Q4 2022 Air Canada Earnings Call
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All participants please standby your only thing is ready to begin.
Ladies and gentlemen, welcome to the Air Canada fourth quarter of 2022 earnings Conference call I would now like to turn the meeting over to MS. Valerie. Please.
Please go ahead Mr Gong.
Thank you Suzanne.
Oh gosh old if you've known that kept him because he can S. T L. The domains and welcome to our 2020 Q full year and fourth quarter yearend call. Joining us. This morning are Michael Rousseau, Our President and Chief Executive Officer, Amos cause is our executive Vice President and Chief Financial Officer.
He met our executive Vice President and Chief Commercial Officer, and Craig Landry, Our executive Vice President and Chief Operations Officer.
Also with us in the room. This morning are <unk>.
Mendoza Wexler Executive Vice President Chief Human Resources Officer, and public Affairs masks basketball Executive Vice President and Chief Legal Officer, and Mark <unk> Senior Vice President Network planning and revenue management.
Following managements overview, we will be available until nine am for questions from equity analysts after which Mr cause as well as vice President and Treasurer, who will be available for questions from term loan b lenders and holders of Air Canada.
Before we begin please note that some of the statements made on today's call may be forward looking within the meaning of applicable securities law.
Please refer to our fourth quarter MD&A for cautionary statements relating to forward looking information.
I will now turn it over to Mike.
Great. Thank you Valerie.
Oh sure.
And thank you everyone for joining us today.
In the fourth quarter, we reported record operating revenue of nearly $4 7 billion.
For the full year, we had operating revenues of about $16 6 billion.
That was more than two five times that of 2021.
About 87% of our 2019 operating revenues.
The progress is attributable to the deep resilience, we have built into our company for long term stability.
It is largely a result of the dedication and the hard work of our employees.
Alright, thanks them for their commitment and professionalism.
Similar to last quarter, but through recent years.
They have shown incredible capabilities scale, and teamwork and dealing with the collapse of travel early in the pandemic.
And then with the unprecedented resurgence of traffic that began this past spring with the travel rebound in Canada.
I also commend the members of our management team will remain focused on executing our strategy.
Our ability to navigate through wide variety of conditions, we saw in 2022.
Due to our early and steady efforts initiated in the fall of 2021 to rebuild this step.
Proof of the successes that we achieved our full year adjusted EBITDA margin of eight 8%, despite a very challenging fuel the deflationary environment.
And within the guidance, we provided at the analyst community on Investor Day in March of 2022.
Adjusted EBITDA was $389 million in the quarter.
This was a significant increase from the adjusted EBITDA of $22 million in the fourth quarter of 2021.
For the full year, our adjusted EBITDA was close to $1 5 billion.
<unk> to a negative adjusted EBITDA of about $1 5 billion in 2021, nearly $3 billion turnaround.
Our results also reflect the success of our strategy of diversifying our revenue sources.
Air Canada cargo revenue in the fourth quarter of 2022 was 55% higher than that in the same period prior to the pandemic.
Air Canada Vacations also delivered a strong performance.
And Aero planes active membership is at an all time high and continuing to increase.
The operational and commercial depth that we that enabled us to overcome the unprecedented increase in demand through the spring and summer of 2022.
Was again on display at the end of the fourth quarter.
Severe winter weather disrupted the operations of all North American carriers.
As Craig will tell you we recovered very very quickly.
On behalf of everyone at the airline I want to thank our customers for loyalty.
I share all customers that we are working hard everyday to earn and retain this loyalty and we look forward to welcoming even more customers aboard our aircraft in 2023.
Now before I turn it over to Craig.
I would like to take a minute to acknowledge.
The incredible and outstanding contributions of one Lucy commit.
As you know this is lucy's last analyst call before her retirement after a remarkable remarkable career with our airlines.
She has held a wide range of ever more responsible positions that are too long to list here.
But the common theme is that with each role she showed strong leadership.
Prior to colleagues.
It made us and myself all better.
Congratulations Lucy I know I speak for everyone at Air Canada, When I say thank you.
And you will be greatly missed on both the professional and a personal level.
Now over to Craig.
Thank you Mike Good morning, and those all have to us.
Before looking at operational performance in the quarter, let's recap some of the context I shared on our second quarter call of 2022.
As you will recall compared to other markets the degree and the duration of travel and health restrictions in Canada kept travel at a near standstill for almost two years.
So when travel rebounded in the second half of 2022, it did so at an accelerated pace.
To give you some color and all of 2021, we operated approximately 162000 flights and carried about $13 7 million customers.
As for the period of June 2022 until the end of the year, we operated over 217000 flights and carried over two 5 million customers.
That was an increase of 83% and customers carried in just seven months period as compared to the full year 2021.
During the summer period, we managed our capacity and schedule conservatively, while continuing to recall hire and train staff on an unprecedented scale.
During this initial ramp up phase, we also observed unexpected levels of instability from a range of third party support functions within the travel ecosystem.
Combined with the unique challenges of this period. This contributed to the operating performance seen in June and July .
Following extensive efforts in collaboration by all parties operations recovered in August and through the fall.
By the fourth quarter operations has stabilized with operating metrics progressing well towards pre pandemic levels. We also continue to make prudent adjustments to our schedule, while continuing to hire and build the skill sets of our employees with extensive additional training.
As we enter December 2022, we had 35874 employees in place maintaining our objective of having more employees than pre pandemic levels to support less flying.
