Right. Thanks for coming, John. Hey, Will. Sorry for getting introduced to you. So, Head of Investor Relations, Valerie Durand, as well, please. Thanks for coming in, guys. Appreciate the time. You know, like John, we have obviously had seen a lot as well for you guys this year in the airline industry, just like we were talking about rails, so I don't know if you wanna kind of open up with some remarks or wanna kinda do some Q&A, but, you know, just, you know, tell us about, you know, what's, what's going on right now, you know, where's the, what's the state of the industry?
Great. Well, first of all, good morning and it's good to be here with everybody. I would say that, you know, just kind of maybe quickly summarizing the year and where we are today. 2023 was an extraordinary year. It was maybe a bit of Goldilocks as well. Fuel prices quite low, a lot of pent-up demand in travel, particularly for Canadians who had been kind of held back for a while, and so it made a bit of a tough compare, but as we kinda navigated through 2024, I think we've seen a lot of good normalization, and I say that in the sense that I think it's a good place to be right now. We've seen demand and traffic come up probably single digits, maybe, you know, three to five% across the board, so that's been good, so the customer's still flying.
I think for Air Canada itself, we've also navigated some challenges. Obviously, Canadian economy, Canadian consumer was always a bit of a concern for investors. I think that's kind of managed its way through. And I think with lower interest rates now, that's kind of taken a bit of the potential immediate concern off of the table. And we see that demand continuing through 2024. And also we feel, you know, we have pretty good early sight of 2025. It was important for us to get through the labor negotiation with the pilots through the year. That's been handled. We've continued to work on the balance sheet at the beginning of the year. We did some debt pay down. We've also done some small anti-dilutive work over the last couple of years.
We took out some warrants and we've paid down some of the convertible debt that we've had. So for all those things, I think, you know, we've fully navigated what was obviously a lot of volatility in 2022 and a strong 2023 and then a normalized 2024 to give us a real strong platform for what I believe is gonna be a very successful, very exciting second half of the decade. We have our fleet strategy, well laid out, and I know there's always a conversation around our CapEx. I'm sure we'll get to that. At the same time, I think that, you know, the network has never been in a better state, and the brands and the assets that we have, I think, are very strong, and well-positioned. Aeroplan's never been better.
So for all those reasons, I have a lot of confidence in what comes up over the next five years.
Okay. That's great. Thanks for those comments. You know, maybe let's unpack a few things. Obviously, you know, like you're going through a lot of kind of transitions right now. You just had the pilot contracts. Maybe you can begin with the pilot contract initially. You know, what's, it's, it's like, you know, the industry has seen such a dramatic increase in wage hikes and all that, right, across, right? And you guys also were part of that discussion. Now that's good. It's behind you. But does it, does it open up opportunities for you? Does it reduce your competitiveness to your peers? Like, how, how do you think about this pilot contract?
I would say that we went in with, to the negotiations, eyes wide open. I think we had a good dialogue and it takes time to go and we hadn't had an agreement, I think, a new agreement in 10 years. So there was a lot of work to be done just to update the agreement for just what evolves over a 10-year period. So that's part of, you know, why it took some time. Obviously then we did go through an inflationary cycle from, you know, 2020, 2021 through the next four years. That has an implication as well. A lot of other agreements were signed in the interim, particularly in the U.S. and even in Canada. So I think there was a lot of dots on the board, if I can say it this way.
And so we went in eyes wide open and I think we came what we believe to be a win-win in the sense that we always wanted our pilots to have the best career opportunity in Canada with Air Canada. And at the same time we know that we have to keep a responsible cost structure and we have to do that effectively. So you can see from the way we planned for it and the way that it concluded that largely this is you know more or less where we had expected things to land. And from a competitive point of view I think frankly it positions us well. We have the pilot workforce that we need. They're engaged.
I think that our deal kind of does mirror many of the other deals that were out there in prior years and kind of, you know, handle some of the inflationary pressure and some of the adjustments we want to make. So.
Okay.
Yeah.
Does it give you enough flexibility to kind of like grow for the next five years?
