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Air Canada to expand capacity despite slow recovery

After cutting capacity by 4.4 per cent last year to survive the recession, Canada's largest airline plans to increase it by four to six per cent this year using its existing fleet.

Domestic capacity is forecasted to increase by 1.5 to 2.5 per cent, following a 3.7 per cent cut last year.

In the first quarter, capacity is planned to increase by 5.5 to 6.5 per cent.

"We remain focused on building our international network while maintaining our commitment to the Canadian domestic market,'' CEO Calin Rovinescu said Wednesday during a conference call.

Rovinescu said the carrier will do what it needs to in Canada to protect its market share from rival WestJet in order to serve its international and U.S. business.

The international system growth planned for the year will outpace the overall capacity increases as Air Canada plans to introduce four new European destinations this summer and enhancing its Asian offerings.

Air Canada also plans to use its updated aircraft and convenient
Canadian hubs to attract U.S. travellers.

"There is a huge market of consumers along the eastern U.S. seaboard that are already in the habit of connecting to international flights and we intend to target a greater share of that market,'' Rovinescu told analysts.

The airline beat analyst expectations by reporting a loss of $56 million or 25 cents per diluted share for the quarter ended Dec. 31, a dramatic improvement from the same period in 2008 when the company lost $727 million or $7.27 per share.

The quarterly loss would have been even bigger if not for $108 million in gains on foreign exchange in the most recent quarter compared with $527 million in foreign exchange losses a year ago.

Operating revenues dropped by $150 million to $2.35 billion from nearly $2.5 billion in the same quarter of 2008.

Revenue fell for a number of reasons, including less passenger travel because of the weak economy, greater fare discounting and reduced fuel surcharges.

Excluding currency gains and a loss on assets, Air Canada lost 62 cents per share.

The average analyst estimate had been for a loss of loss of 69 cents on $2.3 billion of revenue, according to Thomson Reuters.

For the full year, Air Canada lost $24 million, or 18 cents per share, compared with a loss of $1.03 billion or $10.25 per share in 2008.

The 2009 results included $657 million in gains on foreign exchange, while 2008 included $655 million of currency losses and a $125-million provision for cargo investigations.

Revenues fell to $9.74 billion in 2009, from $11.08 billion in 2008.

Revenues from business and first-class travellers, which are key to Air Canada's financial health, showed signs of improvement.

Yield or revenues per passenger mile flown from business travellers and other higher-fare customers fell 7.2 per cent in the quarter. They had been down 16 per cent in the third quarter and 30 per cent in the second period.

The airline was helped in the final three months of the year from an eight per cent drop in operating expenses as lower fuel prices and favourable foreign exchange trimmed $213 million of costs.

Meanwhile, Air Canada is sticking to its goal of achieving $500 million in annual cost savings and revenue enhancements by 2011.

Despite the optimism by the company, analysts believe the industry will face a challenging environment for months to come.

"While we believe a recovery is underway, a difficult operating environment could persist for at least another six months as the industry typically lags economic improvement,'' wrote David Newman of National Bank Financial.

As of Dec. 31, the airline had $1.41 billion of cash. Its lenders have agreed to boost its secured term credit facility by $100 million to $600 million.