Air Canada Sees Fare Pressure as Rivals Add Seat Capacity

Air Canada predicted further pressure on fares this year after its first-quarter yield dropped as competitors added seating and offered lower prices on some routes in North and South America.

Yield, or average fare per mile, dropped 1.1 percent from a year earlier to 19 cents, Canada’s largest airline said today in a statement. The loss excluding such items as currency fluctuations and employee-benefit costs narrowed to 52 cents a share from 58 cents a year earlier.

Chief Executive Officer Calin Rovinescu said the fare environment remains “challenging” as he works to bolster earnings after the Montreal-based carrier returned to profitability in 2012 from four years of losses. In addition to fiercer competition, the company grappled with a less lucrative passenger mix and and severe winter weather.

“The tough quarter could be the first sign of weaker demand,” Walter Spracklin, an analyst at RBC Capital Markets in Toronto, said in a note to clients. “While management did indicate that a number of the factors were timing-related, we are concerned that the yield pressure has extended into the second quarter.”

Air Canada fell 6.3 percent to C$2.70 at the close of trading in Toronto today, the largest decline since April 22. The stock had previously gained about 65 percent this year.

‘Competitive Pricing’

Operating revenue slipped to C$2.95 billion from C$2.96 billion as the carrier faced severe-weather cancellations and the loss of an extra day from the 2012 leap year. The number of low-paying leisure travelers increased relative to premium-fare business fliers, partly due to an earlier Easter holiday than the year before, the airline said.

Air Canada is seeing higher industry seating capacity and “competitive pricing” on routes in eastern Canada, the northeastern U.S. and South America, as well as service to leisure destinations, according to a filing today.

“These markets are extraordinarily competitive, and we have seen increased capacity in some of these markets and very specific pricing action,” Rovinescu said today on a conference call with analysts. “We need to continue as we are to tackle our costs. To the extent that we see behavior like this in the future, we’ll have a lower cost structure to be able to deal with it.”

Yield Pressure

Should capacity continue to climb on these routes, “which in the short term we believe it will as competitor airlines launch new services, it will clearly place additional pressure on network yields,” said Spracklin, who has a sector perform rating on Air Canada’s stock.

While the airline expects yields to recover as the economy strengthens, that may take some time, Rovinescu said.

Some of Air Canada’s corporate customers are “feeling the pressure of the economy” and growth in the U.S. remains “relatively weak,” the CEO said.

“We are not predicting that there’s going to be an immediate recovery from the economic standpoint by midyear,” Rovinescu said. “All trends indicate that it is still a relatively slow period of growth.”

Air Canada today reiterated its April 22 prediction that adjusted costs per available seat mile will fall 0.5 percent to 1.5 percent this year. Air Canada had forecast on Feb. 7 that the costs would fall by no more than 1 percent.

Including an impairment charge of C$24 million related to Airbus A340-300 aircraft, as well as an estimated C$10 million due to flight cancellations, the carrier posted a net loss of C$260 million, or 95 cents a share, compared with C$274 million, or 99 cents, a year earlier.