08/07/2013 06:44 EDT | Updated 10/07/2013 05:12 EDT

Air Canada stock jumps after Q2 earnings beat estimates, revenue hits record

MONTREAL - Air Canada's shares got a lift Wednesday after the airline surprised analysts by recording its best second-quarter revenue in its history and dramatically improved its operating income by successfully trimming costs.

On the Toronto Stock Exchange, Air Canada's B shares soared nearly 24 per cent in heavy trading Wednesday. The stock gained 50 cents to $2.62 but remained short of the 52-week high of $3.40.

Trading volume was higher than average, with more than seven million shares traded on the TSX in the early afternoon.

Air Canada's adjusted profit of $115 million amounted to 41 cents per share, an improvement from a year-earlier adjusted net loss of $7 million, or two cents per share, the airline said Wednesday in its most recent quarterly report.

Analysts had estimated Air Canada would have 10 cents per share of adjusted net income and $3.02 billion of revenue, according to data compiled by Thomson Reuters.

Walter Spracklin of RBC Capital Markets said Air Canada's strong performance was driven by "good cost controls and positive yield."

"Costs (are) coming down quicker than expected," he wrote in a report, noting the airline is projecting lower costs for the year likely driven by lower maintenance costs.

Air Canada's operating income increased to $174 million from $63 million, while operating revenue totalled $3.06 billion, a second-quarter record for Air Canada and up from $2.99 billion a year earlier. Passenger revenues increased three per cent to $2.76 billion on a 1.6 per cent growth in traffic and a 1.5 per cent improvement in yield. Premium class revenues increased 3.3 per cent.

Domestic revenues were flat but trans-Atlantic revenues were strong, rising six per cent driven by a 7.7 per cent pricing improvement. The improved premium cabin yield of 2.2 per cent marked a rebound from weakness in the first quarter.

Including one-time costs, the Montreal-based airline lost $23 million or nine cents per share for the three months ended June 30, compared with a loss of $161 million or 59 cents per share a year earlier.

"These results clearly indicate that we are executing on our strategic initiatives particularly with our company-wide efforts to achieve long-term cost-containment and underscore the substantial operating leverage and upside that are available to us if we can continue to execute on these initiatives," CEO Calin Rovinescu said during a conference call.

He said the revenue growth and significantly higher profitability was achieved despite competitive pressures and large capacity additions by WestJet Airlines (TSX:WJA).

EBITDAR (earnings before interest, taxes, depreciation, amortization and rent) was $385 million, up from $312 million last year and compared to $326 million forecast by analysts.

Air Canada (TSX:AC.B) said its operating expenses decreased one per cent as higher wages, salaries and capacity purchase costs were more than offset by lower fuel costs, depreciation, amortization and impairment expenses.

Depreciate amortization and impairment expense decreased $37 million or 22 per cent and are expected to decrease by $150 million for the year. Aircraft maintenance expense was down $6 million in the quarter and is expected to decrease by $40 million for the year.

Its adjusted cost per available seat mile excluding fuel and the cost of Air Canada Vacations ground packages fell 1.4 per cent. It now says costs will drop more than it previously anticipated for the year, falling by one to two per cent.

Rovinescu said the airline's focus on cost transformation and international growth has resulted in improvements in virtually all metrics by which a company is measured — profit, revenue, operational performance, and customer satisfaction. On Aug. 1 it flew a record 124,700 passengers.

The improved results prompted Cameron Doerksen of National Bank Financial to raise his rating of the airline to outperform and increased his target price by 25 per cent to $3.75.

The airline, which is already closely aligned with the Jazz regional service operated by Chorus Aviation Inc. (TSX:CHR.B), recently launched a new discount long-range leisure service called Rouge.

This summer, Rouge is flying to Edinburgh, Venice and Athens, as well as a number of Caribbean destinations. In the winter it will add sun destinations in the Caribbean, Mexico and the U.S.

The airline has also started to take delivery of five large Boeing 777 aircraft fitted with 458 seats that it will use to service "high-volume, hypercompetitive routes" such as Montreal to Paris. The planes are being added ahead of the arrival of new cost-efficient Boeing 787 Dreamliners starting next year. The additions will allow Air Canada to transfer 33 planes to Rouge by the end of 2014.