Air Canada profits soar as travel demand stays high

MONTREAL – Air Canada reported soaring profits in its latest quarter as consumers continued to spend big on travel, despite higher inflation and interest rates weighing on their wallets.

The country’s biggest airline saw net income in its third quarter jump to $1.25 billion from a half-billion-dollar loss in the same period a year earlier.

On a conference call Monday, chief executive Michael Rousseau told analysts demand remains “very stable” – an adjective executives deployed seven times during the call.

Bookings back up the CEO’s confidence. Advance ticket sales in the quarter ended Sept. 30 shot up by 55 per cent from the same period a year earlier to $4.5 billion.

Passenger revenues leaped 22 per year over year, Rousseau said. Adjusted earnings also surpassed those from 2019, the last year before the COVID-19 pandemic wreaked havoc on the travel industry.

The resurgent appetite for travel extends a trend that began in the summer of 2022 and held steady throughout 2023. Despite still-elevated inflation and the Bank of Canada’s key interest rate sitting at 4.5 per cent at the end of January – it’s since crept up to five per cent – Canadians took more than 10 million trips abroad between January and April. The figure marks a seven per cent increase from the same four months in 2019, according to an RBC report, which diagnosed “Canadians’ post-pandemic travel fever.”

Not all observers were so bullish on demand – including RBC’s own.

“We are cautious on consumer spending patterns going into 2024 on the back of lower discretionary income due to higher interest rates, increased competition and higher costs – fuel and labour,” RBC Capital Markets analyst Walter Spracklin said in a note to investors Monday.

“It was a very good summer, but investors are worrying it’s as good as it gets,” said TD Cowen analyst Helane Becker. Air Canada’s stock price slid to its lowest point in more than a year last week, hovering near that level to close at $16.50 on the Toronto Stock Exchange on Monday.

Air Canada’s strong financial results landed despite lower flight capacity than four years ago and business from corporate customers sitting 25 per cent to 30 per cent below pre-pandemic demand, said network planning head Mark Galardo.

The smaller fleet may have contributed to a relatively weak on-time performance, which saw Air Canada recently rank ninth out of 10 major North American airlines, according to aviation data firm Cirium. Some 68 per cent of the carrier’s 32,000-plus flights in September arrived on time, versus between 76 per cent and 86 per cent for the top seven airlines, including WestJet.

Rousseau pointed to Air Canada’s 90 per cent load factor – a key metric measuring the proportion of available seats filled by passengers – as one reason for the delays.

“While this signals that we use our assets very effectively, one consequence is it puts extra pressure on the operations. That said, our on-time performance progressively improved throughout the quarter,” he said.

Executives also acknowledged stiffening competition in the domestic and sun destination markets, as Porter Airlines, Lynx Air and Flair Airlines embark on rapid expansions.

“Competition will continue to evolve. In particular, we’ve seen some moves into seasonal markets,” Galardo said, referring to those airlines’ heightened focus on sun-splashed getaways.

The ongoing pilot shortage and manufacturing backlogs have raised further hurdles for Air Canada.

“Throughout 2023, we made some capacity adjustments to account for regional pilot availability and supply chain pressures,” Galardo acknowledged.

But the same challenges face other carriers too, allowing Air Canada to enjoy fatter profit margins on transoceanic routes.

“Demand continues to track above 2019 levels. This combined with the capacity constraints at the global industry level have continued to favour the yield environment, especially for international markets,” Galardo said.

Yield – the average revenue per passenger flown one mile – rose 13 per cent on Atlantic flights and 11 per cent on Pacific ones last quarter versus a year earlier, he said.

Earlier this month, Air Canada dropped its direct flights from Toronto and Montreal to Tel Aviv – 10 round trips to Israel each week – after Hamas’s Oct. 7 attack on that country that sparked retaliatory airstrikes and an incipient ground invasion of Gaza.

“We’d love to get back to Tel Aviv as soon as the situation permits us to go back there,” Galardo said, calling the cost to Air Canada “relatively inconsequential.”

According to the airline’s website, customers can book a direct flight operated by Air Canada as early as Nov. 15. But the company says ticket-holders can get a full refund if they opt to cancel, or can change their flight up to two hours before departure to another date before 2024, free of charge.

Air Canada “handily beat” expectations for the quarter, said analyst Savanthi Syth of Raymond James.

The Montreal-based company continued to hack away at its block of debt, reducing its leverage ratio to just 1.4 from a towering 5.1 as of Dec. 31.

Net income amounted to $3.08 per diluted share for the quarter ended Sept. 30 compared with a loss of $1.42 per diluted share a year earlier, the airline said.

Operating revenue totalled $6.34 billion, up 19 per cent from $5.32 billion in the same quarter last year, boosted by higher passenger revenues.

On an adjusted basis, Air Canada said it earned $3.41 per diluted share in its latest quarter compared with an adjusted profit of $1.07 per diluted share the year before, far exceeding analyst predictions.

Analysts on average had expected an adjusted profit of $2.15 per share for the quarter, according to estimates compiled by financial markets data firm Refinitiv.

In its outlook, Air Canada said its adjusted cost per available seat mile for 2023 is expected to be about 1.5 per cent to 2.25 per cent above 2022 levels compared with earlier expectations its adjusted CASM would rise 0.5 per cent to 1.5 per cent.
www.aircanada.com