All participants, please stand by. Your meeting is ready to begin. Good morning, ladies and gentlemen. Welcome to the Air Canada fourth quarter 2022 earnings conference call. I would now like to turn the meeting over to Ms. Valerie Durand. Please go ahead, Ms. Durand.
[Foreign Language] Thank you, Giselle. Hello, [Foreign Language] Welcome to our 2022 full year and fourth quarter year-end call. Joining us this morning are Michael Rousseau, our President and Chief Executive Officer, Amos Kazzaz, our Executive Vice President and Chief Financial Officer, Lucie Guillemette, our Executive Vice President and Chief Commercial Officer, and Craig Landry, our Executive Vice President and Chief Operations Officer. Also with us in the room this morning are Arielle Meloul-Wechsler, Executive Vice President, Chief Human Resources Officer, and Public Affairs, Marc Barbeau, Executive Vice President and Chief Legal Officer, and Mark Galardo, Senior Vice President, Network Planning and Revenue Management. Following management's overview, we will be available until 9:00 A.M. for questions from equity analysts. After which, Mr.
Amos Kazzaz and Pierre Houlès, Vice President and Treasurer, will be available for questions from Term Loan B lenders and holders of Air Canada bonds. Before we begin, please note that some of the statements made on today's call may be forward-looking within the meaning of applicable securities law. Please refer to our fourth quarter MD&A for cautionary statements relating to forward-looking information. I will now turn it over to Mike.
Great. Thank you, Valerie, and [Foreign Language] , and thank you everyone for joining us today. In the fourth quarter, we reported record operating revenue of nearly CAD 4.7 billion. For the full year, we had operating revenues of about CAD 16.6 billion. That was more than two and a half times that of 2021 and about 87% of our 2019 operating revenues. The progress is attributable to the deep resilience we have built into our company for long-term stability and is largely a result of the dedication and the hard work of our employees. I thank them for their commitment and professionalism, not only in the last quarter, but through recent years.
They've shown incredible adaptability, skill, and teamwork in dealing with the collapse of travel early in the pandemic, and then with the unprecedented resurgence of traffic that began this past spring with the travel rebound in Canada. I also commend the members of our management team who have remained focused on executing our strategy. Our ability to navigate through a wide variety of conditions we saw in 2022 is due to our early and steady efforts initiated in the fall of 2021 to rebuild this depth. Proof of their success is that we achieved a full year Adjusted EBITDA margin of 8.8% despite a very challenging fuel and inflationary environment, and within the guidance we provided the analyst community on Investor Day in March of 2022. Adjusted EBITDA was CAD 389 million in the quarter.
This was a significant increase from the Adjusted EBITDA of CAD 22 million in the fourth quarter of 2021. For the full year, our Adjusted EBITDA was close to CAD 1.5 billion, compared to a negative Adjusted EBITDA of about CAD 1.5 billion in 2021, a nearly CAD 3 billion turnaround. Our results also reflect the success of our strategy of diversifying our revenue sources. Air Canada Cargo revenue in the fourth quarter of 2022 was 55% higher than that in the same period prior to the pandemic. Air Canada Vacations also delivered a strong performance, and Aeroplan's active membership is at an all-time high and continuing to increase.
The operational and commercial depth that enabled us to overcome the unprecedented increase in demand through the spring and summer of 2022 was again on display at the end of the fourth quarter. Severe winter weather disrupted the operations of all North American carriers. As Craig will tell you, we recovered very, very quickly. On behalf of everyone at the airline, I want to thank our customers for their loyalty. I assure all customers that we are working hard every day to earn and retain this loyalty. We look forward to welcoming even more customers aboard our aircraft in 2023. Before I turn it over to Craig, I would like to take a minute to acknowledge the incredible and outstanding contributions of one Lucie Guillemette.
As you know, this is Lucie's last analyst call before her retirement after a remarkable career with our airline. She has held a wide range of ever more responsible positions that are too long to list here. The common theme is that with each role, she showed strong leadership, inspired her colleagues, and made us and myself all better. Congratulations, Lucie. I know I speak for everyone at Air Canada when I say thank you. You will be greatly missed on both a professional and a personal level. Now, over to Craig.
Thank you, Mike. Good morning and [Foreign Language] . Before looking at operational performance in the quarter, let's recap some of the context I shared on the second quarter call of 2022. As you will recall, compared to other markets, the degree and the duration of travel and health restrictions in Canada kept travel at a near standstill for almost 2 years. When travel rebounded in the second half of 2022, it did so at an accelerated pace. To give you some color, in all of 2021, we operated approximately 162,000 flights and carried about 13.7 million customers. Whereas for the period of June 2022 until the end of the year, we operated over 217,000 flights and carried over 25 million customers.
That was an increase of 83% in customers carried in just a seven-month period as compared to the full year 2021. During the summer period, we managed our capacity and schedule conservatively while continuing to recall, hire, and train staff on an unprecedented scale. During this initial ramp-up phase, we also observed unexpected levels of instability from a range of third-party support functions within the travel ecosystem. Combined with the unique challenges of this period, this contributed to the operating performance seen in June and July. Following extensive efforts and collaboration by all parties, operations recovered in August and throughout the fall. By the fourth quarter, operations had stabilized, with operating metrics progressing well towards pre-pandemic levels. We also continued to make prudent adjustments to our schedule while continuing to hire and build the skill sets of our employees with extensive additional training.
