Air Canada Sees Fatter Margins as Cost-Savings Target Raised

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Air Canada said it will cut costs more than previously forecast to increase the airline’s profitability, sending shares to their highest value in almost eight years.

Cost savings of 21 percent on each available seat mile are now expected by the end of 2018, higher than the previous target of 15 percent given at the investor day two years ago, Canada’s largest airline said Tuesday.

Chief Executive Officer Calin Rovinescu is trimming operating expenses by packing more seats on long-haul aircraft, expanding the low-cost Rouge leisure unit and ordering new fuel-efficient jets such as Boeing Co.’s 787 Dreamliner. The cost-reduction effort has been helped by a decline in prices of jet kerosene, one of the biggest expenses for an airline.

“We expect these initiatives to deliver meaningful growth from 2014 to 2019,” David Tyerman, an analyst at Canaccord Genuity in Toronto, said in a note Tuesday.

Air Canada gained 1.3 percent to C$14.38 in Toronto, its highest closing price since Nov. 9, 2007. The shares have climbed 21 percent this year.

“You are going to see a lot more effort around ensuring that our business is better focused on really what makes us work, which is our customers,” Ben Smith, president of passenger airlines, said at the investor day.

Air Canada also said it’s now targeting a margin for earnings before interest, taxes, depreciation and restructuring costs of between 15 percent and 18 percent and a return on invested capital of 13 percent to 16 percent. The carrier is aiming for a leverage ratio of 2.2 by 2018.

In 2013 Air Canada said it would target a leverage ratio below 3.5 for 2013 and over the “medium term.” At the time, Air Canada said it wanted its return on capital to exceed the weighted average cost of capital, a goal that it surpassed in the first quarter this year.

“The company’s unit costs have come down significantly of late given the reduction in jet fuel, partially offset by a significantly stronger” U.S. dollar, Helane Becker, an analyst at Cowen & Co. in New York, said Monday in a note to clients.

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