Q1 2020 Earnings Call
All participants please stand by your conference is ready to begin.
Good morning, ladies and gentlemen, welcomed air Canada first quarter 2020 conference call I would now like to turn the meeting over to Kathleen Murphy. Please go ahead as Murphy.
Thank you.
Good morning, everyone and thank you my joining us on epic particle.
Let me just Borneo, killing I've been asked <unk>, President and Chief Executive Officer, right. So I could be Chief Executive Officer, and Chief Financial Officer, <unk> Executive Vice President and Chief Commercial officer, he couldn't laundry and executive Vice President of operation.
On today's call will begin by giving you an overview of the impact at the corporate Nike and then make on air Canada, but we have been doing seem excited and how we view the future.
If you looked like will touch on travel demand cargo and loyalty and Michael provide you with visibility accrued plastic like burn rate, it's pretty easy before turning it back to Carolyn.
Well then open it up the questions from equity analysts.
Before we get started please note that certain statements made on this call them forward looking within the meaning of applicable securities laws.
This call. It also includes buckets, if you're not getting measure.
Your first my first quarter, that's what he said and beneath the cautionary statement.
Any forward looking information for because there's just a non-GAAP measures to GAAP yourself and when that pretty nobody Cameron.
Thank you Kathy good morning, everyone and thank you for joining us on our first quarter earnings call.
[noise] shopping that todays results would have been that's got three months ago. When we reported strong 2019 earnings which founded on several years of record results.
Further affirmation of the severity and abruptness of course, I teams impact upon air Canada, and the global airline industry.
No I picked us can adequately described the pandemics cataclysmic effect upon our industry.
NERC another supposed to quantify it extends to the financial devastation.
And industry is experiencing and we'll continue to experience for some time.
Okay got it up the pandemic and government upper left out and travel restrictions. The Webber have ended around a 27 consecutive quarters.
Over your revenue growth.
So January and February result, despite weakness in China, and other Asian markets give us every encouragement that this performance would continue.
It was started and catastrophic onset of credit 19 in Europe, and North America in early March.
We're now living through the dark period ever in the history of commercial aviation.
That's a company worse than the aftermath of 911 Sars.
The 2000, and a global financial crisis.
I mean do so in the quarter by more than half a billion dollars.
71 million from 583 million a year ago.
Last year, we had the Boeing 737, Max operating for most of Q1.
On a GAAP basis, we reported an operating loss of $433 million.
And there's little doubt, but we're not yet at the trough.
Yeah that is now forecasting, but the industry will lose Canadian dollars 450 billion or do you have 314 billion in passenger revenue in 2020.
55% decline from 2019.
The global airline industry was virtually shut down as we entered Q2, but more than 100 carriers from around the world, having suspended service altogether and most others operating at less than five per cent compared to last year.
Despite the financial Carnage, our first priority has been in remain the health and safety of our customers our employees and the communities, where we live and work.
Our premise concern from the outset has been to apply best practices and recommendations on preventative measures. That's a contributor in anyway, we can to assisting with public health initiatives, often acting more quickly than required by governments.
We pulled out of China on January 29, well ahead of other international carriers and ahead of any government imposed restrictions.
We didn't likewise with respect to certain European markets in February.
We introduced personal protective equipment for stuff in March and Facebook coverings for passengers in early April ahead of other airlines or any requirements to do so.
We fully understand that once government restrictions are raised a key factor in the return of travel demand will be customers, having confidence to travel, especially until the vaccine is broadly available.
That's a reputable watching air Canada clean care plus.
And your program for safety cleanliness in hygiene throw to passengers flight journey.
We are actively rethinking all aspects of the travel experience.
We're checking security to the Maple leaf lounges Airport gate, the voting process and personal space support onboard our aircraft.
We intend to continue enhancing her kinda clean care, plus where we can with best practices from around the world, including increased use of screening tool does it become available.
Well the rolling out various video another communications to explain this new program.
Secondly, we've made a priority preserving liquidity.
Just as we exercise much discipline with respect to our balance sheet over the last decade.
Mike will provide more details in a few minutes I've ever at this point I'd like to come and Mike and the finance and Treasury team for their first sites during prosperous times.
That we had the discipline and were able to accumulate liquidity of nearly $7.4 billion as we started this year.
It's harvesting during the goodyear's positions us well for the extraordinary challenges in the lean years.
Finally, we focused on stabilizing our airline and preserving cash effectively putting it in a state of hibernation.
Among other things, we have reduced our capacity at our schedule, but 85% to 90%.
Unwinding a success a decade of successful international growth.
And we have park the majority of our fleet for the time be.
Perhaps most of that we were forced to take the extremely painful step a furloughing more than half of our 38000 employees and the number of employees on the inactive status is now around 20000.
In addition, we introduced various other workforce mitigation programs, including management wage reductions for continuing employed.
Implementing for those with agonizing, given the tremendous dedication of our employees to air Canada transformation over the decade.
At no time has a commitment seen as evident as in their response to covert 19.
Their concern for the wrapping up our customers and each other the private bringing stranded Canadians home from abroad, and our continued hard work transporting customers and emergency supplies and other essential goods is truly inspiring.
Realistically, we expected to take at least three years for their Canada to get back to 2019 levels of revenue and capacity.
And despite the difficulty of the present situation and the uncertainty of its timeline, we are already working on a restart plant.
That's required that we anticipate what our industry will look like.
The global economy is likely to be.
Governments may require what customers may require.
Well there are many ought to answer questions. We do not intend to wait until they can all be answered to take concrete action and that is what we are doing.
You'll hear more about this from a Lucy and Mike.
I, thank our employees for their dedication and professionalism my commitment and the commitment of our leadership team to our employees our customers and our shareholders. It's to do everything we can to safely rebuilt as quickly as possible in this new reality and ensure air Canada retain or better yet given our foundation improves upon its industry.
<unk>, leading position coming out of this.
And with that I'll turn the call over to Lucy.
Good morning, everyone.
Sorry, pardon me thinking.
On the front lines and behind it.
No genius.
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So many around the world.
Our customers.
Okay.
Thank you again.
When you are.
