Air Canada Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2024

There are 15 speakers on the call.

Operator

Hello, bonjour. Welcome to Air Canada's Third Quarter 2024 Results Conference Call. All participants are in a listen only mode. After the speakers' remarks, there will be a question and answer session. As a reminder, today's call is being recorded.

Operator

I would now like to turn the conference over to Valerie Duran, Head of Investor Relations and Corporate Sustainability at Air Canada. You may begin.

Speaker 1

Thank you, Sarah. Welcome, and thank you for attending our Q3 2024 earnings call. Joining us this morning are Mike Russo, our President and CEO Mark Gallardo, our Executive Vice President of Revenue and Network Planning and President of Cargo and John Deibert, our Executive Vice President and CFO. Other executive team members are with us as well. After our prepared remarks, we will take questions from equity panelists.

Speaker 1

I remind you that today's comments and discussion may contain forward looking information about Air Canada's outlook, objectives and strategies that are based on assumptions and subject to risks and uncertainties. Our actual results could differ materially from any stated expectations. Please refer to our forward looking statements in Air Canada's Q3 news release available on aircanada.com and on SEDAR Plus. With that, I'd like to turn the call over to Mike.

Speaker 2

Great. Thank you, Valerie. Good morning, bonjour. Thank you for joining us. Today, we reported solid results for the Q3.

Speaker 2

Operating revenues in the quarter were $6,100,000,000 Adjusted EBITDA was $1,500,000,000 with an adjusted EBITDA margin of 24.9 percent. And adjusted EPS was $2.57 Both adjusted EBITDA and adjusted EPS were ahead of market expectations. I'm very proud of these results, which were achieved through strong commercial operational execution and discipline. Allow me to call out 3 important developments this quarter. 1st, very significant achievement reaching our new 4 year collective agreement with our pilot group, represented by Alpha.

Speaker 2

Proud that we concluded a mutually beneficial agreement without significant disruption to our customers and with a contained revenue impact, which Mark will speak to. This agreement recognizes the contributions of our pilots. We continue to make progress with respect to our operational performance improvement program. Our OTP for the quarter was 8 points better than in the same period a year ago. And complementing this was our cargo year over year 18% revenue growth.

Speaker 2

Again, Mark will provide more details. We are always focused on both the short term and long term plans with the objective of delivering value to all stakeholders, especially our shareholders. I'm pleased that our Board of Directors has approved a new share buyback program which will enable us to reverse some of the dilutive but necessary measures we took during COVID. We have promised to return value to shareholders. Today, we are pleased to fulfill this commitment.

Speaker 2

Also with just 1 quarter remaining, we have updated our guidance to better reflect our expectations for the full year 'twenty four results. And before turning it over to Mark, let me close by acknowledging our 40,000 employees. Summer is always a demanding time and they again showed their dedication and professionalism by safety safely transporting nearly 13,000,000 customers in the quarter. Our drive for operational excellence was on the display when we successfully carried Team Canada athletes and delegation members to Paris for the 2024 Summer Olympic and Paralympic Games. And of course, I thank our customers for the loyalty of Air Canada.

Speaker 2

And I assure them we are working hard every day to keep providing industry leading products and services to them. Thank you. Over to Mark.

Speaker 3

Thanks, Marcie, Mike, and good morning. Thanks to all our employees for their contribution to our Q3 results. Our Q3 performance was sustained by strong international performance. Despite tougher comps, some weaker market forces in Europe and uncertainty about our pilot negotiation, our international network achieved encouraging profitability and drove overall results. Multiple new routes performed above expectations and our 6 Freedom revenues continue to progress favorably.

Speaker 3

We recorded operating revenues of $6,100,000,000 this quarter, down 4% from Q3 last year. Passenger revenues were $5,600,000,000 a decline of 4% from the same quarter last year. With year over year decreases in yield and system load factor, PRASM declined 7% from Q3 2023, but was way above Q3 2019 PRASM and Q3 2022 levels as we had anticipated. The proactive goodwill policies we've put in place to mitigate our customers' travel disruptions during the pilot contract negotiations was the right thing to do. During that time, we saw multiple weeks of softer booking volumes as some customers postponed or canceled itineraries, while others chose to fly with other carriers.

Speaker 3

This had an impact in Q3, particularly in September and continued to a lesser extent in the first half of October. Now let's zoom into our markets. Both domestic and U. S. Transborder markets did well and we saw good demand for air travel in a competitive marketplace.

Speaker 3

Our 6 Freedom offering continues to prove its value, yielding results that continue to surpass our expectations. I'd like to reiterate that our investment in U. S. For the long run and our 2024 transborder network continues to meet our expectations. Looking at our international markets, our performance in the Atlantic remains stable.

Speaker 3

We saw good demand, but as we said in the last call, it was impacted by competitive market pressures this summer. While the Paris Olympics had a negative effect on France, we're witnessing a significant rebound in demand in September and onward. We also operated less capacity than originally anticipated. For instance, we extended our suspension on Tel Aviv throughout the quarter. The Pacific outperformed.

