Q3 2024 Air Canada Earnings Call
Hello, Boswell welcome to Air Canada's third quarter, 'twenty 'twenty four results conference call.
Speaker Change: All participants are in a listen only mode. After.
Speaker Change: After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time. Please press star one on your telephone keypad.
Speaker Change: As a reminder, today's call is being recorded.
Speaker Change: I'd now like to turn the conference over to Valerie <unk> head of Investor Relations and corporate sustainability at Air Canada, You may begin.
Valerie: Thank you Sarah Hello, Basel. It gave me and that's why sometimes you see and then get welcome and thank you for attending our third quarter 2024 earnings call.
Valerie: Joining us this morning are Mike Rousseau, our president and CEO, Mark Gallardo, our executive Vice President of revenue and network planning and president of cargo and John <unk>, Our executive Vice President and CFO.
Valerie: Executive team members are with us as well.
After our prepared remarks, we will take questions from equity analysts.
I remind you that today's comments and discussion may contain forward looking information about air Canada's outlook objectives and strategies that are based on assumptions and subject to risks and uncertainties. Our actual results could differ materially from any stated expectations.
Please refer to our forward looking statements and air Canada's third quarter news release available on Air Canada Dot Com and on SEDAR, the bus with that I'd like to turn the call over to Mike.
Mike Rousseau: Great. Thank you Valerie good morning, Joe.
Mike Rousseau: Thank you for joining us.
Mike Rousseau: Today, we reported solid results for the third quarter.
Mike Rousseau: Operating revenues the quarter was $6 1 billion.
Mike Rousseau: Adjusted EBITDA was $1 5 billion.
Mike Rousseau: Adjusted EBITDA margin of 24, 9%.
Mike Rousseau: And adjusted EPS was $2 57.
Mike Rousseau: Both adjusted EBITDA and adjusted EPS were ahead of market expectations.
I'm very proud of these results were achieved through strong commercial operational execution and discipline.
Speaker Change: Well I mean, you called out three important developments this quarter.
Speaker Change: First very significant achievement, reaching a new four year collective agreement with our pilot group represented by ALPA.
Speaker Change: Proud that we concluded a mutually beneficial agreement.
Speaker Change: Destruction to our customers.
Speaker Change: With that I can see.
Speaker Change: <unk> revenue impact.
Speaker Change: Which mark will speak to.
Speaker Change: This agreement recognizes the contributions of our pilots.
Speaker Change: We continue to make progress with respect to our operational performance improvement program.
Speaker Change: For the quarter was eight points better than the same period a year ago.
Speaker Change: Hum.
With our cargo year over year, 18% revenue growth good Mark.
By more details.
Speaker Change: We are always focused on both the short term and long term plans with the objective of delivering value to all stakeholders, especially our shareholders.
Speaker Change: I am pleased that our board of directors has approved a new share buyback program.
Speaker Change: Enable us to reverse some of the dilutive, but necessary measures we took during COVID-19.
We have promised return value to shareholders.
Today, we are pleased to fulfill this commitment.
Speaker Change: Also with just one quarter remaining we have updated our guidance to better reflect our expectations for full year 'twenty for results.
Speaker Change: And before turning it over to Mark let me close by acknowledging our 40000 employees.
Speaker Change: Summer is always a demanding time.
Speaker Change: Again showed their dedication and professionalism by safety safely transporting nearly 13 million customers anymore.
Speaker Change: Our drive for operational excellence was on display when we successfully carry team can athletes and delegation members to Paris, the 'twenty 'twenty four summer Olympic and Paralympic games.
Speaker Change: And of course, I think our customers for their loyalty to air Canada, I assure that we are working hard everyday to keep providing industry leading products and services.
Speaker Change: Thank you.
Speaker Change: Mark.
Mark Gallardo: Thanks, Mike and good morning.
Speaker Change: Well komatsu.
Speaker Change: C to know exactly.
Speaker Change: Michelle and Alicia tends to <unk>.
Speaker Change: <unk>.
Speaker Change: Thanks to all our employees for their contribution to our Q3 results.
Speaker Change: Our Q3 performance was sustained by strong international performance.
Speaker Change: Tougher comps some weaker market, which is in Europe and uncertainty about our pilot negotiation.
Speaker Change: Our national network achieved encouraging profitability and drove overall results.
Speaker Change: Upon your routes performed above expectations and our sixth freedom revenues continued to progress favorably.
Speaker Change: We recorded operating revenues of $6 1 billion this quarter down 4% from Q3 last year.
Passenger revenues were $5 6 billion a decline of 4% from the same quarter last year.
Speaker Change: With year over year decreases in yield in system load factor PRASM declined 7% from Q3 2023, well was way above Q3 2019, PRASM in Q3 2022 levels as we had anticipated.
Speaker Change: The proactive goodwill policies, we've put in place to mitigate our customers travel disruptions during the pilot contract negotiations was the right thing to do.
Speaker Change: During that time, we saw multiple weeks of softer bookings volumes.
Speaker Change: Some customers postponed or canceled or generates well others chose to fly with other carriers.
Speaker Change: This had an impact in Q3, particularly in September and continue to a lesser extent in the first half of October.
Speaker Change: Now, let's move into our markets.
Speaker Change: Both domestic and U S Transborder markets did well and we saw good demand for air travel in a competitive marketplace.
Speaker Change: Our sixth freedom offering continues to prove its value.
Speaker Change: <unk> results that continue to surpass our expectations.
Speaker Change: I'd like to reiterate that our investment in for the long run and our 2024 Transborder network continues to meet our expectations.
Speaker Change: Looking at our international markets our performance in the Atlantic remains stable.
Speaker Change: We saw good demand, but as we said in the last call. It was impacted by competitive market pressures. This summer.
While the parcel Olympia had a negative effect on France, where we didn't see a significant rebound in demand in September and onward.
