Air Canada (AC) Earnings Call Transcript & Summary

Great. So we'll get started. I'm Wiley Griffiths. I helped run our Transportation Investment Banking business. So we're giving Ravi a break, but we're still on the topic of airlines. So with me is Amos Kazzaz. He is the Executive Vice President and CFO of Air Canada. And pleased to have you here. So thanks for coming over. I know it's a rough place to be.

This is like a nightmare, but I'll take this any day. It's so lovely to look out and watch the surfers out there, wish actually we could go out and roll in the wave a little bit there.

I've done this conference a few times. I still think there's people out there surfing in the morning who actually go to work after that. So if you can incorporate that, I think you're doing something right. That will be my next -- that will be 2023 for me.

So thanks for having us out here. And it's always great to be out being able to tell the Air Canada story.

Well, with that, maybe just to level set, why don't you kind of give the audience and the listeners a sense of just Air Canada at a high level as an airline, how would you describe it?

So Air Canada is actually, as of last week, celebrated its 85th anniversary. So a long-time carrier, which we would say is certainly the largest carrier in Canada, large franchise, large network, strong brand, worldwide reach, large Atlantic Pacific, South America, Caribbean and North America franchise. Part of the Star Alliance. So certainly, we're part of the founding members and Star celebrated its 25th anniversary. A modern, efficient fleet made up of very efficient MAXs, A220s, family of A321s. We have a product within a product, an airline with an airline, Rouge, which is a lower-cost leisure carrier focused on sun and leisure destinations. And then we have mainline products and very strong lounges, signature programs, concierge services. So both catering to high end and to the low end, leisure end of the business.

As a Canadian, I know all that, but we've had a lot of U.S. airlines in here, so just wanted to level set. Maybe just, again, kind of we're speaking of airlines, it's been yes, it's been an interesting couple of years to say the least. What -- as you think about Air Canada's progression or maybe evolution through the pandemic in 2019, kind of where are you in that progression?

It was sadly, as you know, from Canada, Canada was locked down for nearly 2 years. And so our recovery, our grow back is certainly slower than we've seen here in the States from other U.S. carriers. We started -- if you look at 2021 activity, for the full year, we're going to be up 150% from 2021, but that's only will be 74% of 2019 capacity. If we look at third quarter, we'll be at about roughly almost 80% of 2019 activity. So certainly, it's been a slower buildup for Canada, again, given the lockdown. If you throw out the first quarter, essentially, we're beginning to ramp back up. And it's -- we're still probably 6 months behind U.S. carriers in terms of recovery, I would say, from 2019 levels.

Okay. One of the strategic initiatives during the pandemic was rise higher. How would you describe that to the audience? I got a sense of it when you did the Investor Day earlier in the year, but how would you summarize that?

So what's higher for us is really elevating the business. And elevate the business in 4 probably key pillars dimensions, which we pivoted from what we had in '20 -- from the last decade of 4 key pillars, which was cost and revenue transformation. We had international expansion, customer engagement and culture change. And now what we've done is, we've taken all those dimensions, those pillars and have developed measures, processes, standards to take us really into that next level of performance. And the first one is fund our future. So for us funding our future is building a more profitable, cost-effective and sustainable business. Second one is reaching new frontiers. So it's leveraging our competitive strengths, expanding our international reach and for extending our network coverage and driving new revenue opportunities. Third dimension is elevate our customers. So I think as a customer, how do I elevate that. And it's basically setting up our teams to be able to provide superior service across the network. And we've made investments into -- in technology, innovation, loyalty, products and all those will come together in terms of being able to deliver superior service to our customers. We'd before focused on the hard spec, but now there's also the soft dimension to that. And the last one is lift each other up. And lifting each other up really builds on the foundation of Air Canada having the best employees in North America and in Canada as measured by Skytrax and building out that collaborative, inclusive, diverse culture that we have and elevating that even further to support each other in that whole process. And it's that culture that really got us through the pandemic and it's that culture that will propel us out of the pandemic in our recovery.

