Turbulent times for WJ ahead?

[Fanblade]

Is it me or is this thread quite odd? Yeah yeah we all know it's me.

Matrix why the exuberance and relief over someone saying AC is doing crappy. I don't get it.

Realitychex,

Do you believe that net income is a good portrayal of a companies profitability? It contains a bunch of one time items not really related to the core profitability of a business. Save one IMO. Interest expence. Rarely is interest a one time expense. Usually it is simply a cost of doing business. In my house it is.

Because of this I like to take adjusted net income minus interest expence to quickly asess profitability. Fair enough? Quick fast and easy. In AC's case that would be about a billion for the full year 2015 and an improvement from 4Q 2014 to 2015. There is a very large 3/4 of a billion foreign exchange loss for 2015. Also a large foreign exchange loss from 4Q 2015.

Foreign exchange gains and losses have very little to do with core profitability. Any savvy investor would see straight through using foreign exchange gains to overstate profitability.

Why now use foreign exchange losses to understate it?

[Fanblade]

Something is driving those unit costs up to 16 cents a mile over a 1,495 mile average sector when WJ's are 13 cents on an 877 mile average sector. Why is WJ's BELF a full 10% points lower than AC's, even with RASM that is 13% points lower? If it it's not RASM, it has to be CASM.

So what is it?

That something is absolutely CASM.

Lets say you are the CEO of AC. You need to undo a small jets business plan that was a bust. Regional costs off the charts. How long would it take you to get financial legs under the company and then right size the fleet?

5 years? 10?

It's a slow go and you know it. The biggest part of the cost transformation with be from fleet right sizing. That has only just begun.

What I don't get is why the sensitivity to AC starting to perform better. Why is that so threatening? As I said WJ is a great company. If AC could get half way to their margins I'd be happy.

[brooks]

So out of interest, I dig out our new contract while watching timezones slide by, and run the just announced 2015 financial results in to the profit sharing formula. Unless I really blew the math, my profit sharing cheque will be about $16K, just a hair under a months salary. So Brooks et all, for some reason my money losing airline is going to pay me (and 3300 other pilots) a big profit sharing check.

You're probably right sportingrifle. Yourself and all the other 3,300 AC pilots should get that fat cheque for all the hard work you have done. Even if your company doesn't pay income taxes and has a giant white elephant of debt, you guys and the rest of the big wigs in Montreal deserve a big fat profit share cheque.

[fish4life]

Before everyone starts firing more shots, I would love to see pilots for both companies cashing profit sharing checks it means they are both doing well which is good for everyone.

[Lateralus]

This thread is beyond stupid. Pilots thinking they know how to run companies always makes me chuckle. All the CEOs are in the flight decks and Avcanada apparently. Who knew?

[jjj]

Lateralus,

FYI - one of the main posters in this thread did run a very successful airline. Let's not make assumptions about people by what they post on here. Notwithstanding that - I'll take a Big Mac, fries and a Coke please.

[Realitychex]

Is it me or is this thread quite odd? Yeah yeah we all know it's me.

Matrix why the exuberance and relief over someone saying AC is doing crappy. I don't get it.

Realitychex,

Do you believe that net income is a good portrayal of a companies profitability? It contains a bunch of one time items not really related to the core profitability of a business. Save one IMO. Interest expence. Rarely is interest a one time expense. Usually it is simply a cost of doing business. In my house it is.

Because of this I like to take adjusted net income minus interest expence to quickly asess profitability. Fair enough? Quick fast and easy. In AC's case that would be about a billion for the full year 2015 and an improvement from 4Q 2014 to 2015. There is a very large 3/4 of a billion foreign exchange loss for 2015. Also a large foreign exchange loss from 4Q 2015.

Foreign exchange gains and losses have very little to do with core profitability. Any savvy investor would see straight through using foreign exchange gains to overstate profitability.

Why now use foreign exchange losses to understate it?

I never include "below the line" foreign exchange gains and losses or interest income when assessing profitability and margins.

But interest expense? You bet I include it.

Banks need to be paid for the use of their money so airlines can buy / finance the aircraft required to generate revenues. No airplanes. No revenues. Banks tend to get very ornery when they don't get paid. Things start to disappear.

Financing a US$44m airframe with $8m cash down, a 15 year term at 4% will result in interest charges of about $67,000 a month over the term of the deal. Those are "dollars out the door". Pretending that interest isn't a cost of operating the business is patently absurd.

