Air Canada (AC) Earnings Call Transcript & Summary

Let's keep the ball rolling. Mark and I put a lot of effort into trying to time our conference in a way that does afford the carriers a logical opportunity to address how they're coming on the first quarter. This conference is noteworthy to us internally for so many reasons. But one of them, unfortunately, is that not only 1 but 2 airlines, Alaska, now Air Canada, have Investor Days planned within the next 2 weeks -- or 2.5 weeks in Air Canada's case. So hopefully, that doesn't limit the level of disclosure that you're willing to share with us. But I am happy to offer the stage to Amos Kazzaz, who's a former United executive. I think that's where we first came across one another, current EVP and CFO of Air Canada. So let me turn the stage over to you, and I apologize for our awkward timing. I really wasn't anticipating your Investor Day.

Thanks, Jamie. Yes, I'll try not to get ahead of my skis. So sorry, not be able to talk a lot about things, but we do have an Investor Day end of March. So maybe we'll see some of the folks out there. So anyway, good afternoon, everyone. I hope everyone is well. It's a long day. So I know we're just sort of wrapping up. I think almost second on the list here. So I think there's one more after me or maybe 2. But again, Jamie, thank you for inviting us. It's always -- it's a pleasure to be out here, and this is our first live in-person conference. So again, it's wonderful to see actually people. We've sort of -- we had a good morning of investor meetings. And again, it was good to see everyone. So before we get started, it's the typical obligatory safe harbor slide. So here it is for those who can speed read and read about 8-point font. I think you got it there, but it's a lot of forward-looking information here that may come out. So I'm going to first start and tie out to -- here, it is in front of me, our highlights from -- we had a very strong fourth quarter finish to the year. First positive EBITDA in 7 quarters since the start of the pandemic. Operating revenues are a little over 3x Q4 of 2020. And we ended the year with record unrestricted liquidity of just under $10.4 billion, an increase of $2.3 billion from the start of the year. We're finally seeing the recovery take hold with the easing of travel restrictions announced by the government of Canada in mid-February. As you can see here on these 3 charts here are seat miles, passenger miles and operating revenues. We are rebuilding our global network with growth in all services, where we see strong demand with the exception of China, and we've actually also returned to Australia after 20 months. VFR and leisure traffic continues to lead the recovery with resilience in traffic from small and midsized companies. Corporate travel continues to lag and has moved to the right, pending return-to-office policies. And just one other note, sort of topical on Ukraine. We certainly are watching the situation closely. But keep in mind, we don't fly to Russia, Ukraine or Belarus. We are participating, however, in humanitarian efforts and have extended our support to those involved. Cargo has been a bright spot, producing just under $1.5 billion in revenue in 2021, a record for us. We've actually never exceeded $1 billion in revenue, in cargo revenue. So clearly, a testament to the cargo team and the nimbleness of taking advantage of an opportunity there. Last year, as a result of all of the activity we saw in building in commerce and freight, we took a decision to return to the dedicated freighter business by converting 8 of our own 767s to freighters after retiring them from Rouge. Our first freighter entered service in December, and it was first put into service in helping the BC floods in December. And then it went into service -- commercial service, serving the South American routes. We should expect -- we're planning on having 3 more by year-end. We also launched a small package service called Rivo by partnering with first- and last-mile providers. And clearly, from our perspective, the Cargo business helps diversify revenue and for us also helps offset seasonality. Our new Aeroplan program was finally unleashed. After acquiring the program from Aimia, we spent a couple of years researching and designing a new world-class loyalty program and a new technology platform to underpin it. Unfortunately, the new program launch was in November of 2020, coincided with the depths of the pandemic. So really not much in terms of large efforts of marketing the product at the time. But the foundation was established and in 2021, we brought on new partnerships to make the program relevant in members' everyday lives. And you see here, everything from Starbucks to Uber. And you may not be familiar with what LCBO is, that's the Liquor Control Board of Ontario. So for those Canadians here, it's become a great stop here and probably, one of our biggest successes is LCBO. We added 1.2 million members, more than in prior years before the launch, and gross billings now are above 2019 levels. Cost discipline is a continuous effort throughout the company. We have long-term labor agreements that provide cost stability and certainty. Given the significant changes in capacity, we have seen, CASM and our adjusted-CASM number of variances are not as meaningful at this time. However, we're seeing the leverage on operating efficiencies in adjusted-CASM numbers. And again, we'll provide more details as we -- in a couple of weeks at Investor Day. I would venture to say that fuel price has been probably the hot topic of today's conference and has been top of mind from all questions and such. And clearly, yes, as fuel price, it does pose some uncertainty, but it can be managed. And we've seen that we can manage this through the industry. I mean, certainly, there are tools in our quiver, if you will. First, it's really been through pricing actions across