Q4 2019 Earnings Call
Good morning, ladies and gentlemen, welcome to Air Canada fourth quarter, and full year 2019 conference call I.
I would now like to turn the meeting over to Kathleen Murphy. Please go ahead this machine.
Thank you.
Good morning, everyone.
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Thank you Kathy and good morning, everyone and thanks for joining us on our call today.
I'm pleased to report a strong financial performance in 2019.
We generated EBITDA of more than $3.6 billion, 13% above the prior year.
Reported an EBITDA margin of 19%, which met our guidance and surpassed the prior years margin.
These results were achieved despite the loss of approximately 25% or narrow body fleet for most of the year. Following the worldwide grounding of the Boeing 737 Bucks and I'll have a few words to say about this later [noise].
Operating income of $1.6 billion reflected an improvement of 154 million some 2018.
We generated record operating revenues of $19.1 billion and ended the year with record levels of unrestricted liquidity of 7.4 billion and a leverage ratio of <unk> 0.8.
These strong results during a difficult year or further evidence of our ability to effectively and nimbly manage through major challenges and demonstrate the commitment of our 37000 employees could take care of our customers under extremely complicated operating circumstances.
So our transformation, we built a rock solid foundation, which allowed us to fully deliver on our outlook on keeping natural metrics for the year and this is something I'm very proud of.
Our discipline was rewarded by an 87% return on our shares and 2019.
Yes, when added to our strong stock market performance over the previous nine years.
Helped make air Canada, the top performing stock on the T.S. Saks over the past decade, with a 3575% return.
On past calls I've, often spoken about resiliency and consistency as key objectives for Air Canada.
And a 10 year consistent track record is exactly what we have aspire to achieve.
The agility, we displayed and 29 team gives me confidence that will successfully execute on several valuable opportunities in front of us.
This includes the launch of our new loyalty program later this year, which we expect will be the best airline loyalty program in the world.
It will also enable us to successfully integrate trends, assuming we obtained the requisite regulatory approvals for our proposed merger.
We have no doubt that our whole the Canadian solution is the best possible one as it will secure jobs results in more trouble options for the traveling public and benefit all stakeholders.
We started 2020 with the constraints imposed by the ongoing grounding of the Boeing 737, Max as well as emerging economic and geopolitical risks and route suspensions, resulting from the 2019 <unk> novel Corona virus now known as Cobot 19.
However, our strong balance sheet.
Extensive in diversified network brand strength as the best airline in North America Young fleet as well as a remarkable employees equip us to respond effectively to any challenges that come our way [noise].
Before turning it over to Lucy I'd like to knowledge all employees for their dedication and thank them for delivering exceptional customer service and their contribution to achieving these strong 2019 financial results in the face of greater than normal challenges I also of course, thank our customers for their continued loyalty and with that I'll turn the call over to Lucy.
It could Caitlin and good morning, everyone.
I also like to thank our employees for their I'd have to viliki and commitment to taking care of our customers.
Their passion and drive allowed them to deliver excellent customer care. Despite the challenges created by the granting of the Max as well is the complex cut over to our new reservation system.
On this last point, we will undoubtedly achieved the financial benefits outlined in our business case, but more importantly, we remain confident that this much needed yet extremely complex transformation will facilitate improvements across our customers journey.
I would also like to thank our customers and our trade partners for their continued loyalty and understand Judy during these exceptional circumstances in for choosing Air Canada.
It's right 2019, we continued to focus on enhancing the overall customer experience.
In the fourth quarter, we begin refurbishing, our Airbus Athree seriously to bring it up to the same standards as our going 77, and going chip ascendon offering a consistent product across on mainline widebody fleet.
This refurbishment will be completed within the next 12 months.
We also completed installation of high speed satellite why fly on our Rouge fleet in December and expect to have completed watch that installation across the entire air Canada mainline fleet by the end of 2020 as well.
We're honored to be recognized these awards catches the best airline in North America by Skytrax and global judges Airlines have a year in 2019, and we will continue to innovate and invest in our product.
In 2019, we introduced our air Canada Cafe in Toronto, a unique lounge experience as well as we launched our onboard cafe and Skywriters Kids program.
Very pleased with the feedback received from our customers study.
Turning to our revenue performance for the fourth quarter.
Capacity growth of 3.3% passenger revenues increased 199 million or 5.3% on the traffic increase of 2.9 and yield improvement of 2.2%.
<unk> versus last year included additional revenue from Aeroplan slight redemption.
Yield and PRASM improvements were recorded in all markets with the exception of the Atlantic.
And it Didnt cabin honest system basis passenger revenue increased 31 million or 3.7% on yield growth of 4.1% further highlighting the strength of the premium experience we've created throughout the customers journey.
Turning to the domestic market on capacity growth it see 0.4% passenger revenues increased 46 million or 3.8%.
For the fourth quarter.
Growth of 3.8% reflected improvement on all major domestic services.
PRASM increased 3% on the higher yield.
Shopping for the quarter was slightly down compared to last year due to weaker western Canadian market transitional impact created from the cut over to our new rest system unless connecting traffic as a result scheduled adjustments related to the Max grounding.
I seem to be revenues were impacted negatively by the grounding as well as a reservation system cutover.
Despite the weakness experienced in western Canada are important transcontinental services continued to perform very well.
Looking to the first quarter, we anticipate year over year domestic revenue capacity growth. However continued to be impacted by the Max grounding from a schedule and product consistency perspective.
And it's been necessary to strategically deploy air Canada on select frequency markets that normally would be operated by our mainline sort of it.
[laughter] deviates from several of our scheduling guidelines and treats inconsistency for our customers. However, mitigation dr. searches are necessary when faced with the alternative of spending or further reducing capacity.
On the U.S. trans border markets on capacity growth of nearly 1% in the fourth quarter revenues increased 61 million for 7.2% versus the prior year.
You increased 8.3% and reflecting improvements in all major U.S. Trans border services, and a strong business class performance for the quarter.