I think so. I think so. I mean, look, at the end of the day, we have, we have Jazz. There's a lot of feed from the regional pilots into the mainline. We continue to curate that. We have seven, eight sevens coming, A321s coming. We are gonna have, you know, quite a bit of training to do. There was a bit of a, kind of a, some error in the system, if you, if you will, back in 2022, 2023. Schools have been closed for a long time. So there was a bit of like a, a, a part of that supply that had been interrupted for about 18-24 months. That took some time to reestablish. We're now in a good place, with respect to pilot availability.
Ultimately, the real work now is just making sure that we train those pilots on some new aircraft over the next couple of years.
Okay. You know, like as part of the negotiation process, right? I think there was a bit of an uncertainty, I think, right? Like a lot of media reports talked about, you know, I think, you know, there might be a strike or not, right? So I think there were some book aways.
Yes.
You know, and some sort of deferrals, I would say, in terms of traveling.
Yes.
You probably saw that in Q3 a little bit, but, you know, the yield environment, even without that, seemed like it was a bit soft this summer, right?
Yes.
Especially in transatlantic. So can you talk about the dynamics on the booking curve side of things and yield? Like what are you seeing now? Like the pilot contract's done, the summer is over. How are things looking in this winter, spring?
We feel good. They look good. And so, you know, I'll ask Val if she wants to add some comments here in a second, but I think that, you know, I mentioned it early, 2023, you know, first of all, it's a tough set of comparisons, but there was, I mean, the season started, particularly transatlantic in 2023, started very early, started almost in April, May. Canadians typically go transatlantic later in the summer, but people hadn't traveled for so long that they were out of the gate. Capacity was very constrained. Yields did move up very quickly. Obviously we benefited in 2024. I would say that, and again, you know, I mean, there's a whole few set of dynamics. We had the Olympics in Paris. You had the Euro in Germany.
And here in Canada, I think, you know, we also had some competitive forces that perhaps put more inventory on the market than was the right call. And that inventory kind of wasn't sold out. And so at some time early in the summer became a bit of an excess capacity. We've seen a lot of that kind of normalize itself, clean out. And our view right now is, you know, I'll just go quickly for a quick second here. You know, transatlantic is starting to shape up well, even though it's early days for next year. We've believed that the capacity has kind of sorted itself out. I think we only added 3% transatlantic capacity in 2024. So we've remained pretty disciplined. The transborder network is working very well.
There's more real step change to come now that we're starting to get A220s. So we feel good about that. The yield environment, generally speaking, that's an investment. So we're developing that network, but it's still in relatively good shape. The highest yields that have now taken some, you know, kind of maybe normalization is the transpacific. Essentially there, we had, you know, a big opportunity in 2020-24 to move capacity there. We took advantage of it. We've been operating sometimes load factors of above 90%, very high yields. I think that'll normalize as we go forward. But I don't know if you wanna add anything here.
Yeah. So maybe just to go over this, I mean, John spoke to the yield environment this summer and the competitive dynamics and just the context we were in this summer. Followed by that, you do have the book away impact from the negotiations that were mostly felt in September, although that was quite contained. It does spill over a little bit into October, but then as we go into Q4, we start seeing that yield environment, quote unquote, normalize. I just wanna pick on the normalize for a second. Yes, there's the competitive dynamics, but don't forget also the timing of the reopening in Canada. The lifting of restrictions from the pandemic occurred in the fall of 2022, so what that did is it pushed everybody into 2023.
So Q4 is really that first quarter where that yield environment starts to loop itself, versus 2023. So when we think about the environment of 2023 and the extraordinary environment that it was, maybe in 20 years, we'll look back and we'll say that was truly an extraordinary year. When you look into Q4, it starts to loop itself, a little bit. So it's just something to keep in mind when you think about the comps of 2023 versus 2024.
Okay. I know it's weird. You know, you mentioned competition, right? In transatlantic, right? In Canada, especially. You, like you only have WestJet primarily and somewhat like Transat maybe as an international competitors, in Canada or flying out of Canada. And like WestJet obviously had scaled back some operations in Eastern Canada over the past few years. And they have also scaled back some of the growth aspirations they had for transatlantic. Where's the competition coming from? Like in transatlantic, was it international airlines or U.S. airlines?