If you have a 5 year $500k mortgage at 4%, you're paying about $1,000 a month in interest and $1,388 in principle redemption.

If you make $5k take home a month, and for the sake of simplicity, you spend $750 a month on food, $750 on your car, $750 on other living expenses and $750 on miscellaneous stuff, and you only include the $1,388 principle redemption of your mortgage, your "operating costs" are $4,388 a month and your "profit" is $612 a month. Woo hoo!

The only problem is you still have to cut the bank a check for the $1,000 a month in interest. If you don't, no more house.

Lo and behold, that $612 "profit" is, in truth, a $388 loss. If you won the lottery and are sitting on some cash, you can run your household at a $388 loss for as long as there's cash in the bank. But unless you continue to win the lottery, or you are able to increase your monthly pay check without increasing any of your other costs, you'll eventually run out of benjamins.

Pretending the interest you are contractually obligated to pay isn't part of your monthly "operating costs" is not only absurd, but fiscally reckless.

All airlines do it, which is why when assessing profitability, they are all treated equally.

[Fanblade]

I never include "below the line" foreign exchange gains and losses or interest income when assessing profitability and margins.

I agree completely by the way.

However why are you now bashing AC's 2015 and Q4 numbers using a foreign exchange loss then?

[Realitychex]

I never include "below the line" foreign exchange gains and losses or interest income when assessing profitability and margins.

I agree completely by the way.

However why are you now bashing AC's 2015 and Q4 numbers using a foreign exchange loss then?

What part of "I never include below the line foreign exchange gains and losses or interest income when assessing profitability and margins" don't you understand?

4Q 2015

AC Revenues: $3.182m
Expenses: $3.024m
Interest Expense: $112m
Operating Earnings: $46m
Operating Margin: 1.45%

The $159m Forex loss (or gain when the C$ goes the other way), is NOT included. I also didn't include a further $27m of "Net financing expense relating to employee benefits"

WJ Revenues: $958.7m
Expenses: $846.0m
Interest Expense: $12.9m
Operating Earnings: $99.7m
Operating Margin: 10.4%

[Fanblade]

Oh I get the concept very well. If you remember I brought it up.

Read what you wrote on the previous page. A 2.2% profit margin using .................?

A 3/4 of a billion foreign exchange loss in the calculation.

Air Canada's net profit, after paying no income taxes for the second year in a row, was $308m on revenues of $13.89B, .........That's a 2.2% profit margin after tax, (and remember, AC didn't pay any income taxes in 2015, or 2014, for that matter...).

AC lost $116m in the most recent quarter, compared to a $100m loss in 4Q 2014 last year.

I wasn't asking you about the concept. I wanted to know why in this instance you chose to not use your normal methodology.

Although your statements are accurate, they are also misleading. Your including a massive foreign exchange loss that you have already acknowledged isn't relevant to core profitability.

Why?

[Fanblade]

4Q 2015

AC Revenues: $3.182m
Expenses: $3.024m
Interest Expense: $112m
Operating Earnings: $46m
Operating Margin: 1.45%

The $159m Forex loss (or gain when the C$ goes the other way), is NOT included. I also didn't include a further $27m of "Net financing expense relating to employee benefits"

Exactly.

AC's margin was positive in Q4 2015 when using your normal methodology. It was also an improvement over Q4 2014. AC's full year 2015 margin was far far higher than the 2.2% using your normal methodology. 7%ish I would guess.

I like the no tax touch too. Suggesting that alone might put the numbers underwater.

Go back to the previous page and read what was written by the poster who quoted you immediately below your comments.

[Realitychex]

[quote="Fanblade"][quote="Realitychex"]

Very well.

2015

AC Revenues: $13.87b
Expenses: $12.37b
Interest Expense: $402m interest
+$105m Net Financing Expense relating to Employee Benefits
Operating Earnings: $989m
Margin: 7.13%
BELF: 76.9%
CASM: 15.8 cents
ASL: 1,545 miles (Stage length increases 3.2%, casm decreases, yield per mile decreases).

WJ Revenues: $4.03b
Expenses: $3.46b
Interest Expense: $53.7m
Operating Earnings: $516m
Margin: 12.8%
BELF: 69.8%
CASM: 13.1 cents
ASL: 910 miles (Stage length decreases 2.7%, casm increases, yield per mile increases).

For the record, the industry produced a margin of 10.6% with a BELF of 74.7%.

