Air Canada (AC) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome. Next up, we have Air Canada with us today. Joining us are John Di Bert, Executive Vice President and Chief Financial Officer; and Amanda Murray, Head of Financial Planning, Strategy and Investor Relations. John, Amanda, thank you for being with us.

Thank you.

Thank you.

So Air Canada has been an interesting story to follow this year, balancing a volatile fuel price environment, a volatile U.S. Canada narrative at times, with what's been a strong demand, continued execution on your new frontier strategy and significant fleet investments. So Maybe, John, let's start with the current operating environment. You reinstated full year guidance earlier and despite all the moving variables. Since then, I'm curious to get your take what has turned out better than expected? Where do you see the greatest amount of uncertainty as it relates to [indiscernible] factors from what you're seeing out there?

Yes. Good afternoon to everybody, and thanks for being here. It's a beautiful outside. So I know that we're keeping some of you in the room here, but thanks, and it's great to be at the conference. So yes, so I would say that when we reinstated guidance, we were seeing and continue to see strong demand, good traffic, the ability to significantly price through fuel, and at the time, we had disclosed about a $4 a gallon kind of expectation. And so we have been pricing fares to that $4 a gallon. We'll talk in a minute about where we are today and kind of the surge in some of the fuel prices. But premium traffic working, strong extension of the summer season internationally. That's been very positive as well. Corporate traffic continues to be solid and continues to grow. And overall, I think we feel good about 2026 despite all of the adversity. And we see continued ability for the customer to take pricing. So we are going to continue to price through. We're sitting at about $5 a gallon now for fuel, somewhere, and it moves around every day. But that's kind of where it is. So that's a lot of work in the next short while here. There's a little bit of a lag between the time that fuel moves on, you can actually price it through. we're in that right now. I think we probably made our way halfway through the $4 gallon to the $5 current spot. On a full year and for Q4, I think it'd be good to see some [ REPREVE ] maybe as we get into October, November, December, it would be nice to see that come peel back maybe somewhere in the mid-4s or less. I think that would give us even a bit more confidence. But we feel that we've managed all of the variables and the customer continues to fly. In fact, I would say they continue to fly even more than we would have expected in this kind of environment.

Great. And let's touch on demand in a minute, but you discussed recurring approximately up to 100% of fuel price increase in Q4. How is that progressing? How are you -- how confident are you that revenue can continue catching up if fuel price just remains or, let's say, even increases from where we are today.

Yes. So back to the comment, I would say that at $4 a gallon when we went into the second quarter, we were seeing the ability to price that through. since then and relatively in the last 15 days or so, it's moved towards $5 a gallon, and we've continued to add pricing. I would suggest right now we're probably halfway between the $4 and the $5 in terms of what we're currently pricing the market. But our intention here is to continue to price our fares to the fuel environment. And it's hard to know how and where the numbers will go as you get to the back end of Q4 and into next year. And we're not speculating on that right now. We're just trying to bring the fares to the fuel price and there's a lag and you always have to deal with that lag, but that's okay.

Your -- some of your peers yesterday highlighted some capacity levers they have at their disposal. Is that...

A very good question -- very good question. We do -- we are looking at -- our, I would say, at over $4, it starts to make sense to maybe look at some of the maybe some of the sun market, leisure markets in Q1 and Q4, the very long haul flying, maybe we would look at Asia Pacific where it's a little bit harder to get a fair fully through and you carry a lot of fuel to burn fuel, so to speak. We would look at whether there's some capacity adjustments there. And that's under process right now and may look at 1 or 2 points of capacity in the fourth quarter.

You mentioned demand a little earlier, so maybe double-click on a couple of things. So premium, corporate, sixth freedom, these have remained notable areas of strength for you. What does that say about the resilience of the business? And how has that evolved over the past couple of quarters and perhaps years?

I think that we set out a plan really to bring back the full potential of the airline network back in 2024. And we've been making a lot of progress. So sixth freedom is a great example. Year-over-year, that continues to grow mid-teens in terms of traffic. We've brought on quite a lot of A220s. We have a fleet now that's probably around 45 aircraft. It will probably get to about 65% over the next 2 years. So from the sixth freedom point of view, there is continued real potential for us to carry niche traffic from the U.S. internationally. In terms of premium, I think there's a lot of opportunity going forward with respect to both segmenting the cabin, which we're doing. But also as we get larger planes, widebodies, 787s, the 321XLRs will have an important [ life flag ] J class, so actually improving the locus on the aircraft and bringing on preferred seating, preferred economy and J class. Aeroplan is another great example of where we can continue to improve the yield profile of our customers. So across the airline, we're seeing opportunities to accelerate revenues and to provide even more value. And with that, we're getting pricing.