I'd say it was both sides of the pond. There were different dynamics in Europe that made European carriers behave a certain way last summer. And from this side of the pond too, you saw added capacity over the transatlantic. I mean, for us, we were, you know, when you look at our capacity growth in the Atlantic over the summer, it was quite contained. It was low single digits, but you saw some industry capacity go up to close to 20%. So it both sides of the pond, I would say.
Okay. Moving to domestic Canada then, you know, we have seen like a couple of startup airlines trying to kind of make their way, and couldn't help the exit of the market. Porter, on the other hand, is expanding a little bit here with the E-Jets. What's the dynamic looking like right now to you? Like, is it seem like a balanced market at this point, domestic and trans-border, or are we seeing a little bit more competitive pressures?
No, I would say that it feels balanced. We always have competition, right? It's a constant factor. But I would say that competitors are behaving, generally speaking, rationally. Yeah, Porter's trying to make a push and trying to expand, especially their southern pointing routes. And that's fine. I think ultimately, you know, the general context I would say is rational behavior.
Okay. You know, moving to sort of the macro environment, right? I think we have seen some, maybe three or four Fed rate cuts in Canada already happened, right? U.S. is on the path too. But at the same time, we had a surge in immigration, last few years. I think the government is trying to kind of slow it down. It's not like.
Yeah.
Going to zero or negative, but it's just slowing down. How do you kind of balance the two, you know, like the rate cuts? Does it help the consumer at the same time immigration slow down? Does it kind of hurt your business?
Yeah. Yeah. So I think that, I think just generally speaking, whatever keeps the economy in a healthy state is good for travel. Just as simple as that. And of course, you know, just in Canada with the mortgage renewal cycle taking some pressure off the rates, I think is good for discretionary spend. Although we didn't really see any, you know, direct impact, I think it just removes some overhang risk. And I would say, you know, it's a net net positive. With respect to immigration, you know, what I would say is that we really are mostly focused on the cumulative impact of what's happened over the last decade. Canada's had strong population growth. It's had strong demographic diversity. And I think that, you know, the one of the fastest growing franchise for us is Canada-India.
So it just goes to show it's the impacts of the last decade or so of immigration are already with us and will be with us for a generation. And so yes, further immigration will continue to add to that. But really, we don't think that it's the current year immigration that dictates the demand. It's really fundamentally the accumulation of people going back for business, for family, for friends, the propensity to travel for new entrants. And we see it significantly in India, North Africa, Middle East, to some degree China as well. And so, particularly in the past, but you know, those are the fastest growing franchises. And I think that that's structurally changed for long term.
Okay. And you mentioned China, right? I mean, I think.
Yeah.
You had some restrictions, into China and compared to China, right? And then we still have some sort of airspace restrictions out of Russia.
Yes.
Where are you on capacity, you know, restoration in China?
Yeah. We used to fly 35 times a week pre-pandemic to China. We've been flying about five times a week up to about now. There is gonna be additional flying, probably get up to about 14 weekly flights, as we kind of grow back in, over a bit of time here. And the Chinese will also add some flights as well. I would say that our mid, you know, term plan doesn't really have a big dependency on high restoration of pre-pandemic flying to China. So we're gonna manage that responsibly. We'll bring it online, you know, as appropriate. And, at the same time, I think, you know, we've redeployed a lot of the aircraft and we've done a lot of work now that has kind of put the airline in a good place with respect to our reliance on kind of growing back into China.
We see it as an opportunity, but it's. We're not dependent on it.
Okay.
And we've just announced daily flights to Beijing and to Shanghai. So it's early innings 'cause it starts next month. But from what we're seeing, the velocity as we go forward is within the norm that we would expect.
Okay. Corporate travel, right? I think it had a little bit of an upswing initially coming out of the pandemic, right? But it seems like the pace has sort of plateaued here on the recovery front. Like what really drives the corporate travel? Like are you kinda like doing any surveys where corporate travel budgets are kind of going up or stagnant here? Like what do you think?
Yeah. So the thing with corporate travel is that it's very closely tied to the return to office policies, which have lagged in Canada when you think about it, and then in that sense, it's not back to 2019, but that said, you know, the premium revenues are up because what we've managed to do is push up the leisure customer into the premium cabin. When it comes to corporates, it becomes even harder to understand what is corporate travel and what isn't.
