Despite a low Canadian dollar, Air Canada profits rise due to a continuing drop in jet fuel costs. Figures released in its Annual Report published this week show a marked decrease in operating costs. Compared to the previous year, 2015 jet fuel costs were down $35 million, after adjustments on foreign exchange rates. These savings boosted liquidity, and contributed to robust free cash flows.
Air Canada’s Stock Prices
Air Canada’s Stock Prices by mmacdona on TradingView.com
Source: TradingView.com
Figures from the operating expenses chart show a decline in costs. Those savings are offset by a drop in the Canadian dollar. Jet fuel is the air carrier’s chief operating expense and is paid in US dollars. The low value of the Canadian dollar has reduced fiscal gains in the range of 25 million dollars in expenses. Despite the poor exchange rate on the Canadian dollar, Air Canada exhibits strong corporate results across several key measurements, explained Fred Lazar, an economist at York University and an expert on the airline industry.
Other gains in net profit are a result of expenses recovered from Air Canada’s restructuring of debt and the recent bankruptcy of a heavy maintenance firm that serviced the air carrier, allowing it to find alternatives that led to significant cost savings. Overall, reduced costs helped boost the company’s operating cash flows by a wide margin. Although not a core financial instrument, the statement of cash flows helps stakeholders gauge a firm’s liquidity, solvency and general performance, according to the Canadian Institute of Chartered Accountants’ Handbook.
Source of data: 2015 Air Canada Annual Report
A portion of Air Canada’s financial statement annotated in DocumentCloud
(click inside the annotation to see the entire document and other annotations)
Source: 2015 Air Canada Annual Report
A portion of Air Canada’s financial statement annotated in DocumentCloud
(click inside the annotation to see the entire document and other annotations)
Source: 2015 Air Canada Annual Report
A portion of Air Canada’s financial statement annotated in DocumentCloud
(click inside the annotation to see the entire document and other annotations)
Source: 2015 Air Canada Annual Report
The net gains for Air Canada have not resulted in dividend payouts to shareholders, however. Lazar notes that other considerations may influence the Board of Directors’ decision with respect to dividends, including paying down debt, which will strengthen the carrier’s competitive position in the long term. Shareholders can opt to cash in on the company’s improved stock price, which rose by 69 cents per diluted share over the previous year. If shareholders decide to exercise that option, they will realize a capital gain over the original cost at purchase.
Consumers see less direct benefits from the slide in jet fuel prices, Lazar said. The analyst points to other recent changes introduced by the carrier to boost sales. Such incentives include seat sales, which are driven by competitor moves. In addition, Lazar notes that Air Canada recently reconfigured many aircraft in its fleet, adding seats to increase capacity and generate revenues. As the Alberta economy continues its downturn, expect fares to be periodically reduced in response to these and other economic events, he stated.
Source of data: 2015 Air Canada Annual Report
A portion of Air Canada’s financial statement annotated in DocumentCloud
(click inside the annotation to see the entire document and other annotations)
Source: 2015 Air Canada Annual Report
Despite a banner year, don’t expect Air Canada management to go on a spending spree or its Board of Directors to take a less cautionary approach. Commodity prices such as jet fuel are beyond management’s direct control, as is the exchange rate on the US dollar. How long the windfall savings on the price of jet fuel may last is unpredictable. Investors may decide to cash in their shares or expect a higher sale profit if 2016 performance matches or exceeds that of 2015, while consumers can expect competitive ticket pricing during 2016, if current trends prevail.