Bloomberg News

Air Canada Falls Most Since 2009 as Profit Forecast to Drop (3)

February 12, 2014

Air Canada Flights

Air Canada uses U.S. dollar currency derivatives and U.S. dollar cash reserves to offset about half of its net U.S. dollar exposure this year. Photographer: Brent Lewin/Bloomberg

Air Canada (AC/A) tumbled the most in more than four years after forecasting a drop in first-quarter profit because of a weaker Canadian dollar and “severe” winter weather conditions.

Earnings before interest, taxes, depreciation, amortization and rent will fall as much as C$30 million ($27.3 million) from a year earlier, Air Canada said today. The stock slid (B:US) 20 percent to C$6.22 at the close in Toronto, its biggest single-day decline since May 2009.

The forecast shows the impact of the loonie’s loss of about 3.4 percent of its value against the U.S. greenback in 2014, the second-worst performance among 16 major global currencies. Frigid temperatures took a toll as well, forcing Montreal-based Air Canada to cancel dozens of flights last month at its main hub, Toronto’s Pearson International Airport.

“This winter is clearly an outlier, but the currency was the bigger hit in the quarter, and the bigger issue,” David Tyerman, a Canaccord Genuity Inc. analyst, said by telephone from Toronto. “If the dollar stays at its current level, then that’s a long-term change and something that Air Canada has to offset.”

Jet fuel and planes are both sold in dollars, putting a squeeze on airlines when foreign currencies decline against the dollar. Tyerman, who rates Air Canada as buy, said fares will have to rise because carriers typically need to find more revenue and cut expense to recover from a “cost shock.”

Fourth Quarter

Fourth-quarter profit excluding some costs and gains totaled C$3 million, or 1 cent a share, the company said. That missed the 11-cent-a-share average of analyst estimates.

Foreign-exchange effects boosted operating expenses in the quarter by C$75 million, Air Canada said. That was partially offset by a favorable currency impact on passenger revenue of C$24 million and realized currency-derivative gains of C$13 million, the company said.

“Severe” weather conditions in December reduced profit that month by C$15 million, the company also said. Disruptions at Pearson last month had “about the same impact” on operating costs, Chief Financial Officer Michael Rousseau said today on a conference call with analysts.

Chief Executive Officer Calin Rovinescu said on the call that Air Canada will be able to “mitigate the financial impact of these challenges.”

Currency Derivatives

Air Canada uses U.S. dollar currency derivatives and U.S. dollar cash reserves to offset about half of its net U.S. dollar exposure this year. As of Dec. 31, the company said it had $1.55 billion of currency derivatives and $743 million of U.S. dollars on hand. Air Canada said the currency derivatives allow it to buy U.S. dollars at a weighted average price of C$1.0341.

Air Canada’s forecast assumes that the Canadian currency will trade at C$1.10 per U.S. dollar this year.

Air Canada has “a series of initiatives” under way to lower costs by more than C$100 million this year, Rousseau said, without giving specifics. The company is “firmly committed” to a goal of cutting expenses by 15 percent over five years, Rovinescu said.

Rovinescu told investors at a presentation in June that the carrier was planning to reduce costs with the help of higher-density aircraft, new maintenance agreements and the start last year of the Rouge leisure unit.

Dreamliner Delivery

New aircraft such as Boeing Co.’s (BA:US) 787 Dreamliner, the first three of which will be delivered this year, “will really move the needle,” Rovinescu said.

Sales climbed 1.9 percent to C$2.89 billion in the fourth quarter, short of the average projection of C$2.93 billion. Passenger revenue for each seat flown a mile fell 1.7 percent as yield, or average field fare per mile, dropped 0.6 percent.

Costs for each seat flown a mile, excluding fuel, the cost of ground packages at the company’s Air Canada Vacations unit and other items, dropped 2.3 percent in the fourth quarter -- in line with a drop of 2 percent to 3 percent that the company projected in November.

On that basis, Air Canada (AC/B) said today it expects costs to decline 1 percent to 2 percent this quarter. For all of 2014, costs will probably fall 2.5 percent to 3.5 percent, the company said. The projected weaker Canadian dollar adversely impacts the cost outlook by 1.4 percentage points, Air Canada said.

To contact the reporter on this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net


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