Yes, we have the links that we have with our corporate customers and the SME tool that we have, but all of the indicators that we would look at in the past to determine corporate travel are somewhat blurred now because you have the leisure component, which is, you know, if you've got that trip to San Francisco, for a conference and you're thinking about it, you know, oh, I might go because I'm gonna tack on an Aeroplan component to it and you might book it earlier than you would've in the past. And so it becomes a little bit harder to tell what's corporate and what's not, in that sense. So, you know, from what we see from the indicators that we have, it's not back to 2019. It's growing, I would say, at a natural pace.
You know, there was an impact in September with the book aways. I mean, obviously, with the negotiations probably affected the corporate travelers, but the indicators that we are seeing is good growth, but not back to the 2019 levels. But again, you know, the premium revenues are there. So it's something that is structurally perhaps different right now. How does that progress going forward remains to be seen.
Okay, and full disclosure, like you can track my corporate travel activity because I'm doing no bleisure.
Yeah.
And in terms of the operations then, like, you know, maybe talk about, you know, you have a lot of CapEx coming up, but step back to that is, you know, today your capacity is not back to pre-pandemic levels, right? Whereas the U.S. airlines and maybe some of the geographies they have kind of recovered back. What's causing this kind of issue specific to Canada? Like why are we not back to pre-pandemic?
During the pandemic, I think we retired 79 aircraft in total. We had a big component of 767 s, older wide bodies retired, fair amount of regional jets as well, and a handful of other aircraft. So we did kind of clean up the fleet a little bit. Then the challenge in terms of you know, getting new planes, deliveries of aircraft, we should have had more aircraft today than we do right now based on just the delivery schedules we had originally intended with 321 XLRs and 220s. So as a result, that's kind of held back some of the recovery. I think that you know, by and large, we're gonna see some you know, push in 2025. Now we're gonna get you know, mostly narrow body type aircraft next year.
Then in 2026, 2027 is a fair amount of wide bodies, 787s , 321s will start to become a lot more, a higher delivery rate in 2026 as well. So I think, you know, it's a matter of just restoring the capacity, and that comes with jets.
So, like, does it give you any confidence that you can get all the 80 aircraft that's on the order for the next five years?
Yeah. I mean, it's a loaded question in the sense that I think that we stay very close to both Airbus and Boeing. I think that the 220s, I feel very confident about their delivery schedule now. I'd say 321s. It was a certification delay that they had for the XLR. They added fuel tanks and needed to reinforce the aircraft, and that needed further certification. That's all done, complete. So the aircraft is ready now for delivery and service. So I think that that will trend as well. We have some 737s next year. I think there's a dozen coming in that are expected, all leased aircraft. I do see some stress on those. I think we've planned our network around some buffer for delivery there. So I think, you know, that'll maybe push out a bit.
And the seven, eight, sevens, we're working with Boeing right now just to make sure that we get them at a rate that we can absorb them well, and at the same time that they can deliver them on time. So I think we do get the aircraft, do things move around a little bit. I mean, you know, you've seen the industry and you know that it's a little bit tough. And I think we have enough flexibility to be able to manage that and we will. So.
Okay. And you know, like under the IFRS accounting system, right? Like all the aircraft that you're getting, some are leased, some are owned, right?
Yes.
They're all part of CapEx, I guess, right? How are you planning to fund those aircraft? You know, like the ones especially that are non-leased, are you looking to do all debt financing on them or you have some excess liquidity you wanna use that toward?
If you think about it very quickly, I think the seven, eight, sevens are all on our order book. There's 18. The 220s are all on our order book. We have 27 to come. And then we have 12 seven, three, sevens. Those are leased. And then the 321 XLRs, there's 30 aircraft, half are leased, half are on our book. Today, just to give some context to the question, today we have about one times leverage and we own about 80% of the aircraft fleet. So to some degree, a little bit of room to say the least in terms of just being able to use the heavy equity that we have both on the balance sheet as well as in the fleet itself.
