Air Canada results hurt by fuel costs, Aveos

Discussion in 'Air Canada | Aeroplan' started by Rejuvenated, May 4, 2012.  |  Print Topic

  1. Rejuvenated
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    TORONTO (Reuters) - Air Canada's loss ballooned in the first quarter as the country's largest carrier grappled with wildcat strikes, rising fuel costs and charges from the shutdown of itsaircraft maintenance contractor.

    Air Canada's shares, which have dropped about 60 percent over the past year, edged higher on Friday after the company posted the results. Air Canada, last profitable four years ago, had provided estimates for some of the quarterly metrics last week.

    Despite its recent performance, Montreal-based Air Canada sounded an optimistic note, saying it expected a sharp reduction inmaintenance costs and efficiency gains from upcoming labor negotiations with its two biggest unions.

    Still, with the airline still facing a swelling pension deficit, fractious labor relations and tougher competition, it conceded that a return to profit won't happen overnight.

    "What you're seeing is the chipping away, through a transformational process, of many, many, many, many inefficiencies that are built-in and inherent in a legacy environment like this," said Chief Executive Calin Rovinescu during a conference call.

    "Achieving it, through what you have seen in the last quarter, is not done without many, many bumps in the road."

    LOSS WIDENS

    Air Canada's first-quarter net loss widened to C$210 million, or 76 Canadian cents a share, from C$19 million, or 7 Canadian cents, a year earlier.

    Excluding a foreign exchange-related gain, a noncash loss on investments and other one-time items, the loss widened to 64 Canadian cents from 45 Canadian cents.

    The smaller adjusted loss reflects stronger revenue and lower maintenance costs, said National Bank Financial analyst Cameron Doerksen.

    Operating revenue rose 7.6 percent to C$2.96 billion.

    Quarterly earnings before interest, taxes, depreciation, amortization and aircraft rent came in at C$175 million, in line with last week's projection.

    Air Canada's load factor, or the proportion of seats filled with paying customers, rose to 79.2 percent from 77.9 percent.

    RBC Capital Markets analyst Walter Spracklin said strong gains in premium cabin traffic was encouraging.

    "Traffic growth there was 11.8 percent, well ahead of system wide traffic growth of 4.8 percent. This bodes well in our opinion as it points to the strength in the high yielding corporate travel segment," Spracklin said in a note to clients.

    Cash reserves rose C$135 million to C$2.25 billion.

    BRUISED BRAND

    Three wildcat strikes in the quarter hurt Air Canada's bookings and brand, but booking trends have improved now that the government has forced the labor disputes with its pilots and machinists unions into arbitration, the airline said.

    The unions are worried that Air Canada's plan to start a low-cost carrier will hurt their job security and wages, while the airline has said the start-up is critical to sustained profitability.

    Air Canada hopes the labor negotiations will produce deals that cut costs, through increased efficiency, and make pension adjustments that will reduce its C$4.4 billion pension deficit by an estimated C$1.1 billion.

    While Air Canada generated more revenue than Canaccord Genuity analyst David Tyerman had expected, he said the company must stop posting losses or it would eventually go bankrupt.

    "Ultimately, revenues have to rise faster than the costs. Pure and simple," he said.

    COST CONTROL

    To that end, the company said it expected a sharp decline in long-term aircraft maintenance costs as it seeks a replacement contractor after Aveos Fleet Performance Inc shut down in March.

    The Aveos shutdown allows Air Canada to shift maintenance costs to future periods and reduce those expenses through increased competition for the work, analysts say.

    Aveos halted operations and laid off some 2,600 workers in March, prompting the province of Quebec to sue Air Canada, saying the airline breached a legal obligation to keep the facility open.

    Under a 1988 law in which Air Canada was privatized, the company is required to keep maintenance and overhaul operations in several Canadian cities. Air Canada and the federal government's legal opinion say the airline is complying with the law.

    Air Canada took a C$120 million charge in the first quarter related to the creditor protection filing of Aveos, but the closure also reduced its maintenance costs.

