MONTREAL - Air Canada (TSX:AC.B) says it's embarking on a cultural change that will result in deeper cost cutting, including possible route and fleet reductions, as it attempts to restore its profitability in the face of ongoing economic turbulence.
The country's largest airline is now aiming for $500 million in annualized cost reductions and revenue enhancements within three years, double the previous target.
An internal tactical team will implement more than 100 initiatives to reduce costs by about $400 million, including $50 million this year and $250 million in 2010. Air Canada also plans to increase revenues by $100 million.
"Everything will be thoroughly evaluated over the next short while with a sense of urgency, nothing will be overlooked. This includes routes, schedules, fleet, supplier relationships and all of our go-to-market strategies," CEO Calin Rovinescu said Friday during a conference call about second quarter results.
The Montreal-based carrier reported Friday that its net income increased to $155 million or $1.55 per share for the quarter ended June 30 compared to profits of $122 million or $1.22 per share recorded in the same quarter a year ago.
Excluding a $355 million foreign exchange gain and other non-cash adjustments, it lost $268 million.
Air Canada says operating revenues fell to $2.3 billion from $2.8 billion booked the year before, with passenger revenue down 16 per cent to $2.1 billion.
Like other carriers, Air Canada was affected by the economic downturn which has eroded demand for air travel. Passenger traffic dropped 7.9 per cent in the quarter, more than the 5.4 per cent reduction in capacity.
Among the items identified in the cost savings plan so far are an estimated $40 million from a revised capacity purchase agreement with Air Canada Jazz (TSX:JAZ.UN), $50 million from inventory and baggage handling, $30 from corporate discounts and $50 million from large third party vendors.
None of the cost savings require union approvals, even though they include undefined "improved workforce management."
"Attacking the non-labour portion of the cost pile could result obviously in some cases in efficiencies and those efficiencies could have some consequences on staffing levels but we're not looking at actually reducing any of our wages under our collective agreement," he told analysts."
The airline said the changes won't affect consumers.
However, economic conditions will force it to reduce system capacity by three to four per cent during the current third quarter ending Sept. 30. The July-September period is usually the busiest quarter for airlines because of vacations.
For 2009, deeper domestic capacity cuts should reduce the system capacity by 4.5 to 5.5 per cent, more than the previous guidance in the four to five per cent range.
Chris Murray of CIBC World Markets said the cost reduction plan, although largely general at this point, could have a big impact on the airline's fairly thin margin.
"If you're (adding) $500 million in operating earnings, that's a big swing for these guys," he said, noting that it could help to narrow the estimated 30 per cent cost advantage enjoyed by Calgary-based rival WestJet (TSX:WJA)."
But Jacques Kavafian of Research Capital Corp. said the cost reductions need to be faster, deeper and more structural.
"Cutting costs by $400 million is just not enough. It cuts their loss in half but they're still losing money," he said in an interview.
He also said the carrier can't wait three years to fully realize the benefits of the reductions.
Kavafian said Air Canada will "tweak" with supply contracts whose costs will eventually return instead of making the route and fleet reductions needed to help it in the long-term.
But Rovinescu said the airline needs to undertake a cultural change to nimbly respond to opportunities and react quickly to challenges and position it for an eventual recovery.
Air Canada's ability to raise more than $1 billion of liquidity "provides us with a window of opportunity to make structural changes which we cannot and will not squander."
Falling passenger travel, particularly among business and premium groups caused the carrier to record a $113 million operating loss in the second quarter, reversing year-earlier operating profits of $7 million.
Premium cabin revenue accounted for more than 40 per cent of total passenger revenue decreases.
The airline's weakened operating results were despite $276 million in lower fuel costs. The H1N1 virus has a $30 million impact in the quarter as capacity was diverted to other sun spots and some Asian visitors cancelled plans to travel to Canada this summer.
Once markets improve, the airline hopes to reduce its increased debt by raising funds from an equity issue. However, Rovinescu said there is no consideration right now of partnering with an industry player.
Air Canada's parent company, ACE Aviation Holdings Inc. (TSX:ACE.B) also filed financial results Friday, reporting net income of $110 million or $2.68 per share. The results mark a decline from year-earlier profits of $830 million or $10.76 per share.
ACE's operating revenue declined to $2.3 billion from $2.8 billion the year before. The company owns 75 per cent of the airline and recently helped shore up its liquidity.
On the Toronto Stock Exchange, Air Canada's shares closed down three cents to $1.85. Ace shares lost 18 cents, or 3.61 per cent, to $4.81.