Air Canada Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 11, 2023

There are 16 speakers on the call.

Operator

Morning, and welcome to Air Canada's Second Quarter 2023 Results Conference Call. All participants are in a listen only mode. After the speakers' presentation, we will conduct a question and answer session. As a reminder, this conference call is being recorded. I would now like to turn the call over to Valerie Duran, Head of Investor Relations.

Operator

Thank you. Please go ahead.

Speaker 1

Thank you, Julienne. Hello. Welcome and thank you for attending our Q2 earnings call of 2023. Joining us this morning are Michael Russo, our President and CEO Mark Gallardo, our Executive Vice President of Revenue and Network Planning and John Deibert, our new Executive Vice President and CFO. Welcome on board, John.

Speaker 1

Also in the room today are Pierre Melon Wexler, Executive Vice President and Chief HR Officer and Public Affairs Marc Bergeau, Executive Vice President and Chief Legal Officer Mark Nasr, Executive Vice President of Marketing and Digital and President at Aeroplan And Kevin O'Connor, Senior Vice President, Global Airports and Operations Control. To begin, Mike will give us a brief overview of the quarter. Mark will talk about our revenue, network and demand trends, and John will touch on financial performance and guidance before turning it back to Mike. Following this, we will take questions from equity analysts. Our comments and discussions today may contain forward looking information about Air Canada's outlook, Objectives and strategies that are based on assumptions and subject to certain risks and uncertainties.

Speaker 1

Our actual results could differ materially from any stated expectation. Please refer to our forward looking statements in Air Canada's Quarter news release that is available on aircanada.com and on SEDAR. And now, I'd like to turn over the call to Mike.

Speaker 2

Great. Thank you, Valerie, and good morning to everyone. Thank you for joining us. And John, welcome to Air Canada. I look forward to seeing your leadership help our entire company and the finance organization continue to excel.

Speaker 2

Our quarterly operating revenues reached 5,400,000,000 up 36% from the Q2 of 2022. Operating income totaled $802,000,000 A year over year improvement of over $1,000,000,000 Adjusted EBITDA of $1,200,000,000 was up by more than $1,000,000,000 as well We'll see in the period last year. Our adjusted EBITDA margin reached 22.5%. We carried more than 11,000,000 customers over the quarter. That is a 23% greater than in the same period of last year.

Speaker 2

Traffic growth outpaced capacity growth with an impressive system load factor nearing 88% in the quarter. And this continues. Our load factor reached almost 91% in July, reflecting the overall strong summer demand. Passenger revenues totaled $4,900,000,000 about 42% higher than a year ago. As we look ahead, advanced passenger bookings remain solid for the balance of 2023 and now into Q1 2024.

Speaker 2

Mark will expand on the demand environment in his remarks. I thank the entire team for their dedication to customer service and for collaborating with our partners who also share the responsibility of ensuring a smooth customer journey. And I congratulate all employees on delivering a strong quarter and recently winning some very important awards. These include the recognition of our people spirit and expertise at the 2023 SkyTrax World Airline Awards in June. For Canada, our employees won the Best Airline Staff and Best Airline.

Speaker 2

Air Canada Rouge also won SkyTrax Best Low Cost Airline And Air Canada received the inaugural Global Awards of World's Most Family Friendly Airlines. These are significant as they mark us as a leader in leisure travel. We're all very proud of these awards, But no, there's still work ahead of them. We had more employees trained, better coordination with our key ecosystem partners And improved tools in last summer, which resulted in strong operational results in both April May. Yet our June July operations were not at expected levels due to several factors.

Speaker 2

We are increasing our efforts to protect the customer journey from disruption regardless of the cost. This includes using any influence we have in such instances as positive attrition at our principal regional partner or global supply chain issues We're working to mitigate the effects of situations beyond our control, such as increasing disruptive storm activity in our key hubs and markets. We are confident that our efforts will generate positive outcomes. Cost discipline and deleveraging remain top priorities for us And John will cover both in more detail. We ended the quarter with $9,600,000,000 in cash

Speaker 3

and cash

Speaker 2

equivalents and investments. That includes an early repayment of $650,000,000 in EDC loans in the quarter. Our cash position enables us to competently execute our business plans, Move forward with new initiatives and continuously invest in customer service. I thank our customers for entrusting their travel to us And for the loyalty, we're more determined than ever to deepen this loyalty through elevated customer service. And Mark, over to you.

Speaker 4

Thanks, Mike, and good morning, everyone. We're pleased with our 2nd quarter performance. We owe these results to the effectiveness of our network diversification strategy and to a strong performance in several areas, And we're excited with what we're seeing ahead. For Q3 2023, we plan to increase Air Canada system wide capacity by roughly 11% from the same quarter in 2022. For the full year, we are looking at a year over year capacity increase of about 21% versus 2022.

Speaker 4

Let me get back to our results. Passenger revenues reached $4,900,000,000 in the quarter. These results stem from the strength in passenger demand for a wide ranging international network, record 6 Freedom revenues and continued Aeroplan redemption stream. In the quarter, we saw year over year gains in yield and unit revenues across the board. Domestic performed expectations and our transborder revenues grew 36% from the Q2 of 2022 on a 21% capacity increase.

Speaker 4

6 Freedom revenues were above what they were in the 2nd quarters of both 2022 2019. In fact, Q2 2023 was the strongest 6 Freedom quarter Air Canada has ever seen. This traffic is an important contributor to our diversification As it evens out some traditional seasonality peaks and valleys. We believe that we're still in the early phase of reaching our full potential in leveraging 6 Further to a strong 6 Freedom performance, our transborder network performed above expectation, anchored by the initial success of our joint business arrangement with United Airlines. This allowed us to start new routes such as Toronto, Sacramento and in many cases Restore pre pandemic frequencies to a variety of routes on the transborder network.