As we entered December 2022, we had 35,874 employees in place, maintaining our objective of having more employees than pre-pandemic levels to support less flying. We further built additional operational resiliency into our plan by setting aside 15 aircraft, including wide-body aircraft, that were not scheduled to fly to ensure that we would have adequate backup aircraft available for operational support and recovery. As often happens during this time of year, winter weather impacted our operations. This year, though, the weather events were more extreme than usual, even for Canada. It also coincided with some of the highest peak travel dates of the holiday season. During the week of December 19th, a continent-wide weather event impacted all of our major hubs. In Vancouver, four-foot icicles formed on aircraft and bridges, rendering the assets unusable.
In Calgary, the extreme cold exceeded safe conditions for de-icing activities. In Toronto, facilities such as airport baggage handling systems started to freeze. Of course, with such heavy snowfall, snow removal activities heavily affected takeoff and landing times. Because we are a network carrier, weather in one location can impact downline flights where weather impact is less present or even not present, both in the displacement of crews and aircraft. Also, as flights take progressive delays due to weather, this can cause our crews to exceed their maximum duty days. In some cases, where this cannot be remediated, it can lead to unplanned flight cancellations. Ensuring our customers have flexibility during these types of events is critical. We worked hard to keep our customers informed. We provided our customers the option to change their flights at no cost or to cancel their plans and receive a full refund.
We also provided goodwill compensation to customers in many circumstances, even beyond our regulated obligations. For the full year 2022, we spent approximately CAD 290 million in hotels, meals, and other forms of compensation for our customers. All of this said, our holiday winter operation compared quite favorably to what was observed elsewhere in the industry over the same period. Air Canada planes took off almost every 90 seconds of every day during the holidays. We operated nearly 1,000 daily flights on average. On Friday, December 23rd, which is the busiest travel day leading into the holidays, which was also hampered by extreme weather, we operated the majority of our flights and carried about 90,000 customers. For the quarter as a whole, the results were even stronger.
We carried over 10 million customers, and our baggage handling success rate was close to 98%. We also reached a flight completion rate of over 95%. I would certainly like to recognize the professionalism and the commitment of our employees during this challenging operating environment. As we enter 2023, our operational depth and resilience continue to bolster our stability even further. Our staffing and experience levels are on plan, and a wide range of initiatives are underway to elevate our customer experience, leveraging our significant recent investments, including a new and modern reservations and departure control system. Our operating results continue to improve, with strong on-time performance in February actually trending ahead of 2019 levels.
We have the flexibility necessary to make the investments we view as a priority, but I would also highlight that as an industry, we remain dependent on improvements to airport facilities and infrastructure. We would encourage government and airport authorities to urgently work together to address the shortcomings of the existing funding model for airports, which is unique to Canada. Travelers, airlines, and other on-site users fund this model, which is then a source of revenue for the government. This model fails to redirect the funds generated by the industry back into the industry and constrains the critical investments that are needed in our airports. To conclude, we remain confident in our ability to execute on our plan, and we'll work with all key industry stakeholders to ensure we collectively achieve and maintain pre-pandemic levels of operational stability. With that, I'll pass it over to Lucie.
[Foreign Language] Craig. Thank you very much, Mike, for your kind words. [Foreign Language] . Good morning, everyone. Allow me to dive right in by discussing our passenger revenues, which surpassed CAD 4 billion in the quarter, nearly doubling those of the fourth quarter of 2021. When compared with the fourth quarter of 2019, that's an increase of about 2% on 85% of the capacity and 87% of the traffic. Yield in the quarter versus 2019 was 18% better, and gains were observed in all geographies. Our full year results reflect the rapid surge in demand following the easing of travel restrictions in the second half of 2022. If we consider each geography, we performed very well in domestic Canada with passenger revenues of close to CAD 1.2 billion for the quarter.
That was an increase of 54% from the fourth quarter of 2021, or a recovery of 95% of Q4 2019. This was achieved in a competitive environment and speaks to the strength of our connecting network and our ability to successfully manage our capacity. Domestic yield improved despite the negative impact on yield of longer domestic stage length. Our Transcon markets performed very well. Transborder market passenger revenues of CAD 916 million surpassed the fourth quarter of 2019 by 1% on 7% less capacity, as well as lower volumes of corporate traffic on short-haul flights. Long-haul and US sun destinations performed very well, and I'm pleased to say our joint venture with United Airlines, although in the early innings, is surpassing our expectations with benefits for Air Canada, our trade partners, and our customers.
We're thrilled with the results from the transatlantic market. In the fourth quarter, Atlantic passenger revenues made up 27% of the total passenger revenues and reached nearly CAD 1.1 billion. That was 16% above the fourth quarter of 2019. As expected, leisure and sun markets were very successful. Fourth quarter sun and South America passenger revenues were 40% ahead of those of the fourth quarter of 2019, with capacity increasing 5% from that same period. Consistent with strong demand for sun and leisure destinations, other revenues were CAD 62 million, or 23% higher than the fourth quarter of 2019, with an important contribution from ground package revenues at Air Canada Vacations. We saw a positive performance in Asia and the Pacific, particularly in Australia, New Zealand, Japan, and Korea, since certain travel restrictions were eased.
