Air Canada loses $263M in Q3 as revenues plunge, restructuring costs grow
TORONTO (CP) - Air Canada has reported a $243-million loss in the third quarter, usually the most profitable period for the industry, as the insolvent airline was hit with restructuring costs and declining revenues due to lingering effects of the SARS crisis.
Revenue fell to $2.2 billion from $2.7 billion in the same 2002 period, when the company had a $125-million profit - one of the few times since 1999 that it posted a quarterly profit.
But Air Canada CEO Robert Milton said Wednesday he was "satisfied" with a $17-million operating profit in the latest quarter, given the "difficult revenue environment" caused by the SARS outbreak in Toronto and Hong Kong in the spring.
"Given the rapid and precipitous fall off in revenues due to SARS, I am pleased with the speed with which we were able to eliminate costs during the period," Milton said.
That included a 21 per cent reduction in salary and wage expenses as Air Canada - operating under court protection from creditors - jettisoned the equivalent of over 6,300 full-time employees and changed work rules and salaries for its remaining unionized and non-unionized labour groups.
"We are making good progress in our restructuring," Milton said, adding that customers and employees had responded positively to the changes Air Canada is making. "We continue to look to the future with a sense of confidence."
Meanwhile, Air Canada's loss amounted to $2.18 per diluted share for the third quarter ended Sept. 30, including $273 million in restructuring charges. That compared with the profit of $125 million, or 91 cents a share, for the same quarter of 2002.
In another development, the airline said in court documents it will need about $4 billion to buy new planes over the next five to seven years, on top what its new investors will put into the company.
The insolvent company will need to renew its fleet if it is to stabilize its domestic business and compete internationally, Air Canada CFO Rob Peterson said in an affidavit filed in an Ontario court this week.
The Montreal-based airline supports a proposal for Victor Li, a Hong Kong businessman who is a Canadian citizen, and other investors to provide $1.1 billion to help fund the airline's operations after it exits from court protection.
But that money won't be enough to cover Air Canada's needs to acquire smaller, more cost-efficient planes in the coming years, Peterson said in the affidavit.
"It was always contemplated that this minimum liquidity would only be an initial start on the recapitalization of Air Canada," he said. "Approximately $4 billion in additional financing will be required over the coming five to seven years to finance the renewal of Air Canada's fleet."
Li's offer has run into opposition since an unsolicited bid from rival New York-based Cerberus Capital emerged this week, an alternative offer supported by some of Air Canada's creditors.
But Peterson said in the affidavit that Air Canada's board viewed Li as a "strategic long-term equity investor" that could provide greater stability for the airline and interests in "transportation enterprises all over the world" that may benefit the airline.
In contrast, he said, Cerberus is an investment fund specializing in hedge funds and distressed debt investments "with an uncertain investment time horizon."
He also said the New York-based company would be prevented from exerting the same level of control because of Canada's foreign ownership restrictions.
AlekToronto From Canada, joined Nov 2003, 328 posts, RR: 0
Reply 5, posted (10 years 10 months 1 day 23 hours ago) and read 2696 times:
We are making good progress in our restructuring," Milton said, adding that customers and employees had responded positively to the changes Air Canada is making. "We continue to look to the future with a sense of confidence."
It is so SAD it is funny...
I guess being a CEO means never having to say you're sorry!
WestJetYYZ From , joined Dec 1969, posts, RR:
Reply 6, posted (10 years 10 months 1 day 22 hours ago) and read 2670 times:
"...customers and employees had responded positively to the changes Air Canada is making..."
Where does he get this? The employees seem to be even more uphappy than ever (wouldn't you if you had to take a pay cut, fear for your job, and then get a stupid burger coupon?). And I'm yet to have talked to a passenger that was pleased with Air Canada's latest service (still high prices, and even less frills...).
I'd be very interested to know who's happy with all the changes? I don't see many articles on that out there.
Lymanm From Canada, joined Jan 2001, 1138 posts, RR: 1
Reply 7, posted (10 years 10 months 1 day 22 hours ago) and read 2654 times:
I still don't get the reason for the delay in announcing this. The loss and its magnitude was expected. Potential investors would certainly have known prior to placing their bids, so who is AC concerned about regarding this delayed announcement?
Last night, Canada's dominant airline racked up another loss in its latest quarter. It blamed a dropoff in travel after the outbreak of severe acute respiratory syndrome.
The airline, which has been flying under bankruptcy protection for close to eight months, published financial results late yesterday showing it lost $263 million, or $2.18 a share, for the three-month period ending Sept. 30. Revenue dropped to $2.23 billion from $2.75 billion.
