Welcome, thank you for joining us on our first quarter earnings call of 2023. Joining us this morning are Michael Rousseau, our President and CEO, Amos Kazzaz, our Executive Vice President and CFO, and Mark Galardo, our Executive Vice President of Revenue and Network Planning. Also in the room with us today are Arielle Meloul-Wechsler, Executive Vice President and Chief HR Officer and Public Affairs, Craig Landry, Executive Vice President and Chief Operations Officer, Marc Barbeau, Executive Vice President and Chief Legal Officer, John Di Bert, our incoming Executive Vice President and Chief Financial Officer, and Mark Nasr, Executive Vice President, Marketing and Digital and President of Aeroplan. Mike will provide a brief overview of the quarter. Mark will discuss our revenue, network, and trends. Amos will provide more details on our financial performance before turning it back to Mike for an update on our corporate strategy.
Following management's overview, we will take questions from equity analysts. Amos Kazzaz and Pierre Huot, Vice President and Treasurer, will also be available for questions from Term Loan B lenders and holders of Air Canada bonds. Note that our investor relations team remains available for questions after the call. Finally, I would like to note that our comments and discussions on today's call may contain forward-looking information about Air Canada's outlook, objectives, and strategies that are based on assumptions and subject to risks and uncertainties. Our actual results could differ materially from any stated expectations. Please refer to our forward-looking statements in Air Canada's first quarter news release that is available on aircanada.com and on SEDAR. Now, I'd like to turn the call over to Mike.
Well, thank you, Valerie, and good morning. Bonjour tous. Thank you for joining us on our first quarter call today. Merci. I'm extremely pleased that Air Canada began the year so strongly, with first quarter operating revenues of CAD 4.9 billion, 90% higher than the first quarter of 2022. This is a record for first quarter revenue numbers. Our results exceeded all expectations, and as we look to the strong advanced bookings for the remainder of the year, we expect demand to persist. For this reason, and for the lower than expected fuel costs, we increased our adjusted EBITDA guidance last week. We have the strategy, the fleet, the network, the product, and certainly the people to make the most of the recovery. I thank our employees for their great teamwork, carrying our customers safely during the quarter.
The winter and the start of spring can be very challenging in North America, especially Canada. Apart from the weather disruptions that can affect all aspects of the air transport system, it usually comes with high traffic flows, particularly with the spring break peak. The strong and improving collaboration between our people and our ecosystem partners has been key to our service delivery during this period and sets our expectation for a continued strong performance through the summer. In the quarter, passenger revenues total CAD 4.1 billion, which is more than double that of a year ago and a record for our first quarter. We recorded adjusted EBITDA of CAD 411 million. That is up CAD 554 million from the same period last year.
Our adjusted EBITDA margin was 8.4%, one of the strongest among North American network carriers. Along with this, we remain vigilant on costs, with adjusted CASM down about 7% year-over-year. Cost control is and will remain a top priority for us. We ended the quarter with total liquidity of over CAD 10.5 billion. This certainly gives us the ability to confidently execute our business plans, to take our company forward, and to continue to grow. All components of our company contributed during the quarter. Air Canada Vacations produced remarkable results, and Air Canada Cargo continued to expand its network and their fleet. I'm also pleased to share today that Aeroplan has already reached its original 2024 target of 7 million active members, despite the effects of the pandemic.
In addition, gross billings have increased 50% when compared to the first quarter of 2022. We're proud of the record-breaking numbers of enrolled members, growth billings, and redemptions in our award-winning loyalty program. This is a significant milestone because it speaks to the importance of Aeroplan for us. A growing membership base also unlocks more partnership possibilities, enabling members to enjoy benefits and earn points in their everyday lives. A larger customer database in the digital platform create additional opportunities to tailor our redemption offerings. All this translates into a key competitive advantage for us. Certainly, I thank all our customers for their loyalty and for choosing to fly with us. Before I give the call over to Mark Galardo, first, I wanna welcome John Di Bert to the team.
I believe many of you know him, and all of you will and should have the opportunity to meet him over the next several weeks. I also want to welcome Mark Galardo and Mark Nasr to their first analyst calls. Both became executive vice presidents a couple of weeks ago, leading all commercial and digital areas. They are excellent leaders and will be critical to both our short-term and long-term future. I will save my comments about Amos for the end of the call. Mark, over to you.