Speaker 3

We continue to bring more services to Asia Pacific regions like Japan, South Korea and Hong Kong. With a capacity increase of 31% in the quarter, the revenue expansion was limited by comparatively lower yields and lower load factors year over year. This was expected as we experienced exceptionally high yields and load factors in the region in 2023. This market saw a rapid ramp up of demand and the region was significantly underserved at this time last year. Our premium offering remains strong.

Speaker 3

Revenues from premium cabins reached 28% of total revenues, a 1 percentage point increase from Q3 2023. We continue to deliver a competitive offering for our premium customers with an unmatched product in Canada. This includes the choice of the most premium seats of any airline in the Canadian market. For cargo, and as highlighted by Mike, we're very pleased with cargo's delivery with sequential improvement in Q3. Revenues grew 18% year over year to $253,000,000 quarter.

Speaker 3

This is mostly due to higher yields and volumes in belly cargo in the Pacific market. We also surpassed expectations on our 767 freighter operation. Our right sized network and freighter to belly commercial model are producing solid financial results that we believe are sustainable in the long run. We're confident that cargo will continue to perform well. Air Canada Vacations continues to execute in a highly competitive market.

Speaker 3

Although demand is strong, we'll be watching the effects from rising hotel costs and foreign exchange, which may impact the coming winter season. With only 1 quarter left, we expect full year capacity to increase by around 5% from 2023. This is slightly less than we had anticipated due to ongoing supply chain pressures, aircraft availability and geopolitical conditions. We're not providing any 2025 guidance today. We will do so at the upcoming Investor Day, but at this time, our plans are targeting capacity growth in the mid single digit range in 2025.

Speaker 3

On the demand side, load factors are stable year over year going into Q4 and we see demand remaining healthy over the next three quarters. One important barometer of leisure demand sentiment is demand for some market with our countervacations. Importantly, we see no slowdown in leisure demand along the booking curve for the coming quarters. We're also encouraged by the early results in our North Atlantic network, with strengthening yields and demand despite some weakness in our Middle East and India services. On the Pacific, even with a more challenging yield environment year over year, we expect yields will continue to be elevated, which will lead to strong performance overall.

Speaker 3

And just yesterday, we announced that in a few weeks, we'll be resuming our nonstop services between Canada and Beijing and increasing our flights between Canada and Shanghai, both important markets in our global network. On the whole, we observed healthy demand surpassing 2024 levels and expect a sequential percentage yield improvement in Q4, keeping in line with our previously committed full year PRASM expectations. We see early encouraging signals of a favorable yield environment in Q1. Let me conclude with a few key points. We are executing our plans with diligence.

Speaker 3

We will continue to bring scale at our hubs, leverage our diverse and competitive international network and grow into our 6th region of potential. These strategic pillars are supporting our results and are the backbone of our future plans. Thank you, Maxi. And John, over to you.

Speaker 4

Thanks, Mark. Good morning, everyone. And thanks to all our employees for their passion and drive in helping us deliver our Q3 results. And gros Melis at Touker L'Equipe. In the quarter, we recorded operating income of $1,000,000,000 and adjusted EBITDA of $1,500,000,000 Our net income of $2,000,000,000 included a $1,200,000,000 book tax recovery for previously unrecognized tax attributes.

Speaker 4

Adjusted net income was $969,000,000 or $2.57 per diluted share. For the 3rd quarter, operating expenses increased 3% year over year, mainly in support of capacity growth. We also recorded certain contract related adjustments in the quarter, benefiting our full year adjusted CASM expectation by 1 percentage point. This is reflected in our updated 2024 financial guidance. Fuel expense increased 1% versus Q3 2023 with a year over year decline in price per liter inclusive of an $8,000,000 hedging loss, largely offsetting the increase in fuel expense from capacity growth in the quarter.

Speaker 4

Comparatively, Fed recorded a hedging gain of $68,000,000 in Q3 2023. Labor expense increased 3% year over year in line with planned headcount related to capacity growth and the impact of higher salaries and wages compared to Q3 2023. Keep in mind that we began accruing for a new pilot agreement in the Q4 of last year. Maintenance expense decreased 4% from Q3 2023, mainly due to a favorable contract adjustment in the quarter. It more than offset a greater number of scheduled engine and airframe maintenance events from additional flying and higher average prices year over year.

Speaker 4

In sum, Q3 2024 adjusted CASM decreased 0.4%

Speaker 2

year over year. Turning to cash flow.

Speaker 4

We generated cash flow of $282,000,000 in the quarter, a $147,000,000 year over year improvement. Year to date, we generated almost $1,800,000,000 in free cash flow with $1,500,000,000 of CapEx spend. We expect slightly higher CapEx across the portfolio for the Q4 due to the timing of certain events. We forecast full year CapEx close to $2,500,000,000 which includes the addition of 2 A220s to

Speaker 2

the fleet this year. With the ratification of

Speaker 4

the Alcoa agreement in October and some of its retroactive impact, we forecast a cash payout before year end. This will be a working capital draw in Q4. Separately, given that the new labor agreement includes significant pension benefit improvements, we are highlighting that we will be recording a one time pension pass service cost charge of about $500,000,000 in the 4th quarter. The cash impact of these planned benefit enhancements will be funded out of the planned surplus and are not expected to impact Air Canada's liquidity or shareholders' equity positions. This morning, we updated our full year guidance for 2024.

