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Air Canada raises forecast as international push pays off

Air Canada, the nation's top-performing industrial stock this year, raised its profit outlook as the airline's international expansion bolsters demand.

[MONTREAL] Air Canada, the nation's top-performing industrial stock this year, raised its profit outlook as the airline's international expansion bolsters demand.

The addition of 16 overseas and US routes is drawing more passengers using Canada as a stopover on their way to other destinations, the company said in a statement Tuesday. Air Canada said it served close to 167,000 people on June 29, a record, while fuel costs and pricing power remained stable in the quarter. 

The increase in customers comes as Air Canada benefits from plans to renew its fleet with more fuel-efficient aircraft such as the Boeing Co 787 Dreamliner, which is driving down costs and improve profit margins. The expansion of the Rouge discount unit is drawing customers and a debt refinancing completed last year also helped reduce expenses.

Earnings before interest, taxes, depreciation, amortisation, impairment and aircraft rent will climb to 17 per cent to 19 per cent of revenue in 2017 and 2018, the Montreal-based carrier said in the statement. The forecast compares with a range of 15 per cent to 18 per cent disclosed May 5.

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"The outlook appears to be very constructive and implies material upside to estimates,'' Fadi Chamoun, a BMO Capital Markets analyst, said in a note to clients. "The results underscore a significantly stronger demand environment than anticipated alongside a very robust execution.''

Second-quarter adjusted earnings of 78 Canadian cents was more than double the 38-Canadian cent average of analysts' estimates compiled by Bloomberg. Revenue of C$3.91 billion (S$4.25 billion) also beat the C$3.79 billion average estimate.

Air Canada has gained 45 per cent this year through Monday, closing at C$19.83 in Toronto. A sub-index of Canadian industrial stocks has advanced 6.4 per cent for the period.

The airline's biggest domestic rival, WestJet Airlines Ltd, also reported quarterly earnings Tuesday that exceeded analysts' expectations. WestJet's profit of 41 Canadian cents a share beat the 27-cent average estimate.

At Air Canada, free cash flow this year will probably be C$600 million to C$900 million, the airline said. That exceeds the C$200 million to C$500 million range projected in May.

At the same time, Air Canada warned anticipated cost savings for through 2018 will fall short of a previously disclosed target. Costs for each seat flown a mile will drop about 17 per cent from 2012 to 2018, compared with a 21 per cent target, the company said.

Air Canada blamed the shortfall on lower-than-anticipated capacity growth and higher non-cash depreciation expenses, as well as "cost increases not anticipated at the time related to the airline's investment in initiatives focused on improving customer service levels.''

The Canadian dollar has gained about 7.7 per cent this year against its US counterpart. Jet fuel and aircraft rent are two expenses denominated in US dollars.