Dropping through the quarter declined, 1%, which reflected reduced capacity on services to Hawaii and on certain long haul services due to the Max granting.
Looking ahead at the first quarter, we expect to see year over year revenue growth in the U.S. transport market. However, we will continue to be impacted by the Max grounded and we anticipate a slight capacity reduction.
The impact of the Max grounding is perhaps that's exactly right by the significant decrease in our profitable Hawaii operation.
First quarter of 2019, we had six daily flights from Western Canada to Hawaii with 77 Max.
We have had to have this operation backfilling, the philosophy with less efficient wide body aircraft and extensive whitney's operation.
[noise] this has impacted our overall profitability in just one example of a considerable in fact over the next grounding.
Consistent with the last few quarters, our international transit strategy of connecting U.S. customers to international destinations to Rob has been adversely impacted by the Max as we consolidate frequencies to several years market.
In the last several years. This strategy has delivered very strong results and has been a key component of our profitable international growth.
The negative impact on our transit traffic was south Rotary International network and will continue into the first quarter of 2020, given the ongoing grounding of the Max and the impact of the grown virus.
We do however, see very good results for traffic connecting over Montreal.
We took delivery of our first Airbus to 20 in December and this aircraft is currently operating between Montreal in Calgary.
Starting in May once we've taken delivery of three more eight to 20, we will begin flying between Montreal, and Seattle connecting two important aerospace market.
As well as Toronto, and San Jose, California.
Benefiting from a modern and efficient aircraft leasing to bolster our extensive U.S. networks and will support our strategy to attract U.S. customers to transit or hubs when traveling internationally.
We firmly believe that need to 20 will enable us to create new profitable city pairs and are now.
Other aircraft don't have the economics, our operational performance required to do so.
Finally, our customers experience with the eight to 20 is being enhanced as the aircraft offers large overhead bin space.
Why do you see instead of the yard entertainment.
Did you say, we're extremely excited about this aircraft and the opportunities. It represents for our North American network not to mention the reduced environmental impact.
Journey, George Bloody performance on capacity growth of 7% in the quarter revenue increased 52 million or 5.9%.
Our capacity growth over the Atlantic was an intentional strategy to reduce our exposure in Asia and to invest in the very stable North Atlantic.
Traffic increased on all major Atlantic services with the exception as Halifax in St. John's to the UK, where service was temporarily suspended as as a result to the Max Brandy.
We saw at 1.8% decreasing year than the quarter due to competitive pricing activities as a result, I mean <unk> industry capacity.
In addition to the above we experienced a strong quarter in the middle East in India to markets that hit therapy in the Canadian winter.
The growth prospects in India are very encouraging.
A longer average things like and currency also played a part in the yield decline compared to the fourth quarter of 2018.
Looking at the first quarter, we anticipate continued capacity growth as we redeployed capacity from the Pacific, especially China and Hong Kong over the glad to do you see the impact of the core Novartis.
Well as ongoing geopolitical tensions between Canada and China.
[noise] RASM in yields will continue to be I'm, just some minor pressure.
Just a fast resulting in a competitive pricing environment Oliver strategy, so focused on reducing our exposure to Asia.
We're confident in the performance over the 90 and later this year, we will be introducing our year round Montreal to to service [noise] connecting Montreal to another important aerospace market.
As long as Toronto to Brussels, which was acquired through cooperation with one of our transatlantic joint venture partners, that's an airline.
North Atlantic continues to be a very robust part of our network and you see considerable opportunities for further profitable growth.
Moving onto the Pacific on it I see reduction of 1.5%.
Revenues increased 6 million or 1.2%.
You've improved on China, Japan in Taiwan.
Traffic was essentially flat to prior years corridor.
The geopolitical situation between Canada, and China as well as attention in Hong Kong continue to negatively impact travel demand, particularly business related stuff.
As mentioned, we were able to redeploy capacity from China, and Hong Kong over the Atlantic.
In the quarter, we successfully launched our seasonal service from Vancouver to augment supporting our efforts to reduce seasonality throughout our network [noise].
Looking forward to the crude Florida.
[noise] specific capacity will be significantly reduced as we've suspended service to mainland China as well as from Toronto to Hong Kong until the end of March which will also significantly impact revenues over the Pacific.
We're closely monitoring the situation and will be adjusting the schedule as necessary.
Redeployed this capacity throughout our network, including up gauging certain services as well as increasing frequencies [noise] between several market.
Moving onto our other services on capacity growth of 7.2%, our revenues increased 34 million or 12.1%.
I think increased 9.8% with traffic was recorded on services to South America.
Personal leisure destination.
You improved 2.2% with improvements on services to South America in Mexico.
In the quarter, we introduce service from Toronto to Quito, as well as Montreal to sell Pablo.
These services bolstering network to South America, and similar to our often service support our efforts to reduce seasonality you know schedule.
We're encouraged by the early results of these efforts.
New routes to so Paulo, Auckland, and he told have all delivered positive results with a favorable outlook.
Continue to explore opportunities to better to first if our network on a year round basis.
[noise] for the first quarter, we anticipate continued revenue in capacity growth.
Voted by New South American services to ketones Apollo, we look forward to induce introducing our service for months you got to Bogota needed here.
Turning to cargo fourth quarter of 2019 saw year over year reduction in cargo revenues 31 million or 42%.
Specific continue to be impacted by industry wide decrease in air cargo demand due to continued global trade uncertainty.
Overall cargo yields was down 8.7% mall traffic declined 6% versus the.
Our years of fourth quarter.
Looking ahead, we anticipate cargo to be significantly impacted by the suspension service China [noise].
Oh facing exceptional circumstances, our cargo remains focused on continuing to invest and new technology and artificial intelligent optimized our revenue generation capabilities and also enhance the collection and use of data.
Turning to other revenues, we saw an increase of 34 million or 50% in the quarter within net margin recorded on the redemption and delivery of non air goods and services related to the airplane program being the largest contributor.
