Air Canada stock is soaring again on high loads and lower costs
 

http://business.financialpost.com/20...inues-to-soar/

Air Canada’s efforts to transform its costs appear to be taking off as the country’s largest carrier revised its cost-cutting guidance this week, and several analysts said it was only the beginning of what’s to come.

The stock rose 44¢, or 11%, to $4.41 in early trading Friday.

Air Canada reported a strong September load factor, or average amount of seats filled on its planes, of 86.2% late Thursday, down just a hair from its record month last year at 86.3%.

But perhaps more interesting for investors was the company’s revised guidance on costs.
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The carrier said it now expected it adjusted unit costs, as measured by costs per available seat mile [CASM], to be down 3% to 3.5% in the third quarter compared to last year, an improvement over its previous guidance of being down 1.5% to 2.5%.

As a result, Air Canada expects its full year CASM to be down 1.5% to 2.5% in 2013, an improvement over its previous guidance of it being down 1% to 2%.

Cameron Doerksen, National Bank Financial analyst, raised his price target on the stock to $4.75 a share from $3.75 a share previously, on the news and maintained his outperform rating on the stock despite a near 50% increase in the share price since he upgraded it in August.

Mr. Doerksen downgraded rival WestJet Airlines Ltd. to a sector perform Thursday after its load factor slipped and on management¹s warning that unit revenue would be under pressure in the final half of the year with the launch of its new low-cost carrier, Encore, its premium economy seats, and its aggressive growth.

But he said Air Canada was not following the same flight path. While WestJet will be held in a holding pattern until early next year, Air Canada was taking off.

“Based on solid traffic results and unit costs that are coming in better than expected, we believe that [third quarter] results will be very strong and likely ahead of the current market expectations,” Mr. Doerksen said in a note to clients. “The company¹s cost performance is outperforming expectations.”
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He also noted that Air Canada was able to refinance high-interest debt during the quarter, which should afford it additional balance sheet flexibility to help finance new aircraft in the coming years, with a new narrow-body order expected soon and the delivery of its new 787s coming late next year.

The changes underway will have a broader impact than just the third quarter, said Walter Spracklin, RBC Capital Markets analyst, who raised his price target on the stock to $5.50 a share from $4 previously.

Mr. Spracklin, who has an outperform rating on the stock, said his primary concern for Air Canada had been that the too much capacity would be added to the market with the launch of its low-cost carrier, Rouge, and WestJet¹s own Encore. This, in turn, he feared, would drag on prices.

But Mr. Spracklin’s tracking of 12,000 random fares suggests that prices are actually up 1.5% year-over-year, which, combined with the strong load factor, has him switching his focus to the significant growth opportunities at the airline and the benefits from its cost-cutting
measures.

“We believe Air Canada is in the early stages of a transformational change which will lead to vastly improved operating metrics . and ultimately a step-function increase in profitability,” Mr. Spracklin
said.

“Despite the strong share price performance, we believe the early-stage positioning means the shares hold significant value at current levels, as the bias remains significantly to the upside on our estimates and target,” he added.

Fadi Chamoun, BMO Capital Markets analyst, agrees. He raised his price target on the stock to $5 a share from $4 previously and maintained his outperform rating.

“While the stock has risen 35% in the past month, the company is only starting to realize the benefits of its fairly sizeable CASM reduction opportunity over the next several years. We believe this would strengthen the company¹s competitive position and open up new revenue growth opportunities, particularly in international market,” he said.

“The positive outlook for revenues and costs and improved pension funding position also translate into a lower financial risk, which should allow for valuation to further re-rate going forward,” he added.

shout out to my dad for making me buy this when it was at 3 bucks.

See guys, all of you who complained about changes to the FF program... Accountants and their creative writing appear to have won.

Which of course does not necessarily mean that real costs are dropping. Just that the way these things are being accounted for it's dropping...

Or that there won't be side effects such as lower income per seat-mile, offsetting the perceived benefits of cuts in FF program.

When the left hand does not know what the right hand is doing, and all try to please the king without concern for side effects...

Management, not leadership?

I am reminded of the phrase, "lies, damn lies and statistics"...