Speaker 4

We're particularly pleased with our international performance, representing about 70% of the year over year increase in passenger revenues. Demand for transatlantic services was stronger as compared to last year, Translating into a 19% capacity growth and a 9 percentage point increase in load factor. This year, we restored services, increasing frequencies in certain destinations like Toronto, Rome and Toronto, London and launched new routes on the European market, including Montreal to Amsterdam, Toulouse and Copenhagen. We're pleased with the results from our new routes, which met or exceeded expectations. We saw strength in leisure demand, particularly to markets in Southern Europe.

Speaker 4

Our strategic partnership with Emirates led to very strong results on our Dubai route, and the outlook for transatlantic demand continues to be favorable in the second

Speaker 2

half of twenty

Speaker 4

twenty three. In the Pacific, we more than doubled our capacity to that of last year. We restored services to Osaka from Vancouver In fact, we restored more than our full 2019 capacity to Japan. The high loads on the Pacific reaching a 93% load factor reflect continued strong demand. The growth in capacity and traffic led to strong RASM deal gains, even though capacity to China remains limited.

Speaker 4

Our Pacific Passenger revenues increased 2.5 times compared to the Q2 of 2022. We also announced new services such as Vancouver to Singapore and Dubai, demonstrating our commitment to rendering Vancouver as a global international hub for Asia Pacific travel from North America. Our comprehensive network, which is bolstered by our strong international presence, I was well positioned to capture the demand we're seeing. Air Canada Vacations continue to see strong demand for leisure travel. I want to underscore that this demand is an important barometer of leisure demand sentiment, and this indicator continues to be favorable as compared to both 2022 2019.

Speaker 4

Another indicator of strength in projected future demand is Aeroplan's continued record growth rates, which deliver proportionally strong travel redemptions. We recently unveiled our most extensive winter sun schedule With added frequency and capacity to popular destinations like Cancun, Los Cabos and Punta Cana. In fact, We are increasing our capacity from all of our major hubs to certain destinations this winter. Air Canada Cargo expanded its network in the quarter, And as we saw with our peers, our cargo business experienced lower volumes End yields in the Q2 of 2023. This was somewhat expected given the normalization in cargo yields from extraordinary highs at the beginning of the pandemic.

Speaker 4

Bill, we made good progress, expanding our fleet to 6th graders from 3 that we had at the end of 2022. We're closely watching how this market evolves to capture strategic opportunities. Our overall cargo diversified revenue stream can also set offset some of the seasonality in the past year's events. Now over to you, John. I look very much forward to working closely with you.

Speaker 4

Thank you.

Speaker 5

Thank you, Mark. I'm thrilled to join you, Mike and Valerie on this call and I'm excited to work with all of you. It's truly a pleasure to speak with you today. It's exciting to join this dynamic industry as well as the passionate and talented Air Canada team. I'm grateful for the warm welcome that I've received, and I'm looking forward to building strong relationships with all of you.

Speaker 5

Welcome to the results. Mike spoke to our financial performance generally and Mark touched on our strong passenger revenues. So I'll begin with our Q2 operating expenses. These totaled just over $4,600,000,000 for the quarter, Increasing 9% from the Q2 of 2022, primarily due to the higher levels of flying and customers we saw in the period. The increase was partially offset by an 18% decline in aircraft fuel expense, stemming from a 31% decrease Jet fuel prices from the same period in 2022.

Speaker 5

Overall, 2nd quarter adjusted CASM was $0.133 Roughly 1.6 percent in the Q2 of 2022. The unit cost was impacted by higher passenger service costs From increased traffic and higher selling costs, which are directly correlated to greater revenues and the year over year growth in full time equivalent employees. In fact, you'll have noticed that wages, salaries and benefits grew 24% in Q2 2023 from the same period a year ago. This reflects a 22% growth in full time equivalent employees year over year As we rebuilt our operations throughout 2022 and hired and trained people to prepare for this summer. We have now reached the stable levels and employee turnover has normalized to historical rates.

Speaker 5

As we continue to grow the airline and add capacity, You can expect to see meaningful improvements in productivity. Our optimized and efficient fleet is essential for our strategy. In the Q2, we added 1 Boeing 787-nine and 1 Airbus A330. Our 2nd quarter delivered strong free cash flow of $965,000,000 $537,000,000 more than the same period In 2022, we ended the quarter with $10,600,000,000 in total liquidity and a leverage ratio of 1.7, Down from 5.1 at the end of last December. Our strong cash flow and liquidity position allow us to fund our future Thanks to deleverage, and we've been paying down where it makes the most sense.

Speaker 5

The recent EDC loan prepayment and The repurchase in 2022 of Sun Air Canada's outstanding 4% convertible senior notes results in a combined reduction About $72,000,000 in annual interest expense. Now let me turn to our full year expectations and provide some color As we update our guidance, our first half performance was strong. We entered to the second half with good visibility, Given $5,700,000,000 in advanced ticket sales, continuing strength in demand and notwithstanding some headwinds that lie ahead, A good view on cost. As such, we are raising our lower end and narrowing our range on full year EBITDA guidance to between $3,750,000,000 $4,000,000,000 We also modified our adjusted CASM guidance for 2023 To reflect our revised full year capacity assumptions and to adjust for various expense items due to the evolving cost environment, We now expect full year adjusted CASM to land roughly within 0.5% to 1.5% Above 2022 levels. Notwithstanding the fact that this is a full year number, I can tell you that leading into Q2, We have made good sequential progress.

