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spk12: Good morning and welcome to Air Canada's third quarter 2023 conference call. All participants are in a listen-only mode. After the speaker's presentation, we will conduct a question and answer session. To ask a question, you will need to press star followed by the number one on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to Valérie Durand, Head of Investor Relations and Corporate Sustainability at Air Canada. Thank you. Please go ahead.
spk01: Thank you, Julianne. Hello, bonjour et bienvenue à notre troisième revue trimestrielle de 2023. Welcome and thank you for attending our third quarter earnings call of 2023. Joining us this morning are Michael Russo, our President and CEO, Mark Gallardo, our Executive Vice President of Revenue and Network Planning, and John Deibert, our Executive Vice President and CFO. Other members of the executive team are also with us today. Mike will begin this call with a brief overview of the quarter, followed by Mark with comments on our revenue, network updates and demand trends. John will cover our financial performance and guidance before turning it back to Mike. We will then take questions from equity analysts. Our comments and discussion today 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 statement in Air Canada's third quarter news release available on aircanada.com and on CDAR+. And now I'd like to turn the call over to Mike.
spk07: Thank you, Valerie, and good morning to everyone. Bonjour tout le monde. Thank you for joining us today. We are very pleased with today's results and the solid three quarters behind us. Air Canada's operating revenues in the quarter totaled about $6.3 billion, up 19% from the third quarter of 2022. Our operating income increased by $771 million to $1.4 billion, with an operating margin of 22.3%. Passenger revenues were nearly 22% higher year over year. Mark will provide more details on our revenues and the ongoing demand environment, which remains very stable. Arrow Plan membership continues to grow. Growth billings and redemptions also surpassed third quarter of 22 levels. Adjusted EBITDA grew by $773 million to $1.8 billion for the quarter. This translates into a market-leading adjusted EBITDA margin of nearly 29%. Adjusted net income of $1.281 billion, approved $850 million year-over-year. This brings us to an adjusted EPS of $3.41 compared to an adjusted EPS of $1.07 a year ago. We ended the quarter with nearly $10 billion in liquidity, while at the same time making progress on our stated goal of reducing leverage. And John will cover this in his remarks. The summer is always a peak travel season in Canada. Due to our careful preparations, we captured more than our share of traffic. and flew in excess of 12.6 million customers in the period. This was a 10% increase year-over-year, which resulted in an historic system load factor of almost 90%. While this signals that we use our assets very effectively, one consequence is that it puts extra pressure on the operations. That said, our on-time performance progressively improved throughout the quarter. With a 9 percentage point boost from July to August, and another eight percentage point sequential improvement in September, and continued improvement in October. I thank all our employees and management team for their hard work in safely transporting all our customers during the busy and demanding summer season. And their efforts are noted by our customers. For the fifth straight year, we were voted North America's favorite airline for 2023 in August in the Trazee Awards, which are geared to the important 25 to 45-year-old market. This followed on awards early this summer at the Skytrax World Airline Awards, where we won the world's most family-friendly airline in awards for best airline in Canada and best airline staff in Canada. And through their empathy and care, our people distinguish themselves in other, more important ways. We operated extra flights to Yellowknife in August to help evacuate residents from wildfires. And this month, we coordinated special flights with the government of Canada to bring Canadians home due to the conflict in the Middle East. These flights take a tremendous amount of work and planning, and I thank all our teams for this. It is with great sadness we witness a terrible impact of this situation on civilians and sincerely hope for a peaceful resolution soon. We continue to monitor the situation closely. Safety is always our number one priority, and we will reassess when our return is possible. Before I pass the call to Mark, I want to thank our customers for entrusting their travel with us and for their loyalty to our company. We know we must earn this loyalty every day, which is why we make elevating our customer service a top priority for Air Canada. Thank you, Mercy. Mark, over to you.
