Q2 2021 Air Canada Earnings Call
Please go ahead Mr Huh.
Thank you Mark.
Yeah.
Yes.
Thank you you're welcome and thank you for joining us on our second quarter call.
With me this morning on Michael Rousseau, Our President and Chief Executive Officer, Amos cause on our executive Vice President and Chief Financial Officer.
Net our executive Vice President and Chief Commercial Officer, and Craig Landry, Our executive Vice President and Chief operating Officer.
On today's call, Mike will begin by providing an overview of the quarter and the impact of the COVID-19 pandemic on our positioning for recovery.
Lucy will touch on travel demand, our network airplane and cargo.
This will provide additional details on our costs liquidity and financial performance.
Turning it back to Mike.
We will then open the call for questions from equity analysts followed by questions from fixed income.
Before we get started.
Please note that certain statements made on this call are forward looking within the meaning of applicable securities laws. This call also includes references to non-GAAP measures. Please refer to our second quarter press release, and our management discussion and analysis for important and for important assumptions and cautionary statements.
Relating to forward looking information and reconciliations of non-GAAP measures to GAAP results.
That said securities laws do not prevent us from unreservedly, Cherry and wishing all or at least the best.
Reach their personal goals, while representing a proudly in the Olympics and Paralympics that will unfold in Tokyo, starting today in the upcoming weeks.
They're on journeys and resilience in preparing for these games. During these spend during the pandemic are an inspiration to all Canadians.
Go Canada go.
I will now turn it over to Mike.
Well, thank you Valerie and good morning, everyone and thank you for joining us on our second quarter earnings call.
For Air, Canada, and the global airline industry generally the COVID-19 pandemic contributed continued to weigh heavily on our second quarter performance.
Our employees as they always have done focused on taking care of our customers, while carrying them safely to their destinations.
And on the prudent and very strong management of our company.
I, thank them for their dedication their creativity and professionalism in this very challenging and complex environment.
Although overall bookings from remain below pre pandemic levels customers are returning.
In June we began to see a significant increase in bookings.
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Eliminating the quarantine period for fully vaccinated, returning Canadians and the removal of other travel restrictions.
We are seeing steadily increasing bookings for the domestic trans border and Atlantic markets into Sun.
Destinations for the coming winter.
In fact for next winter Sun travel future bookings during some weeks in June we're ahead of the same period in.
2019 that hard to remember time before COVID-19.
We are certainly pleased to see vaccination rates, increasing and more recent announcements of assume easing of travel restrictions in Canada.
We can now optimistically say that we are turning a corner and we expect to soon see correlated financial improvements.
We are excited and ready to welcome back our valued customers in greater numbers.
And to introduce them to the many improvements we have made to enhance the travel journey.
Yeah.
I went back to our results today, we reported second quarter negative EBITDA of $665 million compared to negative 32 million in the same quarter of last year.
On a GAAP basis, we recorded an operating loss of $1.133 billion.
Compared to an operating loss of 1.55 billion last year.
Our net cash burn of melons somehow on $45 million on the quarter or about 8 million per day on average.
Good thing like lower than previously projected $13 million to $15 million.
We attribute this to increase bookings and our continuing effective cost controls.
The upward trend in advanced ticket sales has continued into the current quarter.
We had nearly $9.8 billion in unrestricted liquidity at quarter's end, including the funds available under the credit facilities with the government of Canada.
We have said we view the general purpose government facilities as an insurance policy and this remains the case.
Air Canada is more than adequate resources to compete effectively and manage through the end of the pandemic.
We are now looking beyond COVID-19, and taking steps to ensure we are well positioned to seize on many opportunities we see before us and the emerging post pandemic landscape.
The skills of our highly talented professional on committed employees have helped us carry us through the pandemic.
Looking ahead with them I am fully confident that air, Canada will rebuild stronger and rise higher than ever before.
Thank you and now I'll turn the call over to Lucy.
Let's see Mike and good morning, everyone.
I'd like to begin by thanking our customers for their steadfast loyalty and confidence in our early throughout the pandemic as.
Well. Thank you to the people of Air Canada will work tirelessly to ensure we are well positioned as travel return.
We achieved passenger revenues of 426 million in the quarter, an increase of 219 million or more than double compared to the second quarter of 2020, which was the first full quarter to be impacted by the pandemic.
We operated at 78% more capacity in the second quarter in 2020, and 86% less when compared to the second quarter of 2019.
Looking ahead he sees the momentum in bookings due to the easing of travel restriction. We plan to operate approximately 85 per cent more capacity on the third quarter than we operated in the same quarter from 2020.
Representing a decrease of about 65 per cent compared to the third quarter on 2019.
And we've done as we've done since the onset of the pandemic, we will continue to dynamically adjust capacity as this situation evolves to ensure we can Matt.
As we transition into a period of significant recovery many of our initial assumptions on the rebuilds are coming to fruition.
First our domestic recovery led the way.
In August our domestic capacity would be roughly 2 thirds of what it was in 2019.
Witness demand growth throughout the country, especially in on.
I've been into services.
The more we are proud to retain our position as Canada's largest domestic airline as we went into service 250, Canadian cities and communities from coast to coast to summer.
Although the current demand is largely for leisure and visiting friends and relatives based on feedback from our corporate partners. We believe that this fault features a progressive return corporate demand.
We are encouraged by some of the commentary from our peers in the United States with regards to overall visits traveled the country.
We have also dramatically increased our capacity to the U S over the summer, which includes 55 routes and 34 destinations with up to 220 daily flights between the U S and Canada.
The new schedule coincide with the easing of Canadian travel restrictions between the 2 countries as of August 9, including the removal of hotel 14 requirements for all travelers rely on testing requirements for Canadians traveling to the U F for less than 72 hours.
Allowing fully vaccinated citizens and permanent residents in the U S into Canada for nonessential travel among other measures.
We will continue to ramp up our operations to the United States, which has been significantly scaled back from the 57 cities or pre pandemic.
Rebuilding our U S operations and restoring our position as the largest foreign carrier operating to the United States is key to our recovery.
This will also expedite the rebuild of our international long haul operations as we seek to achieve or exceed our fair share of the U S long haul global markets.