We further built additional operational resiliency into our plan by setting aside 15 aircrafts, including wide body aircrafts that were not scheduled to fly to ensure that we would have adequate backup aircraft available for operational support and recovery.
Of course as often happens during this time of year winter weather impacted our operations. This year, though the weather events were more extreme than usual even for Canada.
It also coincided with some of the highest peak travel dates of the holiday season. For example, during the week of December 19th a continent wide weather event impacted all of our major hubs in Vancouver, Forefoot icicles formed on aircrafts and bridges rendering the assets unusable.
Calgary, the extreme cold exceeded safe conditions for Deicing activities and in Toronto facilities, such as airport baggage handling systems started to freeze.
And of course with such heavy snowfall snow removal activities heavily affected takeoff and landing times.
Because we are a network carrier whether in one location can impact down line flights, where weather impact is less present or even not present, both in the displacement of crews and aircraft.
Also as flights take progressive delays due to weather. This can cause our crews to exceed their maximum duty days in some cases, where this cannot be remediated. It can lead to unplanned flight cancellations.
Ensuring our customers have flexibility during these types of events is critical we worked hard to keep our customers informed we provided our customers the option to change their flights at no cost or to cancel their plans and receive a full refund.
Furthermore, we also provided goodwill compensation to customers in many circumstances, even beyond our regulated obligations for the full year 2022, we spent approximately $290 million in hotels meals and other forms of compensation for our customers.
All of this said our holiday winter operation compared quite favorably to what was observed elsewhere in the industry over the same period Air Canada planes took off almost every 90 seconds of everyday during the holidays. We operated nearly 1000 daily flights on average and on Friday December 23, which is the busiest travel they leading into the hall.
Todays which was also hampered by extreme weather, we operated the majority of our flights and carried about 90000 customers.
For the quarter as a whole the results were even stronger we carried over 10 million customers and our baggage handling success rate was close to 98%. We also reached a flight completion rate of over 95%.
I would certainly like to recognize the professionalism and the commitment of our employees during this challenging operating environment.
As we enter 2023 are operational depth and resilience continued to bolster our stability even further our staffing and experience levels are on plan and a wide range of initiatives are underway to elevate our customer experience leveraging our significant recent investments, including a new and modern reservations and <unk>.
Control system or.
Our operating results continued to improve with strong on time performance in February actually trending ahead of 2019 levels.
We have the flexibility necessary to make the investments we view as a priority, but I would also highlight that as an industry. We remain dependent on improvements to airport facilities and infrastructure, we would encourage government and airport authorities to urgently worked together to address the shortcomings of the existing funding model for airports.
Which is unique to Canada.
Travelers Airlines and other onsite users fund this model, which has been a source of revenue for the government. This model fails to redirect the funds generated by the industry back into the industry and can constrains the critical investments that are needed in our airports.
To conclude we remain confident in our ability to execute on our plan and we will work with all key industry stakeholders to ensure we collectively achieve and maintain pre pandemic levels of operational stability.
And with that I'll pass it over to Lucy.
FC Craig and thank you very much like for your kind words.
Good morning, everyone.
Allow me to dive right in by discussing our passenger revenues.
Which surpassed $4 billion in the quarter nearly doubling those in the fourth quarter of 2021.
When compared with the fourth quarter of 2019, that's an increase of about 2% on 85% of the capacity and 87% of the traffic.
Yields in the quarter versus 2019 was 18% better and.
James were observed in all geographies.
Our full year results reflect the rapid surge in demand following the easing of travel restrictions in the second half of 2020.
Now if we consider each geography.
We performed very well in domestic Canada with passenger revenues of close to $1 2 billion for the quarter.
That was an increase of 54% from the fourth quarter of 2021.
Or are recovering at 95% at Q4 2019.
This was achieved in a competitive environment and speaks to the strength of our connected network and our ability to successfully manage our capacity.
Domestic yield improved despite the negative impact on yield as longer domestic stage length.
Our transcon markets performed very well.
James Watermark passenger revenues of 916 million surpassed the fourth quarter of 2019 by 1% on 7% less capacity as well as lower volumes of corporate traffic on short haul flights.
Long haul and use sun destinations performed very well and I'm pleased to say our joint venture with United Airlines, Although in the early innings is surpassing our expectations with benefits for Air Canada, Our trade partners and our customers.
We're thrilled with the results on the Trans Atlantic market in the fourth quarter Atlantic passenger revenues made up 27% of the total passenger revenues and reached nearly $1 1 billion.
It was 16% above the fourth quarter of 2019.
As expected leisure and send markets were very successful.
In South America passenger revenues were 40% ahead of those of the fourth quarter of 2019 as capacity, increasing 5% from that same period.
Consistent with strong demand for kind of a leisure destination other revenues were $62 million or 23% higher than the fourth quarter of 2019 was an important contribution from ground package revenues at Air Canada vacations.
We saw positive performance in Asia Pacific, particularly in Australia, New Zealand, Japan and Korea.
Travel restrictions are eased.
Specific passenger revenues traffic and capacity, respectively recovered to 74%, 52% and 51% of fourth quarter of 2019 levels.
These results are meaningful because they were achieved despite continuing challenges, including ultra flight restrictions were subject to in China.
Our strategy to diversify our network has allowed us to protect ourselves from the lingering impacts of defendants.
At the current level in the first quarter of 2022 passenger revenues in the premium cabin.
13%, while those in the economy cabin reached 98% at fourth quarter 2019 level.
We saw yield gains across all cabins in all markets, reflecting both strong demand and favorable pricing environment.