Apart from rise higher, how has the pandemic -- I mean, I think the pandemic has shaped strategy for all the airlines in some way. There's been some lessons learned. There's been adaptations of either fleet strategy or mix or some of those have just been thrust upon the airline. How would you say Air Canada has reacted from a strategic perspective or a positioning perspective due to the pandemic?

I'd say the first largest impact that we had was really taking a look at the fleet. And there, we retired 79 aircraft, of which the largest segment of that was 25 767s and they were primarily in the Rouge configuration. We still had about 5 others so maybe 30 767s. But by taking those out and by retiring those aircraft, it then meant we had to serve secondary European cities in a different fashion. And how we've done that is so we've changed the network that we fly more hub to hub to our European hubs. And then from there, we connect on the Star partners to go into the secondary European cities. Then as part of that strategy, as we look through that, we saw the opportunity to get into the 321XLRs, which will deliver in the second half of this decade, starting second half of 2024. And those will end up complementing service into secondary Europe. Now along with that, we continue to sort of build on the relationships and alliances partners that we have. And then I would say the next element part of that would be the way that we looked at the network from a leisure perspective VFR traffic. And there we saw really opportunities to get into more specific destinations as we knew that leisure was going to lead the recovery out of the pandemic. We brought on markets such as Doha, Cairo into the network. And I would say that the last piece of that network change is China. We had a large China franchise, certainly China locked down. And so we pivoted to India. And India has become certainly a large market for us. It sort of replaced China, if you will. So much that we continue -- we're going to grow there into Mumbai and adding more into the VFR traffic, we're going to also launch into Bangkok. So the network all sort of changed around that, driven by changes in the fleet. And then I would say part of that, as we retire those older aircraft, we brought in essentially accelerated the renewal of the narrow-body fleet. So we have MAXs and A220. So a little bit smaller, more fuel-efficient, cost-efficient, lower greenhouse gas emission fleet. So all in all, that fleet network changes were really sort of core out of the strategy. And the last element I would say is relative to revenue diversification strategy and try to offset seasonality as we saw a very large opportunity with freighters, with cargo. And so we have launched really back into the dedicated freighter business. And that would probably say would round out sort of the strategic changes around fleet, network and then cargo.

Okay. That was comprehensive. So a lot of things to think about, obviously, but some changes that change the operating leverage going forward. Maybe just sticking with cargo. There's a lot of discussion about that, whether it's airlines, Amazon, freight business, where obviously you saw Atlas ownership change hands. What is Air Canada's view on kind of the cargo future? Is it coming off? Is that still a business that is a core part of the franchise? How do you think about that going forward?

So Cargo has always been a core part of the franchise, but we've served it primarily through the belly space and 787s and 777s really offered great opportunity there. As we expanded and grew the 787 fleet, we have 37 now, another 3 on order. Every time we launch a new market, we built another relationship with freight forwarders. And so for us, we've always seen cargo as a solid business. Now during the pandemic, we saw the opportunity is, cargo is growing, has continued to grow. And we said, well, what does it take to actually get back into this business? As we used to actually operate a dedicated freighter project, freighter program years ago, we said, well, let's talk to our pilots, see if we can get a better labor rate to fly cargo freighters. And we look -- again, we have a strong, a very strong team on the cargo side and saw this really as a dimension that will not stop growing. And so we made the pivot and jumped into it. Now I want to make sort of say, well, from the business case, there were very high yields. It was a very strong revenue environment during that time, during the COVID and during the pandemic and perhaps even now. But our business case really wasn't based on those high yields and that high revenue was really based on returning back to a normal environment. So we actually had opportunities here to step into a couple of new 767 freighters and a couple of new 777 freighters to round out Asia service. So by the end of 2024, we'll have 12 dedicated freighters. Again, we have the core infrastructure there. We've invested in cool chain. We have the resources and we'll continue to invest to make this say, to build out the business, but we view it as sort of long-term sustainable, good margin business for ourselves.

Tell me about -- so we've heard from only U.S. airlines over the last couple of days. Tell us about some of the structural differences between operating an airline in Canada versus the U.S. or just maybe operating in airline Canada, opportunities, challenges, how do you guys manage those?