spk09: Thanks, Mike, and good morning, everyone. I'd like to thank our employees for delivering impressive quarterly results. Passenger revenues in the third quarter totaled $5.9 billion, a record. That's an increase of over a billion from the third quarter of 2022. This increase was propelled by our effective network diversification strategy, which delivered strong results on our international network. We've built scale at our hubs, and we've leveraged our partnerships to drive a strong and growing internationally-focused airline. Signifying people's eagerness to travel abroad over the summer, revenues for international services increased 32% year-over-year. Our domestic and trans-border revenues rose 3% and 23%, respectively. But most importantly are the yield gains. Demand continues to track above 2019 levels. This combined with the capacity constraints at the global industry level have continued to favor the yield environment, especially for international markets. Best performers were Atlantic and Pacific, where we saw year-over-year yield increases of about 13% and 11% respectively. Most of the new international routes met or exceeded expectations. And we look forward to launching promising new routes such as Vancouver, Dubai and Vancouver, Singapore over the coming months. We witnessed continued strength in our premium revenues too, which increased 21% from the third quarter of 2022. This strength was across all markets for both leisure and business customers. Although we saw premium revenue gains, we're pleased to see our premium and economy cabins deliver similar and proportional gains as well. The density of our cabin configurations on our wide-body aircraft ensures that we're not entirely dependent on premium performance to drive overall revenue results. Other passenger revenues increased 10% from the same quarter last year, thanks to a solid contribution from Air Canada Vacations. We saw strong demand, mostly for services to the Caribbean, as well to Mexico. And we'll be launching our new service to Monterrey, Mexico, in just a matter of weeks. Throughout 2023, we made some capacity adjustments to account for regional pilot availability and supply chain pressures to name but a few. As a result of these ongoing headwinds and with the immediate effects from the suspension of our Tel Aviv routes, we now expect full year system ASM capacity to be 20% above 2022 levels. And as we look to Q4 2023 and early signals into 2024, we continue to witness stable demand indicators. For the fourth quarter of 2023, we plan on increasing our system ASM capacity by about 10% from the same quarter in 2022. We see a strong opportunity to redeploy capacity into the Asia Pacific sector over the coming months. And as we take advantage of this opportunity, we are increasing our capacity to Japan and Korea, adding frequency to our successful new route to Bangkok, and in adding an additional red-eye flight from Vancouver to Hong Kong. We're assessing further opportunities to reallocate capacity in the region, as we believe the demand and yield signals will continue to be favorable throughout the coming months. And looking to the future, we're very excited to be adding the Boeing 787-10 to our fleet in late 2025. This aircraft will replace existing widebodies that are reaching end of life, and its size will allow us to add premium seating and increased overall seat count on many of our existing routes. This aircraft will also enhance our cargo proposition, offering two additional pallet positions versus the 787-9 that we operate currently today. Turning to cargo, revenues in the third quarter of 2023 declined 66 million from the third quarter of 2022, giving lower yields in all markets resulting from continued softness in demand. that although it's relatively early, signals observed from the market demonstrate upticks in demand and in yield. I thank the entire team at Arcana for their dedication. Their hard work is the cornerstone of our accomplishment. Thank you. John, over to you.
spk13: Thank you, Mark. Good morning, everyone. Bonjour à tous. Mike spoke to our financial performance generally, and Mark touched on our strong passenger revenues. I'll begin with our third quarter operating expenses, which grew 5% to $4.9 billion, reflecting 14% growth in revenue passenger miles, a total capacity increase of 10%, and were mitigated by a better fuel backdrop versus Q3 2022. Total chasm was down by 4%, driven by lower aircraft fuel expense, as a result of a 23% year-over-year decline in jet fuel prices, including the impact of a $68 million fuel hedging gain. recorded in the quarter. As we did for Q3, we have chosen to protect a portion of our Q4 fuel consumption. Early in the quarter, we hedged 45% of our projected Q4 fuel requirements. Our hedging positions in the second half of the year reflect a prudent approach to managing the current volatility in fuel prices in an environment with continued good visibility on realized bookings. Adding some color on our key operating cost items, in Q3, we saw a 17% rise in wages, salaries, and benefits year over year on an FTE increase of 13% as we staffed our employee levels in support of our summer peak operations. Cost increases for spend categories such as sales and distribution and catering are also seeing increases that are correlated to higher yields and higher premium cabin revenues. Overall, adjusted chasm in Q3 is 5.6% higher than prior year. Year-to-date 2023, our adjusted chasm is 13.2 cents versus 13 cents for the first nine months of 2022. This represents a 1.6% increase. The slight pressure we have been seeing in our unit cost guidance in the second half is mainly due to lower than planned capacity. growth. We now expect 2023 adjusted CASM to come in at around 1.5 to 2.25% above 2022 levels. As we look beyond 2023, we do anticipate some continuing cost pressures from an evolving regulatory environment, updated airport rates and charges, as well as the potential impact of a pilot agreement renewal. We do, however, expect to begin stabilizing our overall unit cost operating costs as we enter a period of early productivity improvements. We are factoring all of these elements into our plans going forward, and we'll provide updates for 2024 when we report our full year earnings at our Q4 analyst call. Let me now turn to cash generation, debt management, and liquidity. We're pleased with our third quarter positive free cash flow of $135 million. We continued to pay down debt in Q3. In September, we prepaid a total of $589 million in aircraft financing. The amount of debt prepayments now stands at about $1.87 billion since we relaunched more normal operations in the second half of 2022. With this latest prepayment, we are bringing our unencumbered asset pool value to approximately $6.7 billion, excluding the value of Aeroplane. We ended the third quarter with $9.9 billion in total liquidity and a leverage ratio of 1.4, down from 5.1 at the end of 2020. We have made deleveraging a financial priority for Air Canada and our strong cash flow and liquidity position will give us flexibility and confidence to invest in our growth. Moody's recent upgrade of our corporate family rating of BA II from BA III and maintenance of a stable outlook prove that these efforts and our strong operating incomes are being recognized. This