Milton said he was "satisfied" with the results. Analysts said they were not surprised by the numbers.
"This is the best time for Air Canada to announce bad news," said Joseph D'Cruz, an airline specialist at the University of Toronto. "It'll give them a much cleaner income statement as they come out of restructuring and they'll look good."
Results from operations were positive, with a $17-million profit. But the airline recorded restructuring charges totalling $273 million, which wiped away earnings. The charges relate to claims resulting from repudiated contracts with suppliers and jet leases, among other things.
Air Canada said it paid all its suppliers and creditors during the quarter except for certain aircraft lessors and unsecured debt holders.
"Given the rapid and precipitous fall off in revenues due to SARS, I am pleased with the speed with which we were able to eliminate costs," Milton said. "Almost two-thirds of our revenue shortfall was due to a dramatic dropoff in international revenues."
To put the SARS effect in perspective, the airline estimated it lost $125 million in April alone as a result of the disease outbreak. Competition from rivals like WestJet Airlines, Jetsgo and CanJet also hurt profits.
The next step in Air Canada's restructuring is for an Ontario Superior Court judge to decide which of two companies should be the airline's new equity investor.
Air Canada picked Trinity Time Investments, controlled by Hong-Kong businessperson Victor Li. But surprise revised offers by the other candidate, New York-based vulture fund Cerberus Capital, appear sweeter than the Li proposal. Some creditors are pushing the airline to reconsider its position.
In an affidavit filed in court yesterday, Air Canada said its board saw Li as a "strategic long-term investor" that would bring stability to the airline. It characterized Cerberus as an investment fund "with an uncertain investment time horizon."
This article doesn't make my question in the previous post any clearer:
"This is the best time for Air Canada to announce bad news...It'll give them a much cleaner income statement as they come out of restructuring and they'll look good."
They'll look better now than they would have 3 weeks ago?
On another note, interesting that operations were actually profitable...
CanadaEH From Canada, joined Jul 2003, 1341 posts, RR: 4
Reply 10, posted (10 years 10 months 1 day 20 hours ago) and read 2608 times:
Obviously an operating profit is good news for Air Canada; however, as the articles have stated - restructuring charges have negated any profit and produced a loss. Given that the third quarter is the most profitable quarter in the year, is $17 million in that period enough for Air Canada to be profitable for a whole year?
I see Air Canada emerging from bankruptcy protection, but I do not see Air Canada continuing to be profitable in the years ahead. Why, do you ask? In the domestic market, Westjet and Canjet will be adding an additional 20 aircraft each in the next two years. I'd expect Jetsgo to continue its expansion as well. Air Canada also wants to add an additional 70(?) regional jets to its fleet. Does the Canadian market need all this added capacity?
In the international market, HMY is looking to expand to markets in Asia and Zoom is looking to expand to European markets. Transat and Skyservice as still operating but I've yet to hear of any plans for expansion. Canjet and Jetsgo already operate in the transborder market to Florida, in a very small capacity, and Westjet is set to expand south in the near future. Some American LCC's are also hinting at expanding north as well (Frontier, Jetblue).
Air Canada may not be the loser in all of this expansion, a smaller carrier may fold under the rapid growth - who knows.
Cessnapimp From Canada, joined Oct 2001, 1320 posts, RR: 19
Reply 13, posted (10 years 10 months 1 day 17 hours ago) and read 2499 times:
What is very interesting to me is the Victor Li approach to things. A recent article (too lazy to find it...) denoted hard times for a Husky employee when Trinity moved in in the early 90's. In a jiffy there were lightning changes in the company, a huge structural change in a short period of time, a completely reorganised corporate tree, and, of course, massive demotions and redundancies. The peons that survived saw a radically changed company that now brings in hundreds of millions in profit...
...that being said...
we all know how rigid the structure is at AC, embedded deeply from the crown corp days. That includes an entrenched management team, albeit shaken up recently; but more importantly, strong intransigent unions. How much union dealing experience does this gentleman have in his curriculum? I bet he's going to find it very hard to implement his radical corporate strategies whilst keeping the workforce coming in every morning.
An interesting showdown indeed is shaping up.
On another note, I hear the CFO stating the need for 4 Bill withing the next few years to rejuvenate the fleet. They suddently want to buy? While I certainly understand the need for re-capitalisation, the main advantage is being able to absorb hits easier, methinks these are very premature statements. Like shopping for a car before you get the license and the money. I wonder what kind of picture of AC management wants to display by talking about this at this stage of the game? Displaying the necessity for long term financial commitments I suppose? Hmmmm...