Speaker 5

We also expect to continue to see further productivity improvements flow into our cost structure In preparing our updated 2023 guidance, we assume that the Canadian dollar will trade On average, dollars 1.34 per U. S. Dollar and the price of jet fuel will average CAD1.08 per liter for the full year 2023. Going forward, we have taken a position to hedge A portion of our Q3 fuel, you can refer to our public disclosure file for information on this. As for our 2024 targets, we are not providing updates at this time.

Speaker 5

We will continue to evaluate them as we progress with our plans and execute on our strategy through the second half of twenty twenty three. Let me now turn it back to Mike.

Speaker 2

Thank you. Great. Thanks, John. We're now in the middle of our busiest period of the year. Our load factors are high this summer, which while positive also adds complexity to running an airline when disruptions occur.

Speaker 2

In advance, we've made extensive preparations like hiring more people And changing our schedule to reduce our traffic peaks and smooth customer flows to some degree. Our employees are more experienced than last summer. This has contributed to our operational stability. Our flight completion level and baggage delivery ratios are stable, And we continue evaluating and making adjustments to protect the customer journey. The air travel ecosystem comprises many persons And we're doing our part to help each partner fulfill their roles for which they're accountable.

Speaker 2

We've seen significant improvement in industry metrics over the last summer. And together, we are committed to strengthening the system. We are doing so while navigating through an evolving regulatory environment, which is affecting crew availability and ultimately our flying schedule. We welcome the opportunity to work with Canada's new Transport Minister, at Lourdes Lucas to bolster the air transport sector. There are many critical files such as the production of staff in Canada to The net 0 by 2,050 ambition, the need to invest in airport infrastructure to safeguard operational efficiency and support GDP growth, as well as ensuring airport costs become more competitive with global competitors.

Speaker 2

This last matter continues to be a challenge with the recently announced review of the passenger protection regulations and increased costs to be borne by the industry. Our user pay model is not appropriate for the current environment. We've taken other steps that are reinforcing our operation, Securing interim lift, including by partnering with PAL Airlines and signing a wet lease arrangement with Omni. But we're also looking further ahead. We have continued to diversify our network, shifting capacity to where we can generate better returns on our aircraft, like the new international routes Mark spoke to.

Speaker 2

Our partnerships like the one with Fly Dubai are key as these will expand customer choice when flying between Canada and the world. We anticipate increased immigration will continue to strengthen the vibrant visiting trends and relatives market and contribute to trade, furthering corporate travel opportunities. We're also transforming the way we sell and distribute the product By introducing new modern technology options for the travel agency community and additional choices for our joint customers. These capabilities are supported by IATA's new distribution capability or NDC. During the quarter, we expanded our successful long standing partnership with Amadeus and we announced a strategic distribution and retailing agreement with Sabre.

Speaker 2

These arrangements combined with other elements of our strategy are already delivering substantially lower distribution costs. Additionally, they'll enable us to scale continuous pricing, dynamic offers and other exciting revenue optimization strategies in the quarters ahead. Our digital investments now extend throughout the customer experience. This includes increasing the use of technology such as expanding our biometric facial recognition most recently in our contact centers. And we've begun renovating cabin interiors on our narrow body fleet, upgrading our Wi Fi and in flight entertainment offerings And launching exclusive original program like Mattel and Apple TV plus We're elevating the customer experience through key investments, including new lounges, a Maple Leaf Lounge in San Francisco and a new Aspire Air Canada Cafe at Billy Bishop, Both opening to great reviews from both customers and the media alike.

Speaker 2

We've also added facilities at Newark Liberty with colocated language within the United Club, a novel model that further builds upon our successful Transporter joint venture. Aeroplan is a key component of customer loyalty, continues to grow at a record levels on all key metrics. This success opens incredible opportunities and throughout the quarter Aeroplan launched key initiatives for mobile engagement. This included new and expanded partnership with Bell, Parkland and Uber for groceries. Aeroplan's success was affirmed at the prestigious Freddie Awards,

Speaker 5

We're at

Speaker 2

led North American Loyalty Programs winning Airline Program of the Year, Best Promotion and Best Redemption Ability. Another aspect of loyalty is a premium that customers place on corporate responsibility. And throughout the quarter, we announced several initiatives to advance our ESG goals. 1 is our partnership with the in service aircraft for global observing systems Regos, an international research organization that uses commercial aircraft as a platform to monitor climate data. Through this agreement, we are outfitting an Airbus A330 aircraft with special diagnostic sensors.

Speaker 2

We also announced agreements to purchase sustainable aviation fuels in San Francisco and Amsterdam from Neste. Apart from reducing emissions, these agreements also demonstrate the viability staff is important to our industry. Once again, we urge governments in our country to be part of the global opportunity. We in Canada need to recognize the potential of staff, both commercially and for our environment and invest appropriately In the development of these fuels as other countries do. We look at corporate responsibility as a whole and are focused on all aspects of our business, Our people and the communities in which we live and work.

Speaker 2

To this end, we continue to pursue our diversity, equity and inclusion policies and initiatives. Our accessibility plan is an example of this, affirming our commitment to enhance accessibility for our customers and employees with diverse abilities. And we're very proud to contribute to Canada's objective to be barrier free by 2,040. We're also pleased to continue with one of our most popular community activities. Air Canada operated 3 Dreams Take flight missions in the 2nd quarter, flying children from Winnipeg, Halifax and Toronto to Florida To experience a trip of a lifetime, another 5 such flights are scheduled for the rest of the year.

