Air Canada swung to a profit in the second quarter of 2019 despite the ongoing grounding of its 24 Boeing 737 Max aircraft that prompted the carrier to extend cancellations of Max flights through 8 January.
The global grounding will hit the company's third quarter financial results, Air Canada chief executive Calin Rovinescu during an earnings call on 30 July. The carrier expects its capacity will decline 2% during the third quarter, as opposed to the 3% increase it previously forecast.
"The 737 Max grounding will be felt more acutely during our busy summer period," Rovinescu says. "Were it not for the grounding of the Max, our expectation for Q3 would indeed be better."
Air Canada says it found ways to compensate for the ongoing Max grounding, maintaining 97% of planned flying during the second quarter ending on 30 June. During the third quarter it expects to meet 95% of planned flights while its Max fleet remains out of service.
The Montreal-based airline reported C$343 million ($260 million) in net profit for the second quarter, up from a loss of C$102 million during the same period in 2018. Operating revenue rose 10% year-on-year from $4.3 billion to C$4.8 billion in the second quarter, while operating expenses increased by 8% year-on-year from C$4 billion to C$4.3 billion.
Cost per available seat mile (CASM) excluding fuel rose 6% year-on-year from 10.3 Canadian cents to 10.9 Canadian cents during the second quarter. Passenger revenue per available seat mile (RASM) increased by 8% from 14.4 Canadian cents to 15.5 Canadian cents.
The airline was able to reduce its debt to C$3.2 billion during the second quarter and increase its liquidity to C$7 billion.
Capacity at the airline is forecast lower due to the 737 Max grounding. Air Canada expected to receive 12 additional Max aircraft by the end of June and had also expected 14 additional Max aircraft to be delivered by mid-2020.
Boeing has promised compensation to airlines for the grounding of their 737 Max fleets. Rovinescu says Air Canada has not yet begun compensation talks with Boeing and that "they will take time".
Boeing chairman Dennis Muilenburg has said regulatory agency tests of a software fix for 737 Max could be completed in September, and that the aircraft could be flying commercially again by the end of 2019. Air Canada and other airlines will make decisions about returning their fleets into service following regulatory approval. Rousseau said it could take up to a year for the carrier to return the 737 Max fleet to full service.
EXPANSION AMID GROUNDINGS
Air Canada in June reached a definitive agreement to acquire Transat AT, parent company of Air Transat, via a cash purchase of outstanding Transat stock at C$13 per share, estimated at C$520 million. The deal requires approval from regulators and shareholders, which the two companies expect to gain in time to close the deal by "early 2020".
Employees of both Air Canada and Transat AT "will enjoy greater job security" following the merger, Rovinescu says.
Transat offers vacation packages, hotel stays and air travel to some 60 destinations in the Americas and Europe. The deal would give Air Canada Rouge a chance to counter WestJet tourism packages and help the mainline Air Canada expand its global network.
Cowen Equity Research analyst Conor Cunningham says there will likely be a neutral response by stock markets amid "solid demand [that] resulted in strong pricing throughout the network".
The International Brotherhood of Teamsters is also working on final contract language with Air Canada following an agreement in principle for an employment contract to cover some 700 customer service representatives and reservation assistance and air cargo personnel.