Air Canada vows not to be thrown off course by weather, loonie as shares fall

MONTREAL - Air Canada has vowed it won't be thrown off course in 2014 even though its shares hit turbulence Wednesday after severe weather and a weaker dollar hurt fourth-quarter results and promised to inflict more pain in the new year.

"We're confident about our ability to mitigate the financial impact of these challenges," CEO Calin Rovinescu told analysts during a conference call in which the airline announced the best full-year results in its 77-year history despite the recent headwinds.

But while the full-year and quarterly results were a big improvement over year-earlier figures, both also missed analyst expectations and the stock, a recent high-flyer, was hammered by investors.

On the Toronto Stock Exchange, the airline's shares (TSX:AC.B) fell $1.60, or 20.46 per cent, to $6.22 on extremely heavy volume of some 13.6 million shares, more than four times the daily average.

The stock, which more than tripled in value last year, has been on a downward trend since hitting a multi-year high of $9.90 on Jan 23.

Air Canada said net losses in the fourth quarter fell to $6 million from $60 million a year earlier, while adjusted net income for the quarter was $3 million or one cent per share, compared with a year-earlier loss of $5 million or two cents per share.

Revenue was up slightly to $2.894 billion for the quarter, an increase of $55 million from a year earlier.

However, the airline had been expected to earn 12 cents per share in adjusted profits on $2.93 billion of revenues in the fourth quarter, according to analysts polled by Thomson Reuters.

The Montreal-based carrier said the December chill reduced EBITDAR earnings, which exclude items such as aircraft rent, interest and taxes, by $15 million in the quarter. The lower loonie increased operating expenses by $75 million, partially offset by a $24-million benefit to revenues and $13 million in derivative gains.

The impact of the Polar Vortex that forced the closing of its hub in Toronto, along with the lower Canadian dollar and increased competition in some markets is expected to reduce EBITDAR by $15 million to $30 million in the first quarter, it said.

"As we forecasted weakness in the Canadian dollar as part of our annual budgeting process — although not at its current level — we had a head start looking at ways to mitigate the exposure, such as through additional cost reduction and new revenue enhancement initiatives," Rovinescu said.

David Tyerman of Canaccord Genuity said he expects the airline will recover over the course of the year from the "negative surprise" from weather and currency that affected its fourth-quarter results and which are expected to persist in the first quarter of the year.

And analyst Walter Spracklin of RBC Capital Markets said the weaker than expected fourth-quarter results won't alter the positive view of the airline's long-term strategy.

"In any major transformational change there will be choppy progress, especially when external factors such as weather and foreign exchange play a role that will impact the pace of this progress," he said.

But Cameron Doerksen of National Bank Financial trimmed his target price for Air Canada shares to $7.50 on concerns that heightened competition and substantial increases in capacity will make it tougher to raise fares, especially on transatlantic routes where its low-cost subsidiary, Air Canada Rouge, is adding new destinations.

"Unless Air Canada believes that demand for transatlantic travel will be 15 to 20 per cent higher this summer, it can only fill the additional seats through stimulating traffic with lower fares," Doerksen said.

Air Canada followed rival WestJet's (TSX:WJA) lead a couple of weeks ago in hiking fares by two per cent in response to the falling Canadian dollar, while Air Canada Vacations has added a $35 per passenger currency surcharge on travel packages.

The lower loonie has put significant pressure on airlines because fuel and the cost of airplane purchases and rentals are paid in U.S. dollars, although some of the fuel is hedged to protect against fluctuations.

Air Canada's full-year adjusted earnings were a company record of $340 million, or $1.20 per share — six-times higher than in 2012, but three cents less than analyst forecasts

Under standard accounting, Air Canada's full-year net income was $10 million or two cents per share in 2013, compared with a 2012 net loss of $136 million or 52 cents per share. Revenues were $12.38 billion — up $268 million from a 2012.

Rovinescu said that made 2013 "truly a great year" and a "watershed year" for the airline.

He said the airline's strong performance, especially in the last three quarters of 2013, where adjusted net income improved sequentially, "establishes a strong foundation for continued success in 2014."

Air Canada expects its 2014 capacity will increase by seven to nine per cent, lower than November's projection of nine to 11 per cent, mainly due to lower Pacific capacity. The airline faces increased competition and is pulling back some service to Beijing because it has been unable to secure the slots it wanted. Domestic capacity is expected to increase by 3.5 to 4.5 per cent.

Meanwhile, Rovinescu urged politicians to carefully study Porter Airlines' request to allow the CSeries jet to fly from Billy Bishop Toronto Island Airport.

"It seems to be that the airport infrastructure process is in a hurry-up offence strategy and the best that the city councillors and the other folks that are looking at it ought to do is take the adequate time to study it properly regardless of artificial deadlines that are tied to municipal elections and figure out whether that's the right approach," he said.

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Note to readers: This is a corrected story. A previous version included outdated background material, including a reference to contract talks in the final paragraph.