That is fair makes some premium and economy cabin and higher average fare levels contributed to the strong yield performance.
Aeroplan also contributed to our yielding revenue upside and continues to exceed our expectations.
Membership is at an all time high and our program continues to grow.
Gross billings from <unk> sold to third parties were up nearly 50% over the fourth quarter of 2019.
And we also observed a 50% growth in total points redeemed over the same comparable period.
They also continue to make solid progress with our strategy of growing your old plant by diversifying beyond Canada in 2022 International gross billings were 76% higher than in 2019, making up an increased share of airplanes third party dealings.
Now as we look ahead, we plan to operate approximately 84% of first quarter 2019 capacity and we're planning to reach 90% of 2019 for full year 2023.
We're very encouraged with several key indicators.
It gets sales in the fourth quarter of 2022, 2% above those of the same period in 2019 are less capacity and these remains strong in all services and in all cabins in 2023.
Advance booking trends remain solid both from a volume and therapy perspective, particularly in our international services.
Giving us the confidence to continue rebuilding our international network.
We've recently started service to back our first non stop service to Southeast Asia, and the only one between North America, and Thailand, allowing us to balance seasonality chip.
Japan and Korea are also showing good future demand.
Sixth Freedom is also expected to be very strong in the second and third quarters of 2023, and a solid yield environment out of the United States.
New routes, such as China, and Sacramento are designed to capture this opportunity and drive further benefits from our joint venture with United Airlines.
We also expect HCV to deliver a strong performance in the first quarter with average package prices and margins holding very well.
We expected domestic leisure spend markets to remain competitive, but we are well equipped with strength in our commercial models to successfully manage.
Now turning to cargo revenues declined $202 million from the fourth quarter of 2021.
All converted cargo aircrafts had returned to passenger service.
We have three Boeing 767 freighters currently in service with more of the way this year.
By the end of 2024, we plan to have a total of $9 767 traders and two triple seven freighters.
Using demand, particularly in the Pacific region have normalized and we expect the softness to continue in Asia.
That said, it's important to keep in mind that when compared to the same period in 2019 fourth quarter 2022 cargo revenues still increased 55% or $102 million.
Lastly, before I turn it over to Amos.
I would like to say how much I have valued my engagement with the financial community.
I also feel blessed to have worked 36 years for an industry I love our brand I adore and with dedicated Kirin colleagues throughout the organization I highly respect.
I'm extremely proud as the revenue optimization culturally fostered in the commercial banks over the years.
Moody's and a desire to win to excel and to be better while always being mindful that our customers have choices and our.
Competition is watching.
So Mike. Thank you for your support your leadership and your guidance.
Got you and the team will cheerfully sidelines.
I wish Mark Miller, and Martin answers, the very best for the future.
It's all the time.
Absolutely.
Good morning, everyone, let's start with a quick financial overview of the quarter as Mike previously mentioned reported fourth quarter operating revenues of nearly $4 7 billion or 71% higher than the fourth quarter of 2021, and about 6% higher than the fourth quarter of 2019 adjust.
Adjusted EBITDA was $389 million to fourth quarter $367 million better than a year ago.
On a year over year increase in traffic of 93% and an operating capacity of 59% total operating expenses were $4 7 billion in the fourth quarter, that's an increase of $1 5 billion or 46% from the same period in 2021.
In addition to the growth in traffic and operating capacity. The increase was also driven by a 60% year over year increase in fuel prices.
Now allow me to quickly discuss two line items in particular, starting with fuel.
Fuel expense of about $1 5 billion increased $794 million from the fourth quarter of 'twenty one.
The increase was largely due to the increase in fuel prices of 37%.
<unk> increase in leaders use to the due to the increased decline and an unfavorable foreign exchange variance.
We certainly remain vigilant in monitoring the price of fuel and are taking various actions where possible to manage its impact. This includes alternate supply options and taking pricing actions as needed and of course monitoring our fuel efficiency.
We have not changed our view on hedging and are not doing so at this time.
Wages salaries and benefits of $892 million increased $88 million or 11% from the fourth quarter of 2021.
The increase was driven by an increase of 32% and employees.
Related to the increased capacity.
Partially offset by a one time net charge of $104 million recorded in Q4 of 2021.
You can obtain more information on these changes in our 2022 annual consolidated financial statements and notes.
Turning to the full year.
From 2022 operating expenses of roughly $16 7 billion rose about seven 3 billion or 77% compared to 2021.
Year over year increase of nearly all line items reflects the surge in traffic and operated capacity of about three two times and two five times respectively.
The variance was also attributable to a 74% increase year over year in fuel prices.
Prior to 2019 operating expenses decreased $738 million or about 4% on capacity that's represented 73% of 2019 levels.
Still a direct comparison versus 2019 total operating expenses is not necessarily meaningful as we still have pandemic related challenges in the first half of 2022 and.
In 2019 was impacted by the grounding of the Max.
We continued to exercise diligent cost control in 2022, CASM decreased 28% and adjusted CASM declined 43% from 2021.
Versus 2019, adjusted CASM increased 19%.
You will note that this is just one percentage point above the upper range of the guidance provided for adjusted CASM for the year and was mainly due to the higher sales and distribution cost inflationary pressures on all line items also higher disruption costs and higher employee benefits expense as.
As we look across the industry inflation has run higher for airlines. We are however, pleased with our relative performance against the U S network carriers in particular, and we can feel we can compete effectively from a cost perspective.