Also saw an increase in ground package revenue from the.
Fourth quarter at Air, Canada, vacations, contributing to a record year for air Kinda vacation.
I will now turn the call over to Mike for a discussion on our cost performance and balance sheet.
Thank you Lucy and good morning to everyone.
But also like to thank our employees for their apart and teamwork and achieving these solid results by the continued focus on taking care of our customers.
We reported EBITDA of 665 million in the fourth quarter 46 million or 7% above prior years fourth quarter.
Operating income amounted to $145 million.
Fourth quarter EBITDA was negatively impacted by two items, which we want to call out first was a onetime negative revenue impact from Merck transition in mid November to our new passenger service system.
The second was higher than expected stock based compensation expense, reflecting the increase in our share price.
An increase in employee incentive program accruals.
Combination of these two items had the effect of reducing EBITDA by $60 million in the quarter.
Each I didnt contributed similarly to the impact.
CASM increased 2.5% in the quarter, while adjusted CASM, which excludes fuel expense ground package cost at Air Canada vacations, and the operating expenses of Aeroplan increased 5.5%.
Consistent with prior quarters. These increases were largely due to the impact of the Max grounding, which resulted in an S. M increase of 3.3% in the quarter versus a planned SM growth of 4.6%.
Relatively higher costs associated with replacement aircraft.
And the ongoing actually that operating expenses, including depreciation and pallet wages, which continued to be incurred despite the grounding.
As disclosed in our news release. This morning, we estimate that that had we operate the 36 Boeing Max aircraft as originally planned in 2019, adjusted CASM would've been reflected an increase of approximately 2.5% when compared to 2018.
The speaks to our continued focus on cost reduction and containment, which remains a key priority at air Canada.
Turning to fuel fuel expense decreased 78 million or 7% in the quarter on lower jet fuel prices year over year, you average price of fuel was 75 cents Canadian sense for leader in the quarter down 11% versus the same quarter in 2018.
Looking ahead, we expect the price of jet fuel to average 71 Canadian cents per lead in the fourth quarter and 74 can 18 cents per liter for the full year.
There are Canada has not entered into any fuel hedging contracts for 2020.
Wages in salary expenses came in above the prior year by 93 million or 17% largely driven by an increase in fulltime equivalent employees of 9.2%.
This growth in the workforce included the impact of the acquisition of Arrow plant in January 2019 incremental personnel support technology projects and the in sourcing of certain IP functions previously outsourced to third parties.
As mentioned earlier, we also recorded increases and stock based compensation expense and expenses related to employee incentive programs.
[noise] communication and information technology expenses increased 40 million over the prior years fourth quarter. This increase reflected additional different technology projects year over year, notably those related to security data platforms system resiliency and monetization and also include the impact to the acquisition of Aeroplan transitional costs associated.
The in sourcing a certain functions previously outsourced to third parties as well as transaction fees related to the new reservation system.
I would now like to provide you some guidance for 2020.
For the full year 2020, we projected EBITDA margin of approximately 19%.
Which would result in a small increase in 2020 EBITDA versus between 19 EBITDA of 3.636 billion.
We expect to system SM capacity growth of 1% to 2% when compared to the full year 2019.
In addition to the other assumptions we revised our 20, we provide our 2020 outlook for the first quarter and full year with respect to both EBITDA and is some capacity notably assume.
One, but air counted as mainline China, and Hong Kong services fully recover by the third quarter of 2020.
And to the Boeing 737, Max aircraft gradually return to service commencing late in the third quarter of 2020.
If either or both of these assumptions should change and impact or projections, we will revise guidance as appropriate.
We had operated up to 24 Boeing 737, Max aircraft in the first quarter 2019, and the impact of their grounding along with the suspensions to mainland China and from Cronto to Hong Kong and a higher proportion of projected annual operating expense increases in both aircraft maintenance and employee benefits in the first quarter 2020.
Is expected to result in a first quarter 2020, EBITDA that is approximately $200 million lower than the first quarter 2019.
Given the overall projected EBITDA increase in 2020, we expect more that make up for the first quarter 2020 shortfall over the remainder of the year.
Our annual fuel assumption on 2014 cents per liter is well above the current fuel curve.
We believe that as the China based business returns fuel prices will move closer to 2019 levels. As a result, we believe that our EBITDA guidance has more upside than risk, assuming or a Max returned to service and trying to recovery assumptions prove to be accurate.
Moving onto the balance sheet liquidity.
As Kelly mentioned earlier, we ended the quarter with unrestricted liquidity of almost 7.4 billion another record.
Looking at the full year 2019, excluding onetime proceeds related to our acquisition of Aeroplan free cash flow Amendment to 2.075 billion.
This reflected an increase of 748 million from 2018 and was higher than the free cash flow of between 1.3 billion at 1.5 billion projected in our third quarter news release.
This improvement was due to a combination of factors, including higher cash from operations are lower than projected level of capital expenditures due to certain projects being deferred to 2020 Antoun initial settlement payment from Boeing.
Air Canada continues to project cumulative free cash flow afford <unk> billion to 4.5 billion over the 2019 to 2021 period, which now includes the 2.0. So in 5 billion of free cash flow recorded in 2019.
We had been discussions with Boeing to seek to settle the terms of an arrangement in relation to the grounding of the Boeing 707 Max aircraft.
Until this arrangements finalize information regarding the outstanding purchase commitments for aircraft is subject to change.
The initial settlement payment was made to air Canada in the fourth quarter 2019, with any further amount subject to the finalization of the agreement.
From an accounting perspective, the compensation will be reflected as an adjustment to the purchase price of the current and future deliveries and we will flow through air Kansas Consolidated statement of operations as reduced depreciation expense over the life of the aircraft.
And as a reduction to the additions to property and equipment on Air Canada is consolidated statement of cash flow.
