Prudential Financial Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 16, 2024

There are 14 speakers on the call.

Operator

Good morning, and welcome to Air Canada's 4th Quarter and Full Year 2023 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, this conference call is being recorded. I would now like to turn the call over to Valerie Duran, Head of Investor Relations and Corporate Sustainability at Air Canada.

Operator

Thank you. Please go ahead.

Speaker 1

Thank you, Julienne. Welcome and thank you for attending our Q4 year end 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 executive team members are with us too this morning. 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.

Speaker 1

John will cover our financial performance and guidance before turning it back to Mike. We will take questions from equity analysts after this call. 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 4th quarter and full year news release available on aircanada.com and on SEDAR Plus.

Speaker 1

And now, I'd like to turn the call over to Mike.

Speaker 2

Great. Thank you, Valerie, and good morning to everyone. Thank you for attending this morning's conference call to discuss our Q4 and full year 2020 results, which capped a very successful year for Air Canada. We produced strong results in Q4 of 'twenty three with operating revenue of approximately $5,200,000,000 up 11% from the same period in 2022. Adjusted EBITDA of $521,000,000 was up almost 34% from the previous Q4.

Speaker 2

We announced record full year operating revenue of $21,800,000,000 up 32% from 2022. Operating income of $23,000,000 was nearly $2,300,000,000 That's a $2,500,000,000 improvement from the previous year. Our adjusted EBITDA was nearly $4,000,000,000 more than twice that of the full year 2022 and at the top end of our guidance that we provided as we predicted last quarter. Further, our adjusted EBITDA margin of 18.2% was once again among the highest in North America. Our performance on profitability and revenue was complemented by effective cost control that kept our adjusted CASM to mid range.

Speaker 2

We also significantly deleveraged the airline. We remain committed and acted on our promises, operating against headwinds in our global industry and in the economic and geopolitical environment. We also delivered on key strategic priorities and took important steps to maintain our consistent performance, reaffirming our dedication to our plan. We are strategically adding to our key hubs, enhancing our level of customer service and improving our operational reliability. In 2023, we saw a meaningful improvement year over year in key operational metrics despite many uncontrollable issues we had to deal with.

Speaker 2

Among other strengthening metrics, our flight completion factor and baggage handling success rate both improved in 2022. Our on time arrivals rose by nearly 10 percentage points of 2022 and were above 2019 levels for the Q4. We have seen increased customer satisfaction across the entire system with the most significant areas of improvement being the handling of delays, cancellations and mixed connections. These have been a key area of focus for the organization to ensure that our customers get where they need to go. I thank everyone for their hard work and dedication to service excellence throughout the year and for caring for our customers while safely and comfortably transporting them to their destinations.

Speaker 2

Thank our customers who choose to fly with Air Canada in 2023. We know that our customers like investors and other stakeholders highly value consistency and reliability, which are integral to our service excellence. These are all things we're fully committed to keep delivering and improving upon for 2024 and beyond. Thank you, Marcie. Marc, over to you.

Speaker 2

Thanks,

Speaker 3

Mike, and good morning, everyone. My sincerest thanks and congratulations to all of our employees for the incredible year that we had. I'll start with a quick overview of the Q4. Operating revenues reached $5,200,000,000 an 11% increase from the same quarter last year. This increase was driven by 12% higher passenger revenues, mainly stemming from higher traffic and a higher yield on more capacity.

Speaker 3

International markets, notably Atlantic and Pacific performed very well in the quarter and were the main contributors to the year over year increase. We had parity in revenue performance in both premium and economy cabins in the 4th quarter above 0.22 levels and this speaks to the diversification of our cabin configuration strategy. Turning to the full year, we're very pleased with the operating revenue we generated in 2023. We achieved record operating revenues of $21,800,000,000 which is 32% higher year over year. We saw a 36% growth in passenger revenues, primarily stemming from a strong demand for travel in all markets and a better operating environment.

Speaker 3

We have very strong passenger load factor performance of 86.7% for the year and maintain strong yields 6% above 2022 even with a 4% increase in our average stage life. We build scale at our hubs, we've restored services and leverage our partnerships to drive a robust and growing internationally focused airline. We operated on average 10 25 daily flights in 2023 against 945 in 2022. We flew to 188 direct destinations on 6 continents and carried 24% of our customers. The performance in 2023 was propelled by our strong effective network strategy, which delivered solid results on our international network.

Speaker 3

Passenger revenues from international services increased 50% from 2022 driven by strong demand. To put this in perspective, international accounted for about 65% of the increase in total passenger revenues. This highlights the strength of our network and demonstrates how well we're positioned as Canada's leading global airline. North America also performed very well with significant increases in passenger revenues, traffic and capacity. Yields also increased despite the competitive landscape.

Speaker 3

It's worth calling out the domestic yield improvement of 3% from 2022 as we leverage both the breadth and depth of our network. Further, the 37% increase in U. S. Transborder passenger revenues was supported by new restored and increased service and improved connection opportunities with our international network. This ultimately supports our 6 Freedom strategy in which we saw continued strength in 2023.

Speaker 3

I'd also like to call out our strong partnership with United Airlines. We witnessed stronger than anticipated results of our joint business arrangement on transborder with added multiple new routes and enhanced services to many medium cities. 2022 was also a very good year for sun and leisure destinations with ground package revenues in Air Canada Vacations driving the 43% increase in other revenues. Further in 2023, revenues from our premium cabins performed well and increased 37% year over year. This strength was noted across all markets for both leisure and business customers.

