Good morning, ladies and gentlemen. Welcome to Air Canada's 4th Quarter and Full Year 2019 Conference Call. I would now like to turn the meeting over to Kathleen Murphy. Please go ahead, Ms. Murphy.
Thank you, Elana, and good morning, everyone, and thank you for joining us on our 4th call and full year call. With me this morning are Caelin Robbinscu, our President and Chief Executive Officer Mike Russo, our Deputy Chief Executive Officer and Chief Financial Officer Lucie Guillemette, our Executive Vice President and Chief Commercial Officer Craig Landry, our Executive Vice President of Operations. On today's call, Kieran will begin by highlighting our financial performance for the year. Lucy and Mike will then address our Q4 financial performance and turn it back to Calin before taking questions from the analyst community. We'll start by taking questions from equity analysts followed by questions from fixed income analysts.
Before we get started, please note that certain statements made on this call, such as those relating to our forecasted costs, financial targets, the timing of the return to service of Boeing 737 MAX Aircraft, the recovery of Air Canada's China and Hong Kong businesses and strategic plans are forward looking within the meaning of applicable securities laws. This call also includes references to non GAAP measures. Please refer to our 2019 year end press release and MD and A for important assumptions and cautionary statements relating to forward looking information and for reconciliations on non GAAP measures to GAAP results. I will now turn the call over to Calin Ravinescue.
Thank you, Kathy, and good morning, everyone, and thanks for joining us on our call today. I'm pleased to report a strong financial performance in 2019. We generated EBITDA of more than $3,600,000,000 13% above the prior year and reported an EBITDA margin of 19%, which met our guidance and surpassed the prior year's margin. These results were achieved despite the loss of approximately 25% of our narrow body fleet for most of the year following the worldwide grounding of the Boeing 737 MAX, and I'll have a few words to say about this later. Operating income of $1,600,000,000 reflected an improvement of $154,000,000 from 2018.
We generated record operating revenues of $19,100,000,000 and ended the year with record levels of unrestricted liquidity of 7,400,000,000 dollars and a leverage ratio of 0.8. These strong results during a difficult year are further evidence of our ability to effectively and nimbly manage through major challenges and demonstrate the commitment of our 37,000 employees who took care of our customers under extremely complicated operating circumstances. Through our transformation, we built a rock solid foundation, which allowed us to fully deliver on our outlook on key financial metrics for the year, and this is something I'm very proud of. Our discipline was rewarded by an 87% return on our shares in 2019. This, when added to our strong stock market performance over the previous 9 years, helped make Air Canada the top performing stock on the TSX over the past decade with a 3,575 percent return.
On past calls, I've often spoken about resiliency and consistency as key objectives for Air Canada, and a 10 year consistent track record is exactly what we have aspired to achieve. The agility we displayed in 2019 gives me confidence that we'll successfully execute on several valuable opportunities in front of us. This includes the launch of our new loyalty program later this year, which we expect will be the best airline loyalty program in the world. It will also enable us to successfully integrate Transat, assuming we obtain the requisite regulatory approvals for our proposed merger. We have no doubt that our wholly Canadian solution is the best possible one as it will secure jobs, result in more travel options for the travelling public and benefit all stakeholders.
We started 2020 with the constraints imposed by the ongoing grounding of the Boeing 737 MAX as well as emerging economic and geopolitical risks and route suspensions resulting from the 2019 novel coronavirus, now known as COVID-nineteen. However, our strong balance sheet, extensive and diversified network, brand strength as the best airline in North America, young fleet, as well as our remarkable employees equip us to respond effectively to any challenges that come our way. Before turning it over to Lucie, I'd like to acknowledge all employees for their dedication and thank them for delivering exceptional customer service and their contribution to achieving these strong 2019 financial results in the face of greater than normal challenges. I also, of course, thank our customers for their continued loyalty. And with that, I'll turn the call over to Lucy.
Thank you, Caitlin, and good morning, everyone. I would also like to thank our employees for their adaptability and commitment to taking care of our customers. Their passion and drive allowed them to deliver excellent customer care despite the challenges created by the grounding of the MAX as well as the complex cutover to our new reservation system. On this last point, we will undoubtedly achieve the financial benefits outlined in our business case, but more importantly, we remain confident that this much needed yet extremely complex transformation will facilitate improvements across our customers' journey. I would also like to thank our customers and our trade partners for their continued loyalty and understanding during these exceptional circumstances and for choosing Air Canada.
Throughout 2019, we continued to focus on enhancing the overall customer experience. In the Q4, we began refurbishing our Airbus A330 fleet to bring it up to the same standards as our Boeing 787 and Boeing 777s, offering a consistent product across our mainline wide body fleet. This refurbishment will be completed within the next 12 months. We also completed installation of high speed satellite Wi Fi on our Rouge fleet in December and expect to have completed Wi Fi installation across the entire Air Canada mainline fleet by the end of 2020 as well. We're honored to be recognized with awards such as the best airline in North America by Skytrax and Global Travelers Airlines of the year in 2019 and we will continue to innovate and invest in our product.
In fact, in 2019, we introduced our Air Canada Cafe in Toronto, a unique lounge experience as well as relaunched our onboard Cafe and SkyRiders Kids programs. We're very pleased with the feedback received from our customers to date. Turning to our revenue performance for the Q4. On capacity growth of 3.3%, passenger revenues increased $199,000,000 or 5.3 percent on a traffic increase of 2.9% and yield improvement of 2.3%. The yield improvement versus last year included additional revenue from Aeroplan flight redemptions.
Yield and PRASM improvements were recorded on all markets with the exception of the Atlantic. In the business cabin, on a system basis, passenger revenue increased $31,000,000 or 3.7% on yield growth of 4.1 percent, further highlighting the strength of the premium experience we've created throughout the customer's journey. Turning to the domestic market, on capacity growth of 3.4%, passenger revenues increased $46,000,000 or 3.8% for the Q4. Yield growth of 3.8% reflected improvements on all major domestic services. PRASM increased 0.3% on the higher yield.