Net debt of 2.8 billion in 2019 decreased 2.4 billion from December 30, Onest 2018, reflecting an increase in cash cash equivalents and short and long term investment balances of almost 1.7 billion.
And a decrease in long term debt and lease liabilities of $679 million.
Our leverage ratio was 0.8 at the end of the year in line with leverage ratio not exceeding one projected in our third quarter news release.
Our return on invested capital was 15.5% at year end inline with our guidance provided in the third quarter news release and significantly higher than our weighted average cost of capital of 7%.
Excess cash amounted to almost 2.7 billion at the end of 2019 as discussed on prior earnings calls, we'd expect to deploy this excess cash 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.
In respect to there are normal course issuer bid, we repurchased approximately 9.1 million shares in 2019 at an aggregate consideration of $378 million for an average cost per share of $41 support.
Of course additional information can be found in our financial statements and Mdna, which were posted on our website and filed on SEDAR. This morning, and with that I'll turn it back to killing.
Thanks, Mike.
Before closing I want to take a few minutes to say a bit more on the Max our mitigation program and its impact.
At the time of the worldwide to grounding of the Max in March 2019 Air Canada was operating 24, Max aircraft and wasn't as significant ramp up phase for scheduled deliveries from Boeing.
By the summer peak of last year of July 29 team Air Canada was scheduled to operate 36 Max aircraft.
By year end 2019, there were 8 billion Max Asms that were effectively not flown as a result of the grounding.
To mitigate in part the loss to air Canada, Sam's that would've been flown by the Max.
We kept in our fleet certain aircraft that otherwise were scheduled to exit.
Hi, this release extensions or through sale deferrals, we source new aircraft from other airlines and lessors, we wet leased aircraft with crude from other operators and we covered mainline flying with ruse and with regional partners.
In total we operated approximately 97% of our schedule in 29 team.
And our efforts from the outset had been focused on minimizing disruption for our customers. So they maintain confidence to book with their Canada, while also preserving value for our shareholders.
For 2020, our plans were to have 50, Max aircraft operating by the summer for a total of 13 billion asms flown by the Max during the year.
As it stands today, all Max aircraft scheduled for delivery beyond the original 24 have not been delivered and Boeing has now suspended production of new aircraft.
No I assume everyone heard that Boeing announced on January 20 Onest.
2020 that it expects that the Max aircraft will start to return to service during mid 2020.
We will continue with our mitigation plans, but as the Undergrounding date continues to shift to the right. This becomes increasingly challenging and operational complexity is compounded.
We're quite confident that the Boeing 737, Max will fly again, and we believe customers will regain confidence in this aircraft.
To be clear safety is Paramount and we're working closely with the governing bodies involved to achieve absolute certainty that this aircraft as safe for our customers and for our crews before it takes to disguise again.
Once the aircraft is ruled safe by the regulators by Boeing and by all our own internal safety and pilot groups, we will be fully dedicated to returning it safely to service.
More generally I feel 2019 tapped an incredible decade of transformation at Air Canada.
The year, we recorded record revenue of 19.1 billion and achieved record levels of liquidity, our stock was a top performer increasing 87% during the year, we have a pension solvency surplus of about $2.5 billion versus a major deficit not so long ago.
In India, we received significant upgrades from two major debt rating agencies, moving us to within one level of our goal of investment grade.
Perhaps more importantly for the future. We also continue to put in place the building blocks to achieve even further growth and increased profitability.
Throughout the year, we consummated transformative transactions such as the acquisition of Aeroplan, which will be foundational for our new loyalty program.
And the signing of our new capacity purchase with our major regional partner jazz.
Personalizing are important regional flying operations in securing estimated annual savings of approximately $50 million.
We also signed a definitive agreement of course to acquire trends that this was subsequently approved by 95% of trends that shareholders.
We're now awaiting regulatory approval the transaction, which we are confident of obtaining as it provides a whole the Canadian solution that'll benefit travelers employs a both companies and other stakeholders, while also strengthening the economy of Quebec, and Canada as a whole.
In the fourth quarter, we launched on your reservation system and took delivery of our first Airbus eight to 22 foundational elements for the next stage of our transformation.
The introduction of new reservation system, something we last did 25 years ago is tantamount to heart and lung transplant for an airline never undertaken without residual effects and we fully appreciate and regret any issues our customers have encountered.
However, we have continued to operate our regular schedule without disruption and as the system continues to stabilize all stakeholders, particularly our customers and our travel agency partners will increasingly see the benefits of the new system.
Since implementation of new system, we have already carried nearly 12 million customers.
As Louis mentioned the eight to 20 is another game changer, helping transform the traveling experience for our customers and its short time in service with Air Canada aircraft has already garnered rave reviews from our customers.
We know it will serve us well and open new market opportunities for us all the while achieving operating efficiencies that will flow directly to the but bottom line.
We also continue to receive affirmation throughout the year that air Canada is truly become a leading global carrier. This includes the Skytrax Award for best airline North America for the third consecutive year, an eighth in the last 10 and other awards for all aspects of our service.
One reason for this in our numerous other accolades is engagement of our employees in our success was recognized through awards as that for one of the top 100 employers in Canada and one of the top diversity employers in Canada.
What makes these and other achievements notable is that 2019 was a year of tremendous adversity.
With ongoing geopolitical events, a more complex regulatory environment significant weather events and of course, the sudden and ongoing grounding of the 737 Max.
This black Swan event unseen pretty previously in our industry now coupled with the impact of the cobot 19 buyers on our industry the magnitude of which only became apparent in early February of this year.
I've been an existential threat a decade ago.
There's no question that we are now not only stronger than we were 10 years ago, but that we are truly transformed.
The crux of our strategy has been to build an airline that is sustainably profitable for the long term.
These crises have put the sustainability to the test test that I'm proud to say, we're passing with flying colors.
I applaud the nimbleness of our people and the agility of our leadership team, which was fully displays and 29 team. It also gives me great confidence for the future.
