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Air Canada jets sit by the gates at Toronto Pearson International Airport in Toronto on April 25 2013. (Fred Lum/The Globe and Mail)
Air Canada jets sit by the gates at Toronto Pearson International Airport in Toronto on April 25 2013. (Fred Lum/The Globe and Mail)

TRANSPORTATION

More seats at lower cost provide lift to Air Canada Add to ...

Jam-packed international flights may not sound too appealing from a traveller’s perspective, but the strategy is helping Air Canada to win praise from investors and industry watchers.

It’s the principal irony of the airline industry: Crowded conditions that make modern flying a test of will and endurance are precisely what help carriers such as Air Canada reduce costs and eke out profits, particularly on long-haul routes.

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“We are focusing significantly on international expansion,” Air Canada chief executive officer Calin Rovinescu said on a conference call to the investment community Wednesday, echoing a message that the Montreal-based company’s executives have been repeating in recent months.

This includes the acquisition of five new 458-seat, Boeing 777-ERs. Air Canada has already begun flying one of these 777s on its Montreal-to-Paris route. As Mr. Rovinescu explained, the addition of 30 per cent more seats on the new aircraft significantly lowers costs per flight.

And yet, they are proving popular. Passengers, lured by competitive fares, are filling the seats.

“The other day, we operated [to] Paris on 100-per-cent load,” Mr. Rovinescu said. Load, or “load factor,” is a measure of a flight’s fullness. Mr. Rovinescu repeated the number for emphasis. “One hundred-per-cent load. So passengers seem to like the product.”

The concern among company watchers, however, is whether more seats and an emphasis on international expansion may overshoot demand.

For instance, despite the strong Montreal-to-Paris performance, Air Canada competes against four other carriers on that route.

“We continue to have longer-term concerns over downward yield pressure as a result of increased competition and as Air Canada itself adds significant new capacity on international routes in coming years,” analyst Cameron Doerkson of National Bank Financial said in a report Wednesday.

Responding to that concern, Air Canada chief financial officer Mike Rousseau said the extra capacity “is being added at significantly lower operating costs.” In an earnings release Wednesday, Air Canada said it expects operating costs per seat to drop 1 to 2 per cent this year compared with 2012.

On Wednesday, Air Canada reported a loss of $23-million in the second quarter, or 9 cents a share, versus a loss of $161-million, or 59 cents, in the same period a year ago. But on an adjusted profit basis, which excludes foreign exchange losses, the financing of employee benefits and other accounting factors, the carrier posted profit of $115-million or 41 cents a share in the quarter, compared with an adjusted loss of $7-million or 2 cents a share a year ago.

Analyst Walter Spracklin of RBC Dominion Securities said in a report that those results were better than expected, adding that “the company’s capacity growth plans in international markets make sense, and it is encouraging to see the cost controls continuing.”

Air Canada’s class-B shares surged by 25 per cent on the Toronto Stock Exchange Wednesday, their biggest gain in more than four years.

Meanwhile, Air Canada is preparing to receive the first of 37 Boeing 787 Dreamliner aircraft it has on order in early 2014. The new model aircraft has had problems with its electrical system, causing it to be grounded for weeks earlier this year by aviation authorities. However, Air Canada hasn’t indicated any change in the role the new planes will play in the international expansion.

“We’re excited about the international growth opportunities in front of us, and the industry-leading unit costs this aircraft provides,” Mr. Rovinescu said. The airline plans to transfer some of its less-fuel-efficient Boeing 767s to Air Canada’s new discount carrier, Rouge.

The “lion’s share” of routes flown by Rouge, which began operating July 1, will be on existing mainline Air Canada routes, Mr. Rovinescu added. That will free up the capacity needed to develop new international routes.

Follow on Twitter: @Guy_Dixon

 
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