(The following story by Scott Deveau appeared on the Financial Post website on March 25, 2010.)
OTTAWA — With the economy back on track, it’s high time investors become bullish on Canada’s transportation sector, according to National Bank Financial.
“What we know is that trains, trucks and planes are witnessing a recovery in volumes and very early signs of pricing improvements,” said David Newman, the bank’s transport analyst. “It’s time to climb aboard and enjoy the ride especially given the efforts of these companies -all of these companies -in cutting costs.”
Even the most pessimistic in the sector are starting to talk about a year of growth.
Canadian Pacific Railway Ltd., long cautious about a possible pullback, has acknowledged its customers are starting to express optimism about 2010.
“We still see a lot of uncertainty out there,” said Kathryn McQuade, CP chief financial officer. “[But ] it’s the first time in the last couple of weeks that we really started seeing a little more optimism.”
By contrast, Canadian National Railway Co. has been much more rosy since its volumes started to improve in recent months. While the railway said business has been “lumpy” as shipments return, it still expects to see a significantly stronger 2010 than last year.
“It is clearly a good start to the year, but we’ll have to see how it evolves,” said Luc Jobin, CN chief financial officer. “The good news is the revenue side of the equation is showing healthy signs of a gradual recovery.”
Volumes are improving at such a rate that JP Morgan upgraded its earnings estimates for all North American rails last week, including those of CN and CP.
Canadian railways have also managed well through the recession by offsetting drastic drops in shipments with aggressive cost cuts.
Canadian airlines have managed to do the same, but are now starting to see both passengers and prices return as well.
Air Canada set a goal to improve its balance sheets by $500-million by the end of 2011 through various cost and revenue initiatives. To date, the carrier has managed to improve its books by $256-million. But Michael Rousseau, chief financial officer, said it won’t stop once the $500-million mark is reached.
Air Canada still has about a 30% cost disadvantage to WestJet Airlines Ltd., which is why most on the Street still prefer WestJet.
The Calgary carrier has also plotted an aggressive expansion that includes partnering with other international carriers to help fill its planes.
Jazz Air Income Fund, the regional affiliate of Air Canada, has also focused its attention on growth this year. Roughly 99% of Jazz’s revenue is derived from its capacity purchase agreement with Air Canada, whereby the main line purchases almost all of its seats and sells them back onto the market.
Joseph Randell, Jazz chief executive, said there are no restrictions in the CPA to limit his carrier from partnering with another carrier to charter flights.
To that end, Jazz has been in talks with players like Direct Save Holidays, a packaged-tour operator expected to launch this November in Canada.
Jazz is also interested in possibly taking an equity stake in another regional player, perhaps in Asia or Latin America, Mr. Randell said.
Regardless, he noted, Jazz should continue to appeal to investors because it is one of the only carriers in the world to offer a distribution -60¢ a unit annually -something he said would likely remain in place even if the company decides to convert to a corporation later this year.