The FINANCIAL — Air Canada on November 5 reported record third quarter adjusted net income of $734 million or $2.50 per diluted share compared to adjusted net income of $457 million or $1.55 per diluted share in the third quarter of 2014, an improvement of $277 million or approximately 61 per cent.
EBITDAR (earnings before interest, taxes, depreciation, amortization and aircraft rent) amounted to $1,076 million compared to EBITDAR of $749 million in the same quarter in 2014, an increase of $327 million or approximately 44 per cent year-over-year. On a GAAP basis, Air Canada reported record third quarter operating income of $815 million compared to operating income of $526 million, an improvement of $289 million or approximately 55 per cent from the third quarter of 2014. An operating margin of 20.3 per cent in the third quarter of 2015 reflected an improvement of 6.5 percentage points from the same quarter in 2014, according to Air Canada.
“I am very pleased with the financial results we realized in the third quarter, reflecting both the continued, successful execution of the strategic plan that we have developed over the last several years as well as the efforts of all of our employees,” said Calin Rovinescu, President and Chief Executive Officer of Air Canada. “Our EBITDAR margin improved 700 basis points versus last year as passenger revenue increased 6.9 per cent and adjusted CASM declined 0.5 per cent.
“We will continue to direct the majority of our operating cash flow to finance the renewal of our fleet with more fuel efficient aircraft and to reduce net debt levels, two drivers which we firmly believe will continue to increase long-term shareholder value.
“The transformative changes we have made in recent years provide us with the cost structure, fleet and flexibility to respond not only to competitive market conditions, but also to fluctuations in the Canadian dollar and economic downturns. Moreover, our plan is not based on fuel prices staying at the current levels. Our capacity additions for the year, largely in international markets, remain consistent with our plan that had been established in a higher fuel price environment and continue to be important contributors to our increased profits.
“In addition, we have increased investments in training and support for our employees, contributing to higher employee engagement levels and improved customer service scores, such as the Ipsos Reid Business Traveller Survey which named Air Canada “Canada’s Favourite Airline for Business Travel”. Air Canada was preferred by 86 per cent of Canadian frequent business travellers surveyed in 2015, an improvement of 17 percentage points over the past seven years. I would like to thank all 28,000 employees for their collective efforts in delivering these strong financial results and for continuing to improve our customer service, reaching higher levels of excellence,” said Mr. Rovinescu.
Third Quarter Income Statement Highlights
In the third quarter of 2015, on capacity growth of 10.5 per cent, system passenger revenues of $3.7 billion increased $240 million or 6.9 per cent from the third quarter of 2014. The favourable impact of a weaker Canadian dollar on foreign currency denominated passenger revenues increased passenger revenues by approximately $119 million in the third quarter of 2015. Passenger revenue per available seat mile (PRASM) decreased 4.0 per cent from the third quarter of 2014 mainly on a lower yield. Traffic growth of 10.2 per cent reflected traffic increases in all of Air Canada’s five geographic markets. A yield decline of 3.8 per cent, consistent with the anticipated yield impact stemming from the implementation of the airline’s strategic plan, reflected an increase in average stage length of 3.7 per cent, which alone had the effect of reducing system yield by 2.1 percentage points, a higher proportional growth of lower-yielding international-to-international passenger flows in support of the airline’s international expansion strategy, a higher proportion of seats into long-haul leisure markets and a reduction in carrier surcharges relating to lower fuel prices, particularly where carrier surcharges are regulated. Air Canada’s commercial strategy, combined with its focus on cost reduction, produced a 20.3 per cent operating margin in the third quarter of 2015, 650 basis points above the third quarter of 2014.
In the third quarter of 2015, operating expenses of $3.2 billion decreased $64 million or 2.0 per cent from the third quarter of 2014. This decrease was mainly due to the impact of lower base fuel prices (before the impact of foreign exchange) which decreased operating expenses by $477 million in the third quarter of 2015. This decrease was largely offset by the impact of the 10.5 per cent capacity growth and the unfavourable impact of a weaker Canadian dollar on foreign currency denominated operating expenses which increased operating expenses by approximately $215 million in the third quarter of 2015 (comprised of $111 million in aircraft fuel expense and an aggregate of $104 million in non-fuel operating expenses).
Air Canada’s cost per available seat mile (CASM) decreased 11.3 per cent from the third quarter of 2014. The airline’s adjusted CASM(1), which excludes fuel expense, the cost of ground packages at Air Canada Vacations® and unusual items decreased 0.5 per cent from the third quarter of 2014, in line with the 0.5 to 1.5 per cent decrease projected in Air Canada’s news release dated August 12, 2015. Had the Canadian-U.S. dollar exchange rate remained at 2014 levels, adjusted CASM would have decreased 4.6 per cent when compared to the third quarter of 2014.