rating is one notch below our highest Moody's rating, which was in place prior to the pandemic. As a matter of note, Advanced ticket sales were $4.5 billion at the end of the quarter, down about 20% from the June level, and consistent with pre-pandemic seasonal trends and expectations. Now turning to our fleet. Operating a modernized fleet with optimized and efficient aircraft is fundamental to our long-term growth and our profitability and sustainability strategies. We expect two remaining 787-9s to be delivered in 2024. And we have recently announced the acquisition of 18 Boeing 787-10 Dreamline aircraft with options for 12 more. The deliveries are set to begin in late 2025 with the last aircraft scheduled for delivery in Q1, 2027. Mark shared some excitement about this aircraft. Now allow me to share more reasons why we're thrilled to add this aircraft to our fleet. First, the 787-10 is the most efficient aircraft within its range. Second, our knowledge and familiarity with the 787 family will drive operational efficiencies, optimized maintenance, and the benefits that commonality offers, such as spare parts provisioning and pilot training synergies. As highlighted by Mark, the new 787s offer optimized chasm and greater flexibility for growth. Finally, We are confident that our customers are simply going to love this aircraft. Additionally, we also are looking forward to welcoming the Airbus 321 XLR to our fleet with 25 aircraft on order and deliveries to begin in 2025 and completing with the final aircraft due in 2028. Rounding out our order book is the completion of the remaining 27 Airbus A220 deliveries planned between 2024 and 2026. When complete, we will be operating a fleet of 60 A220s, an excellent aircraft for our domestic and trans-border markets. We have updated our capital commitments disclosures to account for these fleet changes and other capital expenditures, such as aircraft reconfigurations, maintenance and technology, among others. Now, before I turn it back to Mike, Allow me to say a few words on how impressed I am with our Air Canada team. I'm looking forward to working side-by-side with my colleagues as we develop our 2024 roadmap and as we chart the future of this iconic airline. I see the people and the culture are a backbone of this company, and I know that this will continue to elevate Air Canada towards its long-term aspirations. Mike, back to you.
spk07: Terrific. Thanks, John. As I mentioned at the start of the call, while we are pleased with our third quarter performance, these results can only be fully appreciated in conjunction with the other strong quarters we have reported so far this year. While we are not updating our 24 targets or providing 24 guidance at this time, I'd like to take a moment to walk you through our financial performance thus far. approached $3.5 billion at the end of the third quarter, compared to $1.1 billion in the same period last year, and was 16% higher than that in 2019. Interesting to note is that our equity value as of October 20th has declined 12% versus the same day in 22, and is about 50% of the same day in 2019. Cumulative free cash flow was almost $2.1 billion year-to-date. And at quarter's end, our leverage ratio was 1.4, a major improvement from 5.1 at the end of 22. Air Canada's progressive performance proves the success of our strategy to grow back the airline and improve operational stability while mitigating risk. Like most airlines, we continue to face challenges, but our demonstrated adaptability over these last nine months, combined with a continuing stable demand environment, Give us every assurance for the rest of the year and into 2024. We remain confident with our full year 23 adjusted EBITDA guidance and at this point expect to land in the higher end of that range. This involves more than simply staying the course. We know we must continue to invest in our business and continuously improve to remain competitive and attract customers and maintain their loyalty. Acquiring the Boeing 787-10 Dreamliner aircraft is one example. But beyond our fleet, we continue to invest in products that earn a return by building greater appeal to strategic customer segments like families and six freedom connections. This includes a stunning new Maple Leaf Lounge in San Francisco and a unique co-location arrangement at the United Club Lounge in Newark's all-new Terminal A. Going forward, we will be adding, expanding, or renovating lounges in several key markets. We are also renewing our aircraft interiors and upgrading onboard service as well. Our success in these areas continues to be recognized. We have won Best Airline for Onboard Entertainment for five consecutive years from Global Traveler and Apex, which in September affirmed our five-star rating and gave us its Passenger Choice Award for Best Entertainment in North America. Aeroplan continues to deliver record performance. By the end of the third quarter, we have doubled our active member base since the program was purchased in 2019. This growth is fueled by infrequent but regular travelers who are engaging with our marquee everyday partners. Millions of members have now linked their account between Aeroplan and leading brands like Uber and Starbucks. Aeroplan remains a highly effective tool for retaining loyalty and influencing customer purchase decisions on Air Canada, and we continue to pursue the many expansion opportunities available to us. We believe, as others do, that Aeroplan is one of the best loyalty programs in the world. The accolades we recently received by Rewards Canada that are the top airline loyalty program, top overall travel rewards credit card, top airline credit card, and top ultra-premium credit card, demonstrate that we continue to be Canada's top choice. To support our product initiatives, we are also highly focused on service in the launch of our ECX program, or elevating the customer experience, to bolster all aspects of the customer journey. This is a multi-year initiative, and for 2024, we have dozens of important projects underway to improve everything from on-time performance to onboard service and baggage handling. And already, it is making a difference, such as a double-digit improvement in OTP since July that I spoke about earlier. And we continue to focus on our ESG goals. The grassroots level, nearly 200 Air Canada employees, along with their friends, family, and customers, recently participated in a shoreline cleanup event in Vancouver, Toronto, and Montreal, collecting 380 kilograms of waste. And we are advancing through community involvement and by engaging with our customers. One example is a hospital transportation program, which helps sick children fly for needed medical care away from home. And thanks to collaborative efforts of Canadian companies and dedicated Aeroplan members, More families were supported than ever before. This year, an astounding 67.7 million points, Aeroplan points, were raised during Aeroplan's recently concluded annual Aeroplan Point Matching Week, by far the most successful point matching campaign in its two-decade history. I thank our partners and Aeroplan members for their generosity. We are proud of the collective impact we have on our communities and on Canadian families. With that, we're happy to take questions. Merci. Thank you. Valerie?