Speaker 3

Moving to cargo. 2023 revenues declined 27%, primarily on lower volume and yield in all markets. Despite that 2023 had challenging market conditions, we've taken all the necessary measures to position ourselves to take advantage of the recovery. This includes strategically adjusting our freighter plan, so that we can keep focusing on proving overall results for the long term and maximizing cargo network value with our entire fleet. As we eventually receive the 787-ten with larger cargo capacity, taking advantage of global cargo flows to our hubs will become an important lever to further diversifying revenue streams.

Speaker 3

We continue to make important market share gains in the global market. Turning to 2024, we expect to increase capacity between 6 percent 8% year over year. This is reasonable for us as we continue to see industry supply chain pressures and other constraining factors. We also have 1 aircraft initially planned in 2024 that is moving into 2025. We have secured interim capacity to achieve this level of capacity this year.

Speaker 3

For Q1, we expect to operate 10% more capacity compared to the same quarter last year. We anticipate market conditions to remain stable, although we do see some pressure on yields and leisure and sun destinations given the increased capacity in those markets. It is worth noting however that Q1 of the previous year was the high watermark for sun performance and is therefore normal to expect some yield normalization. Our diversified network will allow us to mitigate most of this pressure. Beyond Q1, we're encouraged with what we see in forward bookings.

Speaker 3

We see strong demand for international services our 6 Freedom bookings already ahead of where we were last year, which as we recall is a banner year. Demand for Southern Europe is outpacing 23 and for Q2 and Q3 responded with additional capacity to Greece, Italy, Spain. We expect the Pacific to continue to Osaka Kansai Airport starting this July. We're very encouraged by the overall performance in our Japan operations. We do anticipate a normalized environment in the domestic market given the competitive landscape.

Speaker 3

However, we are well positioned to compete and the overall diversification of our network gives us multiple options to redeploy capacity to other geographies. We continue to have solid international growth prospects. The combination of growing demand for international travel equipment from Canada, our 6 Freedom potential and the enhanced scale of our hubs gives us various international expansion opportunities. We look to make the most of this in the years ahead. Thank you.

Speaker 3

Over to you, John.

Speaker 4

Good morning. Mike provided an overview of our overall financial performance and Mark discussed our strong passenger revenues. I'll begin with our 4th quarter operating expenses, which grew 8% to $5,100,000,000 and tracked to revenue and capacity growth of 11% and 9% respectively.

Speaker 2

Let me highlight

Speaker 4

a couple of items that did not naturally track overall increased activity. First, we saw 21% increase in salaries, wages and benefits. The increase was driven by a 10% capacity related FTE growth versus Q4 2022, wage inflation and company wide profit sharing accruals recognizing the strong performance delivered by our employees. Conversely, fuel expenses were 5% lower than Q4 2022 on 12% jet fuel price declines, partially offset by an increase in fuel leaders consumed related to the ASM growth in the quarter. Q4 adjusted EBITDA was $521,000,000 $132,000,000 or 34% higher year over year producing a 10.1 percent adjusted EBITDA margin.

Speaker 4

Q4 operating income was $79,000,000 an important reversal from our operating loss of $28,000,000 in Q4 last year. Turning to the full year, we reported $19,600,000,000 in operating expenses, 17% higher than 2022 on revenue increase of almost $5,300,000,000 or 32% and a growth of about 20% in operated capacities. Salaries, wages and benefits increased 21%, reflecting staff additions as we supported the surge in ASM. This also includes accruals for profit sharing and other wage alerts related items. For full year 2023, fuel expense remained stable with a 1% year over year increase, reflecting a 14% lower fuel price offset by higher fuel consumption due to significant capacity growth.

Speaker 4

Overall, our 2023 adjusted CASM of $0.135 was a 2.2% increase over 2022. It's worth highlighting that our 2022 comparison also includes a one time maintenance cost adjustment, representing approximately 150 basis points non recurring 2022 favorability. Normalizing for this prior year adjustment would result in a net cost increase of only 70 basis points in 2023. Beyond the higher labor expense and generally inflationary pressures, the increase also reflects the impact of higher load factors experienced in 2023. The cost increases were mitigated by the early efficiency benefits of improved productivity.

Speaker 4

We do expect to realize additional productivity gains over the next 2 to 3 years. Let's now turn to free cash flow and liquidity. Q4 and full year free cash flows were better than 2022 comparative periods, reaching almost $670,000,000 in Q4 and nearly $2,800,000,000 in 2023 full year. Including approximately $800,000,000 in free cash flow generated in 2022, we have now surpassed our now withdrawn 3 year cumulative target of $2,500,000,000 even before considering 2024 performance. We have put our solid cash generation to good use by aggressively prepaying expensive debt.

Speaker 4

In 2022, we retired USD473 1,000,000 of our USD748 1,000,000 convertible senior note. In 2023, we prepaid approximately $1,300,000,000 in A220 and Boeing 787 related aircraft financing. Including the effects of these accelerated debt payments, we have built total liquidity of $10,300,000,000 and increased our unencumbered asset pool $6,600,000,000 at the end of 2023, excluding the value of Aeroscience. Our leverage ratio is now solidly back to pre pandemic levels ending 2023 at 1.1 times EBITDA. This is a significant improvement from our leverage ratio of 5.1 December 31, 2022 and it achieves 1 year early our now withdrawn post pandemic target level of sub-1.5 times.

