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Air Canada expects fares will rise in 2010

Dec. 29, 2009, Montreal –  Discount air fares won't totally disappear but the airline industry's need to pare financial losses in 2010 will translate into higher fares, says Air Canada chief executive Calin
Rovinescu.

"It doesn't mean you won't still see cheap fares but you'll have to shop more carefully to find the cheapest fares,'' Rovinescu said in an interview as he reflected on eight months of intense pressure
to turn around Canada's largest carrier.

With base fares being "unnaturally low'' in 2009 and almost unchanged over the past decade, the former investment banker believes Canadians understand that the airline needs more revenues
to survive and deliver its award-winning service.

As part of its efforts to achieve sustainable profits, Air Canada is also introducing a series of new fees, including baggage charges for non-domestic flights.

The global airline industry is expected to lose US$11 billion this year and $5.6 billion in 2010 due to higher fuel costs and discounting in Europe, says the International Air Transport Association.

North American carriers may cut losses to $2 billion from $2.9 billion as a result of cost reductions gained by cutting capacity.

Passenger demand, after a decline of 4.1 per cent in 2009, is forecast to grow by 4.5 per cent in 2010 as the industry rebounds from the recession, IATA recently said.

"The worst is likely behind us,'' said IATA general director Giovanni Bisignani. "For 2010, some key statistics are moving in the right direction.''

Airline non-fuel costs, for example, may decline by 1.3 per cent in the coming year, he said. But the agency believes the North Atlantic will be among the world's weakest markets for fares.

The global industry saw yields, or average fares, fall 12 per cent in 2009 and will remain at depressed levels, Bisignani noted. But Rovinescu said airlines must increase their yields to become
sustainable.

Months after it avoided a possible bankruptcy, Air Canada is bracing for another challenging year in 2010. Analysts expect Air Canada will lose money for the second year in a row in 2009 after
recording a net loss of $1.03 billion in 2008.

"We expect 2010 to hopefully be better than 2009, but we still expect it to be a transformational year,'' Rovinescu said.

With recovery not expected for 18 to 24 months, the airline is seeking stability by cutting $400 million of annual costs and $100 million in additional revenues by 2011. It hopes to be halfway to
its target next year.

The airline is trying to stem market share losses to domestic rivals WestJet and privately held Porter Airlines. At the same time it is hoping to see a rebound in premium business travel on which it relies to drive revenue.

Corporate profitability is starting to improve but a real recovery in this key group will only take place when businesses themselves have recovered, Rovinescu said.

"My expectation is that it will take a full year for the business travel to get to levels that are sustainable.''

In the meantime, Air Canada plans to leverage being named by business travellers as the best North American airline.

New advertising and increased use of social media will remind travellers of the reasons behind this vote of confidence. New international routes are being added. Additional incentives will back the relaunch of its Rapidair service in the Montreal-Toronto-Ottawa corridor. And it will soon announce changes to its "super elites'' program to lure the most active premium travellers.

The goal is to get more U.S. business travellers to pass through Air Canada's hubs and increase the number of higher-paying fares.

Rovinescu said it's very gratifying to have delivered what was voted the best customer product in North America, despite being focused on its very survival.

"For a year where we faced the kind of challenges to our survival that we did, to win these prizes for me is nothing short of amazing,'' he said.

Within a few short months, Air Canada addressed its urgent liquidity challenges, won labour peace, obtained a moratorium on past-service pension payments and raised capital through an equity
offering.

It lived to fight another day by executing its stabilization plan better than what Rovinescu had expected when he took the helm on April 1.

But Rovinescu concedes the level of urgency he faced to address its funding requirements and credit card processor challenges far exceeded his expectations.

"I thought we would have had a bit more time to do that and everything really had to be done in two months.''

Not everyone thought he could pull it off. Union leaders and analysts feared the man who guided Air Canada through its restructuring back in 2004 was hired do it again.

"It's turned out quite differently than anticipated and by and large I think they're going in the right direction,'' said Karl Moore of McGill University's Desautels Faculty of Management.

While the economy still poses a big challenge and the airline has a large debt, Moore said the airline is in better shape than many of its international peers.