Traffic for the quarter was slightly down compared to last year due to a weaker Western Canadian market, transitional impact created from the cutover to our new res system and less connecting traffic as a result of schedule adjustments related to the MAX grounding. Ancillary revenues were impacted negatively by the grounding as well as the reservation system cutover. Despite the weakness experienced in Western Canada, our important transcontinental services continue to perform very well. Looking to the Q1, we anticipate year over year domestic revenue and capacity growth. However, we will continue to be impacted by the MAX grounding from a schedule and product consistency perspective.
It has been necessary to strategically deploy Air Canada Rouge on select frequency markets that normally would be operated by our mainline service. This deviates from several of our scheduling guidelines and creates inconsistency for our customers. However, mitigation tactics such as this are necessary when faced with the alternative of spending routes or further reducing capacity. On the U. S.
Transborder markets on capacity growth of nearly 1% in the 4th quarter, revenues increased $61,000,000 or 7.2% versus the prior year. Yields increased 8.3% and reflected improvements in all major U. S. Transborder services and a strong business class performance for the quarter. Traffic for the quarter declined 1%, which reflected reduced capacity on services to Hawaii and on certain longwall services due to the MAX grounding.
Looking ahead at the Q1, we expect to see year over year revenue growth in the U. S. Transborder market. However, we will continue to be impacted by the MAX grounding, and we anticipate a slight capacity reduction. The impact of the MAX grounding is perhaps best exemplified by the significant decrease in our profitable Hawaii operation.
In the Q1 of 2019, we had 6 daily flights from Western Canada to Hawaii with the 7 37 MAX. We have had to half this operation, backfilling the capacity with less efficient wide body aircraft and through expensive wet lease operations. This has impacted our overall profitability in just one example of the considerable impact of the MAX grounding. Consistent with the last few quarters, our international transit strategy of connecting U. S.
Customers to international destinations through our hubs has been adversely impacted by the MAX as we consolidate frequencies to several U. S. Markets. In the last several years, the strategy has delivered very strong results and has been a key component of our profitable international growth. The negative impact on our transit traffic was stopped throughout our international network and will continue into the quarter of 2020, given the ongoing grounding of the MAX and the impact of the coronavirus.
We do, however, see very good results for traffic connecting over Montreal. We took delivery of our first Airbus 220 in December, and this aircraft is currently operating between Montreal and Calgary. Starting in May, once we've taken delivery of 3 more A220s, we will begin flying between Montreal and Seattle, connecting 2 important aerospace markets as well as Toronto and San Jose, California. Benefiting from a modern and efficient aircraft, these routes will bolster our extensive U. S.
Network and will support our strategy to attract U. S. Customers to transit or hubs when traveling internationally. We firmly believe that the A220 will enable us to create new profitable city pairs in our network, where other aircrafts don't have the economics or operational performance required to do so. Additionally, our customers' experience with the A220 is being enhanced as the aircraft offers large overhead bin space, wider seats and state of the art entertainment.
Suffice it to say, we're extremely excited about this aircraft and the opportunities it represents for our North America network, not to mention the reduced environmental impact it will have. Turning to our Atlantic performance. On capacity growth of 7% in the quarter, revenue increased $52,000,000 or 5.9 percent. Growth over the Atlantic was an intentional strategy to reduce our exposure in Asia and to invest in the very stable North Atlantic. Traffic increased on all major Atlantic services with the exception of Halifax and St.
John's to the U. K, where service was temporarily suspended as a result of the MAX grounding. We saw an 1.8% decrease in yield in the quarter due to competitive pricing activities as a result of increased industry capacity. In addition to the above, we experienced a strong quarter in the Middle East and India, 2 markets that hit their peaks in the Canadian winter. The growth prospects in India are very encouraging.
A longer average stage length and currency also played a part in the yield decline compared to the Q4 of 2018. Looking at the Q1, we anticipate continued capacity growth as we redeploy capacity from the Pacific, especially China and Hong Kong over the Atlantic due to the impact of the coronavirus as well as the ongoing geopolitical tensions between Canada and China. RASM and yield will continue to be under some minor pressure due to increased industry capacity, resulting in a competitive pricing environment. However, our strategy is still focused on reducing our exposure to Asia. We're confident in the performance over the Atlantic and later this year we will be introducing our year round Montreal to 2 new service, connecting Montreal to another important aerospace market as well as Toronto to Brussels, which was achieved through cooperation with 1 of our transatlantic joint venture partners, Brussels Airlines.
The North Atlantic continues to be a very robust part of our network, and we see considerable opportunities for further profitable growth. Moving on to the Pacific on a capacity reduction of 1.5%, revenues increased $6,000,000 or 1.2%. Yield improved on China, Japan and Taiwan. Traffic was essentially flat to the prior year's quarter. The geopolitical situation between Canada and China as well as the tensions in Hong Kong continue to negatively impact travel demand, particularly business related traffic.
As mentioned, we were able to redeploy capacity from China and Hong Kong over the Atlantic. In the quarter, we successfully launched our seasonal service from Vancouver to Auckland, supporting our efforts to reduce seasonality throughout our network. Looking forward to the Q1, our Pacific capacity will be significantly reduced as we've suspended service to Mainline China as well as from Toronto to Hong Kong until the end of March, which will also significantly impact revenues over the Pacific. We're closely monitoring the situation and we'll be adjusting the schedule as necessary. We've redeployed this capacity throughout our network, including updating certain services as well as increasing frequencies between several markets.
Moving on to our other services. On capacity growth of 7.3%, our revenues increased $34,000,000 or 12 0.1%. Traffic increased 9.8% with traffic growth recorded on services to South America and on routes to traditional leisure destination. Yield improved 2.2% with improvements on services to South America and Mexico. In the quarter, we introduced service from Toronto to Quito as well as Montreal to Sao Paulo.