For Canadian-based airlines, it's pretty obvious from 4Q numbers that 2015 was, more than likely, the high water mark. There's a lot of ugliness out there.

WestJet and AC are both exposed to the domestic malaise. WJ has very limited exposure to US trans-border business traffic malaise, and will add to the suffering when Boston is added next month and those $1.70 a mile yields drop to about 75 cents, just as they did after WJ launched LGA a few years ago. Sun traffic, surprisingly, seems to be holding its own for both carriers, but at the expense of yield. That's where having much lower costs is the savior.

WJ has no exposure to the various segments of international malaise that has gone unreported. Outta sight, outta mind.

Asia yields are very, very low. Brazil is in rough shape. A pitched battle is being fought on Edmonton to Europe, which could easily spread beyond Edmonton and the transatlantic jewel in the crown will lose a lot of it's luster for the incumbents starting in a couple of months.

I doubt there would be many who'd suggest that, at least for Canadian domiciled airlines, 2016 results will supercede 2015 numbers. When the elephant gets the flu, it impacts everyone in the jungle.

However, when things start to slip-slide away, it's better to start from a cushion of almost 13% margins than with 7% margins.

If WJA margins fall 10% points from 13%, the company can continue status quo in perpetuity with 3% margins. Not great, but no danger of failure.

Should the malaise result in AC margins falling by 10% pts from 7% resulting in -3% margins, an operating loss approaching $400 million a year occurs, well over a million dollars a day. That sort of scenario has always resulted in some pretty significant alterations to the program.

Neither are happy scenarios. One would hope the weakness will not result in margins dropping anywhere near 10% points.

But that being said, I'm pretty sure I know who's boots I'd prefer to be wearing right now as the various execs look through the murk in search of the bottom.

[Lateralus]

Lateralus,

FYI - one of the main posters in this thread did run a very successful airline. Let's not make assumptions about people by what they post on here. Notwithstanding that - I'll take a Big Mac, fries and a Coke please.

I'm well aware of who is Realitychex is and his role in Westjet. He is the only one that seems to know what he is talking about and yet is still shit on by people here.

[matrix]

Matrix why the exuberance and relief over someone saying AC is doing crappy. I don't get it.

Sorry that's not what I meant. I'm very interested in the business side of airlines. I don't have the background to really dig through the financials like he does. I look forward to his analysis every quarter. I think he cuts through the spin and I think gives the best picture of the true financial health of the airlines.

[Fanblade]

Matrix why the exuberance and relief over someone saying AC is doing crappy. I don't get it.

Sorry that's not what I meant. I'm very interested in the business side of airlines. I don't have the background to really dig through the financials like he does. I look forward to his analysis every quarter. I think he cuts through the spin and I think gives the best picture of the true financial health of the airlines.

He absolutely has the ability to do so. I always read his post when I come across them for the same reason.

What bothered me was watching his balanced view all of a sudden disappear.

[Fanblade]

Lateralus,

FYI - one of the main posters in this thread did run a very successful airline. Let's not make assumptions about people by what they post on here. Notwithstanding that - I'll take a Big Mac, fries and a Coke please.

I'm well aware of who is Realitychex is and his role in Westjet. He is the only one that seems to know what he is talking about and yet is still shit on by people here.

He certainly is knowledgable. Like I said I read everything I come across of his. Still do. You know why?He challenges my perceptions of AC's financials and the industry at large. Everyone including me has some bias. The AC CFO has his, the AC CEO has his. For this reason a critical eye is helpful when, as Realitychex pointed out to one poster, "You are only looking at the number they are pointing you towards." it's good to have your perceptions challenged.

Realitychex isn't immune to his own biases either as demonstrated earlier in the thread. He should be challenged on them. Simply following without questioning is a bad idea.

Cheers.

[scopiton]

what's funny is how all of a sudden people listen when they're being told who's the poster. the same posters were mocking Rcheck's post before that.
what's freaking out is that who is still able to distinguish rant from sound knowledge on this forum ?

[TheStig]

For Canadian-based airlines, it's pretty obvious from 4Q numbers that 2015 was, more than likely, the high water mark. There's a lot of ugliness out there.

WestJet and AC are both exposed to the domestic malaise. WJ has very limited exposure to US trans-border business traffic malaise.

