Q3 2019 Earnings Call
All participants piece then by your conference what begin woman show any once again. Please continue to send all right and we think you for your patience.
All participants please standby your conference is ready to begin.
Good morning, ladies and gentlemen, welcome to Air Canada third quarter 2019 conference call.
I would now like to turn the meeting over to Kathleen Murphy. Please go ahead with Murphy.
Thank you Atlanta, and good morning, everyone and thank you for going out and I take quite a call.
I see this morning are carrying about minuscule I, President and Chief Executive Officer quickly, So I, Deputy Chief Executive Officer, and Chief Financial Officer.
Getting back I guess executive Vice President and Chief commercial officer, and pick laundry I executive Vice President of operations.
On today's call ill begin by highlighting our financial performance for the quarter.
Hey, Mike will then address I think what financial performance in more detail and send it back the carrying before taking questions how the analyst community.
Let's start by saying question, some equity and let's call. It my question a fixed income analysts.
Before we get started I would point out that's been statements made on this call. It said there was an age what cook I could cause actual packet strategic plan.
Forward looking within the meaning of applicable securities laws.
It's called Phil. This call also include references to non-GAAP measures.
Because it fits what did quite a press release, and then DNA, but important assumptions and cautionary statements relating to forward looking information if any dislocations that non-GAAP measures to GAAP results.
I will now kind of call over to kill not mesquite, <unk> President and CEO .
Thank you Kathy up good morning, everyone and thank you for joining us on our call today.
I'm extremely pleased to report an excellent third quarter.
EBITDA of $1.472 billion, 9% above last year's third quarter and better than the increase of approximately 5% projected in our news release of July 30, and better than analysts' consensus estimates for EBIT da again this quarter.
We reported operating income at $956 million in the quarter up $33 million year over year.
Record third quarter operating revenue of almost 5.6 billion grew 3% versus the same quarter in 2018.
Unrestricted liquidity of nearly $7.4 billion was another record and our leverage ratio improved to 0.8 at the end of September half of what it was at year end.
The progress made in improving our balance sheet was recognized once again with Moody's upgrading our debt rating by one dog and events. It goes to one level below our goal of investment grade status.
Also.
We all know that increasingly investors look at U.S.G. measures when making investment decisions.
Therefore, I was extremely pleased by our counted as top ranking of one it all three pillars of the ISS environmental social and governance quality score, which we received within the last several days we ranked in the top 1% of all companies in the obvious that survey and at the top transportation company worldwide.
This indicates lower risk and better disclosure versus the industry group index or region.
Back to our financial performance I consider a Q3 results to be extremely impressive in light of the serious disruption there overall operations into our cost structure at profitability created by the Boeing 737, Max grounding.
We covered approximately 95% to plan flying in Q3 and were able to successfully manage through this extremely challenging and complex situation.
We never moved the aircraft from our schedule until February 14, so as to give customers certainty in their travel plans.
We've also wet lease to Airbus Athree hundred Thirtys.
In addition to the to Boeing 767 is already well at least to ensure we have enough capacity this winter and into next year.
The removal of 36, 737, Max aircraft or about 24% of our narrow body fleet.
From our schedule during our peak summer season exacted a tool from a financial route product and I would say human resource perspective.
And there's no doubt that the grounding is preventing us from realizing our full potential.
However, I'm confident that regulators on ground the aircraft near term our ongoing transformation will quickly regain its former trajectory.
For this reason at this point in time, we've chosen not to adjust our longer term investor day targets for 2020 and 2021.
With respect to trends that.
We're very pleased to see that in Q3 transact shareholders approved the definitive acquisition agreement with their Canada by vote of approximately 95%.
This overwhelmingly favorable result, underscores the numerous benefits for all stakeholders from the proposed merger.
The vote was followed by the approval of the part of arrangement by the Superior Court of Quebec.
And the acquisition remains subject to regulatory approvals, which we hope to received by mid next year.
Before turning it over to Lucy I'd like to thank the entire Canada team for their resourcefulness skill and dedication they've done an incredible job, but also part and thank them for their continued hard work and taking care of our customers, especially from the time to Boeing 737, Max grounding order was issued.
I also think of course, our customers for their continued loyalty.
With that I'll turn the call over to Lucy.
Thank you, Kevin and good morning, everyone.
I'd also like to thank our team and 36000 for their continued passion dedication and consistently demonstrating strong teamwork well taking care of our customers during the busy tend to be.
Turning to our revenue performance through the quarter.
Passenger revenues increased 146 million or 2.9% on a yield improvement of 4.8%, partly offset by declining traffic of 1.8%.
It's traffic decline was driven by capacity reduction of 2.1%.
As an increased 5.1% you will be here on the higher yield.
Can you seem to be second quarter system yield improvement versus last year, reflecting increases in fares and carriers to Chinese and an overall make informed me.
Additionally, you earned on airline redemption revenue, which and I could all five key market and growth in higher yielding local traffic also contributed.
The impact of the Max grounding on our capacity in our operation was amplified during the summer peak.
36 in these aircraft were removed from are scheduled for the third quarter.
Which would have represented 9% or planned third quarter capacity.
Despite the complexity that this event created our teams continue to mitigate the impact by executing or contingency strategy.
Routinely deferrals nonessential maintenance.
Extending aircraft leasing.
TGP leveraging air Canada.
Making necessary schedule adjustment and went leasing aircraft, which enabled us to cover approximately 95%.
The plan flying schedule in the third quarter as Kevin mentioned.
Although we experienced a year over year quarterly capacity decline for the first time in several years and its third quarter.
We anticipate because we really chief capacity growth.
Looking at least 3% in the fourth quarter and this summer peak and we continued to execute our mitigation efforts.
In the mid cabin under invasive passenger revenue increased 33 million or 3.9% versus last year's third quarter on a gross yield.
Looking at our key markets despite capacity reductions in each.
We achieved year over year revenue yield and PRASM growth in all markets, except for the Pacific.
Turning to the domestic market on a slight reduction capacity domestic passenger revenue increased 123 million or 8.6%.
Third quarter of 2018.
Yeah increased 9.3% that impacted the capacity constrained and the launch of new fair category contributing to the yield growth year over year.
I can improvements recorded on all major domestic services.
Looking to the fourth quarter, we will continue our efforts to mitigate the impact of the next grounding.
Including strategically leveraging moves and consolidating frequencies with larger aircraft.
When I was coming in or domestic capacity stable despite flying fewer frequency.
On the U.S. trans border markets and capacity reduction of 4% revenues increased 54 million or 5.6%.
Mostly in her using local traffic and gains in the business cabin lifted yields in the quarter.
We realize significant drives I mean, you <unk> with gains recorded on all major you extract more distributed.
Eastern Seaboard business markets continued to perform extremely well for us.
Drawn year over year revenue growth in addition to yield and PRASM gains in third quarter.
The U.S. leisure markets achieved year over year revenue growth with significant frankly.
Despite the Max grabbing having a significant impact on our capacity these markets, especially to Hawaii. When we were required to reduce our frequencies from Vancouver to hospital in Maui, which were previously somebody to Max.
As of mid June these moves are operated through at least going spending 57 aircraft.
