Airline Air Canada (AC-A.TO, AC-B.TO) reported Friday a profit for the third quarter compared to a loss in the year-ago quarter, reflecting a significant gain on foreign exchange as well as a decrease in operating expenses on lower fuel expenses. Air Canada said traffic declined 2.1% on a 3.3% cut in capacity, which resulted in a decrease in passenger load factor of 1.0 percentage point.
The airline noted that operating results continued to be adversely impacted by ongoing weak economic conditions resulting in declines in passenger and cargo revenues, partially offset by the impact of lower fuel prices year-over-year.
In a statement, president and chief executive officer, Calin Rovinescu said, "The third quarter of 2009 was of pivotal significance for Air Canada. During the quarter, we finalized a series of transactions that stabilized the company and strengthened our position to manage through the challenges brought on by ongoing weak economic conditions."
Third Quarter Results
The Montreal, Canada-based company reported net income of C$277 million or C$2.44 per share for the third quarter, compared to a net loss of C$132 million or C$1.32 per share in the prior-year quarter.
The results for the latest quarter include gains on foreign exchange of C$295 million, and a gain on assets of $1 million, while the year-ago quarter results included losses on foreign exchange of C$87 million. Adjusted to these items, Air Canada reported a loss of C$0.19 per share for the latest quarter.
Operating revenues for the quarter decreased to C$2.67 billion from C$3.08 billion in the prior-year quarter. Passenger revenues declined 13% to C$2.4 billion from the previous year, reflecting a decline in yield of 11.2 % on a drop in traffic of 2.1% and competitive pricing initiatives to stimulate demand. Premium cabin revenues declined 16% from a year ago, while it improved from a 30% year-over-year drop in the second quarter of 2009.
The airline noted that it was successful in mitigating some of the revenue decline with initiatives to stimulate traffic, generate revenues and re-engage customers. These initiatives, along with the right-sizing of its operation through capacity reductions and on-going disciplined capacity management, helped the company achieve a one percentage point improvement in system passenger load factor in the quarter.
Quarterly Traffic Results
During the third quarter, the company's traffic measured in revenue passenger miles or RPM decreased 2.1% to 14.15 billion from 14.58 billion in the same quarter last year. Passenger revenue per RPM were 16.9 cents, down 11.2% from 19 cents a year ago.
Available seat miles or ASM for the quarter declined 3.3% to 16.95 billion from 17.52 billion a year ago. Passenger revenue per ASM were 14.1 cents, down 10.2% from 15.7 cents in the prior-year quarter, entirely due to the yield decline.
Passenger load factor during the quarter declined 1.0 percentage point to 83.5% from 82.5% in the corresponding quarter last year. The marginal decline is load factor improvement reflected Air Canada's disciplined approach to capacity management and the various new initiatives undertaken to stimulate traffic and generate revenues, such as the new 7% commission paid to Canadian travel agents since June 2009 on Tango fares.
Unit cost, as measured by operating expense per ASM or CASM, decreased 9.2% to 15.4 cents from 16.9 cents last year. Excluding fuel expense, CASM increased 4.5% year-over-year to 11.3 cents, reflecting higher aircraft maintenance expenses.
Other Metrics
Air Canada's operating income for the third quarter nearly halved to C$68 million from C$112 million in the year-ago quarter, and operating margin declined 110 basis points to 2.5% from last year.
Air Canada reported earnings before interest, taxes, depreciation and aircraft rent or EBITDAR of C$320 million for the third quarter, lower than C$355 million in the third quarter of 2008.
Operating expenses for the quarter declined 12% from the prior-year quarter, reflecting year-over-year decrease in fuel prices. A weaker Canadian dollar versus the U.S. dollar also resulted in additional expenses of $60 million in the quarter. Fuel price per litre dropped 32% to 68.6 cents from 101.0 cents in the comparable period last year.
In the second quarter of 2009, Air Canada launched a company wide Cost Transformation Program in which it identified C$500 million in annual revenue enhancements and cost reduction initiatives which it expects to realize over the next three years through more efficient operational processes, better vendor contract management and more effective manpower planning.
Air Canada is on track to achieve expected annual revenue and cost reduction initiatives of C$50 million in 2009, C$250 million by 2010, of which C$145 million has been achieved, and the full C$500 million by 2011, of which $175 million has been achieved, on a run rate basis.
The company ended the third quarter with cash, cash equivalents and short-term investments of C$1.21 billion, compared to C$1.11 billion at end of the prior-year quarter. At October 31, 2009, Air Canada's cash, cash equivalents and short-term investments amounted to C$1.46 billion which included net proceeds of $248 million from its recent equity offering.
Nine-Month Highlights
For the nine-month period, Air Canada reported net income of C$32 million or C$0.30 per share, compared to a net loss of C$298 million or C$2.98 per share in the prior-year period.
Operating revenues for the year-to-date period dropped to C$7.39 billion from C$8.58 billion in the same period last year.
Outlook
Looking ahead to the fourth quarter, Air Canada expects system ASM capacity to increase by between 1.0% and 2.0% compared to the fourth quarter of 2008 and the company anticipates CASM, excluding fuel expense, to decrease between 3.0% and 4.0% from last year. The guidance reflects Air Canada's assumption that the North American economy will remain weak for the fourth quarter of 2009.
Further, for the full year 2009, Air Canada currently expects system ASM capacity to decline between 4.25% and 4.75% and full year domestic ASM capacity to decline between 3.5% and 4.0%. The airline said its improved guidance reflects higher customer demand. Earlier in August, the company projected fiscal 2009 ASM capacity to decline 4.5% to 5.5% from fiscal 2008 and domestic ASM capacity to decline between 4.5% and 5.5%.
The company anticipates CASM, excluding fuel expense, for the full year 2009 to increase between 3.0% and 3.5% from last year. Earlier, the company projected CASM, excluding fuel expense, to increase of 4.0% to 5.0%.
"Our improved balance sheet will give us more financial flexibility to meet challenges as they arise. Although we are seeing indications that the bottom of the recession is now behind us, the industry is still facing an extremely challenging revenue environment and we do not expect to see a full recovery for another 12 to 18 months," Rovinescu added.
Stock Quote
AC-A.TO closed Thursday's regular trading session on the Toronto Stock Exchange at C$1.12.
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