Air Canada shares drop as fare revenues stoke concern

By Allison Martell

TORONTO (Reuters) - Air Canada (Toronto:AC.TO - News) shares fell sharply on Wednesday after Canada's biggest airline reported a drop in some closely watched revenue numbers in the second quarter, raising fears that tough competition is weighing on fares.

Macquarie Securities analyst Konark Gupta said a 5 percent decline in yield, a measure of the average per-mile fare paid by passengers, was worse than expected.

"The pricing was quite weak in the second quarter," he said. "I think the market is reading that pricing will likely remain weak."

Shares dropped 6.7 percent to C$12.03, the third-largest percentage fall on the Toronto Stock Exchange's S&P/TSX index.

Despite the yield drop, Air Canada has become consistently profitable after years of losses, bringing operating costs under control. On Wednesday it reported quarterly earnings slightly above expectations, helped by lower oil prices, which may continue to lift profits in the months ahead.

But the airline faces rising competition from rival WestJet Airlines Ltd (Toronto:WJA.TO - News). Once a low-cost carrier focused on domestic markets, WestJet is expanding internationally and wooing business travelers.

Air Canada has also added capacity, which has weighed on some of its financial results.

"I'll address the elephant in the room - our capacity growth," Chief Executive Calin Rovinescu said on a call with analysts and investors.

"As an established carrier with legacy costs, and a great global brand, to compete, we need to grow internationally," he said, adding that every new route must be profitable. The company is focused on profits and return on invested capital, not revenue per available seat mile, Rovinescu said.

Air Canada said it expected adjusted cost per available seat mile, which excludes fuel expenses, to decline 1 percent to 2 percent in 2015, as a weaker Canadian dollar increases some expenses. It had previously forecast a 1.5 percent to 2.5 percent decrease.

This measure edged up to 11.3 cents in the second quarter from 11.2 cents a year earlier. But operating expense per available seat mile dropped 7.6 percent, as lower fuel costs more than offset the currency impact.

A weaker Canadian dollar hurts Canadian airlines, which purchase planes and fuel in U.S. dollars.

Excluding a tax adjustment and other items, Air Canada earned 85 Canadian cents per share in the quarter, slightly above analysts' average estimate of 84 Canadian cents, according to Thomson Reuters I/B/E/S.

Net income rose 33 percent to C$296 million, or C$1.00 per share. Operating revenue increased 3.3 percent to C$3.41 billion.

(Reporting by Allison Martell in Toronto and Sneha Banerjee in Bengaluru; Editing by Sriraj Kalluvila, Frances Kerry and Peter Galloway)