Air Canada planes at Pearson International Airport in April, 2021. Skyrocketing jet fuel costs have threatened to push airfares higher.Nathan Denette/The Canadian Press
Air Canada AC-T has suspended its guidance for the year as jet fuel prices remain volatile due to war in the Middle East and the outlook for those costs in the latter half of the year remained uncertain.
Chief executive Michael Rousseau said on the company’s earnings call Thursday that since late February, the situation in the Middle East and rising jet fuel prices have created an external shock for the industry.
“The pace of that increase is testing demand resilience across commercial aviation and reinforcing the need for discipline. This is not unique to Air Canada; it is an industry-wide challenge that affects how airlines think about capacity, pricing and risk,” he said.
“In this environment, our focus is on staying flexible, making deliberate decisions, and managing the business to prioritize returns and protect cash flow and balance sheet strength.”
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Air Canada offered an outlook for the second quarter in light of the suspended full-year guidance.
The airline’s second-quarter guidance reflects an expectation to offset between 50 and 60 per cent of the estimated incremental fuel expense through commercial and cost actions, Rousseau said.
Air Canada now expects adjusted earnings before deductions for the second quarter to come in between $575-million and $725-million.
“Despite fuel-driven fare increases, we continue to see strong demand across the network and throughout the booking curve,” Rousseau said.
The Montreal-based airline reported net income of $48-million during the first quarter, compared with a net loss of $102-million during the same period last year. That amounted to diluted earnings per share of 16 cents, compared with a diluted loss per share of 40 cents during the prior-year quarter.
The airline said it delivered a record first-quarter operating revenue of $5.8-billion, up 11 per cent year-over-year from $5.2-billion.
Rousseau emphasized the airline’s financial discipline in a news release accompanying the results.
“We are committed to maintaining a strong financial footing while delivering long-term shareholder value. During the quarter, we generated $1.8-billion in cash from operating activities, $1.6-billion in free cash flow and repurchased more than $140-million of our shares,” he said.
“This performance reflects our prudent approach to capital allocation and balance sheet management, allowing us to invest in the business, manage debt and return capital to shareholders while preserving financial flexibility.”
About 20 per cent of the world’s crude supply typically passes through the Strait of Hormuz, a narrow waterway connecting the Persian Gulf with the open sea.
But tanker traffic there has all but halted since late February, when the U.S. and Israel began their strikes on Iran. There’s been virtually no change in that situation despite the ceasefire announced three weeks ago.
The supply constraints have driven up crude oil prices, as well as derivatives such as jet fuel.
Skyrocketing jet fuel costs have threatened to push airfares higher.
Earlier this month, Air Canada announced higher baggage fees – to $45 from $35 for the first checked bag in its basic economy class on domestic, U.S. and sun destination flights, for example.
“Looking ahead, we are diligently managing an evolving geopolitical and macroeconomic landscape. Air Canada was one of the first airlines to implement fare increases as the crisis unfolded,” Mark Galardo, Air Canada’s chief commercial officer, said on the earnings call.
The airline also previously confirmed plans to suspend flights, including to New York City’s JFK airport from Toronto and Montreal between June 1 and Oct. 25.
Carriers across the globe have had to trim their flight schedules as ballooning fuel costs render some routes unprofitable.
North American carriers draw largely from refineries in Canada and the U.S. and remain more insulated from the fuel shortages than Gulf-dependent Asia and Europe, but they may find connecting options more limited as airlines abroad cut trips that are less lucrative and ground planes that are less efficient.
In March, the airline also announced plans for its CEO to step down later this year.
The announcement followed Rousseau coming under fire for his failure to deliver a video condolence message in French after a plane crash at New York’s LaGuardia Airport that killed two Air Canada Express pilots.
The airline said in March that Rousseau had told the board he would step down before October and was expected to continue to lead Canada’s largest carrier and serve on its board of directors until they part ways.