U.S. carriers expected to put pressure on Air Canada

Air Canada expects increased competition will put pressure on its upcoming results but the airline got a lift in the busy summer quarter from a gradual recovery in business travel and enhanced service to Asia.

MONTREAL — Air Canada expects increased competition will put pressure on its upcoming results but the airline got a lift in the busy summer quarter from a gradual recovery in business travel and enhanced service to Asia.

The Montreal-based airline’s income from operations nearly quadrupled to $327 million from $68 million last year.

Passenger revenues increased $322 million, or 13 per cent, to $3 billion due to a 9.7 per cent growth in traffic.

The capacity growth in the quarter was accomplished without adding any additional aircraft.

Almost a third of the revenue increase was driven by gains in Pacific service.

Air Canada president Calin Rovinescu said an almost 26 per cent growth in premium cabin revenues is evidence that business travellers are returningg.

“Our significantly improved financial performance in the quarter clearly demonstrates that we are headed in the right direction,” he said Thursday.

“We fired on all cylinders this quarter and that meant that everyone worked together across all branches, much better than ever before.”

Net income decreased to $261 million, or 91 cents per share, for the period ended Sept. 30 from $277 million or $2.44 a year ago when it gained $295 million in currency exchange.

Adjusting for $90 million in currency gains and taxes this quarter, Air Canada earned $252 million, or 64 cents, compared to a $15 million loss or 19 cents a year earlier.

Analysts had expected adjusted earnings of 62 cents.

The performance was helped by a 5.3 per cent drop in costs, excluding fuel.

Rovinescu warned that increased capacity from U.S. carriers could hurt its results in the fourth quarter on its international routes in Atlantic and Pacific.

“We are fully expecting in the fourth quarter to see some increased capacity being deployed in the fourth quarter which could put pressure on yields.”

Cameron Doerksen of National Bank Financial said he continues to see strong demand on international routes despite an expected slowdown.

“Air Canada is well positioned with its exposure to higher growth markets (like China) and its recently formed trans-Atlantic joint venture,” he wrote in a report.

Doerksen maintained his 12-month target of $6.50 even though the results beat his expectations on most measures.

In addition to strong international travel, Doerksen says he believes Air Canada’s profitability will be boosted by higher Canadian pricing due to a stable domestic capacity environment and ongoing cost reduction initiatives that are slated to generate $530 million in annual savings by the end of 2011.

Air Canada (TSX:AC.B) ended the quarter almost $2.2 billion of liquidity and said it will focus on reducing its debt over the next two years.

It expects system capacity will increase by 6.5 per cent to seven per cent for 2010, with the number of seats available in Canada growing by up to one per cent.

In October, system traffic increased 9.3 per cent on a capacity increase of 8.3 per cent, resulting in a record October load factor of 90.3 per cent.

On the Toronto Stock Exchange, the airline’s shares closed at $3.88, up four cents in Thursday trading.

Canada’s largest airline and its regional partner carry about 31 million passengers annually to more than 170 destinations on five continents.

Air Canada has a fleet of 202 aircraft while Jazz operates 123 smaller jets and turboprops. It has ordered 37 of 787s from Boeing, with the first delivery scheduled for the second half of 2013.

The airline plans to begin offering up to 15 daily flights between Montreal and Toronto’s Billy Bishop airport beginning in February under a capacity purchase agreement with Sky Regional Airlines Inc

Porter Airlines is currently the lone commercial airline connecting the two cities through the downtown airport.

Launched in 1937 as Trans-Canada Air Lines, Air Canada was privatized in 1989 and is the 15th largest airline in the world, with nearly 23,000 full-time equivalent employees.

Amid the economic recession in 2009, the airline lost $24 million on more than $9.7 billion of revenues. The loss included a $657 million currency exchange gain and $316 million loss from operations.

Air Canada is at the centre of a government feud with the United Arab Emirates. National carriers Emirates and Etihad want to add more flights to Canada but Air Canada said the airlines are merely transporting passengers through their hubs in Dubai and Abu Dhabi, which would eventually compromise direct Canadian service to its international network.

The Middle East country recently said would deny Canadian Forces access to a key military base near Dubai, affecting Canadian troop movement to and from Afghanistan. The Canadian military formally left the base this week.