Our international tragic strategy of connecting U.S. customers to international destinations to or hot.
It was also negatively impacted by the next grounding actually consolidated frequencies to several U.S. market.
This strategy is yielding very strong results over the last years and it's been a key component of our profitable international growth.
The negative impact on our transit traffic throughout our international network.
Looking forward and we'll continue to see the impact to the next pounding on the U.S. Trans border markets capacity I.
We do anticipate year over year revenue growth supported by year end private improvement.
We've extended the Whitney's Boeing 767, [laughter] bigger Honolulu, and now we certainly see some Vancouver.
We've executed and wet lease agreement for a second Boeing 767, beginning in mid December which will assume the bank. We wouldn't mildly survey also operate bank in Phoenix.
We're looking forward to the delivery of our group Airbus to 20 in December .
Recently announced or nonstop Montreal to Seattle service as well as our non stop Toronto to San Jose, California.
Which will be operated by the eight to 20 beginning in May of next year.
Benefiting from a modern and efficient aircraft he's due to bolster our extensive U.S. network.
To support our strategy to attract U.S. customers to try and get over our hubs when traveling internationally.
On a capacity reduction of 1.3% during the quarter revenues in the Atlantic increased 7 million or yield growth of 1%.
As projected during our second quarter call, we felt pressure on our Atlantic revenue due to the kept capacity constraints in our schedule and negative currency impacts created by weaker European currencies.
Stronger inbound sales mix.
Additionally, we continue to observe very competitive pricing over the Atlantic on all services.
We also saw a slowdown in carrier surcharges, he's gonna be what you answered in the first six months of here.
I think 1.8% when compared to same quarter last year.
Due to the grounding of the Max the impact of several necessary adjustments choice schedule continued to be felt.
Do you think temporarily suspending our profitable and productive service from Halifax, and think Jones to the UK.
In June we began operating or my chart to Barcelona service and one of our much out to Paris, we can see through a wet lease operation.
For the fourth border. These services will be returned to air Canada Rouge enter kind of the mainline operation, respectively and will no longer be operated by wet lease aircraft.
Additionally, due to the closure in Pakistan airspace, we suspended or well performing trunking together, you say that as of mid June .
Although this provided the flexibility to reallocate the wide body aircraft elsewhere in our network and gives certainty to our customers when bookings summer travel.
Represent the key piece of our international strategy.
We're pleased to have resumed our needing nonstop service to daily from Toronto.
<unk>.
In October 27, we increased capacity by utilizing the Boeing Cooper seven on this route.
As part of our mitigation strategy in the quarter. We also reallocating capacity from the specific market to the Atlantic market.
Uhhuh that change had a negative impact on PRASM, the overall impact to the quarters profitability was favorable.
Looking into the fourth quarter, we anticipate year over year traffic and revenue growth.
The next grounding demonstrating the resilience of our seat endeavors network when facing exceptional circumstances.
As part of our mitigation strategy, we will continue to redeployed capacity from the Pacific over the Atlantic.
In addition to the resumption of art jelly dropped to service our food India schedule is now operational with our nonstop 80 sites today only from Vancouver operating seen since August and the return of our nonstop seasonal service to Mumbai from Toronto.
We currently offer up to 18 weekly flights to India.
Recently, we announced our new year round nonstop service from Toronto to Brussels, beginning next may.
Its service components are serious to Belgium's capital from Montreal and offered exit connectivity for beyond vessels traffic. Additionally, we announced our your own nonstop service from one trial into two beginning next June .
We'll be the only airline offering year around service between these cities linking to the world leading aerospace industry [noise].
Moving onto the specific onyx capacity reduction of 4.1% revenues decreased 46 million or 5.8% on a traffic decline of 4.7% and he will decrease of 1.1%.
The geopolitical situation between Canada, and China continued to negatively negatively in fact travel demand between Canada, and China and Canada in Hong Kong.
We were able to mitigate the impact by reallocating capacity from these markets to elsewhere throughout our network, including two markets where capacity was can constrained due to the Max rounding.
I fear that continue to be negatively impacted by increased interest in capacity from north American the corner.
Looking forward to the fourth quarter, we expect to continue our strategy to redeploy capacity from the specifics about our network Committee beat the impact of the softening travel demand between China, Canada.
We anticipate a slight improvement in year over year yield and present inline with expectations.
December we will begin or nonstop seasonal service between Vancouver, and I've been in our continued effort to counter seasonality.
Revenues from these services increased 8 million or 3.5% on yields and traffic goes up 2.2% and 1.2% respectively.
We saw double digit PRASM growth on services to South America with Air Canada, having reverted to one stops or is the one is ari with the connection in Santiago favorably impacting you.
He was on services to traditional Sun destinations also improved let's get back to decline into Mexico due to the redeployment of aircraft through our network to mitigate the impact of the Max.
We project a strong fourth quarter for the other services with anticipated year over year traffic and revenue improvement.
December we will begin or seasonal nonstop are kinda do service between Toronto to Tito and our seasonal nonstop Air Canada mainline service from Montreal. This Apollo as part of her strategy to counter seasonality.
Got it perspective in August we launched our partnership with award winning can even chef into Newpark, who will cure rate.
Meal, which started on our Montreal can reach a flight in the third quarter.
And we'll be rolled out on our sites to Japan in all cabinets in the fourth quarter, followed by a signature class Kevin from my child, So I wouldn't it made or this year.
Its partnership complements our existing partnerships with chefs, David Hoxworth and some it even if you're going to convey further elevating our new options for customers traveling internationally.
Moving onto cargo.
Third quarter 220, 19 saw year over year reduction in cargo revenues of 18.6% with the Atlantic and specific being impacted by industry wide decrease in air cargo demand.
Overall cargo yield went down 11.5%, while traffic declined 8% versus last year's third quarter.
We're not projecting any improvement in the current yield or global trade trends in the fourth quarter, but we will be focusing our cargo efforts on domestic share shift increased tonnage and strategic initiatives focused on capacity utilization using artificial intelligence and other tools.
Turning to other wherever use we saw an increase of 33 million or 18% in the quarter with the net margin recorded on the redemption and delivery of non air goods and services related to airplane program being the largest contributor.
We also saw an increase in ground package revenues that are kind of vacation.
To close in the quarter, we would remove 36 aircraft tight schedule operating multiple let me say aircraft and experienced softening travel demand between kinda in China.
We'd like to once again, thank our team for a strong performance and our most important enforcement quarter. Despite the significant obstacle.
And for all these continuing to put our customers first I will now turn the call over to Mike for a discussion on our cost performance and balance sheet metrics.
Thank you Lucy and good morning, everyone.
I'd like to add my recognition and thanks to all our employees for an exceptional third quarter for their commitment that taking care of our customers.
With respect to our strong EBITDA results are better than guided performance for the third quarter was mainly the result of lower jet fuel prices, partially offset by higher than expected professional fees, mainly related to the trends that arrangement agreement and really the filings.
As well as higher stock based compensation expense driven by the appreciation of our share price in the quarter.
Moving to the full year 2019 in our news release issued this morning, we disclose that we expect an EBITDA margin of approximately 19%.
Which is within the range, we established our February Investor day.