Financial and Capital Management Highlights
At September 30, 2015, unrestricted liquidity (cash, short-term investments and undrawn lines of credit) amounted to $3.4 billion (September 30, 2014 – $2.8 billion).
Adjusted net debt amounted to $5.4 billion at September 30, 2015, an increase of $291 million from December 31, 2014 due to higher long-term debt and finance lease balances (including current portion) partly offset by higher cash balances. The airline’s adjusted net debt to EBITDAR ratio was 2.2 at September 30, 2015 versus a ratio of 3.1 at December 31, 2014.
In the third quarter of 2015, net cash flows from operating activities totaled $476 million, an improvement of $285 million from the third quarter of 2014. Negative free cash flow(1) amounted to $90 million, an improvement of $102 million from the third quarter of 2014. This increase reflected the impact of higher operating income partly offset by higher capital expenditures when compared to the third quarter of 2014. Air Canada took delivery of two Boeing 787 aircraft in the third quarter of 2015.
For the 12 months ended September 30, 2015, return on invested capital (ROIC(1)) was 18.0 per cent versus 11.4 per cent for the 12 months ended September 30, 2014.
Current Outlook
Capacity
Air Canada expects fourth quarter 2015 system ASM capacity, as measured by available seat miles (ASMs), to increase 7.5 to 8.5 per cent when compared to the fourth quarter of 2014, and to be comprised of an increase in the total number of seats dispatched (system) of 5.5 to 6.5 per cent and an increase in system average stage length (measured by ASMs divided by seats dispatched) of approximately 2.0 per cent when compared to the same quarter in 2014.
Air Canada continues to expect its full year 2015 system ASM capacity to increase by 9.0 to 10.0 per cent. For the full year 2015, Air Canada continues to expect an increase in the total number of seats dispatched (system) of 6.0 to 7.0 per cent and an increase in average stage length (system) of approximately 3.0 per cent when compared to the full year 2014. Approximately 55 per cent of the 2015 forecasted capacity increase reflects the continued lower-cost growth of Air Canada rouge® while approximately 38 per cent of the capacity growth is focused on international markets operated by the mainline carrier.
Air Canada continues to expect its full year 2015 domestic ASM capacity to increase by 3.0 to 4.0 per cent when compared to 2014. The year-over-year growth in full year 2015 domestic ASM capacity is largely focused on the airline’s transcontinental services, reflecting, in large part, the positioning of certain Boeing 777 and 787 aircraft at Air Canada’s major hubs in Toronto and Vancouver. Furthermore, in 2015, an overlap of the aircraft brought into the fleet to replace the exiting Embraer 190 aircraft is expected to account for approximately 30 per cent of the projected domestic capacity growth in 2015. This overlap was designed to better match capacity with the 2015 summer season demand that had been expected. For the full year 2015, Air Canada continues to expect an increase in the total number of seats dispatched (domestic) of 2.0 to 3.0 per cent and an increase in average stage length (domestic) of approximately 1.0 per cent when compared to the full year 2014.
Adjusted CASM
For the fourth quarter of 2015, Air Canada expects adjusted CASM (which excludes fuel expense, the cost of ground packages at Air Canada Vacations and unusual items) to increase by up to 1.0 per cent when compared to the fourth quarter of 2014.
For the full year 2015, Air Canada now expects adjusted CASM to decrease by up to 1.0 per cent from the full year 2014, as opposed to the decrease of 1.0 to 2.0 per cent projected in Air Canada’s news release dated August 12, 2015, the result of additional investments in further improving customer experience, slight increases in depreciation, amortization and impairment, employee benefits and aircraft maintenance expenses (discussed below), as well as the impact of a weaker Canadian dollar.
Major Assumptions
Air Canada’s outlook assumes relatively low Canadian GDP growth for 2015. Air Canada also expects that the Canadian dollar will trade, on average, at C$1.32 per U.S. dollar in the fourth quarter of 2015 and C$1.28 for the full year 2015 and that the price of jet fuel will average 60 cents per litre for the fourth quarter of 2015 and 63 cents per litre for the full year 2015.
For the full year 2015, Air Canada also expects:
Depreciation, amortization and impairment expense to increase by $130 million from the full year 2014, as opposed to the increase of $125 million projected in Air Canada’s news release dated August 12, 2015. This revised guidance takes into account Air Canada’s depreciation, amortization and impairment expense for the first nine months of 2015.
Employee benefits expense to increase $35 million from the full year 2014, as opposed to the increase of $30 million projected in Air Canada’s news release dated August 12, 2015. This revised guidance takes into account Air Canada’s employee benefits expense for the first nine months of 2015.
Aircraft maintenance expense to increase $95 million as opposed to the increase of $90 million projected in Air Canada’s news release dated August 12, 2015. This revised guidance takes into account Air Canada’s aircraft maintenance expense for the first nine months of 2015, including the impact of a weaker than previously projected Canadian dollar on U.S. denominated aircraft maintenance expenses.
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