Speaker Change: We also operated less capacity than originally anticipated for instance, we extended our suspension of Tel Aviv throughout the quarters.
Speaker Change: The Pacific outperformance, we continue to bring more services to Asia Pacific regions, like Japan, South Korea, and Hong Kong.
Speaker Change: The capacity increase of 31% in the quarter. The revenue expansion was limited by comparatively lower yields and lower load factors year over year.
Speaker Change: This was expected as we experienced exceptionally high yields and load factors in the region in 2023.
Speaker Change: This market saw a rapid ramp up of demand in the region was significantly underserved at this time last year.
Speaker Change: Our premium offering remains strong.
Speaker Change: Revenues from premium cabin reached 28% of total revenues <unk>, one percentage point increase from Q3 2023.
We continued to deliver a competitive offering for our premium customers with an unmatched product in Canada.
Speaker Change: This concludes the choice of the most premium seats of any airline in the Canadian market.
Speaker Change: Chicago and as highlighted by Mike, We're very pleased with Hermes delivery with sequential improvement in Q3.
Speaker Change: Revenues grew 18% year over year to $253 million quarter.
Speaker Change: This was mostly due to higher yields and volumes and belly cargo in the specific market.
Speaker Change: We also surpassed expectations on our census is even greater operation or.
Speaker Change: Our right sized network and Frito to belly commercial model are producing solid financial results that we believe are sustainable in the long run.
Speaker Change: Constant in the cargo will continue to perform well.
Speaker Change: Air Canada vacations continues to execute in a highly competitive market. Although demand is strong we'll be watching the effects from rising hotel costs and foreign exchange, which may impact this coming winter season.
Speaker Change: With only one quarter left we expect full year capacity to increase by around 5% from 2023.
Speaker Change: This was slightly less than we had anticipated due to ongoing supply chain pressures aircraft availability and geopolitical conditions.
Speaker Change: We're not providing any 2025 guidance today, we will do so at a at the upcoming Investor day, but at this time, our clients are targeting capacity growth in the mid single digit range in 2025.
Speaker Change: On the demand side load factors are stable year over year going into Q4, and we see demand remaining healthy over the next three quarters.
Speaker Change: One important barometer as leisure demand sentiment demand for Submarket with Air Canada vacations.
Importantly, we see no slowdown in leisure demand along the booking curve for the coming quarters.
Speaker Change: We're also encouraged by the early results in the North Atlantic network with strengthening yields and demand. Despite some weakness in the middle East and India searches.
Speaker Change: On the Pacific.
Even with the more challenging yield environment year over year, we expect yields will continue to be elevated this will lead to strong performance overall.
Speaker Change: And just yesterday, we announced a few weeks, we'll be resuming our nonstop services between Canada, and Beijing, and increasing our flights between China and Shanghai, most important markets and our global network.
Speaker Change: On the whole, we observe healthy demands, surpassing 2024 levels and expect a sequential percentage yield improvement in Q4.
Speaker Change: Keeping in line with our previously committed full year PRASM expectations.
We see early encouraging signals of durable yield environment in Q1.
Speaker Change: Let me conclude with a few key points.
Speaker Change: We are executing our plans with diligence.
Speaker Change: We will continue to bring scale and are hubs leverage our diverse and competitive international network.
Speaker Change: Brilinta, our sixth freedom potential.
Speaker Change: These strategic pillars are supporting our results and are the backbone of our future plans.
Speaker Change: Thank you Marci and John over to you.
John: Thanks, Mark Good morning, everyone just wanted to us.
John: Thanks to all our employees for their passion and drive in helping us deliver our Q3 results and grow them, you'll see that too.
John: In the quarter, we recorded operating income of $1 billion and adjusted EBITDA of one 5 billion.
John: Net income of $2 billion included a $1 2 billion dollar book tax recovery for previously unrecognized tax attributes.
John: Adjusted net income was $969 million or $2 67 per diluted share.
John: For the third quarter operating expenses increased 3% year over year, mainly in support of capacity growth.
John: We're also recorded certain contract rate adjustments in the quarter benefiting our full year adjusted CASM expectation by one percentage point.
John: This is reflected in our updated 2024 financial guidance.
John: Fuel expense increased 1% versus Q3 2023.
John: The year over year decline in price per liter inclusive of an $8 million a hedging loss largely offsetting the increase in fuel expense from capacity growth in the quarter.
John: Comparatively we had recorded a hedging gain of $68 million in Q3 2023.
John: Labor expense increased 3% year over year in line with planned head count related to capacity growth.
John: The impact of higher salaries and wages compared to Q3 2023.
John: Keep in mind that we began accruing for a new pilot agreement in the fourth quarter last year.
John: Maintenance expense decreased 4% from Q3 2023, mainly due to a favorable contract adjustment in the quarter.
John: And more than offset a greater number of scheduled engine and airframe maintenance events from additional flying and higher average prices year over year.
John: In sum Q3, 2024, adjusted CASM decreased.
John: 4% year over year.
John: Turning to cash flow.
John: We generated cash flow of $282 million in the quarter of $147 million year over year improvement.
John: Year to date, we generated almost $1 8 billion.
John: And free cash flow with $1 5 billion of Capex spend.
John: We expect slightly higher capex across the portfolio for the fourth quarter due to the timing of certain events.
John: We forecast full year Capex close to $2 5 billion, which includes the addition of two 8% <unk> to the fleet this year.
John: With the ratification of the outward agreement in October and some of it's retroactive impact we forecast our cash payout before year end.
This will be a working capital draw in Q4.
John: Separately you under the new Labor agreement includes significant pension benefit improvements.
John: Highlighting that we will be recording a one time pension past service cost charge of about $500 million in the fourth quarter.
John: The cash impact of these planned benefit enhancements will be funded out of the planned surplus and are not expected to impact, our kansas liquidity or shareholders' equity positions.
John: This morning, we updated our full year guidance for 2024.
John: For full year 2024, we now expect operated capacity to increase around 5% year over year.