    The company withdrew its estimate for 2012 maintenance expenses, which it previously said would increase 10 to 14 percent, due to the Aveos closure.

    Shares of Air Canada were up 2 Canadian cents to 94 Canadian cents at mid-session on the Toronto Stock Exchange.
    http://ca.news.yahoo.com/air-canada-results-hurt-fuel-costs-wildcat-strikes-102627018--finance.html
     
  2. tcook052
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  3. tomh009
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    A load factor of 79.2 in Q1 doesn't seem too bad?
     
  4. QSG
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    They need a 83.8 % load factor to break even......:eek:

    Break-even load factor

    1. WestJet 74.3%
    2. Allegiant 75.9%
    3. Skywest 77.0%
    4. Southwest 77.7%
    5. Delta 78.2%
    6. US Airways 79.8%
    7. jetBlue 79.9%
    8. Alaska 80.3%
    9. Industry Weighted Average: 80.4%
    10. AMR 81.8% (operating in Chapter 11 bankruptcy)
    11. United 82.5%
    12. Hawaiian 83.0%
    13. Air Canada 83.8%
    14. Republic 86.0%
     
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  5. global_happy_traveller
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    With the fuel surcharges and price of oil tamed a lil, I wonder what will happen if oil prices remain high
     
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  6. canucklehead
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    Surprised at United's cost structure! Way too high, but yet they are expected to make an annual profit (unless the customers are driven away by the new Untied ways!

    That pension deficit is going to kill AC sometime soon unless it can find a solution.

     
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  7. southender
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    The solution may be what we are seeing- death by a thousand cuts (and strikes) until the only choice is bailout/restructuring...
     
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  8. The pension issue won't kill AC but it does disable them from being all the airline they can be. The product in the skies is good as is the geographic reach which will grow more upon receipt of their 787's. It is simply time for old style unionism to be put out of its misery;other industrial unions have gotten that message and adapted. AC unions still have the civil service mindset except for the pilots who are simply greedy.
     
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  9. global_happy_traveller
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    Supposedly the 787's arrives.... they save money....... what happens? First the executive give themselves a bigger bonus and then you have the employees all wanting a bigger pay raise because the company has generated more profits...... Those unhappy goes and brings in an arbitrator which typically draws the lines of interest mid way........ Then your back to square one........
     
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  10. You have it all wrong but this is not the forum to get into that type of discussion.
    As for the new aircraft AC will make money with them because of much lower operating costs.
     
  11. global_happy_traveller
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    Right, I am not disputing the 787 will save $ and provide a better operating profit margin.....

    but the question is, if the financial performance becomes better (and it becomes public knowledge because of disclosure records), wont the executives, management and employees all want more $$ (be it a bonus, a larger pay raise) which will increase the labour costs?
     
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  12. QSG
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    By the time AC gets their 787 (early 2014), some of their competitors will also have the same aircraft therefore minimizing any gains in operating margins (which are at present a -5.9%).
     
  13. Do
    Don't forget that most senior executives at AC have stock options and will want to see them in the money.
     
  14. global_happy_traveller
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    Right, but remember there are also unions..... they will most likely brood how they had to make concessions while the executives took extra bonuses (be it stock options or $)....... and negotiations will likely be fruitless if there's such animosity........... if it gets sent to an arbitrator (whose objective is to be independent, fair and achieve win-win), then the airline may possibly not achieve all its cost cutting objectives from a labour cost standpoint.

    Then there are other providers, if they see your business is doing good then they will most likely raise the cost of their services too.

    Also there's pricing (supply & demand & competition), cost of fuel (escalation and de-escalation).....If they work well together, you can raise profit....but if it works against one another, then even the 787 wont save them.........

    What I'm getting at is..... 787 is part of a solution........but not the entire solution to their financial woes
     
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  15. tomh009
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    I'm kind of late to some of this discussion, but I wonder about the assumptions behind this one (e.g. oil price, mix of regional/transborder/international etc). Do you have a link where I could read more?