It was quite an achievement when you consider the many challenges triggered by the Max grounding [noise].
This speaks to the strengths of our business model and the work ethic and creativity of the air Canada the team.
I'd like to now I'll touch on Aero plan.
We continue to be extremely pleased with their plans financial results, which once again exceeded our expectations and continue to contribute meaningfully to our free cash flow.
We continue to see strength from our credit card issuing partners with acquisition and retention results.
Above expectations.
Redemptions are stable healthy and tracked within 1% of our expectations during the third quarter.
Looking ahead discussions are underway with a number of new potential partners for the redesign program.
Additionally, we are looking to increase and diversify our aeroplan membership base and are exploring international opportunities for growth.
Our digital efforts supporting the new loyalty program, including launching or a new customer data platform and creating a single customer football Cross Arrow plant and air Canada are well underway.
We're also extremely excited that our new all new Air Canada Mobile App is in public beta now and we'll be launching in November which will enhance how our customers interact with us.
Of course, we also remain on track to relaunch our loyalty program late summer 2020.
Now turning to our cost in the quarter, adjusted CASM, which excludes fuel expense impact cost are accounted occasions, and the operating expense in the barrel plan increased 9.3% versus the same quarter in 2018.
These increases reflect a large part the impact to the Max grounding, which resulted in E. S. M declined 2.1% in the quarter versus a planned ESM increase of approximately 3%.
Relatively higher costs associated with replacement aircraft.
And the ongoing match related operating expenses, excluding depreciation and pilot wages, which continued to be incurred despite the ground.
Turning to fuel fuel expense decreased 151 million or 11% in the quarter on lower jet fuel prices when compared to last year.
The average price of fuel was 74.7 needing sense for leader in the quarter down 10% versus the same quarter in 2000 team.
Looking ahead, we expect the price of jet fuel to averaged 77 Canadian cents per liter for Q4 and the full year.
They are counted as not entered into any fuel hedging contracts for Q4 hundred 2020.
Turning to wages and salaries.
There's an increase of 46 million or 8% in the quarter driven by the growth and fulltime equivalent employees of 9.8%.
Due to the addition of Merrill plan.
We also recorded increases in expenses related to employee profit sharing programs and to stock based compensation.
An increase in aircraft maintenance, it's 60 million or 7% in the quarter reflected in large part timing of maintenance activity versus last year's third quarter.
In addition to in order to mitigate the impact the Max grounding weeks tenant leases for Airbus, a three twentys and Embraer 190 aircraft, which resulted in a higher volume and maintenance activity the plan.
Now turning to our balance sheet liquidity.
Killed mentioned earlier, we ended the quarter with unrestricted liquidity of almost 7.4 billion another record.
Free cash flow emitted amounted to 553 million in the quarter 64 million below prior year, you may recall that in the third quarter of last year 2018, or Canada receive proceeds of 293 million from the sale leaseback of 25 Embraer aircraft.
Horse no such proceeds received in the third quarter of this year.
In the quarter, an increase in cash flows from operating activities of 284 million was partly offset by an increase in capital expenditures of 55 million.
The higher level of capital expenditures, mainly reflected our ongoing investments in new technology, including our new reservation and loyalty systems.
Looking at the full year 2019, we project free cash flow between 1.3 and 1.5 billion.
Free cash flow in 2019 is positively impacted by a number of factors, including the deferral at Max aircraft deliveries from 2019 2020.
Timing of certain capital expenditures.
The stronger working capital performance.
The impact of aircraft lease extensions, which differs the end of lease maintenance obligations.
And the favorable impact of higher cash and investment balances on net interest expense.
[noise] excess cash, which air Canada defines as total cash and investments in excess of the minimum cash required to support operations amounted to almost 2.7 billion of young September .
This is expected to be deployed over the next several years to purchase aircraft make strategic investments and reduce existing gross debt levels.
Shareholder buyback programs will be funded by annual free cash flows.
Net debt of 3 billion decreased 2.2 billion from December 31st this reflected an increase in cash cash equivalents in short and long term investment balances of almost 1.7 billion a decrease in long term debt and lease liabilities of $561 million.
Our leverage ratio was 0.8 at the end of September versus a ratio of 1.6 in December .
We foresee our leverage ratio not exceeding one by the end of the year.
At quarter end, our return on invested capital was 15.5%, while our weighted average cost of capital was 7.2%.
Full year 2019, we project ROI see it between 15.5 and 16%.
With respect to the normal course issuer bid, we repurchased cancellation approximately 2.1 million shares at an aggregate cost was $91 million in the quarter.
On a yearly basis to September thirtyth, we repurchased over 6.4 million shares for some of $250 million.
Additional information can be found in our financial statements and Mdna, which were posted on our website and filed on SEDAR. Our this morning with that I'll turn it back to kill.
Thanks, Mike.
The other today as reported another excellent quarter. This one covering our peak summer period.
As you've heard we generated record operating revenue.
A 9% increase in EBITDA year over year operating income of almost $1 billion and ended the quarter with record liquidity in excess of 7 billion.
We also made significant progress on our balance sheet, reducing our net debt by more than $2 billion since the start of the year.
Even with the Max rounding depriving us of 36 aircraft or as I said about 24% of our narrow body fleet. We still operated at 95% of previously planned capacity this summer.
Not allowed the Mac situation to knock us off our game plan or deter us from pursuing our long term transformational goals.
I'd like to reiterate my appreciation and once more commend our employees for how they've responded to this challenge all parts of the company have come together to develop innovative solutions to take care of our customers and runner airline profitably for our shareholders.
The face of this rapidly unfolding situation, we've been able to pivot multiple times, we've anticipated events prepared for contingencies and acted decisively often ahead of others. Similarly affected.
For these reasons the shadow cast by the Mac 737, grounding should not be allowed to obstruct anyone's view of our company or distract anyone's attention from the progress we are making.
In addition to operating safely and consistently delivering strong financial results. We've maintained focus on a host of key activities to continue transforming and improving or Canada.
These programs and strategic initiatives, any one of which might overwhelm or less nimble company are moving us along our path towards our goals, including investment grade status and sustainable long term profitability.
Most immediately were preparing to roll that our new passenger service system by Amadeus.
Replace our legacy Reds three reservation system.
The first phase next month.
Let's see the migration of our reservation inventory and ticketing functions to the Amadeus I'll take a suite.
Then starting early in the new year PSS will be progressively introduced at airports for departure control functions.
The importance of benefits of this to your approach it cannot be overstated.
Hi, there kind of its complexity to implement.
It will have every equip us with the tools to serve our customers better and more efficiently.
With us to interact more easily with our key airline partners and lay the groundwork for some improvements in the future.
We also expect it to generate more than $100 million, an annual incremental benefits once fully implemented.
With the implementation of PSS, we will also have in place the I.T. architecture for another transformational initiatives launch of our new loyalty program in summer 2020.
With the integration of Aimia, Canada, now essentially complete a significant accomplishment and itself we've been introducing improvements to the Aeroplan program and our mobile app.
Efforts are now intensifying to refine the programs value offering, including finalizing attractive new partnerships.
Changes will better secure airplanes places counted as best travel rewards program.
