The FINANCIAL — Air Canada on October 25 reported record third quarter 2017 EBITDAR (earnings before interest, taxes, depreciation, amortization, impairment and aircraft rent) of $1.388 billion compared to the previous record third quarter 2016 EBITDAR of $1.248 billion, an increase of $140 million.
The airline recorded a record third quarter EBITDAR margin of 28.4 per cent. On a GAAP basis, Air Canada reported record third quarter operating income of $1.004 billion compared to the previous record third quarter 2016 operating income of $896 million.
Air Canada reported record adjusted net income of $950 million or $3.43 per diluted share in the third quarter of 2017 compared to adjusted net income of $821 million or $2.93 per diluted share in the third quarter of 2016. The airline reported record third quarter net income of $1.786 billion or $6.44 per diluted share compared to net income of $768 million or $2.74 per diluted share in the previous year’s quarter. In the third quarter of 2017, Air Canada recorded a net income tax recovery of $793 million on its consolidated statement of operations. This amount is excluded from Air Canada’s reported adjusted net income, according to Air Canada.
“I am pleased to report that Air Canada delivered its best ever third quarter financial performance,” said Calin Rovinescu, President and Chief Executive Officer. “These record results underscore the success of the multi-year transformation of our business model. This follows our September 19th Investor Day when we outlined in further detail our accomplishments and the opportunities that lie ahead which, together with more ambitious financial targets for the next three years, have been well received by the investor community.
“In the quarter, Air Canada’s financial performance was strong in all key financial measures, including margins and free cash flow, and we continued to reduce our financial leverage, further lowering the airline’s risk profile.
“Reflecting Air Canada’s on-going growth, in the quarter we increased passenger revenue by 9.1 per cent to a record $4.478 billion, including strong gains in the business cabin. Traffic increased 8.8 per cent while yield improved 0.4 per cent. This yield growth was achieved despite an increase in average stage length of 3.9 per cent versus last year’s quarter, driven by a robust revenue environment and effective revenue management. On a stage length adjusted basis, yield improved 2.6 per cent year-over-year. We also achieved a solid cost performance in the quarter with an adjusted CASM decrease of 2.1 per cent from the previous year’s quarter.
“I would like to thank Air Canada’s 30,000 employees for their unwavering focus on taking care of our customers in our busiest quarter ever during which we served a record 14 million passengers. And they did so with care and professionalism during a quarter marked by significant disruptions to communities and airports in Western Canada, Southern United States, Caribbean, Mexico and Central America affecting customers and employees alike. The spirit, dedication and compassion of the Air Canada team responding to these situations and making a difference to the lives of so many was a moment of pride for all,” concluded Mr. Rovinescu.
Third Quarter Income Statement Highlights
In the third quarter of 2017, on capacity growth of 9.1 per cent, record system passenger revenues of $4.478 billion increased $372 million or 9.1 per cent from the third quarter of 2016. The increase in system passenger revenues was driven by traffic growth of 8.8 per cent and, to a lesser extent, a yield improvement of 0.4 per cent. An increase in average stage length of 3.9 per cent had the effect of reducing system yield by 2.2 percentage points. On a stage-length adjusted basis, system yield increased 2.6 per cent year-over-year.
In the business cabin, system passenger revenues increased $90 million or 13.7 per cent from the third quarter of 2016 on traffic and yield growth of 8.3 per cent and 5.0 per cent, respectively.
In the third quarter of 2017, operating expenses of $3.876 billion increased $321 million or 9 per cent from the third quarter of 2016, mainly driven by the 9.1 per cent increase in capacity and higher fuel prices year-over-year.
Air Canada’s cost per available seat mile (CASM) decreased 0.1 per cent from the third quarter of 2016. The airline’s adjusted CASM(1) decreased 2.1 per cent from the third quarter of 2016, in line with the 1.5 per cent to 2.5 per cent decrease projected in Air Canada’s August 1st, 2017 news release.
Financial and Capital Management Highlights
At September 30, 2017, unrestricted liquidity (cash, short-term investments and undrawn lines of credit) amounted to a record $4.509 billion (December 31, 2016 – $3.388 billion).
At September 30, 2017, total long-term debt and finance leases (including current portion) of $6.329 billion decreased $289 million from December 31, 2016. In the first nine months of 2017, new borrowings of $733 million were more than offset by debt repayments of $574 million and the favourable impact of a stronger Canadian dollar of $448 million, as at September 30, 2017 compared to December 31, 2016, on Air Canada’s foreign currency denominated debt (mainly U.S. dollars).