These services bolster our network to South America and similar to our Auckland service, support our efforts to reduce seasonality in our schedule. We're encouraged by the early results of these efforts. New routes to Sao Paulo, Auckland and Quito have all delivered positive results with a favorable outlook. We will continue to explore opportunities to better diversify our network on a year round basis. For the Q1, we anticipate continued revenue and capacity growth supported by our new services to Quito and Sao Paulo.
We look forward to introducing our service from Montreal to Bogota later this year. Turning to cargo, the Q4 of 2019 saw a year over year reduction in cargo revenues of $31,000,000 or 14.2%. The Atlantic and Pacific continued to be impacted by an industry wide decrease in air cargo demand due to continued global trade uncertainty. Overall, cargo yield was down 8.7%, while traffic declined 6% versus the prior year's 4th quarter. Looking ahead, we anticipate cargo to be significantly impacted by the suspension of service China and Hong Kong.
While facing exceptional circumstance, our cargo group remains focused on continuing to invest in new technology and artificial intelligence to optimize our revenue generation capabilities and also enhance the collection and use of data. Turning to other revenues, we saw an increase of $34,000,000 or 15% in the quarter with the net margin recorded on the redemption and delivery of non air goods and services related to the airplane program being the largest contributor. We also saw an increase in ground package revenue from the Q4 at Air Canada Vacations, contributing to a record year for Air Canada Vacations. I will now turn the call over to Mike for a discussion on our cost performance and balance sheet metrics.
Thank you, Lucy, and good morning to everyone. I would also like to thank our employees for their part and teamwork in achieving these solid results by their continued focus on taking care of our customers. We reported EBITDA of $665,000,000 in the 4th quarter, dollars 46,000,000 or 7% above prior year's 4th quarter. Operating income amounted to $145,000,000 4th quarter EBITDA was negatively impacted by 2 items, which we want to call out. First was a one time negative revenue impact from our transition in mid November to our new passenger service system.
The second was higher than expected stock based compensation expense, reflecting the increase in our share price and an increase in employee incentive program accruals. The combination of these two items had the effect of reducing EBITDA by $60,000,000 in the quarter. Each item contributed similarly to the impact. CASM increased 2.5% in the quarter, while adjusted CASM, which excludes fuel expense, ground package costs at air countifications and the operating expenses of Aeroplan, increased 5.5%. Consistent with prior quarters, these increases were largely due to the impact of the MAX grounding, which resulted in an ASM increase of 3.3% in the quarter versus a planned ASM growth of 4.6%.
The relatively higher costs associated with replacement aircraft and the ongoing MAX related operating expenses including depreciation and pilot wages, which continue to be incurred despite the grounding. As disclosed in our news release this morning, we've estimated that had we operated the 36 Boeing MAX Aircraft as originally planned in 2019, adjusted CASM would have reflected an increase of approximately 2.5% when compared to 2018. This speaks to our continued focus on cost reduction and containment, which remains a key priority at Air Canada. Turning to fuel. Fuel expense decreased $78,000,000 or 7 percent in the quarter on lower jet fuel prices year over year.
The average price of fuel was 0.75 per liter in the quarter, down 11% versus the same quarter in 2018. Looking ahead, we the price of jet fuel to average CAD 0.71 per liter in the Q1 and CAD 0.74 per liter for the full year. Air Canada has not entered into any fuel hedging contracts for 2020. Wages and salary expenses came in above the prior year by CAD 93,000,000 or 17%, largely driven by an increase in full time equivalent employees of 9.2%. This growth in the workforce included the impact of the acquisition of Aeroplan in January 2019, incremental personnel support technology projects and the in sourcing of certain IT functions previously outsourced to third parties.
As mentioned earlier, we also recorded increases in stock based compensation expense and expenses related to employee incentive programs. Communication and Information Technology expenses increased $40,000,000 over the prior year's Q4. This increase reflected additional information technology projects year over year, notably those related to security, data platforms, systems resiliency and modernization. It also included the impact of the acquisition of Aeroplan, transitional costs associated with the in sourcing of certain functions previously outsourced to 3rd parties, as well as transaction fees related to the new reservation system. I would now like to provide you some guidance for 2020.
For the full year 2020, we project an EBITDA margin of approximately 19%, which would result in a small increase in 2020 EBITDA versus the 2019 EBITDA of $3,636,000,000 We expect system ASM capacity growth of 1% to 2% when compared to the full year 2019. In addition to the other assumptions are we provide our 2020 outlook for the Q1 and full year with respect to both EBITDA and ASM capacity notably assumes, 1, that Air Canada's mainline China and Hong Kong services fully recover by the Q3 of 2020 and 2, that the Boeing 737 MAX Aircraft gradually return to service commencing late in Q3 of 2020. If either or both of these assumptions should change and impact our projections, we will revise guidance as appropriate. We had operated up to 24 Boeing 737 MAX Aircraft in the Q1 of 2019 and the impact of their grounding along with suspensions to Mainland China and from Toronto to Hong Kong and a higher proportion of projected annual operating expense increases in both aircraft maintenance and employee benefits in the Q1 of 2020 is expected to result in a Q1 2020 EBITDA that is approximately $200,000,000 lower than the Q1 of 2019.
Given the overall projected EBITDA increase in 2020, we expect to more than make up for the Q1 of 2020 shortfall over the remainder of the year. Our annual 20 shortfall over the remainder of the year. Our annual fuel assumption of CAD0.24 per liter is well above the current fuel curve. We believe that as the China based business returns, fuel prices will move closer to 2019 levels. As a result, we believe that our EBITDA guidance has more upside than risk, assuming our MAX return to service and China recovery assumptions prove to be accurate.
Moving on to the balance sheet and liquidity. As Caleb mentioned earlier, we ended the quarter with unrestricted liquidity of almost $7,400,000,000 another record. Looking at the full year 2019 and excluding one time proceeds related to our acquisition of Aeroplan, free cash flow amounted to $2,075,000,000 This reflected an increase of $748,000,000 from 20.18 and was higher than the free cash flow of between $1,300,000,000 $1,500,000,000 projected in our Q3 news release. This improvement was due to a combination of factors, including higher cash from operations, a lower than projected level of capital expenditures due to certain projects being deferred to 2020 and to an initial settlement payment from Boeing. Air Canada continues to project cumulative free cash flow of $4,000,000,000 to $4,500,000,000 over the 2019 to 2021 period, which now includes the $2,075,000,000 of free cash flow recorded in 2019.