spk01: Thank you, Mike, and thank you all for joining us this morning. Nous vous remercions de votre grand intérêt ce matin. We're now ready to take your questions. Should you require further details following this call, our investor relations team is available for support. Back to you, Julianne.
spk12: Thank you. As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. In the interest of time, we ask that you please limit yourself to one question and one follow-up. Thank you. Our first question comes from Konark Gupta from Scotiabank. Please go ahead. Your line is open.
spk02: Thanks, Alveda. Good morning, everyone. Morning. My first question is on the capacity. If I look at the last few quarters, you have been trimming full-year capacity a little bit here and there. I'm just wondering, you have tell a real situation now, you know, the supply chain issues are obviously ongoing in the industry, but what's your confidence in restoring more than 90% of capacity in 2024?
spk07: Um, iconic I'll start and then Mark will, uh, we'll add some color. Uh, we are bringing some new planes in, uh, not new place, but some lease planes in, in, in 2024, uh, both narrow body and a few wide bodies. And so that will drive the majority of the capacity increase. Plus, we are hopefully making some operational improvements where we're going to get a better utilization of our existing fleet.
spk09: Mark, anything to add? No, Conor, it's Mark here. With some of the supply chain issues and pilot issues that should be behind us in 24, with some additional fleet that we've got coming in and Of course, as you know, in the summer, we actually lost a 7774 portion of the summer. We're reasonably confident we'll be above that for 24.
spk02: That's great. Thanks. And for me, for John, if we look at the projected capex table, which I think now reflects the 787-10s and other kind of fleet changes you have been making. The projections show anywhere between $2 and $5 billion for the next four fiscal years in terms of total capex. I'm just wondering if those numbers are reasonably used as capex when we calculate free cash flow.
spk13: Yeah, I think that we'll probably give you guys more color on the longer-term capex and cash flows as we kind of get together over the next, I guess, couple of quarters as we look forward, 24 and beyond. But I would say for now, what you should expect is that with the 787s and 321s, 26 will probably be the year that will have the most overall fleet cash flow consumption. And, yeah, typically we do also spend above and beyond just the fleet commitments. We do have recurring maintenance that we capitalize and so on. So, largely speaking, of course, it's a good proxy, but there's a little bit more capex than just what's on that table that we would spend on in a given year.
spk07: Yeah, I mean, just to add on that, I mean, we're very excited about bringing three incredible aircraft into the system in the middle of the decade, the 10s, the 220s and, of course, the XLRs. And this, although it's going to, you know, increase our CapEx commitment in that period of time, it's going to reset Air Canada's ambitions as we go forward.
spk10: That's great.
spk05: Thanks a lot. Thank you.
spk12: Our next question comes from Walter Spracklin from RBC Capital Markets. Please go ahead. Your line is open.
spk08: Yeah, thanks very much, operator. Good morning, everyone. So, Mike, can you talk a little bit about your fleet as it stands now in terms of, you know, you just mentioned you're bringing on some great aircraft. Are you looking at any other, you focus on obviously very strong and international. Are you looking at any other additions to the wide-body fleet that you haven't spoken about recently? Is there any new aircraft that are catching your eye that you think would fit into your strategy of of capitalizing on some of your international strengths, or do you think that the fleet now, as you've announced it now, should be the type of fleet makeup that we should expect for the next several years?
spk07: Good morning, Walter. First of all, we love looking at new aircraft. There is some very efficient, exciting aircraft out there in the marketplace that are being developed. And certainly it's our job to make sure that we are well aware of what's coming on market and how does it fit into our strategic plan. For the time being, what's on the table will satisfy our ambitions. Certainly in the back half of the decade, we're going to have to look again potentially as we look for more growth and potentially so other wide bodies. But we don't see that happening until at least the back half of the decade.