Yes. SP1 And on premium, you mentioned, so that represents now roughly what, like 30% of your passenger revenue and obviously continues to grow at a pretty healthy rate. To what extent do you view premium demand as structural? Or is there some cyclicality to it where we should be mindful of going forward?

I think that -- I think travelers have reprioritized travel. And also, the -- we do cater to our customers, corporate as an example, travelers who have the ability to travel later in the season and prefer a premium experience. So we're seeing a lot of so, whether retirees or younger travelers who have privileged experience. We see that through our Aeroplan program, we see that in lounge the traffic. We see that in our load factors remain very high. So even all parts of the cabin, but business cloud sold out most often. The sixth freedom traffic also contributes to that, some higher affluent travel that actually fills up our planes as we bring in that to freedom traffic. We believe that to be a structural evolution of travel. And we have, I think, done a good job of securing that certainly on the corporate side and certainly on the premium traveler.

Yes. And maybe switching to transborder. Earlier this year, you described that as fairly stable, albeit maybe still below levels in February of '25. As I mentioned in my opening remarks, this is one area of added volatility for you guys. What are you seeing today across Canada, U.S. travel patterns? How are you responding to that?

So it's interesting. So just to take a quick minute here. So in -- I think it was April of '25, we definitely saw a correction in Canadians going to the U.S., probably down 20%, maybe a little bit more than 20%. That stabilized. It gave us an opportunity to redeploy some capacity, we did. We deployed some of that capacity to the Caribbean. So Canadians continue to travel. The demand didn't shift but the preference to travel to the Korean as well as Central Latin America. So we opened up our network further redeploying some of the capacity. We didn't stop any destination, just frequencies engage. And today, 12, 18 months later, we have some attributes from transborder that are very specific to Air Canada that actually have put us in a net better position. And I'll explain. Corporate travel between Western Canada, we have the biggest market share, and we are Corporate Canada's airline. So from that point of view, that's a -- that traffic has grown and continues to be active. The biggest reduction came from leisure and specific markets, Orlando, Las Vegas, Arizona, and as a result, some of the strength from corporate as adds traffic, where others have retention and have taken out capacity. So that gives us more share. We also -- we've continued to grow our sixth freedom traffic. And that extreme traffic isn't unique to Air Canada. We're connecting airline. And as a result, those American travelers coming through Canada have continued to add load and has allowed us to continue to fill our planes. So by and large, today with less capacity to deploy transborder, and our capacity adjusted but largely in place, we come out with some yield strength. And it hasn't moved back up, but it has not moved down either. So at this point in time, we think we have the right strategy. And net-net, I think we've done well.

I think 1 other interesting thing to add there is when we redeployed a lot of the capacity down to Lat Am, we actually saw countercyclical fixed freedom flows of Europeans traveling down to Lat Am, in addition -- or European traveling mostly to the Caribbean and LatAm traveling over to Europe. So it also helped us in that regard as well. .

Certainly a unique feature of your business and One thing that we repeatedly heard yesterday as part of some of the preceding conversations that the differentiated products, unique net [indiscernible] attributes and premium offerings are obviously, in addition to fuel, are increasingly driving pricing power, and it's not just fuel pass-through, are you seeing some of this? And is there anything structurally different about the industry today from your perspective relative to, I don't know, previous periods?

Well, I think if you just look at our load factors, our low factors in our traffic are at least 2 to 3 points ahead of last year, and this is after we've increased our fares 20% to offset the price of fuel. So we're really seeing gains across each and every heart of the cabin. And because we have invested to your point in the segmentation of not only our product, but also the offerings we have. We recently launched the premium basic offering, which is basically a no-frills premium new offering that will allow really that customer to switch up into higher-yielding product for us, but also a better product for them. So I think we're finding new and innovative ways to find incremental margin that's just outside of the cabin.

And I'm glad you mentioned the basic offering because we do hear a lot about premium demand and how premium tends to be the healthiest part of the demand environment across the industry. But -- is there a risk that we may be extrapolating from the -- effectively the strongest customer segment while maybe overlooking some potential softness with the most kind of basic fare? Are you seeing any of that? Or you see strength across the kind of [indiscernible] tiers?

Well, as I mentioned, our load factors and our traffic across the cabin and across all of our services are ahead of last year after we've increased our fares, after we've passed through along the surge fuel of. So we haven't necessarily seen that. And because we've invested in that segmentation, it's not just sort of your basic, but we've also invested in preferred seating, which has more seat pitch in addition to the premium economy and the premium. We have been able to, I wouldn't say match our competitors in the back of the cabin, but maintain a premium above them. And yes, we're still seeing traffic through the rest of the year.