John: Our full year adjusted EBITDA to be approximately $3 $5 billion.
John: Our adjusted CASM to increase by approximately 2% year over year.
John: This is inclusive of our underlying assumptions for fuel and foreign exchange.
John: It also reflects the net impact of the contract related adjustments I referred to earlier.
John: The revenue impact of the pilot negotiation uncertainty that Mark has noted.
John: Both of which.
John: In the aggregate.
John: Produce a $100 million benefit.
John: Three 'twenty 'twenty four earnings.
John: Yeah.
Speaker Change: As Mark noted we are targeting mid single digit capacity growth in 2025, and continued stability loads and yields.
Speaker Change: We do see more intense unit cost pressure in 'twenty, five driven by the evolving regulatory environment.
Speaker Change: Board infrastructure fees.
Speaker Change: Continued maintenance cost inflation and the full year.
Speaker Change: Bert.
Speaker Change: We will remain focused on driving cost discipline and productivity.
Speaker Change: These pressures.
Speaker Change: We continue to build up the fleet in 2025, we expect to add another nine Eagle Twenty's.
Speaker Change: Take the first two deliveries of the game changing Airbus 321 XLR.
Speaker Change: We are of course, keeping an eye on the situation at Boeing and monitoring how this may affect the delivery timeline.
Speaker Change: Remaining 12, Max aircraft with planned deliveries in 2025.
I'd like to note that we recently finalized a long commitment from EDC of up to $135 billion.
Speaker Change: To support the purchase.
Speaker Change: Of each of the $27 million or <unk> to be delivered over the next three years.
Speaker Change: Notwithstanding the beginning of a higher capex cycles, we are targeting breakeven.
Positive free cash flow in 2025 progressive progressive improvements in free cash flow margin over the coming years.
Speaker Change: We have successfully navigated a tricky environment in 2024.
Speaker Change: We now see a more normalized and stable environment emerging.
Speaker Change: We are confidence in our future and we are committed to delivering shareholder value, while creating a world class global airline for our customers.
Speaker Change: Alrighty and all stakeholders.
Speaker Change: We remain focused on responsible risk management and the preservation of our strong balance sheet.
Speaker Change: After restoring our pre pandemic debt and leverage metrics. We are pleased to announce a new share buyback program, allowing us to purchase up to 10% of the public float.
Speaker Change: This will there be some of the dilution experienced from financing decisions that were necessary during the pandemic.
Speaker Change: Our buyback program is consistent with our capital allocation roadmap and our strategic plan.
Speaker Change: It can be executed concurrently with our fleet strategy investments.
Speaker Change: Our credit quality objectives.
Speaker Change: We will initiate the program on November 15th and are committed to aggressively pursuing opportunities to buy back shares under our reinstated program.
Speaker Change: We look forward to a more fulsome dialogue on our business plan underlying strategies and resulting investment thesis at our December 17th Investor Day in Toronto.
Speaker Change: Our entire senior leadership team is looking forward to sharing our targets long term ambition with you.
Thank you and now over to you Mike.
Mike Rousseau: Well thank you John.
Mike Rousseau: We have a very strong foundation.
I consider to be an investment grade balance sheet.
And a very experienced leadership team.
Mike Rousseau: All of which provide many opportunities to enhance to enhance value.
Mike Rousseau: We are very confident about achieving our strategic priorities and let me highlight a few points that give me confidence.
Mike Rousseau: The future for this company.
Mike Rousseau: Our strong balance sheet gives us both the resources to reinvest in our business and seize opportunities as they come up and play defense if necessary.
Speaker Change: Mark spoke to our healthy demand this presents opportunities and our experienced management team is capitalizing on using the wide range of tools at their disposal.
Speaker Change: We have diverse edition fleet that will be enhanced with the addition of 88 state of the art new aircraft over the next five years.
Speaker Change: Our extensive global network anchored by three ideally located hubs allows us to allocate resources to the most promising markets.
Speaker Change: Example, we then been carefully rebalancing, our Asian and European operations in response to evolving demand.
Speaker Change: We've also been building our trans border an international network.
Speaker Change: Addition to Star Alliance and the strategic partnership we formed we now have three joint ventures, and 122 Interline partners.
Speaker Change: And last week, we added our 14th Codeshare partner are bolted to increase our presence in northern Europe.
Speaker Change: Our Aeroplan loyalty program is a powerful tool is truly stands out as Canada's best travel rewards program.
Speaker Change: We view Aeroplan is a key competitive advantage contributed to margin expansion and our loyalty driver.
Speaker Change: And we continue to build out a program finding new ways to offer added value for members such as our recently announced expanded strategic partnership with Marriott Bond book.
Speaker Change: We also launched our new loyalty partnership with Canada's leading benefits provider manulife during the quarter.
Speaker Change: In the same vein.
Speaker Change: Our other business units Air Canada cargo Air Canada Rouge, The Air Canada Vacations also help help us reach as a specialized markets.
Speaker Change: And serve a much wider range of travel.
Speaker Change: Air transport needs.
Speaker Change: All of these powerful strategic assets allow us to compete effectively in a move to more markets and add resiliency through diversification.
Speaker Change: Customer service remains the core of our business simplified by the achievement of winning more awards than any other Canadian carrier at the 'twenty 'twenty four Skytrax World airline awards and ranking 29th in the World.
Continuing our multiyear improvement trend from our 50 is place reading in 2022.
Speaker Change: We were by far the highest rate of Canadian Airlines.
Speaker Change: And earlier this week, our commitment to delivering a superior passenger experience earned doses the prestigious 2025 impacts five star recognition.
Speaker Change: Which is based on customer feedback.
Speaker Change: And we will be further upgrading our service through digital technologies and recently welcomed Ras al Austin as our first Chief Digital officer.
Speaker Change: His team will enhance and accelerate our digital transformation strategy to further elevate the customer experience and drive operational efficiency and corporate productivity.
