Air Canada sees long road to recovery after big Q1 loss

Big white plane flies high over snow-capped mountains.

Air Canada (TO. AC) said it will take three years to get back to 2019 revenue and capacity levels, and that it is accelerating the retirement of 79 older planes to make ends meet while it rides out the coronavirus crisis.

That recovery timeline was echoed last week by executives at U.S. carriers. 

Canada’s biggest airline reported Monday that first-quarter revenue fell 16% to CA$3.7 billion ($2.6 billion), the first time in 27 consecutive quarters it has not had revenue growth. 

Airlines began to suspend flights to Asia in January and February, but the full impact of the coronavirus pandemic didn’t materialize until March, when social distancing measures and travel bans were implemented worldwide. 

The destruction in travel demand and resulting ticket cancellations led to a CA$1 billion loss, or $345 million on an adjusted basis. Adjusted earnings per share of minus CA$1.49 was below analysts’ consensus for a loss per share of CA$1.22.

“While the duration of the pandemic and its fallout remain unknown, it is our current expectation that it will take at least three years to recover to 2019 levels of revenue and capacity,” CEO Calin Rovinescu said in a statement. “We expect that both the overall industry and our airline will be considerably smaller for some time, which will unfortunately result in significant reductions in both fleet and employee levels. While it is not possible to predict the course of the pandemic globally or indeed the changes that will be required of the airline industry, our determination is to ensure that our company is positioned to emerge in the post-COVID-19 world as strong as possible and capitalize on the opportunities that will inevitably arise.”

Air Canada has reduced capacity 85% to 90% as part of an overall austerity program to conserve cash, but said it hoped to bump up its flight schedule to 25% of the pre-crisis level by the third quarter if health warnings and travel restrictions ease.

In addition to slashing capacity, the airline industry has drastically reduced operating and capital expenditures, deferred projects, implemented voluntary unpaid leave programs for employees, and reduced executive salaries.

Air Canada said it is also moving up the date for retiring older Boeing 767, Airbus A319 and Embraer 190 aircraft, with the Embraer regional jets exiting the fleet immediately. The move will simplify the fleet, reduce its cost structure and lower carbon emissions.

In March, Air Canada drew down about $1 billion from its lines of credit, and now has unemcumbered liquidity of CA$6.5 billion, down from CA$7.4 billion at the start of the year. Last month, it obtained a one-year term loan for $600 million, secured by aircraft and spare engines and said it will continue to pursue additional financing arrangements. And in late April it concluded bridge financing of CA$788 million for 18 Airbus A220 aircraft, which Air Canada expects to replace with long-term secured financing later this year.

Airlines continue to press the Canadian government for emergency financial aid, saying the pandemic threatens their long-term viability.

Air Canada was one of the first airlines to turn passenger jets into freighter aircraft and operate as an all-cargo carrier after cargo previously took second-class status on passenger flights. Air Canada has operated more than 500 all-cargo international flights since March 22 and said it plans to operate up to 150 all-cargo flights per week in the second quarter. It will use a combination of Boeing 787 and 777 twin-aisle aircraft, as well as four 777s and four Airbus A330s that have had passenger seats removed to expand available cargo space. Opening the passenger deck to boxes of medical equipment and other supplies doubles the cubic volume of cargo that can be carried, officials say.

The earnings report is the first time Air Canada has disclosed that it has converted the Airbus aircraft and an additional 777. Previously, the airline said it removed seats from three 777-300 aircraft.

In related news, De Havilland Canada announced it has started a phased return to work of employees and manufacturing of its Dash 8-400 turboprop aircraft after shutting down on March 20 to help contain the spread of the COVID-19 disease. In the first phase, 100 employees will resume pre-flight activities and delivery of Dash 8s. 

As previously reported, De Havilland is making conversion kits for Air Canada’s regional operator Jazz to reconfigure 13 Dash 8-400 aircraft into freighters by removing seats and making other modifications.