Boeing 787 delivery delay may be blessing in disguise for Air Canada: analyst

MONTREAL - A delay in delivery of the first Boeing 787 Dreamliners until 2014 may complicate Air Canada's expansion plans while giving the carrier more time to continue reducing its debt, industry analysts said Friday.

Delivery of seven of the long-range composite planes has been pushed back from the fourth quarter of 2013 into the first half of the following year and Air Canada is negotiating with Boeing about the delivery schedule for the remaining 30 airplanes.

The first Boeing 787 was shipped to All Nippon Airlines late last month, but the company has cut its early delivery schedule.

The fuel-efficient, long-range planes are part of Air Canada's strategy to offer non-stop service to places like India, which is unprofitable with its current fleet.

"Given their present situation, a lot of uncertainty in the economy, now is not the time to be taking out more debt (so) it is probably a blessing in disguise," said Robert Kokonis, president of airline consulting firm AirTrav Inc.

With most of its debt fixed in U.S. dollars, the high value of the Canadian dollar in the third quarter prompted a nearly $400-million swing on its servicing costs from a year ago.

Coupled with high fuel costs, the currency fluctuation led to a $124-million loss in the third quarter.

The Montreal-based carrier used free cash generated in the quarter to reduce its debt by nearly $500 million to $4.6 billion.

But delaying the aircraft deliveries will push back Air Canada's need to seek financing until late next year or early 2013, chief financial officer Michael Rousseau told analysts.

Air Canada (TSX:AC.B) beat expectations even though it lost 45 cents per share in the period, before adjustments, compared with a profit of $317 million or $1.10 per share a year earlier.

Excluding foreign exchange losses, its adjusted profit was $270 million, or 55 cents per share, seven cents above analyst expectations on average, according to a poll by Thomson Reuters. The results were down from $306 million, or 70 cents per share in the same quarter a year ago.

Air Canada said quarterly operating profit fell nearly 12 per cent as the airline's expenses increased nine per cent to $252 million, driven by a 47 per cent increase in basic fuel prices.

Operating revenue was $3.24 billion, up from $3.03 billion, coming in above average analyst expectations.

"We experienced a strong revenue performance in the quarter, however, the revenue growth did not keep pace with the operating costs given the higher price of fuel," CEO Calin Rovinescu said during a conference call.

Air Canada has permanently removed $530 million of costs from its system and remains committed to proceeding with some form of low-cost carrier to achieve long-term profitability.

Meanwhile, ACE Aviation Holdings Inc., the former owner of Air Canada which remains a minority stockholder in the company, itself reported a loss $28 million in the third quarter, compared with net income of $66 million in the 2010 period.

The figures included unrealized losses of $26 million and $1 million respectively on ACE's investment and warrants in Air Canada, recorded at fair value, ACE said.

Rovinescu conceded that pension reform and the idea of a low-cost carrier are emotional and contentious issues that are causing labour turbulence at many legacy carriers.

But he said a move to some form of discount airline where costs don't creep up is needed to ensure Air Canada's long-term profitability.

That's why legacy carriers with large premium class service such as Singapore Airlines, ANA, Japan Airlines and Qantas are all pursuing this path.

"We would be putting our heads in the sand and pretending that it's not so if we said that segment is just not important enough for us to pay attention to," he told analysts.

Rovinescu denied that the idea is for the discount carrier to underwrite its mainline operations. "There's no subsidizing of anything here, this is a very attractive segment of the market that we ought to be capturing and it's something we will continue to pursue," he said.

The airline won't say how much revenues it lost due to labour disruptions in recent months, but Rousseau said the impact was not "material."

Cameron Doerksen of National Bank Financial said the third-quarter results were better than expected on larger cost reductions.

"However, the company still faces several headwinds, notably still unresolved labour issues and higher fuel costs," he wrote in a report.

The Montreal-based carrier said it expects to limit its capacity growth next year to no more than 1.5 per cent amid an expected slow economic recovery.

However, the availability of various plane sizes will allow it to quickly adjust capacity if the economy dips further than forecast, Rovinescu said.

"We've been increasing revenues through various initiatives, including fares and surcharges and we're monitoring changes in passenger demand given the uncertain global economic environment," he said.

"Should circumstances change, we'll consider appropriate capacity adjustments (but) at this time...passenger demand has however remained stable."

Air Canada is awaiting an arbitration ruling to establish a new collective agreement with flight attendants.

It reached agreement with customer service agents following a three-day strike in June and recently abandoned a judicial review of an arbitrator's pension ruling that will set up a hybrid pension model for new hires.

The national carrier angered pilots by seeking Ottawa's help to appoint conciliators to help negotiate a collective agreement.

Premium traffic, on which Air Canada depends, saw an uptick in the third quarter, with cabin revenues up 7.2 per cent to $38 million, on traffic growth of 5.8 per cent. Sales of higher-priced tickets have slowed in recent quarter because of slowing economies and declining business confidence.

On the Toronto Stock Exchange, its shares closed down four cents to $1.36 in Friday trading.

Note to readers: This is a corrected story. A previous version misstated the company's operating revenue.