exchange gains, Air Canada’s net loss for the quarter was C$19 million, or 7 Canadian cents a share, compared with a loss of C$112 million, or 41 Canadian cents a share, a year earlier. On an adjusted basis, the loss was 45 Canadian cents a share.

The airline’s operating loss was C$66 million, compared with C$136 million a year earlier. Operating revenue rose 9 percent to C$2.75 billion.

“In an environment where fuel charges increase 20 percent quarter-over-quarter, the fact that they were actually able to reduce their loss per share ... is quite significant,” said Robert Kokonis, managing director of airline consulting company AirTrav Inc.

The improved results came as a result of higher fares, fuel surcharges, flying smaller planes, and cost cuts, Air Canada Chief Executive Calin Rovinescu said in a call with analysts.

The higher fuel costs prompted Air Canada to lower its goals for capacity growth to a range of 3.5 percent to 4.5 percent in 2011, down from 4.5 percent to 5.5 percent.

Air Canada, which is in the midst of a cost-cutting program started last year, said its earnings before interest, taxes, depreciation and aircraft rent (EBITDAR), a key measure of profitability, were up 38 percent year over year.

The company raised its EBITDAR outlook for the first half of the year to a 5 percent increase over a year earlier. Last month, Air Canada had forecast EBITDAR to be flat through the first six months of the year. [ID:nN06262547]

Chris Murray, an analyst at PI Financial in Toronto, said the results came in slightly above his forecasts.

LABOR TALKS IN FOCUS

Air Canada is in talks with all five of its Canadian labor unions as all of its collective agreements expire this year. Those contract renewals, along with fuel price increases, are the main risks for the airline going forward, Murray said.

Kokonis said that the chance of a labor disruption has gone up with all of the contract talks, but added he is cautiously optimistic that Air Canada will reach deals with the unions.

Air Canada said it expects second-quarter operating expenses per available seat mile (CASM), a measure of unit costs, to fall by 0.5 to 1.5 percent, excluding fuel costs.

The carrier said system-wide passenger revenue rose 10 percent in the first quarter. Premium cabin revenue was up about 13 percent, helped by higher demand.

Passenger revenue per available seat mile (RASM), an industry performance benchmark, rose 2.2 percent.

Rival WestJet Airlines Ltd WJA.TO, Canada’s No. 2 carrier, reported a 20-fold jump in quarterly earnings on Tuesday, but hinted that its second-quarter performance may be muted. [ID:nL3E7G321U]

Separately, Air Canada said its April system load factor -- a measure of how full its planes were -- fell to 81.9 percent from 82.4 percent a year earlier.

WestJet said it flew slightly emptier planes in April, compared with the same month a year earlier.

Kokonis said the lower load factors may be directly related to the higher ticket prices both airlines are charging to help offset fuel costs.

Air Canada’s class B shares rose 13 Canadian cents, or 3.98 percent, to close at C$2.35 on the Toronto Stock Exchange on Thursday.

$1=$0.97 Canadian Reporting by John McCrank in Toronto and Bhaswati Mukhopadhyay in Bangalore; editing by Rob Wilson and Peter Galloway

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