Air Canada Reports Third Quarter 2011 Results

“Despite a 47 per cent increase in fuel prices year-over-year, our operating profit reflects our disciplined approach to capacity management and asset deployment, which resulted in a record load factor of 85.8 per cent for the quarter. This, combined with our industry leading product, drove strong revenue performance and yield growth in the quarter,” said Calin Rovinescu, President and Chief Executive Officer. 


“Through our Cost Transformation Program, we have now achieved our target of $530 million in annual sustainable benefits. We view cost transformation and continuous improvement as one of our most important priorities and a critical objective going forward to support ongoing unit cost reductions. In addition, we reduced adjusted net debt by close to $500 million when compared to September 30, 2010. 

“For the remainder of this year and next we will remain focused on our four key priorities: 1) leveraging our international network while maintaining a disciplined approach to growth, 2) improving our cost structure, tackling our pension deficit and increasing revenue generation, 3) focusing on premium class passengers and products, and 4) continuing to foster positive changes to our culture. 

“We will continue to manage capacity conservatively going forward given the current economic environment and therefore are planning for system ASM capacity growth of no more than 1.5 per cent in 2012. In the event of a prolonged economic slowdown affecting travel demand, our fleet would provide us with the flexibility to adjust capacity as necessary to mitigate the negative impact. We will also continue to evaluate opportunities to participate in the low cost segment of the market provided we can do so sustainably on a basis that is truly low cost. 

“I want to thank our employees for their commitment to these priorities despite the many challenges presented in the quarter. Their hard work has been recognized by our customers who ranked Air Canada as Best International Airline in North America, the second consecutive year we have achieved top honours in the annual Skytrax World Airline Awards survey of international air travellers.” 

Income Statement Highlights 

System passenger revenues increased $215 million or 7.9 per cent from the third quarter of 2010 on a 3.8 per cent growth in traffic and a 3.8 per cent improvement in yield. System capacity grew 2.6 per cent from the third quarter of 2010 supported by increased aircraft utilization year-over-year. 

A system yield improvement of 3.8 per cent reflected yield growth in all markets. The improvement was driven by higher fares and fuel surcharges to partly offset higher fuel prices, as well as traffic gains in the premium cabin year-over-year. Premium cabin revenues grew $38 million or 7.2 per cent, on traffic growth of 5.8 per cent and a yield improvement of 1.3 per cent. 

Passenger revenue per available seat mile (RASM) increased 5.1 per cent from the third quarter of 2010 as a result of the yield growth and a 1.1 percentage point improvement in passenger load factor. 

Operating expenses increased $252 million or 9 per cent from the third quarter of 2010, mainly on a 47 per cent increase in base fuel prices year-over-year, and on the system capacity growth of 2.6 per cent. Partially offsetting these increases was the favourable impact of a stronger Canadian dollar on foreign currency denominated expenses (which reduced operating expenses by $96 million when compared to the third quarter of 2010). Cost Transformation Program (CTP) initiatives also contributed to reducing various operating expenses. 

Unit cost in the third quarter of 2011, as measured by operating expense per available seat mile (CASM), increased 6.6 per cent from the third quarter of 2010. Excluding fuel expense, CASM decreased 0.4 per cent year-over-year, mainly due to the favourable impact of a stronger Canadian dollar on foreign currency denominated operating expenses (mainly U.S. dollars), the capacity growth and the impact of CTP initiatives. An increase in aircraft utilization and average stage length compared to the third quarter of 2010 also contributed to the year-over-year CASM, excluding fuel expense, decrease. The 0.4 per cent year-over-year decrease in CASM, excluding fuel expense, for the third quarter of 2011 was better than the 1.0% to 2.0% increase projected in Air Canada news release dated August 4, 2011. The improvement was largely due to lower than forecasted aircraft maintenance expense and wages, salaries and benefits expense. 

As a result primarily of foreign exchange losses, Air Canada reported a net loss of $124 million in the third quarter of 2011 compared to net income of $317 million in the third quarter of 2010, a change of $441 million. The third quarter 2011 results include foreign exchange losses of $281 million while the third quarter results of 2010 included foreign exchange gains of $115 million. 

Air Canada reported a loss per diluted share of $0.45 in the third quarter of 2011 on an unadjusted basis. The airline reported net income per diluted share, on an adjusted basis, of $0.55 in the third quarter of 2011 compared to net income per diluted share, on an adjusted basis, of $0.70 in the third quarter of 2010. Net income (loss) per diluted share in the third quarter of 2011 was adjusted to remove Air Canada’s losses on foreign exchange of $281 million. Net income (loss) per diluted share in the third quarter of 2010 was adjusted to remove Air Canada’s gains on foreign exchange of $115 million. 

Liquidity Highlights 

At September 30, 2011, Air Canada’s cash, cash equivalents and short-term investments totalled $2.179 billion which represented 19 per cent of 12-month trailing operating revenues. 

In the third quarter of 2011, free cash flow of $4 million decreased $108 million from the third quarter of 2010, largely due to a decrease in net cash from operations, consistent with the reduction in third quarter EBITDAR, an increase in capital expenditures and the impact of higher pension payments. This year, Air Canada expects to make current and past service payments to its pension plans of $308 million. 

Total debt and finance lease obligations, including current portion, amounted to $4,479 million at September 30, 2011, a decrease of $116 million from December 31, 2010. The reduction in long-term debt and finance lease obligations from December 31, 2010 was mainly due to repayments of $484 million, including balloon maturities totalling $221 million. This decrease was partly offset by the unfavourable impact of a stronger Canadian dollar on Air Canada’s foreign currency denominated debt (mainly U.S. dollars), which accounted for an increase of $213 million, and by proceeds from borrowings of $125 million. 