We have been in discussions with Boeing to seek to settle the terms of an arrangement in relation to the grounding of the Boeing 737 MAX Aircraft. Until this arrangement is finalized, information for aircraft is subject to change. An initial settlement payment was made to Air Canada in the Q4 of 2019, with any further amount subject to the finalization of the agreement. From an accounting perspective, the compensation will be reflected as an adjustment to the purchase price of the current and future deliveries and will flow through Air Canada's consolidated statement of operations as reduced depreciation expense over the life of the aircraft and as a reduction to the additions of the property and equipment on Air Canada's consolidated statement of cash flow. Net debt of $2,800,000,000 in 2019 decreased $2,400,000,000 from December 31, 2018, reflecting an increase in cash, cash equivalents and short and long term investment balances of almost $1,700,000,000 and a decrease in long term debt and lease liabilities of $679,000,000 Our leverage ratio was 0.8 at the end of the year, in line with leverage ratio not exceeding 1 projected in our Q3 news release.
Our return on invested capital was 15.5 percent at year end, in line with our guidance provided in the 3rd quarter news release and significantly higher than our weighted average cost of capital of 7%. Excess cash amounted to almost $2,700,000,000 at the end of 2019. As discussed in prior earnings calls, we expect to deploy this excess cash over the next several years to purchase aircraft, make strategic investments and reduce existing gross debt levels. Shareholder buyback programs will be funded by annual free cash flows. In respect to our normal course issuer bid, we repurchased approximately 9,100,000 shares in 2019 at an aggregate consideration of $378,000,000 for an average cost per share of $41.64 Of course, additional information can be found in our financial statements and MD and A, which were posted on our website and filed on SEDAR this morning.
And with that, I'll turn it back to
Calin. Thanks, Mike. Before closing, I want to take a few minutes to say a bit more on the MAX, our mitigation program and its impact. At the time of the worldwide grounding of the MAX in March 2019, Air Canada was operating 24 MAX aircraft and was in a significant ramp up phase for scheduled deliveries from Boeing. By the summer peak of last year of July 2019, Air Canada was scheduled to operate 36 MAX aircraft.
By year end 2019, there were 8,000,000,000 MAX ASMs that were effectively not flown as a result of the grounding. To mitigate in part the loss to our Canada of the ASMs that would have been flown by the MAX, we kept in our fleet certain aircraft that otherwise were scheduled to exit, either through lease extensions or through sale deferrals. We sourced new aircraft from other airlines and lessors. We wet leased aircraft with crew from other operators, and we covered mainline flying with Rouge and with regional partners. In total, we operated approximately 97% of our schedule in 2019, and our efforts from the outset have been focused on minimizing disruption for our customers so they maintain confidence to book with Air Canada while also preserving value for our shareholders.
For 2020, our plans were to have 50 MAX aircraft operating by the summer for a total of 13,000,000,000 ASMs flown by the MAX during the year. As it stands today, all MAX aircraft scheduled for delivery beyond the original 24 have not been delivered and Boeing has now suspended production of new aircraft. Now I assume everyone heard that Boeing announced on January 21, 2020, that it expects that the MAX aircraft will start to return to service during mid-twenty 20. We will continue with our mitigation plans, but as the ungrounding date continues to shift to the right, this becomes increasingly challenging and operational complexity is compounded. We're quite confident that the Boeing 737 MAX will fly again, and we believe customers will regain confidence in this aircraft.
To be clear, safety is paramount and we're working closely with the governing bodies involved to achieve absolute certainty that this aircraft is safe for our customers and for our crews before it takes to the skies again. Once the aircraft is ruled safe by the regulators, by Boeing and by our own internal safety and pilot groups, we will be fully dedicated to returning it safely to service. More generally, I feel 2019 capped an incredible decade of transformation at Air Canada. In the year, we recorded record revenue of $19,100,000,000 and achieved record levels of liquidity. Our stock was a top performer, increasing 87% during the year.
We have a pension solvency surplus of about $2,500,000,000 versus a major deficit not so long ago. And in the year, we received significant upgrades from 2 major debt rating agencies moving us to within one level of our goal of investment grade. Perhaps more importantly for the future, we also continue to put in place the building blocks to achieve even further growth and increase profitability. Throughout the year, we consummated transformative transactions such as the acquisition of Aeroplan, which will be foundational for our new loyalty program, and the signing of our new capacity purchase with our major regional partner Jazz, rationalizing our important regional flying operations and securing estimated annual savings of approximately $50,000,000 We also signed a definitive agreement, of course, to acquire Transat. This was subsequently approved by 95 percent of Transat's shareholders.
We're now awaiting regulatory approval of the transaction, which we are confident of obtaining as it provides a wholly Canadian solution that will benefit travelers, employees of both companies and other stakeholders, while also strengthening the economy of Quebec and Canada as a whole. In the Q4, we launched our new reservation system and took delivery of our first Airbus A220, 2 foundational elements for the next stage of our transformation. The introduction of a new reservation system, something we last did 25 years ago, is tantamount to heart and lung transplant for an airline. It's never undertaken without residual effects, and we fully appreciate and regret any issues our customers have encountered. However, we have continued to operate our regular schedule without disruption.
And as the system continues to stabilize, all stakeholders, particularly our customers and our travel agency partners, will increasingly see the benefits of the new system. Since implementation of the new system, we have already carried nearly 12,000,000 customers. As Lucy mentioned, the A220 is another game changer, helping transform the traveling experience for our customers. In its short time in service with Air Canada, the aircraft has already garnered rave reviews from our customers. We know it will serve us well and open new market opportunities for us, all the while achieving operating efficiencies that will flow directly to the bottom line.