There's no question situation isn't like any are you just can't never see.
Let me see many air traffic demand around the world in a manner.
[laughter] and travel restrictions and so you can be significantly so.
Andrew.
And your many between 604 million.
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For the quarter.
First quarter 29.
You mean.
On travel demand for the remainder of the 2020 and did you receive anyway.
Let me then no.
[noise] March 16.
More than 90%.
200 aircraft.
[laughter].
Last 10 years, serving 220 airplanes.
In regards to find international destination.
And I think.
With respect to U.S. notwithstanding our entire.
[laughter] wondering.
Let me.
Okay.
Patrick.
Beyond that.
Candidates my carrier.
Traveling.
Sure.
International ever just any country.
Genius Your Canadian Province.
Yeah.
No that's territory.
We continue to provide a lifeline like transporting violent moves and supply area.
Yeah.
Yeah.
Yeah.
Most of the second quarter.
Accordingly.
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Second quarter 2019.
[laughter].
[laughter].
Winter last year.
We're proactively and dynamically adjust capacity based on that.
Oh good recovery.
Let me so there will be monitoring connecting and heater national demand in markets around the world as well.
Fishing.
Due to factors.
Now that are informing our network plan.
As well as our operation.
Okay.
Certain factors.
Returning once institutions or he will be ceiling.
Customer.
Turning to see.
We like that.
Airport and onboard many important.
I didn't see and building confidence.
Seeking or products and services customer journey.
I mean, these new reality instinct.
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Physically.
When you factor in airport checking security.
Our lounge network airport.
Okay.
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No I.
So service in automation is integrating its about or countries journey.
To underscore our commitment to customers and employees.
Today, we are announcing Canada teacher class.
Yes.
It's easy measures we are implementing.
That's my experience.
Hi, good morning, and Air Canada customers will be subject.
Temperature.
Yes.
Okay and provide more personal stay somewhere aircraft.
Block.
Hi.
Yeah.
Yep.
Each player.
Reading into at least you duty.
Oh, absolutely distributing parakeets every customer containing sanitizer inside these anyway.
Andy.
The new offering protocol, our teams have developed and adopted for hospital, great sanitation and cleaning up our lab.
Okay.
Building our award winning can clean standards.
Another element here in Canada, the clean Karen.
We will be further raising or aircraft.
Like you.
So I think two studies for years.
See you then section.
We are.
[noise] product and service delivery to ensure that see.
Like team and passenger.
We have only been recommending cease Matt since early April.
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Three later in April.
The transport, Canada director continue utilizing <unk> personal protective equipment.
[laughter] moving forward.
We have also modifier onward products, including providing package.
On the water.
Cabin instead of are you.
Sure.
We know that human connections are going to be more important than ever.
Oh that we deliver assume if need be different in the future. We are steadfast in our commitment to continue to create memorable experiences for customers.
But meaningful interaction.
[noise] Warner countries healthcare workers and they continue to come back the virus, we've enhanced our focus on airfreight.
We're very proud of the rules, we played in bringing critical medical and other kind of supplies in Canada and help me just keep it down throughout the country.
We have reconfigured the cabin four of our going to 7300 yards.
Just wide body aircraft.
She can give them additional cargo capacity.
We are doing the same thing some of our era.
[music].
Rapid transformation and some of our aircraft to meet current Oregon that reflects our ability to me quickly and maximize actually asking when these threats are like.
Our engineering team has worked around thought to oversee the conversion work and transport Canada to mature all work pursued fine yes when completed.
He's already more than 500, all carbon plate since March 22nd and plan to operate at least on all cargo planes per lead from point you just did you see.
The United States.
America.
Using a combination for newly converted.
Uh huh.
For converting Airbus Securities as well and 77.
In addition to the current regularly scheduled to London, Paris Frankfurt Huh.
We also recently announced that working with our regional carrier jet Aviation, we will begin operating 13 converted dashi 400 aircraft.
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Fine package freedom.
Like I haven't Canada.
Short and medium home market I know, you're trying to express banner.
They convert cabinet well these cars.
Like medical supply.
[laughter].
Importantly, ongoing thing in school in 19.
Today, we moved over 5000 cubic meters are mostly P.B.E. from China.
It would be the equivalent.
10 million or.
This is to me and all hands on [laughter] do you think are only on claims we have created five segments sales team.
I would be for everything.
There seems to continue.
Opportunity.
You need this customer.
My team around the world.
[noise] recognizes when customers and demonstrate our commitment to them. During these tough times, we were happy to extend the status of our Optune members and to me and its 2021.
Sure.
Understood She said 2020.
Yeah.
The next year, you can share status.
Lastly, we designed it to them and that allows our customers to earn mile and status.
Well I'm doing my Institute, a charity engagement fighting equaling 19, Craig.
Well I imagine privilege of experiencing tremendous room story of air Canada over the last 10 years.
We have built a world class airline and we have been rewarded would exceed the with customers.
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As our teams come together to plan for recovery.
Right.
Listen in companies that are people.
Them back up in return for like that.
Yes.
That's enough to me.
Thank you Lisa and good morning to everyone.
The offense over the last few months have been incredibly challenging.
Personal oh I've been affected by the send them.
I would like to extend my sincere thanks store employees for their dedication June these exceptionally difficult times.
[noise] to navigate through this crisis, we have taken that continued to T. Numerous substantial measures.
This includes significantly reducing cost and capital spend.
Adding liquidity.
And reciting the airline through workforce and sleep reductions.
Reducing the burn rate.
As it is commonly referred to as well as Andy liquidity sources.
Layers of insurance.
Our two critical objectives for all airlines.
The burn rate for Canada is a combination of our remaining fixed cost structure rents debts at an interest costs.
Oh, no reduce capital expenditure program.
And she's working capital mother other items, most notably advanced ticket liabilities offset by variable margin on flying and other revenues.
Do not include proceeds from any financings in our definition of Bernard.
Overall, we are working all these key levers to reduce cash burn and excellent progress has already been made over the last summer gorsel weeks and more of a beautiful minute near future.