Speaker Change: With more conventionally. We're also introducing added supports and new training for our customer service and frontline people.
Speaker Change: This includes redesigning processes and simplifying policies.
Speaker Change: We are picking up momentum each and every day.
Speaker Change: And we anticipate our strategy will drive long term value creation to the benefit of all stakeholders.
Speaker Change: I am confident and excited about the prospects for Air Canada.
Speaker Change: I'm looking forward to hosting you and just one on December 17th.
Speaker Change: Where you will have the opportunity to hear directly from our leadership team and better understand the unique strengths and opportunities of our business.
Speaker Change: See you all there.
Speaker Change: Yeah.
Speaker Change: Finally.
Speaker Change: I would like to extend my gratitude to all employees for their dedication and hard work.
Speaker Change: All of our critical players of our team each.
Speaker Change: Each member's unique contributions and passion have been integral to our success.
Speaker Change: Showcasing the power of teamwork and perseverance.
Valerie: Thank you Missy and we will now be pleased to answer your questions with you Valerie Thank you Mike.
Valerie: And thank you all for joining us this morning.
Valerie: Let's say content and I think.
Valerie: We're now ready to take your questions. Since you require further details following this call our Investor Relations team is available for support back to you Sarah.
Sarah Hello: Thank you as a reminder, if you have a question. Please press star one on your telephone keypad.
Sarah Hello: In the interest of time, we ask you. Please limit yourself to one question and a brief follow up.
Speaker Change: Your first question comes from Kevin Chiang with CIBC. Your line is open.
Kevin Chiang: Hi, Thanks for taking my questions here.
Thanks for the color on Sunday.
Speaker Change: Could you speak up a little bit.
Kevin Chiang: Can you hear me better here.
Speaker Change: Yes, so much better thank you.
Speaker Change: Thanks Al.
Speaker Change: Thanks for the color on on some of the moving parts in Q4 related to the new pilot agreement called it the 500 million.
Pension pension item, but just wondering if there's any other accruals, we should be thinking about in terms of the retroactive payment in the fourth quarter.
Speaker Change: I guess, how should we think about you know runway run rate.
Speaker Change: The run rate wage line I guess it in 2025 on the back of this on the back of this new agreement, you've you've been kind of tracking around $1 1 billion a quarter just just what does that look like in 2025.
Speaker Change: Yeah. So.
Speaker Change: I think a couple of things one that we mentioned.
Speaker Change: You highlighted the pen.
Speaker Change: And charge so as I said.
Speaker Change: Shouldn't have any implication for either cash or or equity is.
Speaker Change: We will be using the other plant surplus with respect to the retroactivity, we do intend to make a payment for retroactivity.
Speaker Change: And the cash impact of that accrual in the fourth quarter and.
So that'll be a draw on working capital probably an outsized drop relative to what you would've expected.
Speaker Change: And then finally.
Speaker Change: As far as the run rates I would say generally speaking as we've been tracking here.
Speaker Change: Youll see a little bit more maybe cost for the pilot agreement in 2025.
Speaker Change: Certain work.
Speaker Change: So that.
Speaker Change: That will accrue that are not retroactive sort of speaks of the agreement takes place.
Those will be costs, some pressure next year, but overall in.
Speaker Change: And the whole more or less what we expected.
Speaker Change: Okay.
Speaker Change: Helpful and maybe just my second question.
Speaker Change: As you look at your capital plan over the next.
Speaker Change: The next few years here and you've called out kind of neutral free cash flow in 2025, just wondering how you're thinking about sales leaseback is a lever too.
Speaker Change: To maybe reduce the capital outflow or the Capex outflow over the next three years.
Speaker Change: Have you.
Speaker Change: Have you decided like what percentage of that Capex you'd want to you'd want to.
Speaker Change: Funds through a sales leaseback.
Speaker Change: Yes, Kevin and this also be something that we'll be able to cover a little bit more detail on investor day. So clearly we will be talking about fleet strategy and overall, how we manage that.
Speaker Change: Quality balance sheet as well as generating free cash flow. So with respect to just some early color on that.
Speaker Change: We have a fleet ownership highly advertised in fact, probably around 80% and we do believe that there is lots of room, there its probably be more historical kind of 60% to 65% owned fleet. So some of that will.
Speaker Change: It will be achieved through various mechanisms, including sales of these boxes, you know a lot of the aircraft in our order book, our under our order so there's opportunities to do some sales leasebacks.
Speaker Change: As we go through that cycle.
Speaker Change: And so I.
Speaker Change: Overall, our balance sheets in very good shape so it.
Speaker Change: End of Triangulates that highly advertised fleet.
Speaker Change: Leverage around one and going into.
Speaker Change: The more elevated capex cycle theres opportunity for us to be able to manage our cash liquidity and free cash flow using some of those tools.
Speaker Change: Perfect. Thanks.
You very much.
Speaker Change: The next question is from Savi <unk> with Raymond James Your line is open.
Speaker Change: Hey, good morning.
Speaker Change: I appreciated the color on what Youre seeing the various geographies that I wonder if you could kind of take a little bit more of a deeper look in.
Speaker Change: Where are you seeing.
Speaker Change: Demand weakness versus kind of oversupply I'm, just trying to get a sense of you here.
Speaker Change: Pressure on the consumer but given your results. It seems like things are holding up so just kind of curious you know just by entity where the.
Speaker Change: What youre seeing in Joseph supply and demand.
Speaker Change: Hi, good morning, Savi in the quarter I mean, the one area, where we saw a little bit of a pressure was on the on the Atlantic we.
Speaker Change: We don't think it was a demand issue. We think it was more rapid capacity increase issue that cost a little bit of weakness.
Speaker Change: We will see a little bit of that in the Pacific in in 2025.
Speaker Change: Other geographies that we fly Canada U S sub.
Speaker Change: Some market ECC stable demand and no sign of weakness anywhere.