Well, Canada is an interesting geography. When you look at Canada, it's actually larger than the United States from a territory perspective, but certainly from a population side, it's about 1/9 the size of the U.S. So it puts different challenges there from an opportunity. But because of that geography, actually, we have -- we're sort of blessed with great hubs in terms of our major hubs are in Toronto, Montreal, Vancouver. And since the world is round, and you look at sort of elapsed flying time that it's competitive with North American hubs in terms of serving Asia and Europe. So really, from a geographic perspective, Canada has -- we have well-positioned hubs to be able to flow traffic, not only from Canada, but then across the world to Asia and Europe. And Canada being a cosmopolitan multicultural country, there are opportunities really for immigration and all that really feed into the strength of the network. So I think for that, Canada for us, that's the opportunity ahead. And we continue to take advantage of that and by also bringing into this mix, the alliances, joint ventures, business partnerships to really round out and grow the network. Now the challenges in Canada we've had more specifically, and I'm delighted I didn't call it out per se, but the pandemic restart, given that Canada was closed down, the restart was not as smooth as it should have been. I think the other difficulty in operating in the Canadian environment is high infrastructure costs. So compared to the U.S., it's a very different model, higher user fees in terms of navigation, airports, tax base. So that makes a challenge of which we're always up to and work through those challenges.

Yes. You know it well at this point. I'll ask the question and don't hold it against me because Ravi has asked all the other airlines, so I got to keep a level playing field. But in managing an airline, there's no business as usual. Everything is no easy day, but there were a lot of disruptions to some of the operations in the summer, especially Pearson and Toronto, and that got a lot of media attention. My experience when I went through Pearson was fine, but I know that for others, there were issues. Where -- what caused that from your perspective, what did Air Canada do to mitigate it? And kind of where are we now in terms of operations?

Well, I'm glad you didn't start with that question, but I guess let's see if we can knock that one off. We're well beyond that. We're well past that. But what happened in June that really caused this -- Air Canada caused the airports to really be in the headline stories. And really, fundamentally, despite all the best planning efforts, we work -- look, to get basically from curbside onto the airplane and to your destination requires all the elements to work together. So whether it's the passenger security screening, CASA, whether it's customs and immigration, U.S./Canadian side, whether it's airports, you throw in NavCanada APC-wise and then all of the vendors, everything needs to work together seamlessly to make this happen. And we shared, we've planned well with all of the agencies and said, here's what the volumes are looking at and everybody has to ramp up. But let's say that the ramp-up was not as quick as it should have been. And the experience level of new hires wasn't there. So in June, you saw a bit of this meltdown and headline stories. But then since then, we made a change really at the very end of June, sort of the depth of the summer to pull down 154 departures out of Montreal and Toronto to ease the pressure on the system. So that went into effect in July. And then from there, we also rolled out new tools for customers to be able to self-book themselves, make changes, make it easier in terms of -- in terms of disruptions potentially in their journey. We extended connection times in our schedules. So we made those sort of structural changes into the July and schedules and beyond. And then basically, beginning in the second week in July, we saw improvements in operational performance, on-time, baggage [indiscernible] performance, cancellation reductions that really carried through week by week continue to improve, all the way into August and now into September, and we'll continue to improve through end of the year as experience level continues to build. We certainly did not expect this level of disruption that we saw to happen again or to continue into next year. So I think we're beyond that. Performance is vastly improved and I think there were a lot of lessons learned during this process. And to give you a little bit of sense of sort of numbers there, when you look at it, in the second quarter, this will reflect on how quick Canada came back. In the second quarter, we carried 9.1 million customers, transported them safely to destination that was 8 million more than the Q2 of 2021 and was basically 70% of 2021 capacity. So you can see it was a very quick ramp-up, but now we are in much better shape.

Yes. I mean that's an incredibly steep labor ramp. Maybe on that topic, do you view -- how is the return of labor been managed? How do you feel about your staffing complement to kind of satisfy the airline's capacity outlook?