I'd like to close by thanking again, our employees for a tremendous yearn for continuing to keep our customers at the core of everything that they do as well as our customers for their continued loyalty and that we'd be pleased to take some questions from the analyst community.
Thank you we will now take questions from the telephone line.
If you have a question and you're using a speakerphone. Please post your handset prior to making our selection.
A question. Please press star one on your telephone keypad, if at any time you wish to cancel your question you May press the pound sign. Please press star one at this time if you have a question there will be a brief posco other participants Rochester. Thank you for your patience.
The first question is from a Walter Spracklin that with RBC capital markets. Please go ahead.
Thanks, very much good morning, everyone warning Walter so so focusing on your comment with regards to redeployment of capacity over to Atlanta, because the results of the trying to surface service disruption. It you know the impact there is all other airlines are doing the same.
Be suggestive that competitive pressures that you are leader alluded to is it possible that we could see yields a effectively turned negative in the early part of 2020 here as that capacities redeployed.
First of all the redeployment of this kind of capacity when the when the duration of the China situation is still unclear means that people will be largely doing it on a short term basis and of course airplanes.
Specialty wide body aircraft like this being redeployed is is not a easy feat. So it's not as if people are going to change their entire plans for the rest of the year. So I think that you'll you'll probably see some tactical capacity redeployment, Walter but it's not going to be a wholesale dynamic where.
We went changes their plans for the for the summer.
So you don't see yields as being because of that the tactical you don't see it being overly impactful on overall yields as a result right no at this stage, we don't see that and you could also assume that given the pressures in Asia that said that the Atlantic will become even more attractive destination with the with greater demand.
Okay, turning to CASM I don't know if you like you can give us what your implicitly.
Putting into your 2020, there for for CASM, but the real question here is.
He is when you.
See the Max does return in the third quarter.
Looking at your ability to bounce back to let's call. It your 2018 level for CASM. How quickly do you think it would take for you.
To to get back to that level or is it a multi quarter.
Multi quarter duration, where we may not see that level in 2021.
I think a good morning, Walter I think you'll see it in 2021.
As you probably.
Seen from our our discussion today Maxwell, we believe the Max and start gradually coming back into our operation Q3.
So there will be a little bit overlap during that transition period.
But certainly as we get critical mass for the Max.
Early part of 2021 Theres No reason why did the CASM ex can't get back to two to pre grounding levels perfect. I. Just last question here is on the cadence your free cash flow Mike.
Before you gave the.
Before the Max grounding occurred your free cash flow was essentially you're starting low and ramping up significantly over the over the three year period, you you would forecast, but now that the Max was granted you got to.
Kind of an early lift in free cash flow and now it's probably going to come back down as you except deliveries.
Over the course of that time, you're still guiding to the same level cumulatively.
You know any any risk that you know because of this pushback, we do and the Capex increase that would come in 2021 is we accept delivery that you don't hit the deferred a half level or forward afford a half level over that period.
We don't think so thats why we reaffirmed the long term guidance you've spent a lot time looking at different scenarios and where the Max may fall in right now, we're obviously assuming 30.
Come in well 30, we operating.
Our year end 20 being pushed into next year and that's built into our Capex plans. So so we do not see a at this point I'm, assuming you know given all the assumptions we put around the guidance that the four to 4.5 billion cubic free cash flows.
At any risk.
My question. Thank you very much.
Thanks Walter.
Thank you.
Next question is from a Kevin Chiang with CDC. Please go ahead.
Hi, Good morning, Thanks for taking my question here.
Just on the Boeing front, just from an accounting perspective.
When you come to a.
A final finalized agreement here should I was trying to think of that as a onetime benefit to let's say 2020, capex or or does that bleed through multiple years. As you took delivery of the Max and then secondly to that I think you planned for about 400 to 75 million of Capex in Q4. It looks like you are roughly.
220 million.
Million shy of that would that be primarily related to the Boeing preliminary settlement or are there other moving parts and that number.
Let me start with the Q4 number.
Capex was lower in Q4 than we had anticipated for a couple of reasons. One we did defer some capital into 2020.
And also we did net the initial payment from Boeing.
To that Capex and I can't give you the breakdown of what that variances.
To your first question Kevin.
Any cash we received in 2020 and we expect.
Upon finalization of the arrangement to receive cash in 2020.
We'll go against.
Capex in whatever quarter, we received the cash.
Aside from that.
That means the.
Cost of the aircraft.
That we currently have on property the ones to be delivered will be reduced in book cost and so that our depreciation will be slightly lower over the next 2025 years electronically.
Otherwise would be but that's helpful. Thank you and then can you just update us on on where you are in terms of how many Max simulators, you have and maybe how many will be receiving over the next.
On a let's call it.
Six to 12 months as you as you prepare your pilots for for the recertification here.
We have to Sims.
And we've always had to Sims for the most part and we think thats more than sufficient for our for the the fleet size.
We do have access to another half assume on on a rental basis.
But that will probably be using to bring our palace up.
Up to two requalify once the Max is on grounded.
So certainly that two to two and half sims or more than sufficient for our for our fleet size.
Thank you for that and just lastly from me and I appreciate on on the cargo frontiers.
Uncertainty with.
How the client of ours plays out, but when I look at Q4 results.
Down year over year, but sequentially up 5% and.
I think the last time, we saw sequential growth was was over a year ago.
Are you are your lease where are you at least maybe leasing some signs of stabilization before the court of ours broke out and is that something that if you think of that going to translate headwind.
The cargo revenue might have found a floor here exiting 2019.
Kevin I think that's a fair statement I think.
You know Lucy can confirm this but our China business was stabilizing if not showing some signs of growth.
Small growth small growth, but some signs of growth. So I think your observations that absolutely correct.
Also our Carter group has looked to other ways of generating revenue and primarily looking at domestic.
Opportunities as well so a combination of the stabilization if not small growth in China for Asia in Q4, plus some very good initiatives on the domestic front.
Helped to help the.
The issue in Q4.
