November 8, 2012 / 12:21 PM / 5 years ago

UPDATE 3-Tighter cost controls start to pay off for Air Canada

* Airline forecasts lower fourth-quarter costs

* Third-quarter operating income rises 56 pct

* Stock rises 2.5 pct after results

* Company declines to give details on pension deficit talks (Recasts with comments from conference call, analyst comment)

By Nicole Mordant

Nov 8 (Reuters) - Air Canada reported a bigger-than-expected rise in third-quarter earnings on Thursday as it kept a tighter lid on costs that it said would continue in the fourth quarter, lifting its stock price.

Air Canada, the country’s biggest carrier, said it expected its fourth-quarter unit costs, known in the industry as costs per available seat mile to decrease by between 2 percent and 3 percent from year-earlier levels, excluding fuel costs.

The results and forecast offered evidence that Air Canada’s drive to whittle down its high-cost structure is working, analysts said. Its costs are about a third higher than those at WestJet Airlines Ltd, its biggest domestic competitor.

“They were more efficient and ran better cost savings than we were expecting... We were high on the Street and they beat our numbers,” said RBC Capital Markets analyst Walter Spracklin.

After more than a year of acrimonious negotiations, Air Canada has reached contract agreements with all its labor unions that allow the company to set up a separate low-cost carrier that will pay lower salaries than the mainline carrier.

“With the concessions that they have achieved out of the unions with regards to the low-cost carrier and so on, the cost-side of the equation should get much better,” Spracklin said.

Chief Executive Calin Rovinescu has made reducing costs a key company focus. Air Canada has also won concessions from its pilots to outsource flying to more regional carriers, and has signed new, lower-cost maintenance contracts after its chief maintenance supplier went bankrupt.

Air Canada operating income jumped 56 percent to C$421 million ($421.86 million) in the third quarter from C$270 million a year earlier.

Operating revenue rose 3 percent to C$3.33 billion, while operating expenses, helped by lower spending on salaries and airport navigation fees, fell 2 percent.

Shares in Air Canada rose 2.65 percent to C$1.94 on the Toronto Stock Exchange after the results.

MUM ON PENSION CAP

The company repeated that it is in talks with the Canadian government over an extension of funding relief on its pension plan deficit. Current funding relief expires at the end of 2013.

The deficit stood at a massive C$4.2 billion as of Jan. 1, and analysts have said that funding it under normal rules could threaten Air Canada’s existence.

Company executives declined to provide a timetable for the talks or say what funding relief the airline was seeking.

“There’s obviously a sense of urgency from our perspective and the federal government understands that,” Chief Financial Officer Mike Rousseau said on a conference call.

Air Canada last month won the support of the last of its labor unions in its bid to seek a cap on servicing its pension plan deficit. Bob Orr, from the Canadian Auto Workers union, said Air Canada was approaching the government to “pay C$150 million into the plan” each year until 2024. ($1 =$1.00 Canadian) (Additional reporting by Bhaswati Mukhopadyay in Bangalore; Editing by Saumyadeb Chakrabarty, Roshni Menon and Peter Galloway)

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