MIAMI — Air Canada posted a whopping loss of C$341 million, or C$1.20 per diluted share, in the first quarter of 2014. The carrier lost C$260 million during the same period of 2013.

** All subsequent figures are in Canadian dollars except where otherwise noted

Air Canada blamed a weak Canadian dollar (loonie) and the effects of particularly nasty winter weather for the loss. Foreign exchange alone cost the carrier $161 million, according to management, while weather contributed another $15 million (net) to the loss.

Total revenues were up $113 million to $3.06 billion, a 3.8 percent year-over-year (YOY) increase from 2013, driven by passenger revenue growth of 3.2% YOY to $2.53 billion. Capacity as measured by available seat miles (ASMs) rose 3.8% YOY with a slight decrease in load factors to 80.3%. Passenger revenue per ASM decreased 0.5% to 15.3 cents, while yields grew .04% YOY to 19.1 cents.

Turning to segment specific results, Air Canada’s results based on geographic region mirrored those of its American legacy peers, though domestic operations did see a sharp PRASM decline of 5.5%, though part of this was due to the increase in trans-continental capacity as a share of total capacity in domestic flying. Adjusted for stage length, we project that the real PRASM decline was on the order of 3.8-4.3%. Still, this figure represents increased competitive pressure from Westjet on key business routes and high yield former-monopoly routes that now face competition from Westjet Encore.

Trans-border PRASM grew 4.0% despite the currency devaluation (though yields grew just 0.3% so the reason likely came due to changes in capacity mix and an increase in load factor). Top-line Atlantic passenger revenue growth came in at a sizzling 8,3% YOY to $406 million, though PRASM grew just 0.7% even as yields grew 7.1%. The modest PRASM growth came because of the massive capacity expansion engendered in part by the successful launch of low-cost arm Air Canada rouge, but the yield and top-line figures are positive signs for the remainder of the year given the historical weakness of Q1. The Pacific was unfortunately a bit of a downer, with PRASM declining 2.8% and yields down 1.6%, mirroring the results from United, Delta, and American and hampered by yield declines on services to Japan (understandable given the yen devaluation) and Hong Kong (more interesting). Latin America and the Caribbean conversely, was an unbridled success despite the impact of withdrawal from Venezuela, with top-line revenue growth of 11.0% to $267.0 million and PRASM growth of 12.9%. South American services in particular was a strong performer, driving an outsized share of the 8.5% yield improvement.

Operating expenses grew 2.3% YOY, driven primarily by currency effects. Fuel expenses grew sharply by 5.5% YOY to $918 million, up 1.6% YOY on a per-ASM basis and positioning Air Canada as one of the only North American carriers to suffer an increase in fuel costs per ASM. On the flip side, Air Canada maintained strong cost discipline during the quarter, with labor expenses growing just 0.9% YOY to $569 million and other operating expenses growing just 2.2% YOY to $424 million. Overall operating costs per ASM (CASM) fell 1.5% YOY to 18.6 cents, while CASM excluding fuel fell an even more heartening 2.5% YOY.

Air Canada ended the quarter with $4.43 billion in adjusted net debt, up from $4.35 billion at the end of Q1 2013. It also ended the quarter with $2.39 billion in cash, cash equivalents, and short term investments, up from $2.21 billion at the end of Q1 2013. Capital expenditures for the quarter came in at $310 million (primarily due to the 777-300ER financing activities during the quarter). while operating cash flow came in at $344 million, leading in part to a decline in free cash flow to just $34 million versus $147 million during Q1 2013. The 777-300ER financing was a one-off event however, and adjusting for the impact of that would have yielded an improvement in free cash flow.

Air Canada’s operating margins improved during the quarter with a narrowed operating loss of $62 million for an operating margin of -2.0% versus $106 million and -3.6% the year prior. Return on invested capital (ROIC) for the quarter came in at 10.7%, up 2.7 percentage points versus Q1 2013.

Overall, we are extremely bullish on Air Canada’s financial prospects. Despite growing domestic competitive pressures from Westjet, the structural changes that Air Canada management is making are paying dividends. Management has shown real commitment to stringent cost discipline, and the execution of rouge, despite some customer mis-communication, has been strong to date.

The first quarter net loss was expected, and adjusting for one off effects, Air Canada’s financial results do reflect these structural improvements. It is no accident that Air Canada’s share price is up sharply year-to-date, and the carrier met its ROIC target range of 10-13% in Q1. Looking forward into Q2 and the full year, we expect Air Canada to be comfortably profitable during both the second quarter and calendar year 2014.