For 2023, we expect adjusted CASM to be about 13% to 15% above 2019 levels.
Now for some updates on our fleet.
All 40 blind Matt seats on firm order had been delivered at.
At the end of 2022, we had 32, 8% to <unk> in the fleet and a 30 <unk> was received in the second week of January .
As you know, we now have firm orders for 68% to 20.
For the remaining 27 aircraft, we are expecting six in 2024, 6% in 2025 and 15 in 2026.
Our <unk> hundred 20, and Max deliveries complemented with our announced 3800 21 XLR aircraft, we will complete the renewal of our narrow body fleet.
The deliveries for the remaining seven days $3 780 sevens have shifted.
They are now scheduled to be delivered in 2023, one in the spring and the other over the summer and the last one and 2024.
Now for a quick word on our liquidity, we began the quarter with about $10 2 billion of total liquidity and ended 2022 with total liquidity of more than $9 8 billion.
The change in liquidity considers general cap capex and debt repayments as well as the repurchase and cancellation of convertible senior notes due in 2025 that we made in the quarter.
You may recall that back in September of 2022, we'd be purchased some of our outstanding convertible senior notes for an aggregate cash price of approximately $249 million, including accrued interest.
Following this repurchase in the fourth quarter, we repurchased an additional U S 362 million aggregate principal of notes that repurchase was down for an aggregate cash price of approximately USD $330 million, including accrued interest now.
Now with total of 274 million remains outstanding.
For 2023 deleveraging the balance sheet will remain a priority as you will have seen from our leverage ratio target for 2024.
This target has been adjusted to account for the additional freighter investments.
As previously forecast.
Net cash flow from operations in the quarter were $647 million compared to net cash flows from the operations of $508 million in the fourth quarter of 2021.
On a full year basis. These were close to $2 4 billion as opposed to a negative $1 5 billion at the end of 2021.
Now for the portion I know, you're all waiting for what about those 2024 targets.
You will have seen in our fourth quarter release that along with our guidance for 2023.
We have restated some of our 2024 targets for capacity adjusted CASM adjusted EBITDA leverage ratio.
Annual return on invested capital and cumulative cash flow.
I won't go over all of these as I know you have carefully read the release the one that I will call out is the adjusted EBITDA target. You will have noted that we have moved from an adjusted EBITDA margin to an absolute number for our adjusted EBITDA target range. We feel this new target as a better indicator to assess our financial performance.
At the core this new target for adjusted EBITDA range is in line with the adjusted EBITDA.
Reflected in our margin target communicated at the 2022 Investor day.
I will now turn the call back over to Mike.
Thank you Amos.
Certainly the strong demand environment that we experienced in the second half of last year continues throughout the future booking curve and.
And we expect a solid demand environment throughout all of 2023.
Our strong liquidity position pricing power ability to generate revenue from multiple sources in markets.
Regarding our cost structure.
And our ability to execute on the overall strategic direction.
<unk> as a foundation to effectively compete and be very successful.
In 2020 to Air Canada was named the best airline in North America for the fourth consecutive year by our customers and the readers of global traveler.
We know we must work hard to maintain the status to stay ahead of the competition.
And we will do this by improving processes, introducing new features and investing in our business, especially in customer service.
We believe customer service will be a key different differentiator.
And for this reason last year, we launched our <unk> program elevating the customer experience.
It is a multiyear plan that mobilizes virtually every part of the company to consistently deliver service excellence.
And we're investing to support Dcs for example, we improved our onboard economy class dining and continued to invest in and upgrade our maple leaf lounges.
In November we launched complimentary live television throughout our in flight Entertainment systems and.
We are the only key and carrier offering this product, which has proven popular with sports and news fans.
Our ongoing narrow body fleet renewal program with 30, Airbus <unk> hundred 20, <unk> and an additional 27 Airbus <unk> hundred 20.
Not only offer customers the latest technology and better comfort, but also allow us to cost effectively expand our global reach by entering new markets.
An essential element of customer service, making it easy to interact with us through technology.
We continue to develop new personalized mobile and web services.
And airports, we are testing biometrics to speed up various processes, such as boarding and lounge access.
And we are adopting new technology for baggage tracking.
Another important group of customers is our cargo shippers.
Theyre, Canada cargo continues to expand its network and will keep increasing options for customers for example, through our new cargo agreement with Emirates.
We also know that competing for customers is one thing, but the true value lies in keeping their loyalty.
Along with excellent service, we are also focused on aeroplan.
We are on track to exceed our target of 7 million active members by the end of 2023.
Aeroplan is compelling new frontier to help our core business acquire engage and help customers travel more and trouble better.
We plan to continue upgrading the program such as through exciting new partners and appealing programs like <unk>.
It is difficult not to overstate the importance of Aeroplan.
It is an attribute we believe provides a unique value proposition to our customers.
More fragmented airline market.
This success was recognized by many awards in 2022, and it is Canada's leading travel loyalty program.
Another important driver of loyalty and brand and reputation.
Especially with respect to ESG.
All of our stakeholders customers investors employees the communities, we serve and others.
And that we act responsibly.
And for this reason because it is the right thing to do air Canada's committing significant resources to ESG.
With respect to the environment and climate change each one of the government industry and others in the climate action chain must play its part.
We've critically rely on each other to reach our collective goals.
In addition to our own internal programs to reduce fuel consumption waste and emissions, we're investing with partners or new technologies, including SaaS.
Electric aircraft carbon capture and a new offset partner.