Thank you for that.
Thank you.
Your next question is from corner with Scotiabank. Please go ahead.
Good morning, and thanks, everyone.
And glad to see some good free cash flow numbers, despite the perfect storm here.
So on on first question is on a on the Q1 EBITDA guidance. So Mike you called out some items.
That's caused EBITDA declined by 200 million dollar in Q1, no maintenance and the employee benefits out about 85 million dollar off that Guinea quantify the remaining items and also clarify if the reservation system will continue to have them back in Q1.
I can't I cant publicly qualifier reconcile the items.
But certainly the largest item.
Is the absence of the Max a 24 Max that are not operating Q1 that we're operating a last year in Q1.
One of our most efficient aircraft.
Being somewhat backfill by less efficient aircraft is certainly not helping again that will.
Come full circle in Q2, where we're up against the and grounding the grounding last year as well so so certainly.
The biggest largest items is the absence of the Max.
And certainly there there is some impact from not playing to China for two months of Q1.
Including cargo as well, so so but certainly the Max.
Absence, the Max is the single biggest lighter and remember conoco and we've talked with this in past calls its kalen here that in addition to flying less efficient aircraft that to replace the Max flying were also.
Because of our unique situation.
Covering the floor covering the cost of the pilots who are described the Max.
When the aircraft is grounded the 24 aircraft in our fleet, we had 400 or so.
77 pilots.
And because we did not fly the LNG before our situation is different than the other north American carriers that are were all operators of the of the 77 Angie. So in addition to operating less efficient aircraft. We're also continuing to carry the cost of the of the pilots that had been.
Trained on the on the Max and that are now kind of waiting for the Max come back into service because there is no energy to for them to fly. So so that is an incremental.
Cost, which so we certainly had not expected to cover in our in our operating budget.
That's good color and I understand obviously I make this kind of some noise around that as about US. I think you are you are kind of assuming a slightly higher fuel price then what's kind of implied by quarter today or yesterday, if not much like some of you probably keeping some conservatism there as well.
Yeah, we're looking at that conservatively also I think we do see a correlation between between the return of China, and the and the potential increase in fuel price over that period of time. So we think that theres some correlation, but you're right. We have taken a conservative approach to that.
Thanks, and then on Capex. So there seems to be like 900 million dollar reduction on 2020, and then there's a similar increasing 2021.
I think that's mostly related to the push out of the 20 Max deliveries from 2020 to 2021.
But were there any other nuances beyond that sounds like I understand there's some blowing compensation noises about but anything else that we should be looking out for.
Yes, certainly the largest item was the push the 20, Max but there were other items, we've had to defer some.
Some.
Some.
Some work we're doing on some of our planes, notably the dream cabin.
To our Threethirty fleet and so some of that was initially thought we could get that done this year it'll be pushed into next year. So theres a.
Again, that's all because of the Max situation, where we need the aircraft flying and not in the.
MRO most part so so back certainly, but then also capital projects, which would improve our products are being pushed out to bid as well.
Okay, and if I can clarify Mike is that Boeing competition. The you mentioned on future.
Settlements that already reflected in the capex schedule over the that'd be incremental.
That is already reflected.
Okay. Thanks, and there are actually our expectation perfect. Thanks, and lastly on the free cash flow. So you you said the forward before in a habit and all are free cash flow cumulatively and that seems still unreachable, but if I look at it a in a different way maybe you already have half of that in 2019, and then capex has been pushing out.
What gives you comfort that down this number is.
Not conservative significantly.
Well, our internal analysis gives it gives us the comfort to continue to.
To to tell the market that we that we believe in that number so for Ford and a half is we think is realistic at this point in time and.
You're right, we achieved half of that in almost more than half of that in the first year of a three year plan.
Into Walters.
Earlier question.
We went into this from Investor day, we thought was a bit of a hockey stick and is turned out to be quite different given the situation, but we still believe the four to four and a half is a is it realistic target over that period.
Okay. That's on for me thanks, so much.
Thank you. The next question is from Chris Marine with Altacorp capital. Please go ahead.
Thanks, Good morning folks.
Just thinking about the reservation system I know, we had sort of conversations last year about being prepared for it from all of it.
I'm just trying to understand I guess.
There has been a number of issues.
And then of course, Compounder I think maybe by.
I'm of the shutdown of the the Pacific operations.
Can you give us kind of a timeline or an idea on when you think you're going to have those systems normalized and.
And your expectations for additional cost as we go through Q1 into Q2.
Hi, it's let's see first I just want to put a few things in perspective for the new recipes and so when we say in the quarter.
I think we did see some revenue impact as a result in the cutover.
I want to make sure it's understood that.
Our new reservation system is not preventing us from generating revenue from bookings, that's a very very stable environment. The area, where we faced more difficulties on revenue side was with.
Ancillary revenue collection, so in certain cases.
Once we cut over we chose.
Q2 waves some of the fees in order to reduce some of the friction for customers.
In in areas, frankly, where we were a little bit surprised and some of the functionality wasn't performing as planned and we we quickly worked a you know in conjunction with.
Our team to make sure that we could restore that functionality. So I can tell you that even post cut over on the 19th in November we saw enhancements come enrolling in December January and we continue and we continue to.
To move to land to improve in those areas.
So.
We're very very confident that we're going to get there and as we said earlier, we regret asked how many inconvenience any may have caused but by and large you know given the size of our airline in the complexity of this system like can you read system.
We're confident that we're gonna be able to get through this relatively quickly.
Okay.
Do you have any particular timeline when you think you're actually going to be stable it will be a fairway to put it.
Well, we were certainly the system is very very stable now now there are some areas where you know we're looking to two.
Bring incident significant improvements quickly and notably in one of them is in the call Center environment, where our call Center wait time is it still law.
And some of that is due to.
Yes.
You know improving.
The new system.
More used to.
Using the new Red system and at the same time dealing with a call volumes that regrettably.