the spectrum of fares and ancillary products. And given the shorter time frame that we've seen now in terms of the booking curve where it's much tighter and closer in, we get a more immediate benefit of pricing actions than perhaps before when we had a longer booking curve. Second, we've made certainly -- continue to focus on cost-reduction efforts. And then more importantly, we've transitioned quicker into our new more fuel-efficient fleet, the A220s, the MAXs. So that certainly is helping offset sort of what we were flying before in terms of less fuel-efficient aircraft. Third, we have, obviously, capacity management tools. And finally, to a certain extent, foreign exchange provides some natural offsets. Here is a snapshot of our current operating fleet of 337 aircraft and firm orders that are reflected in the CapEx table on the right. One of the 787s will be delivered in 2022, the other 2 in 2023. Six of the A220s will be delivered in 2022, and the 12 remaining will be delivered in '24 and '25. And hopefully, by the end of the second quarter, we're planning to receive the balance of the MAXs that we've not yet taken delivery of. As I alluded to earlier, we are rebuilding the network. We have 7 new destinations we've launched from our 3 hubs in Canada. We're restoring service to all of the 41 North American routes, offering more seats and frequencies of any Canadian carrier. And actually, we'll reach 90% of pre-pandemic North American capacity. And in the international markets, we'll still have the most extensive schedule from Canada to all of the -- to global destinations. Turning to ESG. Air Canada has established a foundation of social purpose, which contributes to a purpose-driven strategy. This foundation is also a blueprint for Air Canada's Corporate Sustainability Report. With this, Air Canada takes an integrated approach to initiatives, using its assets and expertise to deliver shared value for both the business and for society. Last March, we released our new climate action plan that includes ambitious milestone to achieve our long-term goal of net zero emissions by 2050. In defining the pathway, we've set out 2030 goals, midterm greenhouse gas reduction targets: the 20% reduction in greenhouse gas from our air operations by 2030 compared to our 2019 baseline and a 30% reduction in greenhouse gas emissions from our ground operations by 2030, again, compared to our 2019 baseline. We have targeted a $50 million investment fund in sustainable aviation fuels as well as in carbon reductions and removals. Regarding diversity and inclusion, the Board has established its objectives that women represent at least 40% of the directors of Air Canada by 2025. The Board also takes other dimensions of diversity into account in the process of selecting individual candidates. Through its ongoing renewal, it's a Board aspiration that its composition will reflect the changing population demographics of Canada, recognizing the diversity of the customers and employees of Air Canada. Air Canada is Parity-certified with women in governance and is a member of the 30% club and signatory to the Catalyst Accord 2022, whose objective is to increase the average percentage of women on boards and in executive positions in corporate Canada to 30% or greater by 2022. In addition, we're a signatory to the Black North Initiative CEO Pledge, which recognizes the need to create opportunities and foster inclusiveness for black people and leaders in Canada. As part of the pledge, Air Canada committed to have at least 3.5% of its Board and executive roles being held by black leaders in 2025. Our ESG goals and achievements are reported through our Corporate Sustainability Report Citizens of the World in accordance with the global reporting initiatives or otherwise known as the GRI standards. We're continuously maintaining transparency and accountability. 10 performance indicators, including Scope 1 and 2 greenhouse gas emissions are verified by an independent external party, following internationally recognized standards. We are also committed to pursuing sustainable development goals of and we are also signatory to the UN Global Compact. Air Canada supports all 17 sustainable development goals. We will be publishing our task force on climate-related financial disclosures or TCFD report, and we expect to issue that report, again SASB standards as well, in the coming months. And finally, as we move along. As Air Canada embarks on the recovery and rebuilding of our network, we have adopted 4 new pillars that refresh our pillars that we had before that support now our strategy, what we're calling Rise Higher: one is to fund our future by staying vigilant on costs, seizing opportunities and making the right strategic investments; two, reaching new frontiers by embracing our competitive strengths to grow the business and expanding our international reach and continually exploring new opportunities; three, elevate our customers and support the creation of meaningful customer experiences and human connections by leveraging innovations in technology, loyalty and products; and four, lift each other up, if you will, by fostering a collaborative workplace that respects diverse cultures and languages while making impactful contributions to society. Our strategy to Rise Higher will build upon and leverage our many competitive advantages, including our people and culture, our powerful brand, our fleet, modern fuel-efficient and versatile fleet and our global network, alliance and JVs; planning on improving our customers' experience enhanced by our competitive products and services, including now the fully transformed Aeroplan program. We have Rouge, our own -- our low-cost leisure carrier. We have a growing cargo offering. We have new core technologies and technological improvements and, finally, our sustainment -- our commitment to sustainability. And with that, I will open it up for questions.

