Neha Jain: http://canadaaviationnews.blogspot.com/7

1. Bullish on Canada’s airlines
With Air Canada and WestJet Airlines Ltd. poised to deliver their fourth-quarter results next week, the Street remains bullish on both of the country’s largest airlines despite several headwinds presenting themselves in the months ahead.

Higher fuel prices have been weighing on the shares of both airlines, while the imminent round of labour talks at Air Canada has exacerbated the situation at the country’s largest carrier.

Shares of both WestJet and Air Canada have tumbled roughly 6% since the start of the year.

Rather than be scared off by the storm clouds ahead though, most analysts are urging investors to buy in at current prices.

Crude oil prices have averaged roughly US$84 a barrel in 2011, compared to a $79 a barrel average in 2010, according to International Air Transport Association figures.

But David Tyerman, Canaccord Genuity analyst, said he expects higher fuel prices to be offset somewhat by higher fares, fuel surcharges, and other fees. At the same time, the stronger Canadian dollar should also act as a buffer because jet fuel is purchased in U.S. dollars, and a substantial portion of Air Canada’s debt is in U.S. denominations, he said.

The loonie has gained roughly 4¢ on the U.S. greenback since the third-quarter of 2010. For every one cent gain the loonie makes on the U.S. dollar, Air Canada’s profitability improves by $57-milion a year, or 11¢ a share. While WestJet’s profitability improves by $8-million, or roughly 6¢ a share, for every penny gain.

Meanwhile, Mr. Tyerman also expects both airlines to try to continue constrain their capacity growth in order to raise fares. That trend continued in January, especially at Air Canada, with its load factor increasing half a percentage point to 78% for the month compared to a year ago. WestJet also said it was encouraged by its prices in January.

“The amount of new aircraft being introduced by Canadian airlines has slowed down, while demand continues to recover,” Mr. Tyerman said. “So, buy your tickets for the summer now, or you’re really going to be paying through the nose — if you can even get a ticket.”

Air Canada’s impending labour talks have also weighed on its stock. All of its unions have put increased wages at the top of their agendas. Mr. Tyerman has modelled a 3.4% increase in wage and other benefit costs in 2011 as a result.
But he said there is a chance that the airline might be able to trade improved productivity for those wage increases.

Not everyone is as optimistic about the outcome of those talks. The labour negotiations, combined with higher fuel prices and competitive pressure, caused Walter Spracklin, RBC Capital Markets analyst, to downgrade the stock to a “sector perform” last month. He said there is a risk that Air Canada’s concessions may exceed 3.5%.

“At the very least, we see increased concern being built into the shares from a sentiment perspective until the labour issue is resolved,” he said in a note at the time.

Meanwhile, Claude Proulx, BMO Capital Markets analyst, raised some concerns about WestJet’s aggressive push into sun destinations this winter, which saw its load factor drop a percentage point in January to 77.8%.

“With a significant year-over-year increase in Sun/U.S. leisure destination flying, which typically exhibits higher load factors, it is somewhat concerning to see load factor declining,” he said.

Still, nine of the 10 analysts covering Air Canada’s stock have a “buy” rating on it, while one has a “hold,” according to Bloomberg figures. The consensus price target is $6 a share.

Meanwhile, 10 analyst covering WestJet have a ‘buy’ rating, with two ‘holds,’ and $16.46 a share consensus price target.

2. Dubai races to complete world’s biggest airport

DUBAI—In a land of superlatives — the biggest shopping mall, the tallest skyscraper — construction workers have been toiling in the desert to add one more: the world’s biggest airport.

That’s what Al Maktoum International Airport will be when it’s finished, a monstrous aerial hub with five runways and three sprawling terminals able to handle upwards of 160 million passengers a year.

All this for a country of five million people just slightly larger than New Brunswick.

It’s a dramatic testament to the aviation ambitions of this Arab nation — ambitions that have rankled Prime Minister Stephen Harper, put Air Canada on the defensive and triggered a diplomatic tiff that has cost Canada’s military a strategic staging post in the Middle East.

