Air Canada ready to respond to WestJet plans
Studying how ultra-low-cost carriers play out
• Air Canada said on Friday that it plans on taking a “wait and see” approach when i t comes to ultra- low- cost carriers ( ULCCs), but is well positioned to respond to WestJet’s plans to roll out the alternative service.
Benjamin Smith, Air Canada’s president of passenger airlines, told analysts on a conference call Friday morning that the Montrealbased airline has many tools at its disposal to compete in the domestic market, particularly through the use of Air Canada Rouge, its lowercost leisure carrier.
“We are very well positioned to react to whatever takes place in the marketplace, unlike where we were 10 or 15 years ago,” Smith said.
Earlier this week, WestJet announced that it will purchase up to 20 Boeing 787- 9 Dreamliners as it sets its sights on expanding its international reach in Europe, Asia and Latin America.
The move is part of a larger strategy that will see the Calgary- based company look for growth in both the longer- haul and ultra- lowcost segments.
When i t comes to t he launch of an ultra- low- cost carrier, Air Canada president and chief executive Calin Rovinescu said the company will “wait and see how it plays out.”
“We have no restrictions on deploying Rouge domestically if that’s what we decide to do, so we’ ll look to see how the marketplace evolves,” he said on Friday’s conference call with analysts.
The federal government announced in November it would provide aspiring aircraft carriers from existing foreign ownership limits and pursue legislation to permanently raise the limit to 49 per cent for all Canadian carriers.
But there are still many obstacles in the market, said Rovinescu.
“Canada has its own unique dynamics, which also involve the infrastructure costs that we have in this country which we’ve been fighting for a long time to reduce,” he said.
“I think it’s one of the reasons why we haven’t seen more ULCCs come into the market earlier, and we haven’t seen trans- border traffic by some of the U.S. ULCCs.”
Smith said Air Canada has been t esting Rouge on “a very selective basis” over the last year or more on various routes, including Toronto to Abbotsford, Toronto to Victoria, and Toronto to several locations in the Maritimes, to see whether it would cannibalize yields on the airline’s main routes.
Smith said while Air Canada is pleased with the service, there are no expectations of increasing it at this time.
“But we do have it ready and we have no restrictions if we would like to go down that path,” he said.
The company has the option of removing premium seats from Rouge planes and other aircraft and installing regular seats, which would match the 189- seat capacity on WestJet’s proposed ULCC flights.
Rovinescu also said he isn’t concerned with more airlines moving into the international market.
“To be very, very frank, the addition of incremental competition is something that at this stage is not troubling to us,” he said.
Meanwhile, higher fuel costs continue to squeeze margins for airline companies.
Despite traffic and revenue growth, Air Canada reported a net loss of $ 37- million in the first quarter, or 14 cents per share, driven largely by higher fuel costs.
Fuel costs increased by 48 per cent compared to the same time last year.
Passenger traffic grew 14 per cent in the first quarter, reflecting growth in routes across the world, while revenues increased 8.9 per cent to $3.64 billion.
Air Canada did better than expected in what is considered a weak quarter for the company, AltaCorp Capital Inc. analyst Chris Murray said, adding that the airline is well positioned to take advantage of what appears to be strong demand for travel.
However, Ro vinescu added that capacity growth, driven by wide- body fleet expansion, is expected to slow next year as the company focuses on its narrowbody fleet.
Air Canada’s cost per available seat mile ( CASM), a measure of how much an airline spends to fly passengers, fell six per cent to 11.6 cents, driven in part by lower than anticipated maintenance expenses.
The carrier reported firstquarter earnings before interest, taxes, depreciation, amortization, impairment and aircraft rent ( EBITDAR) of $ 342 million, a margin of 9.4 per cent, better than projected. Air Canada said it still expects to achieve its EBITDAR margin of 15 to 18 per cent by the end of 2017.
Air Canada was up 8.5 per cent to $ 13.88 on the Toronto Stock Exchange in late afternoon trading.
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