Air Canada (Montreal) today (May 12) reported first quarter adjusted net income of $122 million (all amounts are in Canadian dollars) or $0.41 per diluted share compared to an adjusted net loss of $132 million or $0.46 per diluted share in the first quarter of 2014, an improvement of $254 million or $0.87 per diluted share. EBITDAR(1) (earnings before interest, taxes, depreciation, amortization and aircraft rent) amounted to $442 million compared to EBITDAR of $147 million in the same quarter in 2014, an increase of $295 million or 200 per cent year-over-year.

Here is the rest of the financial report:

On a GAAP basis, Air Canada reported operating income of $200 million in the first quarter of 2015 compared to an operating loss of $62 million in the first quarter of 2014, an improvement of $262 million. The airline recorded an operating margin of 6.2 per cent compared to a negative operating margin of 2.0 per cent in the first quarter of 2014, an improvement of 8.2 percentage points.

“I am delighted to report the best first quarter financial performance in Air Canada’s history,” said Calin Rovinescu, President and Chief Executive Officer. “Record results in adjusted net income, operating income, operating margin, EBITDAR, passenger revenues and passenger load factor for the quarter all underscore our team’s success in executing on our value-enhancing strategies. We have continued to see a strong demand environment, and in the first quarter our margins expanded dramatically, bolstered by strong cost control, with adjusted CASM declining 1.8 per cent despite the weaker Canadian dollar, and solid traffic growth particularly on leisure sun routes.

“While fuel prices remain volatile, in 2015 we expect to continue to expand margins, increase adjusted net income, strengthen our balance sheet and create value for shareholders. We also expect to set a new record for second quarter operating income this year; however year-over-year improvements will likely be modest when compared to the first quarter improvement. This is due to a particularly strong revenue performance in the second quarter of 2014 and higher projected maintenance expense, the absence of favourable tax-related provisions adjustments of $41 million recorded in the second quarter of 2014, as well as higher relative fuel prices in the second quarter versus the first quarter of 2015.

“I would like to thank Air Canada’s 27,000 employees for their hard work earning the loyalty of our customers as we continue to implement our commercial strategy focused on international growth with a renewed fleet and onboard product.”

First Quarter Income Statement Highlights

In the first quarter of 2015, on capacity growth of 9.3 per cent, system passenger revenues of $2.786 billion increased $178 million or 6.9 per cent from the first quarter of 2014. The increase in system passenger revenues was due to traffic growth of 10.9 per cent partly offset by a yield decline of 4.2 per cent. An increase in average stage length of 2.7 per cent versus the same quarter in 2014, reflecting international long-haul growth, had the effect of reducing system yield by 1.6 percentage points. On a stage length adjusted basis, system yield decreased 2.6 per cent year-over-year. Modest yield declines are an anticipated and natural consequence of the successful implementation of Air Canada’s strategy to profitably increase long-haul international and leisure flying.

Passenger revenue per available seat mile (PRASM) decreased 2.7 per cent from the first quarter of 2014 as the lower yield was partly offset by a passenger load factor improvement of 1.2 percentage points.

In the first quarter of 2015, operating expenses of $3.049 billion decreased $78 million or 2 per cent from the first quarter of 2014 on capacity growth of 9.3 per cent. The decline in operating expenses reflected the impact of lower jet fuel prices largely offset by the impact of the weaker Canadian dollar and capacity-related cost increases. The unfavourable impact of a weaker Canadian dollar on foreign currency denominated operating expenses (mainly U.S. dollars) in the first quarter of 2015, when compared to the first quarter of 2014, increased operating expenses by approximately $135 million. This currency impact was partly offset by a favourable currency impact of $38 million on passenger revenues and realized currency derivatives gains of $51 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 Vacations® and unusual items, decreased 1.8 per cent from the first quarter of 2014, better than the 0.5 to 1.5 per cent increase projected in Air Canada’s news release dated February 11, 2015. The better than expected adjusted CASM performance was largely due to:

Lower than anticipated aircraft maintenance expenses, primarily driven by the acceleration of aircraft lease extensions and certain favourable lease return condition provision adjustments, reducing maintenance expenses by $22 million in the first quarter of 2015;
The impact of the new Jazz CPA, effective January 1, 2015, whereby certain costs, such as ground handling services performed by Air Canada, are no longer recovered from Jazz and passed through to Air Canada under the Jazz CPA as capacity purchase fees, thereby reducing both other revenues and capacity purchase fees; and

Lower than expected employee benefits expense due to lower benefit payments and improved plan experience.

