Air Canada flying high after last year's bankruptcy

September 25, 2005

Having lightened its debts, cut labour costs and reworked its operations, Air Canada has been flying high in the year since it emerged from bankruptcy protection -- although it still faces storm clouds on the horizon.

The rising cost of jet fuel in an era of record high crude oil prices is an obvious worry, although so far surcharges, fare increases and strong travel demand have helped Air Canada weather the turbulence.

Air Canada believes it can offset about 40 per cent of the impact of sky-high fuel through surcharges and other price increases it charges for passengers and cargo, president Montie Brewer told a business conference last week.

However, Brewer noted that surcharges and fare increases will have an impact on future bookings.

"It shows up over time," Brewer said at a CIBC investors conference in Quebec City last week.

McGill professor Louis Gialloreto said he expects the airline industry will continue to be on an upswing for some time but added that the rate of growth may slow this winter, once consumers see their home-heating bills.

"We really haven't seen yet the major consumer impact (of high fuel prices) in terms of whether or not the significant increase in household management costs will curtail the level of growth that we're expecting," Gialloreto said.

He noted that retail sales in the United States are expected to be lower during the important November-December holiday period and added that travel sales typically slow before retail sales do.

Business travel will likely hold up if the economy remains healthy, "which is important for the airlines because they make much more money on that than leisure (travel)."

But if the demand for vacation travel to the south this winter doesn't materialize, "it could be a rougher first quarter than anticipated," Gialloreto said.

Gialloreto also warned the Montreal-based airline, which exacted painful concessions from its employees as part of its restructuring, may face tussles with its main unions as some clauses in their contracts come up for renewal in 2006.

"Labour has yet to vent their frustrations. So you can expect it to be a pretty tough fight the next time a contract comes up for renegotiation," Gialloreto said.

The pilots have already flexed their muscles, by refusing to agree to contract changes that Air Canada sought in April as a precondition for ordering up to 96 new Boeing 787 and 777 jets at a cost of $6.1 billion to $15.9 billion US.

On Friday, the leadership of the Air Canada Pilots Association and Air Canada announced they have agreed to appoint Martin Teplitsky to help resolve the issues that have, so far, blocked the Boeing purchase.

A major issue is the seniority list that is used to decide how pilots and co-pilots are assigned to aircraft. Different union factions have fought bitterly among themselves since Air Canada bought Canadian Airlines nearly five years ago.

Teplitsky will be the third mediator to attempt to resolve the seniority issue -- which is technically an internal matter within the union but which could have a major impact on Air Canada's labour costs -- hence the company's insistance that the issues be resolved before buying the Boeings.

"The biggest disappointment looking ahead for Air Canada is their inability to get a pilot union agreement about the new aircraft," said Joseph D'Cruz, a business professor at the University of Toronto.

The Boeing 787 has the best combination of fuel-efficiency and passenger seating for Air Canada's transatlantic routes while the Boeing 777 is "in the sweet spot for Air Canada's non-stops to India and to China," D'Cruz said.

"It's a real setback for Air Canada that they haven't been able to get their pilots to come alongside on that strategy," D'Cruz said.

If Air Canada doesn't get the new planes, it will have to rely on older Boeing and Airbus jets already in its fleet and on the Embraer and Bombardier planes that it ordered since restructuring for use on North American routes.

Air Canada's plan to make more use of regional planes, part of its restructuring plan, will mean it will require more flights to carry the same number of passengers that a mid-sized Boeing or Airbus could carry on a given route.

"And of course, that adds fuel costs. So by going to more frequent, smaller aircraft they are raising their overall cost profile on fuel. And that's going to be a strategy that's difficult to reverse at this point," Gialloreto said.

During the airline's 18-month-long court-supervised restructuring, which began in early April 2003 and ended late September 2004, the regional jets were seen as part of the answer to the light passenger volumes at Air Canada.

However, Air Canada's passenger volumes are on the rise -- thanks partly to the sudden demise of feisty rival Jetsgo in March and a cyclical increase in travelling that began in mid-2004.

For now, however, Air Canada and its new corporate parent, ACE Aviation Holdings, are faring well.

ACE Aviation, a holding company that owns the Air Canada and Jazz airlines as well as affiliated businesses, has had a good year on the stock market.

Its shares (TSX:ACE.B) rose 45 cents to close at $36.05 on Friday. They were worth $26.7 on Oct. 4, 2004, when they began trading.

(Shares of the original Air Canada became worthless as a result of the restructuring and were delisted last year from the Toronto Stock Exchange.)

The spinoff of the airline's Aeroplan loyalty program into a separate income trust, still majority-owned and controlled by ACE Aviation, was an instant hit with investors -- helping ACE to raise about $125 million.

Aeroplan units (TSX:AER.UN) closed Friday at $12.20 -- about midway in its range of $11.10 to $14.40 since official trading began in late July.

FlyForLess is not affiliated with any media companies nor does it represent or work for Air Canada. This article is published with the sole purpose of making information available for those who wish to stay informed on Air Canada's actualities.