We also continue to receive affirmation throughout the year that Air Canada truly become a leading global carrier. This includes the Skytrax Award for Best Airline North America for the 3rd consecutive year and 8th in the last 10 and other awards for all aspects of our service. One reason for this and our numerous other accolades is the engagement of our employees and our success was recognized through awards as that for the one of the top 100 employers in Canada and one of the top diversity employers in Canada. What makes these and other achievements notable is that 2019 was a year of tremendous adversity. With ongoing geopolitical events, a more complex regulatory environment, significant weather events and of course, the sudden and ongoing grounding of the 737 MAX.
This black swan event, unseen previously in our industry, now coupled with the impact of the COVID-nineteen virus on our industry, the magnitude of which only became apparent in early February of this year, would have been an existential threat a decade ago. There is no question that we are now not only stronger than we were 10 years ago, but that we are truly transformed. The crux of our strategy has been to build an airline that is sustainably profitable the long term. These crises have put this sustainability to the test, a test that I'm proud to say we're passing with flying colors. I applaud the nimbleness of our people and the agility of our leadership team, which was fully displayed in 2019.
It also gives me great confidence for the future. I like to close by thanking again our employees for a tremendous year and for continuing to keep our customers at the core of everything that they do, as well as our customers for their continued loyalty. And now we'd be pleased to take some questions from the analyst community.
Thank you. We will now take questions from the telephone The first question is from Walter Spratlin with RBC Capital Markets. Please go ahead.
Thanks very much. Good morning, everyone.
Morning, Walter.
So focusing on your comment with regards to redeployment of capacity over to Atlantic as a result of the China service disruption, The impact there is, as all other airlines are doing the same, would be suggestive that of competitive pressures that you alluded to. Is it possible that we could see yields effectively turn negative in the early part of 2020 here as that capacity is redeployed?
First of all, the redeployment of this kind of capacity when the duration of the China situation is still unclear, means that people will be largely doing it on a short term basis. And of course, airplanes, especially wide body aircraft like this, being redeployed is not an easy feat. So it's not as if people are going to change their entire plans for the rest of the year. And so I think that you'll probably see some tactical capacity redeployment, Walter, but it's not going to be a wholesale dynamic where everyone changes their plans for the summer.
So you don't see yields as being because of that tactical, you don't see it being overly impactful on overall yields as a result, is that right?
No. At this stage, we don't see that. And you could also assume that given the pressures in Asia that the Atlantic will become an even more attractive destination with greater demand.
Okay. Turning to CASM, I don't know if Mike, you can give us what you're implicitly putting into your 2020 there for CASM. But the real question here is when you let's say the MAX does return in the Q3, looking at your ability to bounce back to, let's call it, your 2018 level for CASM. How quickly do you think it would take for you to get back to that level? Or is it a multi quarter duration where we may not see that level in 2021?
I think, good morning Walter. I think you'll see it in 2021 As you probably have seen from our discussion today, the MAX will we believe the MAX will start gradually coming back into our operation in Q3. So there will be a little bit of overlap during that transition period. But certainly, as we get critical mass for the MAX early part of 2021, there's no reason why the CASM ex can't get back to pre grounding levels.
Perfect. And just last question here is on the cadence of your free cash flow. Mike, I know before you gave the before the MAX grounding occurred, your free cash flow was essentially starting low and then ramping up significantly over the 3 year period you would forecast. But now that the MAX was grounded, you've got kind of an early lift in free cash flow and now it's probably going to come back down as you accept deliveries. Over the course of that time, you're still guiding to the same level cumulatively.
Any risk that because of this pushback we do and the CapEx increase that would come in 2021 as we accept delivery that you don't hit the 4.5 level or 4 to 4.5 level over that period?
We don't think so, and that's why we reaffirmed the long term guidance. We've spent a lot of time looking at different scenarios and where the MAX may fall in. Right now, we're obviously assuming 30 will come in well, 30 will be operating by year end, 2020 being pushed into next year, that's built into our CapEx plans. So we do not see at this point in time assuming given all the assumptions we put around the guidance that the $4,000,000,000 to $4,500,000,000 of cumulative free cash flow is at any risk. Okay.
That's all my questions. Thank you very much.
And the next question is from Kevin Chiang with CIBC.
Maybe I can just start with on the Boeing front. Just from an accounting perspective, when you come to a finalized agreement here, should I think of that as a one time benefit to, let's say, 2020 CapEx? Or does that bleed through multiple years as you take delivery of the MAX? And then secondly to that, I think you plan for about $475,000,000 of CapEx in Q4 and it looks like you were roughly $220,000,000 shy of that. Would that be primarily related to the Boeing preliminary settlement or are there other moving parts in that number?
Let me start with the Q4 number. CapEx was lower in Q4 than we had anticipated for a couple of reasons. 1, we did defer some capital into 2020 and also we did net the initial payment from Boeing to that CapEx. And I can't give you a breakdown of what that variance is. To your first question, Kevin, any cash we receive in 2020 and we expect upon finalization of the arrangement to receive cash in 2020, we'll go against CapEx in whatever quarter we receive the cash.
Aside from that, that means the cost of the aircraft that we currently have on property and the ones to be delivered will be reduced in book cost. And so our depreciation will be slightly lower over the next 20, 25 years of life of the plane than it otherwise would be.
That's helpful. Thank you. And then can you just update us on where you are in terms of how many MAX simulators you have and maybe how many you'll be receiving over the next, I don't know, let's call it, 6 12 months as you prepare your pilots for the recertification year?
We have 2 SIMs and we've always had 2 SIMs for the most part and we think that's more than sufficient for the fleet size. We do have access to another half a SIM on a rental basis that we'll probably be using to bring our pilots up to requalify once the MAX is ungrounded. So certainly that 2 to 2.5 sims are more than sufficient for our fleet size.