At September 30, 2017, adjusted net debt of $5.939 billion decreased $1.151 billion from December 31, 2016, reflecting the impact of higher cash and short-term investment balances. At September 30, 2017, the adjusted net debt to EBITDAR ratio(1) improved to 2.1 versus 2.6 as at December 31, 2016.
Record net cash flows from operating activities of $493 million improved $55 million compared to the same quarter in 2016. Record free cash flow of $324 million in the third quarter of 2017 increased $9 million from the third quarter of 2016 as the impact of higher cash flows from operating activities versus the same quarter in 2016 was mostly offset by a higher level of net capital expenditures year-over-year.
For the 12 months ended September 30, 2017, return on invested capital (ROIC(1)) was 14.1 per cent, in line with current guidance and significantly higher than Air Canada’s weighted average cost of capital of 8.4 per cent.
2017 Outlook
Air Canada is providing the following guidance for 2017:
EBITDAR Margin: Air Canada continues to expect to achieve an annual EBITDAR margin of 17 to 19 per cent in 2017.
ROIC: Taking into account Air Canada’s new methodology for calculating ROIC (as described in Non-GAAP Measures of this news release), Air Canada now expects an annual ROIC of 13.5 to 14.5 per cent in 2017, as opposed to the annual ROIC of 11 to 14 per cent projected in its August 1st, 2017 news release which was based on the prior methodology.
Free Cash Flow: Air Canada continues to expect positive free cash flow in the range of $600 million to $900 million in 2017.
Adjusted CASM:
For the fourth quarter of 2017, Air Canada expects adjusted CASM (which excludes fuel expense, the cost of ground packages at Air Canada Vacations and special items) to decrease 0.5 to 1.5 per cent when compared to the fourth quarter of 2016.
For the full year 2017, Air Canada now expects adjusted CASM to decrease 3.0 to 4.0 per cent compared to the full year 2016, as opposed to the decrease of 3.0 to 5.0 per cent projected in its August 1st, 2017 news release. While Air Canada expects a favourable impact from a stronger Canadian dollar when compared to the U.S. dollar, this favourable impact is expected to be offset by certain cost increases, including the impact of a higher share price on stock-based compensation expense (included in wages and salaries expense).
Depreciation, Amortization and Impairment Expense: Air Canada continues to expect depreciation, amortization and impairment expense to increase by approximately $145 million from the full year 2016.
Employee Benefits Expense: Air Canada continues to expect employee benefits expense to increase by approximately $50 million from the full year 2016.
Aircraft Maintenance Expense: Air Canada now expects aircraft maintenance expense to increase by approximately $70 million from the full year 2016, as opposed to the $75 million increase projected in its August 1st, 2017 news release. This lower projected aircraft maintenance expense is largely due to a stronger Canadian dollar when compared to the U.S. dollar than what was assumed in Air Canada’s August 1st, 2017 news release.
2017 Outlook – Major Assumptions: Assumptions were made by Air Canada in preparing and making forward-looking statements. As part of its assumptions, Air Canada assumes relatively modest Canadian GDP growth for 2017. Air Canada also expects that the Canadian dollar will trade, on average, at C$1.24 per U.S. dollar in the fourth quarter of 2017 and C$1.29 per U.S. dollar for the full year 2017 and that the price of jet fuel (taking the impact of fuel hedging into account) will average 63 CAD cents per litre in the fourth quarter 2017 and 61 CAD cents per litre for the full year 2017.
Investor Day Targets (2018 – 2020)
In addition to the above 2017 outlook, as projected in its September 19, 2017 Investors Day news release, Air Canada is reiterating its guidance on the following key financial metrics:
EBITDAR Margin: Annual EBITDAR margin (EBITDAR as a percentage of operating revenue) of 17 to 20 per cent over the 2018 to 2020 period.
ROIC: Annual ROIC of 13 to 16 per cent over the 2018 to 2020 period.
Free Cash Flow: Cumulative free cash flow of $2 billion to $3 billion over the 2018 to 2020 period.
Leverage Ratio: A leverage ratio not exceeding 1.2 by the end of 2020 (measured by adjusted net debt over trailing 12-month EBITDAR).
Air Canada continues to expect to achieve a leverage ratio not exceeding 2.2 by the end of 2018.
2018 – 2020 Outlook – Major Assumptions: As part of its assumptions, during the 2018 to 2020 period, Air Canada assumes moderate Canadian GDP growth, Canadian Consumer Price Index (CPI) growth of approximately 2 per cent, and an average annual wage rate increase of 2 per cent throughout the period. Air Canada also assumes that the Canadian dollar will trade, on average, at C$1.32 per U.S. dollar and that the price of jet fuel will average 62 CAD cents per litre for 2018, 65 CAD cents per litre for 2019 and 67 CAD cents per litre for 2020.
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