And what's interesting is the traffic numbers. if you think about the kind of environment that we're in, you would have thought that there would be a little bit of demand destruction, but we're seeing probably mid-single-digit traffic growth year-over-year. And that alone sort of speaks to the more broad-based demand on traffic on travel, I should say. And so it gives us confidence that, yes, of course, premium cabin is working well. But when load factors are close to 90% and year-over-year, you're growing 5 points or so of traffic. It's obviously giving us confidence that there's room to grow some.

And I think one more point to add is just in our 2 core markets, we really do have sort of a unique and differentiated products. So even in Canada and domestic, we are a network carrier invested in our hubs, and we have scale in our house. We have more than 50% of the departing seats out of Montreal, Toronto and Vancouver, and we really are a network carrier versus simply a point-to-point carrier. [indiscernible] We do truly offer something different to the customers that we serve.

Yes. And obviously, these hubs really underpin your sixth freedom strategy and revenue has posted a pretty healthy growth on sixth freedom as this becomes an increasingly component of the story and the business scales further, how do you balance network growth versus any potential risk of your dilution as you plan for your network of the future and you take more aircraft deliveries, and there's obviously quite a few in the years to come.

Maybe I'll take that step back. So when we laid out new frontiers, which included these growth components, right, and we talked about $105 billion ASMs growing to $130 billion ASMs and getting us to a $30 billion P&L top line. Behind that was actually -- it was structural demand that we're planning on. So it's not necessarily chasing market share or chasing cyclical growth. It's structural. And what I mean by that is, in very simple terms, the growth trajectory for Air Canada is built on Canadian demographics over the last 10, 15 years have changed significantly. $30-odd million is over 42 million people today. Distribution of immigration fits very well into our network strategy. So North Africa, Middle East, South Asia, that has India. All of that is contributing to the demographic change in Canada, and those franchises grow 3, 4x GDP on an annual basis in terms of traffic. So number one, -- and this -- I talked to that in relation to kind of giving up yield. You're actually growing with something is growing as fast, if not faster than you are. Sixth freedom is very interesting as well. When you think about 2/3 of U.S. outbound international traffic fly through the big 3 as they should. 1/3 is across all the other global carriers. And when you look at that and you [indiscernible], you see 3% to 5% share per carrier. We sit at about 1%. We believe our solution is incredible value proposition to customers in secondary U.S. cities that might travel from a secondary city to an international hub. For example, it's in Europe and Land in Paris to arrive at 7 in the morning, maybe go through the terminal, take a flight at 11:30 and we had found destination at 1:00, 2:00 in the afternoon rather than that same passenger taking a 2:20 from Cincinnati to Montreal and from Montreal to Athens, Lisbon, Vienna a whole host of cities that you might be in that you need a connection for, but you can wake up where you need to be. So that flow of traffic when you think about our objective is to go from 1% of U.S. outbound traffic to 2%. There's 350 million Americans, 1% is about $3.5 million on a population of about 40 million Canadians. That's an expansion of addressable market of 10%. And offering a better solution. So then again, not necessarily competing but offering a better product, where in you transit 6:00 p.m., you don't a flight at 8:00, and you're here at 7:00 in the morning, and you're done. And then finally, during the pandemic, we had to retrench quite a bit. So corporate, some domestic, we've restrained back to our hubs. We didn't have the aircraft and the capability to take back some of our normal market share in Canada. And with the addition of the 737s, 220s, that will give us more bandwidth and the ability to kind of take back some of our domestic and corporate share there. So in all 3 of those, we actually and we're adding premium cabin content as we do that alongside of other segmentation strategies. So the combination of all this, we actually don't believe that our growth will compete with yield. Of course, we'll have to manage that, and we're aware of it. But we believe that rather the growth will expand the top line, contribute to absolute earnings. The growth will contribute to unit cost efficiency that should contribute to margin expansion. And the type of growth, including premiumization, including some of the corporate, including some of the sixth Freedom and the international travel should add some revenue strength in yield as well. And then the combination of those would be the margin expansionary. So I think we're focused on the right kind of growth.

Yes. I think the mathematics behind the passenger growth that you just laid out is quite compelling, frankly. Maybe frame for us a little bit your primary competition for that type of passenger flow and besides the more convenient slots and departures, what are the competitive advantages you're investing in to effectively appeal to that consumer better than whatever you're competing with?