We should not be facing because of some of the system issues that we faced on some of our direct channels. So given the size of the airline in the volume of jet as bookings that we actually generate a we believe that we are.
That that our system. It is stable now the other item that I didn't talk about.
In truth as we were cutting over at the end of November we were starting to face situation with the current a virus, which hadn't nasas implications on the schedule change. So you can only imagine that at that time, not only where we canceling bookings. What we were also busy we accommodating customers onto other site so that.
At same time, it's the cut over a very rare system.
You know needed that much more it that much more I guess, how much more difficult.
Okay and leave it there.
Since we go into Q1, just if you can you give us a rough idea.
How much of your Pacific capacity.
Does China and Hong Kong group represented extremely well.
I think you talked about a 1% to 2% capacity increase overall, but I guess I will be just reallocated, either either domestically or or to the onto you just talked about.
How much should we really thinking about pulling out of the Pacific in Q1.
Well.
Numbers I think China represents I think as kilns at or someone said earlier about 6% of annual Asms.
For us in Hong Kong is another I think 3% roughly.
Now we've pulled out one one frequency from Hong Kong.
Total all our March from March.
So so those are kind of the background numbers and as Killen talked about others have talked about we're looking to redeploy those on more opportunistic basis or filling basis.
Okay and overall, you don't think that there'll be a tremendous yield impact.
What's the trade offs that does pick your point is that fair to keep thinking about that.
That's our that's our going in view at this point in time.
We will not be.
Impact on yield.
All right.
Next I'll leave it there.
Thank you. The next question is from Andrew Didora with Bank of America. Please go ahead.
Hi, good morning, everyone and thanks for taking the questions. Mike CASM ex question for you, obviously been pressured kind of in the up mid.
The high single digits says the Max has been grounded so as we lap the grounding and the costs are in the base how should we think about kind of the core inflation in your business says, but as the Max continues to sit here should still kind of be tracking in this up to mid high single digit level or as you lap it does that come down a little bit.
No I think Andrew we didn't provide specific guidance on casmex.
Consciously, but but you're right. The CASM ex for 2020 will come down a bit versus the run rate in 29 King.
Okay, and then I guess CASM ex over the longer term do you think you can drive CASM ex down and what kind of growth rate would you need in order to accomplish that yes to the earlier question I I think we can get back to where we were once once the new apartment stabilized and we've got the Max back up and running in the two twentys and.
And those are all key drivers to.
To do better CASM ex as we go forward.
Andrew is killing here you will see as we mentioned in the press release I think we mentioned in her remarks as well that.
We extrapolate it the CASM ex number.
And concluded that a basically had we operated 36 Max as originally planned that CASM ex would have it reflected an increase of about 2.5% compared to 2018, right and that was based on our original capacity.
Plan of roughly 4.8%. So that's another proxy that you can use and your analysis.
Right got it Okay and then just last question for me more of a mechanics issue or the model I guess with with China and all the cancellations how do we think about the kind of PRASM CASM trade off of all of these cancellations. It seems like maybe you're a little bit more bullish on yield so when we kind of forecast our earnings.
Head from both the loss of China do you think it's probably more CASM than PRASM at this point in time.
Good question, Andrew and you need to think about that one.
Let us think what that would come back to you.
Okay. Thank you.
That's it for me thanks.
Thank you. The next question is from home, Turkey with Wolfe Research. Please go ahead.
Hey, this is Andrew quash entrepreneur and your Mdna you noted a significant acceleration indirect channel Sharon's may 19.
Can you talk about how does looked over the past few years and how you expect that the trend following the implementation of new Arrow plan.
Sure sure rights, if it's they see a couple of things.
And.
In very short term, we did take a little bit have they slow down in that area and the reason for that west because we were preparing for that and new reservation system is and as you actually say Errol time.
Once we have completed all the work with their new remedies system, and we will be in a very very good position to be able to.
Significantly shift.
And from.
Alright current channels.
Add to our direct.
Direct channels.
At a much much better cost body was necessary for us to get the Houston implemented yet the new Amadeus product in and then we can and start to focus on how we can.
Going forward with our distribution strategy, but definitely this is something that we look forward to.
In 2020 2021.
Okay, very big opportunities and Fred.
Great. Thanks for my second question can you tell us when exactly in 2020, you expect to complete final stage of the reservation system cutover and realize the greater than 100 million dollar benefit. Thanks.
It's Craig Venter here on the operation side, you know.
From our perspective the system is already very stable. It's important to note that the system doesn't impact our ability to either sell to customers or to operate our global scheduled flights. So the impact that we're experiencing now are more in the servicing level, perhaps from a customer service side and we're seeing rapid improvements in that area, but in terms of our ability to generate red.
The news or two operators schedule, we don't have any impacts from what we've seen so far.
The second phase will continue to roll out in the first half of the year, we expect to be completed by the mid year point.
And just to finish off that Andrew the majority of the benefits will start accruing after the entire programs in place.
So back half of this year.
Great. Thank you.
Thank you.
Next question is from Helane Becker with Cowen. Please go ahead.
Thanks, very much operator, hi, everybody and thank you very much on for your time I just had a question about timing of trends that have can you just kind of update us on where that stands and when you're thinking about completing it.
That's part one of my question.
Okay. Good morning wholly in calendar.
So.
The filings with all of the requisite regulatory authorities of of course, all been made.
There are approval requirements in both Canada.
And in the EU and.
Primarily there's one or two others as well, but those are the two primary filing jurisdictions. Our people are are now engaged in discussions.
And the Minister of transport has an approval as well and Minister has indicated in his initial communication that to the the date by which you would receive recommendations from the Bureau isn't the may timeframe and so we continue to look at that date as being a useful.
Target, but of course as you know in these in these environments.
We can take that target fully to the bank. So so we're optimistic we think that a good progress is being made and look at a at that as being the.
The earliest possible data, we can get the approval.