And we know investors value comprehensive disclosures. So we produced our first Tcf day report.
Billable on our website.
And finally part of our ESG is developing our people.
Our success was highlighted in 2022 as among other recognitions, we were named by Forbes.
As one of the world's best employers and one of Canada's best employers for diversity.
And for the ninth consecutive year, we ranked among Montreal as top employers and.
And we won the best corporate social responsibility strategy at the Canadian EHR Awards in 2022.
These are important recognitions.
Engaged and motivated employees are essential if we're going to succeed and our ambition is to remain north America's leading airline and a Canadian global champion.
That is our commitment and we have the people the resources and the plan to achieve these goals and much more.
Thank you.
Do you.
Thank you Mike and thank you all for joining us today.
<unk>.
Telus has gone a long time that's happened.
We are now ready for questions.
As usual please limit yourself to two questions. So do you have additional questions. We invite you to contact us at Investor Relations.
To use these then thank.
Thank you Ms. Silvana will now take questions from the telephone lines. If your other question and you're using a speaker phone. Please lift your handset before making your selection. If you have a question. Please press star one on your Levi Suski, Bob you May cancel your question that's been a time by pressing star two.
Press Star one at this time, if you have a question it would be a brief pause while the belt the spin with just a quick question. Thank you for your patience.
We want to take the first question from Savi site way Mom Cheng please.
Please go ahead.
Hey, good morning, everyone and congrats and best wishes Lucy on the pending retirement.
And maybe let's say if I can start with you with the first question just curious on the cargo friends.
You know what your expectations are and yields have been coming down quite a bit and yet your performance is fairly good in the fourth quarter as we kind of look to 2023 and 2024, you know against the following yield environment, but growing capacity from air Canada.
What are your targets expectations there.
And so first of all thank you for that.
For the kind words that I appreciate it.
With respect to cargo definitely on the yield side of the business, particularly in the Asian markets.
We are seeing.
So to say the yields normalizing what we were experiencing in 2021.
Particularly in those markets was that a little bit inflated. So that is normalizing and as we bring in the new freighters and few opportunities ahead for us we have opportunity to.
Capture some business and some other trends Atlantic markets that will be very good for us on the cargo front and we also had the ability to focus on connectivity even in the cargo business is a huge opportunity for us too.
Be able to connect some of this at all.
This fact cargo traffic so we're in a little bit in a transition phase here because as you know I.
I think I noted an aimless noted as well that the new freighters our routes we have.
And few that are will be in service momentarily and then by the time, we reach the end of 2024, we'll have our full at <unk>.
Complement so now we're a little bit and are in a transition, but we're still very confident that in other markets Asia might take some time, but in other markets, we'll be able to produce some solid results.
That's helpful. Thank you and then if I might ask.
And if this is for Greg or are the great team that if I look at your cancellations. It seems like you know air Canada mainline and Rouge are performing really well, but jazz has had poor performance throughout you know in good and bad days and I realize the regional pilot dynamics are nowhere near as bad as it is in the U S. As it is in Canada, but I was wondering if you.
This is the result of pilot supply issues at jazz and can I generally kind of what your expectations are as we move through 2023.
Hi, it's Craig.
Yes for sure.
It's been a challenging operating environment for a number of reasons.
When we have constraints at airports there is a variety of factors that come into play in terms of how we determine which flights need to be cancelled that has to do with volume of connecting passengers.
Our goal is always to maximize our customers to be able to get to their final destination on time.
So at times some of the smaller aircraft.
Can free up a gate for larger aircraft to be able to operate and it makes better sense for the overall operation for our customers and that's always what sort of our driving force.
With respect to the pilot supply side as I mentioned earlier, we don't have any issues on the air Canada side.
On the regional side there is some movement between the regional airlines, there's a flow through arrangement in place where regional pilots move into the mainline environment.
And to a certain extent that is creating.
A temporary amount of.
Of a dislocation in terms of some pilot resources, we view it as temporary and not material.
Is that just as air Canada builds back capacity and then as you kind of normalize your hiring that should normalize on the jet side is that what you mean.
Thats quite right, yes, okay.
I appreciate it thank you.
Thank you. The next question is from Kevin Chiang CIBC. Please go ahead.
Thanks for taking my question and I Echo the congratulations we see all the best in your pending retirement here and say congratulations to Mark.
Moving forward.
Maybe just a question on on the 2024 adjusted CASM Guide.
It looks like some of these costs are structural maybe some of these are all related to the faster ramp up of capacity and I'm trying to get a sense of.
Maybe where adjusted CASM eventually ends up but as you kind of get through this accelerated ramp up phase because if I just look at it simplistically it looks like you're you're familiar with them.
To be up about 10 points year over year, what's your gut that chasm is down.
Five roughly on either ends of the goalpost. So just just wondering how we should be thinking about that trend that you've looked at the past 2020 for some of those cost start to come out as you normalize your growth.
Yeah. Thanks, good morning, Kevin.
So yes, our adjusted cancer, if you sort of go back in time of when we put that target out. There was we were building our plans for Investor day was back in March.
And certainly back in that timeframe. So we put the plan together in the January February rolled it out in March and sort of targets in the World. Certainly has moved in terms of inflation as we sort of saw.
After the.
Ukraine, Ukraine Ward lean into returning war and so thats put pressure really on all sort of our cost of items.
And then of course as we began building up and then as we're putting capacity out.
Adding head count before all the capacity comes in for all the reasons, we've talked about relative to operational performance.
