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After a near-miss with bankruptcy nine years ago, Air Canada is among world’s healthier airlines, regularly reporting healthy profit margins while winning passengers with investments in new aircraft, luxurious premium cabins and swanky lounges.
But like nearly every Canadian and European airline since the jet age began, Air Canada still has not solved a structural problem: How to sustain profits from October through March, when Canadians (and Northern Europeans) dig in for winter.
That’s something Air Canada management said this week it wants to fix, by investing in routes that will produce higher profits in the airline’s weakest months, including new flights in the Americas, and to Australia and India.
The numbers are clear. This year, like most, Air Canada turned in a massively profitable third quarter, reporting net income of C$645 million ($490 million U.S.) with an operating margin of 15.5 percent. That was less than last year’s 20 percent margin, but the dip can be blamed on fuel prices that were about 40 percent year than in 2017.
“The numbers were downright phenomenal,” Jay Shabat, publisher of Skift’s Airline Weekly, wrote in a report.
Yet the numbers are not sustainable, because Air Canada’s business will drop off dramatically later this year, as its highly-seasonal (and profitable) transatlantic business slows.
In this year’s first quarter, Air Canada reported an operating loss of $10.64 million with a margin of negative 0.3 percent, and executives were happy about it, calling attention to our “strong results” in their press release. Last year’s fourth quarter was slightly better, with Air Canada producing about $6.1 million in net income, with an operating margin of 3.5 percent.
Air Canada will always peak in summer, executives said, but they acknowledged they can improve during other quarters by finding counter-seasonal opportunities.
“There’s no question that for us Q2, Q3 are such dramatically important quarters that we will always look weaker in Q4 and Q1,” Air Canada CEO Rovinescu said on the airline’s earnings call. “But I think that the picture is a lot better than it was in the past and we will continue to find these opportunities.”
Strong Summer, Weak Winter
Few airline are as strong on transatlantic routes as Air Canada.
This summer, for the first time, Air Canada made more money (by about $144 million U.S.) from its transatlantic business than from domestic flights. Transatlantic routes produced roughly $1.23 billion in revenue, up 20.3 percent, year-over-year.
Unit revenues are up, too. The airline’s revenue-per-available-seat-mile increased 9.1 percent on transatlantic routes, despite a capacity increase of 10.3 percent. Overall passenger unit revenue rose 4.2 percent, year-over-year.
Next summer could be better.
“With long-haul premium demand red hot, Air Canada just keeps adding new European routes from its three hubs, the latest being Toronto-Vienna and Montréal-Bordeaux next summer,” Shabat said.
But that business is highly seasonal, because leisure travelers for the most part want to fly certain months of the year. How many people want to spend a weekend in Paris in January? And how many of them will pay a premium to do it?
While full-service airlines like Air Canada generate major margins from business traffic, especially on business class and premium economy seats, on long-haul routes they also rely on vacationeers who fill hundreds of seats in the back of each aircraft. Sometimes these leisure travelers score deals on fares, and that may lead to tiny margins. But in peak-summer, when demand is robust, airlines can make a lot of money from economy class.
It’s why European airlines, like Primera Air, which folded in October, tend to go bust after the summer travel period, and why some – notably Ryanair CEO Michael O’Leary — wonder whether Norwegian Air can survive this winter. (He said something similar last year, and Norwegian made it.)
To cope with the long winter, many airlines cut capacity and park some airplanes, scheduling aircraft for maintenance. Others lease airplanes during less busy months to airlines with more demand, which is why planes belonging to the European airline Transavia sometimes fly for North American airlines.
A few experiment with unusual routes, including Norwegian Air. This winter it will fly between Pointe-à-Pitre and Montreal with a 737 that usually flies in Europe. It can do that because Guadeloupe is part of France, and thus an EU member.
In winter, Air Canada generally reduces flying, and shifts some focus to its low-cost brand, Rouge. It created Rouge six years ago to cater to leisure travelers, in part hoping it would help it win more business in winter, when the brand flies to what it calls ‘sun’ destinations in the United States, Mexico, and the Caribbean.
But Rouge hasn’t completely fixed the parent company’s issue, Rovinescu said.
“Rouge is intended to address in part that challenge by using some of the wide-body airplanes in the summer to Europe and in the winter wide-body airplanes to larger sun destination markets, the Las Vegases of this world as well Floridas, et cetera,” he said. “That has worked reasonably well, but has not fully solved our problem to be very direct. And so we continue to look for opportunities.”
That includes stretching some summer-only European flights to end in late September or October, rather than in early September, to improve fall numbers.
“We’ve made a big effort over the last number of years of trying to balance the seasonality differences that we’ve seen here,” Rovinescu said. “You’re starting to see some impact of that this year. And we hope to see more of that as things evolve. We’ve seen it in markets like the Central European markets. We’ve seen it in Athens.”
Air Canada has other ideas, too.
Executives said they can develop off-season opportunities in South America, though in the short-term that could be challenging, as Air Canada is facing competitive pressure, and many of the region’s biggest economies are suffering.
They also suggested Australia and India routes could help the airline produce more revenue in slower months. In the past two years, the airline has started flying from Vancouver to Melbourne and Brisbane, along with its existing Sydney route.
Additionally, Air Canada re-entered India in 2015, first flying from Toronto to Delhi, and then adding Vancouver to Delhi and Toronto to Mumbai. The Toronto-Mumbai route has not performed as well as executives wanted, so Air Canada will suspend it in May, just before it adds more frequency to Vancouver-Delhi.
Then there’s opportunity in the traditional sun business. It is performing well, though the airline cited pricing pressure in some markets.
Lucie Guillemette, Air Canada’s chief commericial officer, said the Caribbean has been holding up after “a little bit of softness” in the third quarter, but Mexico is still “very competitive on the pricing side” because of added capacity.
Meanwhile, U.S. markets, such as Las Vegas and Florida, are strong, though the airline is reluctant to add too much capacity anywhere for fear of reducing profitability.
“We don’t want to fly large airplanes into markets with really deteriorating yields and so we’re not going to give the seats away to fill the airplanes,” Rovinescu said. “That’s definitely not part of our strategy. But we will look to find strategic opportunities to deploy. They will be in and around sun markets, South America, and extension of some of the leisure markets for longer periods of time.”