So I have a question on the cargo business. Because several airlines obviously experimented with backfilling capacity and taking advantage of cargo demand when revenue passengers were comparatively few and far between. But you're one of the few -- in fact, I believe the only one that I can think of, but enlighten me if I'm mistaken, that has decided to reenter the dedicated cargo space. And frankly, I'm surprised that others aren't experimenting with that. And a question that I get from your shareholders and prospective shareholders is if this is such a good idea, why is only Air Canada doing it? So what gives you that -- is it as simple as you had the right type of aircraft coming out of Rouge? I mean what do you see -- and I know you can't speak for your competitors, but you're doing something that is unique. And I'm just wondering what went into that thought process, that decision-making.

It's a good question, Jamie, because we do get that often, why are we sort of using this? Just not seeing taking advantage of just the interim dislocations, but actually returning to the business because Air Canada had been in the dedicated freighter business and then exited. And so I guess part of it is the fact that we've been flying cargo for a long time. We've taken on now 37 787s and we have the 777s. Every time we launched a new market, essentially a new international market, it was -- we have belly space to fill up with cargo and we established really strong relationship with basically the freight forwarders who control really probably about 80% of the cargo business. So we had a strong foundation. We had connections on the revenue side, if you will, and partners on there. And then we began thinking, okay, this is a growing business. We saw that, not just -- it's not just going to be dislocated. So is there opportunity for us to actually to get back into this? So to your point, we have essentially low cost of ownership to get into it with the 787s. And then one of the other things that sort of kept us back was a different operating cost model with the pilots to fly it. So we went back, spoke with ACPA with our pilot union and got additional -- got a change in terms of the compensation rate for flying the 767 freighters. So we sort of put that together, the fact that we've got strong relationships on the freight forwarder side of the business. We have a low cost of ownership to get started in this that, fundamentally, it sort of felt natural. And then on top of that, we had already built out now the infrastructure. We had warehouse space. We have scanning. We have the ramp employees and equipment. So it was really just taking advantage of the infrastructure investments we already had and said it's really a small incremental investment. The conversion of a freighter passenger into a freighter is relatively low. And so again, from that perspective, we saw it made sense. And yes, I think the perspective is right now, there certainly is certainly a higher yield environment, stronger pricing, given the dislocations. But we didn't get in that just specifically because we see this as a long term. We view that yields in the cargo side will return back to historical levels. And even then, the business case really makes sense. And so we took that forward and convinced the Board, and this is sort of where we're moving. And we are fortunate to get some early slots in the conversion because now that's one of the more difficult pieces of that.

Amos, it's Mark Streeter here. So at the upcoming Investor Day, are you and Mike and the management team -- are you going to be in a position, given where the recovery is, to give the level of detail on balance sheet targets and leverage targets that you traditionally had given? Because Air Canada was always very specific. You had very specific goals, which also at the time you met early, which was one thing I really liked about your story. Should we expect those at the end of the month?