Speaker 4

With our strong balance sheet and liquidity levels, we are well positioned to execute on our scheduled fleet plan additions. This includes 27 A220s delivered between 20242027, 2 of which are expected this year. 5 leased new Boeing 737 MAX 8 for entry into service in 2025 and 30 A321 XLR aircraft scheduled for delivery between 20252029. Last month, we took delivery of 1 more Boeing 787-nine with a 32nd and final -nine to be delivered later this year. Finally, in 2023, we announced an order for 18787-10s that are scheduled to be delivered between 20252027.

Speaker 4

The order includes options for up to 12 additional 787 10s. As you can appreciate, these commitments and orders must be placed years in advance. We plan on acquiring these new aircraft through measured mix of leases and purchases. For additional details, I will refer you to our MD and A, includes our total committed and projected capital expenditures as well as details on our fleet plan. These modern efficient aircraft will replace some older aircraft and help increase our capacity.

Speaker 4

Each of these additions has been selected to address strategic opportunities. They will also present enhancements in fleet economics, advance our greenhouse gas emissions reductions goals and most certainly they will delight our customers. Okay. Now let's look ahead. This morning we issued guidance for 2024 replacing all our prior 2024 targets.

Speaker 4

Mark highlighted our capacity growth expectations of 6% to 8%. Our adjusted CASM is expected to increase between 2.5% and 4.5% over 2023. This assumes normalizing general inflation across our cost base and we believe that it will be offset by continuing productivity gains across the airline. The productivity gains will gradually occur on many levels. They include newer colleagues who become more experienced, the renewal of our fleet and it also includes our maturing technology improvements and our continually modernized processes.

Speaker 4

The entire travel ecosystem as it works through the final stages of recovery will also play an important role. Notwithstanding these balanced cost conditions, we will also see specific net headwinds to adjusted CASM for the following. First, note that a new agreement with pilots will bring a change in wages and other cost related items. We have factored our best estimates into our guidance with a view of the Canadian pilot market and our desire to be a leading employer of choice for Canadian pilots. 2nd, the potential impacts from changes to regulatory environment for customer disruptions.

Speaker 4

The timing and eventual incremental costs of new rules will be continually assessed as this file evolves. And finally, from the expected increases in airport fees and infrastructure costs as we enter into new agreements. We also are closely watching MRO and supply chain pressures and their potential impact on our maintenance costs and capacity. We believe that we've sized these expected headwinds appropriately and we have factored them into our guidance with the best information reasonably available. We continue to be laser focused on our margins and on finding opportunities for cost savings.

Speaker 4

Getting more specific with financial guidance, we are setting 2024 adjusted EBITDA expectations in the range of $3,700,000,000 to $4,200,000,000 Our earnings guide assumes moderate GDP growth, an average of CAD1.33 to U. S. Dollar exchange rate, average 2024 jet fuel cost of approximately CAD1 per liter. Any changes in these underlying assumptions have a material impact on our guidance. Turning to capital allocation.

Speaker 4

Our capital allocation strategy will continue to prioritize additional gross debt reduction where it's economically beneficial. We will also continue to fund our fleet plan strategy to grow our network, pursue a modern and efficient fleet and to prepare the airline for the next decade. With a sound fleet plan and a resilient balance sheet, we will be able to assess more traditional and historical shareholder return programs. While not included in our formal guidance with the information we have available, we are confident that we will be able to continue to generate solid free cash flow in 2024, albeit at lower levels than 2023 as we take delivery of new aircraft and fund redelivery payments on our committed order book. Through deleveraging, conservative management, exceptional assets and brands, Air Canada has established a bedrock financial foundation to pursue its strategy.

Speaker 4

And we're very excited for the future. Thank you. Nelson Beboo, Mike, over to you.

Speaker 2

Thank you, John. As Canada's slag carrier, we embrace Canadian values and project them to the world. Every day we strive to earn our customers' loyalty.

Speaker 5

We are

Speaker 2

proud to have safely carried more than the equivalent of the entire population of Canada during the year. We also received global recognition. We won SkyTrak Awards for the Best Airline Canada, Best Airline Staff in Canada, Best Low Cost Airline for Air Canada Rouge and the most family friendly airline in the world. There were many other awards too, including for service, product, Aeroplan and employee relations. However, a financial quarter a year are finding discrete measuring periods.

Speaker 2

They serve as milestones for marking progress whereas our plans and our investments we're making are geared to the future. Long term perspective also allows us to see clearly past more immediate temporary headwinds. Among these are economic uncertainty, the evolving regulatory environment, inflation and supply chain issues. We will manage these conditions either because they will resolve themselves or it will simply become part of the environment in which all carriers operate. Some factors can at times be more company specific such as our current negotiations with our pilot group.

Speaker 2

We are working with ALPA have agreed upon a framework for continued constructive bargaining through an independent and experienced mediator. This provides stability while we work together over the next few months with the goal to reach a collective agreement that is beneficial to all stakeholders. This gives our customers certainty and the ability to book with full confidence for the important summer travel period. Our long term perspective includes a new fleet to support our network ambitions. This includes opening new markets that our current fleet mix cannot cost effectively serve and expanding service to existing markets.