[noise] seeing the rapidly deteriorating demand revenue barn, very quickly and aggressively reduced our volume related costs and separately undertook a companywide fixed cost from copper production program.
Putting a project deferrals program, which had an initial target of $500 million.
We have surpassed its target 1.05 billion achieved so far we continue to look at more opportunities to preserve cash.
To give you a little bit of color about 65% No 1.05 billion dollar program.
20, Cabos central planned reductions are deferments [noise].
The remaining portion production twentytwenty fixed operating costs.
We took advantage of the emergency way subsidy or cues for most of our workforce, which allowed for the return previously furlough Canadian based employees the payroll for the March 15th the juice exterior.
[noise] program helps with cash burn as an addition to covering in active employees to compensate us impart for salaries paid to active employees up to June six.
And this was an addition to the 1.25 billion dollar program I just spoke about.
Furthermore, a few weeks ago, we made a bill companywide voluntary separation program for management.
As we begin to re sizing card company to alignment with our view a revenue levels over the next three years.
Mostly fixed operating costs before mitigation were approximately $425 million.
Mostly debts rents in interest cost for about $130 million per month.
Capital expenditures for about $150 million per month, the rest of 2020 before financing for aircraft capital.
There are no lumpsum debt maturities for the remainder of 2020.
Yes, this chick Fil liability foods like credits to be converted into future travel and also reflects refund poll season rules by country.
The sales liability moving forward will also be a function of how quickly borders open and bookings improved.
In Europe as you walk you through your a maximizing the cargo opportunity to cover some portion of our fixed overhead.
We certainly believe as the year progresses, the daily burn rate will improve and that Q2 will represent the lowest point after the month of March.
What do you want to liquidity.
Oh, no. We started the year was $6.4 billion a cash on our balance sheet.
On the highest cash positions in the industry on a relative basis.
This revenue level in advance sales change going forward given the numerous covers we have I would be very comfortable with the minimum cash balance of 2.4 billion on our balance sheet, resulting in having $4 billion to cover a future cash for.
At the end of March was at $6.5 billion Toyota.
This included the impact of drawing down our two revolving lines of credit, which provided us with net proceeds of approximately $1 billion.
This means we utilized approximately 900 million in cash all the month of March.
This amount included.
Lump sum debt maturity of 225 million, resulting in a net operating burn of $675 million in March.
We expect for a daily cash burn will improve modestly in the second quarter versus the net $22 million per day burn experiments in March when a reduction in net refund activity and lower overall cash expenses and other obligations offset impart by much lower revenue levels.
In April we continue to add layers insurance store are very strong start starting liquidity position as we conclude the short term loan and the amount of U.S. 600 million secured by 35 aircraft and five spare engines for net proceeds of $829 million.
We believe who we will be able to utilize the collateral package access a replacement longer term facility for the 364 days facility expires.
Taking this facility into accounting considering certain estimated declines in asset values as a result called the 19 [noise].
Encumbered assets school currently sits at approximately $2.6 billion.
Aircraft values are based on recent valuations have declined since the 2019 year in value.
Turning to our capital expenditures for the remainder of the year.
Next is projected to be approximately 1.5 billion.
This amount includes purchase commitments for Airbus or D to 20 aircraft.
Which have been finance initially the bridge financing of 780 million, which concluded leadership.
This facility is expected to be replaced with longer term secured financing arrangements later on in 2020.
You've raised approximately 2.6 billion liquidity in the past six weeks from refinances I just spoke about.
And with a 4 billion them additional cash we had at year end results or pro forma basis in total cash source sources of 6.6 billion. That's at the beginning of 20 Twond.
We could seem to planned for and expect to close future debt financings.
I had further layers of insurance.
Moving onto our fleet, we've also decided to retire or 39 older less efficient aircraft from our fleet as soon as possible comprised of Boeing something Sevens Airbus three Nineteens number one nines.
Embraer aircraft next thing that leads me to thing [noise].
We own 27 of the combined Boeing seven southern Airbus 319 fleet and the majority of the remaining aircraft leased expirees within two years.
Our objective is to quickly rightsize the fleet the level of revenue, we expect reduce complexity and cost provide more flexibility as a market improves and lower carbon footprint.
Despite the changes, we're making to our fleet. Our fleet plan continues to be very flexible lease returns an option. They believe goes to deal with virtually any scenario.
I would also like disclose that despite lower equity markets and interest rates it perfect storm or any defined benefit pension pot program. Our estimate of pension solvency surplus at April 1st 2020 was $2.7 billion slightly higher than what were working on December 31st 2019.
Immunization diversification strategy and the excellent team we have managing it.
I have all been instrumental in mitigating this risk.
To conclude after a decade of transformation, which allowed us to enter this crisis with a very strong balance sheet and a much lower risk profile I'm confident that with our experienced management team.
This is very difficult steps, we're taking we can successfully manage through these tremendously challenging times and with that I'll turn it back to kill him.
Thanks, Mike.
He discussed.
Focus on safeguarding People's health and safety preserving liquidity and stabilizing our airline through the pandemic.
In addition to these immediate priorities, we have a FERC, but no that's pressing concern preparing to emerge from club at 19 and adapting our airline for a post pandemic world.
Over the decades as most of you know weve infused entrepreneurial spirit resilience innovation and discipline into Air Canada DNA. These attributes will serve us well as we navigate through the crisis and beyond.
Additionally, we expect that both the overall industry airline would be considerably smaller for sometime.
So unfortunately result in significant longer term reductions in both fleet as Mike mentioned and employee levels.
That's not possible to predict the close of the pandemic Enetts fellow globally or indeed, the changes that will be required of the airline industry. Our determination as to ensure that our company is positioned to emerge as strong as possible.
To be ready to capitalize on any opportunities that will inevitably arise.
That are kind of those should be strong coming out of this crisis isn't the interest of all Canadians and all of our stakeholders.
After making it easy for Canadians to travel across our country to.
To the United States and around the world the connectivity or kind of the provides for people and good is essential to the economy.
In 29 team our airline employee 38000 people directly and studies shows it's supported another 190000 jobs in multiple industries and made at least a 47 billion dollar contribution to Canada as economic output.
