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Tough decisions ahead for Air Canada

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Tough decisions ahead for Air Canada
The country's largest airline is in no rush to buy new narrow body aircraft and will carefully study how Boeing and Airbus challenge Bombardier's new CSeries, Air Canada's chief executive recently stated.


September 28, 2010
By The Canadian Press

Sept. 28, 2010, Montreal – The country's largest airline is in no rush to buy new
narrow body aircraft and will carefully study how Boeing and Airbus
challenge Bombardier's new CSeries, Air Canada's chief executive recently stated.

Calin Rovinescu expects the airline will decide within the next
year if it will stick to its Airbus and Embraer series of planes or
purchase new fuel-efficient aircraft.

Buying new planes is a balancing act between the cost and the
benefits, he told reporters following a speech to an international
aviation organization.

"For us to buy 100 airplanes is immense so it's not decision
that is made easily or quickly," he said.

"We will study it and make a decision once we have all the
information from Boeing and Airbus and not before."

Rovinescu said Air Canada continues to examine Bombardier's
(TSX:BBD.B) 110- to 149-seat CSeries that is slated to enter into
service the end of 2013.

Its larger American and European rivals are weighing whether to
switch to new fuel-efficient engines or wait to develop replacement
aircraft.

Everybody would love to have the newest product at the lowest
cost, but Air Canada (TSX:AC.B) also has a huge capital commitment
from having ordered 37 new Boeing 787 Dreamliners, Rovinescu said.

The first of the longer range and more fuel-efficient planes are
expected to be delivered in the second half of 2013.

"There's a lot of moving pieces here. This is something we need
to address but it's not a today issue," Rovinescu said, adding he
doesn't want to make a premature decision that he would regret.

Air Canada's chief financial officer recently said the airline
plans to focus on reducing nearly $1 billion of debt coming due over
the next two years.

Air Canada's fleet of 202 planes includes 86 Airbus A319, A320
and A321, along with 60 newer Embraer 175 and 190s.

Airline analyst Chris Murray of PI Financial Corp. said Air
Canada can wait for years before making a decision because the
Airbus planes have relatively low cycle usage.

"I think they would need to have to financing or a significant
chunk of the debt associated with the 787 retired and under control
before they start bringing in new narrowbodies," he said in an
interview.

Murray said Air Canada can wait until 2017 or 2018 before taking
delivery of new planes. Consequently, it could wait for a new plane
design from one of the airplane manufacturers.

The planes would be primarily used on the domestic and U.S.
routes which aren't expected to experience strong growth. Air Canada
would therefore get a bigger bang for its buck by allocating its
resources on growing international markets, he added.

While Air Canada said it has studied the CSeries, Murray said he
doubts the plane is large enough to offer enough seats in economy
and premium classes.

Earlier, Rovinescu said airlines will earn "razor-thin" profits
next year as the world experiences a slow recovery.

An industry association forecast for $8.9 billion of profits on
revenue of $560 billion represents margins of less than two per
cent. The profit will follow nearly $50 billion in losses
accumulated over the last decade.

In Canada, pre-tax profits are expected to total $192 million as
pricing remains soft and business traffic has yet to return to
pre-recession levels.

Rovinescu says government regulations and imposition of fees and
airport rents are a roadblock to the industry's sustainability.

Airport rent, airport infrastructure, navigation fees and
charges, security charges, fuel excise taxes and other taxes cost
the airline nearly $1 billion annually more to operate in Canada
than the U.S., with the same business volume, he said.

Rovinescu also criticized efforts by the United Arab Emirates to
expand its use of Dubai as a hub for Canadian travellers. An
eventual reduction in traffic flow through hubs used by Air Canada
and its Star Alliance partners would ultimately threaten the
viability of direct flights from secondary Canadian airports.

He also said consolidation of the U.S. airline industry won't
have much of an impact on Canada but is good because it will reduce
the overcapacity that has developed over the last decade and hurt
the profitability of American carriers.

The mergers of Delta and Northwest, United and Continental,
Southwest Airlines and Air Train will give "the industry another
decade of room to grow and hopefully get yields back up to where
they were before this last recession," he added.