Speaker 2

Supporting our network growth are our strategic partnerships. We have long standing and successful arrangements such as Star Alliance, our A plus plus joint venture and other JVs. Our transport alliance with United Airlines allows us to take advantage of 6 Freedom opportunities and partake more fully than any other foreign carrier in the world's largest air transport market. With these, we have added new agreements such as our partnership with Emirates, which gives us better connectivity with markets in the Middle East and South Asia. Our long range planning also anticipates a changing competitive landscape with an increasingly crowded domestic marketplace.

Speaker 2

In this arena, customer experience will be a key competitive advantage. We've always been a leader in product and we will continue to make significant investments that our customers can enjoy, such as new and upgraded Maple Leaf lounges and better in flight amenities like new menus and faster Wi Fi, cabin redesigns and customer digital tools. The same time, we are investing more in customer service training, employee tools and processes including for improved accessibility. 2023, we made significant progress in these areas by delivering on 41 special projects to enhance the customer experience like our popular mobile app baggage tracking feature. We also released our 1st multi year accessibility plan, reaffirming our commitment to enhance accessibility for employees and customers with disabilities.

Speaker 2

Loyalty effect of both our product and customer service investments is supercharged by Aeroplan. The ability to foster and retain loyalty simply cannot be overstated. It's been 5 years since we acquired Aeroplan. It is now Canada's leading travel loyalty program, not its leading loyalty program far none, as evidenced by the accolades it receives every year. Aeroplan has grown to more than 8,000,000 members, double since the acquisition.

Speaker 2

Gross billings and redemptions have each increased by about 70% and Aeroplan's financial contribution has outpaced that level. We're excited by the many additional opportunities available as the program continues to reach new records. Throughout 2023, we remain deeply committed to the communities we serve as evidenced by our very active and relevant engagement programs. The Air Canada Foundation grants to charities as hospital transportation program supported in part by point donations from Aeroplan members and our scholarship programs are vital to the communities we serve. At grassroots level, we sponsored and celebrated cultural and local events through more than 2 65 partnerships across the country in 2023.

Speaker 2

Often this is overlooked. We are very proud and committed to give back. We also demonstrated good citizenship through our environmental programs. Reducing our carbon footprint is a high priority for our customers and for us. With respect to SAF, we continue to emphasize critical importance of partnerships with industry and government.

Speaker 2

For this reason, we were pleased with the recent announcement of a new combined federal investment of $6,200,000 to support the future of SAF in Manitoba in partnership with the Canadian Infrastructure Bank and the province of Manitoba. But much, much more needs to be done. Taken together, all these items, our strong foundation, our results, our ability to execute a value creating strategy and our continual participation in daily lives of Canadians speaks to Air Canada's long standing and positive presence across our country and assures all stakeholders that they can rely on us to be there and deliver on our commitments far into the future. With that, we're now pleased to take questions.

Speaker 1

Thank you, Mike. And thank you 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,

Operator

Thank you. Our first question comes from Kevin Chiang from CIBC. Please go ahead. Your line is open.

Speaker 6

Hi. Thanks for taking my question. Good morning, everybody. Maybe this is for John. Just on the adjusted CASM, thank you for all the details there.

Speaker 6

But I guess when I think further out, it feels like some of the pressures in 2024 might have an outsized impact on adjusted CASM. So when you look up further out, like what do you think you can get to negative adjusted CASM growth? Is that a 2025 story when you lap some of these issues? Or is visibility there still a little bit challenged?

Speaker 4

Yes, it's a fair question. I think calling 25 CASM now maybe a bit early, but I do think and I added in the commentary that structurally we do believe that there's productivity probably to be felt over the next couple of years. And if you combine that with the fact that we do expect to continue to grow capacity, I think we would expect kind of a transitional period here, right? We had a lot of volatility over the last few years and brought the airline back to fairly complete capacity levels. And now we are facing some of these kind of transitionary adjustments and a better balanced picture and that will give us an opportunity to really experience some of the productivity gains.

Speaker 6

That makes a ton of sense. And maybe just a clarification question. Mike, you mentioned the strength of Aeroplan, increase in gross billings and redemption by 70%. I think you also said the Aeroplan contribution though is tracking above this. Just when you're defining contributions, is that an earnings comment or is that another KPI that you're referencing?

Speaker 2

Yes. Good morning. So this is compared to 2019 and its earnings.

Speaker 6

Earnings. Okay, perfect. That's great. Thank you very much. Best of luck in 2024.

Operator

Our next question comes from Cameron Doerksen from National Bank Financial. Please go ahead. Your line is open.

Speaker 7

Yes, thanks very much. Good morning. I guess I want to ask about cost maybe in a little bit different way. I mean, it does seem that most of these cost inflation that you're seeing is really an industry wide issue. One would potentially even argue that the pilot wage inflation or just general wage inflation is also an industry trend.

Speaker 7

I'm just wondering if you could maybe comment a little bit about what you think cost inflation that you're seeing in 2024 might actually be unique to Air Canada? Or is it really just across the board pretty much an industry cost inflation issue?

Speaker 4

Yes. Thanks for the question, Cameron. I think really and it was very, I guess, purposeful in the commentary that I think generally speaking, we're seeing good efficiency and productivity gains as we kind of restore some fluidity in the system here, but also take advantage of capacity as it continues to grow. So for the airline itself, I don't see any unique items. I think the ones that we did mention are ones that as an industry will deal with.

Speaker 4

And to some degree, I think, particularly on airports and so on and so forth, they will also enable growth. So there is a cost element to that, but for us, that's also helpful to that they continue to restore their own capital investment programs and such.