Speaker Change: And if I might follow up on that just what are you seeing on the on the kind of corporate travel side is is that improving is it stabilizing air.
Speaker Change: And then just any differences between domestic transporter.
Speaker Change: Yes, it was improving unfortunately, we ran into a bit of that.
Speaker Change: Situation about some labor uncertainty that kind of slowed us down in the fall.
Speaker Change: I think it's definitely.
Speaker Change: <unk> signals going forward in particular more strength on the U S network than on on Canada.
Speaker Change: Okay helpful. Thank you.
Speaker Change: The next question is from Chris Murray with ATB capital. Your line is open.
Chris Murray: Yes, thanks folks good morning.
Chris Murray: John Let me just talking about the <unk> for <unk>.
Chris Murray: One of the questions I've already got this morning is just about how to fund this thing.
Chris Murray: Particularly when you think about flat free cash flow.
Chris Murray: Next year can you just talk a little bit about your thoughts around capital allocation and the puts and takes with the CIB and the mix and how you fund that over the next little while.
Speaker Change: Sure. So a couple of things one is again there'll be some additional longer term color as we call. It kind of go into invested in I think it will give some clarity to all this but I mean.
Speaker Change: I would say that we have been pretty methodical about how we constantly strive to lead that come out.
Speaker Change: 23.
Speaker Change: We've paid down a lot of debt.
Speaker Change: Average metrics are in a very good place that are on one time and we do hold.
Speaker Change: Quite a bit of liquidity.
Speaker Change: We've got a pretty good idea about our fleet strategy, our capex cycle, so with all of those things put together.
Speaker Change: We do see the opportunity here to restore some of the share count.
Speaker Change: This is something that was message independent making can now be yield.
Speaker Change: The liquidity exists on hand.
Speaker Change: As we look forward I think even as we get to elevated levels of Capex and as I had mentioned on the prior comments would say Kevin we do have some tools here to be able to manage through all of that and frankly over time, we do see margins kind of.
Speaker Change: Accruing again, and then drawing back to a higher teen levels. So the combination of all those things is really that we believe we have three long term structural free cash flow generation and as we kind of gravitate towards that we have a very strong balance sheet and the ability to actually.
Speaker Change: To both invest in the business, but also restore to share count.
Okay. That's helpful.
Speaker Change: And then one quick question just on the fleet.
Speaker Change: I think there's a couple of 760 sevens that seem to be coming back in into passenger service any color around.
Speaker Change: Are those kind of either cargo aircraft that are being reconfigured or those new 780 sevens are leased or any any.
Speaker Change: Any sort of color on what that was.
Speaker Change: What's going on there would be helpful. Thank you.
Speaker Change: Okay.
Speaker Change: <unk> chocolate.
Speaker Change: These are two older 770, <unk> part of our passenger mainline fleet.
Speaker Change: There is still some lifetime them and we can restart those aircraft on an interim basis to give us some some some insurance on our on our fleet for the next two years.
Speaker Change: There is no plan to have that as part of our long term fleet, it's mark <unk>.
Speaker Change: Barry insurance, if you will.
Speaker Change: Okay. So think of it as a bridging exercise as opposed to kind of where we're back in sub 67 operations again.
Speaker Change: Exactly.
Speaker Change: Okay awesome, thanks folks.
Speaker Change: Next question is from conduct Gupta with Scotiabank. Your line is open.
Speaker Change: Thanks, operator, and good morning, everyone.
Speaker Change: Just maybe on CASM.
Speaker Change: John.
Speaker Change: I look back at your guidance.
Speaker Change: For the full year and back out the first three quarters, So South Lake Q4 CASM.
Speaker Change: On this basis, its tracking 5% up and on flattish capacity.
Speaker Change: You guys are saying mid single digit kind of capacity growth next year is it reasonable to expect that there'll be some CASM inflation next year, but not to the tune of 5%.
Speaker Change: Yes, I think we will get into 2025, guys over probably built it color give color on that at Investor day, as well, but I think that I mentioned in my comments, we do have some headwinds and I think.
That does put a little bit of pressure on year over year CASM.
Speaker Change: Mark mentioned that probably looking at something in the mid single digits for capacity growth, we're going to stay disciplined, but we do have some opportunities for growth and obviously stone and somewhat of a recovery overall system levels and.
Speaker Change: Bringing on some aircrafts as well, but not to the tune that we will in 'twenty six 'twenty seven so I think youll see scale and capacity and modernized aircraft give us some lift.
Speaker Change: In terms of just momentum in CASM in 'twenty six 'twenty seven.
Speaker Change: <unk> will have some pressure.
Speaker Change: The 5% I mean, I think we probably can get some.
Speaker Change: I'll back some of that cost growth with productivity and efficiency as we continue to get better here.
Speaker Change: Post pandemic as a system getting people are getting trained and restoring a higher level of Av.
Traffic so all in I would say that there is going to be some pressure next year.
Speaker Change: Maybe a bit better than 5%, let's say, we will give you some color on that at Investor day, but.
Speaker Change: Probably in the neighborhood of three 4% probably sounds a little bit down the fairway for what we're seeing.
Speaker Change: That's great color, thanks and.
Speaker Change: On the Capex side, so it sounds like the Capex projections have increased for the next four five years or so and it seems like it's coming not from committed capex, but non committed capex in <unk>.
Speaker Change: Color on what's driving this capex projections and outlook for the next few years.
Speaker Change: Well actually I think it reflects the order book, we do have.
Speaker Change: Yeah.
Speaker Change: We do have a higher percentage of non conforming aircraft than we'd like so we're moving some dollars to configuration upgrades across our cabins and our fleet.
We continue to be very focused on customer experience with things like lounges.
Speaker Change: So overall I would say that.
Speaker Change: The.