Right now, the new airport has just a single runway and a passenger terminal. But the plans, like much else in this country, are oversized, reflecting the nation’s strategy to grab a growing share of global air traffic and route it through its airports.

“Many people ask me why the Middle Eastern airports are investing so much in the construction and expansion of so many large airports in such a small geographic area,” said Paul Griffiths, the CEO of Dubai Airports in a speech last year. “Our competition is not local. It is the world market.”

There’s a lot riding on that ambition. A quarter of the country’s gross domestic product of $82 billion is pegged to aviation-related activity. According to Griffiths, fostering the sheikdom’s aviation sector is a “strategic imperative.”

Indeed, across town, at Dubai International Airport—where traffic was up 15 per cent last year — U.A.E.’s sky-high ambitions are even more apparent, notably in the massive double-decker Airbus A380s that move across the tarmac like lumbering whales in a pond of smaller fish.

Emirates, the national airline of Dubai, has ordered 90 of the big jets, able to carry some 500 passengers on flights as long as 15,000 kilometres, including the Dubai-Toronto route.

It’s that very route that has been the flashpoint in relations between U.A.E. and Canada. And it has laid bare the fact that the Conservative government’s free trade agenda doesn’t quite extend to the skies.

At the heart of the tensions is a 2001 agreement that restricts U.A.E.’s airlines to just six flights a week to Canada, currently split between Emirates and Etihad Airways. The two airlines, backed by the U.A.E. government, have been pressing for daily service into Toronto. Emirates would also like to launch service to western destinations like Vancouver and Calgary.

Supporters of the U.A.E.’s demands — and they include Ontario, western premiers, the City of Toronto and even some Conservative MPs — argue the extra flights would be an economic windfall spurring more tourists and business.

Air Canada, backed by the federal Conservatives, has opposed the move, fearing it will lose market share. Indeed, Government House leader and former transport minister John Baird has boldly warned that more Emirates flights would cost Canada “literally tends of thousands of jobs.”

“That’s why we said no,” Baird told the Commons in November, without specifying where those job losses would occur.

To truly understand the fight over access to Toronto, you have to first understand what happens in Frankfurt, where every morning Air Canada jets touch down after night flights from Canada. On-board are passengers going to destinations throughout the Middle East and South Asia. After switching planes in Frankfurt, they’ll be carried there by Air Canada’s Star Alliance partner Lufthansa — a lucrative partnership that benefits both airlines.

That’s traffic both airlines fear losing to Emirates if the extra flights to Toronto ever get the green light.

Not surprisingly, Emirates’ ambitious expansion plans — they have 148 wide-body jets on order, all aimed at the lucrative long-haul market —have run into turbulence not only in Canada but in Europe too, where Lufthansa is opposing a bid by Emirates to increase its flights to Germany.

In Canada, Emirates’ expansion has run up against Transport Canada’s “Blue Sky” policy, which purports to advocate open skies but in fact is a sham, said transportation expert David Gillen.

While Air Canada has long been privatized, he argues that federal bureaucrats and politicians protect the air carrier as if it is still a Crown corporation — even at the expense of consumers and the broader economy, which would get a boost from extra flights.

“All they are doing is trading industrial and tourism jobs for Air Canada jobs. There are all sorts of studies . . . that show the job losses as a result of the protectionist policies,” said Gillen, director of the Centre for Transportation Studies at the Sauder School of Business at the University of British Columbia.

His UBC colleague Tae Oum argues that Canada’s South Asian communities in particular are “paying the price” for Ottawa’s refusal to open up competition and choice. That’s because routing flights through Dubai to India and Pakistan can slice hours off a journey compared to routing them through Europe.

“It would be political scandal actually, if they knew it,” said Oum. “They are paying higher prices and going through inconvenient scheduling.”

Air Canada did not respond to a request for comment.

For now Emirates accepts the “umpire’s verdict” and doesn’t predict extra flights to Canada will be back on the table any time soon, said Andrew Parker, a senior vice-president with the airline.

But he says the airline was the victim of “overblown hyperbole,” notably around the allegation of widespread job losses, which he branded “extraordinary exaggeration.”

“It is very hard to find examples of where progressive sensible liberalization of air services has decimated any flag carrier,” he told the Star.