Speaker 7

Okay. That's helpful. And just on the I guess the capacity, you mentioned that you're still seeing some constraints in 2024. I think maybe your capacity growth is a little lower than what you maybe initially thought a year or so ago. When do you think you can get back to kind of pre pandemic levels of capacity?

Speaker 7

Is that something you could see in 2025 or maybe it actually takes a little longer?

Speaker 3

Hi Cameron, it's Mark. As we get to the end of Q4 and of this year and as we go into 2025 with the fleet delivery skyline that we've got, we're going to exceed 2019 capacity levels.

Speaker 7

Okay, that's great. Appreciate the time. Thanks very much.

Operator

Our next question comes from Konark Gupta from Scotiabank. Please go ahead. Your line is open.

Speaker 5

Thanks, operator. Good morning, everyone. I just want to kind of go back to your EBITDA guidance for the full year. I understand there are a lot of CASM one offs and idiosyncratic factors this year. But my math suggests you are assuming slightly positive yield and RASM this year and margins probably flat to down.

Speaker 5

Does it make sense in light of the competitive environment? I mean, like where are you seeing a lot of strength in the RASMs and yield heading into 2024?

Speaker 3

Hi, Konark, it's Mark. As we model specifically 2024, we're not projecting to have yields that are above last year and neither is our unit revenue and how we get to the EBITDA formulation here. So the yield and RASM projections that we have built into the EBITDA guidance actually factor in the competitive dynamic that we're in. So that's all accounted for.

Speaker 5

I see, Mikkel. Thank you. And then I can just touch base on CASM, John, maybe. I think you have got pilots, you've got maintenance. I think capacity is also not to the mark, right?

Speaker 5

Maybe that also kind of adds to some chasm because of the denominator effect. Is there anything unique in your assessment this time versus last few months or so that has changed your kind of view on the CASM? Meaning like is it inflation that's getting bigger generally across your system or I would say any other updates on regulatory environment side of things?

Speaker 4

Yes. So thanks for the question. I think you hit something in your kind of your preamble to the question, which is, as we looked over the last 3 months, yes, there's been a bit more pressure on capacity. And I think some of that you're well aware of just in terms of, for example, GTF issues. And Mark mentioned an aircraft or 2 that looks out of the schedule into 25.

Speaker 4

So it's I mean, I would say that that is the context that we're operating in, which is as we bring on capacity, there is some still challenges in being able to bring all of it that we'd like from an aircraft point of view. So that lightened our expectation a little bit on capacity and that does have a little bit of an impact, I would say, just on cost absorption. But again, nothing meaningful relative to any other items or changes on how we view the environment. These were things that we had started to discuss in the middle of the year last year as being items that we were tracking and working to manage and mitigate.

Speaker 5

Appreciate the time. Thank you.

Operator

Our next question comes from Walter Spracklin from RBC Capital Markets. Please go ahead. Your line is open.

Speaker 8

Yes. Thanks very much, operator. Good morning, everyone. So on the CASM guide, you mentioned that it does include a labor deal assumption. Is there any way you can frame I know it's tough, but is that over 8% per year?

Speaker 8

Or is it less than 8% any indication that you can give so that we can assess the level of conservatism or that you've built into your labor deal assumption that drove your 2.5% to 4.5% CASM?

Speaker 4

Yes. Good morning, Walter. No, I can't provide any additional comments, but we've assessed and I put something in my comments here that we do expect that we are going to continue to be the best for opportunity for Canadian pilots. And I think that's the way we're looking at our overall expectation for cost. And so you have a few and of course this will evolve over the year and we'll keep you posted if something does come up meaningful.

Speaker 8

Okay. No, understood that. I completely understand that kind of sensitivity for sure. Perhaps moving to free cash flow, you did mention that you're not you don't have a guide out there any longer. And I think you said that 2024 would be strong, but less than 2023.

Speaker 8

Is that half of 2023? Is that love any color there. But and then if you look out over the timeframe of the next few years kind of the way you did it in the past few years on a cumulative basis. You do have a fairly significant CapEx program. Is there should we expect a meaningfully lower free cash flow trend over the next 3 versus last 3 given the CapEx?

Speaker 8

Is that the right way to look at it?

Speaker 4

Okay. Those are 2 good questions. And maybe some of that is going to be a better discussion for kind of a more wholesome investor comment and then maybe I'll add some color to the second. Comment and then maybe I'll add some color to the second. In simple terms, EBITDA has been a good proxy for cash from operations for us.

Speaker 4

So we do have against that, you would think about interest costs. And so we tracked a pretty good conversion is, I guess, my point. And if you look at the disclosure, we do provide a pretty good number for projected CapEx. I think in this last disclosure, it's around $2,700,000,000 for the year. So you can do a little bit of your own math there, right?

Speaker 4

If you do a little bit of a haircut on EBITDA or things like interest cash, and we don't pay any taxes really at this point in time. Our losses from Pirate Prairie are still being absorbed, so that it absorbs our tax burden. And that gives you a pretty good place to land for a cash number and that will move around a little bit with working capital and advanced ticket sales, those kind of things. But I don't expect another $2,800,000,000 free cash flow here in 2020 4, that's for sure. But I think it's going to be solid cash generation.