So not getting ahead of myself, yes, you should expect that because that -- for us, Mark, the issue had been is Canada was locked down. And I know it was difficult for everyone that was asking questions. What's your guidance? What are you guys going to do? And we had the North American carriers, U.S. carriers providing guidance and perhaps sometimes getting a little ahead of themselves, but we really didn't see that pathway. So as then restrictions eased, Canada opened up, then we got a better sense of where the recovery was coming in and gave us far more confidence to say, all right, it's time to put out our perspective on the next couple of years, 3 years and get back to where we were before of providing, again, those targets, metrics of how we measure what we would do because it is fundamentally key if we want to, again, provide some shareholder value. So here is a story, here's how we see it, here's how the recovery will play out.

Okay. And then I'm going to ask a 3-part balance sheet question, but I want to break it down into each part individually. So number one, the use of routes/slots/gates financing, you've relied on that market historically. You haven't been able yet really to do a loyalty deal, a U.S.-type loyalty deal because there was tax issues and so forth. And just sort of wondering when you think about sort of the composition of the balance sheet? We've been asking all the airlines this as you're coming out of the pandemic now and thinking about how the balance sheet might evolve going forward. How should we think about whether you need to do something with loyalty? Or do you end up keeping route/slots/gates type financing outstanding? Do you shift to more unsecured over time?

Good question. All right. So let me take that sort of first part here. From a perspective of liquidity, we're in very good liquidity. We ended the year, as you saw on the slide, almost $10.4 billion, $9.4 billion in cash and $1 billion in revolvers. And when we sort of looked at the Aeroplan program, it was initially securing the government financing -- secured side of the government financing, but we exited that in November. So it's unencumbered. And given our liquidity position, there really is no need, if you will, to tap into that. We have a large, unencumbered asset pool. So when I look at our balance sheet, we pride ourselves in maintaining a conservative balance sheet. We came into the pandemic with about a notch away from investment-grade credit rating, a good portion of liquidity there. And that served us well in going through the pandemic and helped to sort of maneuver because at the end of the day, the government of Canada wasn't there for us unlike other countries, G20 countries, G7 countries here across -- here in the U.S. that provided material support to the carriers. So that in itself basically forced us to start taking more draconian action, getting our house in order, if you will, to the sized-down airline to be able to reduce costs and then look at the recovery of how we're going to come out stronger on the other end. So we'll continue to manage the balance sheet carefully here conservatively. We managed not to overburden the balance sheet during the pandemic by raising about -- look at our raises, about 2/3 was in debt and 1/3 in capital. I know it did obviously cause some consternation, some shareholders, diluted shareholders. But at the end of the day, it was important for us in terms of keeping that so that we do focus then on leverage. We look at again getting back on that right stream there of supporting it. So long sort of story is we'll leave the Aeroplan as just another unencumbered asset to us that, in a worst-case scenario is there for us. We have other unencumbered assets, a pool of which we could tap into. But right now, really in good position to -- as we look forward to delevering the balance sheet.

And the routes/slots/gates -- bonds, keep those outstanding?

Keep those outstanding.

Okay. And it's really only a 2-part question, not a 3-part question because the second part is really related to fleet. And obviously, you've had export credit options on 220s, for example. You've done EETCs. You've got operating lessors, I'm sure, knocking on your door. How are you just sort of thinking about how you're going to fund your deliveries going forward? And do you see any sort of evolution there in terms of your approach to funding aircraft and CapEx on that side?

So right now, given the strong liquidity position that we're in as -- sort of as a first step of delevering, we're essentially been paying cash or using cash to pay for the MAXs that we delivered at the end of Q4, and then we're planning for all of our MAX deliveries this year, for those 9 to be basically used cash to pay for those and thinking of that as also for the 787 deliveries as we look ahead. The 6 A220s that we'll take this year will be financed through EDC. The other 12 that are in '24, '25, haven't yet made any decision on those. So at this point, we will not add additional debt to the balance sheet and use cash, if you will, to help part of our delevering story.