So, your position is AC are calculating CASM today differently from the calculation previously? Really??

This is too good .......

If AC had reported miserable results, I can just imagine the "I told you so!!" threads in here.

FT sure is a quieter place with AC's new agenda (seemingly) paying off . . .

The big effect of killing the FF program won't be immediately noticed. If you'd already put 60k into AC, and had another 40k booked, what are you going to do? Get Premier Silver on UA? Or Super Elite on AC?

Wait until next year, when people can start fresh somewhere else.

No, that's not what I am saying.

I am saying that they may well be targeting "expenses" that contribute to their CASM as it is currently calculated. Among which the effect of things such as the FF program.

Without considering potential side effects. Or even the actual effect on real costs that the changes will bring up.

All about beautifying the accounting. Perfectly legal too. :D

Realistic, who knows? Do they even care?

It is good to see AC doing well. Better than the alternative of them being in a financial mess.

As canadiancow points out their alienation of frequent fliers won't start to be seen in earnest until next year at least when people start to realize what is happening. I was talking to a MM co-worker and he didn't have any idea of many of the changes for example, and almost couldn't believe them until he went back and read the emails from AC that he hadn't paid attention to.

But maybe AC will still be able to do well regardless - maybe they have enough people with no choice or maybe they can make it up with VBITs flying Tango. Time will tell.

Airline stocks are still for suckers though. Historical patterns for the last 10 or 15 years tell you all you need to know about that.

I wonder about that. What proportion of FF's closely monitor their benefits (those not on FT)? How many would just stick with AC because they're based in Canada and Aeroplan seems the most logical? Even if they switch to MP, AC may still get a lot of their business within Canada. So I wonder how/if the changes will affect AC's bottom line.

I can only comment on the changes to the FF program influencing me. My trip to Australia went to Qantas this year (an AA redemption this time but I will pay a preimum to go on the A380 next time), my family (4 fares) trip to Scotland is on Iceland Air next month (though to be fair we often took Transat before because they were the only direct option), and the trip to Hawaii at Christmas is on Delta. Because all of them were the cheapest. Before I may have paid a 10% premium (or so) to go Air Canada for the status, but it is not worth that any more. I don't know if I'm unique or not in their customer base. I suspect I must be, or the numbers would be impacted more. It was still about 8 or 9K of money going somewhere else.

My suspicion is based on conversations I've had is that people don't monitor their benefits. They do seem to notice when benefits are removed the first time they try to use them. However, that might not be relavent. Because the loyalty program participation is not as simple as people choosing one for the benefits alone (it may be the ease of accrual, like skypesos for example, or where you live) it is likely too complicated to attribute any real impact of changes to the FF program.

I'm curious how many people actually have choice.

I'd say about 30% of my flying is domestic US, 20% is domestic Canada, and 50% is transborder.

So with United, I can fly my home airline 80% of the time. With AC, it's 70%. But in general, I prefer AC.

However, it's that 50% transborder traffic they need to watch out for. Because if I leave, they'll still own my domestic Canada flights, but the transborder will switch to United, where I have a chance of upgrades, etc.

Am I unusual in that two different airlines could make sense for my travel patterns? Are most people stuck with one airline, period? Or will there be a lot of people in my situation who end up switching half their flying to someone else?

I don't actually have to make up my mind until I need to credit a flight in 2014, so there's no way AC would see any of this from me yet, but next year, there could be lots of changes in my flying.

This is only an impovement if the Revenue per Available Seat Mile goes up, or goes down less than 1.5 to 2.5%. Hard to tell if (revenue from increased fares, increased loads and dicking around with fare classes and R space) minus (revenue lost due to fleeing FFs) plus (revenue gained from FFs fleeing to AC from other airlines) will be in this range or not. Can we suppose that revenue gained from the large number of sheeple will overwhelm revenue lost to a much smaller number of disaffected FFs? This seems to be the game they're playing.

The overall picture is good for all carriers but Aircanada's performance is indeed surprisingly good.

Which is precisely why they don't care. Just too far into the future. "in the long run we'll all be dead."

Or they'll have moved jobs, based on current wonderful results.