spk08: Back half of the decade. Okay, that's great. Thank you for that. And the booking curve, and I know we ask this question every quarter, but any additional detail that you can provide on how the next three months is shaping up? I know certainly from a number of our consumer and even our financial analysts today is, talking about the impact that higher interest rates are going to have on Canadians as they renew their mortgages, and certainly disposable income is a big factor in choosing to purchase air flights and so on. And I'm just curious what you're seeing in terms of the booking curve. Are you seeing any impact at all on lower discretionary income by Canadians at all when you look out to that booking curve?
spk09: Hi, Walter. It's Mark here. On the booking curve, it's in line with expectations. We see relatively strong demand for Q4 in almost every single geography that we operate in, almost every single segment that we operate in. There is a lot of additional market capacity, so that is one variable. But in terms of demand, it's quite stable in line with expectations, and we're not seeing any major slowdown at this point in time. and sort of the diversification of our network gives us a lot of options to move capacity around if we do see a slowdown in one particular geography.
spk08: Okay, that's great. I appreciate the color. Thank you.
spk12: Our next question comes from Kevin Chang from CIBC. Please go ahead. Your line is open.
spk05: Hi, thanks for taking my question. Just maybe turning back to the fleet expansion plans you have here, obviously exciting investments. I guess when you look at the additional wide bodies, does that require additional regional aircraft or smaller narrow-body aircraft investments to improve regional lift or to increase regional lift to, I guess, to match the expanded wide-body capacity you have, or does the regional lift you have today, do you view that as being sufficient?
spk09: Hi, Kevin, it's Mark. Let me take a stab at that. We don't see a need for additional regional aircraft at this point in time. We've got quite a sizable order book of A220s to come. A lot of those will be deployed into the U.S. where we could leverage additional six freedom opportunities So at this point in time, more regional feed is certainly not in the cards, and with the fleet that we've got coming, I think we're pretty sufficient.
spk07: And again, Kevin, just to add more color, the 18 Dreamliners are replacement. Kevin, if you could speak up a bit for your follow-up.
spk05: Sure, sorry. Hopefully this is better. And maybe just at a macro level, on the back of Conor's question, you've removed about 3% of your expected capacity this year. I know there's been a bunch of moving parts, but maybe from a competitive perspective, are you seeing that getting backfilled from other airlines, whether it's within Canada or international carriers that are looking to take advantage of that? Or is the competitive environment pretty stable, even as you've adjusted your capacity through the year here?
spk09: Yeah, Kevin, the competitive environment is very robust, as you know. Right now in domestic Canada, we have numerous competitors, and it's a very competitive market. But for us, we really focused on building up our hubs and scaling our hubs, and that's been our focus, and I think that's been pretty good so far. And competition will continue to evolve in particular. We've seen some moves into seasonal markets. I think overall, the strength of our network, the position in our hubs puts us in a pretty good position.
spk05: Perfect. Thank you for taking my questions.
spk12: Our next question comes from Matthew Lee from Canaccord Genuity. Please go ahead. Your line is open.
spk04: Good morning, all. Thanks for taking my question. I wanted to start on the demand front. I know you've commented there's no slowdown overall, but You know, have you seen any shift in terms of domestic and international, the way that some of the US carriers have? I know you called out Pacific and Atlantic travel, but, you know, do you see a meaningful growth delta in terms of domestic and international, especially going forward?
spk09: Hi, Matthew, it's Mark here. So what we're seeing so far is, you know, we've seen a shift in international markets. We've observed this shift for the better part of the last two years, I would say. So there's really nothing materially different. The one thing that we are observing is there's still a lot more recovery left on the Pacific, and the Pacific market continues to be a very good opportunity for us to step into. We're actually going to be shifting a little bit of capacity in Q4 and Q1 away from the North Atlantic into the Pacific to really seize on that opportunity.
spk04: Great, and then maybe in a similar vein, can you maybe just talk about the demand you're seeing in terms of premium cabins versus perhaps standard economy?
spk09: Yeah, no, demand for premium continues to be strong. In fact, it's at pace with prior year.
spk02: Okay, that's helpful. Thanks.
spk12: Our next question comes from Savvy Sith from Raymond James. Please go ahead. Your line is open.
spk11: Hey, good morning. Just Curious on the cargo front, you talked about maybe early signs of things improving, but you also kind of changed your fleet strategy on the cargo front. Any kind of revised thoughts as we look at kind of the next one to three years on how that should progress?
spk07: Hi, Savvy. It's Mike. I'll start, and Mark, who oversees cargo, will add some color. We haven't changed our strategy. You know, we... We are still committed and excited about growing the freighter business. We've always run and will continue to run a very strong belly business. We did cancel two 777 freighters because it was a little bit too early for us to take those into our network, but we are looking to expand our 767 freighter business and build that business over time. The market, as you know, has been soft. We believe we've hit the bottom and we're starting to see some early signs of strengthening demand and yield. We'll take full advantage of that with both our bellies and our freighters. Again, the freighters play an important role in providing cargo for our bellies. That's a synergy that we have within our system that adds value. On top of that as well, the 787-10 order book of 18 plus 12 options, also they have much more efficient cargo space. And I believe the additional two pallets that we can add to that. So that compensates somewhat at a much better yield, much better bottom line than potentially running two 777 freighters.
