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Part 1 of 2 - Canadian Airlines Corporation Reports Loss for 1998.

CALGARY, ALBERTA--(BUSINESS WIRE)--Feb. 10, 1999--Canadian Airlines Co(TSE:CA.) (Alberta Stock Exchange:CA.) (VSE:CA.)


Canadian Airlines Corporation today announced a loss of $137.6 million ($3.05 per share) for the year ended December 31, 1998 versus a profit of $5.4 million ($0.12 per share) in 1997. The disappointing results were due to a number of negative factors impacting fourth quarter revenues and costs resulting in a loss in this quarter of $149.7 million, $115.9 million greater than the same period last year. Despite the weaker results, cash and short-term investments at December 31, 1998, was $302.4 million versus 193.9 million one year earlier.

"We are disappointed with the results of the fourth quarter of 1998, but we have taken direct action against the negative factors impacting our performance," said Kevin Benson, President & Chief Executive Officer. "Substantial investment in our products and services has been made in order to attract the high yield customer and we will continue to make improvements throughout 1999. I am confident that given our low unit cost base, these product initiatives combined with the commencement of oneworld (TM); the establishment of other new alliance relationships, including Alaska Airlines; and the major redesign of the Vancouver Hub, will see the results improve significantly during 1999."

Total revenue for the year of $3,171.3 million was an improvement of $93.8 million versus last year. Total passenger revenue increased $76.5 million or 2.9 per cent to $2,751.6 million; however, given the 5.9 per cent increase in consolidated capacity this was far less than expected. The shortfall in revenue was attributable to weakening domestic yields, tough competitive markets in Western Canada and California, lower Japanese revenue due to that country's economic condition, and the temporary loss of the American Airlines designator code from a number of transborder flights. While cargo and mail revenues decreased $8.8 million, contract service and other revenue increased $26.1 million to $184.9 million, an increase of 16.4 per cent over 1997, due to strong Canadian Plus frequent flyer point revenue.

Canadian Airlines' total capacity, measured in available seat miles, increased 5.3 per cent versus 1997 to 23.2 billion available seat miles, primarily due to more efficient utilization of aircraft. Total traffic, measured in revenue passenger miles, increased 4.2 percent resulting in a load factor of 71.9 per cent.

Canadian Airlines' yield per revenue passenger mile was 13.54 cents, a decline of 2.9 per cent versus 1997. This is a result of a global decline in yields experienced by many airlines late in 1998, aggressive pricing competition in Western Canada and California, and the temporary loss of the American Airlines designator code. The loss of the American Airlines designator code and competitive pricing in the California market contributed to a 9.3 per cent decline in yield per revenue passenger mile in the transborder market for the fourth quarter of 1998 compared to 1997.

Canadian Airlines' domestic load factor was 1.5 percentage points higher in 1998, the result of a 3.7 per cent reduction in capacity and a 1.6 per cent reduction in traffic. The reduction in domestic capacity was due to the continued redeployment of narrowbody aircraft into US markets and American Airlines hub structures. This redeployment allowed Canadian Regional Airlines to increase flying in the shuttle markets using F28 aircraft. The redeployment of aircraft increased transborder capacity by 28.7 per cent. International markets saw capacity increase 8.7 per cent with significant growth in the markets of Taiwan, China and the United Kingdom. Canadian Airlines continues to focus on its comparative network strengths: its membership in the oneworld alliance, its extensive codesharing with American Airlines and British Airways and the strong geographic location of its Vancouver hub as a gateway for North America - Asia traffic.

Operating costs increased $212.7 million or 7.1 per cent versus 1997 to $3,193.1 million driven by increased capacity, the introduction of fees from NavCanada, and a weaker Canadian dollar. On a unit basis, operating costs for the year declined slightly in 1998 to 11.34 cents, or approximately 7.5 US cents per available seat mile, despite the negative factors noted. The largest single cost increase was a 45.0 per cent increase in airport user and navigational fees due to the introduction of NavCanada fees. While fuel expense benefited from the lower oil prices experienced throughout 1998, flying volumes and the weak Canadian dollar largely offset this benefit, resulting in a moderate 4.3 per cent decrease to $450.0 million. Also, the continuing weakness of the Canadian dollar relative to the US dollar significantly impacted aircraft rentals, maintenance and material costs, the AMR services fee included under Other, and interest expense.

Throughout the second half of 1998 and into this year, the Corporation has undertaken a number of key initiatives to increase revenues and lower costs, the benefits of which will be seen later in 1999:

- The introduction of significantly improved onboard products including French-style meal service to Business Class passengers featuring the Chefs' Conclave, new state-of-the-art seats in the Airbus A320 fleet, and an expanded offering of power to the seats and telephones.

- The opening of the Vancouver and Toronto domestic Empress Lounges as part of Canadian Airlines' lounge enhancement program.

- The launch of the "Proud Wings" image, which will include a new aircraft livery, refurbished aircraft interiors and new uniforms for all staff, in order to package the airline's many new customer service and product enhancements.

- The announcement of the oneworld global alliance including American Airlines, British Airways, Cathay Pacific and Qantas in September 1998, led the way for the February 1, 1999 launch, a culmination of training and technological efforts that will offer benefits to customers well beyond the reach of individual airlines.

- The expansion of alliance relationships, including codesharing agreements with Alaska Airlines, Horizon Air and Reno Air on West Coast routes, and new relationships with Cathay Pacific and Japan Airlines on Pacific routes.

- The finalization of a major Vancouver hub redesign that will triple connections in North America, Asia and the South Pacific in the spring of 1999. City-pair connections will increase from 525 to over 1500.

