Air Canada says financial impact of Boeing groundings ‘expected to increase’

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MONTREAL — The Boeing 737 MAX grounding continues to weigh on Air Canada‘s bottom line, the company said Monday, despite topping expectations in a quarter elevated by more passengers and a newly acquired loyalty program.

“The impact on our unit cost is expected to increase the longer the grounding persists, particularly heading towards the busy summer season,” chief financial officer Michael Rousseau said.

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He cited a reduction in seat capacity of between three per cent and four cent due to the grounding, which continues across the globe as the MAX jetliner’s flight control system remains under scrutiny following two deadly crashes.

Less fuel-efficient replacement aircraft, extended plane leases and contracting out of some flights will also eat into profits, Rousseau said on a conference call with investors.

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The country’s largest airline has prolonged leases for three Airbus A320s and three Embraer E190s — both fuel-guzzlers compared to the MAX 8 — and made short-term arrangements with carriers such as Qatar Airways and Lufthansa now operating several transatlantic routes for Air Canada.

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The airline’s 24 MAX 8 jetliners comprise about 20 per cent of its narrow-body fleet, typically carrying between 9,000 and 12,000 passengers per day. The planes’ sudden removal helped push adjusted cost per available seat mile (CASM), a key industry metric, up 3.2 per cent.

“On the cost side, there’s no doubt adjusted CASM is going to be influenced primarily by the reduction in ASMs — in seat miles,” Rousseau said.

The company’s financial guidance — which it suspended on March 15 two days after Transport Canada closed its skies to the MAX — will remain frozen until Air Canada gets “greater clarity” on the aircraft, said chief executive Calin Rovinescu.

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The carrier will consider returning the MAX to service after Transport Canada and other regulatory authorities, including the U.S. Federal Aviation Administration (FAA), lift airspace bans and approve software modification and training protocols, he said.

Rovinescu acknowledged it would take at least several weeks after bans are lifted to return MAX 8s to the rotation as maintenance crews prepare the planes.

Transport Minister Marc Garneau recently said he’d like Canadian pilots to undergo simulator training related to the 737 MAX software revision, a step beyond an FAA-appointed board’s proposal for computer-based training.

Air Canada says it is the only North American airline with MAX simulators, which could lead to swifter resumption of MAX service when the grounding ends.

“These pilots are not just sitting around sort of doing nothing. We’re actually able to have some simulator training for them…including having modeled some of these scenarios that occurred in the two accidents,” Rovinescu said.

Safety concerns continue to hang over the MAX aircraft after Boeing said a safety alert sensor malfunctioned on an Ethiopian Airlines flight last March and on a fatal Lion Air crash off the coast of Indonesia in October. The two flights, both on MAX 8s, killed a total of 346 people, including 18 Canadians on board the Ethiopian Airlines flight.

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Rovinescu declined to comment on speculation around Montreal-based tour operator Transat A.T., which confirmed last week it had spoken with several parties about a possible sale of the company.

Chief commercial officer Lucie Guillemette said Canada’s ongoing dispute with China stemming from the arrest of Huawei CFO Meng Wanzhou last year has hurt travel demand between the two countries.

“However, reallocating capacity from China to other markets has helped mitigate the impact,” she said.

Lower demand from Chinese fliers has allowed Air Canada to add larger aircraft to routes that now see fewer daily flights due to the absence of the MAX 8, said analyst Chris Murray of Altacorp Capital.

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“The government in China has a tendency to want to assign where they can go,” he said of passengers from that country.

READ MORE: B.C. aviation expert says Boeing MAX 8 grounding will lead to price spikes for summer travel season

Air Canada cancelled a total of 8,000 flights last quarter, 1,600 of which were on its higher-revenue mainline routes — a 40 per cent increase in mainline cancellations from the first quarter of 2018, Rovinescu said.

“Overnight…literally…we removed these aircraft from the fleet. So we had 18 days where we were scrambling to actually take care of our customers,” he said, adding that harsh weather also played a role in the cancellations.

The airline was slated to receive 12 more MAX 8s from Boeing between March and June, with six of those already completed, Rovinescu said.

The company’s stock was up more than four per cent in mid-afternoon trading Monday, hitting $35.07.

Analyst Doug Taylor of Canaccord Genuity dubbed it “a great quarter given the conditions.”

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The Montreal-based carrier earned $345 million or $1.26 per diluted share for its first quarter, compared with a loss of $203 million or 74 cents per diluted share in the same quarter a year ago.

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Air Canada said the results included foreign exchange gains of $263 million in its most recent quarter compared with foreign exchange losses of $197 million in the first quarter of 2018.

READ MORE: Air Canada to suspend Boeing 737 MAX planes until ‘at least’ July, some flights affected

Its purchase of the Aeroplan loyalty program paired with more passengers propelled a roughly five per cent rise in passenger yield.

On an adjusted basis, the airline said it earned $17 million or six cents per diluted share in the quarter compared with an adjusted loss of $26 million or 10 cents per diluted share a year ago.

Operating revenue rose to a first-quarter record of $4.45 billion compared with $4.07 billion in the first three months of 2018.

Analysts on average had expected an adjusted loss of 18 cents per share and revenue of nearly $4.39 billion for the quarter, according to Thomson Reuters Eikon.

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