Okay. That's very helpful. And then my second question is I know you guys said that you are about leasing in some aircraft <unk> are you able to at least aircraft in from Transat or does that have to be specific case here my providers. No. We are able to an impact have done so already we've done it onto occasions throughout this Max ground.
Adding.
Scenario of course Trans that operates now is a fairly third party carrier.
Until our the completion of our transaction that's the basis of our relationship and so we have.
Arm's length that third party rates consistent with what do we have with other.
With other wet lease providers and the use of their three thirtys have come in very very handy for us so far.
Okay, and then I just have one maintenance related question probably for.
Mike I know you said in me.
Mdna discussion that you were going to spend an extra 150 million.
This year with a third of that in the current corners. So as we think about you know to 2021 potentially being a normal year would would we would would you see a big decline would we see that decline in maintenance flow through the income statement.
I think I think you'll probably see some decline because law that some of that 150 is incremental maintenance costs to keep some of the planes that we're keeping longer than we expected because of the Max situation.
Right. So are you going to keep this planes in service even as the Max comes back so no those planes.
Primarily the Embraer one ninetys in the three Twentys, we'll go back once the Max's on ground.
Great. That's all very helpful. Thanks, gentlemen, and ladies thank you. Thanks Lynn.
Thank you.
Our next question is from Cameron Doerksen with National Bank Financial. Please go ahead.
Yeah. Thanks, good morning.
To follow up on that last question just as far as flexibility you have with the fleet.
With the narrow bodies that are scheduled to go back to lessors I mean, what kind of flexibility do you have should the seven through seven Max.
Grouting, maybe extend longer than what Steven anticipated today.
I think I mean, Cameron we've we've looked at different scenarios internally I think we've got fairly good flexibility tool probably the ended the year.
And then after that it becomes a little more challenging because maintenance costs will go up and some of these planes need to go back to to a lesser ours because of that because of that reason, but certainly I think we've got reasonable flexibility up till the end of the year.
Okay. That's good and just secondly, a im just wondering Mike if you can just update us on some of your most recent discussions with some of the credit rating agencies, and I guess anticipation for potential upgrade to investment grade.
Guessing that maybe there's some.
Maybe some anxiety around the corner virus situation and what that means for airlines, but I'm just wanted to get this update what the third the latest feedback has been from them.
Yeah, we haven't had a conversation yet about our yearend results. We will have those conversations in the next next little while using our strong year on results as a as a proxy to to try and convince them to upgrade us.
Yeah, I want to manage everyone's expectations that it does take some time for the agencies to put you up to investment grade that last low.
Last level.
But certainly our metrics for the most part a hit majority of not not all the criteria and so we'll be having a conversation with Moody's and S&P in the next.
Some of that Uh huh.
Okay, great. Thanks very much.
Thank you. The next question is from Jamie Baker with Jpmorgan. Please go ahead.
Hey, good morning, everybody. Most of my question has been answered, but the first one on the assumption regarding.
A full snap back in China by the third quarter, obviously, helping you are correct, but.
Is there much analysis that lines at the root of that forecast was it shaped by data that might have emerged I don't know during Sars or after 911, I'm just curious as to the Genesis of that forecast right yeah.
Good question and the answer is yes, although obviously the analysis is in perfect. Because he try these viruses is different than the last but but our folks here did analyze.
How long it took a post sars in particular for things to recover.
And you know kind of depends when you start counting as well he knows as I.
I think Lucy mentioned you know there were already signed starting in November in the November timeframe.
And so the question is how quickly does the global health community get their arms around us.
And yeah I mean, it's what you know we looked at Starz, we looked at a couple of other epidemics that have affected the airline industry. There were there were several up after stars for Sars was the most to what's the most visible.
So yes, that's the nature of that and I think well.
We certainly.
I appreciate the amount of anxiety that there is out there now and especially in China.
We've seen other of the Asian markets still being relatively strong at this stage not seeing them fall off a cliff.
Japan, and so on it but we're hopeful that that that continues but the answer is yes. It was done on the basis of having looked at okay.
Recoveries from my past.
Epidemics.
Perfect.
And second question Max related and I'm, sorry, if I missed this before but how confident are you in the timeline for recertification you anticipate starting to put pilots through the Sims prior to recertification, where you start doing the you know the maintenance prior.
To recertification or do you really need that event recertification before you start to work associated with the on grounding right. So our situation while it was more difficult because we were not operating the LNG from the pilot cost perspective. It was it was it was a better from that.
Perspective that we were the only carrier North America that have had the simulators from the beginning because we didn't operate the energy. So we've had the simulators from the beginning so our pilots have been going through the simulators for the last a year basically since the grounding. This has been going on so the training has continued now as as the.
You know final fix so to speak is approved by the a epay and transport Canada of course, there will be incremental time for our pilots to to go through that but that will by definition via shortened environment because it bump they've been into simulator for the past here.
As Mike said in addition to our two simulators. We also have bought access to another simulator. So this is a you know were relatively in good shape when it comes to that and as far as maintenance that you know taking care of these aircraft a throughout the throughout the grounding we've had authority to move their move aircraft for maintenance purposes and and.
They've been up properly taking care because of all kinds of procedures that have to be undertaken while they're great. So that has all been going on and so you know we're.
Hopeful that assuming that the Boeing estimates of so called mid year come to pass and remember this mid year.
This this this mid year announcement by Boeing only came out on January 21st.
And so this is in a way a relatively new information for us to as to what their timeline was because you know sort of lost the following the third quarter. Our expectation was that a that this would have occurred sooner. So this most recent event of a mid year announcement came on January 21st and so we're still kind of.
Adjusting for that and I think what you're seeing today is a.
As a.
Our best view on how the Max comes back into service, we think that will start introducing given the a and the third quarter as Mike has outlined.
But not the fully up to our numbers until a until after the third quarter.
Got it. Thank you very much further detail take care. Thanks Ryan.
Thank you and there are no further questions registered at this time to turn the meeting over to Miss Murphy.
And thank everyone for joining.
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