Air Canada in position to erase pandemic losses
Net Q1 income soars over last year's as demand for travel rises, fuel costs fall
Air Canada is on the verge of erasing its pandemic-related losses thanks to surging demand for travel.
Canada's flagship air carrier reported net income of $4 million in the quarter ended March 31, a dramatic improvement from a massive loss of $974 million in the same period a year earlier.
The results are the latest evidence of the travel industry's rebound from COVID-19 related restrictions that effectively grounded global airlines in 2020, while battering hotels, restaurants and other businesses that rely on tourism.
Subsequent waves of COVID -19 affected travel through early 2022, when airlines suffered an additional blow from surging fuel costs related to Russia's invasion of Ukraine. Those headwinds have now receded, setting up airlines such as Air Canada to take advantage of pent-up demand from travellers who were forced to stay close to home for much of 2020 and 2021.
“As we look to strong advanced bookings for the remainder of the year, we expect demand to persist,” Air Canada chief executive Michael Rousseau said on a call with analysts.
Foreign exchange and other accounting adjustments forced Air Canada to record an adjusted loss per share of 53 cents, which was nonetheless a marked improvement over a $2.09 loss per share in the year-earlier period.
The company said revenue from passengers was $4.1 billion in the quarter, double the first quarter of 2022, as capacity increased more than 50 per cent. Free cash flow, an important metric of a company's health, increased to $987 million from $91 million a year earlier.
Air Canada shares were little changed after it updated its financials, as the stock was hovering around $21.40 per share, down from about $50 per share on the eve of the pandemic. Air Canada last week lifted its earnings outlook by $1 billion based on improved traffic, stronger-than-anticipated demand for travel and lower-than-expected fuel prices.
It raised EBITDA expectations to between $3.5 billion and $4 billion from the previous $2.5 billion and $3 billion.
The airline said it expects capacity to return to 90 per cent of pre-pandemic levels in 2019, with a plan to increase capacity by about 22 per cent in the second quarter compared to the same quarter in 2022.
Walter Spracklin, an analyst for Royal Bank of Canada, said the updated 2023 guidance highlights the decline in fuel prices that was creating a windfall impact on earnings, as the company continued to hold the line on pricing amid a strong demand backdrop.
“While it is our view that demand and pricing is expected to weaken post-summer, we are mindful of a potential structural shift in the nature of airline demand that may see travel hold up despite a weakening economy,” Spracklin wrote in a note to clients on Friday.
He noted to keep an eye on how demand holds up against a weakening macro backdrop and increased competition from ultralow cost startup airlines, which have been gaining momentum in Canada.
Chief financial officer Amos Kazzaz said the company is watching the expansion of certain carriers within the country “very closely obviously,” but remains optimistic based on its different businesses, such as Air Canada Vacations, Aeroplan and cargo.
“Certainly there'll be some pressure domestically and we're aware of that, we plan for that as we go forward. But the fact that we are so well diversified gives us comfort that we can compete in any environment,” Kazzaz told analysts during the call.
Just last year alone, discount airlines such Flair Airlines Ltd., Porter Airlines, Lynx Air and Westjet Airlines Ltd.'s Swoop have announced plans to expand to more routes by this summer. One of Air Canada's largest competitors, Westjet, also completed its takeover of Sunwing Airlines Inc. last month.
We are mindful of a potential structural shift in the nature of airline demand that may see travel hold up despite a weakening economy.