Profitable Air Canada a group effort, CEO emphasizes
VANCOUVER — Calin Rovinescu is quick to note that Air
Canada’s financial turnaround isn’t a one-year story with himself in the starring role.
It’s a long-term story and the cast of starring players runs deep, the airline’s chief executive said last week.
“This isn’t something done by any one individual,” said Rovinescu, who became CEO in April 2009. “This is a concerted effort by many of our folks on the operations side and the commercial and finance side.”
Rovinescu is to speak today at the University of Calgary’s downtown 8th Avenue campus, beginning at noon.
The once-troubled airline reported its “best quarterly performance” in company history on Friday, with adjusted third-quarter profits climbing to $365 million from $229 mil- lion during the same period last year.
Investors embraced the news, and Air Canada shares, which traded in the $1.50 range a year ago, have gained $1 since Friday, closing Monday at $6.60 in Toronto, their highest level in more than five years.
Myriad cost-cutting measures have put the airline in a strong position to proceed with growth plans, especially in international markets. Those measures include new labour contracts achieved after tough negotiations, restructured debt, and a significantly smaller pens i on f und liability — whi c h peaked at more than $4 billion last year, but now is believed to be less than $1 billion.
The pension fund situation has been helped by improved equity markets, higher discount rates and a federal government decision to let Air Canada lower its mandatory contributions to the plan to $150 million annually.
“The pension shortfall is a much, much lower amount and one that we have actively managed,” Rovinescu said.
A leaner Air Canada launched its new leisure service — Air Canada Rouge — this year and has ordered several new state-of-the-art Boeing aircraft to help it become a bigger player in international markets.
It has taken delivery of two of five new Boeing 777300ER aircraft, and expects to receive six Boeing 787-800 Dreamliner planes next year, as well as another 31 between 2015 and 2019.
The new 777 plane has 109 more seats than the previous configuration used by Air Canada, pushing the seat total to 458 and allowing the airline to introduce a new “Premium Economy” class with a higher price point than regular economy but lower than “Executive First” class.
Air Canada said last month that it will use 777 aircraft on its CalgaryLondon (Heathrow) and CalgaryFrankfurt routes next summer. The larger aircraft can seat 349 passengers, versus the 211 that can be accommodated on a 767.
The 787 Dreamliner has been plagued with problems that have forced Boeing to delay deliveries until it sorts them out. The aircraft was subjected to a worldwide grounding this year over lithium ion battery problems, and a panel fell off the underbelly of an Air India jet last month.
Rovinescu isn’t thrilled by the delays, as the extended range of the 787 should open new markets that Air Canada is anxious to access. But he appreciates manufacturers that develop new technologies, so he’ll wait for the Dreamliner to get fixed before it becomes part of his airline’s fleet.
“Boeing and Airbus have both pushed the envelope with technology, and that’s a good thing because if they didn’t do that, we’d still be stuck in the days of turboprop (engines) or stuck in the days of Orville and Wilbur Wright,” Rovinescu said.
The Dreamliner is made of lighter composite materials so the aircraft offers fuel savings of about 28 per cent compared with a 767, which it is intended to replace.
“It can fly virtually any mission, anywhere on the planet from Canada,” Rovinescu said. “That gives us enormous range and enormous scale.”
Rovinescu wants Air Canada to grab a larger share of business in emerging markets such as Brazil and China. It flies to Hong Kong, Beijing and Shanghai, but is considering service to so-called “secondary cities” in China from Vancouver.
“I hate to use the term ‘secondary’ because they are (actually) so massive,” said Rovinescu, who doesn’t want to name the potential new markets.
But he revealed Air Canada will consider expanding its service to Brazil by flying to Rio de Janeiro, rather than just to Sao Paulo.
Expanded European service is also likely, through the airline’s Atlantic Plus-Plus joint venture with United and Lufthansa, which basically pools the airlines’ transatlantic revenues.
Air Canada hopes to increase annual revenues by as much as $400 million a year by grabbing its “fair share” of what is known as “sixth freedom traffic” and funnelling much of it through Toronto’s Pearson Airport. Sixth freedom traffic is when an airline from one country carries traffic from one foreign country to another foreign country via the home country of that airline. Air Canada has about 0.3 per cent of that market, but feels its “fair share” would be about 1.5 per cent.
University of B.C. Sauder School of Business professor David Gillen said Air Canada has done a very good job building its sixth freedom traffic through Toronto.
“I’m surprised at that, given its relationship with (the Star Alliance airline network), because it is clearly taking some passengers from United and other carriers,” he said.
Gillen feels Air Canada could have room to make inroads in the U.S., where there has been “tremendous capacity discipline” in recent years. He noted the number of flights within the continental U.S. last year was the same as it was in 1995, and feels that same trend has carried over into U.S.-based international flights.
Gillen feels Rovinescu’s cost-cutting strategies have been very effective, and the airline has benefited from fuel costs that have dropped about four per cent in the past year. But he warned labour costs could rise.
“Labour may look at this (improved financial situation) and decide they want a piece of the action, too,” Gillen said.
He also said Air Canada benefits from federal policy that favours the airline in international air service agreements.
“The federal government seems to take the view that their mission statement is ‘one global airline and one global airport,’ which is great for Air Canada and great for Toronto,” Gillen said.
CUPE airline division president Michel Cournoyer, whose union represents about 7,000 Air Canada flight attendants, isn’t sure about its designation as a superior employer.
CUPE is fighting the airline’s plan to reduce the number of flight attendants from one for every 40 passengers to one for every 50, something that Transport Canada approved for WestJet earlier this year.
“Listen, we’re glad the company is doing well, and we have no problem with that,” Cournoyer said. “But we shouldn’t put airline profitability ahead of passenger safety. The one-in-40 ratio has been in place for the last 40 years in Canada, and we should be proud of that and proud of our safe skies.”