And so we probably will, as we take on some of the leased aircraft, you know, that's gonna go through a normal route there. There are at least eight two twenties. We just put in a facility with EDC. So that gives us really good financing capacity, Canadian dollars, low interest, on the two twenties. And we'll see how much of that we use, but we have full availability of it. The seven eight sevens, 18, all on our book. The, you know, part of the reason we like to do that is in this environment to actually own the order book is an important thing to know when and how you get your slots. But at the same time, it doesn't oblige us to actually take them on full ownership.
So I gather that some of those seven, eight, sevens will be the subject of sale-leasebacks. And we have a very good balance sheet. There's a lot of interest in. First of all, it's a best-in-class aircraft and we have a great balance sheet for, you know, specifically and for anybody, but for an airline. So there's a lot of lessors that are very interested in. So I think that'll be an interesting opportunity for us to do some cheap financing and also, you know, balance out that 80%, probably get it somewhere around 65% or so owned. And you know, I'll demonstrate the importance of that during the pandemic. The seven, six, sevens that we took out were mostly leased aircraft.
And so there is some flexibility that when you do have changes that are unpredictable, having some leased component in your fleet gives you a little bit more flexibility in terms of what you can dispose of more efficiently and versus owned aircraft as well. So it's not to say that we don't like owning the aircraft, but we don't need to own 80% of the aircraft. And I think the growth will give us an opportunity to rebalance that equation. And I look forward to it because I think it'll also be good for capital structure and capital allocation.
Okay. And you mentioned like your leverage ratio has come down to like 1x right now, right? I think that's pretty fast actually compared to the peers, right? I think some of your peers are probably two and a half plus or something.
Yes.
Do you, do you feel like your balance sheet is underlevered and you need to do something? So that's why maybe perhaps you, you announced the NCIB to kind of, you know, reward some of the shareholder stuff and then also do some sort of CapEx, peaking in 2026. I'm like, do you, do you see something like net one X being sort of the right number for leverage?
Yeah. Yeah. And the, so the answer is yes. And I'll, and I'll give you a little bit more color here, but I think we were very methodical about how we actually approached this. The first thing was coming, you know, 2023 generated a lot of cash. It was a very strong year. We knew there were some elements that may or may not be sustainable. We also had no delivery of aircraft. So our first focus was clean up the balance sheet. And we did, and we did a lot of, you know, aircraft financing that was variable rate, but at the time was still expensive. We took that out. It increased the unencumbered assets. We hold CAD 6 billion-CAD 7 billion of unencumbered assets, right?
Number two, we brought up liquidity to make sure that if there was any correction, if there was any bounce down, that we would be able to handle that well. As we went into 2024, we had a plan. Plan has kind of, you know, now normalized itself. It actually feels very good to plan in this kind of environment 'cause I think we feel like this is a sustainable type of, of backdrop. So with that being at 1x, I think that, you know, the, the airline would run very well with the unencumbered asset pool it has with, solid liquidity to be sub-2 would be fine with me. And so that gives you some pretty good headroom. And the way to use that headroom is in some ways, as I mentioned before, to take on some leased versus owned aircraft.
That'll add a little bit of debt when you put the leases on. I think we feel good about rewarding shareholders. We've come through a debt reduction. We've done anti-dilutive work, you know, in the backdrop here, taking out converts, you know, extinguishing the warrants. We have another convertible coming due in 2025. We'll handle that. Then, you know, the move here with the NCIB was really just to acknowledge the fact that through the pandemic, how we raised liquidity also included issuing stock. So while we healed the balance sheet now back to 1x, the right next thing to do was also to unwind some of that dilution and allow for investors to reclaim the space they had. I think that that's something that we can do, you know, continually over time.
But we only did it once we had a pretty good idea about the fleet strategy, what was right for the business, and where we needed to deploy capital where we thought we had a right to win. And I talk about Sixth Freedom and I talk about, you know, immigration and some of these international opportunities. I think that's the place where we have to deploy to win our fair share. And at the same time, being able to do that concurrently with rewarding shareholders. And I think that's really what the core value thesis for the company is.