So we expect sort of from a productivity efficiency side once we get sort of past 2024 will be more into an operation.
We look back to sort of matching capacity with employees and driving productivity, but we have this sort of interim.
Sure as we get through that so on one hand, we have inflationary pressures on the lines. We have some productivity items that we think will come back.
Fundamentally as you as you know us we are.
Our relentless relentlessly focused on cost and cost transformation. So we don't take this the additional guidance as well.
Perhaps notation that we've held our foot off the accelerator arent going to push forward on our cost reduction programs. It is still part of the DNA here and we can certainly will control that in terms of our spend we have a very.
Strong pre strip procurement department that really does battle in terms of finding mitigating options.
Driving essentially.
That'll with suppliers, but also ensuring that we have supply chain for what we need to drive the operation.
Aside from that we've made as you've seen the technology investments and we'll continue to reap some of the benefits of that we're investing a lot in terms of AI in terms of optimizing maintenance planning continuing optimization of different elements of the repeat management world.
And <unk>.
Continued sort of process improvements, Mike talked on some of them on the.
On the on the airport side as we move into more self service. So there are many factors here. Many items were moving forward, but we have this ability as were going in through 2024 in terms of.
Guidance that was.
It was obviously higher than what we had thought back in March So a long answer to your question, Kevin but overall.
We still are focused on costs and still focused on improving productivity and efficiency and will continue to take every opportunity to do so.
And it ended up that would be some of these causes.
You kind of roll off.
Your growth normalizes.
Yes.
Upfront costs.
Rover as well.
Yes, and certainly that will is that sort of normalizes and then inflation. Yes. There has been some slight reductions here as well so that should that environment should improve and we'll certainly look for opportunities there as that comes down.
Every environment.
That's great, but maybe just a quick follow up here on or even talked about <unk>.
Outlook is pretty good here, just wondering what the impact.
We have had on.
On the demand environment for more leisure traveler, especially your ECB, Brian obviously, they've had some difficulties in December it seems like there's an opportunity to gain market share.
The question in that.
Looking at the performance that we had with air Canada Vacations, I would say to you that in.
Virtually had no impact on our load factors were solid we saw margin growth.
Across all of the routes that we operate.
So I would say to you that it it did not impact us we did very very well.
Alright, Jeff.
Despite just to further.
ACD is an important part of our our program here and we're investing in ACD too.
To allow us to compete much better and the possible take market share away from just not <unk>, but all the other competitors that we compete.
That makes a ton of it. Thank you very much and have a great along with everybody.
Thank you. The next question, Chris Murray ATB kept some buckets. Please go ahead.
Yes, thanks folks so going back maybe a little bit to the.
On the cost side of things and maybe I'm, just trying to understand a little bit about the guidance.
And maybe to follow on on Kevin's portion of it.
I'm thinking about costs as we go forward.
Talked about a little bit about labor, but are there any other cost.
Like the other bucket was higher I'm, just trying to get a sense for is there anything structural.
That we should be thinking about some of these costs maybe related to things like the cargo operation.
Or are there other things that maybe might be unusual in baby.
Kind of like for like from 2019.
I think when you sort of look at it is there anything structural that's changed I would say the dynamic that has changed in terms of our various line items are essentially sort of ground handling costs anything that has a labor component to it and then on the catering side, we have certainly.
Pressure sort of on the food side. So you look at those line items, but when you get into technology.
So all of those areas are.
We're seeing significant inflationary pressures.
Again, because of the labor shortages, a little bit around the world So ground handling contracts.
Across the world are pressured up catering catering costs from essentially the commodity cost of fruit are going up and labor component and then again technology. So I would say those are sort of three items that we would expect that pressure to come off as as we're seeing.
Both commodity prices coming down.
Areas labor.
Dislocation now that sort of coming back in labor is available again.
So it's something that I think it's.
It's temporary we're getting through it through 2022 and seeing into 2023, but I think as we get out into 'twenty four 'twenty five we should see that abate to a certain extent.
Okay. That's helpful.
And then my other question is around cargo and maybe just kind of a longer term question.
I'm trying to get a sense.
The cargo operation matures.
How do we think about that relative to.
Either as either your longer term EBITDA margin.
Margins or EBITDA generation goal.
Should we be thinking that this.
And I appreciate that you get it to diversify your revenue streams.
As part of the strategic rationale but was.
Is this sort of a will take an incremental dollar contribution or is this do you see cargo longer term actually been.
Overly positive margins.
On a percentage basis.
Look at it Chris.
We have invested in in the cargo business, we view it as a growing opportunity for us and we wouldn't have made the investments in triple seven freighters and 760 sevens that we converted in purchase.
To be you know it will be a contributor and again as you said part of the revenue diversification and it helps that also helps offset our seasonality that we have sort of been through the first quarter.
Fundamentally cargo will be a contributor.
To EBITDA as we go forward.
And will it be a contributor similar to passenger or would it be kind of maybe Ed.
Additive, but not all.
<unk> longer term.
It's certainly not it certainly additive but not dilutive.
Our primary business is on the passenger side and.
But cargo will.
Cargo will grow and it will contribute.
Okay. Thanks, Bob.
Thank you.
Next question Andrew.
Bank of America. Please go ahead.
Hi, good morning, everyone.
It's just.
Quick question on your 2020 cost outlook do you include any.
Any new labor deals in 2020 core CASM guide.
Good morning, Andrew.
Thanks for the question.
I know, you're always going to try to get to the details here.
But.
I'm not going to go into the detailed what's included into the.