spk11: I agree. That sounds like a good plan. If I might, just on the business demand trends, I wonder if you could say what you're seeing either on a year-over-year or relative to 2019.
spk09: No, it's structurally above 2019, in particular on the traffic and on the yield side. Are you talking about business capital or corporate recovery, just to make sure that I answered the question?
spk11: Sorry, corporate recovery.
spk09: Okay, so corporate recovery relative to 2019 continues to be in the same range in the minus 25 to minus 30% range on the managed side. But we continue to see sustained recovery in the SME side. And that gives us some interesting yield prospects going forward.
spk12: Helpful. Thank you. Our next question comes from Chris Murray from ATB Capital Markets. Please go ahead. Your line is open.
spk03: Yeah, thanks, folks. Just going back to maybe the booking curve and looking out into 24 a little bit, I guess a couple questions here. One, you know, how are you seeing sort of leisure traffic in terms of the curve? And I'm just wondering, you know, there was a lot of pent-up demand, I think, coming into last year. Are you still seeing kind of echoes of that demand as we go into this year or into 24? And how is Aeroplan shaping some of that for you as well?
spk09: So, good morning. Just on the booking side, the booking curve on leisure, I mean, again, we continue to pace with comparing ourselves to 2022, 2023. In a prior call, we said some of the leisure demand indicators that we're following was demand for, you know, air kind of vacations that continues to be stable, especially when you consider that there's a significantly more market capacity in Q1 of 24 versus 23 in that geography. And then we're also tracking, you know, international leisure demand, and we're tracking it not only for Q4 Q1 but also for Q2 and Q3 24 and again we are at pace or in some cases actually above where we were last year so we're we're feeling reasonably you know confident that the you know the leisure demand indicators continue to be you know stable good morning um sorry Chris there's just a follow-up from Mark Mazur
spk14: Hey, Chris, good morning. It's Mark Master. I think you were going to ask about the Aeropine side, so maybe I'll give some additional color there. So we look at two things in this regard. We compare the behavior of customers that are repeat purchasers on Air Canada that are Aeropine members and are not Aeropine members. And then we also look at, for the Aeroplan members, those that are engaging with our everyday partners versus those that are not. And in each of those cases, as engagement in the program steps up, so does the frequency of purchase on Air Canada and the likelihood to buy tickets directly. So what we're seeing essentially is as an individual, as a customer becomes more engaged in Aeroplan progressively, they're more likely to have higher volume on Air Canada, purchase higher quality tickets, and more likely to purchase those tickets directly versus via third-party distribution sources.
spk03: Okay. My other question, I just wanted to ask a little bit about the fleet changes. You've talked about the fact that the 787-10s, as they come in, you're going to be taking out Older aircraft. Where exactly would you be pulling down some of those aircraft? Is that going to be some of the 777s or is that older 787s that you'll be taking out?
spk09: So we haven't yet determined what exactly is going to get potentially pulled out. So we've got two options. We can reduce our 777 fleet or we can reduce our 330 fleet or do both. So we're looking at both options. As you know, our A330 fleet is getting up there in age. some of our aircraft by the end of the decade will be close to 30 years of vintage. So we're looking at both options right now and seeing which one will most likely come ahead. On the 777 front, some of the issues that we're having with that fleet in particular is managing some of the seasonality and some of the range issues with that airplane. We're not necessarily concerned about the size of the airplane, more the range capability, and the A330 is more a question of age. So over the coming, I would say, months, we'll determine exactly which way we go here.
spk03: Okay, but the idea is that you'll be, you know, you'll allow for a little bit of growth, but that it won't, don't be thinking that it'll be 100% growth on the 710s that come in.
spk09: Yeah, precisely, and we've got a lot of optionality here.
spk05: All right, that's great. Thanks, folks.
spk12: Our next question comes from Helene Becker from TD Cowan. Please go ahead. Your line is open.
spk00: Oh, thanks very much, Operator. Hi, everybody, and thank you for the time. I think John, you mentioned costs associated with regulatory changes. I'm kind of wondering what you were talking about and what the impact of those costs might be.
spk13: Sure. So we've seen duty time for pilots be one of the stressors that we have in our cost structure that's kind of evolved a little bit. So some changes in Canada here in the last year. And we also have some APPR regulation that we are in the process here in Canada of completing and finalizing with the transport minister and the agency. So in both cases, those would be some additive pressure to our cost structure. I think in the whole, they'll be managed within the overall cost structure, but certainly those would be incremental to the current cost base.