Pacific passenger revenues, traffic and capacity, respectively recovered to 74%, 52%, and 51% of fourth quarter of 2019 levels. These results are meaningful because they were achieved despite continued challenges, including overflight restrictions we are subject to in China. Our strategy to diversify our network has allowed us to protect ourselves from the lingering impacts of the pandemic. At the cabin level in the first quarter of 2022, passenger revenues in the premium cabins increased 13%, while those in the economy cabin reached 98% of fourth quarter 2019 levels. We saw yield gains across all cabins in all markets, reflecting both strong demand and a favorable pricing environment. Better fare mix in premium and economy cabins and higher average fare levels contributed to the strong yield performance. Aeroplan also contributed to our yield and revenue upside and continues to exceed our expectations.
Membership is at an all-time high, and the program continues to grow. Gross billing from points sold to third parties were up nearly 50% over the fourth quarter of 2019, and we also observed a 50% growth in total points redeemed over the same comparable period. We also continue to make solid progress with our strategy of growing Aeroplan by diversifying beyond Canada. In 2022, international gross billings were 76% higher than in 2019, making up an increased share of Aeroplan's third-party billings. As we look ahead, we plan to operate approximately 84% of first quarter 2019 capacity, and we're planning to reach 90% of 2019 for full year 2023. We're very encouraged with several key indicators.
Ticket sales in the fourth quarter of 2022 were 102% above those of the same period in 2019 on less capacity. These remain strong in all services and in all cabins into 2023. Advanced booking trends remain solid, both from a volume and fare paid perspective, particularly in our international services, giving us the confidence to continue rebuilding our international network. We recently started service to Bangkok, our first non-stop service to Southeast Asia and the only one between North America and Thailand, allowing us to balance seasonality. Japan and Korea are also showing good future demand. Sixth Freedom is also expected to be very strong in the second and third quarters of 2023, with a solid yield environment out of the United States.
New routes such as Toronto-Sacramento are designed to capture this opportunity and drive further benefits from our joint venture with United Airlines. We also expect ACV to deliver a strong performance in the first quarter, with average package prices and margins holding very well. We expect the domestic and leisure sun markets to remain competitive, but we are well equipped with strength in our commercial model to successfully manage. Now turning to cargo, revenues declined CAD 202 million from the fourth quarter of 2021. All converted cargo aircraft have returned to passenger service. We have three Boeing 767 freighters currently in service, with more on the way this year. By the end of 2024, we plan to have a total of 9 767 freighters and 2 777 freighters.
Yield and demand, particularly in the Pacific region, have normalized, and we expect this softening to continue in Asia. That said, it's important to keep in mind that when compared to the same period in 2019, fourth quarter 2022 cargo revenue still increased 55% or CAD 102 million. Lastly, before I turn it over to Amos, I would like to say how much I have valued my engagement with the financial community. I also feel blessed to have worked 36 years for an industry I love, a brand I adore, and with dedicated, caring colleagues throughout the organization I highly respect. I'm extremely proud of the revenue optimization culture we fostered in the commercial branch over the years, rooted in a desire to win, to excel, and to be better, while always being mindful that our customers have choices and our competition is watching.
Mike, thank you for your support, your leadership, and your guidance. I too will miss you and the team, but will cheer from the sidelines. I wish Mark Galardo and Mark Nasr the very best for the future.
Merci, Lucie. Bonjour. Good morning, everyone. Let's start with a quick financial overview of the quarter. As Mike previously mentioned, we reported fourth quarter operating revenues of nearly CAD 4.7 billion. These were 71% higher than the fourth quarter of 2021, and about 6% higher than the fourth quarter of 2019. Adjusted EBITDA was CAD 389 million in the fourth quarter, CAD 367 million better than a year ago. On a year-over-year increase in traffic of 93% and an operated capacity of 59%, total operating expenses were CAD 4.7 billion in the fourth quarter. That's an increase of CAD 1.5 billion or 46% from the same period in 2021. In addition to the growth in traffic and operating capacity, the increase is also driven by a 60% year-over-year increase in fuel prices.
Allow me to quickly discuss two line items in particular, starting with fuel. Fuel expense of about CAD 1.5 billion increased CAD 794 million from the fourth quarter of 2021. The increase was largely due to the increase in fuel prices, a 37% increase in liters used due to the increase in flying, and an unfavorable foreign exchange variance. We certainly remain vigilant on monitoring the price of fuel and are taking various actions where possible to manage its impact. This includes alternate supply options and taking pricing actions as needed, and of course, monitoring our fuel efficiency. We have not changed our view on hedging and are not doing so at this time. Wages, salaries, and benefits of CAD 892 million increased CAD 88 million or 11% from the fourth quarter of 2021.
The increase is driven by an increase of 32% in employees related to the increased capacity, partially offset by a one-time net charge of CAD 104 million recorded in Q4 of 2021. You can obtain more information on these changes in our 2022 annual consolidated financial statements and notes. Turning to the full year, in 2022, operating expenses of roughly CAD 16.7 billion rose about CAD 7.3 billion or 77% compared to 2021. The year-over-year increase in nearly all line items reflects the surge in traffic and operating capacity of about 3.2 times and 2.5 times respectively. The variance was also attributable to a 74% increase year-over-year in fuel prices.
Compared to 2019, operating expenses decreased CAD 738 million or about 4% on a capacity that represented 73% of 2019 levels. A direct comparison versus 2019 total operating expenses is not necessarily meaningful as we still had pandemic-related challenges in the first half of 2022, and 2019 was impacted by the grounding of the MAX. We continued to exercise diligent cost control. In 2022, CASM decreased 28% and Adjusted CASM declined 43% from 2021. Versus 2019, Adjusted CASM increased 19%. You'll note that this is just one percentage point above the upper range of the guidance provided for Adjusted CASM for the year and was mainly due to the higher sales and distribution costs, inflationary pressures on all line items, also higher disruption costs and higher employee benefits expense.