Another major program is introduction of the Airbus eight to 20.
The arrival of a new aircraft type and the fleet takes years of preparation.
Yet we've been very very ready and eager to take delivery of our first eight to 20. This December .
<unk> eight to 20 promises a step change with operating characteristics that open entirely new markets for us.
The quarter, we already announced two such roots, Montreal, Seattle, and Toronto, San Jose, California.
Our network partners Love this aircraft for its economics, when our customers will love it too for its comfort and spaciousness.
And from a carbon footprint and overall economic perspective, we love the aircraft as well as it averages 20% less fuel consumption per seat emit less greenhill Green House gas is and is significantly quieter than other aircraft in its category.
Another key strategic initiative on which we made excellent progress in the quarter is our acquisition of trends up.
We're very pleased to see shareholders of transact, including.
Three largest shareholders voted overwhelmingly in August to except our offer and to see the Quebec Superior Court subsequently sanction it.
We're now into the regulatory approval process and hope to receive the necessary approvals by mid next year.
We know the combination will create numerous benefits for all stakeholders, particularly those in Quebec, where travelers will have more options employees more job security and Montreal the advantages of seeing the further development of in Quebec based transportation and leisure company.
In addition to these major initiatives. We've also pursued a host of ongoing initiatives this past quarter.
Many of these were designed to improve the customer experience, including the opening of the new Toronto Cafe.
Our agreement with SAP Antonio Park, as Louis mentioned, and the launch or announcements of new routes, including the new nonstop service between Montreal and to lose and Toronto in Brussels next year.
We also maintained focus on our core priorities such as culture change our success here already up we displayed in our handling of the 737 Max issue was recognized in July when we were named one of the 50, most engaged workplaces for the fourth consecutive year by achievers.
Subsequent to the quarter or change culture was again affirmed in a 10 year labor agreement with our U.S. based employees represented by Teamsters.
Taken together the continuing strong financial results, we achieved while successfully managing such a range of other major issues in projects should leave no doubt that ours is a company transformed remain air Canada into an airline that is flexible durable customer focus and positioned for long term sustainable profitability.
So in conclusion I, thank our customers for their loyalty to Canada that for choosing to apply with us.
Now please take some questions.
Thank you we will now take questions from the telephone lines. If you want a question using a speaker phone. Please much your handset prior to making our selection.
You have a question please press star one telephone keypad.
If at any time you wish to cancel your question. Please press the pound sign. Please press star one now it's time if you have a question there will be a brief possible. The participants register thank you for your patience.
[noise]. The first question is from a corner cooped up with Scotiabank. Please go ahead.
Good morning, and that thank you for taking my question.
Morning.
Wanting to kill and congratulations on a good quarter, considering the Max impact obviously in Q3. So just wanted to get started on capacity here. Thanks for providing some color on Q4, so looks like for 2019, despite the Max grounding. Tom you guys have tracking I think to it.
Super Center capacity growth for the full year at 3% in Q4.
No if the Max comes back next year as you anticipating and February maybe and I think you previously kind of a notified that there will be some lag effect and comes from getting those aircraft on grounded and then there's another 26 deliveries coming in next year. So do you think next year, we should see.
The capacity growth kind of from what we anticipated for 2019, I'm like it's kind of a reversal and capacity growth next year.
A card and good morning, Mike I think that's a fairly good proxy.
You use.
And good rationale.
For 2020 again, it is moving target it depends how many reasons are coming when there will be on grounded obviously and we have provided some visibility will take us up to a year to put all 50 back in operation. So so using your original plan for 2019 is a good proxy and caught our feeling here.
Just had one more thing is that wouldn't make sense could take a year to get them all in.
And you know it's a the first.
24 of course, we have pilots that are already allocated to those aircraft, but for the next week, we actually have to higher pilot. This is a process that will be in d. gradual. This is not an overnight process and that's why we say could pick up to a year to have.
To have all 50 aircraft in a in the operation. So you would not see.
Incremental capacity from 50 aircraft flooding the market. So the first few months of 2020.
That's great color. Thank you and then with respect to Bionic hiring would you wait for the transport, Canada certification before starting the hiring process or would you be doing something slightly before that because you have to train pilots as well yeah. I know exactly so we will be doing a prudent steps on hiring once we know that the epay, where we've been we've been very close.
In touch with our transport, Canada regulators here of course, and so were quite a informed on on the dynamics as between the regulators and so we would hope that the on ground to occur soon and once it once that occurs.
At least in the United States, we would start taking steps towards a reinstating our hiring and we're looking at a potentially hiring up to 350 incremental pilots next year.
Okay and my second question is on the Capex here <unk> looks like there's a slight bump in capex for 2020 and I saw that is I think three incremental 80 20 or C series aircraft that you're doing next year and there's probably some leaves us on eight heat treat 20 and E. One might be that you extended.
Any any color on what what also contributed to Capex increase next year Mike.
Yes.
It's Mike.
So you're absolutely right there was a small increase in overall capex at three different reasons. One you are right. We were taking a couple extra two twenties at the ended the year.
Other than originally planned that just moving from from 2021 to 2020.
So just really a timing issue from a capital perspective.
Between 22nd as you know we were fortunate enough to pick up eight very very productive while 320 ones and so we will we will basically a modified the carriers of those claims next year. So that's some extra capital not expensive, but certainly that will produce better return for us for the for those planes.
And third.
Some some extra technology projects that we won't put on on the on the sleep for next year as well.
Okay, that's great color, Mike. Thank you and then lastly on cost.
So second third quarter costs came in I think slightly better I'm talking about nonfuel, though.
Compared to what do you, even probably the market whatever anticipated given the capacity decline. It seems like you probably mentioned the S and the stock based compensation and some other kind of headwinds, but despite that costs seem to be under control here any color on your cost transformation program any incremental costs you recognized during the quarter as well as it looks like it'll play.
And also had some lower costs in Q3.
Yeah, I think there's no doubt our 2 million dollar cost transformation program continues to be a strong focus for us.
And we continue to to look at areas of improvement.
As you can appreciate those are getting a little more difficult, but we are still realizing some areas for improvement across many different cost buckets.
Some of which were reflected in Q3 and somewhat we reflected in Q4 and on a go forward basis.
Okay. That's that's it from me. Thank you so much.
Sure.
Thank you have the next question is from Saudi Schmidt with BMO. Please go ahead.
Good morning, and congratulation on a very good execution here.
Mike.
If you can frame to us like if you're adding those Max in 2019, assuming the aircraft is on ground that you have a few aircraft coming in helping the aircraft can leave that fleet like between what you what leave between the Airbus a that youre planning to Uh huh.
Just to help us going up.
Understand what what the what do you haven't given disposal demand and supply than them next year.
Very great Great question, and it's it's a complex project to bring in and exit.
Excellent claims as you know we extended leases for the 193 twentys too to cover a portion of the loss capacity.
So rough estimates is both 15 planes that we will be able to exit over the next 12 to 18 months.
Given given the lease expiry dates of those plants plus the was plus plus the wet leases and so the wasn't <unk> forward.
Three twentys, we've tried to negotiate walk short term.
Lease extensions and so in total about 15 that we'll be able to exit in.