Speaker 2

The Air Canada Foundation continues to elevate communities in Canada. In the Q2, it dispersed the $1,600,000 that raised last year to Canadian charities to help children spread their wings. I invite you to visit the foundation's website and read its recently published impact report to get an in-depth look at the magnitude of its reach. As these examples show, aside from producing solid financial results, Air Canada has a significant positive impact on our communities and does a lot of good for all stakeholders. This is ingrained in our core values of care and empathy and contributes to our employees' commitment and motivation to work hard We are very pleased to meet expectations, even when we face difficulties.

Speaker 2

It cannot be said often enough how proud we are of this. We are determined to rise higher in an increasingly complex industry and environment, continuously striving to meet Thank you to our employees, our investors, our customers and our suppliers. Their support is key for securing a bright and sustainable future. And with that, I'll turn it back to Valerie.

Speaker 1

Thank you, Mike, and thank you all for joining us this morning. We're now ready to take your questions. Should you require further details following this call, our Investor Relations team is available for support. Back to you,

Operator

In the interest of time, we ask that you please limit yourselves to one question and one follow-up. Thank you. Our first question comes from Helane Becker from TD Cowen, please go ahead. Your line is open.

Speaker 6

Thanks very much, operator. Hi, everybody, and thank you very much for the time. So I just have a couple of questions. The first question has to do with cargo. We're seeing FedEx and UPS in the U.

Speaker 6

S. And we're seeing cargo volumes declining. You mentioned that in your prepared remarks. I'm Just wondering, is it too aggressive to have 6 aircraft in service and maybe 3 was right? Or how are you really thinking about cargo over the next And then I have another unrelated question.

Speaker 4

Sure. Good morning, Galena. It's Marco Oroz speaking. So on the cargo for your piece, it's important to note Our strategy here is more long term focused and the strategy is meant to be resilient to go through the ups and downs of what the cargo market is. So to that extent, we're taking the longer term view.

Speaker 4

And the view of the freighters is basically to bring freight into our Hudson Connected onto our And we see a lot of good long term prospects in that strategy to really optimize our bellies On our passenger business, so to that extent, although we have some challenges near term, Focus is really medium to long term on this business.

Speaker 6

Okay. That's helpful. And then the other question actually came from a client this morning. I was and I know this to be a fact too. I was looking at on time performance and Air Canada tends to be in the bottom half of the crowd.

Speaker 6

Not sure if North American Airlines, not sure how impactful that is, but when you think about your operations And you think about your customers, what's the compensation you have to do? And how are you Thinking about improving on time performance in an environment where things are really busy.

Speaker 2

Good morning, Helane. This is Mike. So That's a big question and something that we're very, very focused on. First of all, there are compensation rules under the If we are here in Canada, if we're delayed by more than X number of hours, we pay customers Much like Europe and in fact there's some changes going into APPR right now that will make it much more aligned to European model. That's one aspect and we obviously fulfill our obligations under that system.

Speaker 2

We We're spending a lot of time improving our on time performance. And again, April May were very solid. June July for a whole bunch of reasons, a lot uncontrollable like severe weather in Toronto, Montreal and the East Coast The United States where we have large franchises affected our OTP. But we're Powering through that and building in more resiliency into the operation. So and I've spoke in my prepared remarks about some of the things we've already done and we will continue to elevate That strategy and certainly an objective of ours is to continue to improve OTP, So that we are we don't have articles like we had yesterday morning.

Speaker 6

Okay. That's very helpful. Thanks, Mike.

Operator

Our next question comes from Kevin Chiang from CIBC. Please go ahead. Your line is open.

Speaker 7

Hi, good morning. Thanks for taking my question. Maybe if I could just turn to your guidance and I know this is Maybe overly simplistic, especially given all that's happening as you come out of the pandemic and maybe have a labor Negotiations are coming in the back half of the year. But if I look at historically, at least pre pandemic, Your Q3 EBITDA was anywhere from 1.6 to 1.7 times what you did in Q2 versus more than double. If I apply that seasonality, it seems like you're tracking at the very upper end of your guide and maybe through it, Depending on how summer plays out, which sounds like it's very strong.

Speaker 7

Just wondering how I should think about the puts and takes as to maybe why historical seasonality or that range Might not hold or maybe it's just conservatism in your outlook or maybe it's a little bit of a buffer because of the labor negotiations. Just If you can frame how you think about the back half of the year given what you've done in the first half of the year?

Speaker 2

Good morning, Kevin. It's Mike. I'll start with a couple of comments and I'll turn it over to John for some further comments. We provided guidance for a long time from the company and obviously our objective is to ensure that we make the guidance. There are a lot of factors involved in putting the guidance together.

Speaker 2

It's an evolving environment, as I said in my prepared comments. Q2, the work that Park and others have done here has allowed us to do better in Q2 Especially with the 6 Freedom traffic that is typically more beneficial to Q2 than it is to Q3. And so that's a good thing from a seasonality perspective, from our perspective. So that's issue number 1. And then issue number 2, We are seeing rising fuel prices.

Speaker 2

And so we had to ensure that we recovered the sensitivity of rising fuel prices. But John? Yes. I think, Mike,

Speaker 5

you covered in the comment on Q2. I think that Q2 was It was an exceptionally strong quarter and it's true that seasonality is always the case that Q3 will come up quite stronger than Q2, but Q2 here this year was very strong. And I think from that point of view, applying maybe the 1.6 wouldn't Totally apply in the same way that you may have done so in the past. So when you look at full year guidance, I think Mike You understood it well. We've moved up the range because we feel strongly that the demand environment is holding the way we expected.