We look across the industry, inflation has run higher for airlines. We are, however, pleased with our relative performance against the U.S. network carriers in particular, and we can feel we can compete effectively from a cost perspective. 2023, we expect Adjusted CASM to be about 13%-15% above 2019 levels. For some updates on our fleet. All 40 Boeing MAX 8s on firm order have been delivered. At the end of 2022, we had 32 A220s in the fleet, and a 33rd was received in the 2nd week of January. You know, we now have firm orders for 60 A220s. The remaining 27 aircraft, we are expecting six in 2024, six in 2025, and 15 in 2026.
Our A220 and MAX deliveries, complemented with our announced 30 A321XLR aircraft, will complete the renewal of our narrow-body fleet. The deliveries for the remaining 787s have shifted. They are now scheduled to be delivered in 2023, one in the spring and the other over the summer, and the last one in 2024. For a quick word on liquidity. We began the quarter with about CAD 10.2 billion of total liquidity. Ended 2022 with total liquidity of more than CAD 9.8 billion. The change in liquidity considers general CapEx and debt repayments, as well as the repurchase and cancellation of Convertible Senior Notes due in 2025 that we made in the quarter.
You may recall that back in September of 2022, we repurchased some of our outstanding Convertible Senior Notes for an aggregate cash price of approximately CAD 249 million, including accrued interest. Following this repurchase in the fourth quarter, we repurchased an additional $362 million aggregate principal of notes. That repurchase was done for an aggregate cash price of approximately $330 million, including accrued interest. A total of CAD 274 million remains outstanding. For 2023, deleveraging the balance sheet will remain a priority, as you will have seen from our leverage ratio target for 2024. This target has been adjusted to account for the additional freighter investments that previously forecast.
Net cash flow from operations in the quarter were CAD 647 million, compared to net cash flows from the operations of CAD 508 million in the fourth quarter of 2021. On a full year basis, these were close to CAD 2.4 billion, as opposed to a negative CAD 1.5 billion at the end of 2021. For the portion I know you're all waiting for, what about those 2024 targets? You will have seen in our fourth quarter release that along with our guidance for 2023, we have restated some of our 2024 targets for capacity, Adjusted CASM, Adjusted EBITDA, leverage ratio, annual return on invested capital, and cumulative cash flow. I won't go over all of these, as I know you have carefully read the release. The one that I will call out is the Adjusted EBITDA target.
You will have noted that we have moved from an Adjusted EBITDA margin to an absolute number for our Adjusted EBITDA target range. We feel this new target is a better indicator to assess our financial performance. At the core, this new target for Adjusted EBITDA range is in line with the Adjusted EBITDA reflected in the margin target communicated at the 2022 Investor Day. I will now turn the call back over to Mike.
Thank you, Amos. The certainly the strong demand environment that we experienced in the second half of last year continues throughout the future booking curve, and we expect a solid demand environment throughout all of 2023. Our strong liquidity position, pricing power, ability to generate revenue from multiple sources and markets, diligence regarding our cost structure, and our ability to execute on the overall strategic direction provides us a foundation to effectively compete and be very successful. In 2022, Air Canada was named the best airline in North America for the fourth consecutive year by our customers and the readers of Global Traveler. We know we must work hard to maintain this status and stay ahead of the competition, and we'll do this by improving processes, introducing new features, and investing in our business, especially in customer service.
We believe customer service will be a key differentiator. For this reason, last year, we launched our ECX program, Elevating the Customer Experience. It is a multi-year plan that mobilizes virtually every part of the company to consistently deliver service excellence. We're investing to support ECX. For example, we improved our onboard economy class dining and continued to invest in and upgrade our Maple Leaf Lounges. In November, we launched complimentary live TV throughout our in-flight entertainment systems, and we're the only Canadian carrier offering this product, which has proven popular with sports and news fans. Our ongoing narrow body fleet renewal program with 30 Airbus A321XLRs and an additional 27 Airbus A220s will not only offer customers the latest technology and better comfort, but also allow us to cost effectively expand our global reach by entering new markets.
An essential element of customer service is making it easy to interact with us through technology. We continue to develop new personalized mobile and web services. In airports, we are testing biometrics to speed up various processes such as boarding and lounge access, and we're adopting new technology for baggage tracking. Another important group of customers is our cargo shippers. Air Canada Cargo continues to expand its network and will keep increasing options for customers, for example, through our new cargo agreement with Emirates. We also know that competing for customers is one thing, but the true value lies in keeping their loyalty. Along with excellent service, we are also focused on Aeroplan. We are on track to exceed our target of 7 million active members by the end of 2023.
Aeroplan is a compelling new frontier to help our core business acquire, engage, and help customers travel more and travel better. We plan to continue upgrading the program, such as through exciting new partners and appealing programs like HotelSavers. It is difficult not to overstate the importance of Aeroplan. It is an attribute we believe provides a unique value proposition to our customers in a more fragmented airline market. Its success was recognized by many awards in 2022, and it is Canada's leading travel loyalty program. Another important driver of loyalty is brand and reputation. Especially with respect to ESG. All of our stakeholders, customers, investors, employees, the communities we serve, and others demand that we act responsibly. For this reason, because it is the right thing to do, Air Canada's committing significant resources to ESG.