Speaker 4

For full year 2024, we now expect operated capacity to increase around 5% year over year. Our full year adjusted EBITDA to be approximately $3,500,000,000 and our adjusted CASM to increase by approximately 2% year over year. This is inclusive of our underlying assumption for fuel and foreign exchange. It also reflects the net impact of the contract related adjustments I referred to earlier and the revenue impact of the PUDO negotiation uncertainty that Mark has noted, both of which in the aggregate produce a $100,000,000 benefit of 2023 2024 earnings. As Mark noted, we are targeting mid single digit capacity growth in 2025 and continued stability, loads and yields.

Speaker 4

We do see more intense unit cost pressure in 2025 driven by involving regulatory environment, higher airport infrastructure fees, continued maintenance cost inflation and the full year of our new pilot labor agreement. We will remain focused on driving cost discipline and productivity to alleviate these pressures. We continue to build up the fleet and in 2025, we expect to add another 9 A220s and take the first two deliveries of the game changing Airbus 321XLR. We are, of course, keeping an eye on the situation at Boeing and monitoring how this may affect the delivery timeline of our remaining 12 MAX aircraft with planned deliveries in 2025. I'd like to note that we recently finalized a loan commitment from EDC of up to $1,350,000,000 to support the purchase of each of the 27 A220s to be delivered over the next 3 years.

Speaker 4

Notwithstanding the beginning of a higher CapEx cycle, we are targeting breakeven positive free cash flow in 2025 with progressive improvements in free cash flow margin over the coming years. We have successfully navigated a tricky environment in 2024. We now see a more normalized and stable environment emerging. We are confident in our future and we are committed to delivering shareholder value while creating a world class global airline for our customers, community and all stakeholders. We remain focused on responsible risk management and the preservation of our strong balance sheet.

Speaker 4

After restoring our pre pandemic debt and leverage metrics, we are pleased to announce a new share buyback program allowing us to purchase up to 10% of the public float. This would remove some of the dilution experienced from financing decisions that were necessary during the pandemic. Our buyback program is consistent with our capital allocation roadmap and our strategic plan. It can be executed concurrently with our fleet strategy investments and our credit quality objectives. We will initiate the program on November 5 and are committed to aggressively pursuing opportunities to buy back shares under our reinstated program.

Speaker 4

We look forward to a more fulsome dialogue on our business plan, underlying strategies and resulting investment thesis at our December 17 Investor Day in Toronto. Our entire senior leadership team is looking forward to sharing our targets and learning long term ambition with you. Thank you. And now over to you, Mike.

Speaker 2

Well, thank you, John. We have a very strong foundation, what I consider to be an investment grade balance sheet and a very experienced leadership team, all of which provide many opportunities to enhance value. We are very confident about achieving our strategic priorities. And let me highlight a few points that give me confidence about our positive future for this company. Our strong balance sheet gives us both resources to reinvest in our business and seize opportunities as they come up and play defense if necessary.

Speaker 2

Mark spoke to our healthy demand. This presents opportunities that our experienced management team is capitalizing on using the wide range of tools at their disposal. We have a diverse efficient fleet that will be enhanced with the addition of 88 state of the art new aircraft over the next 5 years. Our extensive global network anchored by 3 ideally located hubs allows us to allocate resources to the most promising markets. For example, we've been carefully rebalancing our Asian and European operations in response to evolving demand.

Speaker 2

We've also been building our transborder and international network. In addition to Star Alliance and the strategic partnership we formed, we now have 3 joint ventures and 122 interline partners. And last week, we added our 40th co chair partner AirBaltic to increase our presence in Northern Europe. Our Aeroplan loyalty program is a powerful tool and it truly stands out as Canada's best travel rewards program. We view Aeroplan as a key competitive advantage, a contributor to margin expansion and a loyalty driver.

Speaker 2

And we continue to build out the program, finding new ways to offer added value for members, such as our recently announced expanded strategic partnership with Marriott Bonvoy. We also launched our new loyalty partnership with Canada's leading benefits provider, Manulife during the quarter. In the same vein, our other business units Air Canada Cargo, Air Canada Rouge, and Air Canada Vacations also help us reach into specialized markets and serve a much wider range of travel and air transport needs. All these powerful strategic assets allow us to compete effectively in more markets and add resiliency through diversification. Customer service remains the core of our business, simplified by the achievement of winning more awards than any other Canadian carrier at the 2024 SkyTrax World Airline Awards and ranking 29th in the world, continuing our multi year improvement trend from our 50th place rating in 2022.