Speaker 5

The first half performance Ben, has been quite good and Q2 has given us the confidence to move up the range. But I'm not sure that the 250 space that we've left, I think is the right one.

Speaker 7

Okay. No, that's great color. Maybe if I could just follow-up on the cargo question. You discussed the 767s you have, but does what's happened in the cargo market recently? Have you rethinking What your plans are for the 777s that come in next year and beyond?

Speaker 7

Do you think you need to add more capacity on top of what you have? Like does the long term

Speaker 2

Kevin, this is Mike. So like Mark said to the question from Eileen, it's a long term play from our perspective. And there is a strong synergy about putting product or cargo From our freighters onto our narrow bodies to go across Canada and into the U. S. And so we see that as a very, very viable business Yes, as we go forward.

Speaker 2

Again, listen, Q2 like Other cargo operators was not very strong. We expected some decline post pandemic And we had budgeted that frankly and expected that. So we're going to continue to add capacity over the Next little while per our business plan and we're comfortable that we can make efficient use of that capacity.

Speaker 7

Perfect. That's it for me. Thank you for taking my questions.

Operator

Our next question comes from Fadi Chamoun from BMO Capital Markets. Please go ahead. Your line is open.

Speaker 3

Good morning. Thank you. And John, welcome to these calls. I have a question on the CASM. I'm not sure how to characterize it, but ultimately I'm trying to think about If there is a way for you to explain to us how much of these CASM inflationary pressures are Kind of core inflation in wages and kind of overall economy and how much of these pressures on CASM we're seeing are a function of just the Aviation ecosystem being underperforming in its normal fluidity.

Speaker 3

And And John, I think you talked about potential for productivity gain going into like how should we think about the trajectory of Your CASM in a more fluid or kind of normalized environment, how much of the increases in that CASM in the last A couple of years as you ramped up capacity has been a function of those maybe transitory issues longer term.

Speaker 5

Yes. Thanks, Fady. So I think more color will come as we look forward when we look at 2024, but just to give you some color on this now. I think we're roughly, I think, 6,500 employees from the summer of last year to the summer of this year. And I think that's Maybe a little bit of what you're referring to as well, and that's certainly what I'm referring to in my commentary on productivity.

Speaker 5

We will grow into some of that capacity, But it was important for us to get ahead of it here for the summer of 2023. And I think it's proved to be the right decision and we've seen very significant loads and what have you. And then obviously the traffic and we're being rewarded for that. But that is a piece of the cost structure that I think will Alleviate a little bit relative to CASM as we grow. There are some elements that it is a different And that's just something that we I think we absorb into our own business planning here.

Speaker 5

Regulatory changes, duty time, things like this are a little And then ultimately, I think that we have seen like everybody else, some inflation. Don't forget some of the cost in our CASM is also coming from costs that are very revenue correlated, right. So It's kind of the good that I mean, what you pay for when you get that volume in traffic and we're seeing more premium cabin and that's helping as well Overall profitability, but it's a more costly component of the airline as well as We support those customers with premium service. So altogether, I guess, The last piece I'll maybe just say there before I wrap up is, we did take a bit of a touchdown On the capacity in the year, you saw we went from 23% year over year growth down to 21%. There's a few things that are impacting that.

Speaker 5

Some of the regional challenges with just pilot availability and some of our own fleet, Just availability with respect to some of the aircraft that we're trying to put back in service, the 777, for example, and some of those A220s That do have some engine delays. So all of that does kind of impact us as well when you look at the CASM expectation. I would say that over time will heal itself, but when and how that will take a little longer. Looking at 2024, We'll be looking ourselves internally here for productivity that's to come from the overall cost structure as we grow in. And we do expect also that kind of the whole ecosystem will

Speaker 3

Okay. Just a couple of follow-up. I know you're not guiding to 24, but do you still have kind of visibility or Plan to ramp up capacity, I think it was 100% of 2019 previously or is that not The right framework to think about for 2024 at this point and we should wait for your guidance. And just connecting to the first question, I wanted to like why go back on the hedging? You have been kind of not hedging for quite some time and you've managed to

Speaker 7

do that with pricing. And why did you decide to

Speaker 3

kind of hedge fuel again now? And why did you decide to kind of hedge fuel again now?

Speaker 5

Okay, great. Well, Fady, you haven't left off at all from the last time We talked, I guess, let me cover both of those very quickly. So you asked one about hedging and the one prior to that was about 24 capacity. Yes, thank you. So yes, we do obviously, we do have plans And scheduled capacity to come online for 2024.

Speaker 5

So we'll grow back towards those 2019 levels. My sense and you should wait for 'twenty four guidance to be more conclusive, but I think my sense is that we get to 'nineteen levels through the year. At some point, we hit that pace. Will it be on a full year basis? We'll see.

Speaker 5

I mean, let's get through the next couple of months here and then we'll see how we can get a better beat on it. Certainly our intent here and our objective is to bring it to 2019 levels in 2024 and then go from there. The question on hedging, simply say that when we looked at Let's call it the end of Q2. We looked at Q3 bookings very solid And we no speculative kind of objective, but we looked at fuel and it kind of had stabilized at a low level. And despite some pressure of oil cuts and what have you, and so we thought that just good to protect what was already sold tickets in terms of the fuel component of And so we took a position to hedge some of that Q3 demand.