Financial and Capital Management Highlights

At March 31, 2015, unrestricted liquidity (cash, short-term investments and undrawn lines of credit) amounted to over $3.1 billion (March 31, 2014 – $2.5 billion). Air Canada’s principal objective in managing liquidity risk is to maintain a minimum unrestricted liquidity level of $1.7 billion.

At March 31, 2015, adjusted net debt(1) amounted to $5.19 billion, an increase of $58 million from December 31, 2014, as higher long-term debt and finance lease balances were largely offset by higher cash and short-term investments balances. The airline’s adjusted net debt to EBITDAR ratio was 2.6 at March 31, 2015 versus a ratio of 3.1 at December 31, 2014. Air Canada uses this ratio to manage its financial leverage risk and its objective is to maintain the ratio below 3.5.

In the first quarter of 2015, free cash flow(1) of $383 million was $349 million higher than in the first quarter of 2014, reflecting higher cash flows from operating activities partly offset by an increase in capital expenditures which included the acquisition of two Boeing 787-8 aircraft in the first quarter of 2015.

For the 12 months ended March 31, 2015, return on invested capital (ROIC(1)) was 15.2 per cent versus 10.9 per cent for the 12 months ended March 31, 2014. Air Canada’s goal is to maintain a sustainable ROIC of 10 to 13 per cent.

Further to Air Canada’s foreign exchange risk management practices (which are more fully described in Air Canada’s 2014 MD&A dated February 11, 2015), foreign denominated revenues essentially act as a natural hedge against U.S. dollar denominated non-fuel operating expenses. As such, net U.S. dollar operating expenses are largely attributable to the airline’s fuel purchases which are currently at a much lower cost in Canadian dollars despite the impact of a weaker Canadian dollar.

U.S. dollar currency derivatives and U.S. dollar cash reserves which, as at March 31, 2015, amounted to US$2.2 billion and US$711 million, respectively, are employed to offset approximately 65 per cent of the net U.S. dollar currency exposure over the next 18 months. The currency derivatives enable Air Canada to purchase U.S. dollars at a weighted average price of C$1.1784 (subject to various option pricing features, such as knock-out terms and profit cap limitations). These derivatives and U.S. dollar cash reserves would be available to mitigate certain cash flow exposure from the currency movements over the next 18 months; however the benefit of these hedging activities is recorded as a foreign exchange gain and not within operating income.

Current Outlook

Capacity

Air Canada expects second quarter 2015 system ASM capacity, as measured by available seat miles (ASMs), to increase 8.75 to 9.75 per cent when compared to the second quarter of 2014, and to be comprised of an increase in the total number of seats dispatched (system) of 5.5 to 6.5 per cent and an increase in system average stage length (measured by ASMs divided by seats dispatched) of approximately 3.0 per cent when compared to the same quarter in 2014.

Air Canada continues to expect its full year 2015 system ASM capacity to increase by 9.0 to 10.0 per cent. For the full year 2015, Air Canada continues to expect an increase in the total number of seats dispatched (system) of 6.0 to 7.0 per cent and an increase in average stage length (system) of approximately 3.0 per cent when compared to the full year 2014. Approximately 55 per cent of the 2015 forecasted capacity increase will be through the continued lower-cost growth of Air Canada rouge® while approximately 38 per cent of the capacity growth will be targeted to international markets operated by the mainline carrier.

