National Post (National Edition)
‘Darkest period ever’ for commercial aviation
AIR CANADA SEES PANDEMIC IMPACT LASTING THREE YEARS
Air Canada expects it will take three years to recover from the “darkest period ever” in commercial aviation as the coronavirus pandemic continues to prove cataclysmic to the industry.
Canada’s largest airline on Monday reported a $1.05-billion loss in the first quarter compared to a $345-million profit in the same period last year due to crashing demand and revenue from COVID-19 global travel restrictions and quarantine orders. It plans to permanently downsize its head count and fleet to account for reduced capacity, which it expects to cut from last year by 85 to 90 per cent in the second quarter and 75 per cent in the third quarter.
“We’re now moving through the darkest period ever in the history of commercial aviation, significantly worse than the aftermath of 9/11, SARS, and the 2008 financial crisis,” chief executive Calin Rovinescu said on an analyst call Monday.
“We expect that both the overall industry and our airline will be considerably smaller for some time, which will unfortunately result in significant reductions in both fleet and employee levels.”
The airline’s stock price dropped 9 per cent to $17.52 by Monday afternoon, although the fall was part of a wider industry sell-off after billionaire Warren Buffett’s Berkshire Hathaway sold its position in the four largest American carriers.
While Air Canada expects to struggle through an extended rebound, analysts noted the airline is facing bad times from a strong cash position. It started the year with $7.4 billion in liquidity and ended the first quarter with $6.5 billion.
That “represents a formidable buffer as we await a ‘restart’ of the industry, which seems sure to be smaller in any scenario over the next couple of years than before COVID-19,” Canaccord Genuity analyst Doug Taylor noted to clients.
Still, timing of the recovery will be very slow, National Bank analyst Cameron Doerksen noted to clients, adding he expects significant losses and negative free cash flow in the coming quarters.
“We do believe that Air Canada has the financial strength to weather the storm for an extended period and may emerge from the crisis in a relatively stronger competitive position,” Doerksen wrote.
As it stands, Air Canada is “effectively … in a state of hibernation,” Rovinescu said, noting it’s parked most of its planes and put approximately 20,000 of its 38,000 employees on inactive status. It intends to use the federal government’s 75 per cent wage subsidy program to help cover salary costs for most employees.
Yet it still burned through approximately $20 million in cash daily to cover fixed costs including salary, rents, technology and maintenance, chief financial officer Mike Rousseau said on the call.
The airline plans to cut $1 billion in costs this year to help mitigate the revenue disappearance, an increase from previously announced cuts of $500 million and $750 million. It’s retiring 79 planes, about half of which will be replaced with newer models and half representing a permanent capacity reduction, and offering voluntary buyouts to its employees.
Unlike other countries including the United States, France and Singapore, Canada’s federal government has not yet announced a bailout package for the domestic airline industry. The global industry is expected to lose US$314 billion in revenue this year, according to the International Air Transport Association.
Prime Minister Justin Trudeau repeated Monday the government is “looking very carefully” at airline aid, but didn’t promise anything specific.
Rovinescu pointed out that international airlines including United Airlines, Singapore Airlines, Lufthansa, Air France and KLM have all received billion of dollars or euros from their respective governments. He didn’t call for specific financial aid for Canada’s airlines, but voiced his support for industry groups calling for government aid, and highlighted how critical air travel will be to economic recovery.
Air Canada suspended financial guidance for the remainder of the year, given it cannot control when governments will lift travel restrictions. “All the financial planning models have been flushed down the proverbial toilet,” Rovinescu said.
He expects that domestic travel will recover first, followed by U.S. transborder travel as people visit friends, family and vacation homes. Next will be leisure travel, with business and international travel lagging behind.
“This is a little bit of crystal-ball gazing,” he said. “That’s our best estimate at this stage.”
Executives did not answer questions about the future of Air Canada’s merger with leisure tourism and airline operator Transat A.T., which it agreed to purchase for $720 million, or $18 per share. They said they will not comment until regulators approve the deal that would give Air Canada a dominant position in the trans-Atlantic market.
If Transat is more affected by the pandemic than the industry as a whole, Air Canada could walk away from the deal due to a contract clause, according to a recent
WE BELIEVE ... AIR CANADA STILL INTENDS TO ACQUIRE
TRANSAT.
Reuters report. It’s not clear if Transat is worse off, yet investors believe its likely the price will be renegotiated based on Transat’s current stock price of about $8 per share, Desjardins analyst Benoit Poirier noted to clients Monday.
“Bottom line, we continue to believe that Air Canada still intends to acquire Transat as this would enable it to be better positioned to manage its potential recovery,” Poirier wrote.
In the meantime, Air Canada introduced extra health and safety measures for all passengers in recognition that consumer confidence will be critical before people start flying en masse.
It will conduct mandatory pre-flight temperature checks, stop booking adjacent seats until June 30 so passengers have more room on board and distribute personal care kits with disinfectants, among other measures.