Speaker 5

And relative to a Your comment on different philosophy or strategy, I would say not. I would just say that I think it was a prudent thing to do In an environment where taking a position on fuel for Q3 that we're kind of already sold through the fuel was already sold through our ticket It was the right thing to do and it just locked in at least some portion of that dynamic. And from here on in, we'll just Continue probably to behave much the way we have in the past. And if we have a different view, then we'll talk about that as well.

Speaker 8

Thank you.

Operator

Our next question comes from Cameron Doerksen from National Bank Financial. Please go ahead. Your line is open.

Speaker 9

Thanks. Good morning. Maybe a couple of demand questions. I mean, clearly demand is very, very strong Advanced ticket sales, well above what we would have seen pre pandemic. I'm just wondering if you're seeing any signs of Weakness, particularly in the domestic market.

Speaker 9

I mean, we've seen some of the U. S. Carriers cite maybe a little too much capacity that's in the network given where the demand is. Just wondering if you're seeing

Speaker 4

Good morning. It's Mark. On the domestic network, One of the things that we always said is one of the strengths of our domestic network is the connecting network that we have to our 3 hubs and that gives access to a wide geography. So to that extent, the domestic indicators continue to look stable. And we're feeling we're generally pleased about what we saw in Q2, but going forward, it continues to be relatively stable a lot in the asset power.

Speaker 9

Okay. And maybe just a follow on to that is around, I guess, business travel. I mean, you must have some Now on the post Labor Day kind of demand, are you seeing any signs of that picking up from sort of the stable we've seen in the last few quarters?

Speaker 4

Yes. In fact, we're seeing a slight uptick in 2 sort of channels. So one is sort of managed corporate. That's been roughly the minus 30% range for quite some time. So we're seeing a slight uptick there.

Speaker 4

But what's more encouraging is the non contracted corporate SME small business and that's recovering much quicker and quicker than anticipated. So we're starting to see post Labor Day some pretty positive signal there.

Speaker 9

Okay. That's great to hear. Thanks very much.

Operator

Our next question comes from Walter Spracklin from RBC Capital Markets. Please go ahead. Your line is open.

Speaker 8

Yes. Thanks very much, operator, and good morning, everyone, and welcome, John, to the call. I want to Turn to load factors here and tied in with your the new configuration your fleet And the service, a little bit of the on time service issues that you've had and correlate the 2 and what I'm looking for is, You've got a different fleet than you've had previously. Does that mean you can run at higher load factors Going forward on a long term basis or In your efforts to improve your on time, do you have to bring load factors down? I'm trying what I'm trying to do is see if Load factors that we assume going forward can be sustainably higher Then where they were pre pandemic or again, do you have to bring them down in order to address the service issues?

Speaker 2

Hi, Walter, it's Mike. Interesting question. So we don't think there's a high correlation between high load factors and OTP performance. So we think we can run 84% or 88% and it's not going to materially impact on time performance. It may impact if we have to cancel a flight, we've got less seats to put people on, but it shouldn't affect materially OTP performance.

Speaker 2

Can we run at those levels going forward? That's yes. It but it does mean potentially that we're still in traffic. And so that is why we're bringing some more on-site, because we'd like to ensure we don't spill good traffic basically to our competitors. So there is a balance there to some degree.

Speaker 8

Okay. That makes sense. Okay. Thank you. And my second question is coming back to And one of your answers to cargo really makes sense to me that you've got some really good Opportunities to scale some of that cargo into your to make it much more economical into your belly as opposed to on your dedicated freighters.

Speaker 8

I guess my question is, are you still targeting the same number of freighters that you were targeting previously? And is there an opportunity With the tight labor environment to achieve some of the goals you had with your freighters, But not necessarily with freighters owned by you?

Speaker 2

Possibly, but we're not spending a lot of time thinking about that option right now. Right now, we're really focused on Improving the performance of our freighters and obviously bringing the freighters into the operation.

Speaker 8

Okay, fair enough. Thanks very much for the time. Appreciate it.

Operator

Our next question comes from Stephen Trent From Citi, please go ahead. Your line is open.

Speaker 10

Hi, yes. Good morning. Can you guys hear me by the way? Yes. Okay.

Speaker 10

Sorry, just having some trouble with my phone. And thank you for taking my questions. Just one thing there. First, my heart goes out to you guys up north with the turf wildfires and what have you. I'm wondering if Those events have had any impact on your operations?

Speaker 10

Have you had to reroute? Have you had to transport fire crew? And maybe there's Then some incremental flow on your network, just wanted to get a sense of that. Thank you.

Speaker 2

Good morning. It's Mike. Thanks for the question. I mean, we obviously Given our community perspective, we'll do whatever we can. We are doing whatever we can to support That's the situation.

Speaker 2

As it's affecting our operation marginally, we didn't call it out as an issue, Frankly, and it's mostly on the regional side. So it hasn't had much of an impact to date.

Speaker 10

Appreciate that, Mike. Thanks very much. And just one other quick question. Appreciate what you've mentioned about the Airports and the sort of pay system in the Canadian airports, in order to have a change occur there, is this Something that Mr. Trudeau could make some kind of decree and changes or would it have to be something that would Have to pass through a long legislative process of some kind.

Speaker 2

Okay. Now you've asked me a question I could spend about another half hour on, responding. There have been several studies by very, Very intelligent committees and very knowledgeable committees upbuild our business model up here, our airport model, Recommending certain changes. So there is other options available, but it would take a change in law Basically, that would take some time. I would say the pandemic Really has exposed the weakness of our user pay model.