I'm going to disagree with your doom and gloom post. For starters, what trans-boarder business traffic malaise? You seem pretty comfortable making assertions about Air Canada's yeilds on what can only be assumptions (unless WJ has figured out a way to spy on AC's yield management;) I certainly don't have specific figures either, but I find it really interesting how Westjetters have such a die-hard belief in Air Canada's impending demise. Of coarse, we're all subjected to daily internal propaganda, however, I've been through a number of ups and downs and what's going on now is up. Not to say things couldn't come crashing down, but you're describing doomsday and what seems to be going on are some soft spots.

Air Canada for all its faults has been very good at managing it's capacity (growth) and since 2012 maintaining a profitable load factor. The narrative is that with rouge, the airline has a tool it can use to compete with WJ, not to mention US carriers. AC is focusing on diversification, attracting US originating/destined and international traffic to connect through Canadian hubs as it limits exposure to the Canadian economy and currency fluctuations. Well, that's what the propaganda tells me anyways.

WJ has no exposure to the various segments of international malaise that has gone unreported. Outta sight, outta mind.

However, and this is where the thread started. Westjet has HUGE exposure to the Alberta economy! That must be a bit of a concern? I'm told WJ is shifting capacity east, but if the airline had seen easy money to be made east of YYZ that capacity would have already been deployed there. It will be interesting to be how Encore competes with Porter in this market.

Asia yields are very, very low.

This is why AC has launched 787 service out of YVR to China, and 777 HD to HKG.

Brazil is in rough shape.

Yes. South America isn't going to be popular this year.

A pitched battle is being fought on Edmonton to Europe, which could easily spread beyond Edmonton and the transatlantic jewel in the crown will lose a lot of it's luster for the incumbents starting in a couple of months.

I need to pay better attention I thought AC cancelled YEG-LHR last winter over some spat regarding IcelandAir billboards?

I doubt there would be many who'd suggest that, at least for Canadian domiciled airlines, 2016 results will supercede 2015 numbers. When the elephant gets the flu, it impacts everyone in the jungle.

I'm going to suggest AC will generate a larger profit in 2016. There someone said it, besides the full effect of falling fuel prices wasn't realized in 2015.

But that being said, I'm pretty sure I know who's boots I'd prefer to be wearing right now as the various execs look through the murk in search of the bottom.

I know too, I'd rather not have 40% of my annual income depend on corporate profits and company shares.

[altiplano]

The thing with Realitychex is that while he may be up on it, he's always gotta be right and he'll tell you all about how right he is. And he won't back down on it - no matter what. Thus he will always slant his argument to support his bias.

Plus he's got a boner on taking out the trash with AC - literally.

Hardly unbiased analysis... Maybe some points, yes, but too much shilling his agenda and stock options - whether it's against Air Canada or his favourite regional monopoly that was destined to fail 5 years ago...

[Realitychex]

It's not hard for any number of entity's to track fares on a consistent and systematic basis to uncover trends that might not otherwise be noticed by external observers. It's by no means perfect, but when "when it looks like a duck and walks like a duck", well, you know the rest.

As an example, YVR-HKG has been a mess for a while now. Advance purchase yields are always low, but they are usually topped up by much higher yields within 7-10 days of departure. This has not been occurring for a while.

I can purchase a last minute round- trip departing YVR for HKG tomorrow to attend an important meeting and be back by the weekend for a base fare of about $1,000. A couple of years ago, the fare would be double that. Nobody's cost have dropped 50% in that window. Something's gotta give.

A seat from Vancouver to Winnipeg and back the same days is going for about $125 less, and it's about 1/6th the distance.

Why are the fares so cheap? The likely answer is there is way too much capacity in the market and the various airlines have opened up the buckets to maintain share.

That's what happened on YVR-LAX as someone poured on the capacity and drove fares as low as us$57 on the north bound leg. At one point a little while ago, Delta loaded and briefly sold $0 fares as a warning shot on that route.

When an airline operates with a 66% system break even load factor, runs with 94% loads thru the summer and pulls out of the market, it's pretty obvious what's going on. They aren't withdrawing because it's too profitable.

Recent data suggests that route may be stabilizing. I wouldn't be surprised to see Alaska back by the summer of 2017.

Then there's YYZ-JFK, which operates with common rated fares to LGA, using lower cost regional jets, where service is being cancelled even the the route ran with loads pushing 90% last summer. I've never seen an airline cancel a route because of it being too profitable.

