Air Canada weighs higher fares, fees
Moves underway to cope with weakened loonie
MONTREAL • Air Canada is considering new fees and fare increases to blunt the effect of a weaker Canadian dollar as it works toward a goal of cutting operating expenses, chief executive Calin Rovinescu said.
“There are going to be some revenue strategies and some cost strategies,” Mr. Rovinescu s ai d in an inter vie w at Bloomberg’s Toronto offices, without giving details. “Both of those are in the course of being implemented.”
The Canadian dollar has lost about 3.3% of its value against its U.S. counterpart this year, the most among 16 major currencies tracked by Bloomberg. That boosts the cost of items priced in greenbacks, such as jet fuel and new planes. Last month, Air Canada cited a weaker Canadian dollar and “severe” winter weather in forecasting a drop in first-quarter profit.
While Montreal-based Air Canada dampens currency swings with “mini-hedges” such as US$1-billion in annual U.S. sales, those buffers aren’t enough, Mr. Rovinescu said. Air Canada recently introduced a $35 currency surcharge on vacation packages, and additional measures are under consideration, he said.
Mr. Rovinescu is working to turn Air Canada around after it struggled for financial footing after its 2004 bankruptcy exit. A July 2012 arbitrator’s ruling settled a pilot-contract dispute and curbed pension expense, spurring a rally that has more than doubled the stock in the past 12 months.
With the currency pressures, “their most important line of defence” is ticket prices, said David Tyerman, a Canaccord Genuity Inc. analyst in Toronto who rates the stock as buy. “They are going to keep reducing costs irrespective of what the dollar does.”
The target set in June for operating-cost savings stands, even with Canada’s dollar weakening about 7.2% since then, Mr. Rovinescu said. He plans a reduction of about 15% over five years in costs for each seat flown a mile, with benefits from more fuel-efficient jets, favourable maintenance agreements and lower labour expense at the Rouge leisure unit.
“This is a transformational program, and I’m very pleased with the early stages,” Mr. Rovinescu said. “What we said to the marketplace, that 15% objective, is still there. We’re confident.”
Chief financial officer Michael Rousseau has said Air Canada has “a series of initiatives” underway to cut costs by more than $100-million this year. He wasn’t specifics how.
Air Canada’s surcharge on vacation packages “is sticking, in most cases,” Mr. Rovinescu said. He said he couldn’t “signal to the marketplace” how the airline may change other fees or fares.
Asked if fares were going to rise, he said “there’s no free lunch, unfortunately, unless we can get the U.S. dollar to be more co-operative.”
The airline has “a lot of drivers already in place to mitigate” the currency, he said. The “nut to crack” is $4.5-billion of currency outflows, “but we have US$1-billion of U.S. dollar revenue, then you have US$1.5-billion of hedges, then you have some cost and pricing strategies. It should be a manageable amount.”
Air Canada plans to use U.S. dollar currency derivatives and U.S. dollar cash reserves to offset about half of its net exposure to the greenback this year. The company said last month it had US$1.55-billion of currency derivatives and US$ 743- million of U.S. dollars on hand as of Dec. 31.
The currency derivatives allow the purchase of U.S. dollars at a weighted average price of $1.0341, according to Air Canada, whose forecast assumes that the Canadian currency will trade at $1.10 per U.S. dollar this year.