    P.S. My point wasn't that 79.2% is a good load factor, but that specifically in Q1 it might be acceptable.
     
  16. global_happy_traveller
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    i was thinking somewhere along the lines of average revenue per pax..... how much average revenue needed to cover the operating costs (break even)..... how many passengers needed to break even relative to the number of seats available for sale.
     
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  17. You are making assumptions that are all theoretical in nature and unrealistic in fact. AC pays normal competitive prices for everything but labor. There is not one supplier they won't change if pricing is not competitive.
     
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  18. global_happy_traveller
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    Sure my comments are theoretical n speculative, but remember a reason of the labour dispute was due to executive bonus vs concessions. There are also pension issues too.

    Also, we hear time and time again from AC appealing to the government via the media that the cost of being in the aviation business in Canada is higher (ie. additional taxes, landing fees etc).

    Whether AC pays competitive pricing for good/services provided depends on their success in negotiation and hedging. How much they can bargain for also depends on the number of competitive qualified suppliers there are within the aviation marketplace.

    Also isn't there some rules n contract in place to use some of their spin off companies (ie. minimum flying hours with Jazz)? If so wouldn't this limit their ability to use other providers?

    Good thing though, the AVOES will likely tell those spin off companies to get their act together n reduce billable costs to AC.

    As for raising revenue vs costs, it can go in many ways. There are certain origin-destinations n competitive routes that have a hard time raising yield and revenue. Whether 787 is the solution, only time will tell.

    Anyway, I better not side track in this discussion.
     
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  19. boyzfly

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    I doubt replacing a 767 worth $5 million will help AC when its got to borrow $175 million to replace the plane. AC has no room to wiggle so I expect 787 planes to be delayed, or deliveries slowed down.
     

  20. its called leasing when you don't have or want to spend the capital required to acquire something needed in a business. AC will not delay the 787's. Your sense of economics is way off. Its all about range and operating cost that drives the need for the 787's plus the fact 763's are near the end of their normal operating life in an AC environment as are the 333's.
     
  21. tomh009
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    A330s near the end of their normal operating life? Those were delivered between 1999 and 2001, so they are 11-13 years old.

    The oldest 767-300s were delivered in 1989, so they are considerably older than the A330s.
     
  22. The 333's were only kept in the fleet because the 787's were seriously delayed. AC had the 340 series as well but replaced them with 777's for operating efficiency and the same goes for the 333's. I didn't say they were old but I did say near the end of their normal operating life in an "AC environment". In fact I read somewhere that AC has picked up their options on 5 more 777's which will probably speed up the demise of the 333's to be delivered in the next several months(??) I think.
     
  23. tomh009
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    A330-300 efficiency is not all that bad, I thought -- in fact Airbus is still delivering those to customers (unlike the A340, which is basically obsolete now) even with the A350 on the horizon. Of course, for operating parts (and maybe crew?) commonality running all 777s (and some day 787s) would be better.

    On the other hand, the A320s are ~20 years old now, and the A320neo backlog reaches out more than five years. (737 MAX may have better availability but until Boeing commits to fuel burn rates few airlines are willing to sign on the dotted line.) Is AC waiting for the final MAX specifications before deciding? At this rate the oldest A320s will turn 30 before the replacements start arriving.

    The E170s/E190s and A319s are some of the most recent in the fleet, so there is no urgency to plan their replacements, I expect.
     
  24. Tom, I think we will see more of the E 170/190 series or equivalent as replacements for most of the 320 fleet. AC seems to like more frequency on smaller metal in most NA markets. 319's are being used on transcons in some markets. Obviously they also need some larger planes for NA markets as well but I have no idea what that might be. Another factor might be which markets get mostly served by the new LCC.
     
  25. tomh009
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    I agree that the A319s will eventually be either Embraers -- or CSeries.

    But the A320 replacement will have to come first ...
     

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