No, Canada, and indeed, the entire airline industry, our key strategic drivers and economic catalysts for the country's overall economic recovery.
They should be viewed as essential components of any close pandemic planning and we support the National Airlines Council of Canada, and I had a in their representations to governments.
Let me conclude by saying that air Canada has not been sitting idly by hoping for demands to rebound.
Along with all the cash preservation financings and cost saving measures we've taken to manage through this crisis at the plant for the restart of the industry what else are carrying on with certain of the key transformative problem projects that were under way before cobot 19.
This includes the ongoing development, albeit at a slower pace of our new loyalty program.
Recent decision to extend altitude member status to the end of 2021 ahead of most other loyalty programs. As one example of the innovative customer centric thinking shaping the new era, but.
Another major initiative the implementation of on your reservation system has also continued this year the migration of airport services to the alternative platform in the middle of the coldest environment.
And with respect to our proposed acquisition of trends up.
We have now received the comments have concerns of the commissioner of competition of Canada, which have been shared with the ministry of transport.
The filing has also been completed before the European Commission and we're awaiting the commissioners.
But the commissioning phase one response.
We intend at this point to reserve further comment on this transaction.
[noise] the introduction of cargo only place, it's helping us diversified revenue streams and the rapid modification of passenger cabin on some aircraft to increase their cargo capability, our prime examples of nimble entrepreneurship.
In fact, we believe cargo represents a tremendous opportunity.
This is due to the need for urgent cargo transport during the quarter, but 19 lot locked down and expectations the petrochemical permanently alter future behavior in terms of online commerce.
Like a once in a century store called a 19 as washing away all that came before it except those things engineer to withstand such events.
We're confident that air Canada, as well engineered to withstand this crisis.
When you first undertook to transform their Canada, we were always mindful of the widely varying fortunes of our industry.
Overarching objective was to create a strong airline that wouldn't be sustainable and nimble over the long term designed to withstand all shocks.
Today that design has been put to the test that I've every confidence that air Canada at the Air Canada, We have built over the last decade will endure this.
And now it would be pretty pleased to take some questions Uh huh.
Thank you.
My question, you're using the speakerphone. Please mr. Han some prior to making your selection. Please press star. One if you have a question you may cancel your question bypassing the pound sign it will be a brief possible to participants that Justin <unk> patients.
The first question is from Kim <unk> with TD Securities. Please go ahead.
Oh, Thank you and good morning, everyone.
First question, if I could I'm just wondering if you could talk about what you anticipate your cash balance will look like at the end of the second quarter.
Good morning, Tim It's Mike.
Let me answer it this way we ended Q1 at 6.5 billion very healthy cash balance we've already announced two financings in April for $1.6 billion.
If you assume the burn rates for argument sake, it $20 million a day, we would be.
You would burn roughly 1.8 billion.
So we wouldn't be we'd end up at $6.3 billion liquidity now the breakeven burn rate would be roughly $18 million a day to give as to the same level.
We were in Q1 before any debt financings. We are currently working on some debt financings and we hope we will close them before they know the quarter. So our anticipation is that our cash balance will be higher at the end of Q2 than it was at the end Q1.
Okay, great. Thank you my second question I'm, just wondering if you could talk through how you were doing capacity planning at this point, obviously historical models don't help much but are you trying to err on the size of caution with the ability to add more if necessary or are you planning.
Load factors that will provide plenty of room to deal with the more rapid recovery than expected.
Right. That's it for Tim This is Kevin here. So that's one question and I would say that all of the conventional revenue management revenue planning models have been flushed down the the proverbial toilet.
This is an environment where.
We have to assess.
How much faster going to put into the market based on some combination of though when we think governments are going to lift the restrictions.
On a on international travel on Trans border trouble.
On a quarantine requirement on people being able to get into restaurants or other such events. So so although it might loosen a comment in a minute, but basically what we're doing here as we are estimating our best guess at this stage as to how the rest of 2020 breaks out and you heard what we've said about Q2 in Q3 capacity.
Right.
But it really is at this stage are largely interdependent on some factors that are well beyond the control of an airline and well outside the realm of conventional revenue finding models. We are however, because of the fact that we've been so that's an artificial intelligence that drivers are we are building.
They are capability to take information from Nonconventional revenue management sources, not just somebody Lucy to comment a little bit I think it so I would I would characterize it as being probably one of the industry leading drivers at this stage at understanding the back to business. The returned to service that Lucy and our revenue management team.
Are working on Tim So lets you want you to sure okay.
Sure. The you know that traditional information that we would normally used to guide us.
In terms, it's you know developing <unk>.
And anchors and and ER toxic profile.
No value to us today so.
Got it means that we were using all kinds of external crop season and data points.
We've worked at retreating and demand curve.
By geography for example, you know key markets in Canada.
The border markets and trying to Atlantic.
Regions Leasers in order to.
Inform us.
In terms of what they demand could look like using these factors.
And also informing our assay planning team.
Where you could potentially.
Salaries can lead to do some.
Capacity.
Hey, you know in normal times, our systems are believed to be able to recognize.
Demand coming from different market segment.
It sounds like today, we are retreating that based on.
Factors that we deem the important to.
For example, you know whatever the government regulations are which countries are close to which market segments, which went to see on arcos.
As a multitude of factors that we have used to retreat.
I'm anchors and obviously, it's something that explain to adjust.
On a databases and as soon as new information becomes available or you start to see demand in some areas that.
As far as best you without any M&A, so certainly not easy I think we're thanks.
Introduced our system.
Years ago, Despite the fact that historically there's nothing.
Fundamentals in the base that we haven't you, Argentina and you know.
I never planning salmon.
Organization.
Confidence.
We're going to be able to retreat.
Yes, I informed.
And Tim Tim I'll add one other thing I know you also asked the question as to whether we're gonna have flexibility to adjust up if demand recovers more quickly. After is absolutely, yes were hope or keeping back a lot of dry powder. Both in terms of aircraft that are available as well as crews to fly them.
And so so the impact is what we are I characterize this as as a you know planning for the worst and hoping for the best and using our new revenue driven model to a two to help guide that and if we see demand returning more quickly we'll be able to wrap it up a fairly.