With respect to the environment and climate change, each one of the government, industry, and others in the climate action chain must play its part. We critically rely on each other to reach our collective goals. In addition to our own internal programs to reduce fuel consumption, waste, and emissions, we are investing with partners in new technologies, including SAF, electric aircraft, carbon capture, and a new offset partner. We know investors value comprehensive disclosures, so we produced our first TCFD report available on our website. Finally, part of our ESG is developing our people. Our success was highlighted in 2022 as among other recognitions, we were named by Forbes as one of the world's best employers and one of Canada's best employers for diversity.
For the ninth consecutive year, we ranked among Montreal's top employers, and we won the best corporate social responsibility strategy at the Canadian HR Awards in 2022. These are important recognitions. Engaged and motivated employees are essential if we're going to succeed in our ambitions to remain as Air- North America's leading airline and a Canadian global champion. That is our commitment, and we have the people, the resources, and the plan to achieve these goals and much more. Thank you, and back over to you, Valerie.
Thank you, Mike, and thank you all for joining us today. We are now ready for questions. As usual, please limit yourself to two questions. Should you have additional questions, we invite you to contact us at Investor Relations. Over to you, Giselle.
Thank you, Ms. Durand. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your handset before making your selection. If you have a question, please press star one on your device's keypad. You may cancel your question at any time by pressing star two. Please press star one at this time if you have a question. There will be a brief pause while the participant register for questions. Thank you for your patience. We will take the first question from Savanthi Syth, Raymond James. Please go ahead.
Hey, good morning, everyone, and congrats and best wishes, Lucie, on the pending retirement. Maybe Lucie, if I can start with you with the first question. Just curious on the cargo front, you know, what your expectations are. Yields have been You know, coming down quite a bit, and yet your performance is fairly good in the fourth quarter. As we kind of look to 2023 and 2024, you know, against a falling yield environment but growing capacity for Air Canada, just what are your kind of targets or expectations there?
First of all, thank you for the kind words. I appreciate it. With respect to cargo, definitely on the yield side of the business, particularly in the Asia markets, we are seeing, you know, we sort of say the yields normalizing. You know, what we were experiencing in 2021, particularly in those markets, was a little bit inflated. That is normalizing. As we bring in the new freighters, few opportunities ahead left for us. We have opportunity to capture some business in some other transatlantic markets that will be very good for us on the cargo front. We also have the ability to, you know, focus on connectivity.
Even in the cargo business, there's a huge opportunity for us to, you know, be able to connect some of this cargo traffic. We're in a little bit in a transition phase here because as you know, I think I noted and Amos noted as well that the new freighters are en route. You know, we have a few that will be in service momentarily, and then by the time we reach the end of 2024, we'll have our full complement. Now we're a little bit in a transition, but we're still very confident that in other markets, Asia might take some time, but in other markets we'll be able to produce some solid results.
That's helpful. Thank you. Then if I might ask, I don't know if this is for Craig or the Grey team, but if I look at your cancellations, it seems like, you know, Air Canada mainline and Rouge are performing really well, but Jazz has had poor performance throughout, you know, in good and bad days. I realize the regional pilot dynamics are nowhere near as bad as it is in the U.S. and as it is in Canada, but I was wondering if, you know, this is a result of pilot supply issues at Jazz and generally kind of what your expectations are as we move through 2023.
Hi, it's Craig. You know, yeah, for sure, you know, it's been a challenging operating environment for a number of reasons. When we have constraints at airports, there's a variety of factors that come into play in terms of how we determine which flights need to be canceled. That has to do with, you know, volume of connecting passengers. Our goal is always to maximize, you know, our customers to be able to get to their final destination on time. At times, some of the smaller aircraft can free up a gate for larger aircraft to be able to operate, and it makes better sense for the overall operation for our customers. That's always what's sort of our driving force.
With respect to the pilot supply side, as I mentioned earlier, we don't have any issues on the Air Canada side. On the regional side, there is some movement between the regional airlines. There's a flow-through arrangement in place where regional pilots move into the mainline environment. To a certain extent, that is creating a temporary amount of dislocation in terms of some pilot resources. We view it as temporary and non-material.
Is that just as Air Canada builds that capacity, and then as you kind of normalize your hiring, that should normalize on the Jazz side? Is that what you mean? Or?
That's quite right, yes.
I appreciate it. Thank you.
Thank you. The next question is from Kevin Chiang, CIBC. Please go ahead.
Thanks for taking my question, and I echo the congratulations, Lucie, all the best in your pending retirement here, and congratulations to the, to the two Marks moving forward. Maybe just a question on, on the 2024 Adjusted CASM guide. You know, it looks like some of these costs are, are maybe structural, maybe some of these are related to the faster ramp-up in capacity. I'm trying to get a sense of, you know, maybe where Adjusted CASM eventually ends up as you kind of get through this accelerated ramp-up phase.
If I just look at it simplistically, it looks like your, you know, your ASMs are going to be up about 10 points year over year, but your Adjusted CASM is down 5 roughly on either end of the goalpost. Just wondering how I should be thinking about that trend as you look even past 2024, that some of those costs start to come out as you normalize your growth.
Yeah. Thanks. Good morning, Kevin. Yeah, you know, our Adjusted CASM, if you sort of go back in time of when we put that target out, it was, you know, we were building our plans for Investor Day was back in March. Certainly back in that time frame, you know, we put the plan together in January, February, rolled it out in March in sort of targets. The world certainly had moved in terms of inflation as we sort of saw, you know, after the Ukraine war, the beginning of the Ukraine war. That put pressure really on all sort of our cost items.