Speaker 2

And we are Pushing hard to ensure that our airport infrastructure system continues to support operational efficiencies, investments And also growth. And the airports obviously suffered through the pandemic, taking on greater debt And so do we. And so it would be important for the government to support That type of growth opportunity with some injection to accelerate some of the objectives we have in mind. That also goes to SAB as I said in my prepared comments.

Speaker 10

Okay. I appreciate the color. Thank you very much.

Operator

Our next question comes from Chris Murray from ATB Capital Markets. Please go ahead. Your line is open.

Speaker 11

Yes. Thanks, folks. Good morning. Just turning back to

Speaker 7

the 6th Street in traffic a little bit. Can we talk a little bit about Maybe one of the

Speaker 12

drivers that I think got you

Speaker 7

to this number this quarter. I guess what I'm trying to figure out is, is how much of this is sort of tied to the fact that the U. S. Market Itself has been pretty tighter. Has there been something going on that maybe has changed 6 Freedom in the last of a while, be that Aeroplan or something else that you guys have been working on?

Speaker 4

Hi, it's Marsh. There's a combination of reasons for this, but one of the things that we did during the pandemic is we We've clearly changed the structure of our network in our operation, our hub airports to maximize 6 Freedom. So we've picked up our hubs a little bit to really facilitate that traffic flow, and we're starting to see Results basically almost every single geography and in many cases almost every single hub in Q2 on the Six 3 networks, which is something we didn't necessarily do as well pre pandemic.

Speaker 13

Good morning. It's Mark Nasser. Just to add one thing, the region in which Aeroplan It's growing the fastest in the United States. And between that and our relationships principally with JPMorgan, we're also able to introduce the brand and our Product and service proposition to Americans more effectively than we were able to previously.

Speaker 11

Okay. That's helpful. My other question just going to

Speaker 2

the regional network, historically this has been

Speaker 7

kind of Slow and steady, but it certainly was always getting the job done. I guess a couple of questions on this.

Speaker 11

I mean, is this a function of Aircraft or people or what's one of

Speaker 2

the regional network that's really affecting its performance as much

Speaker 14

as it is? And does this For us to change into

Speaker 7

you looking to have to do what was historically considered a regional lift inside Air Canada or maybe a different View on strategy as we go forward?

Speaker 2

Hey, Chris, Mike. I don't think the strategy has changed. There's a transitional challenge right now with pilot availability. A series of factors caused stress on pilot availability at that level, at the entry level. 1, flight duty times came in, which caused all airlines to in Canada to add 10% to 15% more pilots to fly the same schedule, Given the new rules around flight duty time.

Speaker 2

2, we have a lot of new entrants into Canada, all at the same time who are flying bigger planes and Can afford to pay more money. And then 3, during the pandemic, we have a very, very Elaborate school system, pilot school system here in Canada, which our regional partners is heavily involved in and that Didn't provide the supply that it normally would. So we have this almost perfect storm that exists at this point in time. And so that has caused our regional partner to lose more pilots than they otherwise would through to a higher attrition. And so as a result, we've had to make some modifications to the schedule.

Speaker 2

So we're working hard with our partner, Jazz on solving that problem right now and it will be solved, but it will take some time to transition. On the operational side, if we have disruptions, weather disruptions or anything else, we would typically You want to cancel a Jazz flight because it impacts less customers than canceling a 777 for example. And so you will see higher in weather and other disruptions, you will see higher cancellations for the Jazz fleet, Which makes it difficult for them to operate because they've got we also have to put those customers on another plane in the next couple of hours and the next day. But that is trying to minimize the impact to our customer in weather related disruptions.

Speaker 7

Okay. I'll leave it there. Thank you.

Operator

Our next question comes from Savanthi Syth From Raymond James, please go ahead. Your line is open.

Speaker 15

Hey, good morning, everyone. I know you've been doing kind of rolling out NDC, Kind of various aspects of NDC, I was wondering if you could talk about that a little bit more, especially in the sense of kind of where will we see the benefits Is that revenue or costs and a timeline of when we might see some of these benefits flow through?

Speaker 13

For sure. Good morning. It's Mark Nasser. So there's 4 principal elements to our distribution strategy that we've rolled out during the quarter. The first is all new technology, supported by NDC, including a variety of options for travel agencies anywhere in the world to connect to Air Canada.

Speaker 13

The second is improved and expanded commercial agreements with not just the GDSs we've already announced Sabre and Amadeus, But also direct agreements with many of our large agency partners that allows for more efficiency in terms of cost perspective, Expands our products that are on their shelf, in particular, ancillary revenue products, opening them up really for the first time in a meaningful way to third party sales. And then the third is content differentiation. So you've seen a lot of this in other markets, but now we have content that's exclusively available Via NDC and it's just the beginning that will expand over time causing more of a shift to those channels. And the final one, the 4th element is the DCR, the distribution cost So bookings now that are conducted through the less efficient or older technology at a factor platforms in the GDS incur a cost recovery. And so all those four things together are driving both decreased costs As well as increased revenue, Mike talked about the fact that our distribution costs are not materially lower.

Speaker 13

It affects both RASM and CASM. So there's some CASM in there that's taken out, but there's also a lot of in terms of the DCR, a RASM offset, Because as we assess at ECR, even though it's meant as a cost recovery, it counts in the top line.

Speaker 15

In terms of kind of timeline as to I mean, I'm guessing this doesn't kind of Turn on on day 1, how should we think about this building up over the next kind of 2, 3 years?

Speaker 13

So the DCR is fully rolled up globally and all points of sale already. And that's what led to Mike's comments in the opening there. And then NDC itself right now for us is available in Canada. We'll roll out our 3 or 4 largest points of sale including the U. S.