Fairly quickly as well.
Okay. That's very helpful. Thank you.
Thank you.
Next question is from Kevin Chiang CBC. Please go ahead.
Hi, good morning, and thanks for taking my question here, maybe just turned into your fleet retirement so.
Now some of those with somebody like Boulder, Southern six southern Threenineteen, Cynthia we see one nineties.
It looks like about 35 of them in your opinion mainline, which I guess, we just sort of make us coming out a rouge.
But looks like it's pretty significant decline into Rouge fleet. So one is my math correct. There and then and then maybe secondly, how do you view the restart are coming out of this downturn, especially.
Maybe with a greater focus on a less dense aircraft.
Okay.
Kevin Killips, Yeah, you know basically we are looking to a rouge 70 picks up as they're not coming out to necessarily overnight. The ones that we set are going to commit immediately or the embraer.
And then we will pick and choose the timing of the a the exit of the 767.
You know it could be accelerated vote will find optimal timing to do that but Bruce is going to continue to be an integral part of air Canada, albeit primarily a narrow body operator into a leisure markets. It's been extremely successful with both in our body in white body and so now we would look to have a greater concentrate.
Question on narrow body flying as a as we build the recovery a post this cobot 19 environment.
And Kevin you look I want to add.
That is that we do plan to cover some key international leisure destinations with mainline we have very cost efficient fleet you know the three thirtys the high density Triple seven.
And we've identified those key leisure markets.
Principally in Europe that we want to maintain service too and we can do that effectively with a with the mainline product.
That's helpful. And then just last one for leisure.
Cash burn de till you provide it was very helpful.
About 20 million a day you couldn't do you have done that demand takes longer to return can you talk to slip to some of the additional variables you can pull to to drive the lower than if you're able to maybe quantify how much more you end up about 20 million burn rate two of 'em [laughter] tobacco took longer to recover.
Well.
Let me Kim's holds great question, let me first of all saying that.
You know that number is going from our perspective, maybe a little public universities have no revenue coming in other than cargo in Q2, and so we're not getting much benefit from from the revenue side of the business other than hurdle.
So, but going forward on that Oh, not cash burn number I mean does the big buckets are salary benefits technology infrastructure building rent a maintenance contracts.
And RCP fixed fixed costs, so oh, the kind of the five buckets that we continue to work on honestly salary and benefits will be a function of how we received the company. So there will be opportunities in that bucket not by far as large foot bucket, we're working very closely with jazz and sky due to.
Elsner fix some of their fixed cost structure, so that will continue to improve overtime as well.
And the other buckets maintenance I T and building rents are less or less material, but we continue to work with our suppliers and our vendors in our partners to try and negotiate contracts to lower those those cash burn as well. So there is as I said in my comments, there is opportunity to reduce that cash burn.
Some of this takes a little bit longer than than some of the all season was it something done already.
Thank you for the color.
Thank you.
Your next question from Walter Spracklin with RBC capital markets. Please go ahead.
Very much good morning, everyone.
I was wondering if you could go back to your three year recovery indication there, Kevin and just curious how your segmenting your expectation of the rebound in leisure travel versus business travel and particularly could you give us some comfort as to.
We are a lot of investors and folks I speak to seem to be more more pessimistic on on business travel in particular.
And even if you could segment that versus domestic international to whatever so you cannot be <unk> right. So [laughter] you know our order a sense a is that a the first dynamic that recovers.
Is the domestic.
Work. This has been a proven to be the case in are you looking be looking at the at the countries that were ahead of us in this covert 19 a dynamic.
You know like China, Korea and others.
We believe that domestic recovers first visiting visiting friends and family is going to be a big driver that recovery.
We think that in our universe. The trans border you know as soon as we get a comfortable that the U.S. situation. It's a it's relatively speaking under control, we think the U.S. fits within well within this dynamic of a of North America and recovery people visiting friends and relatives visiting their vacation homes and someone and so forth the international becomes obviously.
Based largely on on a as we said earlier on how are the restrictions are lifted and how well other countries are doing in controlling the pandemic and in dealing with it and this is all in this a pre.
Pre vaccine universe, if you like.
And so our sense is that international travel.
It does does return but of course, you know we would have to planned out very very carefully business travel both north American business travel and international business travel or does return, but we know that people are getting comfortable with the alternative facilities such as these videoconferences the zones of this world and so on and so forth.
Oh, we know that and we are we're dealing with that that reality and that's why we are planning to return of our capacity in a measured way. We don't believe that you flick on the switch by the third quarter and all of sudden we're back to 29 came third quarter, we really don't believe that so so we've been very transparent to the market. We think that this is a buildup of up progressive does.
Dick market first domestic trans border visiting friends and relatives leisure business, a international and that's sort of the the trajectory as as we're saying it play out and that's why we've estimated a three year or what we've said as a minimum of a three year recovery time frame you know that some of the manufacturers have come.
Out and an estimated three to five IRSA.
Boeing and Airbus I think both of the estimates in that range.
They of course are a bit longer out that airlines are then we would be on the basis that they need to see that there's some recovery in the airline industry before they can start ramping up production at scale. So you know I think that when we've looked at them. This is a little bit of Crystal ball game thing. So this is not you know sort of in within the conventions of a traditional.
You know perspective or a notebook that's it this is how do we feel the market returns how do we feel the industry rebounds, and how do we feel demand returns. So this is a little bit of crystal ball gazing, but that's our best estimate at this stage and that's how we sort of built up this a recovery timeframe to get two three years from now and that makes sense and a total understand that this.
It's obviously, a a difficult time to do any forecasting at all.
Second question here you, you've obviously been following the.
Financings that had been done so some of the border equity and debt.
What's your what's your view on on the notion of an equity financing, obviously, you're in a bit better positioned than many of those that have done that.
But the markets are open it seems for that type of financing so kill it I'd love to hear your thoughts and does it tie into government.
Everyone support and watch things might be attached to that government support to help you could decide how do you how you emergent and really the question is if you don't need an equity financing or don't go that route how how leverage do you feel comfortable with when you exit. This you know a luxury or your thoughts.
