Air Canada says it can earn profits by boosting labour, maintenance efficiency

MONTREAL – Air Canada believes it can eventually turn its first profit in years by moving past the labour disruptions that have damaged its brand to transform the airline by reducing employee and maintenance costs.

While it would be easier to tackle the challenges of the 75-year-old carrier by starting over, “sadly life doesn’t work like that,” president and CEO Calin Rovinescu said Friday after the airline reported significantly deeper losses in the first quarter.

“What you’re seeing is the chipping away through a transformational process of many, many, many inefficiencies that are built-in and inherent in a legacy environment like this.”

Rovinescu said the airline has given its employees very good lifestyles over the years, but change is needed through making adjustments without wage cuts.

The goal is to deliver returns to shareholders and bondholders who invested in the carrier, especially as it tried to avoid a potential bankruptcy in 2009 and 2010.

Shares in the company fell to a low of 78 cents amid the recent labour strife in March, dropping about 68 per cent from last May, before disputes with its union began to hit its reputation. Shares closed up 4.3 per cent or four cents to 96 cents on the Toronto Stock Exchange Friday.

The boost came even as the Montreal company reported a net loss for the three months ended March 31 of $210 million — 11 times higher this year than the $19 million loss in 2011. During the quarter the airline weathered higher fuel prices, work stoppages by some of its employees and the bankruptcy of Aveos, the company that formerly overhauled its planes.

During a conference call with analysts, Rovinescu was occasionally testy after he was challenged about continued losses and frosty relations with employees.

He said many employees were turned off by the job actions of unhappy workers, which prompted flight cancellations that had a “damaging rippling effect” on consumer confidence.

To those employees who have lost total faith in management, he said “they ought to work in a co-operative where they get to decide.”

Rovinescu believes an end is in sight to labour conflicts that have harmed efforts to improve its corporate culture.

Air Canada (TSX:AC.B) will soon begin 10 days of scheduled negotiations with its pilots and machinists. If deals can’t be reached, arbitrators will impose contracts within 90 days.

The airline’s pension solvency deficit doubled in the past year to $4.4 billion. But $1.1 billion could be trimmed off if the remaining contracts include provisions accepted by other employees.

Cameron Doerksen of National Bank Financial said he remains “cautious” about the airline’s prospects.

“Although final resolution of the remaining two labour contracts is in sight, the outcome and the impact on Air Canada’s future costs and strategic plans remains uncertain,” he wrote in a report.

The head of the union representing 6,800 flight attendants called upon the airline to reconsider its priorities by improving labour relations.

“Paying out millions/billions to executives and ACE shareholders while forcing its employees to accept a decade of wage and benefit concessions is wrong,” CUPE unit president Jeff Taylor said in a statement.

The carrier conceded that bookings for its passenger and Air Canada Vacations business took a hit in the quarter.

“We did see an immediate impact on our bookings following the job actions…(but) we’ve seen an improvement in that trend in the last couple of weeks,” added chief financial officer Michael Rousseau.

Air Canada’s $210 million loss in the busy winter period amounted to 76 cents per share, up from seven cents per share in the prior year.

Adjusted net loss was 64 cents per share, up from 45 cents. But it was better than some had anticipated. Analysts had expected, on the whole, a net adjusted loss of 78 cents per share, according to consensus estimates compiled by Thomson Reuters.

Revenue increased eight per cent to nearly $3 billion and cash reserves grew $135 million to $2.25 billion.

Fuel costs were $147 million, 20 per cent more than in the year-earlier period.

The airline wrote off $120 million in payments and commitments to Aveos in the quarter.

In addition to settling its final two labour contracts, it is launching requests for proposals to find cheaper heavy maintenance operators to replace the work done by Aveos before it closed and obtained creditor protection.

The move should lead to substantial cost savings and quicker turnarounds before aircraft return to service.

The sale of Aveos’ three segments has resulted in expressions of interest from 93 parties, including 20 strategic buyers and 16 financial buyers, said a report from the chief restructuring officer.

Meanwhile, the court-appointed monitor said Air Canada’s motion to end maintenance contracts with Aveos would hurt the value of that sale and is “at the very least premature given the process underway.”

Late Friday, Air Canda said Quebec’s securities regulator has granted it an exemption that allows it to treat class A shares, available to foreign investors and class B shares, which are reserved for Canadians, as a single class in the event of a takeover bid.

The changes will be subject to shareholder approval at a vote at the company’s annual general meeting on June 4.

Air Canada has exercised purchase rights to acquire five Boeing 777 planes starting next year, but wouldn’t say if they will be added to the fleet. It is also looking at adding more Bombardier (TSX:BBD.B) Q-400 turboprops to its regional fleet to “accelerate the exit” of aging CRJs.

Regional partners Chorus Aviation (TSX:CHR), which operates as Jazz, and Sky Regional have taken delivery of 10 Q-400s. Five more are on order.

Any additional plane orders would be good news for Bombardier, which has won an order for up to 45 planes over the next six years from rival WestJet Airlines (TSX:WJA) which is launching a regional service next year.

Air Canada said it is watching this competitive challenge to its domestic service but isn’t prepared to announce how it would respond.