Speaker 4

And then from that point on, I think that the airline has the capacity to continue to generate cash flows on a consistent basis. Like I said, we'll talk 2025, 2026 and further out years perhaps in a whole in a more wholesome discussion. But I would say that we have the opportunity to do many different things with the aircraft that are coming into the fleet over the next 3, 4 years that will allow us to have the right balance of cash generated as well.

Speaker 8

Perfect. Appreciate the time,

Speaker 4

John. Thank you.

Operator

Our next question comes from Andrew Didora from Bank of America. Please go ahead. Your line is open.

Speaker 6

Hi, good morning, everyone. Mark, in your prepared remarks, you seemed a bit more obviously more constructive on international over domestic this year. Just curious in the 6% to 8% capacity outlook, how are you thinking about balancing that between domestic and international? Is domestic growth going to be below international given your thoughts there? Just curious how you're thinking about that.

Speaker 3

Sure. Good morning. Good question. Certainly, international is going outpace domestic growth. We're going to have pretty flat domestic growth this year in 2024 and we're going to be focusing a lot more on international and in particular the Pacific this year where we're seeing pretty still in the middle of a recovery on the Pacific and still think there's some good opportunities there.

Speaker 3

So international will really be the focus in 2024.

Speaker 6

Got it. Thank you. And John, just your comments on capital allocation seemed very balanced. You mentioned kind of continuing to lower gross debt. How much is sort of expensive debt that continues to be that is prepayable here?

Speaker 6

And how can you help provide a number on kind what a maybe a gross debt target might look like? Thank you.

Speaker 4

Yes, fair question. Not sure that there is an absolute target. I think that just generally speaking, capital markets have improved there quite a bit and spreads have tightened up. So that does make the pay down of debt potentially or we have an ability to reprice our term loans and things like this. So I think those are areas that are opportunities for us is really just making our debt cost more efficient.

Speaker 4

And we've managed very well through a period where liquidity was very important to us. And we're coming into a period now where we feel more confident about our ability to generate cash flows on a more consistent basis. And with that, I think no specific target, but we will take advantage of opportunities. And I think that in 2024 that still remains, I'd say, high up on the list of deployment opportunities. And we'll go from there.

Speaker 4

But we have a kind of a balanced nice spot now where we also have a ramp up to some CapEx and so there'll be somewhere to deploy that cash effectively. And then as we said in our comments, there'll always be opportunities here for us to look forward here at shareholder participation.

Speaker 6

Great. Thank you.

Operator

Our next question comes from Fadi Chamoun from BMO. Please go ahead. Your line is open.

Speaker 9

Yes. Good morning. Thank you. Maybe one quick clarification. Does the Q4 CASM, labor CASM incorporate any accrual for a pilot of kind of deal assumption.

Speaker 9

But my main question is maybe just picking up on your last comment, John. Given where the balance sheet is and your overall financial kind of profile, and appreciate you have some heavy capital investment in the next 2, 3 years, but when does some form of distribution to shareholder enter the framework?

Speaker 4

I'll take the first one first and then the second one, I just need to give you some color on that. But the Q4 numbers as reported do have the same thinking with respect to the upcoming contract built into it. So in other words, we've assumed that from the expiry date, there's an accrual for a new wage agreement. And so for all intents and purposes, we expect that to be covered and closed and then we've projected in the same fashion for 2024. Just a consistent approach there.

Speaker 4

I think that answers your question, correct, Fadi?

Speaker 9

Yes, yes, that's correct.

Speaker 4

And so to the second point, in our comments, we did kind of give you our view on the priorities and how we're managing through that. So clearly, I think that we've navigated through a couple of years here where it's really about kind of stabilizing the operation and making sure that we're we see more clearly and I think we start to see it and we have good confidence in 2024. We're looking a little bit further out that we made an announcement on an aircraft order not too long ago that will come in '25, 'twenty six, 'twenty seven deliveries. So I think this is progressing per plan and of course we have shareholders' best interests always top of mind and we'll do that in due course. And I think that that's a fair part of the capital allocation on the longer term.

Speaker 9

Okay. Thank you.

Operator

Chris Murray from ATB Capital Markets.

Speaker 10

Maybe turning back to the EBITDA guidance. It feels like it's a little bit wide this year and has a bit of a big large band starting out the year. Just wondering what when you're thinking about when you're setting those guideposts, are there certain what are the most important risk factors that you're thinking that are driving either the top or the bottom of those ranges?

Speaker 4

Yes, that's a fair comment. I think that when you look at CASM 2.5% to 4.5%. I mean, I described the items that were providing some of that pressure. So and even in my comments, I've kind of indicated that they will move around a little bit through the year. So we just don't want to have a situation where for some small estimatable adjustments, we kind of have to correct that every quarter.

Speaker 4

So you have a little bit of a range for some of this variability in those cost pressures. With respect to, I think, the yield environment and Mark has described kind of our view on just how competitive environment we want to stay in front of the market. And I think for that reason, we have also some variability on overall. I mean, if there's a very strong year over year again and you can see those yields hold up. Mark indicated that we're not assuming the yield growth, but if that did come, then that would push us to higher end of the range.

Speaker 10

Okay, that's fair. But nothing you're not expecting anything kind of one time or kind of binary then it's just sort of a combination of the different inputs?

Speaker 4

Yes, it is. And don't forget, I mean, we guided year to capacity range 6 to 8. We've kind of been battling with different adversity and I think we feel good about that range. So I would say that we wanted to make sure that we had a clear line of sight. And so, I mean, if we're kind of grappling with other than the things that we've described in our commentary.

