Bloomberg News

ACE Aviation Has 4th-Qtr Loss on Record Fuel Prices

February 10, 2006

ACE Aviation Holdings Inc. (ACE/H), owner of Air Canada, the country's largest airline, had a bigger net loss in the fourth quarter than analysts expected because of rising costs for fuel and labor, prompting the company to cut 600 jobs.

The loss was C$103 million ($89.8 million), or C$1.02 a share, compared with profit of C$15 million, or 17 cents, a year earlier, Montreal-based ACE Aviation said in a statement today. Revenue rose 15 percent to C$2.36 billion from C$2.06 billion.

Air Canada's gains from flying more passengers at higher airfares were pared by rising expenses, including a 34 percent increase in jet-fuel costs. ACE announced plans today to fire about 20 percent of its non-unionized workforce to reduce labor costs, the company's biggest expense.

``The numbers are disappointing,'' said Research Capital Corp. analyst Jacques Kavafian, who rates ACE a ``buy'' and doesn't own the shares. ``Revenue was up C$300 million in the quarter, but fuel was up only C$146 million. They've got other expense items that they've got to watch, everything else went up.''

Kavafian expected ACE to lose 16 cents a share, excluding gains from selling assets and the impact of foreign exchange on debt. The average estimate of 10 analysts surveyed by Thomson Financial for ACE's loss was 45 cents. Thomson declined to say whether the earnings included one-time gains or expenses.

ACE shares fell C$1.32, or 3.8 percent, to C$33.90 by the 4 p.m. close of trading on the Toronto Stock Exchange.

Operating expenses rose 16 percent from a year ago, including a 9 percent increase in labor costs to C$648 million. Labor accounts for 27 percent of the company's costs.

Job Cuts

The job cuts apply to workers at units such as Air Canada and its cargo operations, and represent about 1.8 percent of the workforce of 33,000. The cuts probably will cost about C$40 million in the first quarter, Chief Financial Officer Brian Dunne said on a conference call today.

Expenses for depreciation and amortization of aircraft rose 47 percent to C$125 million in the quarter after ACE acquired new regional jets and signed a lease for aircraft for cargo operations.

Fuel costs rose by C$146 million, or 34 percent, ACE said. The average price of jet fuel for immediate delivery at New York Harbor was $1.89 a gallon in the period, 32 percent higher than a year ago, and touched a record high of $2.50 on Sept. 28.

Traffic

Traffic, or the number of miles flown by paying passengers, rose 9 percent. The yield, or average fare for flying a paying passenger one mile, rose to 18.6 cents from 17.3 cents, the company said. ACE filled 76.7 percent of its seats on each plane in the quarter, from 75.5 percent a year earlier.

``From an operating perspective it's very solid, though obviously impacted by fuel costs,'' said Michael Embler, chief investment officer of Franklin Mutual Advisers in Short Hills, New Jersey, whose $50 billion portfolio includes ACE shares. ``It was a little bit disappointing on the maintenance service, but they continue to execute very well and it continues to be a very cheap stock.''

ACE's maintenance business, which Chief Executive Officer Robert Milton has earmarked for a share sale this year, lost C$12 million in the quarter. ACE's Aeroplan customer-rewards program, the company's most profitable unit, had profit of C$30 million and the Jazz regional airline had profit of C$32 million.

ACE, which has sold stakes in Aeroplan and Jazz in the past eight months, also may sell other businesses, Milton said today in a conference call with investors.

Possible Sales

``Dependent on the situation, dependent on the values, we would consider selling any or all of any of the companies,'' Milton said. ``Nothing will be ruled out if it will enhance the value for the ACE shareholder.''

Air Canada Vacations, the tour-package business, also may take over or merge with other companies, Milton said.

In a separate statement today, ACE said airline employees will receive C$54.8 million through the company's profit-sharing program for 2005, representing an average 2.7 percent of salaries. The employees had already received C$34 million of this bonus through incentive programs.

To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net.

To contact the editor responsible for this story: David Scanlan in Toronto at dscanlan@bloomberg.net.


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