July 27, 2018 / 10:30 AM / 5 months ago

UPDATE 2-Air Canada cuts 2018 forecast on two metrics, but bullish on demand

(Adds comments from conference call)

July 27 (Reuters) - Air Canada lowered its 2018 guidance on two key metrics as fuel costs rise, but said it expects to benefit from strong travel demand this year after reporting a higher-than-expected adjusted second quarter profit.

Transborder traffic remains strong, Benjamin Smith, Air Canada's president of passenger airlines said, despite recent trade tensions between the United States and its northern neighbor.

Air Canada said second-quarter traffic rose 8.2 percent and passenger revenue per available seat mile, a key revenue measure for airlines, increased 2.7 percent from a year earlier.

Operating revenue rose 10.8 percent to C$4.33 billion in the quarter, a sign that the future "looks relatively rosy," for demand, Air Canada Chief Executive Calin Rovinescu told analysts.

“That suggests to me that despite all of the fears about the economy, despite all of the price pressures … people are traveling," he said.

Canada's largest carrier now expects to achieve an EBITDAR (Earnings Before Interest, Taxes, Depreciation, Amortization, and Rent), margin of 16 percent in 2018, compared with previous guidance of 17 percent to 20 percent.

The company also now expects return on invested capital (ROIC) of 12 percent in 2018, compared with previous guidance of 13 percent to 16 percent for the year.

Despite rising passenger traffic, airlines are raising fares to offset rising fuel costs, which is eating into margins.

Air Canada's operating expenses rose 13.5 percent and cost per available seat mile - a measure of how much an airline spends to fly a passenger - climbed 5.6 percent.

Rovinescu also said a recent offer with partners to buy back the Canadian airline’s previous Aeroplan frequent flyer program from Aimia Inc for C$2.25 billion ($1.72 billion) was not a "hostile bid."

Air Canada executives declined to provide further economic details of the loyalty program. The carrier said Aimia has until Aug. 2 to respond to the proposal.

Air Canada shares rose 0.72 percent in late morning trading.

On an adjusted basis, the company earned 41 Canadian cents per share, versus analysts' estimate of 28 Canadian cents, according to Thomson Reuters I/B/E/S.

The Montreal-based company, however, reported a loss of C$77 million, or 28 Canadian cents per share, in the quarter ended June 30, compared with a profit of C$311 million, or C$1.13 per share, a year earlier, due to a C$186 million charge on the sale of assets and losses on foreign exchange.

$1 = 1.3068 Canadian dollars Reporting By Allison Lampert in Montreal and Karan Nagarkatti in Bengaluru; Editing by Shailesh Kuber and Marguerita Choy

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