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Air Canada Loss Better Than Estimated as Fares Blunt Fuel

Air Canada posted a narrower first-quarter loss than analysts estimated after more passengers upgraded to business-class seats.

Excluding some items, the airline’s loss was 64 Canadian cents a share, smaller than the 79-cent average of analysts’ estimates. Earnings before interest, taxes, depreciation, amortization and rent were C$175 million ($175.9 million), in line with a late April forecast, according to a statement.

“Revenue performance was strong, particularly in the premium cabin,” Chief Executive Officer Calin Rovinescu said in a statement. “We remained focused on maintaining strong liquidity levels and the ongoing implementation of cost-reduction initiatives.”

Air Canada is working to regain profitability after four straight annual losses, and the gain in premium-cabin sales helped blunt a 20 percent increase in the fuel bill. Executives at the Montreal-based carrier also grappled with a standoff in some union-contract negotiations that prompted wildcat strikes and government intervention.

The shares climbed 4.4 percent to 96 Canadian cents by the close of trading in Toronto, after today’s earnings report. Canada’s largest airline reported preliminary earnings about a week ago.

‘Positive Development’

Revenue advanced 7.6 percent to C$2.96 billion, helped by an 11 percent gain in premium-cabin sales as passengers took advantage of more attractive fares on some North American routes to upgrade from economy seats to business class, the carrier said in a filing.

Cash and short-term investments rose 6.4 percent to C$2.25 billion as of March 31 from a year earlier, Air Canada said. Adjusted net debt declined 5.8 percent to C$4.38 billion.

“This is a positive development and furthers our conviction that Air Canada is not facing any near-term liquidity issues,” Walter Spracklin, an analyst at RBC Capital Markets in Toronto, said today in a note to clients. He has an outperform rating on the shares.

Including currency-exchange gains and charges related to the restructuring of a former maintenance unit now called Aveos Fleet Performance Inc., the net loss was C$210 million, or 76 cents a share, compared with C$19 million, or 7 cents, a year earlier, the Montreal-based company said.

Air Canada’s fuel bill rose to C$889 million, and it booked costs of C$120 million tied to Aveos, which shut down and filed for insolvency protection March 19. The airline, whose parent sold control of the maintenance provider in 2007, was required to pay severance to as many as 1,500 workers.

“The quarter was marked by a challenging environment, with persistently high fuel prices and volatility,” Rovinescu said in the statement.

Wildcat Strikes

Air Canada paid an average of 91.6 cents for a liter of fuel, up 17 percent from a year earlier, it said in a filing.

Labor strife also had an impact, including a sickout by pilots March 18 and a wildcat strike by baggage handlers five days later. Canada’s government intervened to prevent stoppages as talks over collective agreements stalled, and earlier this week named arbitrators to resolve the disputes.

The job actions “resulted in a decline in bookings for travel originating in Canada in the immediate aftermath of these incidents,” Rovinescu said today. “Since then, we have seen an improvement in advance booking trends.”

Air Canada will begin 10-day negotiation periods with its pilots and machinists under the supervision of arbitrators “in the next few days,” Rovinescu said on a conference call. Arbitrators will impose contracts within 90 days if the parties can’t reach agreements.

“We either have an understanding during the 10 days, or not,” the CEO said. “And if we don’t, you have 90-days final offer selection. Period. End of story.”

‘Pension Challenge’

Once labor issues are settled, the next priority will be to tackle the company’s “pension challenge,” entirely due to a low discount rate, Rovinescu said. The solvency deficit for Air Canada’s pension plans doubled to C$4.4 billion as of Jan. 1 from a year earlier, the company said in the filing.

Rovinescu said he’s unconcerned by speculation that the airline might file for bankruptcy protection because of its financial situation.

Bankruptcy Speculation

“People who talk about bankruptcy as an option -- the fact that the media or others may be headed in that direction -- is frankly of no interest to me,” he said. “We are looking to do what we can to preserve and increase the value for the shareholders and for the bondholders.”

Air Canada is “actively studying” the possibility of introducing a premium economy cabin to boost revenue and evaluating the costs of modifying its fleet, Rovinescu said.

Capacity will increase by as much as 1 percent in the second quarter, with the full-year figure expanding no more than 1.5 percent, Air Canada said.

Air Canada is seeking new maintenance suppliers as a result of the Aveos bankruptcy, Rovinescu said. Maintenance expenses will probably decline in the long term, Chief Financial Officer Michael Rousseau said, without being more specific.

Unit costs, excluding fuel and vacation packages, rose 1 percent in the quarter as Air Canada postponed some maintenance work. That’s less than the 4 percent to 5 percent increase that the company had forecast three months ago.

Air Canada now expects the measure to increase by between 0.5 percent and 1.5 percent in 2012, less than the range of 1 percent to 2 percent it projected three months ago.

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