Archives for May 7, 2019

The federal government has started to give away money to encourage people to buy electric cars, but before long it will have to decide how far it will go to force the market towards lower-emission vehicles.

The electric vehicle rebate program launched May 1, giving up to $5,000 back to buyers to help them afford zero-emission vehicles which have higher up-front costs but long-term financial and environmental benefits.

Ottawa, however, is still thinking about whether it will stick with ambitious future emission standards, which would potentially add up-front costs to all vehicles sold in Canada with the promise of lower emissions and long-term savings.

A decision is needed because the U.S. Trump Administration has said the requirements are too stringent and will be lowering them.

Canada has matched U.S. standards since 2011, and will have to decide whether to match new U.S. requirements expected to be announced in late spring or early summer, or to align itself with California and other states that have vowed to maintain the current standards.

Canada’s auto industry has urged the government not to create separate emission standards for Canada and the U.S., while environmental groups say maintaining the current regime is crucial to meeting climate change targets.

The federal government is still in consultations, but it says it is open to following California in maintaining the current standards.

“Canada is looking at following the actions of California and other like-minded U.S. states as we move forward on Canada’s mid-term evaluation,” Environment and Climate Change spokesman Mark Johnson wrote in an email.

“Clean cars are a key part of Canada’s climate plan to fight climate change,” he said.

A decision on whether to maintain the standards, which call for making cars about five per cent more efficient per year, and light trucks 3.5 per cent and later five per cent per year, will come as Canadians increasingly buy larger, heavier vehicles.

The trend towards SUVs, crossovers and pickups that make up the light truck category has helped make Canada’s 2017 vehicle fleet the most fuel hungry per kilometre in the world, according to the International Energy Agency.

It found Canadian vehicles sold in 2017 consumed an average of 8.9 litres for every hundred kilometres, ahead of the 8.6 litres per kilometre in the U.S., 7.9 in Australia, and about 5.4 in France, Turkey, and India.

Since existing regulations will increase stringencies on light trucks, it’s crucial that Canada keeps the current standards in place, said Annie Berube, director of government relations at environmental group Equiterre.

“The bulk of the emissions reductions that we’re getting from those vehicle regulations are from models years 2020 going forward, because of specific technological developments and because the regulations are getting a lot more stringent.”

The shift to bigger vehicles has, however, made it harder for auto companies to meet the increasing standards, which are based on the average of everything they sell.

Industry is pushing for an easing of regulations, but is still committed to continued improvement, said Mark Nantais, president of the Canadian Vehicle Manufacturers’ Association.

“The industry is still looking for year-over-year improvement, and the question is just whether the slope of that line will be as steep as it was,” Nantais said.

Bank of Canada governor raises possibility of mortgage-backed securities in speech to Winnipeg Board of Trade

Bank of Canada governor Stephen Poloz says it’s time for fresh ideas when it comes to Canadians’ mortgage options.

In a speech Monday in Winnipeg, Poloz said changes could include encouraging loan terms longer than five years, the creation of a market for private mortgage-based securities and the launch of shared-equity mortgages for first-time home buyers.

More innovation would help boost flexibility for borrowers, lenders and investors, while also lowering risks in the financial system, Poloz said.

“To be clear, the system is not broken — it has served Canadians and financial institutions well,” he said in prepared remarks during his speech to the Canadian Credit Union Association and Winnipeg Chamber of Commerce.

“But we should not stop looking for improvements and I invite all of you to join this effort.”

3 key housing-market stories

Poloz is making the recommendations as he monitors three key housing-market stories — the oil-slump-driven slowdown in Alberta and Saskatchewan, the steep drop in resale activity in Toronto and Vancouver, and steady growth in many other parts of Canada.

Looking ahead, he predicted the overall Canadian housing sector to start growing again later this year as the Vancouver and Toronto markets stabilize.

In a news conference following the speech, Poloz offered more details about his take on the two big housing markets.

Poloz said the fundamentals — like population growth and job creation — in those cities have been “really strong” and he expects they’ve “put a floor” under the adjustment process. The still-low interest rates remain quite attractive, he added.

He credited the tougher mortgage guidelines, which brought in interest-rate stress tests, for working as they were designed. They helped improve the quality of loans and stop the speculative increase in house prices in Vancouver and Toronto, he said.

Poloz predicts buyers affected by the stress tests will return to the market in search of less expensive homes, while some will wait until they’ve saved more for a down payment.

“All those conditions give you confidence that it’s a matter of adjustment and, after that, a return to normal growth,” he said.

On his request Monday for more brainstorming on the mortgage marketplace, Poloz said he’s wondered why so few changes have been introduced in his lifetime.

In its spring budget, the federal government announced it would create shared-equity mortgages as a way to provide interest-free loans from Canada Mortgage and Housing to help first-time home buyers. The plan, if implemented, would also encourage a lift in housing supply as new homes would qualify for more CMHC aid, Poloz said.

The government is expected to lay out more details on the proposal later this year.

Poloz said the plan would help make the financial system safer because mortgage risks would be shared between the borrower and the lender, though CMHC would have an equity stake in the home.