Speaker 2

We were by far the highest rated Canadian airline. And earlier this week, our commitment to delivering a superior pass through experience earned us the prestigious 2025 Apex 5 star recognition, which is based on customer feedback. And we will be further upgrading our service through digital technologies and recently welcomed Pras Al Osman as our 1st Chief Digital Officer. His team will enhance and accelerate our digital transformation strategy to further elevate the customer experience and drive operational efficiency and corporate productivity. And more conventionally, we're also introducing added supports and new training for our customer service and frontline people.

Speaker 2

This includes redesigning processes and simplifying policies. We are picking up momentum each and every day and we anticipate our strategy will drive long term value creation to the benefit of all stakeholders. I'm confident and excited about the prospects of ProAir Canada And I'm looking forward to hosting you in Toronto on December 17th, where you will have the opportunity to hear directly from our leadership team and better understand the unique strengths and opportunities of our business. Hope to see you all there. Finally, I would like to extend my gratitude to all employees for their dedication and hard work.

Speaker 2

All are critical players of our team. Each member's unique contributions and passion have been integral to our success, showcasing the power of teamwork and perseverance. Thank you, Marcin. We will now be pleased to answer your questions. Over to you, Valerie.

Speaker 5

Thank you, Mike, and thank you

Speaker 1

all for joining us this morning. 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, Sarah.

Operator

Thank you. Your first question comes from Kevin Chiang with CIBC. Your line is open.

Speaker 6

Hi. Thanks for taking my questions here. Thanks for the color in terms of

Operator

Kevin, sorry to

Speaker 1

interrupt you. Could you speak up a little bit?

Speaker 6

Can you hear me better here?

Speaker 1

Yes, much better. Thank you.

Speaker 6

Perfect. Thanks, Val. So thanks for the color on some of the moving parts in Q4 related to the new pilot agreement. You called it the 500,000,000 dollars pension item. But just wondering if there's any other accruals we should be thinking about in terms of the retroactive payment in the Q4?

Speaker 6

And I guess, how should we think about run rate the run rate wage line, I guess, in 2025 on the back of this new agreement? You've been kind of tracking around $1,100,000,000 a quarter. Just what does that look like in 2025?

Speaker 4

Yes. So I think a couple of things. One that we mentioned and you highlighted the pension charge. So as I said, shouldn't have any implication for either cash or equity as we will be using the plant surplus. With respect to the retroactivity, we do intend to make a payment for retroactivity, so the accrual and the cash impact of that accrual in the Q4.

Speaker 4

And so that will be a draw on working capital, probably an outsized draw relative to what you would have expected. And then finally, as far as the run rate, I would say, generally speaking, as we've been tracking here, you'll see a little bit more maybe cost for the pilot agreement in 2025 as you have certain work and work sell benefits that will accrue that are not retroactive, so to speak, so the agreement takes place. Those will be costs some pressure next year. But overall, in the whole, more or less what we expected.

Speaker 6

Okay. That's helpful. And maybe just my second question. As you look at your capital plan over the next few years here and you called out kind of neutral free cash flow in 2025. Just wondering how you're thinking about sales leaseback as a lever to maybe reduce the capital outflow or the CapEx outflow over the next 3 years?

Speaker 6

Have you decided like what percentage of that CapEx you'd want to fund through a sales leaseback?

Speaker 4

Yes, Kevin. And this will also be something that we'll be able to cover a little bit more detail on Investor Day. So clearly, we'll be talking about fleet strategy and overall how we manage that, the quality balance sheet as well as generating free cash flow. So with respect to just some early color on that, we have a fleet ownership highly equitized in fact probably around 80%. And we do believe that there's lots of room there.

Speaker 4

It's probably be more historical kind of 60%, 65% owned fleet. So some of that will be achieved through various mechanisms, including sales leasebacks. As you know, A lot of the aircraft in our order book are under our order. So there's opportunities to do some sales leasebacks as we go through that cycle. And so I think overall our balance sheet is in very good shape.

Speaker 4

So it kind of triangulates that highly equitized fleet leverage around 1 and going into a more elevated CapEx cycle, there's opportunity for us to be able to manage cash liquidity and free cash flow using some of those tools.

Speaker 6

Perfect. Thank you very much.

Operator

The next question is from Savi Syth with Raymond James. Your line is open.

Speaker 7

Hey, good morning. I appreciated the color on what you're seeing in the various geographies, but I wonder if you could kind of take a little bit more of a deeper look and where are you seeing demand weakness versus kind of oversupply? I'm just trying to get a sense of you here, pressure on the consumer, but given your results, it seems like things are holding up. So I was kind of curious, just by entity where the what you're seeing in terms of supply and demand?

Speaker 3

Hi, good morning, Savi. In the quarter, I mean, the one area where we saw a little bit of pressure was on the Atlantic. We don't think it was a demand issue. We think it was more a rapid capacity increase issue that caused a little bit of weakness. We'll see a

Speaker 4

little bit of that on

Speaker 3

the Pacific in 2025. But other geographies that we fly Canada, U. S, the Sun market, we see stable demand and no sign of weakness anywhere.

Speaker 7

And if I may follow-up on that, just what are you seeing on the kind of the corporate travel side? Is that improving? Is it stabilizing? And just any differences between kind of domestic transporter?