The next 12 to 15 months.
Okay. That's great. So so I guess between the gradual.
The entry of the Max and the planes that you can exit you have some flexibility obviously here to.
On the match the supply and demand and protect the yield and then front as you know that as we've always tried to build enough flexibility and I think we've done a fairly good job.
Given the uncertainties and but given our plans to took to manage capacity appropriately, but still have some flexibility to ensure that.
We cover any any potential scenarios.
Okay.
And one question, maybe let's see the the business cabin growth since quarter end up 9% I think the lowest you've seen them at least two years.
But can you offer up can you kind of insights into the trend that you're seeing by Mark isn't this a division specific or that kind of broad based go down mid you seeing and business cabin.
Hi.
Well. This is a couple of things first is on we didn't see a material decline in that business cabins and business travel on that China.
So China and Hong Kong, when Knowns area, we see the closer higher yielding traffic significantly add significant decline.
Other issue is.
With that making adjustments to the schedule that evens out to the Max we do have lose also flying on some domestic and a U.S. suits, which normally would've been operated by the Max which has also caused a little they didn't decline.
But when you look at it you know I think key routes, where we had really good solid Jay class demand for example, trans con the UK no stack to California.
That premium cabins continued to perform very very well in particular in this particular this summer.
Domestic market you can't was also very very strong I'm. So there's nothing there that's a big surprise to US you know most of the.
Most of their performance we anticipated.
Great. Thank you.
Thank you I think next question is from Walter Spracklin with RBC capital markets. Please go ahead, yeah. Thanks, very much good morning, everyone.
Walter So on the Max reentry and as you are killing as you mentioned, you're gonna be flexible you keep some redundancy if we see all the airlines doing that next year or we into a little bit of or risk here that we have excess capacity with a big flood of 737 coming back in some extra play.
Lanes that everyone will now be keeping to keep you know that flexibility how do you see that playing out from a competitive dynamic where we might see a 2020 that has far too much capacity for capacity out there in the in the airline industry.
I don't I don't as to the to Walter.
Our sense is that the these somewhat inefficient aircraft.
You know will well come out of the marketplace I think that the you know in our case.
We've extended for example, the one ninetys, even though we announced a long time ago that we wanted to be able to the one nineties.
I have you got the right airplane for many of the roots and so.
But look to start flying dose I know, if we had the Max coming in in a meaningful ways, we had pilots and so on and so forth I think you're part of the dynamic is that we don't have a firm date other reentry anything at all carriers had a firm date on the.
On the re entry into service of the Max.
These plans could be made somewhat differently, but given that it's been a moving target.
We've had to have that type of flexibility, but nobody you know certainly we don't want to fly inefficient airplanes that consume more fuel than we need to that have a higher cost steppers seat than we need to we don't we're not.
In the game and I think that's certainly our case our idea would be too you know to do the thing that is the most efficient for their routes that we need to serve using the right aircraft on those routes and so there's not really a desire to have inefficient airplanes flying around operating inefficient routes.
Walter Mike just to add to the earlier question.
Our 2020 capacity increases in increases somewhat in the same ballpark is what we initially thought for 2019 I think the market can can certainly to absorb that fairly fairly fairly quickly and actually.
Another another reflection point Walter on the question because it is a good question because when you look at the here. Some of these these comments earlier on the impact that the Max.
Grouting has had a six freedom traffic.
We need the backstop create those six freedom routes you know, there's not much advantage for us to be giving up that's six freedom.
Buying and so that connecting traffic that we've been developing over the last number of years. So I think that you would yeah. We would not have any particular desire to continue operating inefficient airplanes on those rooms. So even if you were to perfectly and everyone reduce those inefficient just to the Mac.
Hello, everybody taking deliveries of Max all the same date all the same you know all at once you don't expect that you'd have to Mike's your your point, you're right that can be absorbed.
It could be absorbed and be buckle. It cannot commit overnight I mean again as we explained our case, it's impossible for it to come in overnight.
Mark is going to take us a full year to get up to 50.
Others may have their own a you know staffing constraints and other other dynamics and they're in their union contracts or otherwise. So it's not as if all of these airplanes come back into market overnight right. Okay that makes sense.
Mike I heard in your prepared remarks, something interesting. There you said, you're you have excess cash on the balance sheet that would be there to fund capex and debt reduction and that free cash flow would be for buyback. If I look at your guidance for 2019 to 2021 cumulative free cash flow of four to four and a half and.
Then your guidance for 2019 at one to one of the have you know lets say ballpark Threebillion left for 2020, and 2021 does that mean 3 billion goes into buyback.
It means a 3 billion is a potential for buybacks.
All I want this well be talking the market a boat for quite some time.
The excess cash currently benefits our leverage ratio and so that is part to help capex and reduce debt levels.
As we go forward and we generate free cash flow that gives us the greater ability to to be more aggressive in buying back shares and we've done that in 2019, we bought back $250 million shares.
After nine months that's.
Much much greater than it was last year and that to 50, obviously reflects the free cash flow. This year adjusted for the deferral of the other Max capital into next year.
Perfect and last question here is just on your I guess, you're guiding the strategy as we hopefully zero in on a lot of 20 automatics reentry date, you've effectively I guess guided here for capacity for next year.
You've typically obviously, given some guidance for CASM and and and a merger that et cetera. When when do you. When do you think you'll you'll kinda dovetail the 2020 guidance into that 2020 to 2021 longer term guidance that you have out there already.
Our plan right now well through to do that as part of our year end release in early February perfect perfect. Okay. Thank you very much with all my questions.
Thank you.
Next question is from Hunter Keay was fluff research. Please go ahead.
Hi, Thank you everybody Caitlin the rest system you said in the prepared remarks that it's going to permit improvements in the future. After is implemented what kind of initiatives routine using there.
Well, we know we see we see the ability of this system.
To help us.
A lot of our.
Inter airline transactions is going to be a significant.
A large number of our Star Alliance partners that are on the.
On the I'll tell you a system that will be one large driver, but then there series of lets call blocking and tackling enhancements. You know this you can describe some of the things that we're we're contemplating things that are just at the system that we've been wanting to do for a long time, if not been able to do which will facilitate upgrade revenue for example.
Great Big deals the flexibility of upgrades, where we do upgrade.
We're celebrating talking about these sorts of things will be a series of I'd say two big categories, the improvements to our own a dynamic with our own product and then they have airlines. She wants to take two or three examples sure. There is that there's quite a few benefits, but the ones that we're most excited about ones around.
Two.
No more frequent sketching believe me out retains we generally have.
Schedule change with <unk>, which is quite mass and but we don't have the ability to adjust frequently and them as much as we would like to so that is obviously a huge benefit.
I didn't catch tiny little bit when he talks about other airlines like their ability for us to have our families in the better in sync with our partners and also another airline and to also has no real time availability in all channels. So in the environment. We are in today.
It's not optimal so tomorrow that will be appearing to benefit from and also on the answer let me side of the business. So today, we have the ability to sell in San Luis by Tomorrow, we'll have the ability to introduce more of them, but also to optimize their revenue that we generate.
