Air Canada Weighs Higher Fares, Fees as Currency Weakens

Air Canada is considering new fees and fare increases to blunt the effect of a weaker Canadian dollar as it works toward a goal of cutting operating expenses, Chief Executive Officer Calin Rovinescu said.

“There are going to be some revenue strategies and some cost strategies,” Rovinescu said yesterday in an interview at Bloomberg’s Toronto offices, without giving details. “Both of those are in the course of being implemented.”

Canada’s dollar has lost about 4.2 percent of its value against its U.S. counterpart this year, the most among 16 major currencies tracked by Bloomberg. That boosts the cost of items priced in greenbacks, such as jet fuel and new planes. Last month, Air Canada cited a weaker Canadian dollar and “severe” winter weather in forecasting a drop in first-quarter profit.

While Montreal-based Air Canada damps currency swings with “mini-hedges” such as $1 billion in annual U.S. sales, those buffers aren’t enough, Rovinescu said. Air Canada recently introduced a C$35 ($31.60) currency surcharge on vacation packages, and additional measures are under consideration, he said.

Rovinescu, 58, is working to turn around Air Canada after it struggled for financial footing following its 2004 bankruptcy exit. A July 2012 government arbitrator’s ruling settled a pilot-contract dispute and curbed pension expense, spurring a rally that has more than doubled the stock in the past 12 months. The Class B shares fell 1.4 percent to C$6.39 by the close of trading in Toronto.

Defensive Asset

With the currency pressures, “their most important line of defense” is ticket prices, said David Tyerman, a Canaccord Genuity Inc. analyst in Toronto who rates the stock as buy. “They are going to keep reducing costs irrespective of what the dollar does.”

The target set in June for operating-cost savings stands, even with Canada’s dollar weakening about 8.1 percent since then, Rovinescu said. He plans a reduction of about 15 percent over five years in costs for each seat flown a mile, with benefits from more fuel-efficient jets, favorable maintenance agreements and lower labor expense at the Rouge leisure unit.

“This is a transformational program, and I’m very pleased with the early stages,” Rovinescu said. “What we said to the marketplace, that 15 percent objective, is still there. We’re confident.”

More Savings

Chief Financial Officer Michael Rousseau told analysts last month that Air Canada has “a series of initiatives” under way to lower costs by more than C$100 million this year. He didn’t provide specifics.

Air Canada’s surcharge on vacation packages “is sticking, in most cases,” Rovinescu said yesterday. He said he couldn’t “signal to the marketplace” how the airline may change other fees or fares.

Asked if fares were going to rise, he said “there’s no free lunch unfortunately, unless we can get the U.S. dollar to be more cooperative.”

The airline has “a lot of drivers already in place to mitigate” the currency, he said. The “nut to crack” is C$4.5 billion of currency outflows, “but we have $1 billion of U.S. dollar revenue, then you have $1.5 billion of hedges, then you have some cost and pricing strategies. It should be a manageable amount.”

Air Canada plans to use U.S. dollar currency derivatives and U.S. dollar cash reserves to offset about half of its net exposure to the greenback this year. The company said last month it had $1.55 billion of currency derivatives and $743 million of U.S. dollars on hand as of Dec. 31.

The currency derivatives allow the purchase of U.S. dollars at a weighted average price of C$1.0341, according to Air Canada, whose forecast assumes that the Canadian currency will trade at C$1.10 per U.S. dollar this year.

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