Air Canada warns of capacity cuts
November 7, 2008
Air Canada warned Friday of deeper-than-expected capacity cuts this winter as the economic downturn replaced high fuel prices as its most pressing concern.
The country's largest carrier, a unit of Ace Aviation Holdings Inc., will reduce capacity by up to 8% in the fourth quarter and by as much as 9% in the first quarter of next year as the economic uncertainty continues to drag down demand, management said.
The airline said in June that record high fuel prices would force it to scale back capacity by 7% in both quarters leading to 2,000 employee cuts beginning this month and carrying through the winter months.
Although fuel prices have subsided, Montie Brewer, Air Canada chief executive said yesterday the carrier's 'tight capacity strategy' remained valid given the impact the global financial crisis and weakening customer confidence would have on demand.
Air Canada parked its final gas-guzzling 767-200s last weekend, has cut its unprofitable routes and is shopping seven of its planes around for sub-lease to accommodate these capacity cuts. It is also flying smaller planes on several of its routes in order to keep its prices high and ensure seats are filled.
'What we've learned during these slowdowns is that you need to manage your capacity well, because it's hard to generate additional revenue by encouraging customers to spend money they don't have,' Mr. Brewer said.
Management noted demand has been soft on its U.K. and U.S. transborder routes, and that domestic traffic dropped as well driven by the economic slump in the East.
In addition, price increases on its lucrative business-class seats were not as readily absorbed as those on its economy seats, according to Mike Rousseau, Air Canada chief financial officer. 'Softness in corporate travel was especially evident in September, which is understandable given the turmoil in the financial market,' he said.
Overall, the airline said it expects capacity this year to decrease between 1% and 1.5% compared to 2007, down from its previous range of up or down by 1%.
The news comes as the carrier reported a net loss yesterday of $132-million, or $1.32 a share, in the third quarter, compared to a $273-million profit during the quarter last year. While revenue rose 4.1%, a 49% increase in fuel prices and unfavourable currency exchange dragged down its earnings.
In addition, the airline was forced to write down $93-million from its fuel hedges after the price of fuel declined during the quarter and reduced their value.
Cameron Doerksen, Versant Partners analyst, noted that with some tough times ahead and only about $1-billion in free cash - representing less than 10% of its trailing 12-month revenue - the company's liquidity 'is a growing concern.'
'With low levels of profitability, a worsening economic slowdown, increased liquidity concerns, and looming potential labour issues, we do not see any compelling fundamental reason to be buying the stock,' he said.
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