Thank you, Mike. Bonjour à tous. Good morning, everyone. C'est un plaisir d'être parmi vous aujourd'hui. Mike touched on our record operating revenues. Passenger revenues more than doubled from the first quarter of 2022, with about half the increase coming from international and sun markets
The domestic market is performing as expected and transatlantic demand remains very strong. We are maximizing on the depth and reach of our diversified network to our hubs and extensive connectivity they offer globally. Aside from strong results from transatlantic and sun markets, flights to Australia and Japan performed very well, with the latter in particular back to 2019 levels. Seasonal routes like Vancouver, Bangkok clearly demonstrate that our network diversification strategy is working. This also counterbalances traditional seasonal patterns. Our average fares have increased above economic indicators, signaling that demand is not only strong, but that customer decisions around travel have evolved. Our premium cabin strength continues. To put this in perspective, the year-over-year growth in revenues from premium cabins represented 30% of the total increase in passenger revenues from Q1 2022, and it represented 49% of the passenger revenue growth versus Q1 2019.
Air Canada Vacations also produced remarkable results this quarter, even surpassing those of the first quarter of 2019, demonstrating the strong value proposition of its product and elevated by a team that clearly rose to the challenge. You will recall that in January 2022, in response to the emergence and impact of the Omicron variant, Air Canada suspended flights to certain Caribbean destinations from January to April 2022. To capture this demand, we have successfully positioned Air Canada Vacations as a leading Canadian vacation brand. Looking ahead to the rest of the year, we continue to see solid advanced bookings in all markets.
The system booked load factor is trending ahead of 2019, and as we look into summer, our new routes to Copenhagen, Toulouse, Brussels and Amsterdam are performing to or above expectations. We continue to deepen our relationships with our partners and expect Sixth Freedom traffic to continue to contribute favorably, and we are seeing a significant improvement in yield stemming from these partnerships. These partnerships also allow us to further balance our seasonality as American and Canadian travel profiles are highly complementary. This will allow us to maximize our Sixth Freedom potential. People want to travel. Seasonality and customer segments are changing post-pandemic. There are two other related points that I'd like to emphasize. First, the importance of immigration, and second, how this leads to visiting friends and relatives.
Apart from its critical importance to our economy, immigration has a multiplier effect on the number of Canadians who travel to see their loved ones abroad and vice versa. As a global carrier, we connect Canada to the world, and we'll continue to explore new routes that serve our current and future customers. A good example is our Vancouver to Dubai route, which is one of our latest additions to the network. It gives us access to regions such as Southeast Asia, from which many immigrants to Canada and foreign students originate. We also foresee good future opportunities in the China and India markets. Finally, we continue to grow and deploy our cargo fleet. This has opened up additional opportunities in Basel in other European cities lately.
Our cargo strategy is core to our diversification focus as it continues to create value, carrying cargo from global freight lanes onto our wider passenger network in the domestic North America and other international markets. This new and diversified revenue stream also counters some of the seasonality of the passenger business and is a key component of our future commercial strategy. I will now pass it over to Amos. Merci.
Merci beaucoup, Mark. Bonjour. Good morning, everyone. Like Mike and Mark, I too am very pleased with our results for the first quarter. Alas, this is my final earnings call. I've enjoyed all of them and will miss discussing our results with you as we continue our recovery and will be following Air Canada's progress from the sidelines very closely. Last week, we updated guidance on certain key metrics for the year, including capacity, Adjusted CASM and Adjusted EBITDA. Although our capacity has remained relatively stable, you will have noticed a change in our cost expectations. In short, we're in a different cost environment as we've spoken about. This is not isolated to Air Canada, it is being experienced across the industry. Of course, the anticipated growth in earnings and higher than expected traffic have an impact on our unit costs for the year. Now, turning to our results.
Total operating expenses increased 57% from the first quarter of 2022, largely due to increased passenger revenue, traffic and capacity. More details on certain line items are outlined in the first quarter MD&A, which was published this morning. Our first quarter adjusted EBITDA of CAD 411 million was better than expectations on a continuing strong revenue environment as explained by Mike. Fuel costs were also lower than expected in the first quarter, coming in at CAD 1.285 per liter, but still higher than Q1 of 2022 by 30%. That said, as always, we continue to maintain a strong focus on cost discipline. Adjusted CASM was about 7% lower than a year ago.