Speaker Change: The maintenance part of the business continues to be a little bit of inflationary. So theres always a little bit of pressure from that but ultimately it's bringing on the new aircraft. That's it that's the lion's share of what you are looking at probably Pdp's play a role and how that's kind of flowing through the next couple of years.
Speaker Change: But ultimately really its about 70 aircraft coming into the fleet over the next several years.
Speaker Change: And then some reconfiguration and some investments in lounges.
That's great and if I can quickly squeeze one more on the leverage ratio. So one X right now and then but the Capex plans for the next few years right then and debate you on free cash flow.
Speaker Change: And buybacks as well.
Speaker Change: It seemed like one onex being super low.
Speaker Change: We'd like to optimize the balance sheet to closer to one five yes, yes.
Speaker Change: Yes and that was.
Speaker Change: I think inherent in my comments on previous questions. Here. This morning is that.
Speaker Change: It's beyond the fact that our Leverages, one of which which is very positive obviously, we like that and we like our strong balance sheet. So theres no theres no.
Speaker Change: We will now take back on wanting a strong balance sheet, but we also have a lot of unencumbered asset strength, we have and Aeroplan franchise no no leverage against that we have a highly advertise fleet. So all of these things.
Speaker Change: And increase our revolver that we put in place earlier this year.
Speaker Change: And again, we do we do want to preserve cash generation. So when you combine all of these things. It does give us we believe some room to be both very responsible on credit quality and at the same time leveraged the balance so we can generate returns.
Speaker Change: And concurrently invest in our business as well as.
Speaker Change: Return.
Capital to investors and shareholders.
Speaker Change: I appreciate the time thank you.
Speaker Change: Maybe just one quick I just wanted to catch myself on your first first question one thing I would just put out there for all the benefit of all of you on the call here is in 2000, and we talked about like a year over year growth on CASM.
Just make a note of the fact that in 2024, we get a little bit of a tailwind there and I mentioned it in my comments right about one percentage point of tailwind I don't see that as kind of being a recurring.
Speaker Change: So that's going to give you a little bit of a bump so unreal kind of subsequent to <unk> three 4%, but you do get a little bit of a bump.
Speaker Change: If you kind of normalize up 24 CASM.
Speaker Change: Yes. Thank you.
Speaker Change: Thank you.
Speaker Change: Next is Jamie Baker with Jpmorgan Your line is open.
Jamie Baker: Hey, good morning, everybody.
Jamie Baker: So I just wanted to follow up on on the Capex. So the $1 4 billion an increase.
Jamie Baker: Over 2025 through 2028, the increase isn't directly fleet related you said lounges or in their PDP noise I don't want to ask the same question a second time.
Jamie Baker: I'm still having trouble reconciling.
Jamie Baker: The $1 4 billion increase versus what you had guided to 90 days ago.
Jamie Baker: Across the year to three years right, yes, yet so.
Speaker Change: So I would I would tell you that.
Speaker Change: It's really timing I guess it ultimately we've got.
Speaker Change: We've got.
Speaker Change: The aircraft orders that.
Speaker Change: We expect to fall in.
Speaker Change: Pretty much I think the 77% of the biggest piece of that 321 <unk>.
Speaker Change: Yeah, no there is not a lot more color to add to that.
Speaker Change: Hi, Janet.
Speaker Change: It's probably just truing up our numbers schedules.
Speaker Change: Some of that might be.
Speaker Change: The lounges and the.
The configuration, but it wouldn't be to the tune of $1 billion right and then on Trans Atlantic. So several of the U S. Airlines are speaking enthusiastically about RASM trends going forward I believe in the prepared remarks, you referred to it as <unk>.
Speaker Change: Stable in the third quarter, when we think about your 2025 forecast and admittedly you're not sharing that with us yet, but would you be able to rank order your geographies next year best to worst in terms of your RASM expectations.
Speaker Change: Hi, Jamie.
Jamie Baker: Sure a little bit of the enthusiasm on what we're seeing on the Trans Atlantic for Q4 and beyond.
Speaker Change: I think it's very very early signals for 25, so it's kind of hard to give you yield definitive statement on whats going to perform in 'twenty five but early indicators suggest the <unk>.
Speaker Change: Monarch is going to bounce back.
Speaker Change: Okay.
Speaker Change: A fairly decent transporter performance next year.
We think the watch out if theres any watch out is obviously on the Pacific yields remains still very elevated and resubmit a downward pressure.
Speaker Change: And domestic would fit in.
Speaker Change: Yes, domestic would be relatively stable.
Speaker Change: Okay.
Speaker Change: The environment I don't really see much.
Speaker Change: I think stability.
Speaker Change: Appropriate term okay. That's helpful. Thank you very much everybody.
Speaker Change: Next question is from Steve Trent with Citi. Your line is open.
Steve Trent: Yes, good morning, everyone and thanks very much for taking my questions.
Steve Trent: First I was just curious if you could remind me.
Steve Trent: Now that you guys have launched the share repurchase either any pandemic era government strictures that.
Steve Trent: On what you guys still have to abide.
Steve Trent: Other corporate actions or servicing low density routes. So this kind of thing or has that.
Steve Trent: Error not water under the bridge.
Steve Trent: Yes.
Steve Trent: Ill just close on all of that.
Speaker Change: Great I appreciate that John.
Speaker Change: The other thing.
I was wondering if you could just give us a little color on what youre seeing on an air cargo may.
Speaker Change: Maybe demand wise, if any one or two regions look exceptionally good or or somewhat worried under the current environment. Thank you.
Mark Gallardo: Hi, Stephen it's Mark.
Mark Gallardo: Overall carb environment is quite favorable I would say it's quite.
Quite favorable in Asia Pacific.
Mark Gallardo: We see similar trends in India.
Mark Gallardo: And those really kind of stand out in terms of weakness or any areas of concern are none at this time.
Mark Gallardo: And we think this cargo tailwind continues into Q4 and the early part of next year.
Speaker Change: Okay Super Thank you very much.
