BUSINESS

Air Canada to use lower fuel costs to boost profits rather than lower fares

02/11/2015 07:33 EST | Updated 04/13/2015 05:59 EDT
MONTREAL - Air Canada expects to use significantly lower fuel costs this year to pad profitability instead of passing on savings to passengers.

"The recent reduction in fuel costs absolutely benefits Air Canada in the short-term and, subject to ongoing volatility, we expect to take full advantage," CEO Calin Rovinescu said Wednesday during a conference call after posting record results in 2014.

Fuel is one of the biggest expenses for any airline and the carrier is forecasting jet fuel prices to average 67 cents per litre this year, down from 89 cents last year.

He said the country's largest airline will remain competitive on fares but will use cost savings to reduce debt and invest in the airline.

The approach mirrors rival WestJet Airlines (TSX:WJA), which last week said it plans to pocket as much of the fuel savings as possible if demand remains strong.

Air Canada said it is not seeing any significant weakening of demand in oil producing provinces, but expects markets in Alberta, Saskatchewan and parts of B.C. to "come under some pressure."

However, the airline said it can easily redeploy capacity to other, stronger markets, he said.

Air Canada said it posted the best annual financial results in its 77-year history in 2014, which Rovinescu described as a "break-out year."

Air Canada's (TSX:AC) annual revenues grew 7.1 per cent to $13.3 billion as it flew a record 38.5 million passengers and saw ancillary revenues increase 10 per cent, from checked baggage and other fees.

Its net income increased 10-fold to $105 million for the 12 months ended Dec. 31 and its adjusted net income — which excludes a number of one-time and non-operating items — grew 56 per cent to $531 million.

Rovinescu said the results "showed what we are truly capable of."

In the fourth quarter, Air Canada posted a $100-million net loss but the adjusted net income excluding one-time items soared to $67 million or 23 cents per share. Revenues improved 7.2 per cent to $3.1 billion.

On the Toronto Stock Exchange, Air Canada shares closed down 9.7 per cent or $1.29 at $11.96.

Meanwhile, Air Canada said will decide by the end of June whether to opt out of federal pension regulations that could pave the way for the airline to reward shareholders by paying a dividend or buying back some of its shares.

The Montreal-based airline said its domestic registered pension plans enjoyed a $780-million surplus as of Jan. 1, up from an $89-million surplus a year ago and a turnaround from a $4.2-billion deficit in 2012.

Air Canada said it will focus on reducing debt but is not excluding funnelling some returns to shareholders.

Chris Murray of AltaCorp Capital said Air Canada has been reluctant to pay a dividend because of the volatile nature of the airline industry.

"There's some concern about can that be sustainable, but . . . I think it would be a strong vote of confidence in the outlook for the company and I think it would also make the stock more attractive to a greater number of shareholders," he said in an interview.