And thank you for that. And just lastly for me, and I appreciate on the cargo front, there's uncertainty with, I guess, how the coronavirus plays out here. But when I look at Q4 results, down year over year, but sequentially up 5%. And I think the last time we saw sequential growth was over a year ago. Are you at least were you at least maybe at least seeing some signs of stabilization before the coronavirus broke out?
And is that something that if you think of that being a transient headwind, at least the cargo revenue might have found a floor here exiting 2019?
Kevin, I think that's
a fair statement. I think and Lucy can confirm this, but our China business was stabilizing, if not showing some signs of growth, small growth, very small growth, but some signs of growth. So I think your observation is absolutely correct. Also our cargo group has looked at other ways of generating revenue and primarily looking at domestic opportunities as well. So a combination of a stabilization, if not a small growth in China or Asia in Q4 plus some very good initiatives on the domestic front helped the issue in Q4.
Thank you for that.
Thank you. The next question is from Konark Gupta with Scotiabank. Please go ahead.
Good morning and thanks everyone. And glad to see some good free cash flow numbers despite the perfect storm here. So on our first question is on the Q1 EBITDA guidance. So Mike, you called out some items that caused EBITDA to decline by $200,000,000 in Q1. Now maintenance and employee benefits are about $85,000,000 of that.
Can you quantify the remaining items and also clarify if the reservation system will continue to have an impact in Q1?
I can't publicly quantify or reconcile the items, but certainly the largest item is the absence of the MAX. 24 MAX that are not operating in Q1 that were operating last year in Q1 are one of our most efficient aircraft and being somewhat backfilled by less efficient aircraft is certainly not helping. Again, that will come full circle in Q2, where we're up against the ungrounding the grounding last year as well. So certainly, the biggest largest item is the absence of the MAX. And certainly, there is some impact from not flying to China for 2 months of Q1, including cargo as well.
So, but certainly the MAX the
absence of the MAX is the single biggest item. And remember, Konark, we've talked about this in past calls, it's Calin here, that in addition to flying less efficient aircraft to replace the MAX flying, we're also, because of our unique situation, covering the cost of the pilots who are scribed to MAX. When the aircraft is grounded, the 24 aircraft in our fleet, we had 400 or so 7 37 pilots. And because we did not fly the NG before, our situation is different than the other North American carriers that are overall operators of the 737 NG. So in addition to operating less efficient aircraft, we're also continuing to carry the cost of the pilots that had been trained on the MAX and that are now kind of awaiting for the MAX to come back into service because there is no NG for them to fly.
So that is an incremental cost, which we certainly had not expected to cover in our operating budget.
That's good color. And I understand, obviously, I mean, there's kind of some noise around that as well as I think you are kind of assuming slightly higher fuel price than what's kind of implied by quarter to date or year to date numbers, right? So I'm like you're probably keeping some conservatism there as well.
Yes, yes. We're looking at that conservatively. Also, I think we do see a correlation between the return of China and the potential increase in fuel price over that period of time. So we think that there's some correlation, but you're right, we are we have taken a conservative approach to that.
Okay, thanks. And then on CapEx, there seems to be like $900,000,000 reduction in 2020 and then there's a similar increase in 2021. I'm guessing that's mostly related to the push out of the 20 MAX deliveries from 2020 to 2021. But were there any other nuances beyond that? I'm like, I understand there's some Boeing compensation noise as well, but anything else that we should be looking out for?
Yes. Certainly, the largest item was the push of the 20 MAX, but there were other items. We've had to defer some work we're doing on some of our planes, notably the Dream Cabin to our 330 fleet. And so some of that was initially thought we could get that done this year, it will be pushed into next year. So there's a again, that's all because of the MAX situation where we need the aircraft flying and not in the MRO for the most part.
So MAX certainly, but then also capital projects, which would improve our product are being pushed out a bit as well.
Okay. And if I can clarify, Mike, is the Boeing compensation you mentioned on future settlements, is that already reflected in the CapEx schedule or will that be incremental?
No, that is already reflected.
Okay, thanks. And then lastly Our expectation. Perfect. And lastly on the free cash flow, so you said the $4,000,000,000 to $4,500,000,000 free cash flow cumulatively, and that seems still reachable. But if I look at it in a different way, you already have half of that in 2019 and then CapEx has been pushing out.
What gives you comfort that this number is not conservative significantly?
Well, our internal analysis gives us the comfort to continue to tell the market that we believe in that number. So 4% and 4.5% is we think is realistic at this point in time. And you're right, we achieved half of that in almost more than half of that in the 1st year of a 3 year plan. And to Walter's earlier question, when we went into this from Investor Day, we thought it was a bit of a hockey stick and it's turned out to be quite different given the situation. But we still believe the 4% to 4.5% is a realistic target over that period of time.
Okay. That's all for me. Thank you so much.
Thank you. The next question is from Chris Murray with AltaCorp Capital. Please go ahead.
Thanks. Good morning, folks. Just thinking about the reservation system, I know we had some of the conversations last year about being prepared for it and a whole bit. Just trying to understand, I guess, there have been a number of issues, and then, of course, compounded, I think, maybe by some of the shutdown of the Pacific operations. Can you give us kind of a timeline or an idea on when you think you're going to have those systems normalized?
And any expectations for additional costs as we go through Q1 and into Q2?
Hi, it's Lucy. First, I just want to put a few things in perspective for the new reg system. So when we say in the quarter that we did see some revenue impact as a result of the cutover. I want to make sure it's understood that our new reservation system is not preventing us from generating revenue from bookings. That's a very, very stable environment.
The area where we faced more difficulties on the revenue side was with an ciliary revenue collection. So in certain cases, once we cut over, we chose to waive some of the fees in order to reduce some of the friction for our customers. And in areas, frankly, where we were a little bit surprised and some of the functionality wasn't performing as planned, We quickly worked in conjunction with our IT team to make sure that we could restore that functionality. So I could tell you that even post cut over on the 19th November, we saw enhancements come in, rolling in December, January, we continue to move to improve in those areas. So we're very, very confident that we're going to get there.
