Air Canada (Montreal) today reported second quarter adjusted net income (1) of $139 million (all amounts in Canadian dollars) or $0.47 per diluted share compared to adjusted net income of $115 million or $0.41 per diluted share in the second quarter of 2013, an improvement of $24 million or 21 per cent. EBITDAR (1) (earnings before interest, taxes, depreciation, amortization and impairment, and aircraft rent) amounted to $456 million compared to EBITDAR of $385 million in the second quarter of 2013. On a GAAP basis, Air Canada reported net income of $223 million or $0.75 per diluted share in the second quarter of 2014 compared to a net loss of $23 million or $0.09 per diluted share in the second quarter of 2013. Air Canada’s second quarter 2014 EBITDAR and GAAP net income results included favourable tax-related provision adjustments of $41 million. These provisions are excluded from Air Canada’s adjusted (net income and CASM) results.

“I am pleased to report that Air Canada delivered its best second quarter financial performance in the Corporation’s history, surpassing last year’s records in all three measures of operating income, adjusted net income and EBITDAR,” said Calin Rovinescu, President and Chief Executive Officer. These results underline the significant incremental progress being achieved through our various value-enhancing strategies, as they continue to be implemented.

“In addition to seeing good year-over-year revenue growth in all of our five markets, we have also seen a marked increase in the number of international and U.S.-originating customers choosing Air Canada for their global travel plans. Investments by Air Canada and our industry partners to provide a seamless transfer experience at Canada’s major hubs are starting to show results. The performance of Air Canada rougeTM has exceeded expectations and allows Air Canada to now compete more effectively in leisure markets on a more cost effective basis. Combined with Air Canada’s other cost transformation strategies, adjusted CASM decreased 4.7 per cent from the previous year’s quarter.

“During the quarter, Air Canada took delivery of the first two of 37 firm orders for the Boeing Dreamliner 787 aircraft and a third since, in July (above). The renewal of our international fleet with these next-generation aircraft will provide us with significant improvements in fuel efficiency and allow us to offer customers superior comfort and amenities. We look forward to realizing the full benefits of our international fleet renewal as new aircraft enter the mainline fleet.

“I am especially pleased that once again international air travellers surveyed by the independent UK-based research firm, Skytrax, selected Air Canada as Best Airline in North America for the fifth year in a row. This honour recognizes the professionalism of our employees and their commitment to taking care of our customers, as well as our investment in providing an award-winning product on board our aircraft and on the ground.

“Looking ahead, we remain focused on maintaining the momentum to transform Air Canada into an increasingly profitable company for our shareholders and employees, and executing on our four core priorities: cost transformation, international growth, customer engagement and culture change,” concluded Mr. Rovinescu.

Second Quarter Income Statement Highlights

System passenger revenues amounted to $2,965 million, an increase of $208 million or 7.5 per cent from the second quarter of 2013, on a 9.9 per cent growth in traffic as yield declined 2.1 per cent year-over-year. Average stage length, on a system-basis, increased 2.5 percent from the same quarter of 2013 and had the effect of reducing yield by 1.5 percentage points. Passenger revenue per available seat mile (PRASM) decreased 0.8 per cent from the same quarter in 2013 on the lower yield as passenger load factor improved 1.1 percentage points. In the second quarter of 2014, system premium cabin revenues increased $14 million or 2.4 per cent on yield growth of 3.6 per cent partly offset by a traffic decline of 1.2 per cent.

Operating expenses amounted to $3,060 million, an increase of $177 million or 6 per cent from the second quarter of 2013 on an 8.5 per cent increase in capacity. Included in Other operating expenses in the second quarter of 2014 were favourable tax-related provision adjustments of $41 million. The unfavourable impact of a weaker Canadian dollar on foreign currency denominated operating expenses (mainly U.S. dollars), when compared to same quarter in 2013, increased operating expenses by $110 million. This unfavourable currency impact on operating expenses was partially offset by a favourable currency impact on passenger revenues of $70 million.