Adjusted CASM targets for 2024.
Okay, I guess I ask because I know that the pilot deal is up in September just curious when you start to fold that in.
I'll wait for future calls on that one.
Second question just around the Capex I think you know in the MD&A.
The $2 billion per year coming up in the MD&A is that a good number to use or a model or is there something else.
We need to think about and then.
Of the $1 billion of lower free cash flow cumulative free cash flow that you've talked about in the release how much of that comes from our freedom investments because I think I count about maybe five new freighters from from you.
Versus your prior release, so just trying to bridge that gap on the $1 billion of free cash flow guide down. Thanks.
Yes, I'll take the second part first.
The majority of the freighter investments so triple seven freighters and used 787 freighters. So those are the those are the items that are driving the cash flow.
<unk> and guidance from three and a half down to two that we sort of talked about there but in the release.
So that's the first part and then.
So that was the last part of your question and I forgot. The first part of the question was just.
Is $2 billion a year in cabinets this year and next reasonable I think that's what was disclosed in the MD&A. This morning, yes.
So that is what we have right now and I think that's that's the number to be using what you have in the MD&A.
Just wanted to add on.
Mike I just want to add onto it was it was his response and kind of combining with Chris's question.
I mean <unk>.
Cash flow is down because of the significant investments in cargo.
Not a lot of.
Economic benefit or income benefit in the 24 year because they are just coming on stream, but that benefit will be in 25% to 26 and so unfortunately, we have to show our free cash flow number for that year without the corresponding economic improvement.
EBITDA again.
The early response to Chris we expect.
Yes.
Additive EBITDA post 'twenty four.
Got it thank you.
Thank you.
The next question is Matthew Lee.
Please go ahead.
Hi, it's Matt <unk> from Canaccord, Congrats and thanks for taking my question.
On the premium cabin it sounds like 2023 still won't have business travelers are change in 2019 level, but in your booking data are you still seeing enough demand from consumers to fill that gap or is there a potential slow down just given what we're seeing in the macro level for consumer discretionary.
Thank you for your good wishes.
With respect to corporate demand.
On the North America side as things have stabilized a little bit so we upgraded around minus 30% for.
For North America compared to what we would have had in 2019.
What we are seeing is a steady growth on corporate for international market. So that has started to return a little bit later than what we were observing for North America.
Now with respect to the J cabins.
As we developed a lot of these VFR markets and we looked at opportunities for leisure.
Premium and travelers and as we started to work on the Aeroplan redemption models, we were able to.
Find really good sources of energy needs for our premium cabin. So if you look at the load factors for example.
In North America, it would be 10 points better than the ones in 2019, so theres many products that we brought online and we had opportunity to generate new demand.
For the international cabinets, and if you look at the international market in the premium cabins.
Do we see a solid demand there, but we also see a very very <unk>.
Interesting yield improvement as well so.
We would like the corporate demand to come back to us.
To greater levels by keeping in mind that the pricing environment is also better than it was in 2019 from a revenue standpoint, it's pretty solid and it gives us confidence as well that if we ever faced slowed down for whatever reason theres other market segments for us to be able to recapture but Jay Kevin our premium cabin and also premium <unk>.
Very very well.
Very well.
Thank you.
Our next participant is camera on the <unk> National Bank financial Please go ahead.
Thanks, Good morning.
So whenever I can my congratulations too to Lucia and maybe a question for you just wondering if you could talk a little bit about what youre seeing on the domestic.
Markets, obviously, theres still a lot of moving pieces here with the <unk>.
West jet kind of retrenching out of out of Eastern Canada, Western Canada, but you also got the I guess announced plans for per quarter, starting up operations out of Pearson. So I'm just wondering what you're seeing from a pricing point of view and eastern Canada, and where do you see the competitive environment.
Well listen there's no doubt.
From a domestic standpoint.
Domestic traffic we are in a very competitive environment.
But looking at advance bookings so basically the posture looking forward for domestic is still good.
And despite the fact that we have this competitive environment, we are still able to produce.
Very nice yield improvement and in fact, if you adjust for stage length on domestic in the fourth quarter and even looking at <unk>, our yield is in the seven or 8% improvement.
The J curve info.
We're able to produce premium at all.
Of course helps us this.
This redemption demand that we've been able to unlock with aeroplan.
Fact that we also have the ability to see that our domestic network from our international services also helps us. So we have what we need commercially to be able to.
And hold our position domestic and some of the key markets of course like the transplant.
We obviously watch those very very closely and we continue to see very very good very good attach bookings, but we're very mindful of that.
The competitive landscape and we will continue to be very mindful of it.
Yeah.
Okay, that's great and maybe just to follow up on I guess on China.
Obviously, China now reopened.
They are still very severe restrictions.
Number of flights between Canada, and China, just through the through the bilateral there but.
You have got any indication as to when some of that capacity you might be able to be added back for air Canada.
At this point in time at this point in time, we don't.
We hope to.
Hi.
Here in relatively short periods, but at this point in time, we continue to operate the.
This schedule, we have given the oversight rules.
But at this point we don't.
We don't know what the next step will be.
Okay fair enough thanks very much.
Thank you.
Next question is from Matthew Li Chemicals Huntington.
Yeah.
I think we already had Matthews question, if we could.
Move to the next question study Salmon BMO. Please go ahead.
Thank you good morning, and congrats on the retirement.
In retirement.
Can you give us guidance about CASM ex for Q1, what is what do you expect to go.
In Q1.
Hi, good morning Patty.