Speaker 3

Yes, it was improving. Unfortunately, we ran into a bit of a situation about some labor uncertainty that kind of slowed us down in the fall. But it's definitely encouraging signals going forward and in particular more strength on the U. S. Network than on Canada.

Speaker 7

Helpful. Thank you.

Operator

The next question is from Chris Murray with ATB Capital. Your line is open.

Speaker 8

Yes, thanks folks. Good morning. John, maybe just talking about the NCIB for half a sec. One of the questions I've already got this morning is just about how to fund this thing, particularly when you think about flat free cash flow next year. Can you just talk a little bit about your thoughts around capital allocation and the puts and takes with the NCIB in the mix and how you fund that over the next little while?

Speaker 4

Sure. So a couple of things. One is, again, there'll be some additional longer term color as we kind of go into invested in. I think it'll give some clarity to all this. But I mean and I would say that we have been pretty methodical about how we've come to this right.

Speaker 4

So we did come out of 23. We paid down a lot of debt. Our leverage metrics are in a very good place at around one time. And we do hold quite a bit of liquidity. We've got a pretty good idea about our monthly strategy, our CapEx cycle.

Speaker 4

So with all of those things put together, we do see the opportunity here to restore some of the share count. This is something that was necessary during the pandemic and cannot be yield. The liquidity exists on hand. As we look forward, I think even as we get to elevated levels of CapEx and as I had mentioned on the prior comments with Kevin, we do have some tools here to be able to manage through all of that. And frankly, over time, we do see margins kind of accruing again and growing back to higher team levels.

Speaker 4

So the combination of all things is really that we believe we have free long term structural free cash flow generation. And as we kind of gravitate towards that, we have a very strong balance sheet and the ability to actually do both invest in the business, but also restore the share count.

Speaker 8

Okay. That's helpful. And then one quick question just on the fleet. I did notice there's a couple of 767s that seem to be coming back in into passenger service. Any color around are those kind of either cargo aircraft that are being reconfigured?

Speaker 8

Are those new 767s or leased? Or any sort of color on what that what's going on there would be helpful. Thank you.

Speaker 3

Hi, it's Mark Riauvi. I have a little chuckle here. These are 2 older 767s that used to be part of our passenger mainline fleet. There's still some life on them and we can restore those aircraft on an interim basis to give us some insurance on our fleet for the next 2 years. There's no plan to have that as part of our long term fleet.

Speaker 3

It's more of a temporary insurance, if you will.

Speaker 8

Okay. So think of it as a bridging exercise as opposed to kind of look back in 767 operations again?

Speaker 4

Exactly. Okay, awesome. All right. Thanks, folks.

Operator

Next question is from Konark Gupta with Scotiabank. Your line is open.

Speaker 9

Thanks, operator. Good morning, everyone. Just maybe on CASM, John, if I look back at your guidance for the full year and back out the 1st 3 quarters, so it sounds like the Q4 CASM is on just a basis is tracking 5% up and on flattish capacity. You guys are saying mid single digit kind of capacity growth next year. Is it reasonable to expect that there will be some CASM inflation next year, but not to the tune of 5%?

Speaker 4

Yes, I think we'll get into 2025 guides over probably be able to give color on that at Investor Day as well. But I think that I mentioned in my comments, we do still have some headwinds and I think that does put a little bit of pressure on year over year CASM. Mark mentioned that probably looking at something in the mid single digits for capacity growth. We're going to stay disciplined, but we do have some opportunities for growth and obviously still in somewhat of a recovery overall system levels and bringing on some aircraft as well, but not to the tune that we will in 2026, 2027. So I think you'll see scale and capacity and modernized aircraft give us some lift in terms of just momentum in CASM in 2026, 2027.

Speaker 4

2025 will have some pressure. 5%, I mean, I think we probably can get some claw back some of that cost growth with productivity and just efficiency as we continue to get better here post pandemic and as the system is getting and our people are getting trained and restoring a higher level of traffic. So all in, I'd say that there is going to be some pressure next year, maybe a bit better than 5%, I'd say, we'll give you some color on that at Investor Day, but probably in the neighborhood of 3%, 4%, probably sounds a little bit down the fairway for overseeing.

Speaker 9

That's great color. Thanks. And on the CapEx side, so it sounds like the CapEx projections have increased for the next 4, 5 years or so. And it seems like it's coming not from committed CapEx, but non committed CapEx. Any color on what's driving this CapEx projection outlook for the next few years?

Speaker 4

Actually, I think it reflects the order book. We do have a higher percentage of non conforming aircraft than we'd like. So we're moving some dollars to configuration upgrades across our cabins and our fleet. We continue to be very focused on customer experience with things like lounges. So overall, I would say that the maintenance part of the business continues to be a little bit inflationary.

Speaker 4

So there's always a little bit of pressure from that. But ultimately, it's bringing on the new aircraft. I'd say that's the lion's share of what you're looking at. Probably PDPs play a role in how that's kind of flowing through the next couple of years. But ultimately, really it's about 70 aircraft coming into the fleet over the next several years and then some reconfiguration and some investments in lounges.