From the sale of and Kelly and that's just you know in from a revenue perspective, but when you look at it from a customer service point of view the benefits you know our ability to better serve that customer in the airport environment and in contact centers will also be meaningful which will give us of course, you know hunter resulted in revenue.
I'd say that needs to be Frank I think that 300 million estimate is conservative.
Okay, great. Thank you and then interesting to see the domestic yields up so much with the domestic loads down.
That's not how every airline that operate them axis is seeing that go down into more of sometimes more of a load factor benefit. So I'm wondering for you guys is just a function of mix, where you're just basically cutting service and lower yielding markets, where are you actually able to take some of the supply reduction and push incremental price sort of.
Across the system. Thanks.
Yes, hi to see this is actually three three things that are most.
Important on the domestic network efficiencies, we can't neglect the comparable to last year. If you recall in the third quarter of 18.
Our competitor with you know facing strike fat. So basically there were a lot of.
Very very significant pricing activities last summer that we didnt observed this year. So that's one thing for sure that you know gives us good yields comparisons. In addition to that and we also pursued a lot of opportunities on the branded fares side of the business and also you know basically ferry system, where we have the opportunity.
Strong demand, we did actually push up the.
Sure. So those three things aren't really the biggest yeah I think its drivers for the domestic performance.
Thank you.
Thanks Hunter.
Thank you. The next question is from onshore Tomorrow with Bank of America. Please go ahead.
Hi, Good morning, everyone. My first question I think as for Lucy can you talk about your ability to manage fares in Fourq you considering that it is all of a low lower load pack load factor period relative to Threeq, you and that's something we should think about fourq. He was having maybe a few more tailwinds given no longer lead time.
On bookings on a little bit more flexibility unloads, just would be great to get your thoughts on that.
Theirs is one thing for sure, particularly on the international networks, and that's our ability to collect incremental.
You know fuel surcharge revenue so they fuel surcharges really peaked in the third quarter of 18.
For obvious reasons, when we look at.
Our ability to push international affairs up it's a little bit more difficult because we don't have the ability to push that.
Surcharges that so much.
The environment is very competitive as we know, particularly on the international Frank.
On the U.S. trans border market and even on that domestic market to like except I think that the pricing environment gets going to be far more stable, India and the fourth quarter.
[laughter] that's helpful. Thank you and then my second question for Mike on your 2019 free cash flow guide of the 1.3 to 1.5 billion you outlined in your release today. It looks like you already have over 1.6 billion year to date and if I do my math correctly it seems like four.
Q implied EBITDA should cover the remainder of Capex for you for the year. So what's the disconnect here you. It is there some change in kind of working capital seasonality or or something just let's see what I'm, what I'm missing on the free cash flow guidance. Thank you.
I.
Don't have the exact answer that question, but I think it's got to be working capital seasonality.
Drops off in Q4.
Okay, maybe we can follow up afterwards, thank you.
Thank you.
The next question is from Dutch tender with Canaccord Genuity. Please go ahead.
Yeah, Thank you and good morning.
A lot of questions on what happens when the Max comes back online as we inch closer to that I just wanted to flip it around and in the off chance that the delays extend further than you anticipate can you talk about.
Whether any of the remedies your views to replace that capacity or you know would reach end of life anytime soon you know are there any measures.
Right.
Or is it possible that you you know you might extend the the seven three sevens coming back online. If you were given the option.
So.
So first of all yes, I mean, we obviously are.
Can you see looking at alternative scenario so Doug.
And.
We do have a series of airplanes that.
We've done the maintenance work to ensure that to continue operating for us.
Well into next year, even though we were otherwise planning to exit them and so so we have done that work several of the airplanes. So that we.
Extended their useful life on the engines a until the end that those will.
We know the tide exact timing of that and so those will not have flexibility if that extends indefinitely, but we have a large number of our contingency aircraft available.
Maintenance work being done with that MRO facilities, having been a secured and steps being taken as well. We've also as you know we've worked very very well with a.
Really for different operators.
Net lease arrangements at this point.
We have arrangements that are available in flexible to go on into a into a longer period of time should not be necessary.
And does the the cost of that replacement lift as you exit you know Pete.
Summer travel season change at all is at lower as its less competitive for people fighting to you know for that scarce resource right now no. There's no question that the that the a wet for example, the wet lease market, which is a short term, which is a short term tool the wet lease market increases based on demand much as any other supply and demand dynamic.
Good.
But we were able to a like for example, they are very useful.
Qatar airplanes that that's helped us through the summer that wet lease arrangement is over so we're not paying for that to the fourth quarter for example, and and so we mentioned that you know into next year. We've we've secured two other three thirtys that'll help us at a lower cost at a substantially lower costs than the than the Qatar one for them.
And so so as we as we go forward based on seasonality the wet lease costs due to do in fact.
Differ.
The other hand.
We do want to maintain flexibility until we have the full visibility on the returned to service.
That's helpful. Last question for me I think most people agree that there was a pretty significant pilot shortage globally, I mean, I understand you're not wanting to higher too soon for the 737, Max but can you can you talk to your ability or what risks there are in your ability to to hire the pilots you need as quickly as you need them.
Right. So first of all we have a as we've said if you're trying to do you have to 400 or so pilots.
Operating the 24, so that issue is a covered already.
The pilots have continued to do simulator training and as you know we're the only one of North America, who have the simulators. So they've done the simulator training over this period of time, they're gonna be you're ready to go fairly be deployed fairly quickly pottery entry into service.
That's the initial 400 beyond that we have a very detailed program with each of our two largest regional partners.
That's guy regional and we have a pilot flow agreements.
That provide for pilots to two to apply their Canada, we already have a detailed approval process that we know which pilots have been approved they in turn have got arrangements with a.
Flight training schools and other capabilities that create assistance to think of it as a farm system and the farm system is working we've been developing it for a number of years now we've invested in it actually helped us reduce our cost and giving them greater stability in greater and given their pilots greater visibility on the on career opportunities Air Canada. So.
Actually no worth a lot of that doesn't mean that 100% of our pilots will come from these two operators, but that provides a good base for future pilot flow.
We've also had no given that you know air Canada as recent successive also had success at attracting and we'll continue to attract pilots from our competitor other competitor carriers and in Canada, and so we're feeling good confident that we'll be able to up.
To to fill the pilot requirements for next year.
And going forward next year.
Thank you.
Thank you.
The next question is from Chris.
Our capital. Please go ahead.
Hi, Thanks folks good morning, Lucy maybe just one more question for you I'm looking at the cargo performance over last few quarters. It.
Breaking down and I know, we've talked a little bit about international trade, but one of the things will cargo and it's also been a fairly decent leading indicator of your business program and business travel I know in earlier question, you talked a little bit about it but is there anything that we should be thinking no different. This time about you know how you how should we thinking about.
And as travel into 2020, given where the metrics on cargo or is there a disconnect that we may be machine honestly.
Yeah actually all maybe I'll take that Chris It's Kevin here, when we look at that you're absolutely right cargo has tended to be a good barometer of economic activity globally, and sort of sort of macroeconomic trends are often influenced by what we see in cargo.
However, in our particular case, we've seen a extremely attractive.
And bullish passenger market other than in the areas that Lucy pointed out which include.