So from a labor perspective, we are not facing the same pilot situation that's here in the U.S. We have sufficient pilots and other key members, flight attendants, mechanics and so forth. So from a labor perspective, we've been staffed up. And actually, during the course as we're going through the summer here, we were carrying basically 90% to 95% of our 2019 employees, but only operating about 80% of capacity. So we had flexed up for the startup. And as we go forward, we real don't see any labor shortages whatsoever and ability to operate our schedule as we continue to build back during the recovery.

Great. And then I guess with that, now that the summer is behind you, there were some disruption, labors more or less in place. How are the bookings looking as you kind of get into the fall season and into the holidays?

So bookings, as we say, are very good. We're very pleased with what we're seeing there. We continue to see strong demand into -- through here, through the end of Q3 and into Q4 and rolling actually also into Q1 of 2023. We're seeing also both on the leisure side continued sort of strength. And we're seeing some markets, in sun and leisure markets, bookings ahead of 2019 levels. So again, very strong demand. On the corporate side, we're beginning to see corporates beginning to come back as we expected them to do after post-Labor Day. Now that leisure has sort of fallen off. But again, a strong demand environment.

Great. And we've heard that from -- in the U.S., too. So nice to see consensus good news and what's kind of been a big question mark in terms of this part of the year. Maybe let's switch gears to the balance sheet. 1.5 years ago, 2 years ago, we were talking about fortress balance sheet, huge cash balances and it was in the context of survival. Now we're even getting into the conversation where is it cash on the balance sheet? Or should I be thinking about return of capital? How do you guys think about liquidity targets? Knowing -- understanding it's a moving target in today's environment. But how are you trying to develop targets or assess the balance sheet?

That's a good question. This industry has been through an awful lot. We went into the pandemic with one of the strongest balance sheets in the industry. We had -- we're about a notch away from investment-grade credit rating. We had a leverage ratio of under 1. And I think it was having that sort of liquidity level and that strength of balance sheet, which really carried us through the pandemic. And so as we look at liquidity now we think of the balance sheet again as we're going through the recovery process. To us maintaining strong liquidity is always going to be key. We always maintain a larger portion of cash on our balance sheet, primarily for that, for disruptions that may happen. So right now at the end of the second quarter, we had $10.5 billion of liquidity and set a target of $5 billion for liquidity, that $4 billion cash and $1 billion in revolver. So that leaves about obviously, a big bucket here of excess liquidity. And my focus in balance sheet is -- on the balance sheet is pretty much to delever and to fund our capital, fund our growth right now. So we've been purchasing the last MAXs, the MAX deliveries with cash, the 767 freighters with cash, which all really help towards at least not putting on additional debt onto the balance sheet. So it helps a little bit from a deleveraging in that standpoint. So for us, it's maintaining that sort of right balance of liquidity, which still provides us both offense and defensive tools. Defense for the calamities or what the disruptions may happen in the industry. And from an offensive nature, ability to step into the freighters, for example, to announce the delivery -- the order on A321XLRs. So it becomes really an ability to really invest in our future and delever. And those will be the #1 and #2 priorities as we look at liquidity.

So it sounds like -- I was going to ask about CapEx, but you answered it. It's excess cash going to be used primarily for the near-term order book. As you think about the order book more generally, and as you get out, is there enough cash to kind of fund the next couple of years of CapEx? Or how are you thinking about financing that?

Yes. No, there certainly is enough cash, we believe, to fund the next few years of CapEx. And certainly, as we return and recovery and produce stronger EBITDA and earnings, as we sort of targeted out to our Investor Day out to 2024, that should also be funding it. And so we'll look for opportunities to delever during that process. But that cash flow should also be coming from the operations.

Yes. Yes, it's a nice time to have cash given where spreads are going, and I'm sure those vendor financing rates are a little different than they were a year ago.

Yes, I'm glad I'm not in the market today looking for liquidity.

Yes. Let's talk a little bit about Aeroplan, Air Canada's loyalty plan. There's been a history to that, but how is that part of Air Canada and part of the strategy?