Looking further ahead, we are seeing strong demand from Canadian leisure travelers to the U S primarily to markets, such as California, Florida, and New York City, Hawaii, and the various United Airlines Hudson's share with many of these markets on pace with 2019 level.
Turning to our international markets. Following the government's recent announcement, we look forward to work on and customers from around the world back on board once Canadian travel restrictions on foreign national begin to ease as of September 7.
On our Trans Atlantic services, we are seeing demand growth in several leisure markets, such as France, Italy, and Greece. In addition to large VFR markets, such as Egypt, Morocco, and the Indian subcontinent searched through our Toronto to go on.
Our students do they ask the word joint venture apartment, because this country is exceeding our expectations.
We're unable to serve India during the quarter, but look forward to returning as soon as possible.
India remains a key area of focus on our network and we continue to be bullish on the long term growth prospects in this market.
Overall discovery on the Atlantic will be quicker than other parts of our long haul network given a combination of high vaccination rates.
[noise] cultural and business ties between Canada, and Europe. In addition to strong leisure demand and interest from Canadian.
We are already observing L T demand signals from Europe into 'twenty 'twenty 2.
Looking to the Pacific market the outlook remains uncertain and significant restrictions are still in place in many of the key markets be true.
We continue to monitor the market and adjust our strategy accordingly.
When looking to the Sun market, we are very optimistic about a recovery as we look to Q4.2021 in Q1 of 2022, you're currently observing demand growth that is above 2019 level.
With a corresponding strong yield environment.
Led by the strong performance of our Air Canada Vacations growth, we anticipate operating in your 2019 levels in this geography by the midpoint of winter 'twenty 1 'twenty 2.
Should demand trends continue we will evaluate redeploying capacity from other parts of our network to serve that is going on.
As we've previously mentioned the recovery will initially be led by demand recovery in leisure and VFR market.
We continue to believe that air Canada is better positioned than our peers to profitably capture the segments given our investments in seat Air Canada Rouge, and our overall advantage you know on what you need density versus our peers.
Actually on air kinds of performance in the second quarter.
Those feelings on point, so are up nearly 40 per cent year over year, demonstrating solid member engagement.
This represents a decrease when compared to 2019 due primarily to a reduction in points from air and hotel partnership.
However, gross billings related to our credit card and retail partnerships that shows up on it and are tracking well towards a full recovery.
On average spend on co brand cards were down almost 7% when compared to the second quarter of 2019 is quite widespread lockout and lower spend on travel and entertainment during the quarter.
Co brand card acquisition is gaining momentum with attractive welcome glitches in the Canadian market offered by our banking partners.
You've already acquired more American express airplanes card members. So far this year versus full year 2019 or 2020.
Card retention rates continue to be in line with historical norms.
We can volume it's converted to Aeroplan from Frank proprietary credit card programs.
And importantly in the second quarter as member transfer their backs on the points into other programs for Aeroplan to redeem for travel we expect these folks to continue its travel rebound.
We will all provide us significant new partner in the third quarter, when she said ultimate reward against all friend airplane.
Transfer option.
So I'll lead redemption recoveries another sign of continued program ill and returning member engagement.
In June members redeem points for air travel at 92 per cent of the race day in June 2019, despite major geographies and popular air upon destination.
Asia Pacific still being substantially close your trial.
Interestingly members are redeeming from proportionately more premium cabin tickets than in the prior program.
This customer shift towards premium cabin redemption further increases airplanes competitiveness is getting them on.
Perfect.
We're uniquely positioned to offer the most competitive premium travel redemption in Canada as our domestic competitors offer far fewer premium auction.
I've known in premium travel during the quarter Aeroplan launched a unique partnership with Rocky Mountain near offering Ernie redemption and benefits barley and go round numbers.
Importantly, the second quarter saw an increase in member enrollment driven by both the return to travel as well as our new partnership with Starbucks, which continues to outperform targets.
Building off this expense, we expect to ask several new airplane partnerships, which will expand the programs relative to the infrequent traveler as well as reinforce its fleet in the travel space.
Turning to our cargo result, we achieved a record 358 million in cargo revenue for the second quarter, which represents an increase of 89 million or 33 per cent compared to the same quarter in 2020.
181 million over a 102% over the same quarter in 2019.
Prior to the pandemic, our cargo network and enhanced by the growth of our wide body fleet, including delivery of the Boeing 77.
Well its several air but they treat dirty.
The pandemic has accelerated the expansion of our cargo business with the movement of critical goods as well as the growth in E Commerce.
This fall we are adding an additional layer with 2 Boeing 767 fully dedicated freighters that will enter into service.
Given the low cost of ownership of the Boeing 760 Sevens recently retired from our passenger fleet as well as the low cost to convert the aircraft a freighter and cargo infrastructure.
Look forward to expanding this program to 8 aircrafts in the next couple of years.
We recently announced the international routes that traders will be operating linking Toronto Miami. He told me about Mexico City and Guadalajara.
Additional destinations to be served in early 'twenty..2 include Outback, St John Madrid, and Frankfurt as more afraid of interest here.
This business represents an opportunity to continue building on the success of our cargo on the flight is important part of our recovery revenue diversification and long term book.
I believe and since the onset of the pandemic, we continue to show industry leadership, and our safety first mindset to our clean Careplus program across the customer journey.
To meet growing demand at our hub airports, we have now reopened 4 of our make movies challenges with our domestic cloud just Montreal reopening in June and given the positive booking in travel trends. We plan on opening an additional 10 of our lounges and the third quarter.
The lounge expansion, Toronto, Montreal, Vancouver, and Calgary is complemented by enhanced safety measures highlighted by contact with century, and mobile ordering available to facilitate delivery of complementary food and beverage directly to our customers people.
In addition on board our Boeing 737, Max aircraft, we introduced our bistro on demand services on select flight that allows our customers to order food and beverage items directly from their teeth using the insights entertainment system.
We look forward to expanding extending digital ordering in the future.
To close we have been relentlessly preparing for the recovery always with our customers top of mind and we're still thrilled to welcome them back on board, our airline has become stronger more resilient and with the foundational elements. We have in place as well as key investments made in chronic sleep innovations and customer experience.