Air Canada’s adjusted cost per available seat mile (adjusted CASM(1)), which excludes fuel expense, the cost of ground packages at Air Canada VacationsTM and unusual items, decreased 4.7 per cent compared to the second quarter of 2013. The 4.7 per cent reduction in adjusted CASM surpassed the adjusted CASM decrease of 3.5 to 4.5 per cent projected in Air Canada’s news release dated May 15, 2014, largely the result of ASM capacity coming at the top end of the expected range and a slight improvement in the value of the Canadian dollar versus what Air Canada assumed in its May 15, 2014 projections.

In the second quarter of 2014, Air Canada recorded operating income of $245 million compared to operating income of $174 million in the second quarter of 2013, an improvement of $71 million. Air Canada’s second quarter 2014 operating income results included favourable tax-related provision adjustments of $41 million.

Financial and Capital Management Highlights

At June 30, 2014, unrestricted liquidity (cash, short-term investments and undrawn lines of credit) amounted to $2,954 million (June 30, 2013 – $2,139 million). Air Canada’s principal objective in managing liquidity risk is to maintain a minimum unrestricted liquidity level of $1.7 billion.

In April 2014, Air Canada completed a private offering of US$400 million of 7.75 per cent senior unsecured notes due 2021 and received net proceeds of approximately $432 million.

At June 30, 2014, adjusted net debt (1) amounted to $4,309 million, a decrease of $42 million from December 31, 2013. The airline’s adjusted net debt to EBITDAR ratio was 2.9 at June 30, 2014 versus a ratio 3.0 at December 31, 2013. Air Canada uses this ratio to manage its financial leverage risk and its objective is to maintain the ratio below 3.5.

In the second quarter of 2014, free cash flow (1) reflected a decline of $183 million from the second quarter of 2013, reflecting primarily the acquisition of two Boeing 787 aircraft.

For the 12 months ended June 30, 2014, return on invested capital (ROIC (1)) was 11.0 per cent versus 8.8 per cent for the 12 months ended June 30, 2013. Air Canada’s goal is to achieve a sustainable ROIC of 10 to 13 per cent by 2015.

Pension Highlights

Based on actuarial valuations completed in the second quarter of 2014, the aggregate solvency surplus in Air Canada’s domestic registered pension plans as at January 1, 2014 was $89 million whereas the solvency deficit at January 1, 2013 was $3.7 billion. The elimination of the $3.7 billion deficit and the surplus generated were largely the result of the following factors: (i) a 13.8 per cent return on investments during 2013, (ii) the implementation of pension benefit amendments which decreased the solvency deficit by approximately $970 million, (iii) contributions made by Air Canada in respect of 2013 of $225 million in respect of the solvency deficit and (iv) the application of a prescribed discount rate of 3.9 per cent to calculate its future pension obligations. Refer to section 9.7 “Pension Funding Obligations” of Air Canada’s 2013 MD&A dated February 12, 2014 for additional information on Air Canada’s pension funding obligations.

Current Outlook

For the third quarter of 2014, Air Canada expects its system ASM capacity, as measured by available seat miles (ASMs), to increase in the range of 9.0 to 10.0 per cent when compared to the third quarter of 2013.

Air Canada now expects its full year 2014 system ASM capacity to increase in the range of 7.0 to 8.0 per cent (as opposed to the 6.5 to 8.0 per cent growth projected in Air Canada’s news release dated May 15, 2014) and its full year domestic ASM capacity to increase in the range of 4.0 to 5.0 per cent when compared to 2013 (as opposed to 3.0 to 4.0 per cent growth projected in Air Canada’s news release dated May 15, 2014). The projected system capacity increase is expected to be achieved at a unit cost which is below historical levels. The change in projected domestic ASM capacity is primarily driven by the use of larger aircraft on transcontinental routes in support of the airline’s international expansion strategy.