You recently bought your warrants back from the government. Can you talk a little bit about the timing of it? And it looked like you imputed a fairly large time value to the warrants. How did you end up valuing and reaching a decision with the government?

So it was -- we were carrying those warrants. So just to back up, those warrants were part of the financing with the government of which we had a call right on the unvested warrants. And they were carried on the balance sheet in the third quarter at $82 million, which is really the fair market value. I can't go through the math on the Black-Scholes model, but that's essentially where we got to that -- where that was being carried on the balance sheet. We had discussions with the government, negotiations around that. There was a process that we went through in the end with evaluators on both sides; and at the end, came to the right place, which is pretty much what we were carrying at, about $82 million was what we use them to essentially purchase and cancel those warrants. So again, sort of helping to -- again, take stock off and not dilute shareholders anymore.

Can you go through the -- what you think your strengths and weaknesses are versus WestJet? Where you think you're really good versus them, where maybe they're better than you in other ways?

Okay. Well, I guess you can sort of start with -- we'll start with the hard assets with the, if you will, our hard spec. And we have award-winning products in terms of airplanes, configurations, international, 777, 787s, MAXs, 220s. Again, efficient, low-cost airplanes. And I think at the end of the day, yes, WestJet has 787s and MAXs. But it's at the end of the day what the network drives. So we have a global spanning network. We have a feed structure from our regionals to ourselves as we feed our Sixth Freedom strategy that really helps drive and support the international markets. Distribution, point-of-sale distribution strength across Canada, Europe, again stronger than WestJet. Employees, I think we both have good employees that are dedicated. We have award-winning employees, and I think we've won probably more awards than perhaps they have. And then as you look at it as the technology investments that we've been making, so we have a series of products that compete well. It's the network, it's our distribution strategy and it's the talent of our team.

Going back to fuel -- rising fuel prices and higher costs and your ability to get that back via higher pricing. How quickly, if at all, do you think you'll be able to recover 100% of rising fuel costs? And how do you think your customer is positioned to respond to higher pricing?

Well, fuel has been an interesting story to watch, right? If we would have had spoken about this last week, we would have been talking about $130 a barrel price, and now we're back down to $100 or under $100 depending on if you're looking at Brent or WTI. But needless to say, when fuel price was increasing, we -- the revenue management team immediately took action. And we took fair actions across pretty much all of the fares, all of the regions that we serve from Europe, transborder, domestic, and we didn't see any impact on demand whatsoever. So from our perspective, demand has been resilient, working through the process. And again, coming back to my earlier comment of the shorter booking curve, we see the ability to recover much quicker than we had in the past.

I had a question on how no longer overflying Russia impacts your India and China flying and your transpacific franchise going forward as we enter an international recovery?

Yes. So the immediate reaction to that, this shutdown of airspace, both Canada, Canada shut down airspace, Russia said it shut down airspace to Canadian traffic, was to put a tech stop in over Dublin to be able to fly to Delhi. And then on our Pacific flying, it was just routed down at another 200 to 300 nautical miles. The same was pretty much the tech stop in Dublin, although it was a little bit more of a -- added a little bit more in terms of crew costs because we have to stage crews there. Now going forward, when we turn to our next schedule. In April, we've been able to sort of reallocate aircraft such that we can now manage to fly it nonstop again, but it adds maybe 200 to 300 nautical miles, both either going to Delhi or going to Seoul or anywhere sort of in Asia as part of our franchise. So it's not material at the end of the day in scheme of things. So that's how we've managed through that.

Amos, when I've thought about what it takes for ultra-low-cost carriers to succeed, high aircraft utilization, really large population centers, density, the proximity amongst those or between those population centers. And that's just not really Canada with the exception of Toronto or Montreal. So I'm surprised that we are seeing such robust startup efforts. What do you attribute that to?

Easy money because I think...

Because times aren't easy and aircraft aren't necessarily easy. You just think it's abundant capital.

