Air Canada shares up 25 per cent

Air Canada’s shares surged more than 25 per cent Friday to their highest level in nearly two months after the company upgraded its outlook for the first quarter and said it expects a strong summer season.

The airline said it has done a better than expected job at offsetting the effect of a lower Canadian dollar and winter weather disruptions by increasing revenues and lowering costs. Its shares closed at $7.30, up $1.54 or 26.7 per cent, in heavy Friday trading on the Toronto Stock Exchange.

Air Canada says it now expects earnings before interest, taxes, depreciation, amortization and rent (EBITDAR) will be about the same as a year ago, a $15-million to $30-million improvement from its February guidance.

The change was hailed by analysts, some of whom increased their target price for Air Canada shares.

“We are encouraged by the stronger than expected recovery of the Canadian dollar cost shock,” David Tyerman of Canaccord Genuity wrote in a report.

He said the result would still be “soft” but better than forecast when the loonie suddenly decreased to about 90 cents US.

Tyerman also raised his outlook for the second quarter, but said offsetting the cost hit will be difficult to achieve. In the past, Canadian airline profits have rebounded within two to four quarters after past cost shocks, he said.

Several initiatives being pursued by Air Canada — increasing the number of seats on large Boeing 777s, expanding low-cost Rouge subsidiary and adding new Boeing 787s this year — are designed to reduce costs by 15 per cent and should be the main drivers to an improving share price, he added.

Walter Spracklin of RBC Capital Markets said Air Canada’s cost-reduction strategy is “sound” and provides enough flexibility to deal with currency changes, fuel fluctuations and increased competition.