Of course, as we began building up, and then as we're putting capacity out, we're adding headcount, you know, before all the capacity comes in for all the reasons we've talked about relative to operational performance. Expect sort of from a productivity efficiency side, once we get sort of past 2024, we'll be more into an operational back to sort of matching capacity with employees and driving productivity. We have this sort of interim piece here as we get through that. On the one hand, we have inflationary pressures on the lines. We have some productivity items that we think will come back. Fundamentally, you know, as you, as you know us, we are, you know, relentlessly focused on cost and cost transformation.
We don't take, you know, this, the additional guidance as a perhaps notation that, you know, we've held our foot off the accelerator, aren't going to push forward on cost reduction programs. It is still part of the DNA here, and we certainly will control that in terms of our spend. You know, we have a very strong procurement department that really, you know, does battle in terms of finding mitigating options, driving essentially battle with suppliers, but also ensuring that we have supply chain for what we need to drive the operation. You know, aside from that, you know, we've made, as you've seen, you know, technology investments, and we'll continue to reap some of the benefits of that.
We're investing a lot in terms of AI, in terms of optimizing maintenance planning, continuing optimization of different elements of the revenue management world. You know, continued sort of process improvements. Mike talked on some of them on the airport side as we move into more self-service. There are many factors here, many items that are moving forward, but we have this ability as we're going in through 2024 in terms of, you know, guidance that was obviously higher than what we had thought back in March. A long answer to your question, you know, Kevin, but, you know, overall, you know, we still are focused on costs and still focused on improving productivity and efficiency, and we'll continue to take every opportunity to do so.
Yeah. And it does sound like maybe some of these costs, as you mentioned, kind of roll off as your growth normalizes here.
Yeah.
Some of them may be upfront costs roll over as well.
Yeah. Certainly that will as that sort of normalizes. Then, you know, inflation, yeah, there's been some slight reductions here as well. You know, that environment should improve, and we'll certainly look for opportunities there as that comes down in the inflationary environment.
That's great. Maybe just a quick follow-up here on, you know, you talked about ACV, you know, outlook is pretty good here. Just wondering what the impact of Sunwing has had on maybe demand environment for more leisure travelers, especially in your ACV brand. Obviously, they had some difficulties in December. It seems like there's an opportunity to gain market share.
It's a very good question. you know, looking at the performance that we had with Air Canada Vacations, I would say to you that it virtually had no impact. Our load factors were solid. We saw margin growth, you know, across all the routes that we operated. I would say to you that it did not impact us. We did very, very well.
Right. Kevin, it's Mike. Just to further, I mean, ACV is an important part of our program here, and we're investing in ACV to allow it to compete much better, and if possible, take market share away from just not Sunwing, but all the other competitors that we compete with.
That makes a ton of sense. Thank you very much. Have a great long weekend, everybody.
Thank you. The next question, Chris Murray, ATB Capital Markets. Please go ahead.
Yes. Thanks, folks. Going back maybe a little bit to the cost side of things, and maybe I'm just trying to understand a little bit about the guidance. Maybe to follow on Kevin's question a bit. Thinking about costs as we go forward, you've talked about a little bit about labor, but are there any other costs? you know, I noticed that like the other bucket was higher. I'm just trying to get a sense for, you know, is there anything structural, that we should be thinking about? Are some of these costs, maybe related to things like the cargo operation, or Aeroplan? Are there things that might be unusual or maybe worked, kinda like for like in 2019?
You know, I think, when you sort of look at is there anything structural that's changed, I would say the dynamic that has changed in terms of our various line items, you know, are essentially sort of ground handling costs, anything that has a labor component to it. On the catering side, we have certainly pressure sort of on the food side. You know, you look at those line items and you get into technology. You know, all of those areas are, you know, we're seeing, you know, significant inflationary pressures. You know, again, because there are labor shortages a little bit around the world, ground handling contracts, you know, through across the world are, you know, pressured up.
catering and catering costs from essentially the commodity costs of food are going up and then the labor component. Again, technology. I would say, you know, those are sort of three items that would expect that pressure to come off, you know, as we're seeing both commodity prices coming down in certain areas, labor dislocation now that's sort of coming back in, labor is available again. You know, it's something that I think it's temporary. We're getting through it through 2022 and seeing into 2023, I think as we get out into 2024 and 2025, we should see that abate to a certain extent.
Okay. That's helpful. And then my other question is around cargo, and maybe just as kind of a longer term question. And trying to get a nice sense as the, as the cargo operation matures. How do we think about that relative to, you know, either your longer term EBITDA margin, or margins or EBITDA generation goal? Should we be thinking that this. And I appreciate that you did it to diversify your revenue streams, was part of the strategic rationale. But you know, is this a sort of a, we'll take the incremental dollar contribution? Or do you see cargo longer term actually being overly additive to margins or on a percentage basis?
Look, Chris, you know, we have invested in the cargo business. We view it as a growing opportunity for us. We wouldn't have made the investments in, you know, triple seven freighters and seven six sevens that we converted and purchased, to be, you know, i t will be a contributor. It, again, as you said, part of the revenue diversification, and it also helps offset our seasonality that we have sort of in through the first quarter. You know, fundamentally, cargo will be a contributor to EBITDA as we go forward.
Will it be a contributor similar to passenger, or would it be kinda maybe a, you know, additive but not, but dilutive longer term?
It's certainly additive, but not dilutive. You know, our primary business is on the passenger side and, but cargo will grow, and it will contribute.