- The redeployment of aircraft from poor performing routes, including Vancouver-San Jose, Vancouver-San Diego and Vancouver-Las Vegas, to more profitable routes.The establishment of the MTU Maintenance Canada Ltd. engine maintenance facility in Vancouver, BC, in partnership with DaimlerChrysler Aerospace, in order to lower repair costs and take advantage of the expertise of this industry leader.

- The addition to the fleet of two late model B767-300ER aircraft and two new B767-300ER aircraft in 1999 which will replace four older DC10-30 aircraft.

- The introduction of a Navigation Services Surcharge on all tickets to recoup a portion of the charges from NavCanada.

Canadian Airlines is a founding member of oneworld - a new customer-driven global alliance. Together with American Airlines, British Airways, Cathay Pacific, Qantas Airways, and oneworld's first new recruit Finnair, Canadian Airlines serves over 600 destinations worldwide, including more than 300 destinations in North America.

N.B. Please see attached Year End Summary for a complete review of issues and strategic initiatives underway for 1999.


WHEN: February 10, 1999
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- Globally, the airline industry is seeing a continuing trend of decreasing yields -- passengers paying less for tickets.

- Canadian Airlines has made attracting the high yield, business traveler its top priority, and has introduced new products and services in 1998/99 including: new Vancouver Empress lounge (December 3, 1998), renovated Toronto Empress lounge (January 19, 1998), installation of Millennium seats and Power to the Seat for laptop computers (ongoing), Chefs' Conclave inflight restaurant cuisine (November 17, 1998), Executive Platinum level for frequent flyers (March 1, 1998), online Internet booking, improved scheduling and new routes to key business destinations.

- All of these products and services are encompassed in a new airline image called "Proud Wings" including new uniforms, exterior logos and interior decor. The focus is on providing business travelers with a friendly, comfortable environment and exceptional service. Very frequent business travelers account for 0.5 percent of Canadian's passengers and almost 40 percent of its revenues.

- The program will cost $38 million over two years, to be recouped with a gain of one percent of the $2 billion annual domestic business travel market.


- Canadian Airlines has an extensive codesharing agreement with American Airlines (AA). This means that AA-coded Canadian-operated flights show as preferred flights and connections to agents booking AA passengers into Canadian Airlines markets.

- The AA code was removed from most of Canadian's transborder routes in June 1998 due to a dispute between American Airlines and its pilots.

- The most significant impact occurred on routes to/from American Airlines' hubs (Vancouver-Dallas, Toronto-Dallas, and Vancouver-Chicago) where the AA code has attracted customers to travel beyond American Airlines' hubs on Canadian's aircraft. Canadian flew into the US 40 times daily in the last half of 1998 without the AA code.

- As of January 1, 1999, the AA code is back on all of Canadian's transborder flights. Canadian has seen an immediate increase in traffic, particularly on flights into Toronto and Vancouver.


- Prior to1998, air navigation service was provided by the Canadian Government and paid for through the Air Transportation Tax . NavCanada implemented a new system of charging back to airlines in 1998.

- Canadian Airlines paid $79 million to NavCanada in 1998 for the provision of this service, and expects to pay $131 million in 1999.

- In January, Canadian announced a Navigation Services Surcharge for domestic, transborder and international travel, in an effort to recoup a portion of the NavCanada charges. CANADIAN DOLLAR

- Canadian pays aircraft leases, aircraft parts, fuel and other costs in U.S. dollars. The 1998 decline in the Canadian dollar cost Canadian tens of millions of dollars, even with lower fuel prices.

- Each one-cent drop in the Canadian dollar costs Canadian $1million a month; for 1998 Canadian forecast a 71 cent US dollar.

- The value of the Canadian dollar against the U.S. dollar appears to have stabilized. Canadian has built a more conservative rate into the 1999 Plan, and has undertaken a more aggressive hedging program.


- Canadian's revenue performance in the California market has been eroded recently following Alaska Airlines' aggressive pursuit of West Coast routes - focusing in particular on the Vancouver market - with low fares and increased capacity.

- To maintain frequency advantage and market share, Canadian responded to Alaska's frequency increases with equal or greater increased frequencies. The result to Canadian was decreasing yields. - Canadian Airlines has completed an agreement with Alaska Airlines. This will maintain Canadian's presence in Vancouver, increase passenger flow to Asian routes and allow the airline to move aircraft to more profitable routes.


- In 1998 Canadian identified an opportunity to build on the success of the Vancouver Hub by adding five new banks of flights in Vancouver.

- The Vancouver Hub expansion will take effect in April 1999, effectively tripling the number of possible connections (from 500 to 1500) for passengers originating in or transiting through Vancouver. - While Japan traffic and revenue will likely remain flat through 1999 Canadian will work with Japan Airlines and Cathay Pacific to increase traffic and yields.

oneworld ALLIANCE:

- In September 1998, Canadian announced its alliance partnership with four of the world's top airlines: American Airlines, British Airways, Cathay Pacific, and Qantas.

- oneworld will make global travel easier and encourage and facilitate the seamless travel of Canadian's passengers on partner airlines and their passengers on Canadian. With integrated information systems and procedures in place, business travellers at home on one of the oneworld airlines, will be treated as a top customer on all of them.

These significant product and service enhancements, introduced throughout the last half of 1998 and the beginning of 1999, are expected impact Canadian's financial outlook by the summer of 1999.
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Publication:Business Wire
Geographic Code:1CANA
Date:Feb 11, 1999
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