The favorable impact of higher capacity and resulting efficiency gain was partially offset by a favorable maintenance cost adjustment recorded in Q1 2022. This adjustment represented 6 percentage points on Adjusted CASM. If we exclude it from Q1 2022, our year-over-year Adjusted CASM variance would have improved about 13%. We are determined to stay on track with our objectives, and we are managing our business for the long term. As to our liquidity and debt, our CAD 10.5 billion in total liquidity consisted of CAD 9.5 billion on the balance sheet and CAD 1 billion available under undrawn credit facilities. It increased generated free cash flow of CAD 987 million in the quarter, CAD 896 million more than a year ago. We remain committed in investing in our future for sustained profitability, including by further de-leveraging our balance sheet.
Net debt at the end of the quarter decreased about CAD 1 billion from the end of 2022 due to the increase in liquidity and debt reduction. The leverage ratio at March 31, 2023, was 3.2x or a 1.9 turn improvement compared to December 31, 2022, which gets us closer to our goal. For a word on our fleet and other expenditures. As planned during the quarter, we brought back a Boeing 777-300, added interim lift with an Airbus A330, and we added a sixth Boeing 767 freighter to the fleet. We plan to add one more freighter to the fleet this year. One Boeing 787-9 Dreamliner was delivered in April, and you expect one more this year. We welcome our 33rd Airbus A220 into the fleet.
Deliveries for the remaining 27 aircraft on firm order are planned between 2024 and 2026. The Airbus A321XLR deliveries are now scheduled to begin in 2025, with the final aircraft scheduled to arrive in 2028. We also continue to invest in technology to improve the customer experience and optimize our processes. In April, we announced a significant change to how we distribute our content and work with travel agencies. At its center, the new distribution capability, or NDC, will offer agencies more options to connect with Air Canada with additional content to sell and will enable advances in our revenue management roadmap, such as continuous pricing. This program and our new commercial arrangements with industry providers also create cost transformation opportunities. We are building for our future success with every investment being made, which will then foster sustained benefits.
Our committed and planned capital commitments now currently sit at around CAD 1.6 billion for the remainder of 2023 and CAD 1.9 billion for 2024. As to our 2024 targets, we'll continue evaluating them as we progress on our plan and execute on our strategic priorities. Any updates we'll provide it in due course. Finally, the aggregate solvency surplus in Air Canada's domestic registered pension plans has been estimated at CAD 4.6 billion. Thank you. Back to you, Mike.
Great. Thank you, Amos. Again, we are very pleased with the results of the first quarter. As any sports fan knows, one good period or a strong quarter doesn't mean you can relax for the rest of the game. For this reason, we intend to remain tightly focused on our operations, taking care of our customers, and staying diligent on costs through the balance of the year and beyond. We are very encouraged by indications for the coming quarters, which are all positive. Our cash flow in the first quarter reflects in part strong advanced ticket sales. Yields, which improved in the quarter by about 9% from a year ago, also will remain strong. To keep this momentum going, we remain steadfastly focused on elevating the customer experience. This includes new programs and training to support our employees and investments in new offerings for our customers.
We're introducing new and renovated lounges, and we have also improved onboard meals. More recently, we announced a landmark partnership with Bell that will improve our in-flight offering through expanded live TV entertainment and the introduction of free Wi-Fi messaging services on all Wi-Fi-equipped flights worldwide. This partnership will also enable us to introduce new Bell point accrual opportunities for Aeroplan members. Customer choice of routings and destinations also keeps expanding, and we're offering more convenient travel options through new partnerships, like our deepened transport of business arrangement with United Airlines and our strategic partnership with Emirates. For Aeroplan, we have introduced an attractive new partner in our agreement with Parkland and its popular brands across the country, like Ultramar and Chevron. We've also expanded our partnership with Uber to include grocery and retail delivery, creating more earning and redemption options for members.
A key element of elevating customer experience is continued investment in new digital technologies. Beyond NDC, which Amos touched on, this includes new dynamic boarding passes, biometric facial recognition technology in airports, and pre-order meals through our website and mobile app. We also continue to advance our ESG initiatives. This includes diversity, equity, and inclusion, community partnerships, and official languages, all of which bind Air Canada to the communities it serves and are critical to Air Canada's culture. One very bright note in this vein is that for the first time since 2020, we operated Dreams Take Flight excursions with flights from Winnipeg, Halifax, and Toronto this spring. Dreams Take Flight is run by generous volunteers, many of them Air Canada employees and retirees. It takes children that are faced with challenges in their lives to a magical place for a day of wish fulfillment.