You can look at YEG yourself. Last minute fares to European destinations have been significantly lower than fares from YYC for a while now. Check out what it costs to fly YEG-FRA tomorrow for a week vs YYC-FRA. There's a difference of about $800.

And lest anyone forget, WJ had 100% exposure to Alberta and BC in the late 90's when oil was in the tank and Glenn Clark and the BC NDP were working their magic. WJ managed ok then, certainly a lot better than their two domestic competitors.

There's no question there's a rough patch ahead. Like the tide, it tends to rise and fall equally for all.

As was pointed out in a recent edition of a very influential, US based, subscription weekly airline newsletter, discussing a major legacy airline's recent announcement to no longer issue monthly traffic data:

"First of all, riddle me this. Would an airline that expects to do well in 2016 do this? No."

I guess we'll watch this all unfold.

[altiplano]

I can purchase a last minute round- trip departing YVR for HKG tomorrow to attend an important meeting and be back by the weekend for a base fare of about $1,000. A couple of years ago, the fare would be double that. Nobody's cost have dropped 50% in that window. Something's gotta give.

A couple years ago fuel would have been double and there would have been 100 seats less on the aircraft...

(YYZ-JFK) I've never seen an airline cancel a route because of it being too profitable.

Airlines consolidate operations all the time. The region is still well served thru EWR & LGA and has better connectivity with United through their hub. In fact United pulled entirely out of JFK last year.

Bloomberg: United Pulls Out of JFK

Check out what it costs to fly YEG-FRA tomorrow

Who flies YEG-FRA?

lest anyone forget, WJ had 100% exposure to Alberta and BC in the late 90's when oil was in the tank and Glenn Clark and the BC NDP were working their magic. WJ managed ok then

Oh the glory days. Keep telling them man. It was a special time. Do you really think the landscape then is comparable to today?

There's no question there's a rough patch ahead. Like the tide, it tends to rise and fall equally for all.

While I generally agree, a diversified market will blunt much of the pain caused by the Alberta advantage here in Canada for those operators positioned such. It's a big world.

[Realitychex]

Keep an eye on the forest, not the trees.

[altiplano]

Keep an eye on the forest, not the trees.

Exactly.

It's a big world

[mbav8r]

Realtychex wrote;
As was pointed out in a recent edition of a very influential, US based, subscription weekly airline newsletter, discussing a major legacy airline's recent announcement to no longer issue monthly traffic data:

"First of all, riddle me this. Would an airline that expects to do well in 2016 do this? No."

So, your opinion is that CR is lying about his reasoning, to be fair, I've never considered CEOs to be a honest bunch but if the goal is to remove some volatility from stock this seems logical to me.
http://business.financialpost.com/inves ... -investors
"Air Canada’s decision to stop providing capacity guidance was a shot across the bow at short-term investors, but the shrapnel is hitting long-term investors too.

The airline’s stock fell for the second day in a row Thursday after it said it will no longer release capacity forecasts and will also stop providing monthly operational data. The stock has now lost 15.9 per cent of its value since Tuesday.
CEO Calin Rovinescu was blunt about his rationale for reducing guidance, saying he’s “not running this company for the benefit of short-term investors.”

This next article I found interesting, never looked into the source but seems well researched and well, fits into my bias, enjoy!
http://www.fool.ca/2016/02/20/3-reasons ... mpetition/
"Yet more international expansion?

Nearly two-thirds of Air Canada’s revenue is from the company’s international routes outside the country. This has shielded the airline from the slowdown in Alberta, where demand for travel in and out of the province has declined significantly.

Looking ahead to the next year, the company stated that nearly 90% of all capacity growth is expected to be from the international markets the airline serves. Larger aircraft that were used in Alberta during the growth years can be re-deployed to other routes that are seeing growth, such as in the eastern side of the country."

[rudder]

The market is never wrong.

AC and WJ shares are being hammered because at a time when spot fuel pricing is at an unexpected and unusual low, the yields are still not trending upwards. That means a shortage of demand either because of overcapacity or a questionable underlying economy.

The US legacy carriers are declaring profits in the $billions$. Meanwhile, the 2 largest CDN carriers are still battling over a relatively small marketplace and adding double digit capacity in to a weakening economy.

The market wants to see increasing yields and capacity discipline. And the market wants to see statistical transparency.

So for now, it would appear that both CDN airline stocks will languish until the market gets the news that it wants to hear. All of the rhetoric and cheerleading on this and other sites will not change that.