Air Canada Jumps as Higher Profit Forecast Delivers New Jolt

(Bloomberg) -- Air Canada, already the nation's top-performing industrial stock this year, surged again after raising its profit outlook as the airline's international expansion bolsters demand.

The addition of 16 overseas and U.S. routes is drawing more passengers using Canada as a stopover on their way to other destinations, the company said in a statement Tuesday. Air Canada said it flew close to 167,000 people on June 29, a record, while fuel costs and pricing power remained stable in the quarter. 

The increase in customers comes as Air Canada benefits from plans to renew its fleet with more fuel-efficient aircraft such as the Boeing Co. 787 Dreamliner, which is driving down costs and improving profit margins. The expansion of the Rouge discount unit is drawing customers and a debt refinancing completed last year also helped reduce expenses.

“The outlook appears to be very constructive and implies material upside to estimates,'' Fadi Chamoun, a BMO Capital Markets analyst, said in a note to clients. “The results underscore a significantly stronger demand environment than anticipated alongside a very robust execution.''

Air Canada jumped 9.6 percent to C$21.74 in Toronto, its highest closing price since the company returned to the stock market in 2006. The shares have gained 59 percent this year, while a sub-index of Canadian industrial stocks advanced 7.5 percent for the period.

Earnings before interest, taxes, depreciation, amortization, impairment and aircraft rent will climb to 17 percent to 19 percent of revenue in 2017 and 2018, the Montreal-based carrier said in the statement. The forecast compares with a range of 15 percent to 18 percent disclosed May 5.

The company said it would hold an investor day Sept. 19.

Profit Beats

Second-quarter adjusted earnings of 78 Canadian cents were more than double the 38-cent average of analysts' estimates compiled by Bloomberg. Revenue of C$3.91 billion ($3.13 billion) also beat the C$3.79 billion average estimate.

“We've made significant progress over the last several years, and these record financial results are clear evidence of the successful execution of our business plan,” Chief Executive Officer Calin Rovinescu said on a conference call.

For more on Air Canada's expansion plan, click here

The airline's biggest domestic rival, WestJet Airlines Ltd., also reported quarterly earnings Tuesday that exceeded analysts' expectations. WestJet's profit of 41 Canadian cents a share beat the 27-cent average estimate. The carrier's shares rose 3 percent to C$25.60.

The planned startup of an ultra-low-cost carrier will be delayed until the summer of 2018, WestJet said in a statement without explaining the reasons for the new timetable. The Calgary-based airline had previously said the unit would begin operating this year with a fleet of 10 high-density Boeing 737-800s.

At Air Canada, free cash flow this year will probably be C$600 million to C$900 million, the airline said. That exceeds the C$200 million to C$500 million range projected in May.

Cost Pressures

At the same time, Air Canada warned anticipated cost savings through 2018 will fall short of a previously disclosed target. Costs for each seat flown a mile will drop about 17 percent from 2012 to 2018, compared with a 21 percent target, the company said.

Air Canada blamed the shortfall on lower-than-anticipated capacity growth and higher non-cash depreciation expenses, as well as “cost increases not anticipated at the time related to the airline's investment in initiatives focused on improving customer service levels.''

The Canadian dollar has gained about 7.7 percent this year against its U.S. counterpart. Jet fuel and aircraft maintenance are two expenses denominated in U.S. dollars.

--With assistance from Kristine Owram

To contact the reporter on this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net.

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Bruce Rule, Molly Schuetz