Finally, Some Good News for Air Canada

After being battered by negative events, Air Canada shares get some good news and surge 26%.

Apr 4, 2014 at 11:30PM

After a big run in 2013, this year has been a rough one for Air Canada (TSX:AC.B). With a drop in the Canadian dollar, lower than expected earnings, and reduced guidance, the airline's shares fell from a peak of $9.90 in January to almost $5 by late March.

But on Apr.4, Air Canada shares surged more than 26%. I'll take a look at what this means for Air Canada and its future outlook.

Guidance reversal
In its February announcement, Air Canada said that its earnings before interest, tax, depreciation, amortization, and rent, or EBITDAR, would be $15 to $30 million lower than for Q1 from the same period in 2013. This, combined with earnings below forecasts, caused a 20% drop in Air Canada shares that day, with shares falling even farther in the following days.

A major reason for today's gains came from what was essentially a reversal of the downbeat guidance. In its March traffic report, Air Canada raised its Q1 outlook, guiding for earnings on par with the same period in 2013. In other words, $15 to $30 million higher than previous guidance.

Air Canada cited higher revenues, as well as higher revenue per available seat mile, and lower cost per available seat mile as reasons for the improved guidance.

Full-year outlook
Not only has Air Canada given improved guidance for the first quarter, but the full year outlook also looks positive. The airline continues to maintain an outlook for cost per available seat mile to decrease 2.5% to 3.5% for 2014.

At the same time, the airline appears to be keeping capacity under control. The March traffic results have revised available seat mile growth down to an increase of 6.5% to 8% compared to the previously estimated 7% to 9%. Domestic available seat mile growth has also been revised down to a range of 3% to 4% compared to the previous range of 3.5% to 4.5%.

Other winners
Air Canada is not the only airline set to benefit here. WestJet Airlines (TSX:WJA) also stands to benefit from Air Canada's outlook and projections. With lower than previously expected Air Canada capacity growth, there should be less total capacity in the Canadian airline market allowing for stronger pricing by all carriers.

Air Canada is also predicting a strong summer saying, "In addition, based on forward bookings, we expect a strong summer travel season ahead." With a strong nationwide network, strong forward bookings at Air Canada could be indicative of a strong market for all Canadian airline players. The airline industry is also a global business, and strong performance in the Canadian market could mean a better summer for carriers south of the border.

The market seems to agree with a brighter outlook for WestJet, with shares rising more than1.5% against a downward move by the broader markets in the U.S. and Canada. U.S.-based airlines failed to get a boost from Air Canada's positive results, with all major carriers ending in the red on the day.

The March traffic results are the first good news for Air Canada since the stock began to slide in late January. The results effectively reversed the downbeat guidance from February while giving an improved capacity outlook for full year 2014.

Air Canada shares found it difficult to gain upward momentum, as bad news continued to dominate headlines. However, this latest news has driven shares sharply higher and could result in some more positive movement in the near term, as market sentiment around Air Canada changes.

Overall, I still see Air Canada as a long-term investment, but this latest move is further evidence that Canada's flag carrier is on the right path.

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Alexander MacLennan owns shares of Air Canada. He also owns shares and options on Delta Air Lines and American Airlines Group. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security.

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