No at this point aren't going to get into quarterly CASM guidance on CASM ex guidance.
Right now, we're just providing guidance for the year.
As outlined in the release.
Okay.
And the second question is on Ftes.
You kind of finished the two.
2020 to $33, two which is about the same level you were either in 2019, obviously with capacity still left behind is this a number that you think.
Steve.
Stable ish going into the next couple of years you grow into it is there.
The driver to that are pushing the FTE numbers higher.
Right.
The productivity story on me.
Technology side.
Hi, it's Craig just picking up on a comment Amis made earlier.
To the extent that we are operating less than a 100% of our pre pandemic capacity, there's a certain inherent.
Lack of productivity in that because you need employees to be able to staff a.
A full day of operations, let's say at an airport, but youre not operating you have a bit of peaks and valleys. During the course of the day. So as capacity increases will grow into that productivity, we expect that to happen over the next 12 to 18.
18 months. So that's that's our primary expectation at this point.
Okay. So we shouldn't expect that could be cut off.
People as you grow into it okay.
Really the main question I have is.
The guidance for 2020 for the middle of the range is about $3 seven obviously that's in line with your where you were in 2019.
But at the same time, you have a stronger loyalty program you have.
A bigger cargo business by 2024 versus 2019, just feels like.
The.
The environment is and absorbing the inflationary cost issues.
Two are highlighted is this competitive issue at the market more competitive maybe.
You had expected before or are.
Or are there other things that play there.
Yes.
This is Mike.
Morning.
It's an interesting question.
Certainly.
I would say the domestic market is probably more competitive than what we had envisioned in March 2022.
As Lucy said, we'll we'll get through that with all the strengths we have in some of the responses to some of the new competitors.
The international markets continue.
Our before.
Humming the way, we thought they would perform frankly.
And so.
Hospital grows to reconcile.
Our expectations versus our guidance.
Guidance on 2000, 2040, Oda basically but.
But obviously our goal is to overachieve.
We're consistent.
Where we were in March 'twenty two is too.
EBITDA levels.
And.
Again, you're absolutely right Aeroplan is stronger than we expected.
Cargo will continue to add more to our profitability, but I would say.
On the other hand, the domestic market is probably a little a little more competitive than what we had initially envisioned.
Okay, great. Thank you.
The next question is from Walter Sparkman RBC capital markets. Please go ahead.
Yes, thanks, very much and good luck Lucia I'm sure you're going to Miss These calls dearly.
Yeah.
Mike You mentioned in your prepared remarks that you expect the demand environment. In 2023 remained strong in the press release, you mentioned that you are assuming I think it's moderate GDP growth and 23, so so am I correct.
And assuming that.
The underlying assumption for year 2023 is that there is no.
The recession or that you expect travel demand to remain robust even even during a recession in 2023.
Yeah.
Another really interesting point Walter.
So.
So obviously, we've got the benefit of a forward curve and.
And we said to the market demand is very strong through that forward curve in fact better than 19 levels basically.
And that's with all the concern about either a soft landing or some level recession.
And again historically, we've been in this business a long time Walter.
Airline travel is typically a multiplier of GDP.
I don't know if that exists at this point in time.
Just kind of a transition period and time will tell whether travel behaviors have changed permanently or in the transitional business, but.
But certainly we're taking full advantage of it while it's here.
And so we're continuing to see strong demand through the booking curve.
Despite the fact as Lucy said corporate travel is not coming back to 100% at this point in time, but certainly leisure and VFR is making more than that up and.
And we pivoted as a company to be able to take advantage of that of that demand.
So.
From an economic perspective.
I think that historical.
Our relationship is Shouldnt, we should again time will just thought will determine whether that it comes back to that historical relationship, but today, we don't see that.
Okay, that's great.
On the cargo side.
Given that it's becoming a bigger part of your business. Now can you can you talk to us a bit about the strategy, particularly around how you get new contracts here or new business is it under contract are you going <unk> CMI on any of this stuff and what is the risk to your belly capacity, presumably many of your customers.
When we start a new theater you go with your.
Some of your existing customers how much is that cannibalizing if at all.
What's going into the belly of bureaucratic.
Yes. Thank you.
It's a little bit the opposite.
Most of the traders are all trading.
In markets, where we don't have enough belly capacity.
Or they are operating in markets, where we don't actually operate passenger so we actually have an opportunity as I mentioned a bit earlier for seed, but it does not cannibalize it all now.
With respect to you know where do we go get these customers, it's a little bit.
On the passenger side, meaning when we enter some of these new markets there are.
At times customers, who specialize in that type of cargo that is destined.
Destined to those destinations so of course, our sales team.
<unk> been very busy in the last.
18 months, securing that business, but we do work with most of the large faithful orders in <unk> and <unk>.
Cargo operators.
There is virtually no risk of cannibalization because again some of the large cargo markets, where we operate passenger.
The incremental.
The market in that market.
Take that demand.
But that's I appreciate the time.
Thank you. This is all the time, we have for the question and answer session I would now like to so let me think back over to you Mr. Bob.
Thank you Suzanne and thank you very much for joining us. This morning, we were on a tight schedule. So if we did not get to your question. Please contact us at Investor Relations.
We will be in contact with you.
We have accrued the potential maintenance capex and I think settlement and Benjani have a nice day.
Thank you.
Thanks Melinda. Please disconnect your lines at this time, thank you for your participation.
Once again the conference has now ended please disconnect your lines at this time and we thank you for your participation.
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