Speaker 10

All right. And then not to jump on this bandwagon too, too much, but just thinking about returns to shareholders, because this is a question that we do get a fair amount. Are there any milestones or events that we should think about that may help change your thinking, whether that's getting a pilot agreement completed or a changing your debt rating or something else like that, that would maybe give us an indication that it could become a more realistic approach at that point?

Speaker 4

No, I think I mean and I appreciate all the interest. It's very valid. I think we're progressing per plan and I think we feel very confident that we're doing the right things at the right times in the right sequence here. And none of this is lost on us in terms of how we'd like to get back to things that we have done in the past. But we want to do that in a very responsible way.

Speaker 4

And I think that the airline has potential here to be a strong performer right through the decade. So that will take a step at a time and I think everybody will be rewarded for that. Every stakeholder will find benefit if we do that right.

Speaker 2

All right. Thanks for taking.

Operator

Our next question comes from Jamie Baker from JPMorgan. Please go ahead. Your line is open.

Speaker 11

Hey, good morning, everybody. A couple of questions for John. So considering the cash balance, do you have the option to reset some of the bank term loan debt at a lower rate like we saw with United last or earlier this week? It sounds like when you answered Connor's question, the answer is yes.

Speaker 4

I didn't fully get the question. Can you just repeat it?

Speaker 11

Sure. Do you have the option to reset some of the bank term loan debt at a lower rate? We saw United in the market with its deal earlier this week.

Speaker 4

Yes. Yes. So great. Yes. So and really, I mean, that's some of what I meant with my commentary on the ability to continue to look for the best cost of capital efficiency.

Speaker 4

So, repricing, perhaps even managing maturities and those kind of things are all part of a good sound comprehensive debt strategy and we look at those things regularly. Market has tightened up a lot here in the last not too long short while and so those are all opportunities that we'll keep on the front burner. And again, as part of that kind of how do we use and deploy capital and that's we believe a good way to do it. And I think I said so in the comments as well that we'll continue to look at

Speaker 2

our

Speaker 4

most expensive debt.

Speaker 11

And then just a quick follow-up on credit ratings. You have Delta right now with almost twice the net leverage sitting at Baa3 with a positive outlook. Air Canada 2 notches lower. I mean, are you and the team pushing for upgrades? I mean, is investment grade a discussion we should be having or is that not one of your top priorities at the moment?

Speaker 11

Thanks for the time.

Speaker 4

Thank you so much. I don't want to make any announcements about investment grade targets. I think what we want to do is we want to have balance. We do have access to pretty efficient debt when it comes to aircraft financing that almost trades like investment grade cost. So I think it's a fair question that we do we're in contact rating agencies all the time.

Speaker 4

We've come through like all airlines a challenging period and I think they'd like to see some printed results over a longer period of time. And I think we're giving them good opportunity here to upgrade us during the year. We did have a couple of upgrades. I think that there's a potential here to be kind of BB across the board and we'll see when that happens. And from that point on, I think just good performance will take us a long way.

Speaker 9

That's great. Thanks, John.

Speaker 2

Thank you.

Operator

Our next question comes from Savi Syth from Raymond James. Please go ahead. Your line is open.

Speaker 12

Hey, good morning, everyone. If I can, on the capacity commentary, you mentioned kind of long haul really driving it. I was wondering if you could give a little bit more color on what you're looking at, particularly in the kind of

Speaker 3

Our growth on the Trans Pacific is really going to be the main driver for international growth. So we'll be looking at international growth that exceeds about 10% versus where we were last year, but most of that is driven on the Pacific. On transborder, we're looking at a decent level of growth above just above 5 and a lot of that is driven off of sort of intensifying our relationship with United across the routes. But as well, we're adding more 6 Freedom connectivity to support our international route network and we're seeing very strong results last year, but also as we look into 2020 4, we're even more encouraged with what we see. So that's really primarily what's driving the capacity allocation for 2024.

Speaker 12

That's helpful. Thanks, Mark. And then if I might ask, John, just with the CapEx plan, and let me know if this is more for an Investor Day. 2026, you do get that step up. Given the recent kind of news on OEM deliveries, and I think that's impacting both Boeing and Airbus, Just any kind of early thoughts on how realistic that plan is or if it's more likely to kind of step down here?

Speaker 4

Yes, hard to I guess, hard to try to out guess our committed schedule and what our contract and what our agreements are. But I mean, it's been a reality, right, where we've experienced it ourselves. We should have had more aircraft here, 321s and so on than we do right now. We watch this very carefully and we have made in the past some decisions about acquiring interim lift and doing other things to be able to support some of that capacity as it come in. I think just stay tuned.

Speaker 4

It's not that I don't have an answer for you. It's just that I'd be guessing to something that we're going to play this closely and they'll work with Mark and the network team to make sure that they have the appropriate aircrafts where they need them. And when we see that there's challenges there, then we'll make decisions accordingly for the network. But tough to call 26. I'm still very hopeful that this will stay as it's committed.

Speaker 4

And I know that despite all the challenges that both OEMs do stay very close to us and work hard to achieve those schedules.

Speaker 12

Understood. Thank you.

Operator

Our next question comes from Stephen Trent from Citi. Please go ahead. Your line is open.

