August 8, 2008 / 11:04 AM / in 9 years

UPDATE 3-Air Canada looks to raise cash as profit falls

(Adds ACE Aviation executive comments)

By Jeffrey Jones

TORONTO, Aug 8 (Reuters) - Air Canada ACa.TO may raise up to C$800 million ($750 million) selling and leasing back planes and other inventory, it said on Friday after reporting its second-quarter profit fell 21 percent due to surging fuel costs.

Air Canada, the country’s largest airline, has tallied the worth of numerous assets and will study in the coming months how much cash to extract amid tough times in the industry, Chief Financial Officer Michael Rousseau said.

The move comes as Air Canada prepares to cut 2,000 jobs and reduce its capacity by 7 percent in the autumn and winter to cope with sky-high fuel costs and a drop in air travel, especially in the United States.

“We are planning to spend a great deal of time looking at that over the next couple of months,” Rousseau told analysts.

He gave no details about the timing or structure of any transactions.

“But we obviously have done a lot of homework determining what is available and what the market conditions are, and we will take opportunity when it presents itself,” he said.

At the end of the second quarter, the airline had nearly C$1.5 billion in cash and short-term investments to draw on, down from C$1.8 billion a year earlier. Sales and lease-backs and other transactions could be used to bolster that position as operating costs rise.

Meanwhile, Air Canada’s parent company, ACE Aviation Holdings Inc ACEa.TO, said it expects to take another two or three months deciding how to part with its 75 percent stake in the airline and wind up operations, an effort that has already been delayed this year in the industry’s downturn.

Alternatives include selling its stake via a secondary offering, buying back the minority interest and then amalgamating the firms, or selling out to private equity.

A 21 percent drop in oil prices in recent weeks is helpful in the effort, ACE Chief Executive Robert Milton said.

In the quarter, Air Canada earned C$122 million, or C$1.22 a share, down from a year-earlier profit of C$155 million, or C$1.55 a share.

The most recent results include net gains on financial instruments like hedges of C$176 million and on foreign currency items of C$48 million.

Revenue rose 5 percent to C$2.8 billion from C$2.6 billion.

The company said fuel costs ballooned by a third, or C$212 million, from the second quarter of 2007. The impact was cushioned somewhat by hedging and the addition of newer, more fuel-efficient aircraft, executives said.

Oil averaged nearly $124 a barrel in the quarter, 90 percent higher than a year earlier.

Air Canada has raised fares and tacked fuel surcharges onto ticket prices. It has also joined numerous other airlines in charging passengers for checking a second piece of luggage.

“The second-quarter results demonstrated the difficulty increasing revenues at the same rapid pace as the increase in the price of jet fuel,” Chief Executive Montie Brewer said.

“However, our customers will have to eventually absorb the higher cost.”

Brewer said Air Canada had suffered among the lowest drops in margin in the industry as nonfuel costs were kept in check.

Passenger loads were flat during the quarter at 82.7 percent of capacity.

Air Canada shares were off 11 Canadian cents at C$5.80 on the Toronto Stock Exchange, about half their value at the start of this year. ACE rose 28 Canadian cents to C$11.26.

$1=$1.07 Canadian Additional reporting by Scott Anderson; editing by Rob Wilson

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