“It’s just modern competition. BlackBerry gets on and competes around the world with dozens of other phone and software providers as they should, but somehow in the world of aviation we live with this arcane Jurassic system of bilaterals,” Parker said.

“Where is the consumer interest in this whole debate? More competition, better choice, better service, lower prices,” he said.

Emirates’ global ambitions are most easily seen in its operations centre — “heart of the evil empire,” deadpans Parker — where a wall-sized screen depicts a world map and, on it, the position of each of its jets at that moment. Even during a midday lull, more than 100 planes are shown moving across the Atlantic, approaching Australia and clustering like ants between the Middle East and Asia.

It is this rapid growth in just a few years that has put Emirates in the crosshairs of so-called “legacy” carriers like Lufthansa, Air France and Air Canada, who fear losing their passengers to the relative newcomer.

Emirates is focused on what Parker calls the “new trade corridors of the world,” with emphasis on the Middle East, Africa and Indian subcontinent.

“How are people doing business between Canada and the Middle East, the Gulf, India, Africa going to get there? Via Europe is one option

Andrew Parker, a senior vice-president of Emirates airlines, says airline was the victim of “overblown hyperbole,” notably around the threat of job losses, when Ottawa rejected its request for daily flights to Toronto.

3. Air Canada, unions begin contract talks

Contract talks begin this week between Air Canada (AC.B-T3.240.061.89%) and the union representing airport customer service agents and call centre staff, the first in a series of bargaining sessions as labour leaders focus on the carrier’s climb out of its financial hole.

Negotiators for the Canadian Auto Workers union will meet Friday with management amid a business climate in the airline industry that has vastly improved since the last round of talks during the recession in 2009.

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Montreal-based Air Canada narrowly averted filing for bankruptcy protection in the summer of 2009, when management secured pension and labour pacts with the CAW and four other unions.

The CAW’s collective agreement lapses on Feb. 28, while March 31 is the contract expiry date for the rest – the Air Canada Pilots Association, the Canadian Union of Public Employees, the Canadian Airline Dispatchers Association and the International Association of Machinists and Aerospace Workers.

“Our work needs to be valued, appreciated and paid accordingly. Significant wage gains will go a long way to addressing our need for recognition and appreciation,” the CAW said in a newsletter to its 3,800 members. “As the global economy recovers, so too will investments for pension plans. We will be vigilant in protecting our pension plans, as secure pension benefits for our current and future retirees must be maintained. We do not intend to have this round of bargaining sidetracked by pension discussions.”

Industry analysts say new labour contacts will likely lead to increased expenses for wages and pensions in the coming years at Air Canada, which reports its fourth-quarter and 2010 results on Thursday. Chorus Aviation Inc., (CHR.B-T5.100.030.59%) which owns regional carrier Jazz Air LP, releases its financial report on Tuesday.

WestJet’s (WJA-T13.20-0.15-1.12%) board of directors will meet in Toronto this week as the carrier seeks to promote its flights in Central Canada and the East Coast. Calgary-based WestJet announces its results on Wednesday.

With the economy on the mend, Raymond James Ltd. analyst Ben Cherniavsky notes that Air Canada and WestJet should be able to offset rising fuel bills with higher ticket prices.

4. PIA pushing Turkish deal despite serious flaws

ISLAMABAD: The PIA is all set to hit bottom as its top management is vigorously pursuing the idea of having a joint venture with Turkish airlines despite strong reservations of its own finance department and the Ministry of Defence.

Documentary evidence and background interviews with the sources in the Ministry of Defence and the airlines revealed that the mere assumption based PIA-Turkish airlines joint venture will reduce the PIA to a feeder airline, which according to the calculation of airline’s own financial consultants would make more loss than what is already estimated in the 2011 budget.

The Ministry of Defence, which is unhappy with the PIA’s unilateral move to sign a Record of Discussion (RoD) with Turkish airlines, objected that while this joint venture is being pursued under the pretext of getting rid of loss making routes whereas in actual the biggest loss making route — UK sector — does not cover in the proposed venture.