Speaker 13

Good morning, everyone, and thanks for taking my question. Maybe the first one is for Mark or Michael perhaps. We heard one of the lessors mentioning kind of a rebound in sort of air cargo demand and maybe some of that's coming from greater difficulty and maritime channels, ships getting attacked in the Middle East or what have you. Are you guys seeing any sort of indications on your air cargo side as sort of you look at what revenue trends are doing?

Speaker 3

Hi, Steve. So on that specific question, the impact of the Red Sea hasn't really had much of an impact on us because it's more of an Asia Europe dynamic. However, we had a bit a slower start in January, but as we look into February beyond, we're starting to see volumes pick up, we're starting to see some yields also pick up. And our 2024 assumption on cargo is more volume driven than yield driven. So we're starting to see some positive indicators.

Speaker 3

How it relates to what's going on the Red Sea is really hard to link right now.

Speaker 13

Okay. Very helpful. And I believe I heard John De Berta or one of you folks mentioned higher infrastructure costs this year. And I know you've mentioned in the past sort of Canadian airport system there have been some challenges there. But any color to what extent those regulatory costs, infrastructure costs are feeding through to the 2020 forecast and guide?

Speaker 4

Yes, sure. So if you look at the year over year 2.5% to 4.5% CASM increase, it's one of the elements, right? So we talked about kind of 3 that stand out and really it's just assumption for a pilot contract. It's those airport fees and infrastructure costs, and it is also our best view of the cost of APPR. So I mean, you probably can go and run some math and make your own kind of conclusions.

Speaker 4

But the I would say that it's one of those that's kind of a it's a mixed blessing in the sense that I think that we would like to see airport infrastructure improve. We do believe that there's opportunity for better airport development and that all of our business and I think just Canadian passenger in general. And so to some degree, those costs are kind of the other side of that coin. And there'll be probably very long term multiyear programs and projects that we'll feel through those airport improvement programs. And so so we're managing the business, so we can integrate those costs.

Speaker 4

And that's kind of how we see it is that there's opportunity for growth. And at the same time, we'll manage the business, so we can absorb those costs.

Speaker 13

Okay. Appreciate it, John. And thank you, everybody.

Operator

Our next question comes from Matthew Lee from Canaccord. Please go ahead. Your line is open.

Speaker 6

Good morning guys. Thanks for taking my question. Maybe a follow-up to Konark's earlier question. If yields remain somewhat flat in 2024 and CASM is expected to grow, our math would suggest that load factors will have to continue to be kind of at 2023 levels. Maybe just talk about the levers you're using to keep that KPI high and the sustainability of mid-eighty load factors long term?

Speaker 3

Sure, Matthew. Great question. So firstly, demand environment continues to be pretty strong. And as we're seeing in our forward numbers in Q1, Q2, we're going to be able to maintain the load factor. And we've got many levers to play with.

Speaker 3

So we can reallocate capacity to where we see strength. So Asia being 1. We still see very strong demand on the transatlantic in particular for leisure destinations in Southern Europe. And we've got the 6th reason lever to play with that has significant untapped potential for us. So all this combined puts us in a high load factor dynamic for 2020.

Speaker 6

Okay, right. And then maybe on the fuel side, can you perhaps talk about your hedging strategy going in 2024? How far in advance are you comfortable hedging fuel costs?

Speaker 4

So our base premises is that volatility in fuel is kind of recovered and inflected through fares. And so that's kind of the base premises. Right now, we don't have any active hedges in place. So we are buying fuel at current costs. In terms of the way we think about it, I guess, if we had reason to believe that there was a significant volatility and it's hard to start to go out too far in the curve.

Speaker 4

Sometimes we'll protect bookings where we have very full book in very high capacity season. But other than really protecting the book, we don't really go out too long on the curve. All right.

Speaker 6

Thanks for taking my questions.

Speaker 2

Thank you.

Operator

Our last question will come from David Ocampo from Cormark Securities. Please go ahead. Your line is open.

Speaker 6

Thanks. Good morning, everyone. Just a quick one for me, John. Obviously, there's a lot of capital being spent over the next few years and that's been discussed pretty heavily on the call. And that tends to happen when you guys go through these larger fleeting initiatives.

Speaker 6

I'm just trying to back into kind of a more normalized CapEx number. I think you guys provided 1 in the past. Just curious what that would look like on a maintenance level just given all the inflationary pressures that we've seen?

Speaker 4

I think that's probably we have the next few years kind of laid out in our disclosure and we do have a peaking number I think in 2026. I think that we'll look at what the airline should look like by the time we get to the end of the decade and make sure that we're in the right spot for 2030 and beyond. I think from a normalized CapEx, I recall we run around 12% or so of revenue and that's historically where we run. We have an international higher weight to this airline. So sometimes that does also play in the overall CapEx mix.

Speaker 4

So I mean maybe a conversation for Investor Day to provide longer term looks, but what we have in our disclosure gives you a pretty good idea of what you can expect over the next 36 months. Longer term, I think we'll think about what the fleet needs to look like for 2030 and then make some decisions around that. 12% of revenue all in probably looks like a good place to start.

Speaker 6

Okay. That's perfect. Thanks so much, Ron.

Operator

We have no further questions. I would like to turn the call back over to Valerie Durrant for closing remarks.

Speaker 1

Thank you. Thank you very much for joining us on this call this morning. Once again, should you have any further questions, please reach out to us at Investor

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Earnings Conference Call
Prudential Financial Q4 2023
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