Also if you recall pass optimize because Mike it's been I know, obviously, considering all of our various financing alternatives here in between an amazing job I know that most of you think he's at home by making gotta catch videos or something but.
He is he has are actively a busy looking at all kinds of financing so.
I you know we're not we entered this with one of the best balance sheets in the global airline industry relative to our site.
And we you know as you know we have not done an equity issues and says 2009.
And so we know all of the alternatives are available to us, but Mike and the Treasury team are doing a fantastic job at isolating and identifying the alternatives that make the most sense relative to our current a dynamic Oh you know we look at that we were very proud of our.
Leverage ratio, we were getting to investment grade as you know that was our big target of hours than we were kind of you know within shooting distance I'd say arguably we were there already and so we've we've been guarding that Ah that leverage ratio very carefully but there are lots of alternatives open to us and so we're not necessarily jumping up the first thing that somebody waves in front of our eyes, but like on budget.
Had anything else.
Sure Thanks, Carolyn and good morning.
[noise]. So interesting question obviously it starts with what are you have the recovery is and what the burn will be over that period of time.
And we've got fairly good sensor that then obviously equity is one of the options I would say.
Oh assays and key option, but it certainly has to be one of the offices opening for us.
But that really depends on what our view the burn is and what our capacity is from a debt perspective.
We do have the balance leverage, but as we recover you know leverage will get back into a more reasonable range as or if the dog improves over the next couple of years.
So we put that into a into a plan and right now we're executing on debt financings.
That we feel are appropriate that are using some apparel, we already have in place.
And and certainly not Mark is open for us at this point in time. So we will will continue to focus on debt.
No equities is as we've always talked about in the past is always an option for us.
It really depends on on the recovery keys over the next go up.
Thank you very much appreciate the time.
[noise] Q.
Next question from <unk>.
With Scotiabank. Please go ahead.
Thanks, and good morning, everyone.
So just wanted to ask you a follow up on cash no. Thanks for providing color. So just to confirm if the 22 million dollar per day in March one said before government subsidy cost in Capex reduction and eight to 20 financing and if that's the case then what would you think that cash when would look like.
Another dose offsets.
Oh, sorry corner, you were breaking up there for a second so cash burn in for the month of March was $22 million.
Okay, a day and so that is before any financing.
And that is before any subsidy.
Because we had not yet apply more received subsidy from the GARP.
We still though and we still haven't that's subsidy will we'll we'll go against equal the March component of the subsidy will go against begins April for most part.
Right, So, yes, sorry for taking out the.
Just curious if none of those subsidies.
And the cost and Capex reduction or what would be a cashman would look like.
In the month of March.
<unk> for a lot of today.
I I haven't worked those numbers, though again.
The way you can look at it is the subsidy.
Is probably.
Because again, we subsidies beneficial to us only for active employees, we bought all the employees back off furlough and working to see a mountain gums paying off so it's a flow through for further inactive employees for active employees.
You do the math is $847 per per week, three 300 per month for roughly 10000 12000 active employees, so $30 million to $40 million a month in benefit to us till June six.
And and again, we put together the program the 1.05 billion dollar program.
I don't have the split on capital capitals, roughly 700 million with that.
Cost of 350 million. So another 30 $40 million at most in fixed cost reduction as well.
All right there for the most vehicle, we have roughly $80 million to $90 million of reductions in cost plus the capital reduction.
I don't have a tip my fingers as to what how about the influenced April.
Okay. Thanks for that and then on I'd love to get sale, it's Mike I'm. So I saw the number drops by $325 million during the quarter.
How much was that relates to the drop in bookings works. This increase in Vsan and can you provide some color on those trends in April versus March.
So both of those components contributed to the 300 million dollar decline investor because as you know corner typically advanced ticket sales will increase this time here as we build towards summer very unusual for defense ticket sales to decline.
It's going be interested to see what happens is a market comes back hopefully towards you ended the year, where advance ticket sales historically may have declined and they may increase we make it a complete cheese and seasonality of the growth or decline with advanced ticket sales depending on the recovery Keith.
The.
The so again.
Refunds were higher than last year, and Ah, obviously dense sales are much lower than last year and so both of those factors contributed to the 300 million dollar I don't have to slip at this point in time.
But again both factors contributor.
Occasion is up as soon as the governments are released the travel restrictions that that will start resulting in a.
Terribly important to improvements in advance ticket sales. So obviously, we're waiting for that especially as it relates to a international markets for the third quarter.
Thanks, and just last one for me before the first then it or.
So on the unencumbered valuation you said 2.6 billion dollar I think we're just kind of down from the private schools are Oh for about $5 billion is it fair to assume that.
600 million dollar Euro some loans that you raised that's why that's the $1 billion revolver draw downs reduce the unencumbered asset pool by $1.9 billion and the remaining 511 and dollar reduction relates to the lower asset valuation that of FX tailwind.
Yeah, you were beating 500000 dollar reduction you're right.
Yeah. So we went from 5 billion sorry, you write.
Down about 21 nine for the collateral we posted a build to the up 364 day facility and to the 200 million dollar revolver and the remaining component is the revaluation of the planes that were part of the collateral package.
Thanks, Mike.
Thank you.
Next question from Hunter Keay.
Research. Please go ahead.
Hey, good morning, everybody.
Well in your prepared remarks, you're talking about capitalizing on any opportunities that may arise is that a comment that you are the <unk> are you referring to organic growth opportunities or are you contemplating some scenarios, where you guys make some strategic acquisitions of assets or the like at some point here in the event that you're ready to do something like that.
No look I mean, I think that first of all where do we need to get through this before we capitalize any opportunity. So that's the number one objective is to is to get through this environment and a this environment you know because that's a lot of a lot of risk because you're hearing here, but on the assumption that air Canada is gonna be a strong player coming into this.
It'll go to our it'll go to our growth primarily there's no particular, a company that were looking at or anything else like that at this stage and would be foolish for us to do that given the current environment. So I I just want us to be position strong coming out of it because whenever you have an industry dislocation to where you have here.
As you know when you look back to the history of our industry in many other industries and an industry with a dislocation like this will result in many many opportunities we're well aware of that if we want to position Air Canada Best.