I think it's abundant capital. I think that we saw it of quantitative easing QE and sort of all of central bank actions that essentially, lots of liquidity. And unfortunately, where also, either to their credit or not, lots of aircraft available from aircraft from either airlines that were going under. So repossessed aircraft, and now I've got some more -- some customer to put it off, to put it into service with. And so I think that's sort of been the part of the mystery, if you will, of why we see that coming in. Now I think to your point, Jamie, it's really spot on. There aren't the underlying requirements to make ULC successful in Canada, and that's why the landscape is somewhat littered with them with startups in that, as you said, the population density, but the other thing is secondary airports. There's maybe 1 or 2, maybe 2 or 3 secondary airports, whereas in the U.S. or Europe or Asia, plenty of secondary airports. And the other item that I want to add in on that is the high infrastructure cost. Canada is not a cheap place to operate in, which is why you see also higher yields, et cetera. So -- at the end of the day, when you put in all those factors, it sometimes leaves your head -- scratching your head, leave yourself scratching your head.

On that last point about high infrastructure costs, and you sort of referred earlier to the government being late to the table to step up to help Air Canada. Is there any sort of post-mortem dialogue, if you will, with the government about the process and how other jurisdictions, countries were quicker to come to the table? And how -- clearly, the cost to operate in Canada is higher than, say, in the United States, for example. Just wondering if something constructive can come out of this, which maybe changes that going forward? Or is it just not something you're engaged with right now?

Yes, I'd have to say, Mark, that it's not something we're engaged with. It was -- believe me, it was a very long process. From the start of the pandemic, you go back to March 2020 to -- we didn't finally engage with the government until December of 2020. And it took us all the way to April to conclude, April of '21. And by the time we concluded, it was like, okay, the world is beginning to return to sort of normal. It's just -- it was not top of mind. And it was it was sad, I think, from that perspective of the damage that had been done to hospitality, travel, tourism throughout Canada. Left, again, surprised, but that was their policy. And thankfully, they did step up at the end, and we certainly are grateful for that and grateful for stepping into supporting and easing of travel restrictions. But from the perspective of going forward, no, we really have not had any dialogue. And we hope the recovery will hold, and we always will look to ourselves to be able to manage through any crisis.

And on loyalty with Aeroplan, and obviously, you have the new Chase Card, which you highlighted in your deck there in the U.S., have you been able to benchmark where you stand in terms of loyalty economics versus, say, where Delta is with American Express? Or where American is with Citi and Barclays? Or down the line of your sort of North American peers, for example? I'm just sort of wondering where -- how much further growth and upside is there in loyalty for Air Canada versus these other programs, which are maybe more maxed out.

Yes. I think for us, we are delayed by 2 years. And back in our 2019 Investor Day, we sort of talked about what the value of the Aeroplan program would be over a 10-year term. There is nothing from that, that I would say that takes us off of that. You'll hear more about it at the end of the month. But I think for us, there certainly is upside where finally our -- the program is launched, it's growing. And all the things that we said we wanted to do, we can now finally do. And it's playing really a very important part as part of our recovery of being able to -- we didn't have the data before. We didn't have that relationship with the customer. So now we actually have the data. We have built that relationship, especially during the portion of the pandemic when nobody could fly. So we want to still stay engaged with customers and build that engagement, and having that data enabled us to do that. And do nonflying offerings and redemptions and also certainly is going to be a key part of our recovery.

What are the terms of the EDC financing? What are your plans for taking out that EDC financing at some point in the markets? And do you see the EDC financing as a source of financing aircraft going forward?

I'll start with the last part. Sort of EDC is available to us relative to more to Canadian content, if you will, so the A220s. But again, we haven't made any decisions relative to the last 12, and these 6 are going to be part of the other -- the EDC financing that's already in place. As far as the terms, I can't get into that detail and disclose that. But they're clearly on good terms, as you would expect, under the Export Development Bank of Canada.

So 2024, pick your financial metric. I tend to gravitate towards pretax margins, but it could be EBITDA. 2024 relative to 2019, higher, lower and why?

That's going to be the mystery. You're going to have to wait 2.5 weeks here, Jamie, so then we'll get forward into guidance. But nice try.

All right. All right. Well, with that, thank you very much.

Thank you very much.

Thank you.