We are well positioned to retain our leadership position as the top airline within Canada and as the top airlines globally with that I will pass it on to me.
Thanks, Lucy on Bushnell, good morning to everyone.
I will begin by reviewing our costs operating expenses were well controlled in the quarter on a year over year capacity increase of 78% operating expenses decreased 112 million or 5% from the second quarter of 2020.
We called it in the second quarter of last year Air Canada recorded a charge of $236 million under special items due to measures taken in response to the COVID-19 pandemic.
Turning to the major expense categories in the quarter fuel expense increased 115 million or 93% from the second quarter. This was due to the higher volume of fuel liters consumed because of an increased volume of flying year over year.
In addition, the impact of a 32% increase in fuel cost per liter accounted for a variance of 56 million when compared to the second quarter of last year that is a net favorable that is net of a favorable foreign exchange variance due to the strengthening of the Canadian dollar year over year.
Keep in mind on the Canadian dollar usually strengthens when oil prices increase which partially reduces our exposure to fuel price.
Wages salaries and benefits increased 33 million or 7% on the second quarter compared to the second quarter of 2020 wages and salaries increased 44 million or 14% primarily on higher average salaries. This is because of layoffs completed in June of 2020 led to a change of them.
Volume mix and years of service.
With higher levels of flying when compared to the second quarter of last year.
The airlines expense, excluding fuel increased 21 million or 12 per cent.
Depreciation and amortization expense from the second quarter was 404 million a decline of 83 million or 17% from the same period last year. This.
This reflects the accelerated retirement of certain older aircraft from our fleet and the decline was partially offset by the addition of 5 fuel efficient Airbus day to 28.3 hundreds.
Our fleet reduction also played a part on the decline by 54 million or 30 per cent and aircraft maintenance expense maintenance expense from the second quarter.
Also contributing to the year over year decline was a reduction in maintenance provisions, resulting from updated end of lease cost service cost estimates and a favorable currency impact.
We recorded special items amounting to a net operating expense of 73 million driven by a 157 million related to the early retirement incentive program and by 68 million from benefit plan amendments the.
These pension amendments will not impact our liquidity position is the amendments are funded from the surplus of the pension plans.
The charges were partially offset by a net benefit of 158 million related to the Canada emergency wage subsidy program or cues.
Plan to continue to participate on this program, which has been extended to September 2021.
Despite the decline in capacity compared to 2019 levels. We have managed to maintain approximately 50% of our work force in part due to Qs and are currently recalling employees to support our summer schedule.
Turning to liquidity since the onset of the pandemic, we have taken measures required to stabilize operations and to be prepared for the recovery process..1 of these critical measures had been raising liquidity to provide us with more flexibility to meet future challenges and better compete in the recovery phase and on the post the pandemic.
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Since March 2020, we have raised significant liquidity reinforcing was even at the time 1 of the strongest balance sheets relative to our size in the global airline industry.
1 year later at the end of March 'twenty, 'twenty, 1 unrestricted liquidity amounted to nearly $6.6 billion.
In April we substantially increased our available liquidity through a series of debt and equity financing agreements with the government of Canada.
In addition to gross proceeds of 500 million from an equity investment.
Or this financial package, we have access if needed to close to 4 billion in additional liquidity through week payable credit facilities.
There was also a separate 1.4 billion government credit facility to support the payment of refunds to customers, who did not travel due to COVID-19, and we're holding nonrefundable tickets.
On June 10th 2021, you extended the deadline for customers to seek a refund to July 12 of this year.
As of June 30, we have refunded 997 million to eligible customers.
It is projected at about an additional 200 million of refunds will be paid during the quarter on 2020 during the third quarter of 2021 to finalize the processing of the COVID-19 refund claims all of which will be eligible for draws under the refund credit facility.
At the end of the second quarter 858 million in proceeds have been drawn under the <unk> credit facility.
It matures in 2028 and carries an interest rate of about 1.2%.
In addition to this over the quarter, we received proceeds of $180 million on aircraft financing related to the delivery of 5 Airbus day to 23, hundreds and on April 15, 2021, we repaid U S 400 million of the 7 and 3 quarter percent senior unsecured notes upon maturity.
At the end of the quarter unrestricted liquidity was $9.775 billion.
On Monday, we launched a refinancing transaction of our term loan B and completed the syndication of a new senior secured revolving facility.
With these will be able to see will be seeking total gross proceeds of USD 535 billion.
Subject to market and other conditions.
The proceeds of the term loan B are intended to 1 from the refinancing of the 200 million principal amount of our 4 and 3 quarters senior secured notes due 2023.
The 840 million principal amount of our 9% second lien notes due 2024.
To fund the refinancing of the indebtedness under the loan agreement dated October 6.2016 comprised of our syndicated secured U S. Dollar term loan B facility of USD 578 million and our syndicated secured U S dollar revolving credit facility of USD $600 million and 3 from.
By working capital and other general corporate purposes for Air Canada and its subsidiaries.
The refinancing transaction is a significant step in our efforts to continue to improve our liquidity and reduce our overall financial risk by you.
Sizing and pushing out the maturity of the existing term loan b from senior secured notes to provide more runway as we go through the recovery period.
Current market conditions are favorable for air Canada to launch this type of transaction.
So the obvious question of whether we will now opt out of the government's pronouncing facilities. It's a decision we will make later in this year as we gain more line of sight on the recovery.
Subject to market and other conditions. This financing will also unencumbered some assets tied to the current term loan b.
And increased our unencumbered asset pool by about 700 million for total of $2.2 billion to support other financings should this be require.
This pool excludes the value of Aeroplan and Air, Canada, Vacations and Air Canada cargo.
Moving on to cash burn.
In the second quarter of 2021, our net cash burn was 745 million worried about on average of 8 million per day better than it was previously communicated.
Driving the improvement in cash burn was EBITDA working capital and Capex EBITDA was better than expected mainly due to continued strong cost control and the rapid adjustments of capacity, we made to adjust to market demand.
Working capital improved due to stronger advance ticket sales and forecast and ongoing management of trade receivables and other working capital items.