spk00: Right, but are we talking about a magnitude of hundreds of millions of dollars or tens of millions of dollars?
spk13: Well, I think, you know, what yet to be determined on the final constitution of what those changes might be. But like I said, you know, I mean, hundreds of millions would feel heavy, but certainly it could have some impacts that, you know, may still be felt when we look forward to 24 and beyond. So I think, you know, we'll provide some color around that as regulations complete and we push through our 2024 plan. You know, remember that we, as an airline as well, we'll have an overall spend related to all of those kind of issues, including our own goodwill, and we'll have to balance between what is regulated and what is actually offered as a goodwill. So we'll look to calibrate all of that as we look forward and we understand the regulation.
spk00: Okay, that's very helpful. Thank you. And then just for my follow-up question on the pilots, can you just talk about the timing? I think the contract expires tomorrow. But can you just sort of walk us through the timing of what you expect, you know, when you expect some type of an agreement? I noticed that some pilots were picketing over the weekend, what they call informational picketing.
spk07: Right, right. Yes. It's Mike. Good morning, Helen. So the contract actually expired at the end of September. Okay. We do provide updates on our website as to ongoing developments on our discussions with ALPA, the pilot union. So we are in discussions with them at this point in time. It's difficult for us to comment on timing, on any aspect, as you can appreciate, as we have discussions with them on several elements. So I wish we could provide more, and we will provide more. I wish we could provide more, but we will provide more when we come to agreement with the pilots. But again, timing is to be determined.
spk00: Okay. All right. Well, that's a lot of to be determined for me for my questions. But thank you. Merci.
spk12: Our next question comes from Cameron Dirksen from National Bank Financial. Please go ahead. Your line is open.
spk06: Yeah, thanks. Good morning. I guess my first question is really just around, I guess, the growth that you've kind of got planned, especially internationally and especially at your three main hubs. I mean, you've kind of refocused the whole operation a little more at the big hubs. I'm just wondering if you can maybe discuss some of the infrastructure constraints that you may see in the next few years, because there are certainly some of these airports that are pretty stretched, not so much from a slot perspective, but really from physical infrastructure. So maybe you can just discuss how that may or may not be a constraint for you as you think about continuing to grow those hubs.
spk07: Hi, Cameron. It's Mike. That's a very interesting area, and we're spending a lot of time with our key partners at the airports today. ensuring that they have enough capacity for us to grow in Vancouver, Montreal, and Toronto. And those are very productive discussions that we're having with them. We are also spending time with the government of Canada to see if we can accelerate some investments in the airport infrastructure to allow us to grow. We think that's important for the Canadian economy. We think it's important from a passenger perspective, obviously, updated infrastructure. And so all those efforts are underway right now. So it's a little early to tell as to over the next couple of years as to whether the three key hubs are going to be able to absorb the capacity that we want to put into the marketplace, especially on the international side. But we're certainly comfortable that we're having productive discussions with all the stakeholders to make that happen.
spk06: Okay, fair enough. And just a quick follow-up for John. I think you mentioned something about the hedging in Q4. I think you said 45%. Are you able to provide what the price is at?
spk13: I think our full-year guide is $0.13 per litre Canadian, and I would suggest to you that it was marginally better than our average rate. So I think, you know, we did probably see rates for Canadian fuel per litre in the 120s, and so I think that, you know, this was well below the range that we've seen spot for most of the quarter. There's some additional disclosure that's in our financial filing as well. But, like I said, you know, I mean, 113 average for the full year, and that's probably... a hedge rate of better than probably a nickel or close to 10 cents better than that.
spk06: Okay, that's helpful. Thanks very much.
spk12: Our next question comes from Andrew Dodora from Bank of America. Please go ahead. Your line is open.
spk15: Hi. Good morning, everyone. John, obviously you have 1.4 turns of net leverage. It's about a half a turn from the low in 2019. I guess in this interest rate environment, how are you thinking a little bit about capital allocation, I guess just in terms of what are the opportunities to keep prepaying debt here, and how are you thinking about financing your CapEx over the next couple of years?
spk13: Yeah, so thanks for the question. So we've been on a steady stream here of debt repayment, and we'll continue to look at opportunities in terms of continuing to take out the gross debt As an aside, we actually, in this environment, actually do quite well with interest income return on debt cash. So it's a little bit of a cheap option on liquidity that we do have, given the return on our deposits almost matches some of our fixed rate costs on debt. But we will continue to look at opportunity to be leveraged. We still do have a little bit of capacity to do so. As we get into those bigger years of fleet additions, 26 in particular, a combination of one for sure, continuing to generate cash from the business and being able to redeploy that to fleet growth is going to be important. And then depending on debt markets and cost of capital, we'll also determine what the best instruments might be for either direct aircraft financing or... or any other options that might exist for most of the 26 acquisitions, but I think we'll have a lot of flexibility in coming into it with good cash on hand, but also with what a great balance sheet will give us access to pretty good pricing, I'm sure, whatever the environment.