In another example, he suggested there should be more work to promote the merits of fixed-rate loans longer than five years. Only two per cent of all fixed-rate mortgages issued in 2018 had durations longer than five years, he added.

For borrowers, longer terms would mean they would have to deal with fewer renewals, reducing the risk that they will face higher interest rates. Policy-makers would also benefit from the increased stability related to fewer renewals.

He said there’s some momentum in Canada towards the creation of a private market for mortgage-backed securities. Poloz said it would provide a more-flexible source of longer-term funding for mortgages not insured by CMHC. 

They would have to be designed carefully, he said, because mortgage-backed securities were central to the “sub-prime debacle” ahead of the financial crisis more than a decade ago.

HBC shut Home Outfitters and looking at other alternatives in drive for profitability

Hudson’s Bay Co. says it’s pursuing strategic alternatives for its Lord & Taylor business, including a possible sale or merger.

HBC says Lord & Taylor had $1.4 billion in annual revenue in 2018.

The Lord & Taylor chain has more than 40 stores in the northeastern and mid-Atlantic regions of the United States as well as its online business. The Bay retail stores also carry the Lord & Taylor  line of women’s wear.

HBC chief executive officer Helena Foulkes says the retailer is exploring options to position itself for long-term success.

“Over the last year, we’ve taken bold actions and made fundamental fixes that have resulted in a far stronger, more capable HBC, having returned to positive operating cash flow, increased profitability and strengthened the balance sheet,” Foulkes said. 

The retail chain is thinking about selling some units and reconsidering strategy after lacklustre results in the past 18 months.

HBC previously announced in February that its Canadian retail banner, Home Outfitters, will be discontinued and its 37 locations will be closed this year and that about 20 Saks Off Fifth locations will be closed in the United States.

Foulkes says Lord & Taylor remains committed to serving customers across its stores and digital channels throughout the review.

Simulator training could lead to swifter resumption of Max service when the grounding ends

Air Canada topped expectations in its latest quarter, but said Monday the Boeing 737 Max grounding and political tensions between Canada and China weighed on its results.

“The impact on our unit cost is expected to increase the longer the grounding persists, particularly heading towards the busy summer season,” chief financial officer Michael Rousseau said.

He cited a reduction of seat capacity of between three per cent and four cent due to the grounding, which continues across the globe as the Max jetliner’s flight control system remains under scrutiny following two deadly crashes.

Less fuel-efficient replacement aircraft and the cost of extended plane leases will also hurt the bottom line, Rousseau said.

Chief commercial officer Lucie Guillemette said Canada’s ongoing dispute with China stemming from the arrest of Huawei CFO Meng Wanzhou last year has hurt travel demand between the two countries.

“However, reallocating capacity from China to other markets has helped mitigate the impact,” she said on a conference call with investors Monday.

8,000 flights cancelled

Air Canada cancelled a total of 8,000 flights last quarter, 1,600 of which were on its higher-revenue mainline routes — a 40 per cent increase in mainline cancellations from the first quarter of 2018, chief executive Calin Rovinescu said.

The airline’s 24 Max 8 jetliners comprise about 20 per cent of its narrow-body fleet and carry between 9,000 and 12,000 passengers per day, he added.

Adjusted cost per available seat mile, a key industry metric, increased 3.2 per cent. The rise was caused in part by the grounding, which affected the final 18 days of the first quarter, executives said.

Transport Minister Marc Garneau recently said he’d like Canadian pilots to undergo simulator training related to the 737 Max software revision, a step beyond an FAA-appointed board’s proposal for computer-based training.   

Air Canada says it is the only North American airline with Max simulators, which could lead to swifter resumption of Max service when the grounding ends.   

“These pilots are not just sitting around sort of doing nothing. We’re actually able to have some simulator training for them…including having modeled some of these scenarios that occurred in the two accidents,” Rovinescu said.

Some of the pilots who usually fly the 737 Max have also been assigned to other planes.

Safety concerns continue to hang over the Max aircraft after Boeing said a safety alert sensor malfunctioned on an Ethiopian Airlines flight last March and a fatal Lion Air crash off the coast of Indonesia in October. The two flights, both on Max 8s, killed a total of 346 people, including 18 Canadians on board the Ethiopian Airlines flight.

Favourable foreign exchange

The Montreal-based carrier said Monday it earned $345 million or $1.26 per diluted share for its first quarter, compared with a loss of $203 million or 74 cents per diluted share in the same quarter a year ago.

Air Canada said the results included foreign exchange gains of $263 million in its most recent quarter compared with foreign exchange losses of $197 million in the first quarter of 2018.

On an adjusted basis, the airline said it earned $17 million or six cents per diluted share in the quarter compared with an adjusted loss of $26 million or 10 cents per diluted share a year ago.

Operating revenue rose to $4.45 billion compared with $4.07 billion in the first three months of 2018.

Analysts on average had expected a loss of 18 cents per share and revenue of nearly $4.39 billion for the quarter, according to Thomson Reuters Eikon.