Capital expenditures were lower than forecast.
Due to the strengthening of the Canadian dollar together EBITDA working capital on Capex contributed 5 million per the favorable variance.
In June we were encouraged by the strong rebound of advanced ticket sales following earlier announcements on that using a certain travel restrictions are updated schedules and other service. Another recent service announcements.
Looking at the end of the third quarter looking ahead to the third quarter.
In light of the most recent order announcements made by the government of Canada, We estimate net cash burn to be between $280 million and 460 million on average of 3 to 5 million per day for.
For the third quarter. The net cash flow projection includes 2 million per day on Capex net of financing and 4 million per day and lease and debt service costs.
It also continues to exclude the remaining amount of eligible refunds of non refundable fares being process pursuing to the chain.
Change in refund policy announced on April 12.
I must say it feels great to be delivering this guidance today, we are encouraged and excited as we look ahead to brighter skies.
As we begin to look ahead with optimism. Please allow me to pause here for a moment to recognize the boundless efforts courage and tenacity of our employees.
I admire them for their professionalism and commitment and force commendable ability repeatedly to old flow often to overcome awesome cascading challenges.
To conclude I look forward to continuing and further developing the transparent and positive relationship we have with the financial community.
I am eager for future conversations as well as our next Investor day expected in early 2022, we can better showcase with the actions we have already taken and the plans and targets we will be implementing to further strengthen our company.
Now I'll turn it back over to Mike.
Thank you Amy.
Throughout the quarter, we continued to make progress on rebuilding our business preparing for the return on travel.
Pursuing new initiatives to further ensure we succeed and what would be a highly competitive environment.
Most visibly we have begun re establishing our global network by announcing new strategic routes and restoring suspend on services.
In support of the summer schedule, we recalled approximately 2900 employees for June and July.
A key competitive attribute is customer service.
The pandemic our primary focus has been on the safety of our customers and employees and this will continue.
Many of our COVID-19 innovations will become permanent because they were also designed to enhance the travel experience.
Includes a new mobile solutions, so that customers can obtain preapproval for health documents before arriving at the airport.
We have introduced many touchless features on check in baggage drop and in our lounges.
And we will look to expand the use of facial recognition biometrics for boarding after a successful test in San Francisco.
Loosely touched on destroyed and we are developing new onboard futures.
These and other planned technological innovations will make the travel experience, particularly at the airport safer more convenient and quicker for all customers.
Another important initiative is our transformed aeroplan loyalty program.
In addition to the programs compelling new attributes we continued to enrich them through powerful partnerships to give members more weighted to collect points and redeem for rewards.
We've always regarded aeroplan is a key differentiator of air Canada.
Setting it apart from domestic and international competitors.
The ongoing improvements we are bringing to our industry, leading loyalty program will amplify this as well.
We're also very pleased by the performance and future prospects are air Canada cargo.
Which recently operated as 10000 all cargo flights.
Our dedicated freighters, which are our converted aircraft retiring from our passenger fleet will allow air Canada cargo to provide consistent capacity on key air cargo routes and facilitate the movement of goods globally.
Even while dealing with the pandemic, we kept our eyes on the horizon and worked on all the other elements crucial to our long term success from our business.
Notably our commitment to sustainability has been unwavering.
In March we set an ambitious goal of achieving net zero emissions by 2050.
Central to achieving this is a renewal of our fleet, which we progressed significantly by accelerating the retirement of certain older aircraft from our fleet at the outset of the pandemic.
This continues today with the narrow body program during the quarter, we took delivery of 5 more Airbus <unk> hundred 20 aircraft and we expect 3 more to be delivered in 2021, along with another 3 Boeing 737 Max aircraft.
These aircraft types are much more fuel efficient than the older aircraft, they replace and offer customers a greater level of comfort.
We continue to work on other initiatives during the quarter as well as included entering into an agreement with the Edmonton International Airport to reduce carbon emissions shipping critical COVID-19 medical supplies to India.
Since its inception over 1.3 billion points have been donated by Aeroplan members in support of more than 1400 causes.
No, Canada and its employees are proud to be part of the initiatives such as these which are also important to investors customers and other stakeholders.
Updated information on our commitments and programs will soon be shared when we released our 2020 edition of the citizens of the world Our annual corporate sustainability report.
Yeah.
As I said, beating of the call indications are that the worst effects of the COVID-19 pandemic may now be behind us.
Based on what we are seeing in other markets that are further along on reopening the Canada, we anticipate travel will resume on a quickening pace.
However, as we have historically done we will continue to manage both our cost structure and our balance sheet very considerably.
Already we are seeing green shoots of recovery bookings are accelerating and our own customer surveys indicate a strengthening of attempt to travel within the coming months.
We expect the most recent announcements of the government of Canada relaxing existing measures will further help strengthen the interests of our customers from flying again.
Air Canada is well prepared from a financial customer service and operational standpoint to ramp up our business to meet the returning travel demand and welcome our customers back.
We are well positioned to emerge strongly into the post pandemic world.
Thank you and I guess, we're ready now for questions.
Thank you we will now take questions from the tariff on mines. If you have any question that you are using a speaker phone. Please lift your handset before making your selection. If you have a question. Please press star 1 on your devices keep that you make and so on your question at any time by pressing star 2.
Please press star 1 at this time, if you have any question that will be a brief pause from all participants, but just ask 1 question.
We thank you for your operations.
Our first question is from <unk> Gupta.
From Scotiabank. Please go ahead.
Thanks, and good morning, everyone.
So maybe my first question the M S on on cash burn guidance for Q3 so.
So it seems like Capex lease and debt service payments be accounts for 6 minutes per day of cash burden and then your guidance for cash burn of 2 to 5 so I'm curious a what's the offset coming from I mean, what kind of assumptions are you, making about operations on working capital. Thank you.
Hi, good morning called Arc a good question.
So really the difference is coming from positive cash from operations.
And also on the debt service costs. The interest cost is also included so when you consider these items are these couple of factors there that brings you into the $3 million to $5 million.
Average per day cash for.
Okay. Thanks for that and then secondly, if I can ask about maybe its more from Lucy.
