Fuel costs hit Air Canada's bottom line

[Bulldog]

Scott Deveau, Canwest News Service
Published: Friday, August 08, 2008

TORONTO - ACE Aviation Holdings Inc. said Friday it intends to reach a decision over the next two to three months about its remaining stake in Air Canada, and reiterated that all options remain on the table as it looks to fully unwind itself.

The holding company had planned to unload its 75 per cent stake in Air Canada in the first half of the year. But a dramatic spike in fuel prices and the potential for a rocky second half at the airline have put a kink in those plans.

Management has said they would prefer to sell ACE's 75 per cent stake in Air Canada into the market or to a private-equity player. But after a 50 per cent decline in the airline's stock price since the start of the year, such a scenario seems unlikely.

"The picture is obviously pretty fast moving," said Robert Milton, ACE chief executive, on a conference call. "The movement downward of oil over the last couple of weeks, I view as helpful in the whole equation."

A more likely scenario, however, is an "amalgamation transaction," whereby ACE buys the remaining 25 million Air Canada shares it doesn't own with cash or through a share exchange, essentially making the airline and the holding company one.

While Air Canada reported a second-quarter profit Friday that beat the Street's expectations, it declined to $122 million from $155 million the year before.

The drop was largely attributable to the increase in the cost of fuel, which the airline was not able to fully offset through fare hikes, fuel surcharges or cost-cutting.

"Despite aggressive efforts to increase revenue and reduce non-fuel costs, we could not fully offset the $212-million net rise in our fuel costs," said Montie Brewer, Air Canada chief executive.

The higher cost of travelling is also expected to have an impact on demand in the latter half of the year.

Air Canada said Friday it expects domestic capacity to grow one per cent this year, down from its June forecast of 2.5 per cent.

Still, Brewer remained upbeat that after fuel prices settle and the current economic downturn subsides, Air Canada will be in good shape to rebound.

Even with its $1.5 billion in cash on hand, Air Canada is reviewing the possibility of a sale leaseback on some of its aircraft and other assets that could improve its liquidity by up to $800 million to help it weather the storm. "Though the road ahead may be challenging, we are well-positioned for that journey," Brewer said.

Meanwhile, WestJet Airlines Ltd.'s load factor - or average amount of seats filled on its flights - slipped for a fourth-consecutive month in July. The Calgary carrier said Friday its load factor fell to 79.7 per cent during the month, or down 2.9 percentage points compared to last year. The drop was largely attributable to the airline adding 22.7 per cent more seats to the market year over year at a time when higher fares are causing demand to soften. Traffic, nonetheless, was up by 18.3 per cent compared with last July, and management said the revenue it receives for each available seat mile was "comparable" to last year.

Air Canada said after cutting its capacity by two per cent systemwide in July, its load factor matched its record 83 per cent set in July, 2005. Traffic at the airline was down 0.6 per cent, however, with the most dramatic capacity cuts and traffic declines coming from the U.S. trans-border market.


© Vancouver Sun 2008

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