spk15: Got it. Thank you. John, and maybe for Mike. Mike, I know last cycle, I think you started buying back stock when your leverage was around these levels, certainly sub-two times. How do you think about the share buyback here, especially with the stock trading at just about two and a half times EBITDA? Thanks.
spk07: Again, as John said, our priority is deleveraging at this point in time. We'll look at other ways of providing returns to shareholders in due course, but right now our entire focus is on deleveraging.
spk10: Okay. Thanks, Mike.
spk12: Our next question comes from Stephen Trent from Citi. Please go ahead. Your line is open.
spk17: Good morning, everybody. Can you hear me okay?
spk13: Yeah, you're fine.
spk17: Okay. Thank you, and thank you for taking my questions. Just quickly for me, the first is, you know, one of your competitors recently gave some color around Tel Aviv flight suspensions and, you know, how it sort of affected 4Q EPS. Do you have any high-level view with the available seat and aisle adjustment? You know, to what degree this came from? Maybe, you know, suspended flights to Tel Aviv or maybe a little bit of a, reduction in some some flow to India or maybe not just curious if you know, what may have been the impact there?
spk09: Hi Steven, it's Mark. The impact of Tel Aviv is you know, relatively inconsequential. I mean Tel Aviv is an important market for Canada. You know certainly a very good market for Canada, but from a full system basis, it's about 30 basis points of decimal 30 basis points of capacity and So it's really inconsequential and, you know, close in, we've been able to redeploy some of those ASMs into productive flying. You know, and we'll look to get back to Tel Aviv as soon as we, you know, obviously the situation permits us to go back there.
spk17: Okay, appreciate that, Mark. Thank you. And just one very quick follow-up here. I heard you mention, I know it's not a big piece of the pie for you, but I heard you mention Mexico, for example, that you're going to start some Monterey flying. Um, any indication for Mexico city service, you know, to what degree you might be, um, doing any flying to the new airport there as opposed to Benito Juarez.
spk09: Yeah, regrettably we, we, you know, Mexico, firstly, Mexico city is a great market for air Canada. And if there was an opportunity to expand our presence there, certainly seize on it. Um, you know, however, there are constraints at that airport in terms of slots and availability. So the only option to grow is into that new airport or that second airport. Right now, that's certainly not in the cards for us, at least for the passenger side of the business.
spk17: Understood. Appreciate it. Thanks, Mark, and thanks for taking my questions.
spk12: Our last question will come from Jamie Baker from JP Morgan. Please go ahead. Your line is open.
spk16: Hey, good morning, everybody. During the prepared remarks, I think it was Mark, but you mentioned wide-body density and not being wholly dependent on premium demand. You know, I'm just curious, based on your forecast and ignoring conversion time and conversion expense, are you fully satisfied with your density? I guess another way of asking is whether you might revisit density or think about it any differently going forward, particularly with the dash 10s.
spk09: Great question. Something that we're actually discussing internally right now. The beauty of the Dash 10 is that you have a lot more real estate to play with, to look at premium cabin configurations one way or another. There's a lot of real estate between door one and door two on that airplane, so it gives us some very interesting optionality. Now, in terms of our cabin configurations, when we look at the Canadian demographic, when we look at our strategy of with all the immigration coming to the country, we feel reasonably good that the level of density that we have right now is appropriate for the market, you know, segment out there. And as we look at the Dash 10, you know, one option could be to look at increasing the premium seat count, but we'll look at that over the coming months.
spk16: Okay, helpful. Thanks. And then second, you know, and I recognize, you know, Mike, you won't comment directly on how you're thinking about pilot economics, but, you know, if we think back to when you first established your 2024 targets, How would you describe the market for pilot compensation since that time? Would you say that the increases you've seen are, you know, broadly in line with what you imagined, meaningfully ahead, meaningfully behind? I mean, the general consensus in the U.S. is that, you know, economics have appreciated, you know, meaningfully ahead of what was once envisioned. But, you know, our Canada may have, you know, had a better forecast in the first place. Just wondering how you would characterize the change in the pilot market since you established your targets.
spk07: That's an interesting question.
spk16: Well, it's a riff on Helene's question, so credit where credit is due.
spk07: I figured that out. We're obviously focused on the Canadian marketplace, and so WestJet, you know, put together a deal earlier this year that was within, you know, our range of expectations. So, you know, I think that's as far as we're going to go at this point in time.
spk16: Okay. Interesting. Thank you very much, everybody. Take care. Thank you.
spk12: We have no further questions in queue. I would like to turn the call back over to Valérie Duran for closing remarks.
spk01: Once again, thank you very much for joining us on our third quarter call of 2023. Should you have follow-up questions, please contact the Investor Relations team. This concludes today's call. Thank you for your participation. You may now disconnect.
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