No Mike if you're on to take it from a yield so how like when you talked about new bookings are coming in in this different markets talked about quite like especially some you know it's a long day.
Transport on domestic et cetera.
How does that kind of pricing on the fares are training on these new bookings that you compare them to the.
The existing bookings that were made before COVID-19 flow future travel.
I assume it's Lucy maybe.
Maybe let me just.
Give you a little bit of a comparison here because there's a couple of points that are pretty important.
Up until such point as the U S.
S government measures were announced we.
We have to keep in mind that we can only generate demand from point of sale, Canada. So we had no upside upside potential from currency from other points of sales.
And you know given the fact that corporate demand is also somewhat.
Our challenge at this time, we didn't have the potential for high yield so setting that as a sort of a any share initial.
Comment.
When we look at the pricing environment in the international markets.
On the environment is quite stable and I would say on the environment is competitive, but we are well set up to deal with the.
The VFR market and we have upsell opportunities for example into our premium cabins and in generally the pricing environment is quite stable.
In the North American environment, it's a little bit different if you look at when the lowest of the domestic competition starting to enter the market. It really started in June. So when you look at the deal environment. You know what day early start in the second quarter. The environment was a little bit more stable, but as the competition really started to ramp up.
The pricing environment became a little bit more challenging in domestic Canada. The good thing is from that perspective, and we're very encouraged because we know corporate demand will come back. We know we will get some high yield upside you know from international connections and at the same time, we do have the right leverage and we do have the right tools to be able to.
Not entirely true there. So you know from branded fares, how we talked about air plan and.
In our in our you know early statements. The Aeroplan program is also providing them.
Very good opportunity for us on the yield side to be able to.
Monetize our premium cabins for example, so the.
The environment is very competitive, but we're confident that we're well equipped to be able to to deal with it.
Okay.
Thank you and then last 1 from me before I turn it over.
The fuel price it seems to be obviously going up here on they get still below our 2019 levels I guess, but it's kind of you know maybe it approaches there as the demand for jet fuel goes up our.
That's your expectation are bye bye allergy markets I guess I like from your perspective, I guess, it's a good problem to have as fuel price goes up which means demand is going up but can I ask.
And if you have seen fuel being a challenge at times. So how do you like in this coming out of the Covid. How do you plan to mitigate the field has been professionally here on I guess it is pricing a tool or do you do kind of reconsidered hedging or is there anything you can change the suppliers so any thoughts there.
Corner I can say with some you.
You know at this point are you know certainly as you mentioned.
A little bit of a good problem to have if we have increasing sort of fuel on demand and adding capacity back but overall you know we will manage its not true hedging at this point in time, you know, it's a little bit as we looked at that hedging historically has been more of an insurance policy and.
Now to deal with the spikes in in and fuel price I think what the industry has seen sort of over time as fuel prices increase.
The industry has been able to push along fares to compensate for that so we would not expect that that scenario or that outcome would not be again repeated going down the road.
Okay. Thank you that's it from me Thank you guys.
Thank you.
Our following question is from Helane Becker from Cowen. Please go ahead.
Oh, thanks, very much operator, hi, everybody on thank you very much for your time this morning, and so I'm not sure who wants to answer this but as you think about cargo going forward I know the converted freighters are permanently in the mix now.
How should we think about cargo is this going to be a major revenue generator I mean, historically, it's not your core business.
A lot of opportunity I would think to really participate in debt and a dedicated cargo business. So how should we think about that going forward.
Good morning, Glenn It's Mike Hum.
Hi, Mike.
There's no doubt it's it's it's like we said, it's a big part of our future.
From a whole bunch of different inspections perspective, certainly diversification.
Long margins and we're good at it and we're going to get better at on frankly, so the cargo the dedicated cargo freighters on 1 aspect, but the other aspects that are equally if not more exciting is our entry into the E Commerce business under under a brand name called rebel where we've partnered with a lot.
Smile on first mile providers to provide point to point a deliberate air.
And and you know, we're not expecting to replace a major players in this area, but this market is growing and we have this.
The skills and the technology now to take advantage of that marketplace.
So long winded answer to tell you that it's it will be a more important part of our future going forward.
We will save you know to maybe at the Investor day as to what our expectations are but certainly we.
We see the growth rate in cargo are exceeding well exceeding what our what our passenger rate might be but we're still going to be a passenger airline air.
And.
And in.
Opening up new markets from a cargo perspective is going to be very very important to us and an opportunity given given our brand and give them give them the strength of our management team.
Okay. That's very helpful. Mike. Thank you and then my other question is just related to how you were thinking about.
I know you were talking about bringing back capacity I guess is as demand comes back is that is that how we should think about it. So you'll you'll see demand and then you'll add capacity or you'll add capacity and then.
The price sensitive.
Game that day.
I'm not sure how to think about how.
How to think about this sixth freedom traffic and so on that was such a big part of the business pre pandemic.
Hi, Lucy maybe ask maybe I can start on this Saturday and Mike wants to ask to add 5 to 10.
Since the start of the pandemic you know we had a very disciplined process here to try and understand the triggers that would inform us in terms on what the demand could be so including you know observing what occurred in other markets when some restrictions related to it et cetera.
And of course, you know looking at our.
Our own and that advance bookings, we give that much debt quite a few scenarios. So basically now that we know that day restrictions have been lifted.
We had already planned for that so we had a scenario where the capacity that we loaded was based on the existing debt you know bookings velocity, but we were also prepared for the opening of the market. So for example, you know we could see it was evident that the Sun markets for example, and you know.
On the fourth quarter of the year would be very very strong. So we we hedged our bets and we plan for that and we put the capacity and so you know we're very disciplined obviously because it's.
Important for us to be a public the indicators. We ask you know we didn't only focus on 1 option. We had several capacity plans and as soon as indicators gave us confidence that these markets would rebound we added a second lien only talked about a strong.
On the farm market. So if you look at the makeup of our route you know we took some risks which paid off you know we introduced still what we introduced kind of movies or heightened VFR markets.
And we made sure that you know we have the right capacity into our or our partners' hubs.