To up to be ready to look at a those sorts of situations as we as we come out of this post a cobot a environment in a hunters Mike took to that end. That's why we made a conscious decision to continue to invest in our reservation system and in our loyalty system.
Those are going to be two key drivers to customer experience.
Customer satisfaction to organic growth and any other type of girls, we want consider and so again those are two conscious decisions that we wanted to make and continue to invest in to ensure that we position ourselves to take advantage whatever opportunity presents itself as we as we move through this situation.
Yeah, Thanks, Mike in that that actually good it's a good so when I made my second question, which is I guess is a two parter or how do you feel about the underlying assumptions for Aero plan that drove the $2.5 billion NPV estimate right now and how do you feel by the.
The build to 7 million members at some point or the next couple of years relative to you know pretty cool, but for both those metrics. Thanks a lot.
Thanks, So it's a little more color on their plan.
No plan still all the cash flow positive to us.
For different reasons and then in the past credit card spend is down based on market market trends.
But still or cash coming in from our partners.
And then also redemptions are way down so the cash costs associated with.
With that business unit is also down so net cash is still positive from our perspective so.
You know not probably not as positive as it could've been but still positive and so still very very comfortable with a business model.
Certainly going forward.
You know we push launch into later this year you know because we believe will be a better business market at that point in time to launch the Oakland New World class products.
We're not done we'll see how on the 7 million.
Customer base going from five to seven we still think that doable. It makes you maybe pushed a bit for the most part, but we still think that's a very doable objective.
And you know the war we designed this new program the more we like it ER and the more comfortable we are that we can achieve those objectives in due course.
Thank you.
Thank you.
It's from that came out with Canaccord Genuity. Please go ahead.
Yes. Thank you good morning, I want to follow up on an earlier question about government support I understand it's a sensitive issue right now, but can you share your thoughts on.
The range of outcomes in terms of the form that might shake the timing, especially given that the are our neighbors to the south of all completed.
See industry specific below packages now.
Yeah. So I mean, you know we are of course, a following or what is going on in other parts of the world and I think as you approach with the point out. The are you at a industry ER has seen a 50 billion dollar U.S. up a program half of which is in respect of a.
Employee wage of a program until September 30, and then the other half of which is its alone.
Programming and virtually all of the major U.S. carriers have.
I have stepped up and benefited from both programs.
And they typically been into circa between the two programs circa $10 billion U.S. When you when you put the two programs together per carrier. So that's an adult American United Southwest et cetera.
Similarly in in Europe, we look at a markets like.
France, and the Netherlands, where the combination of France, and the Netherlands resulted in something that is call. It a circuit or 10 or 11 billion euros.
Air France, KLM from the combination of the two Oh the to government.
In the respective look towards that we look at a Germany, Austria, Switzerland, and Belgium, which is also circa a $11 billion. So those are I would say that those are all models that are out there for a larger carriers that we would consider to be potential competitors again as I said, we came into this way.
Very strong balance sheets, so for us it was not a tomorrow morning sort of an issue the way it was perhaps for some of the other carriers that including some of the ones I've mentioned.
This being said I know that our government is a is that looking and studying the models that are taking place elsewhere. I could also talk about Asia by the way, Singapore Airlines, a combination of equity and debt for but 11 billion a U.S. dollar so a big their partially owned by the Oh by the Singapore Sovereign wealth fund.
Likewise in Korea.
Similar program for a Korean airlines, so ours I know a government is looking out and considering various models from around the world.
I I've thought not able to comment here on on the various outcomes possible structures and so on and so forth.
Other than to say that we are all of you know watching them paying attention in our industry associations have been making representations to government subsidy as to the merits of of supporting airline industries.
Okay. Thank you I just wanted to dig in on the 79 aircrafts that are being retired from the fleet I mean, presumably over next couple of years. Some of these were aircrafts that are being replaced by newer aircraft anyway. So I guess I want to ask what to what degree that represents a permanent reduction in.
Your your capacity versus just an upgrade of technology.
And our any other decisions regarding that sleeps and the removal of certain aircraft from that sleek contingent on the closing of the trends that acquisition.
Thank you.
[laughter] going down it's Mike So let me take those two questions on the second one the questions simple answer is no is our fleet decisions are independent of transact.
Well. The first question was which is a little more complicated you're absolutely right. The when I used to being replaced the two twentys, which which we like to which we will continue to.
We delivered to us.
Oh the 319th.
Some of them, we're being replaced by the by the Max but you know I think I think we wore aggressive in our retirement schedule for the three nineties.
So that's a part and apart a part issue and then of course of some six sevens.
I would say the majority of that is accelerate retirements.
Not being backfill to any great degree other than with some mainline fleet the reserves or triple sudden high density used for key international leisure markets stressful for so.
Generally I would say more than half of that 79, our absolute reductions and the rest are more.
Built in as part of the replacement program to the two more efficient sleep.
Heartfelt over the last year so.
Thanks for squeezing me in.
Thank you.
<unk>.
Thank you.
A question Chris He was also gross capital. Please go ahead.
Thanks folks I'm, just maybe turning back to the cargo business in the conversions I'm sort of gets a couple of quick questions one.
You know on I kind of on a cash or operating basis are those cargo aircraft actually positively contributing and then the second question or second part of this is you know you do have some older aircraft any thoughts about I'm, taking some of those and re purposing them into hardware crop full time.
Let me take those two questions Chris Good morning as Mike.
The Oh, there's no doubt the cargo business is cash positive to us we we look at the imputed costs of.
Moving cargo in our two different models now the all cargo triple sums and three threes or the normal passenger plane.
The current market was very strong yields are strong demand, obviously very very strong and those are contributing to a to reduce the overall through right now the volumes not incredibly high but it's still contributing to the overall burn rate.
And Tim.
And our current team are doing great job getting business talking to different governments and different partners to move business from all of the world into Canada and vice versa.
On the second question.
Regarding a permanent cargo retrofits, that's not our intention or you know at this point in time the.
It's not really our business is not really our Ah we used to be freighters are 10 or 12 years ago.