Air Canada expects the ASM capacity growth to be comprised of an increase in the total number of seats dispatched (system) in the third quarter and full year 2014 in the range of 6.5 to 7.5 per cent and 5.0 to 6.0 per cent, respectively, when compared to same periods in 2013.

For the third quarter of 2014, Air Canada expects adjusted CASM to decrease in the range of 3.5 to 4.5 per cent when compared to the third quarter of 2013.

Taking into account Air Canada’s adjusted CASM performance in the second quarter of 2014, for the full year 2014, Air Canada now expects adjusted CASM to decrease in the range of 3.2 to 4.2 per cent from the full year 2013 (as opposed to the 3.0 to 4.0 per cent decrease projected in Air Canada’s news release dated May 15, 2014).

Air Canada’s outlook assumes Canadian GDP growth of 2.0 to 2.5 per cent for 2014. Air Canada also expects that the Canadian dollar will trade, on average, at C$1.08 per U.S. dollar in the third quarter of 2014 and C$1.09 for the full year 2014 and that the price of jet fuel will average 90 cents per litre for the third quarter of 2014 and 91 cents per litre for the full year 2014.

Notes:

1) Adjusted net income (loss) and adjusted net income (loss) per share – diluted are non-GAAP financial measures. Refer to section 16 “Non-GAAP Financial Measures” of Air Canada’s Second Quarter 2014 MD&A for additional information.
(2) EBITDAR (earnings before interest, taxes, depreciation, amortization, impairment and aircraft rent) is a non-GAAP financial measure. Refer to section 16 “Non-GAAP Financial Measures” of Air Canada’s Second Quarter 2014 MD&A for additional information.
(3) Unrestricted liquidity refers to the sum of cash, cash equivalents, short-term investments and the amount of available credit under Air Canada’s revolving credit facilities. At June 30, 2014, unrestricted liquidity was comprised of cash and short-term investments of $2,615 million and undrawn lines of credit of $339 million. At June 30, 2013, unrestricted liquidity was comprised of cash and short-term investments of $2,107 million and undrawn lines of credit of $32 million.
(4) Free cash flow (cash flows from operating activities less additions to property, equipment and intangible assets) is a non-GAAP financial measure. Refer to section 7.5 “Consolidated Cash Flow Movements” of Air Canada’s Second Quarter 2014 MD&A for additional information.
(5) Adjusted net debt (total debt less cash, cash equivalents and short-term investments plus capitalized operating leases) is a non-GAAP financial measure. Refer to section 7.3 “Adjusted Net Debt” of Air Canada’s Second Quarter 2014 MD&A for additional information.
(6) Return on invested capital (“ROIC”) is a non-GAAP financial measure. Refer to section 16 “Non-GAAP Financial Measures” of Air Canada’s Second Quarter 2014 MD&A for additional information
(7) Operating statistics (except for average number of FTE employees) include third party carriers (such as Jazz Aviation LP (“Jazz”) and Sky Regional Airlines Inc. (“Sky Regional”) operating under capacity purchase agreements with Air Canada.
(8) Adjusted CASM is a non-GAAP financial measure. Refer to section 16 “Non-GAAP Financial Measures” of Air Canada’s Second Quarter 2014 MD&A for additional information.
(9) Reflects FTE employees at Air Canada. Excludes FTE employees at third party carriers (such as Jazz and Sky Regional) operating under capacity purchase agreements with Air Canada.
(10) Average stage length is calculated by dividing the total number of available seat miles by the total number of seats dispatched.
(11) Includes fuel handling expenses. Economic fuel price per litre is a non-GAAP financial measure. Refer to sections 4 and 5 “Results of Operations” of Air Canada’s Second Quarter 2014 MD&A for additional information.
(12) Revenue passengers are counted on a flight number basis which is consistent with the IATA definition of revenue passengers carried.

Copyright Photo: TMK Photography/AirlinersGallery.com. Boeing 787-8 C-GHPQ (msn 35257) departs from the Toronto (Pearson) hub.

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