Air Canada reported its best second-quarter financial results ever on Thursday. But its shares slid more than eight per cent amid concern over smaller margins.
Air Canada's Class B shares closed down 76 cents at $8.50 in heavy trading on the TSX as the company said it expected yields to fall this year. Yield is a measure of the average fare paid per passenger per mile flown.
"We expect weaker yields to weigh on investor sentiment today despite strong progress on the cost transformation initiative and improved full-year CASM guidance," RBC Capital Markets analyst Walter Spracklin said in a note to clients, according to Reuters.
For investors, news of lower yields overshadowed news of the airline's higher profits, as it reaped the benefit of continued cost-cutting, fuller planes and a one-time tax gain.
Canada's biggest airline said it made $223 million in the quarter, or 75 cents a share, turning around last year's same-quarter loss of $23 million, or nine cents a share.
Part of the better performance was due to a $41-million tax gain. But the results also show that Air Canada has been able to increase revenues while aggressively cutting costs.
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Operating revenues in the quarter rose eight per cent from the same quarter last year to $3.3 billion as the airline saw revenue growth in all of its major markets. At the same time, its adjusted cost per available seat mile, a key metric in the airline industry, dropped by 4.7 per cent. That was slightly more than it projected three months ago.
Air Canada said its low-cost vacation carrier, Rouge, has played a role in its better results.
Rouge 'exceeds expectations'
"The performance of Air Canada Rouge has exceeded expectations and allows Air Canada to now compete more effectively in leisure markets on a more cost effective basis," said Air Canada CEO Calin Rovinescu in a statement.
Air Canada hopes to save $100 million a year from its cost-cutting efforts. A lower cost structure was critical to the launch of Rouge in 2013. Rouge pays its crews lower wages and benefits than its mainline counterpart — helped by an arbitration settlement that went against the pilots' union.
Air Canada also reported a "marked increase" in the number of American and international passengers using Air Canada for global travel. The carrier attributed that to efforts to make it easier for foreign passengers to transfer from partner airlines at Canadian hubs.
The cost-cutting drive comes at a time when Air Canada is facing increased competition from WestJet Airlines and the possibility of further competitive pressures from the big U.S. discount carrier Southwest Airlines. Last month, Southwest said it was thinking of expanding its network to include Canadian destinations.
Air Canada stock has tripled in the last year as investors warmed to the airline's efforts to trim costs.