Air Canada plans to hire 350 pilots ahead of eventual Boeing 737 Max return
Airline had to cancel relatively few flights after Max grounding, but needed to lease planes
Air Canada's shares hit an all-time high Tuesday even though its earnings fell slightly below expectations last quarter as the grounding of the Boeing 737 Max continues to weigh down the country's largest airline.
The Montreal-based company's earnings fell slightly below expectations last quarter, but shares hit a high of $48.09 on the Toronto Stock Exchange and sat at about four per cent or $1.83 at $47.55 in mid-afternoon trading.
Chief executive Calin Rovinescu said once authorities lift the airspace ban it could take up to a year for all 50 Max jetliners slated to be in operation by mid-2020 to hit the skies. Air Canada says it plans to hire 350 pilots next year in anticipation of the return of the Boeing 737 Max
"This is a process that will indeed be gradual. This is not an overnight process," he said.
Rovinescu cited "the serious disruption to our overall operations and to our cost structure and profitability" caused by the now eight-month grounding of the 24 Max planes in its fleet and 12 more that had been slated for delivery by mid-2019.
"The removal of thirty-six 737 Max aircraft, or about 24 per cent of our narrow-body fleet, from our schedule during our peak summer season exacted a toll," he said on a conference call with analysts Tuesday.
Rovinescu's reiteration of the "extremely challenging and complex situation" of the 737 Max came less than an hour before Boeing CEO Dennis Muilenburg sat down for withering questions from U.S. senators about two fatal crashes and whether the company concealed information about a critical flight system.
"We have made mistakes, and we got some things wrong," Muilenburg conceded.
While the carrier covered more than 95 per cent of planned flying in the third quarter, it was forced to lease two Airbus A330s on top of leases and life extensions for other aircraft that are less fuel efficient than the Max 8.
The Max 737 has been grounded since a March crash in Ethiopia, which occurred just over four months after another model went down off the coast of Indonesia. A total of 346 people died in the two incidents, with 18 Canadians killed in the Ethiopian crash.
Air Canada has removed the Max from its flight schedule until at least Feb. 14, while WestJet Airlines Ltd. has ruled the aircraft's return until Jan. 4 but is mulling an extension.
'Gradual' process of reintegration expected
The 12 undelivered Max aircraft now sit on Boeing lots, delaying Air Canada's hiring of pilots — the company currently has about 400 Max pilots, relegated to training for the time being. Fourteen more Max 8s were slated for delivery in the first half of 2020, but may now be pushed back.
The company will be able to remove about 15 planes from its fleet over the next 12 to 15 months, on top of the two A330s, chief financial officer Michael Rousseau estimated.
"This is a process that will indeed be gradual. This is not an overnight process," Rovinescu said, noting it could be up to a year after the airspace ban is scrapped before all 50 Max jetliners are in operation.
Analyst Walter Spracklin of RBC Dominion Securities said the effects of the grounding were to be "most significantly felt" in third quarter, when capacity is tightest.
However, he said the cost impact was not as bad as had been expected.
"The key takeaway in this quarter from our perspective is that Air Canada has demonstrated that it can successfully manage a significant external event through better pricing and nimble cost management to achieve strong results," Spracklin said in a note to investors.
Rare decline in capacity
Doug Taylor, an analyst with Canaccord Genuity, highlighted how "the company has been able to effectively pass the added costs through to customers."
Net income fell nine per cent year over year to $636 million in the quarter ended Sept. 30. Revenue dropped three per cent to $5.53 billion.
On an adjusted basis, earnings per diluted share rose to $2.27, up from $2.10 a year earlier but below analyst expectations of $2.34, according to financial markets data firm Refinitiv.
Aircraft fuel, which comprises close to one-quarter of Air Canada's operating expenses, cost the company $1.09 billion last quarter, 11 per cent less in the third quarter of 2018.
The company saw capacity decline year over year for the first time in several years, but expects capacity growth of three per cent in the fourth quarter, said chief commercial officer Lucie Guillemette.
Revenue from high-yield business cabin passengers increased by $33 million or nearly four per cent year over year.
Domestic passenger revenues rose by $123 million or nearly nine per cent despite a slight capacity reduction, with a new fare category adding to a higher yield.
Rovinescu said he hopes Air Canada's acquisition of Transat A.T. Inc., which shareholders approved overwhelmingly in August, will receive regulatory approval by mid-2020 following heavy scrutiny from the Competition Bureau.