In order for us to be able to do as you say extract the most potential we could from sixth freedom market. So as we move forward now that the restrictions are opened we had another you know you have capacity if things materialize. The way we think they may we will be ready.
I had to have capacity in the market and you know this is for every share you know it's pretty clear that there are some areas of centers that are clearly showing some strength and we've been able to to jump on that pretty quickly and we will continue to do that.
But at the same time of course, we're very mindful of ensuring that we have a ramp up that's a coordinated with that my colleague Craig here and the operation you know to make sure that we can deliver on that and at the same time that we're mindful of costs.
But as you saw we do not like to be that are sent on the table. So as soon as we see our.
Opportunity we are at.
Ready to kill them.
Thank you that's very helpful. Thank you Lucy Thank you Mike.
Okay. Thank you. Our following question is from camera on their expense from National Bank Financial. Please go ahead.
Thanks, Good morning, I guess, just a couple of kind of outlook questions from me..1 is just on the booking trends and specifically the domestic markets are certainly sounds like you know August ER on peak summer is looking pretty positive for you I'm just wondering if you could comment on.
What you're seeing in September October kind of past the summer peak I mean do you do you see enough demand there on the booking trends that will support kind of level of capacity you brought back domestically in August.
Where we're actually very confident with the schedule that we have planned for for the fall you know for September and beyond.
So we're very excited because obviously you know this week and we need to first week, where we can actually observe new velocity based on the opening of the of the restrictions.
Early July the whole, California team was removed which meant that he gave that gave us a little bit of opportunity.
4 of them attorneys Canadians have were coming back from abroad ask.
The lease on upside there and it did have an uptick there, but as you know the provinces also had pretty tight restrictions for travel within Canada. When that was lifted we you know saw a surge in the domestic environment. So understands where we're confident with what we have noted and as I said earlier if things at you.
No.
Materialized exactly how we planned we would have opportunity to redeploy or to right size and we all seem to have a little bit on ability our flex to be able to act on.
But I can tell you and you know this is probably the best we got certainly had that in the <unk>.
In the last year and the early indications with the easing of travel restrictions is very very encouraging very encouraging.
Well, that's that's great to hear.
Second question I guess is somewhat related is just with regards to business travel I suspect, we'll see more companies start to diet with with our business travel in the fall.
I'm just wondering if you have had any survey data or discussions with your with your corporate clients that you could maybe discuss that you sort of give you some confidence it didn't help business travel is going to start to recover come September yeah.
So we did see just even for the month of June we did see a little bit of improvement versus what we've seen in April and may, particularly in our in the domestic market.
Slight but some improvement we always assumed are 2 things that perhaps in Canada. The recovery would be a little bit later than what we were observing in the United States. So we always assume that post labor day, we would see some returning is on business travel we are encouraged.
In fact, yes in discussions with several of our agency partners are corporate accounts. There is a sentiment on where corporations are now starting to talk about return to travel and from you know for for business in the fall.
And also when we look at what's occurred in the United States. If you know we overlay on that.
Ramp up that they saw on the business.
Markets once restrictions started to ease and we overlay that you know it's 2 our markets were thinking that by September October we will start to see some some positive signs.
We were also very encouraged with some of the restrictions that were put in.
On that allow actually.
I ask injuries, who are really you know traveling on very short haul destinations from very short periods of time.
That they can use the same test and treat departure from their return on a reentry into Canada, and that's going to be meaningful also for those who are contemplating business travel to United States on New York, Boston, Washington, and that kind of thing. So that's another positive into Canada.
We really look forward to seeing that booking curve you know post holiday to start to see how things shape up for September but definitely the domestic market will be number 1.
Followed by a trans border.
On the international routes I suspect it probably will be similar to what we've heard from our peers will take a little bit longer to act to recover for a long haul international.
Okay, well, that's great great detail, thanks very much.
Thank you. Our following question is from Kevin Chiang from CIBC. Please go ahead.
Good morning, everybody. Thanks for taking my question.
Maybe I'll just ask a question on on a range.
We moved all the wide bodies.
During the early parts of the pandemic, but and it sounds like you know the VFR markets, improving as I suspect, you'll see some improving trends on the international market as well, but I also suspect it will take years before somebody's.
Border restrictions are fully removed.
I think I'm correct me, if I'm wrong, I think the but the thought process was you couldn't you could flow subtropics hubs versus using point to point as you might've done with your old Southern 6 Sevens are you seeing you ask me tension from from your from customers and helping in another country when when when when when choosing an international vacation spot interest does that change how you.
[noise] about reintroducing wide bodies.
Back into Rouge to reintroduce those point to point, Oh auctions for customers.
Good morning, Kevin its Mike.
No I think we we made the conscious decision to exit the wide bodies from Rouge and to your point flow the traffic through our partner partner hubs. We see no reason at this point in time to change that strategy or change that direction.
Full stop.
Obviously, we're focused on the narrow body of part of Rouge now, we'll be launching that in September with a very strong ramp up to.
To take advantage of all the sudden traffic that Lucius spoke about earlier and so we think that is the.
A key a key differentiator for air Canada, and an important part of our future growth again, I think on balance we will flow tropics internationally through through the partners are true Lufthansa hubs and we think we can capture the majority of the traffic that we otherwise had had to pull them directly.
Okay. That's helpful.
Just a second question here.
Maybe maybe they'll lose too just to just a follow on from <unk> question there on on corporate travel.
I guess I'm trying to figure out.
You know when you're when you're looking at the trends over the next few months and quarters and you're talking about being a bit delayed with the U S. Because we own.
We reopened a little bit later than the U S Air Canada.
Feeling from the ramp will be the same though when things start moving or what was the feeling about the ramp might be a little bit slower because it just feels like corporate Canada has been a little bit more cautious on bringing people back to work. So I'm just thinking through what does that mean, they're a little bit more cautious and they're putting their employees back in the air as well as we start to reopen the economy further.
Kevin Let me take that and because it's so it's a very interesting point.
We don't think a wrap ups could be any different than I think corporate Canada.
Has to realize that they do have to get out to visit customers and clients.
Does the U S is doing that right now and and I think I think a lot of <unk>.
Corner offices in Canada.
<unk> earlier point are saying what are we missing here now that are now that we're almost fully vaccinated.
