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Before Calin Rovinescu came on board as CEO in 2009, Air Canada was dealing with a lack of liquidity and too much debt.


Fabrice Taylor, CFA, publishes the President's Club investment letter, for which he and The Globe and Mail have a distribution agreement.

Air Canada shares are up 1,500 per cent since the financial crisis thanks to a better economy and a successful turnaround strategy launched by chief executive officer Calin Rovinescu and his team. Can they possibly deliver more or will the stock do what the old Air Canada did, roll over and die as soon as the economy softens?

Most analysts are bullish on the stock, with only a couple of exceptions. But the enthusiasm behind the "buy" ratings varies a great deal. Analysts appear particularly divided over what will happen in 2016. Does the airline continue to report strong earnings, even if profit growth slows down, as the more optimistic ones expect? Or does next year bring a sharp decline even as the airline remains in the black, as more moderate company watchers predict?

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My conversation with Mr. Rovinescu started with my assertion that a lot of institutional investors still don't quite believe that there is a new Air Canada – that today's airline isn't that different than the old one.

He disagrees, but if it's true that there are skeptics out there and if the airline can post robust earnings per share over the next several quarters, I would guess that the shares may benefit from a higher multiple and price.

To get a better sense of the odds, let's consider what Mr. Rovinescu and his colleagues have accomplished. In 2009, when he took the helm, Air Canada had a handful of big problems: a lack of liquidity, too much debt, a big hole in its pension plans, labour agreements coming up for renewal with unions looking for more, and the fact that the airline had just gone through a restructuring, meaning the avenues for renewal were limited. The airline had also retrenched away from international routes to fight for domestic market share, which was not where the growth was.

Today, Air Canada has more than $3-billion of cash, the pensions are in surplus, there is peace with the unions, debt is down and falling, costs are much lower and still falling, and returns on capital are on the upswing.

Mr. Rovinescu predicts further improvement and the airline has announced a modest buyback of shares, which suggests board and management confidence (assuming the airline actually acts on the buyback).

What stands out about the turnaround plan is the creativity. As mentioned, in 2009 the airline had recently been restructured, so there weren't many obvious fixes. But the team was creative in financial and operating ways that created a cascading effect of improvement.

New, alternative debt financings allowed for more flexibility and lower interest costs.

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Then there was the creation of Rouge – "a fantastic tool for us," Mr. Rovinescu said. Its lower cost structure allowed Air Canada to move less efficient planes, notably the Boeing 767s, into the Rouge subsidiary where, thanks to lower costs and different configurations, they effectively became 30 per cent more efficient.

This, in turn, allowed Air Canada to place large orders for Boeing's revolutionary Dreamliner, which is about a third less expensive to fly.

The Dreamliner, a long-distance wide-body plane, is allowing Air Canada to attack more international locations.

If there are a couple of areas Mr. Rovinescu seems especially keen on, they would likely be the airline's efforts to pick up more U.S. overseas traffic and deeper partnerships with foreign airlines.

Air Canada is the No. 1 foreign airline in the United States, many of whose cities don't have direct access to overseas destinations. Air Canada reasons that if passengers are willing to connect through a U.S. city, they are just as likely to connect through Canada, notably Toronto, which is close to so many U.S. urban centres. Mr. Rovinescu's near-term goal is to double Air Canada's share of that traffic to 1.5 per cent, which, he says, would add about $600-million of annual revenue. If that's achievable, there could be more to come.

In terms of partnerships, Mr. Rovinescu mentioned the success of the Lufthansa code-sharing deal. He expressed high hopes for a similar and more recent deal with Air China, and growing Asia traffic.

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"Historically, airlines have not rewarded shareholders," the CEO said, but "we are focusing on profitability and margins."

So is the industry, which has finally embraced discipline after decades of destructive chaos. Without that, Air Canada would likely not be in such good shape, but it's hard to imagine the airline business suddenly going back to its old sloppy ways after finally creating value. So it seems likely that, barring another economic shock or economic slowdown, which are always present risks, Air Canada's stock, with a forward price-to-earnings ratio of 3.7, isn't ready to begin its descent yet.

Disclosure: The author personally owns Air Canada shares.

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