Air Canada Tumbles After Pricier Fuel Saps Profit Forecast

Updated on
  • Cowen also sees higher-than-expected costs for non-fuel items
  • Airline says it’s ‘committed and on track’ for lower expenses

Air Canada dropped the most in seven months after the country’s largest airline said rising fuel costs would cause a key profit measure to fall by half in the first quarter.

The forecast implies earnings before interest, taxes, depreciation and aircraft rent of C$250 million ($190 million) in the first quarter, trailing the C$366 million estimated by Fadi Chamoun, an analyst at BMO Capital Markets. A margin of 6.9 percent, half of last year’s level, would fall well short of the 12 percent predicted by Cowen & Co., which also expected lower non-fuel costs.

While results were “solid,” the company’s 2017 outlook “had elements that caused some trepidation and that was enough to bring the stock back down to week-ago levels,” Walter Spracklin, an analyst at RBC Capital Markets, said in a note to clients.

The airline said it’s “committed and on track” to cut costs for each seat flown a mile by as much as 21 percent over six years through the end of 2018, as it seeks to expand its Rouge discount carrier and adds more fuel-efficient jets such as Boeing Co. 787 Dreamliners and 737 Max aircraft. Air Canada is also boosting capacity and wooing passengers flying from the U.S. to Europe or Asia.

Read more: How Air Canada is expanding internationally

The shares dropped 6.9 percent to C$13.41 at 2:27 p.m. in Toronto after tumbling 8.5 percent for the biggest intraday decline since June 27. The Montreal-based airline had climbed 5.3 percent this year through Thursday, topping the 3.8 percent gain in the S&P/TSX Composite Index.

Too Aggressive

Return on invested capital in both 2017 and 2018 will probably range from 9 percent to 12 percent due to lower-than-projected adjusted profit, Air Canada said Friday. That’s short of the company’s previous target of 13 percent to 16 percent.

Investors viewed the lower return target “as the key negative on the quarter,” Spracklin said.

“In hindsight we were a little bit aggressive on the numerator in the calculation,” Chief Financial Officer Michael Rousseau said on a conference call with analysts.

Ebitdar this year will probably represent 15 percent to 18 percent of revenue, Air Canada said in statement. The company is also “quite comfortable” with that range for 2018, Rousseau said. The comparable figure for 2016 was 19 percent.

Free cash flow this year will range from C$200 million to C$500 million, Air Canada said. Analysts polled by Bloomberg had been expecting the company to burn through about C$20 million this year.

Air Canada said it expects to pay an average of 66 Canadian cents a liter for fuel this year. That’s 22 percent more than what the carrier paid last year.

Pilot Talks

The company reported adjusted profit of 14 cents a share for the fourth quarter, topping the 7 cent average of analyst estimates compiled by Bloomberg.

Separately, Air Canada has begun discussions with its pilots about expanding Rouge beyond 50 aircraft.

“There is definitely interest on both sides to look into that, but it’s way to soon to speculate if we’ll be able to come to an agreement,” Ben Smith, who runs the company’s passenger airline unit, said on the conference call.

(Updates with analyst’s comments in third paragraph.)
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