That's probably one of the best decisions we made was to bring it back in-house. It was -- we had this dysfunctional relationship. We had 3 parties involved here, but now that it's in-house, we actually get to have that engagement with the customer. We didn't have the customer data before. We weren't really able to market effectively to consumers, to our customers. And so right now from what we've put out in terms of our KPIs for Aeroplan, it's hitting really on all cylinders from a perspective of new members through the first, what we had done core to Aeroplan was to make it useful in people's everyday lives. So we brought on strong partners, such as Starbucks and Uber and Liquid Control Board of Ontario, to really sort of help drive that engagement. So we have, in the first half of the year, brought on 2 million new members into the program. Our -- and not only importantly bringing on new members is, we're actually engaged in retaining them and getting them involved in the program and flying. We've seen gross billings up 15% above 2019 levels in the second quarter. We've seen redemptions growing. So all in all, we couldn't be happier with Aeroplan. And the last element on it, it helps provide additional opportunities in terms of cabin and yield management of driving up, of getting better yields through Aeroplan and through, again, direct marketing to our customers.

Maybe I will just turn it to the audience. Any questions for Amos before I ask my final few?

You discussed a concern about WestJet gaining share in [indiscernible]. And you talk about WestJet, how they are [indiscernible].

Well, I never speak ill of our competitors. That's not a good place to be. And all I would say is, competitively, we watch what they're doing. We compete effectively with them through the strength of our products, our employees, our route network, our alliances, our joint ventures. So I think we're in a strong competitive position, and they're a good competitor.

Do you think the acquisitions to I guess bolster their leisure vacation segment?

I think you might be pointing at to the Sunwing acquisition.

Yes.

That had not yet been approved to my knowledge. So that's out there. So don't know much more on that.

[indiscernible] talk a bit more about [indiscernible] growth strategy. Maybe you can just talk a little bit about how relevant that is for the Air Canada story and what you've seen to date?

So what we've seen during the course of the recovery and pandemic coming out of this is, is the demand is leisure customers buying into the premium cabins. And so that we continue to see. That really hasn't -- that hasn't fallen off. I think there's also this combination of business and leisure sort of coming on as well. So if you sort of step back and look at Air Canada from a seat perspective and our layout configurations or [indiscernible], if you will, we have a smaller business cabin than typically than other U.S. carriers, European carriers per se. So our ability to see if business is impaired will not have a -- particular percentage will not really have a large impact on us. But underlying your question at the end of the day is premium cabin and we've seen leisure buying into premium cabins. And part of that is really driven by Aeroplan as well.

Great. Well, I'll wrap it up with one that you have to ask these days, which is what is Air Canada's focus and strategy as it relates to ESG in the current line? What initiatives are you doing? How do you think about it longer term? What's going on in Air Canada?

A lot is going on at Air Canada was on ESG. It's something that we really have not stopped thinking about. And even in the pandemic, so we focus through in all parts of both the E, the S and the G. Certainly, the transitions we made in the fleet certainly will help on the environmental side as we transition more into MAXs and 220s and drop the higher gas-guzzling, if you will, fleet. Certainly, from a perspective of social good and all, we through the foundation through the Air Canada Foundation, continue sort of to -- we raised money, $1 million and dispersed $600,000 into the communities that we serve through Aeroplan points. We've raised 100 million Aeroplan points, donated 100 million Aeroplan points and along with customers doing other 50 million points for Ukrainians to fly into Canada. So in the communities we're in, we're continuing to make efforts. We rolled out our climate action plan in last year that lays out our targets for 2030, interim targets in our 2050 and ambitious goals there. So really there hasn't been an area out of the ES and G that we really are not focused on to continue to drive. That's because sustainability at the end of the day is very important for Air Canada, I think, and for the industry, all in all.

Great. Well, thanks for spending time with us. We'll leave it at that, but a real pleasure having you here in Laguna Beach. Usually, it's a little chillier where we typically meet and sharing more about Air Canada, and you're one of the true good guys in the business. So good to be with you today and thanks for the time.

Thank you very much, Wiley, and thank you very much, everyone, for listening in and joining.

Thank you.