Okay. Thanks, folks.
Thank you. The next question, Andrew Didora, Bank of America. Please go ahead.
Hi. Good morning, everyone. Amos, just a quick question on your 2024 cost outlook. Do you include any new labor deals in the 2024 CASM guide?
Good morning, Andrew. Thanks for the question. I know you're always good at trying to get to the details here.
Of course.
I'm not gonna go into the detail of what's included in the Adjusted CASM targets for 2024.
Okay. I guess I asked because I know the pilot deal is up in September. I'll wait for future calls on that one. Second question, just around the CapEx, I think, you know, in the MD&A is the CAD 2 billion per year coming up in the MD&A. Is that a good number to use in our model, or is there something else, you know, that we need to think about? Then of the CAD 1 billion of lower free cash flow, cumulative free cash flow that you talked about in your release, how much of that comes from the freighter investments? 'Cause I think I count about maybe five new freighters from your, you know, versus your prior release.
Just trying to bridge that gap on the CAD 1 billion free cash flow guide down. Thanks.
Yeah. I'll take the second part first. It is the majority of the freighter investments, so 777 freighters and new 767 freighters. Those are the items that are driving the cash flow, change in guidance, from CAD 3.5 down to CAD 2 that we've sort of talked about there in the release. That's the first part. I thought that was the last part of your question, and I forgot the first part of the question was?
Is CAD 2 billion a year in CapEx? Th is year and next reasonable? I think that's what was disclosed in the MD&A this morning.
Yeah. That is what we have right now, and I think that's the number to be using. We have the MD&A.
Right.
I just wanna add on to Mike. I just wanted to add on to Amos's response and kind of combine it with Chris's question. I mean, cash flow is down because of the significant investments in cargo, and there's not a lot of economic benefit or income benefit in the 2024 year 'cause they're just coming on stream. That benefit will be in 2025 and 2026. It's unfortunate we have to show a free cash flow number for that year without the corresponding economic improvement to EBITDA. Again, as to in your early response to Chris, we expect you know, additive EBITDA in post 2024.
Got it. Thank you.
Thank you. The next question is from Matthew Lee. Please go ahead.
Hi, it's Matt Lee from Canaccord. Congrats, Lucie, and thanks for taking my question. You know, on the premium cabin, sounds like 23 still won't have business travelers returning to 2019 levels. In your booking data, are you still seeing enough demand from consumers to fill that gap, or is there a potential slowdown just given what we're seeing in the macro level for consumer discretionary?
First, thank you for your good wishes. With respect to corporate demand on the North America side, things have stabilized a little bit. We operate around -30% for North America compared to what we would have had in 2019. What we are seeing is a steady growth on corporate for international markets. That has started to return a little bit later than what we were observing for North America. With respect to the J cabins, you know, as we developed a lot of these VFR markets and we looked at opportunities for leisure, premium, you know, travelers, as we, you know, started to work on the Aeroplan redemption models, we were able to find really good sources of revenue for our premium cabins.
If you look at the load factor, for example, in North America, it would be 10 points better than it was in 2019. There's many products that we brought online, and, you know, we had opportunity to generate new demand for the international cabins. If you look at the international markets in the Premium Economy cabins, not only do we see a solid demand there, but we also see a very interesting yield improvement as well. We would like the corporate demand to come back to greater levels, but, you know, keeping in mind that the pricing environment is also better than it was in 2019.
From a revenue standpoint, it's pretty solid, and it gives us confidence as well that if we ever faced, you know, slowdown for whatever reason, there's other market segments for us to be able to recapture. J cabin, our premium cabin, and also Premium Economy did very, very well. Very well.
Thank you. The next participant is Cameron Doerksen, National Bank Financial. Please go ahead.
Thanks. Good morning. Also wanna echo my congratulations to Lucie. Maybe a question for you. Just wondering if you can talk a little bit about what you're seeing on the domestic markets. Obviously, there's a lot of moving pieces here with, you know, WestJet kind of retrenching out of Eastern Canada into Western Canada, but you also got the, I guess, announced plans for Porter starting up operations out of Pearson. Just wondering what you're seeing from a pricing point of view in Eastern Canada and where you see the competitive environment.
Listen, there's no doubt that, you know, from a domestic standpoint, pure, you know, domestic traffic, we are in a very competitive environment. You know, looking at advanced bookings, so basically the posture looking forward for domestic is still good. You know, despite the fact that we have this competitive environment, we are still able to produce very nice yield improvement. In fact, if you know, adjust for stage length on domestic in the fourth quarter, and even looking at ADR, our yield is in the, you know, 7% or 8% improvement. The J cabins, so, you know, what we're able to produce premium, of course helps us. This new, you know, redemption demand that we've been able to unlock with Aeroplan.
The fact that we also have the ability to feed our domestic network, you know, from our international services also helps us. You know, we have what we need commercially to be able to hold our position domestic. You know, some of the key markets, of course, like the transcon, we obviously watch those very, very closely, and we continue to see very, very good advanced bookings. We're very mindful of the competitive landscape, and we will continue to be very mindful of it.
Okay. That's great. Maybe just a follow-up on, I guess, on China. Obviously, China now reopened . I guess there's still very severe restrictions, on number of flights between Canada and China just, through the bilateral there. Wonder if you've got any indication as to when some of that capacity might be able to be added back, for Air Canada.
At this point in time, we don't. We hope to, you know, here in relatively a short period, but at this point in time, we continue to operate the schedule we have given the overflight rules.
