Air Canada shares up 20% on stronger profit forecast

Shares of Air Canada surged more than 20 per cent Friday after the company said its results for the first quarter will be better than it expected.

Air Canada's shares surged more than 20 per cent Friday to its highest level in nearly two months after the company upgraded its outlook for the first quarter and said it expects a strong summer season.

The airline said it has done a better than expected job at offsetting the impact of a lower Canadian dollar and winter weather disruptions by increasing revenues and lowering costs.

It now expects earnings before interest, taxes, depreciation, amoritization and rent (EBITDAR) will be about the same as a year ago, a $15 million to $30 million improvement from its February guidance.

"We are encouraged by the stronger than expected recovery of the Canadian dollar cost shock," David Tyerman of Canaccord Genuity wrote in a report in which he upgraded his expectations for the airline's shares.

Tyerman also raised his outlook for the second quarter, but said offsetting the cost hit will be difficult to achieve.

He said Canadian airline profits have in the past rebounded within two to four quarters after past cost shocks, including a surge in fuel prices in 2011.

Several initiatives being pursued by Air Canada (TSX:AC.B) — increasing the number of seats on large Boeing 777s, expanding low-cost Rouge subsidiary and adding new Boeing 787s this year — are designed to reduce costs by 15 per cent and should be the main drivers to an improving share price, he added.

Walter Spracklin of RBC Capital Markets said Air Canada's cost-reduction strategy is "sound" and provides the airline with enough flexibility to deal with currency changes, fuel fluctuations and increased competition.

"The positive EBITDAR revision highlights both the management's ability to effectively adjust to the new cost realities and the underlying strength of demand levels," he wrote.

Air Canada (TSX:AC.B) announced late Thursday that its traffic grew by 2.9 per cent in the first quarter on a 3.8 per cent increase in capacity, resulting in a dip in load factor to 80.3 per cent.

Traffic was higher in all markets but grew the most for its flights to and from the U.S., rising by 5.7 per cent.

The airline also said capacity will grow 6.5 to eight per cent this year compared with expectations of seven to nine per cent outlined in February. Costs excluding fuel and Air Canada Vacations land costs are still expected to decrease by 2.5 to 3.5 per cent.

CEO Calin Rovinescu said its expects a strong summer travel season based on bookings.

Cameron Doerksen of National Bank Financial said the confidence is "clearly encouraging" because one of the risks is a more competitive environment this summer, particularly on trans-Atlantic routes where Air Canada is adding significant new capacity.

"We caution, however, that it is still quite early to reach any conclusions about summer demand and pricing," he added.

Air Canada shares were up $1.27 at $7.03 in Friday morning trading on the Toronto Stock Exchange.

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