Pockets of of instability like in China, and Hong Kong and.
Those were those were of course influenced by a are there other factors.
So we have seen this year a disconnect between demand on the cargo side and demand on the passenger side other than those.
Those pockets so we're not reading into if your question is should we be reading the indicators coming out of the cargo business is being indicators of becoming a recession, we're not reading that into.
Our demand curve for 20 funny.
And in particular in their business.
And that includes the business have setting that is true as far as a business Kevin is concerned as well correct.
All right [laughter] and then Mike just a quick question I'm one of the somebody really headline numbers. This morning, just talked about your bps somewhere maybe missing some consensus numbers any tax rates in the quarter were a little higher than maybe we wouldn't expect I think in Investor Day, you talked about Q4, as we start seeing some tax impacts.
Just you know I I appreciate with the the integration into our plan, there's probably been some changes in your tax thinking I'm just a couple of questions. This is we think about.
Setting up the estimates for Q4 in 2020, how do we think about tax rates and I think the last time, we talked about you saw that you would be cash tax paying sometime in the 2021 timeframe, but just any update you can give us would be great.
Sure.
Good morning, Chris.
I still think we should the market should use the 27%.
Corporate tax rate on a go forward basis, I think thats, the best proxy to use.
On the cash taxes.
We did actually.
Say that would probably be some leakage this year in 2018 and more in 2020, and then potentially fully taxed when 2021 is our loss carryforwards run out we've been able to structure. Some things that would allow us to defer that a bit so the cash impact would be a little bit less on a go forward basis.
All right. So it's Joe you're thinking is 27, we should be kind of our baseline number we should assume at this point.
Hello.
Okay. Thank you that's all my questions.
Thanks.
Thank you.
Next question is from a breakeven on wanting with Morgan Stanley . Please go ahead.
Hi, good morning.
Hi, Good morning, Mike, Mike you talked about.
Realty to support yields RASM et cetera, So a healthy top line, if you're well going into next year, but what about the.
Unit cost side is there going to be any material lingering effects from the Max just general color on puts and takes and maybe your ability to get down unit costs next year, just given all the.
Relation next year and so on.
It's a great question and we're still working through those issues, given the uncertainty or the Max situation and the overlap of fleets.
From a mitigation perspective, so there'll be probably some leakage next year from a cost perspective.
And I would consider that risk insurance for the most part.
We.
Aside from that there are a couple structural issues next year, but we think we can absorb those those issues.
And again as I said, there to an earlier question well have clear guidance in early February as to where CASM ex where we'll end up in 2020.
I've a follow up you talked about leverage your bed buybacks is there way that we can approach maybe what a lower bound is on what the leverage metric.
Would be meaning are you willing to go to <unk> 0.5 times leverage or something like that so we can start to put some numbers around the ability to buy back stock and so now it's a very fair question I think.
You know, we believe where we are today you know 0.7 to 1.2 range is investment grade level.
The other metrics also involved in Moody's recipes analysis of giving us investment grade, but as a proxy for for a leverage ratio.
I don't see is going much lower than we were in Q3 0.8, frankly, I don't think that's sufficient from a from a capital allocation point of view.
But I know that a range will be plus or minus 23 points from where we are at year end.
So Kevin here and as you probably know the consistency that you maintain those levels is also a factor that they look at.
I think that it's not just doing it for one or two orders, making sure that sort of.
Such as that it's a sustained.
Coverage ratio.
Thank you.
Thank you.
The next question is from Helane Becker with Cowen. Please go ahead.
Thanks, very much operator, hi, everybody and thanks for your time I'm kill and I think he made a comment I want to read too much into it but you talked about.
The Max and when the grounding in the U.S. is lifted did you mean to imply that the U.S. would love to grounding before that the Canadian market or you know am I reading too much into that statement [laughter].
[laughter] I would say, probably we probably reading more into it because I have no visibility myself on that.
Topic, but I think that we know that.
The phase to be the regulator of first resort here, if you like and so whether or not to transport, Canada or other regulators, though at the same time.
Really are looking to the regulator first resort the Fey and it's a initial step as being an indicator as to the returned to service and so we're hopeful that other regulators would act in tandem we have no visibility that they won't.
But we would certainly view that as a step to start taking cuts constructive.
Actions ourselves in terms of pilot hiring.
We have of course, we know that dynamic with yeah. So that was somewhat disconnected in the past that we hope that yes. It would have to the same time. So we don't know where all the regulators are going to be but we would start taking some steps towards reestablishing. The returned to service because this is it as I said several times. This is not a overnight fee.
Gotcha, Okay. Thanks for that.
And then my other question is with respect to the deferred maintenance that you guys were doing you know to keep as many aircraft in there as possible as we think about that for.
Say, Tony Tony and let's think about it from like the second quarter on and assume that sometime in the first quarter. The aircraft gets back into service.
How much deferred maintenance should we think about you guys having to do in the last nine months of next year.
[noise] you know for cost for catch up purpose.
Separate maintenance into regular maintenance, which is being done on ongoing basis.
Per schedule.
For example, Oh, we have we've deferred on Wi Fi on many claims and so that's more of a capital item than it is a operating expense item.
It's a policy customer service.
But that we pull planes out a Wi Fi conversion.
As you know, we're changing our the paint as well on many of our claims so we've taken those two programs and basically deferred those into into next year until we have certainty around that situation, but yet the same time, even putting doable.
77 back this year, while the airplane so considering.
Putting Wi Fi on while they're benefiting so you do have a little bit of that trade off where we're getting some of their work. This year that would otherwise thought of it does this year given the airplanes were sitting so.
Little bit of trade off that you're seeing there.
Okay, Great and then my last question is just on.
So a while back maybe two years you you guys renegotiated the agreements with you our regional partners and I'm just kind of wondering if it does renegotiated agreements are working as you anticipated and if you can somehow quantify the benefits of those you know for for.
I guess the second half that this year, maybe up to 2020.
Thanks Sherri.
I'll answer that question. So the biggest contract we have because partner we have courses jazz.
And we renegotiated and extended that contract earlier this year in February .
Of certainly the biggest short term impact is a reduction of approximately $50 million in fees that we would page as to operate those planes on our behalf.
That is obviously being being realized as we speak.
There were other network benefits associated with more flexibility around their fleet.
Which we're we're getting some benefit now but of course, the Max situation has also cause that to be deferred a bit. So we expect a much better.
Impact next year on the network side.
Regarding the suggesting at a given examples of things I want to things you may remember, we talked about the fact that we were able to the result of the changes to the contract we're able to introduce Rouge aircraft on some of the regional routes, which obviously has a much lower.
As a dynamic cost for LTL dynamic than the than the jazz airplanes would.
That is some cases that have to be suspended.
Because of the fact that we needed to to users airplane to fly other additions or otherwise loan by mainline and therefore, the regional carrier was continuing to operate the regional route so what Mike first that's an additional benefit that we'll get a next during the following year once they have backed set of return to service.
Gotcha, Okay. Okay, great. That's all very helpful. Thank you very much excellent.
Thank you.
Next question is from Kevin Chiang with RBC. Please go ahead.
