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Air Canada Beats on Profit After Cost Cuts, Traffic Gains

Air Canada (AC/B), the country’s largest airline, rose to its highest price in 15 months after increased traffic and cost-cutting helped produce the company’s first profit in seven quarters.

The widely traded Class B shares climbed 2.1 percent to C$1.91 at 3:59 p.m. in Toronto, the highest close since Aug. 17, 2011. The stock had gained 89 percent this year through yesterday.

Third-quarter net income was C$429 million ($430 million), the Montreal-based company said in a statement today. The company hadn’t reported a profit on that basis since the final three months of 2010. Air Canada’s operating expenses fell 2.2 percent, while traffic increased 0.8 percent.

Air Canada has been struggling to shake its status as North America’s least efficient airline, a distinction it retained this quarter, as discounter WestJet Airlines Ltd. (WJA) vies for some of its bigger rival’s market share. A labor accord selected by an arbitrator in July will let Air Canada start a low-cost unit to help compete with the Calgary-based company.

“It’s a tool for us to deploy, call it 50 airplanes, where we can ensure incremental growth,” Chief Executive Officer Calin Rovinescu told analysts on the earnings conference call. “Is it ultra-low-cost a la some of the other low-costs elsewhere in the world? That is not necessarily achievable within the context of our unionized environment.”

Air Canada will start its leisure unit with service to holiday destinations in Europe and the Caribbean in July 2013 using four aircraft, which may eventually grow to 20 Boeing Co. (BA) 767s and 30 Airbus SAS A319s, Rovinescu said.

Aircraft Shift

“Air Canada can now push less economical aircraft onto its leisure carrier which will likely have a much better cost structure in place,” Walter Spracklin, a transportation analyst at RBC Capital Markets in Toronto, said today in a note to clients. He rates the Class B shares outperform.

The traffic growth outpaced capacity gains in the quarter, enabling Air Canada to fly fuller planes and helping the company post earnings of 82 cents a share, excluding foreign-exchange gains. That beat the 73-cent average of 11 analysts’ estimates compiled by Bloomberg. The airline said it filled a record 86.3 percent of seats during the period.

Operating expenses fell to C$2.9 billion, helped by a C$124 million reduction in benefits resulting from changes in the labor agreement, the airline said today in a filing. Fourth- quarter unit cost, or the expense to fly each seat a mile, will probably fall by 2 percent to 3 percent, Air Canada (AC/A) said.

Regional Leader

Passenger revenue from each seat flown a mile, a measure of airline performance, was 15.9 cents, the highest among North American carriers that have reported third-quarter results, according to data compiled by Bloomberg.

Yield, or the average fare per mile, was 18.4 cents, the second-highest among North American carriers after WestJet. Air Canada historically outperforms most North American airlines on yield because it operates more long-haul flights.

The company’s cost per available seat mile, a measure of airline efficiency, was 15.4 cents, down from 15.8 cents a year earlier, yet still the highest among North American airlines, according to data compiled by Bloomberg.

Maintenance costs climbed 4 percent to C$155 million, Air Canada said in the filing. The carrier blamed an increase in scheduled engine work, which was eased by lower rates for airframe maintenance.

Repair costs probably won’t decrease in 2013 because the carrier plans “high maintenance activity,” Chief Financial Officer Michael Rousseau said on the conference call. The carrier is also facing rate increases from some suppliers under previously negotiated agreements, he said.

Older Planes

Air Canada, which has a fleet twice the average age of WestJet, has started evaluating options to renew its narrow-body jets, a process that probably will be complete within 12 months, Rovinescu said on the call.

“We’re looking at that 75-to-160-seat environment,” he said. “We will study that carefully. Each of Bombardier, Airbus and Boeing have products in that size.”

The third-quarter results include a C$71 million gain on foreign exchange, mostly related to the company’s U.S. dollar- denominated long-term debt. That compares with a C$281 million loss a year earlier.

Net income per share was C$1.54, compared with a net loss of 45 cents, or C$124 million, a year earlier, the company said. Revenue rose 2.7 percent to C$3.3 billion.

Air Canada said today that it has begun discussions with the federal government on extending a moratorium on reduced funding payments for its pension plans, which expires in January 2014. Air Canada’s Canadian-based unions support the extension request, the company said.

An extension of the moratorium “provides the company with ample liquidity to fund its ongoing turnaround,” Fadi Chamoun, an analyst at BMO Capital Markets with an outperform rating on the carrier, said in a note to clients last month.

-- With assistance from Mary Jane Credeur in Atlanta. Editors: John Lear, James Langford

To contact the reporters on this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net; Ari Altstedter in Toronto at aaltstedter@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net AC/A CN <Equity> BA US <Equity>

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