Air Canada reports solid Q4, but stock market dissatisfied

Airline redeploys some aircraft from Pacific to Atlantic market

White Air Canada plane taxiing at night

(Photo Credit: Flickr/Heads Up Aviation)

Air Canada’s  (TSX: AC) stock slid 2.64% on Feb. 18 due to fourth quarter results that fell below analysts’ expectations. Reasons for lower results included a choppy implementation of a new passenger reservation system, higher stock-based compensation costs and the ongoing financial drag of the Boeing 737 MAX grounding.

The Montreal-based airline said the first quarter of 2020 is lining up for earnings, excluding financial considerations, to be CA$200 million lower than in the first quarter of 2019 because of headwinds from the coronavirus, the 737 MAX and a higher proportion of projected annual maintenance expense and employee benefits. 

Executives said they plan to continue redeploying assets from Asia-Pacific to the profitable Atlantic market, partly in response to the coronavirus outbreak. During the fourth quarter, Air Canada reduced Asia-Pacific capacity by 1.5% because of the political unrest in Hong Kong and diplomatic tensions between China and Canada. The shift in aircraft will accelerate to minimize risk from the  coronavirus, which has virtually closed down international travel between China and the rest of the world. Later this year, the airline will introduce year-round service between Montreal and Toulouse, France, and between Toronto and Brussels.

In a conference call with analysts, CEO Calin Rovinescu downplayed the potential for lower yields over the Atlantic if other carriers follow suit and increase the market’s capacity. Airlines will only move a limited number of aircraft because redeploying widebody aircraft is not easy to do.


“It’s not as if people are going to change their entire plans for the rest of the year. And so I think that you’ll probably see some tactical capacity redeployment, but it’s not going to be a wholesale dynamic where everyone changes their plans for the summer. And then you could also assume that given the pressures in Asia that the Atlantic will become an even more attractive destination with greater demand,” Rovinescu said. 

The new reservation system and stock-based compensation costs – both one-time items – effectively reduced operational cash flow by CA$60 million, although earnings before interest, taxes, depreciation and amortization (EBITDA) was still CA$46 million more than in the last quarter of 2018. Operating income, however, slid CA$34 million to CA$145 million.

Fourth quarter adjusted earnings per share were CA$0.17, well below the consensus estimate of CA$0.38, while total revenue was CA$4.43 billion compared to estimates in the CA$4.5 billion range. And per unit operating costs, not including fuel, climbed 5.5% compared to some estimates of 3.7%.

Revenue grew 5.3%, but operating expenses increased 6%, or $236 million, largely due to the loss of the MAX fleet. 


Fourth-quarter cargo revenue fell 14.2% to CA$186 million from the same period in 2018 on yield and traffic decreases of 8.7% and 6%, respectively. Full-year cargo revenue decreased CA$86 million, or 10.7%, to CA$717 million, which tracked with an overall industry downturn for cargo. The cargo decrease was due to lower economic activity in the Atlantic and Pacific markets.

For fiscal year 2019, EBITDA was more than CA$3.6 billion, 13% above the prior year. 

The airline expects maintenance expenses to climb CA$150 in 2020 and employee benefits to increase by CA$105 million compared to 2019, with one-third of the increases incurred in the first quarter. The extra work is required for additional Airbus A330 aircraft in the fleet and more scheduled engine maintenance.

The sidelining of MAX aircraft is resulting in fewer connecting passengers, slower growth and extra expense for maintenance, fueling of older planes and salaries for idle pilots. Air Canada said it doesn’t expect its 24 MAX jets to return to service until late in the third quarter. It also assumes six aircraft originally scheduled for delivery in 2019 will be delivered later this year, the remaining six will be delivered in 2021 and that 14 undelivered 737 MAX aircraft originally scheduled for delivery this year will be pushed back to 2021. 

Air Canada estimated that had it operated the 36 Boeing MAX aircraft as originally planned in 2019, adjusted unit costs would have increased about 2.5% rather than 4.1%. 

Air Canada said it received an initial settlement payment from Boeing in the fourth quarter to compensate for the financial harm associated with sidelining the 737 MAX aircraft and that terms of a final arrangement are still being negotiated. Unlike some airlines, Air Canada did not disclose the amount of its interim settlement, but said it will be taken as an adjustment to the purchase price of current and future deliveries. 

The company assumes its China and Hong Kong services, which are entirely suspended save for one route, will be back to normal by the third quarter. However, even if the deadly coronavirus is largely suppressed by then, there is no guarantee travelers will want to go back to the region right away.

“We generated record revenues in excess of $19 billion and reached record levels of unrestricted liquidity, despite the loss to Air Canada of approximately 25% of our narrow-body fleet for most of the year following the worldwide grounding of the Boeing 737 MAX. These results underscore the airline’s ability to overcome major challenges as well as the deep commitment of Air Canada’s 37,000-strong team, which took care of our customers under extremely complicated operational circumstances,” Rovinescu said in a statement.


Air Canada’s strong balance sheet, diversified global network, brand strength, young fleet, talented employees and nimble management “equip us to respond effectively” to the uncertainty and challenges presented in 2020, he added.

Seat capacity increased 3.3% in the fourth quarter versus a planned increase of 4.6% with the MAX aircraft. A 2.3% improvement in yield was partly attributed to the constrained capacity resulting from the MAX grounding.

Executives expressed excitement on the call about the addition of the Airbus A220 to the fleet. Air Canada took delivery of its first Airbus A220 in December and has 44 more of the regional jets on order. The planes will replace the Embraer 190 in the mainline fleet and support network growth. The plane’s longer range and fuel efficiency gives the airline more opportunities to extend its network into new markets not as well suited to larger 737 MAX or Airbus A321 aircraft. Air Canada estimates the A220 will deliver a 12% lower cost-per-average-seat mile compared to the Embraer 190, mainly due to greater maintenance and fuel efficiencies.

Air Canada is waiting for regulatory approval to complete the acquisition of leisure-travel airline Transat.

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