Speaker 9

That's great. And if I can quickly squeeze one more on the leverage ratio. So I said 1x right now and with the CapEx plans for the next few years, right? And the breakeven free cash flow, buybacks as well. Do you see like 1x being super low, meaning like you'd like to optimize the balance sheet to close it to 1.5?

Speaker 4

Yes. Yes. And that was I think inherent in my comments on previous questions here this morning is that it's beyond the fact that our leverage is 1.0 which is very positive, obviously, and we like that and we like a strong balance sheet. So there's no take back on wanting a strong balance sheet. But we also have a lot of unencumbered asset strength.

Speaker 4

We have an Aeroplan franchise, no leverage against that. We have a highly equitized fleet. So all of these things, we have an increased revolver that we put in place earlier this year. And again, we do want to preserve cash generation. So when you combine all of these things, it does give us, we believe, some room to be both very responsible on credit quality and at the same time leverage the balance sheet so we can generate returns and concurrently invest in our business as well as return capital to investors and shareholders.

Speaker 4

Thank you. Conor, maybe just one quick. I just want to catch myself on your first question. One thing I would just put out there for all the benefit of all of you on the call here is, in 2020, we talked about like a year over year growth on CASM. Just make a note of the fact that in 2024, we get a little bit of tailwind there and I mentioned it in my comments, right, about 1 percentage point of tailwind.

Speaker 4

I don't see that as kind of being a recurring. So that's going to give you a little bit of a bump. So in real kind of subsequent, we probably see 3%, 4%, but you do get a little bit of a bump if you kind of normalize a 24% CASM. Percent.

Operator

Next is Jamie Baker with JPMorgan. Your line is open.

Speaker 10

So I just wanted to follow-up on the CapEx. So the $1,400,000,000 increase over 2025 through 2028, the increase isn't directly fleet related. You said lounges are in there, PDP noise. I don't want to ask the same question a second time, but I'm still having trouble reconciling the $1,400,000,000 increase versus what you guided to 90 days ago.

Speaker 4

Across the 3 years, right? Yes. So I would tell you that it's really timing, I guess. Ultimately, we've got the aircraft orders that we expect to fall in. Pretty much, I think, the 787s are the biggest piece of that 3/21 XLRs.

Speaker 4

Yes, no, there's not a lot more color to add to that. I would say that it's probably just truing up our numbers to reschedules

Speaker 6

and some

Speaker 4

of that might be a little bit of the lounges and the configuration, but it wouldn't be to the tune of $1,000,000,000

Speaker 10

Right. And then on transatlantic, so several of the U. S. Airlines are speaking enthusiastically about RASM trends going forward. I believe in the prepared remarks, you referred to it as stable in the Q3.

Speaker 10

When we think about your 2025 forecast, and admittedly you're not sharing that with us yet, but would you be able to rank order your geographies next year best to worst in terms of your RASM expectations?

Speaker 3

Hi, Jamie. We shared a little bit of the enthusiasm on what we're seeing on the transatlantic for Q4 and beyond. I think it's very, very early signals for 2025, so it's kind of hard to give you a real definitive statement on what's going to perform in 2025, but early indicators suggest the Atlantic is going to bounce back. We're going to have a fairly decent transborder performance next year. We think the watch out, if there's any watch out is obviously on the Pacific where the yields remain still elevated

Speaker 6

and there's

Speaker 3

a bit of downward pressure.

Speaker 10

And domestic would fit in where?

Speaker 3

Yes. Domestic would be relatively stable. It's a very environment, so I don't really see much. I think stability is the appropriate term.

Speaker 10

Okay. That's helpful. Thank you very much, everybody.

Operator

Next question is from Steve Trent with Citi. Your line is open.

Speaker 11

Yes. Good morning, everyone, and thanks very much for taking my questions. First, I was just curious if you could remind me, now that you guys have launched this share repurchase, are there any pandemic era government strictures that on which you guys still have to abide, other corporate actions or servicing low density routes or this kind of thing or is that era now order under the bridge?

Speaker 4

Yes, it is. The chapter is closed on all of that.

Speaker 11

Great. Appreciate that, John. And just the other thing, I was wondering if you could just give us a little color on what you're seeing on air cargo. Maybe demand wise, if any 1 or 2 regions look exceptionally good or somewhat worrisome under the current environment? Thank you.

Speaker 3

Hi, Stephen. It's Mark. The overall cargo environment is quite favorable. I would say it's quite favorable in Asia Pacific. We see similar trends in India and those really kind of stand out in terms of weakness or any areas of concern, none at this time.

Speaker 3

And we think this cargo tailwind continues into Q4 and the early part of next year.

Speaker 11

Okay, super. Thank you very much.

Operator

Next question comes from the line of Cameron Doerksen with National Bank Financial. Your line is open.

Speaker 12

Yes, thanks. Good morning. Just wanted to clarify something that you said in the prepared remarks around the yield into Q4. I think you said you expected overall yields to be sequentially higher in Q4 versus Q3. Do I have that correct or did I mishear that?