8 dreams flights are planned for this year from across Canada. In total, we will collectively make an expected 1,000 wishes come true. On the environmental front, we recently announced a new SAF purchase agreement that will see us increase the use of alternative fuels by 5x . We're in the preliminary stages of SAF use. This agreement is one more step towards our ambitious commitment to reach net zero emissions by 2050. This goal, the centerpiece of our climate action plan, is very important to all stakeholders, including investors who take sustainability into account when making investment decisions. However, we face an uneven competitive landscape, including in the sustainable aviation fuels area. Other countries have adopted various mandates and incentives to promote their production and adoption. This is not about climate action, it's about remaining competitive and continuing to fuel our Canadian economy.
To make this happen, government involvement and support is required, as we see in other countries. We are excited about all business opportunities ahead, including those Mark touched on earlier regarding India and China, which we are exploring, keeping in mind the current environment and its constraints. Ultimately, our objective is to connect Canada with the world safely, we are very proud of the role we play in Canada. We create jobs and contribute to Canada's social and economic development. In closing, I wanna acknowledge the incredible contributions of Amos over the past 13 years. He has been a critical senior leader involved in virtually every key decision. He was instrumental in bringing home significant strategic initiatives such as the acquisition of Aeroplan and the subsequent credit card negotiations with our partner banks.
He has created so much value for Air Canada, just not dealing with the most complex issues with creativity and a work ethic second to none, but also representing Air Canada with absolute care and class. He built an incredible team, leading with empathy and mentoring many more, leaving Air Canada with a solid foundation. On a personal note, he's been a strong partner for me and a great friend. We all wish him the very, very best. With that, Valerie, we're now ready to take questions.
Thank you, Mike, and thank you all for joining us this morning. We are now ready for your questions. Keep in mind you may always reach out to our investor relations team should you require further details. Over to you, Moe.
Thank you. We will now take questions from the telephone lines. If you have a question and you are 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 participants register for questions. We thank you for your patience. Our first question is from Andrew Didora from Bank of America. Please go ahead.
Hi, good morning, everyone. Mike, the CAD 561 million in other revenues was much stronger than we anticipated. I know there's a lot of seasonality in this figure with Q1 the strongest, but was there anything in that figure that, you know, might, you know, might be one time or would alter kind of the way this trends throughout the year?
Good morning, Andrew. It's Mike. No, there's certainly no one-time issues in that number. That really reflects the commentary we've made around ACV and Aeroplan.
Yep. Okay. Makes sense. Mike, I know, you know, balance sheet repair is a top priority. I think pre-pandemic, you really didn't get aggressive in capital returns via the buyback until you got to about a turn of leverage. Should we think about it the same way, or did COVID change the way you're thinking about, balance sheet and capital returns? Thank you.
Yeah. No, Andrew, a great question. No, deleveraging remains a top priority for us and, you know, we're on a path to get back to where we were, pre-pandemic. Again, that remains a top priority for us.
All right. Thank you.
Thank you. Our following question is from Kevin Chiang from CIBC. Please go ahead.
Thanks for taking my question, and congrats, Amos, on your pending retirement. It's always been great working with you. John, congrats on joining Air Canada here. Maybe just my first question on seasonality. You know, historically, we've seen, and I know we're in a unique environment, but historically Q1 has been your lowest load factor quarter, and you obviously had a very strong Q1 in 2023. Just wondering how you think about utilization rates as you get through the remainder of the year. Do you think you hold here as you add capacity? Do you think it actually grinds higher and exhibits historical seasonal patterns just given the pent-up demand? You know, any color there would be helpful.
Hi, Kevin. It's Mark Galardo here. You know, prior to the pandemic, we had discussed a lot about de-seasonalizing the business, and we had invested a lot of capacity into markets like Australia, India, leisure sun markets, and I think you see some of the results of that in Q1. Going forward, we expect to have that same type of performance in Q2, in particular on the strength of, you know, some of the decisions we made on our network and of course Sixth Freedom traffic that's helping us de-seasonalize the business going forward.
That's a good point, and that's helpful. Maybe just my second question. Be curious to wonder, you know, you hit a milestone here with Aeroplan, 7 million members. I guess, what's the target moving from here? Is it, you know, 7 to 9, 7 to 10? And then just wondering how much the Chase partnership might have accelerated that membership growth as you expanded the program into the U.S.
Sure. Good morning, it's Mark Nasr, and thanks for the question. We will release new targets for Aeroplan, but we're not prepared to do that this morning, so stay tuned. We do believe that there is additional growth available from the program and from the business. In terms of the U.S., Chase has been a great partner, and the performance from that relationship has exceeded our expectations. I think on the last call, Amos also talked about, in general, how the international business of Aeroplan has grown significantly more quickly than the Canadian business, while the Canadian business has grown as well. Other than that, we don't segment out specific performance of partners.