Speaker Change: Next question comes from the line of Cameron Gilbertson with National Bank Financial Your line is open.
Cameron Gilbertson: Yeah. Thanks. Good morning, just wanted to clarify something that you said in the prepared remarks around the yield into Q4, I think you said you expected overall yields to be sequentially higher in Q4 versus Q3, do I have that correct or did I mishear that.
Speaker Change: Hi, Karen that's correct.
Speaker Change: Okay perfect.
I guess my main question is just around I guess labor negotiations obviously good to have this pilot deal in the rearview mirror here.
Speaker Change: But you do have some additional negotiations coming up in 2025, I guess, specifically the flight attendants in March I'm just wondering if.
Speaker Change: You can talk about anything that you might do differently I guess with this negotiation process. Because we did have kind of a year of uncertainty I guess, while the pilot negotiations are ongoing and I am just wondering if there's maybe more urgency to get something done earlier. So you can avoid I guess the impact on bookings and things that we saw in the past in the past 12 months.
Speaker Change: Okay.
Yes, good morning cameras, Michael I'll take that one.
Speaker Change: Yes, we think youll, probably be a shorter process than that.
Speaker Change: Negotiation, which went on for.
Speaker Change: Approximately 15 months.
Speaker Change: And as you can appreciate it's too early to speak about any expectations at this point in time.
Speaker Change: Okay.
Speaker Change: Alright, that's great I'll leave it there thanks very much.
Speaker Change: Next question comes from James Mcgarrigle, with RBC capital markets. Your line is open.
James Mcgarrigle: Hey, Thanks for having me on an inaugural good morning, everyone.
Speaker Change: Okay.
James Mcgarrigle: Ask the question given some of the favorable yield trends you'd flagged into Q1.
James Mcgarrigle: Are you seeing any changes in the Canadian industry with regard to adopting kind of a more measured approach to capacity kind of in line with what we're seeing in India or the U S market.
Speaker Change: Hi, James.
Speaker Change: No major changes I think.
Speaker Change: More rational.
Speaker Change: The capacity situation going into Q1, I mean, some geographies are up summer.
Speaker Change: Pretty flat.
Speaker Change: What we're starting to see us at this time last year, we started to see some.
Speaker Change: The normalization in our yields and we start to lap over that in the base period.
Speaker Change: So that's why in part we are expecting Q1 to be or look more favorable from a yield perspective.
Speaker Change: Yes.
Speaker Change: Okay I appreciate that.
Speaker Change: Just a longer term question here on some of the recent changes to the Canadian immigration targets.
Speaker Change: Has that impacted your long term strategy at all any update into how youre thinking about the future, which looks like some potential near term headwinds.
Population growth.
Speaker Change: A few years.
James Mcgarrigle: James on materially.
Speaker Change: There's still going to be a decent run rate in terms of number of immigrants, even if it's a reduced amount.
Speaker Change: And we've had multiple decades of significant make immigration into the country Thats led to the demand situation that we fly today. So I don't think it really changes all that much I still think we're going to have <unk>.
Speaker Change: Favorable international demand environment to attract from Canada for the years to come.
I appreciate it and I'll turn the line over thank you.
Speaker Change: Next question is from Andrew <unk> with Bank of America. Your line is open.
Speaker Change: Hey, good morning, everyone, John just to clarify I think I.
Andrew: <unk> heard you say neutral free cash flow in 2025 is that on the committed capex figure of $3 $6 billion.
Speaker Change: And then kind of as a follow up to that.
Speaker Change: And I guess, maybe to ask the Capex question. Another way, we've seen many U S Airlines without Boeing order books bring down their spending plans in the out years. That's why have you not seen that or is there any framework that maybe you can give us about you know kind of what that could look like going forward. Thank you.
Speaker Change: Sure Yeah. So.
Speaker Change: Yes.
Speaker Change: We have a pretty good idea for 25 capital and Capex I should say and.
Speaker Change: We.
It will be in that range as you mentioned.
Speaker Change: I think with that inclusive our expectation here is to drive our expectation.
Speaker Change: Correct I'll say, our target is to drive and we'll give you expectations when we meet.
Speaker Change: And at Investor day, but we're targeting free cash flow breakeven to positive for next year.
Speaker Change: With respect to kind of Boeing and aircraft delivery, we did make some adjustments. So a couple of quarters back you will recall, we had a lot of aircraft coming in in 2006 was that spread out over a couple of years that we did that for a couple of reasons, one working with them to assist our own ability to kind of.
Speaker Change: Get them and bring them effectively.
Speaker Change: So with respect to future look and how that might evolve frankly as I mentioned in my comments, we're staying very close we have very good relationships there and they are going through their own issues right now and we'll let them settled through all of that and then.
Speaker Change: We'll make any adjustments as necessary and we'll balance that so that's number one.
Speaker Change: They can manage the delivery schedule as appropriate and number two that we can take the aircraft effectively when they are ready. So that's a conversation that will evolve, but theres no theres no.
Speaker Change: I don't have a perfect.
Speaker Change: The answer for what May come out of it but certainly over the next whatever three to six months, we'll get a little bit more clarity and with that we will make the appropriate adjustments.
Speaker Change: I think we try to manage our mid and long term planning. So we've taken into consideration some of the potential volatility and I think by and large we.
We have some clarity as to the roadmap, we're trying to execute for inventory.
Speaker Change: Got it makes sense and then I know.
Speaker Change: John you had some a few wins <unk> and.
Speaker Change: I don't think it was talked about I didn't see it in the filings, but with the recent decline in jet fuel prices do you have any hedges in place today and just how do you think about that going forward. If you will continue to be opportunistic. Thanks, thanks for taking the time.
Speaker Change: Got it thanks for bringing that up.
Speaker Change: So no, but look I guess no regrets to be honest with you I mean, it's a very volatile environment right and what we'll do is we run an airline and we run an airline as you try to manage the <unk>.
