Air Canada sees lower profits
Revenues rise, earnings fall amid terror threats and Brexit
Air Canada reported lower profits in the second quarter, even though revenues were up slightly, as concerns grow over terrorist attacks in Europe and the Brexit vote in the U.K.
“Our perspective is we are operating in a somewhat uncertain world,” said Air Canada president and CEO Calin Rovinescu during a conference call with analysts on Friday. “But based on what we are seeing for our business, from our geography, it continues to be quite strong.”
Demand for the third quarter travel is steady, and it is traditionally a strong quarter. The company is forecasting earnings before expenses, like interest and taxes of 4 to 8 per cent for the full year.
It added 10 new international routes and11new routes to the U.S. in the second quarter on both its mainline and discount carrier Rouge, which Rovinescu called the “most intensive period of expansion in Air Canada’s history.”
The airline continues its focus on its push to draw more U.S. travellers to fly through Canadian hubs like Toronto’s Pearson airport onto global cities on other continents.
On June 30, the airline flew more than 160,000 passengers, setting an all-time record, which it expects to exceed during this August holiday weekend. Net profit was $186 million in the quarter, or 66 cents per diluted share, down from $296 million in the second quarter of 2015, or $1 per diluted share — thanks in part to lower jet fuel costs.
The airline reported $3.1 billion in revenues in this year’s second quarter, up $61 million from the same period last year — as it felt competitive pressure on flights over the Atlantic and in weak domestic markets, such as Western Canada, due to low oil prices.
Benjamin Smith, president of passenger airlines, noted that the airline is seeing lower demand, especially in originating traffic from the U.K., after the Brexit decision, where voters opted to leave the European Union in June.
He also specifically cited recent terrorism attacks in Belgium, France and Turkey as also having an impact on travel.
In the next quarter, the airline will move some of its planes to flights over the Pacific, where demand is stronger. It is also cancelling its Toronto to Rio de Janeiro route after the Summer Olympics due to weak demand in Brazil, Argentina and Chile.
Smith added the airline won’t fly routes that don’t make economic sense — but would consider returning if demand picks up.
Smith noted that the airline is using its discount Rouge brand on routes considered more leisure than business, where costs are lower.
“We are not deploying capacity in an irrational way. We are looking for margin expansion,” he said. “And we have the resilience to hold a stronger market position.”
It is also facing more competition from low-cost carriers like WOW air, which is flying from Toronto to Europe, via a stop in Iceland, though Smith said it is still a “limited amount.”
Air Canada can move planes to better performing routes as needed — though it remains committed to long-term expansion into Europe.
“It’s a strong market for us, and it’s a strong business market, and it’s a strong leisure market,” Rovinescu said. “Between the mainline and Rouge product, we have huge expectations for that market.”
For the winter, Air Canada will have more wide-body planes as it has taken delivery of more Boeing 787s this year. It plans to use 767 Rouge aircraft to U.S. sun destinations like Florida, Arizona, Las Vegas, Hawaii as well as the Caribbean and Mexico.
And the new 787s will be flown on routes like Vancouver to New Delhi and Toronto to New Delhi.
CIBC Capital Markets analyst Kevin Chiang said in a note to investors that it was another strong quarter by Air Canada as it executes on its overall strategy.
“We continue to see the airline structurally improve its earnings profile given its ability stimulate traffic and reduce its cost structure,” Chiang said, adding that while there is a tendency to focus on lower jet fuel prices, he noted that the airline is continuing to cut other costs.