Air Canada stock dives 20% on record 2013 results

Air Canada shares hit turbulence on Wednesday after its earnings missed analysts' forecasts because of a weaker Canadian dollar.

Chief executive Calin Rovinescu calls 2013 a 'watershed year' for the airline

Air Canada's full-year, adjusted earnings were a company record of $340 million, or $1.20 per share — six-times higher than in 2012, the airline announced Wednesday. (Canadian Press)

Air Canada shares hit turbulence on Wednesday after its earnings missed analysts' forecasts because of a weaker Canadian dollar.

Air Canada stock fell 20 per cent to $6.22 at close of trading on Wednesday after closing at $7.84 the previous day.

The airline had reported the best financial results in its 77-year history in 2013 by several financial measures, with full-year adjusted earnings of $340 million, or $1.20 per share — six-times higher than in 2012.

Under standard accounting, Air Canada's full-year net income was $10 million or two cents per share in 2013, compared with a 2012 a net loss of $136 million or 52 cents per share."

Air Canada president and CEO Calin Rovinescu told analysts Wednesday during a conference call that 2013 was "truly a great year" and a "watershed year" for the airline.

"But there's no doubt we still have more to achieve in terms of sustainable profitability and even greater value creation for shareholders,"Rovinescu added.

He said the airline's strong performance, especially in the last three quarters of 2013 where adjusted net income improved sequentially "establishes a strong foundation for continued success in 2014."

Feeling effects of weather and lower dollar

Still, Rovinescu said this year's first quarter will continue to feel the impact of weather-related costs and the effect of the dollar's weakness against the U.S. currency.

Air Canada's A shares dropped sharply after the Toronto Stock Exchange opened. They were down nearly 15 per cent in the first minutes of trading, dropping $1.16 to $6.66.

The shares are still up sharply from this time last year, when they traded at about $2.35, but have been on a downward trend since hitting a multi-year high of $9.88 on Jan 23.

Rovinescu said Air Canada's EBITDAR earnings, which exclude items such as aircraft rent, interest and taxes, will be $15 million to $30 million below the first quarter of 2013.

It says severe weather in December reduced the quarter's EBITDAR by $15 million.

Under standard accounting, Air Canada had a $6-million net loss or two cents per share in the fourth quarter, compared with a loss of $60 million or 22 cents per share.

Air Canada's adjusted net income in the fourth quarter was $3 million or one cent per share, compared with a year-earlier loss of $5 million or two cents per share. Its $340-million full-year adjusted profit compared with a $55 million or 20 cents per diluted share in 2012

Revenue was up slightly to $2.894 billion for the fourth quarter, an increase of $55 million from a year earlier. For the full year, 2013 revenue was $12.38 billion — up $268 million from a 2012.

Recovery expected

The Montreal-based airline was expected to earn 12 cents per share in adjusted profits on $2.93 billion of revenues in the fourth quarter, according to analysts polled by Thomson Reuters. Analysts expected the carrier would earn $1.23 per share in adjusted profits on $12.4 billion of revenues for the full year.

David Tyerman of Canaccord Genuity said he expects the airline will recover over 2014 from the "negative surprise" from weather and currency that affected its fourth-quarter results and which are expected to persist in the first quarter of the year.

"Overall, the fourth quarter results and 2014 guidance do not change our view," he wrote in a report. "Near term results are likely to be negatively impacted by fuel and the weak Canadian dollar, but we expect Air Canada and the industry to recover from this over 2014 by revenue actions and cost improvements."

Analyst Walter Spracklin said the weaker than expected fourth-quarter results won't alter the positive view of the airline's long-term strategy.

"In any major transformational change there will be choppy progress, especially when external factors such as weather and foreign exchange play a role that will impact the pace of this progress. Costs are still coming down at a good clip and we are encouraged by the fare increases that have kicked in a couple weeks ago."

Followed WestJet's lead

The carrier reported strong passenger traffic in January on top of a 2.1 per cent gain last year and outpacing a 1.9 per cent increase in capacity. The full-year load factor increased 0.1 percentage point to 82.8 per cent.

The airline followed rival WestJet's lead a couple of weeks ago in hiking fares by two per cent in response to the falling Canadian dollar, a move that later copied by other airlines.

The lower loonie has put significant pressure on airlines because fuel and the cost of airplane purchases and rentals are paid in U.S. dollars, although some of the fuel is hedged to protect against fluctuations. Fuel prices, one of the largest costs for an airline, are up 8.9 per cent over the last three months in U.S. dollars, but up 13.2 per cent in Canadian currency.

Air Canada Vacations, Transat and Sunwing have added $35 per passenger currency surcharges while Sunquest has raised package costs to offset higher hotel costs.

Air Canada is Canada's largest domestic and international airline and among the 20 largest in the world, annually carrying more than 35 million passengers to some 175 destinations.