Hi, Thanks for taking my questions. Just a couple of quick ones for me I'll, just one on pension funding I see your 85% mashed on liabilities.
<unk> points quarter over quarter, just wondering if there's a timeframe to get this 200% or perhaps even a.
Target of yours over the near term near term here.
The hedging the hedges.
The pension funding sorry pension funding Okay. Yes, we're currently sorry, Kevin we're currently at 85%.
Well, we'll we'll look to stepping up overtime, but we think we're fairly risk well risk adjusted at this point in time or 85%.
We look at risk measure, which is less than half of where where it wasn't we started this this journey.
And we're comfortable with that risk profile at this point. So so again, we may step it up overtime, but currently 85% we're very comfortable on the on the Humanization process.
That's helpful. And then you get your comments on the on on the six freedom strategy and some of your earlier comments I'm just wondering how does not end market outlook for for the Atlantic what were the Pacific.
Impact our strategy, so if the pacifics weaker than maybe a little bit more competition on the Atlanta to throttle back your long term outlook for that six through them.
Growth strategy or would you look at them independently.
Yes.
What we've done or they are they.
The six freedom as we view the six freedom opportunity as a long term opportunity as we've been building out our three hubs. So we expect the good portion of our business model kind of.
In perpetuity to to be it at around this connecting traffic.
It's not something that we're going to go in and out of you know, but what well do it. Once you mentioned is that we will allocate capacity, where we see weaknesses, but we're not we don't excess six feet a market you know.
To the Pacific.
Because the Pacific is a bit tougher China's a little bit tougher. So you will see you will see movement as between Atlantic at Pacific.
But we certainly have big aspirations that will come to the big aspirations for six freedom traffic in each of our three hubzu.
And then certainly we're not getting out of the six freedom business and Vancouver.
So so this is a big big part of our strategy, it's going extremely well.
And ER, we Oh, we have a bit of a slow down because of 737.
Because of the 737 back Scrounging, we're still not anywhere near our fair share.
What we consider the fixed rate a business to be.
Well continue to be to be a moderate so I think if you've seen the third quarter.
We sort of took a bit of a pause with it certainly is not based on demand, but it's based on the lack of the right aircraft to take passengers over the hubs.
Yes.
If you look at town are transatlantic performance.
Thank you can assume quarterly operating at 80 or 89% so in essence.
Our job is to try and.
Capture the high yielding traffic, which in many cases, what had been in local passengers. So has there been selling to the next grounding there comes a point, where we have to optimize the revenue.
We didn't lose any load factor on the Trans Atlantic [laughter] connecting passenger would have given us.
Revenue potential so.
That's why you seem a little bit anything like if we have the 10 more time.
We like some of that you let me mention maybe some of the South Texas markets are little bit more on me on Asia.
But it's really a question about lightning are slow that down.
And our before.
That's a that's helpful color, thanks, and congrats on the good quarter there. Thank you very much.
Thank you and then next question is from Jamie Baker with JP Morgan. Please go ahead.
Hey, good morning, everybody.
Thank you and most of my questions have been answered, but I also have a follow up on what leasing and pardon my ignorance here, but I I don't have much experience on this topic. Since you know scope clause is here in the states.
Generally don't allow for it so it does seem like you're going to be in a situation where.
Where max is and what we used aircraft simultaneously overlap one another.
Sounds like the plan is to operate both.
My question is there any contractual ability.
To switch from a wet leads to a dry lease in which case it might make sense to just sit well leased aircraft. It seems that you know that would address what is clearly growing concern over you know oversupply next year and I apologize if that's a dumb question, but if there's a situation where you only be on the hook for the cost.
The shell it seems that that might prove economically preferable right. Yeah. So Jamie kalen here first of all thanks for the question. Thanks for being on the call I'd say two things one is that these the wet leases are very very short term leases. So so we can.
I think we put the expiry dates that are in our comments.
I think that they.
The new wet leases will expire at the end of the first quarter.
And so we're not this.
This is not something that's going to go on into all of next year unless there's a further extension to the grounding. So so they they're very very short term leases secondly, the up the the operators. These wet leases are in the wet lease business so to speak that they're not.
Conventional lessors of aircraft they actually do this as a business. So I thought the sort of thing that you separate the crew from the aircraft.
But it's not it really is not a major part of our overall cost.
Dynamic here from the back. So this is a we have many other costs have come up as a result of the Max. This is part of it but this is not the major factor now and we only have for west leases in any event going into next to the two three the two new three thirtys, which is very very short term and then the too.
767 said, we operate at Hawaii, which also which we've extended because of the extension of the grounding, but which will also.
And you know at the end of the first quarter. So it's not quite Oh, you're probably we might choose to extend them further if the ground extends but this is not a big big could cost dynamic for us.
Got it I appreciate it thanks for walking me through got that's it for me. Thanks Jay.
Thank you that's come I do know press star one to ask a question. The next question is from Tim James with TD Securities. Please go ahead.
Thanks, Good morning.
Question for Mike If you can help me reconcile that we change table.
Which shows 38 rules I think in 2020.
Between 7673, Twentys and the one ninetys combined with your comment about the the 15 kind of flex aircraft that you have is that ability to remove 15 I believe it was that you mentioned earlier in the call is that in addition to the plans that we see in the table.
[noise], it's a great question Tim It is in addition, we well.
Some of them or we do have specific plans to.
To exit some of these planes because of maintenance issues full summer.
2020, so so the ones that are actually planned because of maintenance issues or that Brian end of life are in the table and then again, there's a couple of those 15.
A lot a little more flexibility, depending on what happens with them that situation.
Okay. So the the 15 some of the 15 or our aircraft in the.
One is that we know will exit the fleet for for valid reasons, okay. Okay.
Next question, Mike the a stronger working capital performance that you mentioned a in reference to 2019.
Just wondering if those are kind of sustainable changes in the model.
In terms of of cash coming from working capital or should those influences reverse or or kind of moderate in 2020.
No I think Tim the majority of that is sustainable again I think.
We're still learning on the economics of Aeroplan.
I think we would probably conservative when we issued our initial guidance that we suspended on free cash flow for the year.
We tend tend to take a more conservative view of working capital, but as we continue to grow as you know advanced ticket sales continue to grow which is a good leading indicator to the booking curves.
And you've seen growth in Q3, as well and so.
I think the majority that is sustainable as we continue to grow.
Okay and then just my final question I guess for Lucy here I'm, just wondering if you with the new daytime slots that are being provided to to US airlines at an eight of them I think services starting in March of 2020, I'm, sorry, if you seeing any or your thoughts on the potential impact on on pricing into that kind of key mark.
Good for Air Canada.
Finally, we haven't seen any of that impact yet, but I think you know given that type of market that any day.
My my.
Feeling is that we would probably see very marginal impact on time.
Okay, great. Thank you very much.
Thank you there are no further questions registered at this time I would like to turn the meeting back over to Miss nursing.
[noise] [noise] perfect. Thank you Atlanta, and thank everyone for joining us on a softening.
Thanks, everyone.
Thank you [laughter] friends has now ended.
Disconnect your lines at this time anyway. Thank you for your participation.
Thank you the conference ask Alan please disconnect your lines at this time and we thank you for your participation.