Air Canada Falls Most in Six Months Amid Declining Yields

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Air Canada fell the most in six months after the country’s biggest carrier predicted average fares will decline amid increased capacity on longer-range international routes.

Yield, or average fare per mile, decreased 5 percent in the three-month period ended June 30, the Montreal-based carrier said Wednesday. Third-quarter yields will probably “continue to be under some pressure, although demand remains very strong,” Chief Financial Officer Mike Rousseau said on a conference call with analysts.

The pressure on fares is being exacerbated by a slowing Canadian economy and by Chief Executive Officer Calin Rovinescu’s decision to pack more seats on long-haul jets and expand the low-cost Rouge unit in an effort to reduce costs. Smaller rival WestJet Airlines Ltd. two weeks ago also predicted revenue for each seat flown a mile will continue to decline this quarter.

“Clearly, the expected yield compression is not encouraging,” said Helane Becker, a Cowen & Co. analyst in New York. She has an outperform rating Air Canada, saying “We like the story longer term as the company works through their cost-reduction program.”

Air Canada dropped 6.4 percent to C$12.08 at the close of trading in Toronto, its biggest one-day decline since Feb. 11. WestJet fell 4.5 percent.

Capacity will climb 9.5 percent to 10.5 percent in the third quarter, Air Canada said Wednesday. For all of 2015, the increase will be 9 percent to 10 percent.

The Elephant

That capacity growth is “the elephant in the room,” Rovinescu said on the call.

“We fully anticipate and have planned for decreases” in yields, revenue for each seat flown a mile and load factor as “natural consequences” of the carrier’s international expansion, he said. Each new route must contribute to profitability, the CEO added.

Rovinescu is adding capacity and ordering fuel-efficient models to boost savings to 21 percent on each available seat mile by the end of 2018 from a previous target of 15 percent. The efforts have been buoyed by kerosene prices that are about half what they were a year earlier.

Earnings excluding one-time items jumped to 85 cents a share from 47 cents, matching the average estimate of analysts in a Bloomberg survey. Revenue of C$3.41 billion ($2.63 billion) compared with a C$3.45 billion estimate.

Air Canada forecast that the third-quarter margin for earnings before interest, tax, depreciation, amortization and aircraft rent, will expand more than the 3.5 percentage-point gain of the second quarter.

For all of 2015, Air Canada now expects a drop of 1 percent to 2 percent in adjusted costs for each seat flown a mile. That’s less than the 1.5 percent to 2.5 percent decline that the company projected May 12 -- a change that Air Canada said largely reflects the impact of a weaker Canadian dollar on U.S.- denominated operating expenses.

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