And as we said earlier, we regret some of the inconvenience that it may have caused. But by and large, given the size of our airline and the complexity of a system like a NewRez system, we're confident that we're going to be able to get through this relatively quickly.
Okay. So do you have any particular timeline when you think you're actually going to be stable? It would be a fair way to put it.
Well, we're certainly the system is very, very stable now. Now there are some areas where we're looking to bring in some significant improvements quickly. And notably, one of them is in the call center environment where our call center wait time is still long. And some of that is due to us improving on the new system, being more used to using the new res system And at the same time, dealing with call volumes that regrettably we should not be facing because of some of the system issues that we faced on some of our direct channels. So given the size of the airline and the volume of bookings that we actually generate, we believe that we are that our system is stable.
Now the other item that I didn't talk about, but in truth, as we were cutting over at the end of November, we were starting to face the situation with the coronavirus, which had massive implications on the schedule change side. So you can only imagine that at that time, not only were we canceling bookings, but we were also busy re accommodating customers on 2 other flights. So that, at the same time, is the cutover of our res system made it that much more difficult.
Just as we go into Q1, just if you can give us a rough idea. How much of your Pacific capacity does China and the Hong Kong group represent? Assuming that will I think you talked about 1% to 2% capacity increase overall, but I guess that will be just reallocated either domestically or to the Atlantic as you talked about. But how much should we be really thinking about pulling out of Pacific in Q1?
Well, numbers I think China represents, think as Caitlin said or someone said earlier, about 6% of annual ASMs for us. And Hong Kong is another, I think 3% roughly. Now we've pulled out one frequency from Hong Kong from Toronto and Hong Kong. For March. For March.
So those are kind of the background numbers. And as Calin talked about and others have talked about, we're looking to redeploy those on more opportunistic basis or fill in basis.
Okay. And overall, you don't think that there'll be a tremendous yield impact with the trade offs at this particular point. Is that fair to keep thinking about that?
That's our going in view at this point in time is that there will not be an impact on yield.
All
right. Thanks. I'll leave it there.
Thank you. The next question
Mike, Cazimax question for you. Obviously, you've been pressured kind of in the up mid to high single digits as the MAX has been grounded. So as we lap the grounding and the costs are in the base, how should we think about kind of the core inflation in your business as the MAX continues to sit here? Should still kind of be tracking in this up to mid high single digit level or as you lap it, does that come down a little bit?
No, I think Andrew, we didn't provide specific guidance on CASM consciously, but you're right. The CASM ex for 2020 will come down a bit versus the run rate in 2019.
Okay. And then I guess CASM ex over the longer term, do you think you can drive CASM ex down and what kind of growth rate would you need in order to accomplish that?
Yes. To the earlier question, I think we can get back to where we were once the environment stabilized and we've got the MAX back up and running in the 220s. And again, those are all key drivers to better CASM X as we go forward.
And Andrew, it's Calin here. You'll see, as we mentioned in the press release, I think we mentioned in our remarks as well that we extrapolated the CASM X number and concluded that basically had we operated 36 MAX as originally planned that CASM ex would have reflected an increase of about 2.5% compared to 2018.
Right. And that was based on our original capacity plan of roughly 4.8%. So that's another proxy that you
can use in your analysis.
Right. Got it. Okay. And then just last question for me, it's more of a mechanics issue of the model. I guess with China and all the cancellations, how do we think about the kind of PRASM, CASM trade off of all of these cancellations?
It seems like maybe you're a little bit more bullish on yield. So when we kind of forecast our earnings hit from the loss of China, do you think it's probably more CASM than PRASM at this point in time?
Good question, Andrew, and we need to think about that one. Let us think about that and come back to you
Okay. Thank you.
That's it for me. Thanks.
Thank you. The next question is from Hunter Keay with Wolfe Research. Please go ahead.
Hey, this is Andrew Quash on Proner. In your MD and A, you noted a significant acceleration in direct channel share in 2019. Can you talk about how this looked over the past few years and how you expect that to trend following the implementation of new Aeroplan?
Sure. It's Lucy. A couple of things. In the very short term, we did take a little bit of a slowdown in that area. And the reason for that was because we were preparing for the new reservation system and as you rightfully say Aeroplan.
Once we have completed all the work with the new Amadeus system, we will be in a very, very good position to be able to significantly shift demand from our current channels to our direct channels at a much, much better cost. But it was necessary for us to get the system implemented, get the new Amadeus product in and then we can start to focus on how we can move forward with our distribution strategy. But definitely, this is something that we look forward to in 2020, 2021, very big opportunities ahead for us. Great.
Thanks. And for my second question, can you tell us when exactly in 2020 you expect to complete the final stage of the reservation system cut over and realize the greater than $100,000,000 benefit? Thanks.
It's Craig Landry here on the operations side. From our perspective, the system is already very stable. It's important to note that the system doesn't impact our ability to either sell to customers or to operate our global schedule of flights. So the impacts that we're experiencing now are more in the servicing level, perhaps from a customer service side, we're seeing rapid improvements in that area. But in terms of our ability to generate revenues or to operate our schedule, we don't have any impacts from what we've seen so far.
2nd phase. The 2nd phase will continue to roll out in the first half of the year. We expect to be completed by the midyear point.
And just to finish off, Andrew, the majority of the benefits will start accruing after the entire program is in place, so back half of this year.
Great. Thank you.
Thank you. The next question is from Helane Becker with Cowen. Please go ahead.
Thanks very much, operator. Hi, everybody, and thank you very much for your time. I just had a question about timing of Transat. Can you just kind of update us on where that stands and when you're thinking about completing it? That's part one of my questions.
Okay. Good morning, Helane. Calin here. So the filings with all of the requisite regulatory authorities have, of course, all been made. There are approval requirements in both Canada and in the EU and primarily there's 1 or 2 others as well, but those are the 2 primary filing jurisdictions.
Our people are now engaged in discussions. And the Minister of Transport has an approval as well, and the Minister has indicated in his initial communication that the date by which he would receive recommendations from the Bureau is in the May timeframe. And so we continue to look at that date as being a useful target. But of course, as you know, in these environments, we can't take that target fully to the bank. So we're optimistic.
