Air Canada says its first quarter should be strong

Shares jump 15.6%, maintenance costs expected to fall

TORONTO – Air Canada shares jumped Friday morning after the company released a stronger-than-expected guidance for the first quarter.

At the same time, while the collapse of Aveos Fleet Performance Inc. last month will see Air Canada hit with a $120-million charge during the first quarter, it could improve the maintenance costs of the country’s largest carrier in the long run as it seeks more competitive suppliers, according to Cameron Doerksen, National Bank Financial analyst.

Shares in the company were up 15.6 per cent, trading at 96 cents a share on the Toronto Stock Exchange at closing.

Air Canada said late Thursday its first quarter would be hit with a one-time charge relating to the bankruptcy of Aveos, its former maintenance unit, including a $65-million hit tied to a non-cash loss on investments and $55 million related to the employee separation program.

But Doerksen noted Air Canada has already found alternative heavy maintenance suppliers for the short term, and has put out a request for proposal for a more permanent supplier base.

The airline said earlier this week 50 of its aircraft will go to two Quebec-based firms, Avianor and Premier, for maintenance work ahead of the busy summer season.

Another 60 aircraft will be sent to various centres in the U.S., Ireland, Hong Kong, Singapore, and Brazil.

“We believe that the closure of Aveos will allow Air Canada to reduce it aircraft maintenance expenses over the long-term,” Doerksen said in a note to clients.

While that will certainly have an impact on the company long term, shares in Air Canada jumped Friday on its first-quarter guidance for earnings before interest, tax, depreciation, amortization, and rent (EBITDAR) of between $170 million and $180 million released on Thursday, which was well ahead of Doerksen’s $34-million estimate. Doerksen noted its cash position was up to $2.25 billion as well from $2.1 billion at the end of the fourth quarter.

“Air Canada had previously indicated that (first quarter) would see substantially higher maintenance costs primarily due to the timing of maintenance events,” Doerksen said.

“With the closure of Aveos in mid-march, we speculate that some (first quarter) scheduled maintenance has been pushed to later quarters.”

He said he also suspected its first quarter unit revenue was better than his estimates as prices improved.

“As we have stated previously, we do not have imminent concerns about the company’s balance sheet,” he said.

“The preliminary expectations for (the first quarter) are clearly positive for Air Canada, but we await full details on the financials before adjusting our estimates and valuation.”

Air Canada will release its first-quarter earnings May 4.