Canadian airline profits soar

Increased passenger traffic and lower operating costs are driving profitability at Canadian airlines, with Air

Canada and WestJet both posting robust second quarter profits that beat expectations.

With the launch of 16 international and U.S. routes in the second quarter, Canada’s largest airline reported robust traffic growth of 13.6 per cent, driving passenger revenues up by 11.9 per cent to $3.52 billion. On June 29, Air Canada flew nearly 167,000 passengers, setting an all-time record that chief executive Calin Rovinescu expects will be surpassed over the coming August long-weekend. “We have increasing confidence that our business plan can deliver what we expect it to, regardless of fuel prices, foreign exchange or other extraneous factors,” Rovinescu said in a conference call with analysts Tuesday.

“Demand continues to be robust in a stable fuel and pricing environment as we move into what has historically been our most important quarter, given the travel demands and patterns of our North American customers.”

Air Canada’s net income reached $300 million, or $1.08 per diluted share, in the three-month period ending June 30, an increase from $186 million, or $0.66 per diluted share, from the same time in 2016. Adjusted net income was $215 million, or $0.78 per share, almost double the alreadyelevated average analyst consensus of $0.38, according to Bloomberg.

Air Canada issued a press release in early July that it had set a record for passengers flown in one day, and that its earnings before interest, taxes, depreciation, amortization, impairment and aircraft rent (EBITDAR) would “significantly exceed” analyst expectations of $475 million. The company’s EBITDAR came in at $670 million, surpassing last year’s record second-quarter results of $605 million. Air Canada adjusted its EBITDAR guidance, and now expects to achieve an annual margin of 17 to 19 per cent, up from the previously anticipated 15 to 18 per cent.

The airline also revised its 2017 guidance for expected free cash flow from between $200 million and $500 million to $600 million and $900 million, which will be used in part to reduce debt levels.

Air Canada’s adjusted cost per available seat mile (CASM), a measure of how much an airline spends to fly passengers, decreased 3.5 per cent from the same time last year, driven by lowerthan-anticipated aircraft maintenance expenses. The airline said it expects adjusted CASM to continue to decrease by between 1.5 and 2.5 per cent through the next quarter.

Air Canada shares soared as much as 12 per cent on Tuesday, closing in Toronto at $21.74, up 9.6 per cent.

In a note to clients, RBC Capital Markets analyst Walter Spracklin called the results “significantly better than ‘significantly better’.”

“The company exceeded expectations that were already revised higher on Q2; it indicated that the demand environment remains robust into Q3; and it provided material increases to its guidance in virtually all metrics,” Spracklin wrote.

“Combine this with what we view as a significantly undervalued stock that is trading well below peers, and a key potential catalyst to come in the form of the September Investor Day, we continue to see Air Canada as the stock to own in our coverage universe.”

Going forward, as the airline shifts its focus from wide-body expansion to its narrow-body fleet replacement program, Rovinescu expects capacity growth to slow down, beginning in 2018.

WestJet Airlines Ltd. also reported a solid second quarter, flying a record amount of passengers while posting net earnings of $48.4 million, or 41 cents per diluted share, up 32 per cent from the same time last year, beating the analyst consensus of 27 cents.

The company flew a record 5.9 million passengers, while revenue per available seat mile (RASM) increased 4.6 per cent from the same time last year to 13.95 cents. Revenues increased by 11.1 per cent to $1 billion.

“We not only grew earnings significantly, we expanded margins, reported double-digit revenue growth and, for the second-consecutive quarter, recorded positive year-over-year RASM growth,” said chief executive Gregg Saretsky in a conference call with analysts.

“Clearly our business fundamentals are strong and we are confident that the strategic initiatives we are pursuing position us for continued profitable growth.”