We think that good progress is being made and look at that as being the earliest possible date where we can get the approval.
Got you. That's very helpful. And then my second question is, I know you guys said that you were wet leasing in some aircraft. Are you able to wet lease aircraft in from Transat or does it have to be specific ACMI providers?
No, we are able to and in fact have done so already. We've done it on 2 occasions throughout this MAX grounding scenario. Of course, Transat operates now as an entirely third party carrier until our the completion of our transaction. That's the basis of our relationship. And so we have arm's length 3rd party rates consistent with what we have with other wet lease providers.
And the use of their 330s have come in very, very handy for us so far.
Okay. And then I just have one maintenance related question probably for Mike. I know you said in the MD and A discussion that you were going to spend an extra 150,000,000 dollars this year with a third of that in the current quarter. So as we think about 2021 potentially being a normal year, would we would you see a big decline? Would we see that decline in maintenance flow through the income statement?
I think you'll probably see some decline, because a lot of that some of that $150,000,000 is incremental maintenance costs to keep some of the planes that we are keeping longer than we expected because of the MAX situation.
Right. So are you going to keep those planes in service even as the MAX comes back?
No, no. Those planes, primarily the Embraer 190s and 320s will go back once the MAX is ungrounded.
Great. That's all very helpful. Thanks, gentlemen and ladies.
Thank you. Thanks, Lane.
Thank you. And the next question is from Cameron Doerksen with National Bank Financial. Please go ahead.
Yes, thanks. Good morning. Maybe just a follow-up on that last question, just as far as flexibility you have with the fleet, with the narrow bodies that are scheduled to go back to lessors. I mean, what kind of flexibility do you have should the 7 37 MAX grounding maybe extend longer than what Steven anticipated today?
I think, I mean, Cameron, we've looked at different scenarios internally. I think we've got fairly good flexibility till probably the end of the year. And then after that, it becomes a little more challenging because maintenance costs will go up and some of these planes need to go back to lessors because of that reason. But certainly, I think we've got reasonable flexibility up to the end of the year.
Okay, that's good. And just secondly, I just wondered, Mike, if
you can just update us on some of your most recent discussions with some of the credit rating agencies and I guess anticipation for a potential upgrade to investment grade. I'm guessing that maybe there's some anxiety around the coronavirus situation and
conversation yet about our year end results. We will have those conversations in the next little while using our strong year end results as a proxy to try and convince them to upgrade us. I want to manage everyone's expectations. It does take some time for the agencies to put you up to investment grade, that last level. But certainly, our metrics for the most part hit majority, if not all the criteria.
And so we'll be having a conversation with Moody's and S and P in the next month to month and a half.
Okay, great. Thanks very much.
Thank you. The next question is from Jamie Baker with JPMorgan. Please go ahead.
Hey, good morning everybody. Most of my questions have been answered. But first one on the assumption regarding a full snapback in China by the Q3, obviously hoping you're correct. But is there much analysis that lies at the root of that forecast? Was it shaped by data that might have emerged, I don't know, during SARS or after 9eleven?
I'm just curious as to the genesis of that forecast.
Right. Yes, Jamie, good question. And the answer is yes. Although, obviously, the analysis is imperfect because each one of these viruses is different than the last. But our folks here did analyze how long it took post SARS in particular for things to recover.
And it kind of depends when you start counting as well.
As I
think Lucy mentioned, there were already signs starting in November in the November timeframe. And so the question is how quickly does the global health community get their arms around this. And yes, I mean, so we looked at SARS and we looked at a couple of other epidemics that have affected the airline industry, there were several after SARS where SARS was the most visible. So yes, that's the nature of that. And I think while we certainly appreciate the amount of anxiety that there is out there now and especially in China, We've seen other of the Asian markets still being relatively strong at this stage, not seeing them fall off a cliff like Japan and so on.
But we're hopeful that, that continues. But the answer is yes, it was done on the basis of having looked at recoveries from past epidemics.
Perfect.
And second question, MAX related, and I'm sorry if I missed this before, but how confident are you in the timeline for recertification? Do you anticipate starting to put pilots through the SIEMs prior to recertification? Will you start doing the maintenance prior to recertification? Or do you really need that event recertification before you start the work associated with the ungrounding? Right.
So again, our situation, while it was more difficult because we were not operating the NG from the pilot cost perspective, It was better from the perspective that we were the only carrier in North America that have had the simulators from the beginning because we didn't operate the NG. So we've had the simulators from the beginning. So our pilots have been going through the simulators for the last year, basically since the grounding, this has been going on. So the training has continued. Now as the final fix, so to speak, is approved by the FAA and Transport Canada, of course, there will be incremental time for our pilots to go through that.
But that will, by definition, be a shortened environment because they've gone they've been in the simulator for the past year. And as Mike said, in addition to our 2 simulators, we also have bought access to another simulator. So this is we're relatively in good shape when it comes to that. And as far as maintenance, taking care of these aircraft throughout the grounding, we've had authority to move aircraft for maintenance purposes. And they've been properly taken care of because of all kinds of procedures that have to be undertaken while they're grounded.
So that has all been going on. And so we're hopeful that assuming that the Boeing estimates of so called midyear come to pass. And remember, this mid year announcement by Boeing only came out on January 21. And so this is in a way relatively new information for us as to what their time line was because sort of last following the Q3, our expectation was that this would have occurred sooner. So this most recent event of midyear announcement came on January 21, and so we're still kind of adjusting for that.
And I think what you're seeing today is our best view on how the MAX comes back into service, we think that we'll start introducing it in the Q3 as Mike has outlined, but not be fully up to our numbers until after the Q3.
Got it. Thank you very much for the detail. Take care.
Thanks Jamie.
Thank you. There are no further questions registered at this time. I'd like to turn the meeting over to Ms. Murphy.
Thank you, Elena, and thank you everyone for joining us on
our Q4 call. Thanks very much.
Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.