Okay. That seems like that's a rhyming with, with the stock markets these days. So it's good, but maybe spend a minute on, on the cost side. You know, I think your, your CASM inflation or unit cost inflation is, is going to be some sort of turbulent over the next couple of years, I guess, right? With, with the pilot contract coming out now and, and some of the levers we have. Can you talk about some of the moving parts next year and year after? Like, you know, how, how do we see the CASM? Like what happens before it goes back to CPI? Like.
Mm-hmm. That's fair. So I think 25 is gonna be a little bit of pressure, and so but I do see kind of a bend the curve, you know, past that and I'll talk a little bit about both more the tactical shorter term and then maybe more conceptually longer term. So in the short term, we're gonna have the full implication of the pilot agreement. So things that will kind of in that full impact is the work-life benefits that they got. So, you know, wages are retroactive and so on and so forth. But the other components of changing work schedules and work-life benefits are really forward looking, right? So there's a little bit more pressure coming from that. That's fine. It's as we would've expected based on our own planning, but just on a year over year basis.
We are gonna go through a negotiation with the flight attendants. And there again, there's a lagging inflation. The agreement, the contract's been in place. We've gone through an inflationary cycle. There's gonna be a step change that needs to be reflected. And that's gonna happen in 2025. We'll do our best to put that in inside of our cost structure and guide, but that'll be a year over year impact, I believe as well in terms of just the cost. Probably, one that is gonna be a multi-year headwind is gonna be, and it's a double-edged sword in the sense that I think we're very supportive, but airport infrastructure. So the, you know, particularly Toronto and Montreal are gonna make major investments. Those investments eventually do come back to fees and airline costs.
And so we think that we're gonna have a, you know, probably a 2X inflation cost movement for several years as they fund those investments. So we'll have to deal with that. The flip side is that it's gonna make us an even better airline and a much more competitive airline as those investments get made. So we do get some benefit. It's just gonna take some time. We'll see where regulation goes, you know, for passenger rights. That may or may not be another headwind. I don't wanna speculate too much, but that could be some additional pressure there. So I think that's the challenge when with respect to what kind of will put pressure on cost. Maintenance typically runs a bit faster than CPI. I think that'll continue for a little while.
Why do I, and you know, 2024 is a good example of why I have confidence in our ability to kind of harness some of that cost pressure. You know, 24, some of the same factors existed. We did take the step change in pilots. We did have maintenance challenges. We already started on some of these other cost pressures. And yet we've been able to manage a fairly good year-over-year cost management on what I would say is very reasonable capacity growth. So I think we're gonna be somewhere around 5%. So I think that the pieces that will kind of start, and I've already started in 24, but we'll continue 25, 26, 27, are the following. Number one, we had about 30% of our workforce that was brought on post-pandemic that was new.
So I think there's productivity that comes from workforce, just, you know, time and place, training, so on and so forth. Number two, we're making pretty significant investments in technology and that's bringing productivity. So there is a lot of productivity coming from technology investments. And we'll probably talk more about that at Investor Day. Number three, scale matters. We're 92%-93% of 2019 levels. You need to get back to full size to be able to absorb the fixed cost structure to scale. More importantly, as we add planes, that'll also bring some scaling benefits. And number four is that you have a modernizing fleet. So you've got three twenty ones, you've got seven, eight, sevens, two twenties. They're very fuel efficient, great maintenance costs. They will bring efficiency to the airline.
As we bring them on, the startup, yes, a little bit more painful, but as you go through, I think you start to see a pattern of CPI minus something as you get out 2026 and beyond. A few more bumps to go here as we kind of get through, 2024, 2025. I think you'll see margins kind of find their, their compressed state, in that 2024 month period. Then I think as you get into 2026, 2027, the benefit of all the things I talked about will give us some leverage on, on operating margin. I think it gives us a chance to go back to those higher teen, margin levels.
Okay. And that's, that's a great summary actually. And we'll probably have more to talk about at the investor day, I guess.
Absolutely.
Just remind us, when's investor day, Valerie, and is it?
It's on the 17th. Yeah. In Toronto. It's at the Lumi offices.
Perfect.
Yeah.
Good. Look forward to seeing it.
Around the corner.
Yeah.
Okay. Thanks so much. On that note, thanks again for the time, guys.
Thank you.
Appreciate the time.