A senior Defence Ministry source said that the PIA management is pursuing the venture following latent pressure and without taking the ministry into confidence. “The RoD was signed between the PIA and the Turkish airlines without our knowledge,” the source said.

Under the proposed venture the PIA management is inclined to surrender to the Turkish airlines almost all its west bound flights with the exception of Paris, UK and Canada. Acting like a feeder or backyard airlines, the PIA management plans to run daily flights from Islamabad, Karachi and Lahore to Istanbul from where the Turkish airlines would take the passengers to their final destinations in Europe and America.

PIA spokesperson Muhammad Tajwar when approached said that the defence ministry did have complaint about the signing of the RoD without its approval but insisted that the ministry is told that the RoD does not mean anything as it is not an agreement. He said that the defence ministry is now being briefed about the details of the proposed venture following which the former has started taking it positively.

Regarding the objections of the PIA’s own finance department, the spokesperson said that the finance department is presently evaluating the scheme.

Tajwar explained that the proposed joint venture has three steps. In step one the PIA would link itself with Turkish airlines for destinations where the PIA does not operate at all. In the second-step, he said the PIA-Turkish airlines cooperation would work for the PIA destinations but only during those days when the PIA does not fly on such destinations. In the third step, the spokesperson said the PIA and Turkish airlines would share those routes, which are loss making for both of them.

In its analysis on the RoD, the Defence Ministry, however, recently found it in contradiction with the PIA’s own business plans besides expressing reservations that how the airlines could go ahead with such a joint venture with a foreign airlines without the approval of the Ministry of Defence.

According to the Defence Ministry’s analysis, total losses for the year 2010 projected in PIA’s business plan were approximately Rs14 billion. These include losses on UK route (27 flights) are about Rs5.9 billion (38%), North American route (USA 5 flights & Canada 3 flights) are about Rs6 billion (39%) and on rest of the European routes about Rs2 billion (13%) (up to July 2010).

The MoD, however, wondered that while the major reason being given in favour of the RoD is the need for PIA to cut down its loss making routes, the biggest loss making route is the UK sector, even with 27 weekly flights, are being retained. By this definition PIA should also be seizing its operations to the UK.

The defence ministry source also shared details of the observations made by the employee unions besides reservations raised by the aviation body — CAA. “Even the financial experts of the PIA are of the view that the airline would lose instead of increasing its revenue from such a cooperation with the foreign airline,” the source said. The source believes that the analysis of the project’s assumptions shows fall in revenues as against what is budgeted for the year 2011. “It would mean that the project will add further to the loss,” the source said, wondering with such a scenario, what is the wisdom in risking global operation of the PIA. From PIA’s own Business Plan, according to the MoD’s analysis, it is evident that all routes/sectors are hugely profitable. But it is only when all other fixed costs, direct and indirect costs are added, the routes/sectors are being shown as loss making. The conclusion that can be drawn is clear. The losses are not owing to operations on these routes. The reasons lie elsewhere.

The MoD also apprehended that there exists no guarantee that PIA would be able to hold on to its share of traffic on the routes it is planning to abandon.

The News has learnt that the management of PIA has claimed on various occasions that it would get 15% of the fare of each passenger from the Turkish airlines for onward flights to Western destinations but this point is not reflected in the RoD.

Moreover sources said that in order to get the deal done, exaggerated assumptions of fare and seat factor have been given by the marketing department of the PIA, which have been challenged by the finance department.

The ministry also pointed out that the PIA has been continuously crying hoarse on the issue of exploitation of 6th freedom traffic by Gulf Carriers and Turkish Airlines, whereas now it is itself planning to facilitate carriage of sixth freedom traffic between East and West, especially for the Turkish Airlines. This would automatically lead to similar demands, which have been forestalled up till now, by Gulf carriers. The ministry though acknowledged that the PIA could negotiate and conclude any commercial or technical arrangement that would be of operational and financial benefit to the airline, reminded the airlines’ management that it could only be done while remaining within the framework of the bilateral arrangement that is negotiated by the government (MoD). According to one source, without even waiting for the approval of the Ministry of Defence, the airlines management is enthusiastic to engage an American company to procure software.

NEHA JAIN

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