At September 30, 2011, adjusted net debt of $4,645 million increased $283 million from June 30, 2011 due to an unfavourable impact of foreign exchange of $331 million partly offset by debt repayments of $73 million. 

When compared to September 30, 2010, adjusted net debt of $4,645 million decreased $493 million mainly due to net debt repayments of $459 million and the favourable impact of foreign exchange on aircraft rent, which lowered capitalized operating lease obligations. 

Labour Update 

Following two ratification votes by the airline’s flight attendants, each rejecting a tentative collective agreement endorsed by CUPE’s bargaining committee, and the subsequent referral by the federal Minister of Labour of the matter to the Canada Industrial Relations Board, Air Canada and CUPE reached an agreement on October 20, 2011 on a final and binding process to resolve outstanding issues relating to the renewal of their collective agreement under Section 79 of the Canada Labour Code. The final and binding decision will set the terms of the collective agreement renewal and is to be issued by no later than November 7, 2011. During this process and once the new collective agreement is in force, the parties are bound by the Labour Code requirement that no strike or lockouts may occur. 

Following the ratification vote by Air Canada’s pilots rejecting a tentative agreement reached by Air Canada and ACPA, the union representing its pilots, on March 18, 2011, that had been endorsed by ACPA’s bargaining committee, Air Canada filed for the appointment of a federal conciliator on October 28, 2011 to facilitate talks towards a negotiated settlement in view of the time elapsed since the company had advised ACPA of its desire to return to the bargaining table. 

A new four-year collective agreement was ratified on June 27, 2011 with the unit of the CAW representing the airline’s call centre and airport customer service agents in Canada following a three-day labour disruption during which the airline maintained full operations. Air Canada has commenced negotiations with the CAW units representing the airline’s 125 crew schedulers. 

Air Canada has also commenced negotiations with the IAMAW representing the airline’s mechanics, baggage handlers, cargo agents and certain finance and clerical staff towards a new collective agreement. 

The company is in discussions with CALDA representing the airline’s 74 flight dispatchers following a failed ratification vote of a tentative agreement reached on August 19, 2011. 

Current Outlook 

For the fourth quarter of 2011, Air Canada plans to increase its system ASM capacity, as measured by available seat miles (ASMs), by 1.5 to 2.5 per cent compared to the fourth quarter of 2010. 

Taking into account reported ASM capacity for the first nine months of 2011, Air Canada now expects its full year 2011 system capacity, as measured by available seat miles (ASMs), to increase by 4.0 to 4.5 per cent from the full year 2010 level (as opposed to the 3.5 to 4.5 per cent ASM increase projected in Air Canada’s news release dated August 4, 2011). The system capacity increase is being achieved primarily through the use of Air Canada’s current aircraft fleet. 

Air Canada expects its full year 2011 domestic capacity to range between a 0.5 per cent decrease and a 0.5 per cent increase from the full year 2010, unchanged from what was projected in Air Canada’s news release dated August 4, 2011. 

In addition, for the full year 2012, Air Canada plans to increase its full year 2012 system capacity by 0 to 1.5 per cent when compared to the full year 2011. 

For the fourth quarter of 2011, Air Canada expects CASM, excluding fuel expense, to increase by 0.5 to 1.5 per cent from the fourth quarter of 2010. 

Taking into account the CASM, excluding fuel expense, results in the first nine months of 2011, Air Canada now expects its full year 2011 CASM, excluding fuel expense, to decrease by 2.0 to 3.0 per cent from the full year 2010 level (as opposed to the 1.0 to 3.0 per cent CASM, excluding fuel expense, decrease projected in Air Canada’s news release dated August 4, 2011). 

As a result of changes in cost and discount rate assumptions for provisions related to end of lease maintenance return conditions, Air Canada now expects its full year 2011 aircraft maintenance expense to increase by 4.0 and 5.0 per cent from the full year 2010 level (as opposed to the range of between a 1.0 per cent decrease and a 3.0 per cent increase projected in Air Canada’s news release dated August 4, 2011). 

Air Canada expects full year 2011 depreciation, amortization and impairment expense to decrease by $75 million from the full year 2010, unchanged from what was disclosed in Air Canada’s news release dated August 4, 2011. 

Air Canada’s projection on pension and other employee future benefits expense which projected an increase of approximately $60 million for the full year 2011 compared to the full year 2010 remains essentially unchanged from what was disclosed in Air Canada’s news release dated February 10, 2011. 

In mid-2009, Air Canada launched the CTP, identifying and implementing initiatives with a goal of generating annualized revenue gains and cost savings, including through contract and operating process improvements and productivity gains. In 2010, Air Canada achieved and delivered annual benefits of $330 million. Air Canada has now fully achieved its overall CTP target of $530 million, on a run-rate basis. Air Canada views continuous cost transformation and improvement as one of its most important priorities, and a critical objective going forward to support ongoing CASM improvements. The company continues to identify and execute cost reduction initiatives to improve its overall cost structure. 

Air Canada’s outlook assumes that the Canadian economy will continue to recover in 2011 and assumes modest Canadian GDP growth of 1.5 per cent to 2.0 per cent through to the end of 2012. In addition, Air Canada expects that the Canadian dollar will trade, on average, at C$1.01 per U.S. dollar in the fourth quarter of 2011 and C$0.99 per U.S. dollar fo