Getting somebody from some vaccinated.
Because they do have to build business and you know there's a lot of surveys and talk about how corporate travel will change over time.
We certainly believe that are that are.
Traveling to see clients and customers will continue to be very strong and there might be up ask you. Some pent up demand to do that once the market opens up and once the once a day.
Companies get back to somewhat into their offices.
The internal meetings might have a little bigger impact from from the you know the virtual world that we've all been.
Recently.
<unk> been forced to utilize over the last little while but we do believe based on our conversations with with many many corporate leaders are but that's.
That kind of customer traffic as well.
Well, we'll come back fairly strong.
But that's not that's good color. Thank you very much everybody have a great debt.
Thank you our.
Following question is from Savi <unk> from Raymond James. Please go ahead.
Hey, good morning, everyone.
Lucy I Wonder if you could.
Sure, how you're thinking about that kind of a potential path on timing and capacity of restoration in Canada individual entities I realize things are highly uncertain and you have several different plans, but just as you know it today like how do you envision that that recovery and that's the individual entities.
And from that capacity perspective, I'm, sorry, I didn't.
Capacity perspective exactly okay.
Well it's simple.
When we get a common.
Introduction, we said 15 to third quarter, we were expecting capacity to be approximately 65%.
And in that in Q3 and.
You're highlighting a very good point because in fact, we.
We have to keep in mind that there are many ultra long haul markets that we do not plan to operate.
In the third quarter. So for example, if you think of Australia, we had a significant franchise on China and as we know those markets for the time being we have limited capacity. So there are several markets like that ultra long haul debt. We don't have in the plan for the third quarter, which means that overall it.
65 per cent.
A very large difference when you look at it from a North America perspective, if you look at domestic for example that would probably be at.
Closer to a -40 range and if you look at the acceleration you know between June July August September if you look at the ramp up for example on domestic or the Sun.
He is a pretty large acceleration so theres no doubt that the 2 are on attained the 3 largest sectors, where the ramp up is fastest our largest would be the domestic U S and some networks.
So you know U S leisure and then looking at Q4, the subgroups and then publicly followed by in the Trans Atlantic and Regrettably the specific and.
Australia is that.
He is somewhat delayed.
And every 1 of those lines moving like when do you think domestic can get back to you like pre COVID-19 levels in some of these other ones that are stronger today like how long do you think that those can take to get back to pre COVID-19 levels.
Good morning, Mike.
Hey, Mike.
Yeah.
To Lucy's point, we're seeing strong mark.
Mark strong return on all the markets the per.
Pacific and and and to some degree South America are the ones that are lagging.
You know, we kind of see that probably in the back half of next year.
And that would be kind of where we you know when those 2 large components come back into play.
We would you know we.
Our expectations we've come on.
Close if you know to where we would otherwise be pre COVID-19 levels.
Got it and just 1 last question on <unk>.
I'm curious with the transport or still you know on thank you Les has opened.
On the border yet I'm kind of curious like your point of sale mix isn't in the transporter and blood.
Blood component is still missing I guess right. So.
Just to clarify the landlord is not open the air borders always been open air.
And now it's easier to travel.
So so there's no restrictions on air but there is still a at least to August 21, our restrictions on on land for.
Poor for Americans.
So we're not seeing any constraints in our ability and you saw that very quickly when we announced the expansion of our capacity in the U S. On on the Monday on Monday, This past Monday and will be entering that market with some aggressive marketing programs as well to drive traffic.
Makes sense. Thank you.
Thank you. Our following question is from Walter <unk>, Brooklyn from RBC capital markets. Please go ahead.
Thanks, very much good morning, everyone.
So you you indicated that domestic is obviously coming back quicker, but you know there's been some interesting moves by your 2.2 primary domestic competitors.
Just curious as to 2 to what your thoughts are on on how that might play out and let's start with with Porter Porter, having announced a what can only be described you know on some very significant.
Significant for them investment in in Embraer aircraft on.
On the regional side, clearly, making a push into a into the domestic market.
Outside of their core Toronto Island airports so into.
And do some on the more traditional airports.
What what's your thoughts on on the competitive landscape.
Particularly with regards to port all get back to western on the moment, but with regard to support her in that effort on the other part to significantly expand their there domestically.
Good morning, Walter as Mike likes to hear from you.
Yeah, it's a.
Really fair question and certainly it has not gone unnoticed that our Porter has as it was.
Looking to expand now again, they're not going to start expanding until the second half of next year.
As you can appreciate we can't.
Speculate on their plans.
And we certainly welcome healthy competition, but suffice to say, we will be ready to deal with that situation as as they start ramping up in the second half of next year.
We have a lot of things to work with our starting with our Aeroplan program.
And we you know we're confident are the 1 the competition will make us better and 2 that we will be able to to deal with it.
Effectively as they ramp up their their expansion.
And in the same aspect with the with flare as they expand a different a different set of some degree challenges, but are we we internally and I, obviously I can't comment on detailed plans.
But we are all working on ensuring that we get better and regain our market share at a profitable margin over that period of time.
Makes sense I know with western it was interesting that they are declined government support now there could be 1 of 2 buckets of reasons or a private company. They didn't want to have any kind of limitations from a disclosure or or any other related factors or you know.
<unk> they saw the restrictions that the government might may have been requesting is too onerous do you do you see if its that second bone bucket is there any risk here of that west jet will be have some more flexibility that you perhaps do not have.
Given your decision to go with government support versus Theres, not too or or do you see it more as a first bucket a type of type of decision.
Yep.
Fair question, but 1 which I really can't speculate on but let me give you the bottom line from our perspective is that we believe there is a we have the full ability to compete effectively with the existing agreement in place.
There is nothing from our perspective that restricts our ability to compete.
Very well with with Westjet or any other domestic competitor or any other international competitor frankly, a debt that is.
And our current agreed with the government Canada.
Perfect I appreciate the answers as always Mike good to hear from you.
Thank you I'm. Following question is from Chris Murray from a T be kept on a whole buckets. Please go ahead.
Good morning folks.
Just thinking about is we're starting to get restocked restarted on with bookings.