Really didnt make money for us and so we exit that business and we really see no reason to to reenter that business.
Okay Fair enough and then this one it's a bit of a delicate question, but what I'm getting a lot from investors I'm.
Just the trans I transaction I appreciate that it's a before regulators right now so there's maybe only so much you can say.
I guess, we intend to the thought process around entering the transaction I guess a couple of parts of this.
Changed your rationale for.
For wider and wider approach trends out and how it builds out the leisure business and then second are there any opportunities to revisit some of the terms of the transaction at this particular point.
Well, Chris we really are at this stage until we get a regulatory approval. There's really no further update that we can we can provide I think that Toby that we've been very very clear and these and the document is a you know they the agreement is of course available for everyone to review is posted on SEDAR and so on.
This is a you know this is a well publicized transaction or we're not going to speculate beyond.
Simply saying that a until such time as we get regulatory approval, we will provide an update.
Okay. Thank you very much.
The next question comes from.
With Bank of America. Please go ahead.
Hi, Good morning, everyone. Most of my questions have been it's been a trust, but just talk just one for for T. Lynn.
Oh, you speak about emerging from this crisis as a smaller airline the other three year recovery period, how should we think about your cost structure as you shrink the airline, particularly around now the salaries and wages like you know if if you're saying.
<unk> cutting capacity by say, 20% relative to 2019.
Tenure salaries expense fell 20% or if you are reportedly not thinking about this right and that really really hard and is the relationship linear or not thanks.
So I mean look that that is of course they are they the challenge to our operating a team here in the discussions we have with our various the labor groups and how do we get productivity.
At the highest levels, we can and so.
You know where it is very similar to the exercise that we embarked on a you know many years ago. When we get our initial CTP program, you know to try to sort of rightsize, our cost structure in relation to our operation and so obviously that doesn't mean that you get the cost out overnight, but if we're looking at a three or three year plus timeframe that it's certainly.
Our expectation that we ticked down our cost structure to a level that is consistent with a smaller operation it would not make any sense for us to to carry drag along a a cost structure that was consistent with the 20 billion dollar revenue operation. If if we're not able to generate $20 billion of revenue. So so we're very very aware of that we're not going to give you.
CASM guidance right now it's way too early for that but that we can certainly tell me. The what you've described is exactly what is the operating assumption here that we can get our cost structure, especially our ER.
ER or wage and salary and benefits line to be consistent with a with a reduced operation.
And who is Mike just to add a few little more color I mean, we we doubled our size over last 10 years as we we've been profitable at different levels of revenue and not for me head Arrow plan for the most part so if you go back into a couple of years ago.
We might have in several billion dollars lower in annual volume, but our margins were still very strong and again that was before Errol plan. Some of the technology investments. We made so we're very comfortable that we can right size. The company, because we had practice and doing it and ER and we've experienced doing it.
As a recovery.
[noise] keys.
Sure.
Great. Thank you for that's that's all I had.
Thanks.
Thanks.
Last question from Helane Becker with Cowen and company. Please go ahead.
Thanks, very much operator, hi, everybody and thank you very much for taking the time in Squishy me in here I just had two questions. One is you know right now the fifth Street six freedom traffic is nonexistent and I was just wondering how you're thinking about that business.
As you think about recovery and say.
Mid 2021.
Right.
I mean, all legacy to comment as well, but Oh, yeah that was one of the reason that we are building get back.
In a progressive fashion, we're well aware of that and that's why we've said you know what we've said for the for the summer for example that we expect to be 75% down.
A lot of that six freedom Tropic will be challenged for sure this coming summer and and as we get into next year. We're not at this stage so putting out a forecast for next summer, but but our expectation is that we start getting some of it back end with the strength of our Star Alliance partnerships and with our.
European gateways, we think that we will be able to be up between the Canadian gateways that we built from the European gate, but well be able to reintroduce some of that tropic overtime, but others, who don't have anything to that sure E. M. D N fear in the immediate term.
The question is.
Some of the government.
[laughter] lifting.
Yeah.
[noise], how much sense, we're fine should actually be introducing you know what you see our international.
He said earlier, we anticipate.
Cover quickly, but there's no doubt that nobody kinds of each at 2021 and kind of thing you know trans border extremely important to us.
And I mentioned, the only a very strong partnership with United Airlines says.
Partnership [laughter] tend to Atlantic network. So our goal would be too you know we introduce Oh.
Well this quarter.
In order to see.
I can tell me right so.
Hey, you know be monitoring very very close because they definitely apparently not surprised you know continuing currency.
For example.
Right right Gotcha, and then the other question I had once you have a lot of you know Canadians who have vacation homes in like Arizona, South, Florida on Nevada, and I knew you were talking about.
In the recovery you know seeing some of that return I imagine a lot of them more quarantining themselves down there so far.
Well given the weather in Canada, and maybe March and April. She was it is it more that you're thinking about them coming back next year I imagine many of them when they have driven this time around trade. So you're thinking more next year they come back as opposed to 2020.
No no no. We think that there is we think that there is a a desire for this year as well as you know the Oh some of the some of those markets, especially the so called the you know vacationers sunbirds most them have come back that was one of the reasons why we maintained our trans border flying after the Canada U.S. restrictions were put into allow.
Some of these people to come back to Canada. So that's not you know that this I'd say, a typically want directional and its sort of a target at a relatively small market. We just believe that as people start getting more comfortable and that was one of the reasons. We launched this clean care initiative to make sure that people are aware of it.
Additional steps taken onboard people want to go back to their vacation homes again, because it made a big investment their vacation homes. They want to go back and visit their families again, a and visit their friends over there again I think that that as the assumption ever make is that as he said domestic first trans border leisure and then business and then international I think that's sort of as the cases that we see but.
We certainly expect to see leisure travel a return to some level. This year, although you obviously see or you know what we expect in terms of demand for the third quarter.
Gotcha, Okay, well, thanks very much definitely.
Thank you.
Clue to be question and answer session I would now like to turn the meeting over to Miss Murphy.
Okay. Thank you Atlanta and that makes you have any like doing okay.
Thank you very much.
Thank you.
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