BUSINESS

Air Canada accelerating international expansion after record quarterly profit

11/06/2014 06:28 EST | Updated 01/06/2015 05:59 EST
MONTREAL - Air Canada plans to accelerate expansion on international routes after reporting the best quarter in the airline's 77-year history.

The Montreal-based company (TSX:AC) said Thursday that it plans to increase overall capacity by nine to 10 per cent next year, compared with this year's projected increase of seven to eight per cent.

Much of the added capacity will be in the international business, with domestic capacity project to increase by four or five per cent. More than half of the international growth will come from expansion of its low-cost Rouge subsidiary, while much of the rest will flow from using lower cost Boeing 787 Dreamliners.

Rouge is adding Asian and South American destinations and increasing the frequency of some flights to Europe as a new 10-year agreement with pilots allows it to increase the number of widebody aircraft.

"We view the expansion of our international and leisure businesses as building blocks for making Air Canada sustainably profitable," CEO Calin Rovinescu said Thursday during a conference call.

Air Canada's third-quarter net income increased 24 per cent to $323 million as operating income hit an all-time high and margins grew to 13.8 per cent.

Adjusting for one-time items, the airline earned a record $457 million or $1.55 per share, up from $365 million or $1.29 per share a year earlier. That was 11 cents better the average analyst estimate of $1.44 per share as compiled by Thomson Reuters.

Air Canada's system-wide passenger revenue rose to a record $3.48 billion, up $299 million or 9.4 per cent from the same time last year.

"We believe our record performance in the quarter to be a positive reinforcement of our international growth strategy and the strategic deployment of Air Canada Rouge to compete more effectively in leisure markets," Rovinescu told analysts.

On the Toronto Stock Exchange, Air Canada's shares were up 40 cents or 4.69 per cent at $9.30 Thursday afternoon.

The increased revenues were buoyed by a 31 per cent increase in international traffic passing through Canadian hubs, mainly from the United States. The airline hopes to eventually secure $400 million worth of this traffic destined to Europe and Asia.

Ben Smith, president, passenger airlines, said the gains were better than expected which, along with other gains during the period ended Sept. 30, has given Air Canada confidence to accelerate its capacity growth.

As well, the airline now has enough flexibility to scale back the increases if a weak economy curtails demand, he added.

David Tyerman of Canaccord Genuity said Air Canada's aggressive capacity expansion next year could "spook investors" over the negative impact on pricing and margins.

"That has not been the case so far at Air Canada, so we remain optimistic that Air Canada's strategy will produce additional financial gains," he wrote in a report.

He said the Air Canada's third-quarter results were better than expected as demand grew 11 per cent with the load factor coming in a very strong 87.2 per cent.

Pricing or yield was also better than expected, falling 1.6 per cent compared with his forecast for a 3.5 per cent decrease.

Although a reduction in costs fell short of the airline's guidance, Air Canada remains on track to reduce non-fuel costs by 15 per cent thanks to lower operating costs for Rouge and the addition of more seats to widebody aircraft.

Air Canada announced Thursday that it will buy two more Boeing 777s worth about US$660 million in 2016 and reconfigures much of its widebody fleet with international business and premium economy class seating.

Rovinescu said he's not disappointed that costs fell by only 2.9 per cent in the quarter because the airline's growing profit led to higher profit sharing with employees.

"I view this as a good news story," he told analysts.

Cameron Doerksen of National Bank Financial raised his target price for Air Canada to $12 from $11 after reviewing the results.

Follow @RossMarowits on Twitter