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Finally, Some Good News for Air Canada

Alexander MacLennan
April 4, 2014

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 ahe