Since recovering from another near-death experience in 2012, Air Canada (TSX:AC.B) has demonstrated a remarkable turnaround through cutting costs, improving earnings, controlling its pension liability, and launching a new low-cost subsidiary.
But with greater earnings power and plans for growth, Air Canada is doing what many of us are this holiday season. It's going shopping.
New aircraft are expensive but can make all the difference when it comes to maintenance and fuel costs. With the latest aircraft offering fuel efficiency gains of up to 20% and more creature comforts that passengers like, it's no surprise Air Canada is looking to modernize its fleet.
The Canadian flag carrier has already brought five new Boeing (NYSE:BA) 777-300ER aircraft, with deliveries of these aircraft wrapping up in early 2014. As part of a way to lower cost per available seat mile, or CASM, Air Canada has configured the 777 aircraft in a high-density 458-seat layout for total seating capacity approaching that of the larger Boeing 747-800 jet.
But planned purchases from Boeing don't end there. Beginning in the spring of 2014, Air Canada will begin taking deliveries for the first of its 37 Boeing 787 Dreamliner aircraft on order. These aircraft will gradually move in to phase out many of the less efficient Boeing 767 aircraft in mainline Air Canada's fleet. But the 767 aircraft will find a second life in the fleet of Air Canada's low-cost subsidiary, Air Canada Rouge, where the transfer of 767 aircraft will dramatically grow the Rouge fleet over the next several years.
Despite these previous purchases, Air Canada isn't finished acquiring new aircraft. Reports are suggesting that the Canadian flag carrier is on the verge of placing an order for up to 60 new jets. The Globe and Mail notes that this purchase could determine the winner in the tight aircraft order race between Boeing and Airbus, a subsidiary of European Aeronautic Defense and Space (NASDAQOTH:EADSY).
The report goes on to note that of the 60 orders, 30 are expected to be firm orders, with the others as options to be exercised in the event of a faster economic recovery. At list prices, this order is expected to total in the area of $6 billion.
Farther down the road, Air Canada could mean big business for regional jet rivals Embraer (NYSE:ERJ) and Bombardier (TSX:BBD.B). Looking to renew parts of its regional fleet, the two manufacturers are top candidates. Embraer's E-Jets have already amassed a significant number of orders, but Bombardier's C Series has yet to be the duopoly busting airplane Bombardier has hoped.
But Bombardier may have an edge here. As a Canadian aerospace manufacturer, Air Canada would get a lot of positive press from supporting homegrown manufacturing. An analyst from RBC Capital markets noted that Air Canada could end up ordering 30 Bombardier C Series aircraft. Considering Bombardier could use every order it can get, this would be a major boost for the manufacturer.
More big orders
After a year of strong sales at most aerospace manufacturers, Air Canada may well settle the results of the annual order race between Boeing and Airbus. Additionally, an order for either Embraer or Bombardier aircraft may not be far off as Air Canada seeks to modernize its fleet. Even though Air Canada isn't the world's largest airline, investors in aerospace manufacturers could have their year-end fortunes shaped by the decisions at Canada's largest airline.
Alexander MacLennan has no position in any stocks mentioned. his 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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