Air Canada says it's preparing to weather a stormy second half of 2008 with the help of oil-hedging contracts and selected leaseback of planes.
Montreal-based Air Canada had announced in June that it will cut seat capacity worldwide by 7 per cent this fall and also chop 2,000 jobs, saying high fuel prices were forcing up ticket prices and dampening consumer demand.
On Friday, the country's largest airline said it's expecting that slower economic growth in North America, including a mild U.S. recession, will further slow travel demand.
In anticipation of tough times ahead, Air Canada has hedged 49 per cent of its fuel requirements for the rest of the year at oil prices that average between $94 (U.S.) and $101 a barrel. Benchmark oil prices are currently hovering around $116 a barrel, down 21 per cent over the past four weeks but still more than double the $60 early last year.
The airline owns or has equity in a variety of aircraft, including Boeing 777s and Embraer jets, and forecasts that through the sale and leaseback of planes, its cash liquidity could get an $800-million (Canadian) boost.
The focus on cutting costs and strengthening the balance sheet comes as Air Canada struggles to improve its financial performance. In the second quarter, Air Canada posted a $122-million profit, down 21 per cent from $155-million in the same period in 2007.
Air Canada chief executive officer Montie Brewer said during a conference call Friday that passenger loads are holding up so far, despite new fuel surcharges introduced in May. The July load factor, or the proportion of seats filled by paying Air Canada and Jazz customers, rose to 83 per cent, up from 81.8 per cent in the same month last year.
By contrast, WestJet Airlines Ltd. reported that its July load factor slipped to 79.7 per cent from 82.6 per cent. But WestJet CEO Sean Durfy pointed out that the Calgary-based carrier's seat capacity has jumped 22.7 per cent over the past year.
"Given our substantial growth in capacity, we are pleased with our strong load factor," Mr. Durfy said in a statement.
Air Canada's parent company, ACE Aviation Holdings Inc., also released its financial results Friday, announcing an $830-million profit, compared with $118-million a year earlier. This year's figure included pre-tax gains of $908-million for the sale of remaining stakes in the Jazz regional airline unit, as well as the Aeroplan customer loyalty program.
ACE is winding down as a holding company, and executives said during a conference call that a decision on what do with ACE's 75-per-cent stake in Air Canada could be made in the next two to three months.
"The movement downward in oil over the last couple of weeks I view as helpful in the whole equation," said Robert Milton, ACE's chairman and CEO.
For the remainder of the year, Air Canada is modestly upbeat about its prospects as it cuts capacity and "is aggressively managing the costs of all controllable parts of its operation and continues in its efforts to mitigate the significant increase in its fuel expense," it said in a news release.
National Bank Financial analyst David Newman noted that Air Canada's fight against high fuel prices includes various fees charged to passengers.
© The Globe and Mail