Speaker Change: Current volatility that's in the system by just.
Speaker Change: Focusing on the things that we can control and in this sense.
Speaker Change: Fuel and fuel hedging that we did take some some positions in September that also cover Q4. So we're about 50% hedged in Q4 and as you well noted the fuel price has been softer. So there is some negative impact there.
Speaker Change: And we will.
Speaker Change: Included in our guide obviously here today, and so Q4 will take some some a little bit of pressure relative to what you pay at the pump.
Speaker Change: But then again, you know who knows where November at year end.
Speaker Change: And you don't know in the next 60 days may bring as well so.
Speaker Change: We feel comfortable that at least we have in our environment. We can operate in for 2025, I mean, we typically as you've seen we've looked at things in the shorter term and protect volatility there relative to our bookings situation.
Speaker Change: No real changes I think we just try to manage responsibly and at the same time.
Speaker Change: Not get too far ahead, but with the hedging program out there.
Speaker Change: That's great. Thank you.
Speaker Change: Next question is Sheila <unk> with Jefferies. Your line is open.
Speaker Change: Thank you so much and good morning, everyone.
Speaker Change: Maybe.
Speaker Change: About.
Speaker Change: The mid single digit capacity guidance.
Speaker Change: For 2025, just very different than your U S peers, what gives you confidence in that and how should we will fill that capacity.
Speaker Change: Yes.
Speaker Change: He showed the confidence in terms of our ability to grow our ability to execute.
Speaker Change: Yeah, just the missing ability to grab more so mid single digit versus what we've seen commentary out of the U S carriers have been much more subdued in the 1% to 3% range and.
Speaker Change: And the capacity cuts Nathan.
Speaker Change: Domestically, how do you think about that mid single digit why come out with such a robust target and how do you think about that geographically.
Speaker Change: Yes, Okay. Great question. So first comment we're still not at 2019 levels of capacity.
Speaker Change: We're still somewhere in the 90% range of close to sales are still catch up for us to get back to 2019.
Speaker Change: In the next year the majority of the fleet that we're getting is narrow bodies.
Speaker Change: And Youll see us restore certain domestic links that we've either had to reduce.
Speaker Change: Our plateaus.
Speaker Change: And we're also increasing the size and scope of our of our sixth Freedom network.
Speaker Change: It's really fortify our international route network long term.
Speaker Change: Those are the big themes for 'twenty five we don't have much widebody or international capable capacity coming into 'twenty five.
Speaker Change: That is a 301 XLR arrives later in the year.
Speaker Change: Okay got it. Thank you so much and then maybe if we could just I know a few questions were asked on CASM. Max If you could just put a finer point on that CASM ex up 1% year to date with the full year guide.
Speaker Change: Up to 2% it seems like some of those like some contract related adjustments that are tied to the maintenance line, which stepped up a $100 million.
Speaker Change: Sequentially.
Speaker Change: I guess, maybe that's some Kiev and propulsion are how do we think about that and then quite exit rate for the year is up to mid single digits. So what's the right way to think about CASM ex in 'twenty five knowing it's somewhat been touched upon.
Speaker Change: Yes, I think it was actually very clear on what I said, maybe more than I want it to be about before this call to be Frank but I.
Speaker Change: I think that what you should expect is that.
Speaker Change: The 2% in 2024, probably.
Speaker Change: Feels a little bit it looks a little bit better than it is probably we had a guide previous two and ask the three five.
Speaker Change: Clean up some of the contracts maintenance and other things and so as a result, we got a little bit of a kick there. So it was down to 2%, but if you normalize that kind of think three and then.
Speaker Change: And then that's.
Speaker Change: Frankly, but frame talk 2025.
Speaker Change: For what it's worth I think it shows a lot of ability to on lower CASM than we started the sorry lower ASM. When we started the year I think it shows a lot of agility on the airlines to be able to actually manage costs and then bring this airline in to what is a better guide than they originally had anticipated on higher ASM. So for one I think.
Speaker Change: We feel good about just your ability to execute some efficiency as we go through things.
For 2025.
Speaker Change: I think that you probably have to get back to at one point.
Speaker Change: That we get this year, so that kind of normalizes out and so your base will be a little bit depressed.
Speaker Change: Where we land.
Speaker Change: And CASM absolute CASM ex in 2004, so move up probably in the neighborhood of 3% to 4% channel, we'll refine that number and I'll reserve the right to make an adjustment when we guide.
Speaker Change: December but I think that's the kind of level. We're looking at so you get a little bit of normal inflation, you've got some pressure that I mentioned earlier airport fees will go higher.
Speaker Change: We do go through another labor.
Speaker Change: Agreement next year, so that will probably have an impact I think you'll feel the full implication of the pilot agreement a little bit more than you do in 2004, Youll feel a full in 'twenty five and so those elements will have some upward pressure.
Speaker Change: And then I think we'll be able to call some things back here with productivity and just a little bit of scale on the airlines. So that's kind of the math.
Speaker Change: And I would say that overall.
Speaker Change: As we go into 'twenty six 'twenty seven as Mark said earlier and 25 were getting a lot of short haul aircraft is not the ideal in terms of managing down CASM ex.
Speaker Change: <unk>.
Speaker Change: So as we get longer haul in new aircrafts and had some ASM on longer routes with modern aircraft I think youll see a little bit of.
Speaker Change: Of tailwind there, but that's probably a year out from next year.
Speaker Change: Got it thank you so much.
Speaker Change: This concludes the question and answer session I will turn the call to <unk> for closing remarks.
Speaker Change #100: Thank you Sarah and once again, thank you for joining US. This morning should you have any additional questions don't hesitate to reach out to us at Investor Relations, Kevin financing concluded, let's ask ourselves MSA with <unk> and then the panel protective Vanessa I'll say this that <unk> have a great day.
Speaker Change #101: This concludes today's conference call. Thank you for joining you may now disconnect.
Speaker Change #101: [music].