Air Canada’s Robust Earnings Beat Expectations


Air Canada posted strong operating profits of CAD 174 million in the second quarter versus CAD 63 million in the year-ago period. Sales grew 2.3% to CAD 3.1 billion, driven by traffic growth of 1.6% and 1.5% higher yields.

Fuel expenses were down 6.4% from the prior year, and cost per available seat mile excluding fuel was down 1.4%, exceeding our expectation. The load factor remained robust at 83%. These were strong results for Air Canada, especially as competitor WestJet posted a softer load factor. Still, the differences are striking. WestJet has posted positive operating profits for 33 straight quarters, while Air Canada struggled between profits and losses.

The company is sitting on CAD 3.8 billion of debt with CAD 1.4 billion looming in maturities in 2015 and has committed to nearly CAD 1.3 billion of capital expenditures over 2013 and 2014. With CAD 2.1 billion of cash on the books, Air Canada will need access to outside money. Positively, the Canadian government looks to constrain its mandatory pension deficit funding to CAD 200 million per year through 2020, in line with the cash contributions of CAD 175 million for 2012 and CAD 225 million for 2013.

Air Canada sees capacity increasing 1.5%-2.5% and adjusted cost per available seat mile to decline 1.0%-2.0% for 2013. The company launched its low-cost carrier business, Air Canada rouge, with four aircraft (two Boeing 767-300s and two Airbus A319s) on July 1. Should the new business succeed, Air Canada could take as many as 50 aircraft (20 Boeing 767-300s and 30 Airbus A319s) from its current fleet and divert them to the new low-cost carrier. Our estimates include little positive impact from rouge at this time.


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