Air Canada continues to expect its full year 2015 domestic ASM capacity to increase 3.5 to 4.5 per cent when compared to 2014, with a large part of the growth focused on the airline’s transcontinental services. The increase on transcontinental services is partly driven by the positioning of certain Boeing 777 and 787 aircraft at Air Canada’s major hubs in Toronto and Vancouver. Furthermore, in 2015, an overlap of the aircraft brought into the fleet to replace the exiting Embraer 190 aircraft is expected to account for approximately 30 per cent of the projected domestic capacity growth in 2015. This overlap is designed to better match capacity with expected 2015 summer season demand. For the full year 2015, Air Canada continues to expect an increase in the total number of seats dispatched (domestic) of 2.5 to 3.5 per cent and an increase in average stage length (domestic) of approximately 1.0 per cent when compared to the full year 2014.

Adjusted CASM

For the second quarter of 2015, Air Canada expects adjusted CASM (which excludes fuel expense, the cost of ground packages at Air Canada Vacations and unusual items) to increase 0.25 to 1.25 per cent when compared to the second quarter of 2014.

For the full year 2015, Air Canada now expects adjusted CASM to decrease 1.5 to 2.5 per cent from the full year 2014 (as opposed to the decrease of 0.75 to 1.75 per cent projected in Air Canada’s February 11, 2015 news release). This improvement is largely driven by the impact of the new Jazz CPA, effective January 1, 2015, whereby certain costs, such as ground handling services performed by Air Canada, are no longer recovered from Jazz and passed through to Air Canada under the Jazz CPA.

Major Assumptions

Air Canada’s outlook assumes annual Canadian GDP growth of 1.75 to 2.25 per cent for 2015. Air Canada also expects that the Canadian dollar will trade, on average, at C$1.22 per U.S. dollar in the second quarter of 2015 and for the full year 2015 and that the price of jet fuel will average 69 cents per litre for the second quarter of 2015 and 70 cents per litre for the full year 2015.

(1) Non-GAAP Measures

Below is a description of certain non-GAAP measures used by Air Canada to provide additional information on its financial and operating performance. Such measures are not recognized measures for financial statement presentation under Canadian GAAP and do not have standardized meanings and may not be comparable to similar measures presented by other public companies. Refer to Air Canada’s First Quarter 2015 MD&A for reconciliation of non-GAAP financial measures.

Adjusted net income (loss) and adjusted net income (loss) per diluted share are used by Air Canada to assess its performance without the effects of foreign exchange, net financing expense on employee benefits, mark-to-market adjustments on fuel and other derivatives and unusual items.

EBITDAR is commonly used in the airline industry and is used by Air Canada to assess earnings before interest, taxes, depreciation, amortization, impairment and aircraft rent as these costs can vary significantly among airlines due to differences in the way airlines finance their aircraft and other assets.

Adjusted CASM is used by Air Canada to assess the operating performance of its ongoing airline business without the effects of fuel expense, the cost of ground packages at Air Canada Vacations and unusual items, as such expenses may distort the analysis of certain business trends and render comparative analysis to other airlines less meaningful.

Adjusted net debt is a key component of the capital managed by Air Canada and provides a measure of the airline’s net indebtedness. Adjusted net debt is calculated as the sum of total long-term debt and finance lease obligations and capitalized operating leases less cash and cash equivalents and short-term investments.

Free cash flow is used by Air Canada as an indicator of the financial strength and performance of its business because it shows how much cash is available for such purposes as repaying debt, meeting ongoing financial obligations and reinvesting in Air Canada.

Return on invested capital (ROIC) is used by Air Canada to assess the efficiency with which it allocates its capital to generate returns. Return is based on Adjusted net income (loss) (as referred to in the above paragraph), excluding interest expense and implicit interest on operating leases. Invested capital includes average year-over-year total assets, net of average year-over-year non-interest-bearing operating liabilities, and the value of capitalized operating leases (calculated by multiplying annualized aircraft rent by 7).

Copyright Photo below: SPA/AirlinersGallery.com. Air Canada acquired two Boeing 787-8 aircraft in the first quarter of 2015. C-GHPQ (msn 35257) departs from London (Heathrow).

Air Canada aircraft slide show: