Air Canada CEO vows to dodge ‘New Coke’ error

Air Canada raised the bar for itself Tuesday, announcing ambitious new financial targets but promising it will stick to the strategy that has helped lift its shares 1,600 per cent since 2009.

“Drawing on the lessons of New Coke, we’re not about to fiddle with a recipe that has proven successful,” CEO Calin Rovinescu said at the company’s investor day in Toronto.

Air Canada easily exceeded the targets it set at its last investor day in 2013 thanks to a wholesale restructuring that is still underway, and said it’s “confident enough” in its ongoing transformation to predict further improvement for the 2015-18 period.

Specifically, the airline is targeting an annual margin of 15 to 18 per cent, return on invested capital of 13 to 16 per cent and, by 2018, a leverage ratio of 2.2.

By comparison, Air Canada’s margin in 2014 was 12.6 per cent, return on invested capital was 12.1 per cent and the leverage ratio was 3.1.

“We’re delivering on a permanently lower cost structure,” Rovinescu said.

Air Canada’s management team spent three hours Tuesday outlining the ways in which it has cut costs and boosted revenue since 2009, when Rovinescu became CEO and it appeared the company might not be able to avoid another trip to bankruptcy court.

“In 2009, we had a choice: transform or disappear,” Rovinescu said, adding that Air Canada was under pressure at the time to slash its fleet, routes and headcount in order to survive.

Instead, the airline started buying planes and expanding internationally while lowering its operating costs. “We leaned in rather than shrink and the run is not over,” he said. “We want to raise the bar further, provide more ambitious targets and narrow the valuation gap with our U.S. peers.”

Air Canada’s shares rose 1.3 per cent Tuesday to $14.38.

The airline’s stock has long traded at a discount to its U.S. competitors, but that gap should shrink as long as it maintains its discipline and doesn’t add too much capacity, said Salman Malik, portfolio manager at Barometer Capital Management, which holds Air Canada debt and equity.

“I think they have done the heavy lifting,” Malik said in an interview. “If they can reduce costs, improve profitability and stay disciplined, there is no reason that they cannot trade at the same multiple as Delta and Southwest in the U.S.”

One of the major contributors to Air Canada’s cost-cut-

We will be able to make big inroads against these carriers

ting efforts has been Rouge, the budget carrier that it launched in 2012. With lower labour costs and denser planes — industry-speak for less legroom — Rouge is giving the airline more flexibility and “disproportionately improving our bottom line,” said Ben Smith, president of passenger airlines.

The introduction of Boeing Co.’s cost-efficient 787 Dreamliner has had a similar impact, giving Air Canada the ability to “opportunistically take advantage of some weaker competitors,” Smith added.

He pointed to Canadian tour operators like Transat AT Inc. and Sunwing Airlines Inc. as examples of companies from which Air Canada can steal international market share.

“With the advantages, flexibility and all the tools we have, going forward we will be able to make big inroads competing against these carriers,” Smith said.