Speaker 3

Hi, Karen. That's correct.

Speaker 12

Okay, perfect. So I guess my main question is just around, I guess, labor negotiations. Obviously, good to have the pilot deal in the rearview mirror here. But you do have some additional negotiations coming up in 2025, I guess, specifically the flight attendants in March. I'm just wondering if you can talk about anything that you might do differently, I guess, with this negotiation process because we did have kind of a year of uncertainty, I guess, while the pilot negotiations were ongoing.

Speaker 12

And I'm just wondering if there's maybe urgency to get something done earlier, so you can avoid, I guess, the impact on bookings and things that we saw in the past 12 months?

Speaker 2

Yes. Good morning, Cameron. It's Mike. I'll take that one. Yes, we think it'll probably be a shorter process than the pilot negotiation, which went on for approximately 15 months.

Speaker 2

And as you can appreciate, it's too early to speak about any expectations at this point in time.

Speaker 12

Okay. All right. No, that's great. I'll leave it there. Thanks very much.

Operator

Next question comes from James McGarrigle with RBC Capital Markets. Your line is open.

Speaker 13

Hey, thanks for having me on and good morning everyone.

Speaker 4

Hi.

Speaker 13

Just wanted to ask the question, given some of the favorable yield trends you flagged into Q1, are you seeing any changes in the Canadian industry with regard to adopting kind of a more measured approach to capacity kind of in line with what we're seeing in the U. S. Market?

Speaker 3

Hi, James. There are no major changes. I think there's a more rational capacity situation going into Q1. I mean some geographies are up, some are pretty flat. I think what we're starting to see is at this time last year, we started to see some normalization in our yields and we start to lap over that in the base period.

Speaker 3

So that's why in part we're expecting Q1 to be or look more favorable from a yield perspective.

Speaker 13

Okay. I appreciate that. And just as a longer term question here on some of the recent changes to the Canadian immigration targets. Does that impact your long term strategy at all? And any updates into how you're thinking about the future, which looks like some potential near term headwinds to population growth in the upcoming few years?

Speaker 3

James, not materially. I mean, we there's still going to be a decent run rate in terms of number of immigrants, even if it's a reduced amount. And we've had multiple decades of significant immigration into the country that's led to the demand situation that we fly today. So I don't think it really changes all that much. I still think we're going to have a favorable international demand environment to and from Canada for the years to come.

Speaker 13

Appreciate it. And I'll turn the line over. Thank you.

Operator

Next question is from Andrew Didora with Bank of America. Your line is open.

Speaker 14

Hey, good morning, everyone. John, just to clarify, I think I heard you say neutral free cash flow in 2025. Is that on your committed Quebec figure of 3.6 $1,000,000,000 And then kind of as a follow-up to that, I guess maybe to ask the CapEx question another way. We've seen many U. S.

Speaker 14

Airlines with a Boeing order book bring down their spend plans in the out years. Why have you not seen that? Or is there any framework that maybe you can give us about kind of what that could look like going forward? Thank you.

Speaker 4

Sure. Yes. So, yes, have a pretty good idea for 25 capital and CapEx, I should say, and we will be in that range, as you mentioned. I think with that inclusive, our expectation here is to drive our expectation. I'll correct that.

Speaker 4

I'll say our target is to drive and we'll give you expectations when we meet in at Investor Day. But we're targeting free cash flow breakeven to positive for next year. With respect to kind of Boeing and aircraft delivery, we did make some adjustments a couple of quarters back. You'll recall we had a lot of aircraft coming in, in 'twenty six. We did spread that over a couple of years.

Speaker 4

We did that for a couple of reasons. 1, working with them. 2, just our own ability to kind of take them and bring them in effectively. So with respect to future look and how that might evolve, frankly, as I mentioned in my comments, we're staying very close. We have very good relationships there and they are going through their own issues right now and we'll let them settle through all that and then we'll make any adjustments as necessary and we'll balance that so that number 1, they can manage the delivery schedule as appropriate and number 2, that we can take the aircraft effectively when they're ready.

Speaker 4

So that's a conversation that will evolve. There's no I don't have a perfect answer for what may come out of it, but certainly over the next whatever 2 to 6 months, we'll get a little bit more clarity and with that, we'll make the appropriate adjustments. I think we try to manage our mid and long term planning. So we take into consideration some of the potential volatility and I think by and large, we have some clarity as to the roadmap we're trying to execute for the network.

Speaker 14

Got it. Makes sense. And then I know, John, you hedged some fuel in 3Q and I don't think it was talked about. I didn't see it in the filings. But with the recent decline in jet fuel prices, do you have any hedges in place today?

Speaker 14

And just how do you think about that going forward if you'll continue to be opportunistic? Thanks for taking the time.

Speaker 4

Yes. Thanks for bringing that up. So no, but look, I guess no regrets, be honest with you. I mean, it's a very volatile environment, right? And what we do is we run an airline and we run an airline and we try to manage the different volatility that's in the system by just focusing on the things that we can control.