Just a question about channels and the evolution.
We're seeing a and kind of got lost in the pandemic, but certainly a lot of new programs and I'm. Just wondering if you could maybe give us some idea of how youre seeing.
Yeah.
Passengers engage with you in terms of booking new travel.
And certainly how you think that the the travel agent channel may have evolved over the last little while.
That's a very good question and I'm certainly during that during this time you know we've we've spent a lot of cash.
In fact, you know time and energy, ensuring that our channel or the absolute best.
You know where you can find air Canada content and same holds true for travel agencies to be able to come to our direct channel as well. So on many initiatives were put in place you know during the pandemic to continue to work to improve our web sites for both in general consumers seem to me and on.
So we just see them now as we start to expand and introduce new international markets.
It's a given that you know for some of these markets are you know we have to be where the demand is so we still have access obviously to all other channels.
But of course, you know we are.
You know her preferences from customers to be able to come on.
Directly to air Canada or have agencies come directly to air Canada, where they can actually see the full suite of products that we have to offer the ability for customers to choose is best thing on air Canada Dot Com and we also have upside potential with ancillary et cetera are in those direct channels. So we can.
Okay.
Continue to do that.
But at the same time and they're being very very conscious that it's you know some markets.
You know that channel captains are in other area and that we are that we're there as well to make sure that all of them that's successful.
Have you any seen any shifts in channel, you're essentially and I guess, what I'm kind of interested in is has there been any significant damage to the to the agent channel such that Youre going to end up with more traffic directly into <unk> and into your into your direct channels.
Well the distinction I would make there is you know we have a very good relationship with the travel agency community and in fact, you know in that whole refund file.
Kurt.
It's very important for us to make sure that the travel agency community with also considered in our in our decisions. When we talk about direct channel. It doesn't only limit you know general consumers coming directly to air Canada Dotcom. We also have a portal for our travel agents are and you know we do encourage them.
2 to come true.
So channels if that if they can so from a travel agency perspective, you know we continue to work very very closely with them are they.
They supported us through the pandemic, where St pool for that and at the same timing I'll ask and you know.
Return to the business and we are in contact with them of course to ask you know to make sure that we capture our fair share of that kind of bad debt.
Okay Fair enough and then just turning maybe to thinking about how are you.
See the cargo business evolving I did notice that on the fleet plan you know you've got the 2.760 sevens coming in in the second half, but then you also show that you've got the 2 or 330 freighters coming up so should we be thinking about you, bringing those converted passenger aircraft back into passenger service.
Kind of on a 1 to 1 basis as the absolute.
I forget dedicated freighters come in or is there. Some other way to think about this on a go forward based on all of them.
Good morning, Chris It's Mike.
No that's not really the alignment we're looking at the growth of the E trade or is it independent of bringing back the converted freighters converted freighters are being bring bought brought back because we've got demand and from the passenger side and we want to fill it and we wont convert them back to full passenger so that's really that's really the plan of attack.
We are we introduced these international markets.
And then we are now opening up the belly space for our cargo customers. So some of it you know the freighters that are operating today are operating because there was no passenger nevada when the passenger aircrafts come back we open up the belly space for apartments.
Okay that sounds fair alright, thanks folks.
Thank you. Our following question is from Hunter Keay from Wolfe Research. Please go ahead.
Hey, good morning, everybody.
Hey, Mike how many planes have you retire early and how many can you unretire if demand snaps back and the competitive environment ramps and then in the same vein of the 50 per cent of employees that you had to let go how many are still available to come back.
Yeah can you bring those people back thanks.
Good morning Hunter, Great Great Great question.
So we retired 79 planes.
The 25 or so are wide bodies for Rouge, and then to 119 that we were going to retire frankly in due course as the 2 twenties came in.
And some from Airbus narrow.
Narrow body product as well again with as.
As a Max we're coming in as well so.
With our current fleet configuration, and what's in front of us from a delivery perspective committed delivery perspective.
We can get back pretty close to where the you know pre COVID-19 capacity was.
And so we're comfortable with our positioning from a from a weekly perspective.
So if.
If capacity does go up faster than we anticipate we'll go hunt planes and we'll we'll find them, but again, we don't see a reason to do that at this point in time, but that would be a good problem to have but from our perspective on the labor side.
We've been calling back people already I mentioned that we were calling back 2900 for June and July will call back more for the for the fall season. We're.
We're finding everyone's coming back.
We are not getting a we're getting virtually no no 1 saying listen I've I've found something else I don't want to come back our pilots as you.
I think as we talked about in the past, we're never furloughed, we furloughed, some small percentage, but that all everyone else. The vast majority of them were kept current and so there's no issue from a pilot perspective here at Air Canada, and as we bring back flight attendants and ramp workers and call Center people in an airport people.
We're getting everyone to come back.
Got it that's great and then.
As we contemplate the transat deal that fell apart, what's the upside of that deal not happening you know is there a lot of integration expense and pain that you were potentially preparing for then that you can kind of reallocate those resources elsewhere can you get simpler.
But what what good can come of that.
I think I think you hit the major benefit is in the <unk>.
Fact that we are spending 100 per cent of our time focused on air Canada and all of the opportunities we have in front of us versus having a very complicated.
Merger and integration.
Oh added on to our list of things so it's not like.
Yeah, I think we're gluttons for for how much work, we want to get done, but certainly today as we sit here today. You know this restart is is complex and and I'm happy that this management team. That's on the entire company is focused entirely on making this a complete success for our customers and having trends.
At although my might have good long term benefits to overall overall for Canada for Air Canada, I think would have been a very very difficult thing to integrated at this point in time.
Thank you Mike.
With things on them.
Yeah.
Thank you. So that's all the time, we have for questions I'd now like to turn on meeting back over to Ms. Angela.
Hello. Thank.
Thank you everyone for joining us on our second quarter call should you have any further questions you may contact Investor relations and have a great day messier than that off as you went from I think something that happened that you can Smith and adult guests tell me Blayne, who has waned on kind of sometimes it's a massive passing next Ams on me.
Thank you Nancy.
On France has now ended please disconnect your lines at this time and we thank you for you on your calculation.
Yeah.