No, at this point, we don't, we don't know what the next step will be. Okay, fair enough. Thanks very much.
Thank you. Next question is from Matthew Lee, Canaccord Genuity. Please go ahead.
I think we already had Matthew's question. If we could move to the next question.
Fadi Chamoun, BMO, please go ahead.
Thank you. Good morning, and congrats, Lucie, on the retirement. Amos, can you give us guidance about CASM ex for Q1? What do you expect to have in Q1?
Good morning, Fadi. No, at this point, we're not gonna get into quarterly CASM guidance, or CASM ex guidance. Right now, we're just providing guidance for the year, as you've outlined in the release.
Okay. The second question is on FTEs. You kinda finished the 2022 at 33.2, which is about the same level you were at in 2019, obviously, with capacity, still, far less behind. Is this a number that you think kinda stays, stable-ish going into the next couple of years, you grow into it? Is there drivers that are pushing the FTE numbers higher, you know, despite the productivity story on the technology side?
Hi, it's Craig. Just picking up on a comment Amos made earlier. You know, to the extent that we're operating less than 100% of our pre-pandemic capacity, there's a certain inherent lack of productivity in that because, you know, you need employees to be able to staff, you know, a full day of operations, let's say at an airport. You're not operating. You have a bit of peaks and valleys during the course of the day. As capacity increases, we'll grow into that productivity, and we expect that to happen over the next 12-18 months. That's our primary expectation at this point.
Okay. We should expect that to be kinda more or less stable as we grow into it. Okay. Really the main question I have is the guidance for 2024, the middle of the range is about 3.7. Obviously, that's in line with where you were in 2019. At the same time, you have a stronger loyalty program. You have a bigger cargo business, by 2024 versus 2019. Just feels like the environment isn't absorbing this inflationary cost issue that were highlighted. Is this a competitive issue? Is this market more competitive than maybe what you'd expected before, or there other things at play here?
Yeah. Fadi Chamoun, it's Michael Rousseau. Good morning. It's an interesting question. Certainly, I would say the domestic market is probably more competitive than what we had envisioned in March of 2022. As Lucie Guillemette said, we'll get through that with all the strengths we have and some of the responses to some of the new competitors. The international markets continue, you know, are performing the way we thought they would perform, frankly. You know, it's impossible for us to reconcile, you know, your expectations versus our guidance on 2024 EBITDA, basically. You know, obviously our goal is to overachieve. You know, we're consistent where we were in March 2022 as to EBITDA levels.
You know, again, you're absolutely right. Aeroplan is stronger than we expected. You know, cargo will continue to add more to our profitability. I would say, you know, on the other hand, the domestic market is probably a little more competitive than what we had initially envisioned.
Okay, great. Thank you.
Thank you. The next question is from Walter Spracklin, RBC Capital Markets. Please go ahead.
Yeah, thanks very much. Good luck, Lucie. I'm sure you're gonna miss these calls dearly. Yeah. Michael, you mentioned in your prepared remarks that you expect the demand environment in 2023 to remain strong. In the press release, you mentioned that you're assuming, I think it's a moderate GDP growth in 23. Am I correct in assuming that the underlying assumption for your 2023 is that there is no recession or that you expect travel demand to remain robust even during a recession in 2023?
Yeah. Another really interesting point, Walter. So obviously we've got the benefit of a forward curve, and we said to the market that demand is very strong through that forward curve, you know, in fact, better than 19 levels, basically. That's with all the, you know, concern about either a soft landing or some level of recession. Again, historically, and we've been in this business a long time, Walter, but, you know, airline travel is typically a multiplier of GDP. I don't know if that exists at this point in time in this kind of transition period. Time will tell whether, you know, travel behaviors have changed permanently or in a transitional basis. But certainly we're taking full advantage of it while it's here.
We're continuing to see strong demand through the booking curve. You know, despite the fact, as Lucie said, corporate travel is not coming back to 100% at this point in time, but certainly leisure and VFR is making more than that up and we've pivoted as a company to be able to take advantage of that demand. You know, from an economic perspective, I think that historical relationship is, you know, shouldn't, you know. Again, time will decide, will determine whether it comes back to that historical relationship. Today, we don't see that.
Okay, that's great. On the cargo side, given that it's becoming a bigger part of your business now, can you talk to us a bit about the strategy, particularly around how you get new contracts here, or new business? Is it under contract? Are you going ACMI on any of this stuff? What is the risk to your belly capacity? Presumably many of your customers, when you start a new freighter, you go with some of your existing customers. How much is that cannibalizing, if at all, what's going into the belly of your aircraft?
in fact, it's a little bit the opposite, because most of the freighters are operating in markets where we don't have enough belly capacity, or they're operating markets where we don't actually operate passenger. We actually have opportunity, as I mentioned a bit earlier, for feed, but it does not cannibalize at all. With respect to, you know, where do we go get these customers? It's a little bit like on the passenger side, meaning, you know, when we enter some of these new markets, there are, you know, at times customers who specialize in the type of cargo that is, you know, destined to those destinations. Of course our sales team has been very busy in the last, you know, 18 months, securing that business.
We do work with most of the, you know, large, freight forwarders and, you know, cargo operators. There is virtually no risk of cannibalization because again, some of the large cargo markets where we operate passenger, the incremental, you know, the market can take that demand.
Fantastic. Appreciate the time.
Thank you. This is all the time we have for the question and answer session. I would now like to turn the meeting back over to you, Ms. Durand.
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