Speaker 13

Before the end of this year. And then by the end of next year, we'll be substantially fully rolled out in our online points of sale globally. And all of our GDS Agency agreements are global in nature for the footprint of those companies.

Speaker 15

That's helpful. And if I might, just on the Aeroplan, I know back in pre pandemic that I think the thought was lack of our plan was maybe a 3 point or so margin drag for Air Canada. Just how much of that is unlocked and now that you have the plan in house and seeing the real value of it, just any kind of revised thoughts on If there's more to kind of margin contribution that you would expect?

Speaker 13

For sure. So we don't segment out Aeroplan's Results, excuse me, and its impact on our profitability. But what I can say is the program has grown significantly from the point at We took it over and we're seeing that growth contribute both top line and profitability, but we just don't segment out the results of the business.

Speaker 15

All right. Thank

Speaker 2

you. Thank you. Our next question

Operator

comes from Konark Gupta from Scotiabank, please go ahead. Your line is open.

Speaker 14

Thanks, operator. Good morning, everyone. Just wanted to get back to the CASM question. Is there any specific factor that has been most difficult to predict over the last 6, 7 months or so that has kind of caused the guidance to kind of go up on the CASM side. And can you remind us The CASM targets you laid out for 2023 2024 previously, do they reflect any potential implications of coming labor agreements?

Speaker 5

Yes. I met a call a friend on this. So maybe Mike in I just need this or Elizabeth, you can help us.

Speaker 2

Good morning. It's Mike. We modified the guidance Partly because of capacity cuts, partly because of costs that are coming in place, some of which are revenue based costs, Not all, inflationary based costs. We're also not going to disclose or talk about Pilot agreements, what's in there or what's not in there for any one of the pilot agreements that we're talking about. We as John said, we're continuing to look at productivity.

Speaker 2

We had to staff up to ensure that we ran as good as summer as possible. Done that. We'll see that productivity gain come back to us over the next little while as we grow into it. And so a lot of different factors, but Like I said in my comments and John said in his comments, this is a high, high focus area for us and we'll continue to look at improvements in productivity Using technology and other process equipments.

Speaker 14

Okay. That's great color. Thanks. And welcome, John, about Clear Canada. Just one more question quick on the balance sheet.

Speaker 14

I think you guys have done a decent progress on Retiring some debt early on. Are there any more opportunities to utilize your excess cash sitting on the balance sheet and obviously free cash flow is kind of running ahead Your expectation so far, any opportunity to reduce fully?

Speaker 5

Yes. Thanks for the other Definitely, we will continue to be focused and active and look for opportunities to take down That where we see opportunities where it makes economic sense and there are still You've seen us be active over the last year between the convertible notes and The aircraft financing in the first and the second quarter, I think we'll continue to look at opportunities to deploy Some of that cash against the more expensive debt. So that's I think for the course.

Speaker 14

All right. Thanks for the time.

Speaker 5

Thank you.

Operator

Our last question will come from Andrew Didora from Bank of America. Please go ahead. Your line is open.

Speaker 12

Hey, good morning, everyone. John, just on the fuel guide, at first, I was a little surprised you lowered it given the rough in crude prices, but The hedge makes sense. I haven't gotten through all the disclosures, but can you give us some color in terms of where you are hedged in 3Q on Fuel and then what have you assumed in your $108,000,000 full year guide in terms of hedge gains?

Speaker 5

Yes. So I would say that the hedge we took in Q3 is the only assumption we've made. So it was locked in when we made that assumption for the second half of the year. It's proving to be now quite favorable to the run rate On fuel today, I think that overall The oil prices did run up a little bit in the last week or so. So I would say that the 108 really reflects Status quo on our prior guide plus the hedge and the fact that Q2 was actually a little bit better And actually it was a lift.

Speaker 5

So that's kind of I would say the big picture math. I said it before, I'll just reiterate it again. We feel pretty good about our range. We feel good about all the components that come into that guide. Fuel is always going to be a little bit of a put and take and it will kind of drop where it drops.

Speaker 5

But I'd say that we feel pretty comfortable that the guide range will protect Against any kind of reassessment.

Speaker 12

Got it. And then One big picture question for Mike. Earlier this week, I know China opened up some more group travel opportunities. How are you thinking about the Build back there, what needs to happen? And given your success in other markets in the Pacific, do you think China will ever get back to where it was pre pandemic?

Speaker 12

Thanks.

Speaker 2

Hi, it's Mike, Andrew. And I might turn some of this to Mark, who's very, very close to Obviously, China is a very important market to us. I think we're flying there 4 times a week right now. Pre pandemic, we were flying 35 times a week. We also now have the Russia overflight situation, so it's difficult to have flights from Eastern Canada Toronto, Montreal primarily to China without using a rush overflight.

Speaker 2

We are we'd like to see that market come It was a strong market for us pre pandemic. Will it come back to 35 a week? Certainly not without the rush overflight situation Being removed and we have certainly no visibility on that situation. We hope it happens sooner than later. Certainly, that market continues to be a strong market and we'll expand as we can into that market.

Speaker 4

And just to piggyback a little bit here. So our desire obviously is to get back to a daily frequency on Shanghai at some point and restore our service

Operator

We have no further questions. I would like to turn the call back over to Valerie Dufin for closing remarks.

Speaker 1

Once again, thank you very much for joining us this morning. Master bookou pour over Trinitarian Samantha. Should you have any further questions, please do not hesitate Thank you. We wish you a lovely day.

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Earnings Conference Call
Air Canada Q2 2023
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