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Air Canada halves capacity as shares drop amid 'severe drop in traffic'


MONTREAL — Air Canada is halving its seat capacity in the second quarter and withdrawing its earnings forecast for 2020 and 2021 amid a "severe drop in traffic" due to the novel coronavirus.

The announcement sent company shares into a tailspin, with the stock plunging by more than 28 per cent or $7.14 to $18.23 — barely one-third of its price two months ago.

Chief executive Calin Rovinescu said Monday that COVID-19 is presenting the airline industry with "unprecedented challenges," adding he is confident Air Canada can weather the storm of cancellations and border closures.

"The crisis facing our industry is worsening as countries around the world adopt increasingly severe measures, national lockdowns and travel restrictions," Rovinescu said in a statement.

The country's largest airline has now suspended or postponed 18 transatlantic routes as Canada announced Monday an entry ban on most non-residents, with U.S. citizens excepted.

Air Canada has also reduced capacity in the Pacific market by 75 per cent, suspending flights to mainland China and cutting back routes to Hong Kong, Tokyo and Seoul as travel fears spread with the new virus.

Rovinescu echoed a call earlier Monday by the Star Alliance Group, which includes Air Canada, for governments and stakeholders to offer assistance to the airline sector.

The International Air Transport Association has also urged governments to support airlines with extended lines of credit and lighter tax burdens. The group on March 5 projected a loss of $113 billion in global carrier revenue from the pandemic's effects.

Since that projection, the European Union has closed its borders to all non-essential travel. Canada has rolled out plans to bar anyone, including Canadian citizens, with symptoms of the virus from boarding flights to this country. And bars, schools and tourist sites have shut down from Montreal to Madrid.

Carriers in Canada and around the world are reeling amid the unprecedented global quarantine.

Effective Tuesday, Toronto-based Sunwing Airlines is cancelling all southbound flights through April 9 to focus on returning customers to Canada.

On Monday morning, the first four repatriation flights departed as Sunwing prepares to bring back 500 Canadians from Honduras, Aruba, Panama and St. Maarten, all of which are shutting their borders to foreign nationals, the company said.

These initial flights will bring over 500 Canadians home from Honduras, Aruba, Panama and St. Maarten, all countries that have announced the imminent closure of their borders. Sunwing is working closely with the governments of all our destinations, in collaboration with Canadian government authorities, to continue repatriation flights in the coming days.

United Airlines said Sunday it would cut scheduled flying in half in April and May, while the parent of British Airways and Spain's Iberia plan to cut capacity by at least 75 per cent year over year this spring.

Air Canada said cost-saving measures will include layoffs. Targeted cost reductions of at least $500 million along with lower jet fuel prices will help the Montreal-based company offset up to 60 per cent of its revenue loss for the second quarter, it said.

Four weeks ago the carrier said it expected a "small increase" in adjusted earnings for 2020, based largely on the assumption that its cancelled routes to China and Hong Kong would be fully recovered by the third quarter.

It had also forecast available seat miles — an airline metric for carrying capacity — would rise by up to two per cent this year, an expectation dashed with Monday's announcement of slashed capacity.

Last week, WestJet confirmed that layoffs of 50 per cent or more are a possibility as the number of flight cancellations continues to mount.

"The current situation is unprecedented and has escalated rapidly in the past week," Mark Porter, an executive vice-president at WestJet, said in an email Friday. "Unfortunately, we also have no alternative but to reduce the number of employees."

Cost-reduction options include cutting back on contractors, freezing capital spending and asking vendors for a discount as well as asking employees to take voluntary leaves and unpaid vacation, WestJet said.

Recent booking-fee waivers by Air Canada and WestJet have failed to stem the tide of cancellations or encourage new bookings as countries halt tourism or impose border controls and domestic quarantines.

Air Canada's CEO is urging the Canadian government to allowed postponed payment of taxes and airport operators to reconsider their landing fees "until the industry stabilizes."

Rovinescu said Air Canada has the cash and investments — about $7.1 billion — and "agility" to navigate the disruption, which he sees as "temporary."

The company originally planned to spend $2.4 billion this year, half of it on 17 Airbus A220 narrow-body airplanes and six Boeing 737 Max jets — grounded around the globe since March 2019 following two fatal crashes.

"Dependent on the impact of the COVID-19 virus, Air Canada will work with its aircraft partners in exploring the potential deferment of aircraft deliveries," the company said.

Air Canada's 24 grounded Max 8s and 26 delivery delays were already presenting higher costs for the company, which has had to spend more on leases for aircraft that are less fuel-efficient while paying about 400 Max pilots who are not trained to fly other jets.

Air Canada also disclosed it has wrapped up discussions with Boeing on compensation for the plane, which governments around the world banned from their airspace after crashes in Indonesia and Ethiopia that killed 346 people, including 18 Canadians.

Air Canada said it will not disclose the terms of the deal due to confidentiality restrictions.

This report by The Canadian Press was first published March 16, 2020.

Companies in this story: (TSX:AC)

Christopher Reynolds, The Canadian Press

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