Changes in guidance for Air Canada's (TSX:AC.B) first-quarter results created a whipsaw effect in the airline's stock price during the past few months. But the report is out, so investors finally get to see the Q1 results, and an outlook for Q2 and the rest of 2014. Additionally, the report gave an update on the airline's fleet renewal program..
Bad weather, lower currency, bad earnings?
The first quarter of 2014 was an "all of the above" when it comes to rough winter weather. Airlines were forced to cancel or delay flights due to standard things like ice and snow, but also due to temperatures sometimes falling 20 degrees below zero.
In the U.S., Delta Air Lines (NYSE:DAL) grew Q1 profits year over year when excluding special items, despite that the airline cancelled more than 17,000 flights, costing $55 million in pre-tax income. However, Air Canada's Star Alliance partner, United Continental Holdings (NYSE:UAL), did not live up to expectations. Poor Q1 performance at United Continental sent shares down around 10% as the results seemed to confirm previous market skepticism about the airline.
For much of the winter, the weather was even harsher north of the border, so Air Canada was expected to be hit by weather-related issues. But the airline also had to deal with a lower Canadian dollar, which increased costs for oil and interest on bonds denominated in U.S. dollars
Unlike previous Air Canada earnings releases, which resulted in double-digit share price moves, the response to this release was much more muted. Largely due to foreign exchange losses, Air Canada's loss increased to C$1.20 per diluted share from C$0.95 per diluted share a year earlier. However, on an adjusted basis, the airline did show improvement, posting a loss of $132 million compared to the prior year's $143 million dollars, and beating analyst expectations per diluted share by C$0.01.
While the results were nothing special, the outlook given by Air Canada looks strongly positive. First, the airline reiterated its plans to grow capacity by 6.5% to 8% total, but only 3%-4% in the domestic market. This continues with the strategy to grow revenue overall while not saturating the domestic market.
As Air Canada works to bring down costs, its outlook gives some positive guidance. Now, the airline expects to reduce cost per available seat mile, or CASM, by 3%-4% compared to its guidance in April of a CASM decrease of 2.5%-3.5%. For an airline the size of Air Canada, cutting costs by this extent should have a positive effect on profits.
Indeed, much of Air Canada's efforts have focused on cost-cutting. From launching high-density configurations to starting Air Canada rouge to even removing the paper manuals from aircraft and replacing them with lighter digital versions, cutting costs has been one of the main ways Air Canada has been able to recover during the past few years.
A good opportunity
It's no secret that I've been bullish on Air Canada for a while now having owned shares of the airline since it traded around $2 per share. But with little movement after this report, it doesn't look like the market is giving Air Canada enough credit for the forecasted cost-cutting.
While this investment still remains above average in risk, if the airline can execute on its CASM goals while growing internationally, 2014 could be another good year for Air Canada.
Alexander MacLennan owns shares of Air Canada and Delta Air Lines. Alexander MacLennan has the following options: long January 2015 $22 calls on Delta Air Lines, long January 2015 $25 calls on Delta Air Lines, and long January 2015 $30 calls on Delta Air Lines. 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. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.