Speaker 4

And in the sense of fuel and fuel hedging, we did take some positions in September that also covered Q4. So we're about 50% hedged in Q4. And as you well noted, fuel price has been softer. So there's some negative impact there. And we'll it's included in our guide obviously here today.

Speaker 4

And so Q4 will take some a little bit of pressure relative to what you pay at the pump. But then again, who knows, we're November here and we're and you don't know the next 60 days may bring as well. So, we feel comfortable that at least we have an environment we can operate in for 2025. I mean, we typically, as you've seen, we've looked at things in the shorter term and start to protect volatility there relative to our booking situation and no real changes. I think we just try to manage responsibly and at the same time, not get too, too far ahead with the hedging program on there.

Speaker 14

That's great. Thank you.

Operator

Next question is Sheila Kahyaoglu with Jefferies. Your line is open.

Speaker 5

Thank you so much and good morning everyone. Good morning. Maybe if I can ask about the mid single digit capacity guidance for 2025 just very different than your U. S. Peers.

Speaker 5

What gives you confidence in that and how should we see the capacity geographically?

Speaker 3

Should confidence in terms of our ability to grow or ability to execute?

Speaker 5

Yes, just the mid single ability to grow more so mid single digit versus what we've seen commentary out of the U. S. Carriers has been much more subdued in the 1% to 3% range, let's say, and the capacity cuts we've seen in the U. S, at least domestically. How do you think about that mid single digit?

Speaker 5

Why come out with such a robust target? And how do you think about that geographically?

Speaker 3

Yes. Okay. Great question. So first comment, we're still not at 2019 level of capacity. We're still somewhere in the 90% range or close to.

Speaker 3

So there's still catch up for us to get back to 2019. In the next year, the majority of the fleet that we're getting is narrow bodies and you'll see us restore certain domestic links that we've either had to reduce or

Speaker 1

pull out of.

Speaker 3

And we're also going to be increasing the size and scope of our 6 Freedom network to really fortify our international route network long term. Those are the big themes for 2025. We don't have much wide body or international capable capacity coming in in 2025. We'll get that as the 321 XLR arrives later in the year.

Speaker 5

Okay. Got it. Thank you so much. And then maybe if we could just I know a few questions were asked on CASM ex, if you could just put a finer point on that CASM ex up 1% year to date with the full year guide, up to 2%. It seems like some there's like some contract related adjustments that are tied to the maintenance fund, which stepped up 100,000,000 dollars sequentially.

Speaker 5

I guess, maybe that's GTF implications there. How do we think about that? And then implied exit rate for the year is up to mid single digits. So what's the right way to think about CASM ex in 2025 knowing it's somewhat been touched upon?

Speaker 4

Yes. I think I mean, it was actually very clear on what I said, maybe more than I wanted to be, but before this call to be frank. But I think that what you should expect is that the 2% in 2024 probably feels a little bit or looks a little bit better than it is probably we had a guide previously 2.5% to 3.5%. So we did clean up some of the contracts, maintenance and other things. And so as a result, we get a little bit of a kick there.

Speaker 4

So it's down to 2%. But if you normalize that kind of think 3%. And then that's frankly before I talk 2025, for what it's worth, I think it shows a lot of ability to on lower CASM than we started the sorry, lower ASMs when we started the year. I think it shows a lot of agility on the airline to be able to actually manage costs and then bring this the airline in to what is a better guide than originally had anticipated on higher ASM. So for 1, I think we feel good about just the ability to execute some efficiency as we go through things.

Speaker 4

And for 2025, I think that you probably have to give back that one point that we get this year. So that kind of normalizes out. And so your base will be a little bit depressed where we land in CASM, absolute CASM ex in 2024. So move up probably in the neighborhood of 3% to 4%, and we'll refine that number and I'll reserve the right to make an adjustment when we guide in December. But I think that's the kind of level we're looking at.

Speaker 4

So you get a little bit of you got normal inflation, you get some pressure that I mentioned earlier, airport fees will go higher. We do go through another labor agreement next year. So that will probably have an impact. I think you'll feel the full implication of the pilot agreement a little bit more than you do in 2024, you'll feel in full in 2025. And so those elements will have some upward pressure.

Speaker 4

And then I think we'll be able claw some things back here with productivity and just a little bit of scale on the airline. So that's kind of the math. And I would say that overall, as we go into 2026, 2027, as Mark said earlier in 2025, we're getting a lot of short haul aircraft. It's not the ideal in terms of managing down CASM ex. So as we get longer haul new aircraft and had some ASMs on longer routes with modern aircraft, I think you'll see a little bit of tailwind there, but that's probably a year out from next year.

Speaker 5

Got it. Thank you so much.

Operator

This concludes the question and answer session. I'll turn the call to Valerie for closing remarks.

Speaker 1

Thank you, Sarah. Once again, thank you for joining us this morning. Should you have any additional questions, don't hesitate to reach out to us at Investor Relations.

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Earnings Conference Call
Air Canada Q3 2024
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