Benefiting from improved traffic and lower-than-expected fuel prices

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Air Canada lifted its earnings outlook for 2023 by an additional $1 billion amid improved traffic, stronger-than-anticipated demand for travel and lower-than-expected fuel prices.

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On May 4, the company raised expectations for its annual adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) to between $3.5 billion and $4 billion from the previous $2.5 billion and $3 billion.

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The revised guidance comes ahead of the company’s first quarter earnings report on May 12.

Walter Spracklin, an analyst for Royal Bank of Canada, said demand and pricing after the summer will still be a concern for airlines, but he has commended management efforts to regain post-pandemic footing.

“(Air Canada) is capitalizing on very solid near-team demand trends that are allowing the company to raise prices in excess of rising costs, while benefiting from the drop in fuel prices,” Spracklin wrote in a note to clients May 5.

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Air Canada also adjusted its forecasted operating costs to about 0.5 to 2.5 per cent below 2022 levels from 13 to 15 per cent above 2019 levels. It said the adjustment was due to various changes to expense items, including from higher-than-expected traffic.

In the previous quarter, the airline reported a significant increase in expenses, something that likely weighed on investors, driving the airline’s shares down despite reporting record passenger and operating revenues for that quarter.

At the time, chief executive Michael Rousseau said the environment was challenging due to fuel costs and inflation.

Air Canada will now use 2022 instead of 2019 as a baseline comparison for its 2023 adjusted costs guidance.

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“Given the new cost environment, prior comparisons to the 2019 baseline are no longer as meaningful, and comparisons to 2022 are more appropriate,” the company said.

The airline’s capacity guidance for the year is mostly unchanged.

Air Canada said the updated forecast was prepared under the assumption of moderate gross domestic product growth in 2023.

It also assumes the Canadian dollar will trade, on average, at $1.34 per US dollar for the full year and that the price of jet fuel will average $1.09 per liter.

Air Canada shares fell 2.4 per cent to $18.34 at the close on Thursday.

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