Air Canada, WestJet shares soar on boom in air travel

One of the most traditionally volatile sectors appears to be reaching new heights. The airline industry, notorious for punishing investors with its tight margins and cyclic nature, is seeing packed airports and carriers posting bumper profits.

Air Canada and WestJet Airlines Ltd. are riding high in the boom, with the former boasting records in profit, share price and passenger numbers as it rolled out a slew of new international routes in the second quarter.

WestJet also reported solid quarterly earnings, although the news was dampened by a declining return on invested capital and an announcement that the company was pushing back the planned launch date for its ultralow-cost carrier. While its results were not as spectacular as those of its national rival, WestJet managed to rack up double-digit gains in passenger revenue as it recovers from a gruelling recession.

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Air Canada earned a record $300-million or $1.08 a diluted share, compared with $186-million or 66 cents in the 2016 second quarter. The company's $670-million earnings before interest, taxes, depreciation, amortization, and rent costs, (EBITDAR) exceeded most analyst estimates by more than $100-million.

That profit was driven by strong revenue growth from increased passenger traffic, as well as lower-than-expected costs, mostly related to deferred maintenance. Passenger revenue increased by $374-million or 11.9 per cent year-over-year, hitting $3.517-billion.

"The traffic increase was driven by strong demand on services within Canada as well as incremental connecting traffic to the U.S. and international destinations via Air Canada's hubs," said Benjamin Smith, president of passenger airlines at Air Canada on a Tuesday morning conference call with analysts. The airline launched 16 international routes last quarter. Demand was particularly strong for flights between Canada and the United States, with revenue rising16.3 per cent from a year earlier.

"On June 29, we served close to 167,000 customers, setting an all-time record, which we expect to surpass during the upcoming August long weekend," said president and chief executive officer Calin Rovinescu on the analyst call.

At the same time passenger demand grew, the company managed to lower its adjusted cost per available seat mile by 3.5 per cent, compared with the second quarter of 2016.

"This improvement was largely driven by lower-than-anticipated aircraft maintenance expense, which was mainly attributable to the deferral of certain maintenance activities into the remainder of 2017 and to lower end-of-lease maintenance provisions due to more favourable terms on wide-body aircraft lease extensions," Air Canada said in a press release.

"The company exceed[ed] expectations that were already revised higher on Q2," said Royal Bank of Canada analyst Walter Spracklin in a note to clients where he reiterated Air Canada as a "top pick" stock. Air Canada stock closed up 9.6 per cent at $21.74, beating the $21 peak achieved back in 2006.

WestJet also saw positive earnings growth of 11.1 per cent year over year, bringing earnings up to $48.4-million or 41 cents a diluted share. As with Air Canada, high passenger numbers drove total revenue to $1.055-billion, up from $949.3-million in the second quarter of 2016.

The Calgary-based airline benefited from rebounding demand in its key Alberta market, where leisure passenger traffic fell in the wake of the 2014 oil price slump.

"There was a billion dollars in travel revenue that evaporated in the recession. Now that's not all going to come back and we're not expecting it to come back in a hurry, the way some previous recoveries in Alberta have. But having hit the bottom [we're] starting to see some recovery," said WestJet chief financial officer Harry Taylor, adding that Alberta passenger revenue increased 10 per cent from a year earlier.

Despite solid earnings, WestJet's return on invested capital declined year over year to 9.8 per cent from 10 per cent, considerably short of its 13- to 16-per-cent target.

"We believe we're in a trough now," said CEO Gregg Saretsky, pointing to the upfront costs associated with acquiring its new fleet of Boeing 787 and Boeing 737 Max aircraft. He said he expects return on invested capital to begin improving next quarter and throughout 2018.

The company also announced that it was pushing back the launch of its new ultralow-cost carrier from late 2017 to the summer of 2018. WestJet is still waiting on government approval, which it expects to come in the first quarter of 2018. It plans to begin selling tickets in the first quarter of 2018, with the first flights on the new carrier expected for June, 2018.

WestJet shares rose 3 per cent to close at $25.60. The company announced on Monday that it would be paying a 14-cent dividend on Sept. 29.