That's helpful. Again, congrats, Amos and John, and thank you for taking my questions.
Thanks, Kevin.
Thank you. Our following question is from Jamie Baker from JP Morgan. Please go ahead.
Hey, good morning. This is James on for Jamie Baker . Just wanna talk about the rating agency sensitivities, if you can remind us what those are given the positive outlook, changes you received over the quarter. If you just remind us of the internal leverage targets, if you think ending at 3.2x this quarter, you know, is sufficient to, you know, receive those upgrades.
Good morning, James. It's Amos. In terms of the target that we had out there for 2024 was 1.5x turn. Right now we're, you know, we're down to 3.2x. We had 1.9 turn improvement in the quarter. We'll, you know, continue our progress there. I think we're in good shape as we look at that, and that clearly de-leveraging remains our priority. As far as the rating agencies, you know, it always takes them a bit longer to catch up with the performance.
It's not automatic as soon as we hit our leverage ratio or let's say if we get to investment-grade credit rating, you know, metrics sometimes of 1x or, you know, we were before 0.8x , you know, back, at the end of 2019. You know, there from the rating agencies, what they wanna see is continued strong performance. I think the performance we have this year will continue to inform them in their decision-making process.
Okay, got it. That's helpful. Just a quick follow up. If you have, you know, given any thought onto how you will account for labor costs coming through in the coming quarters, will it be at accrual basis, or will you kind of just update the cost guidance as the contracts are reached?
Right now, in terms of our CASM guidance, that we provided, it really includes everything that we know of as now and our assumptions, you know, going forward on all of the cost line items. We just don't break all of that out. You know, it has our perspective, for what we know now.
Got it. Appreciate the questions. Thanks.
Thank you.
Thank you. Our following question is from Fadi Chamoun from BMO. Please go ahead.
Good morning, congrats for both Amos and John. Amos, way to go on a high note here. With the load factor at almost 85% in Q1, I think that's highest that we've ever seen for a Q1. You know, Mark talked about the durability of the demand going forward. I'm wondering how you're thinking about your lift capacity going into next year as we continue to see kinda, you know, the strength in demand. Are you looking to add some lift? Is there an opportunity kind of in the leasing market? Like how are you thinking about the lift capacity going into next year?
Hi, Fadi. Thanks very much for the comment. Yes, it is. It's nice to go out on a high note here. Listen, you know, overall, we continue to always hunt for lift, as we've said before in our process. You know, when we see recovery and strong demand, you know, we have the ability to go out and search for additional interim lift. You know, we're constantly in the market looking for lift, and we'll, you know, we'll see our ability to bring that in and be able to line up with what Mark has on network plans.
Okay. There is consideration to adding some lift to the current existing fleet right now.
Yeah.
You know, given the demand. Okay.
That's true.
Second quick question. I mean, you know, obviously your balance sheet position has gotten a lot better, but your interest cost is still, you know, I think just over CAD 200 million this quarter. Is there an opportunity to start making a dent in some of the higher interest-bearing secured loans, you know, the debentures to kind of cut into this cash outflow?
Yeah, that's a good question, Fadi. As we look at that, you know, we have a couple of items that are, you know, a couple of loans that are floating rate. Certainly that's some of the EDC loans that you see out there. You know, there's always an opportunity to pay those down. Again, when we sort of look at an overall weighted average cost, it's essentially about 4.4%, you know, on a weighted average basis. Some of the higher notes that we have out there, we continue to take a closer look at and see if there's opportunities to pay that down. Again, trying to keep within our perspective of always of deleveraging and looking for the right opportunities.
You know, interestingly, when, you know, the cash balances that we have right now, and liquidity is really providing also a very large offset in terms of interest income. There's a little bit of. You know, when we look at the interest expense and the interest income, you know, there's a couple of months sort of lag delay between the ability to really to cover that. Our, you know, perspective on having a strong liquidity and like looking for the right opportunities to pay down debt, sort of is balancing each other out a little bit at this point.
Again, just wanna continue to see the perspective of the recovery, the pace of the recovery, and then we'll, you know, make more determined measures in terms of taking other early debt reduction opportunities or paying off some floating rates.
Yeah. Just to add to that, Fadi, is Mike. I mean, we're very comfortable with our balance sheet. I mean, 70% of our debt's fixed rate debt, and to Amos' point, at a fairly low interest rate. 30% floating, which we can, you know, which we have time to make decisions on as to whether we pay it down or not. As Amos said, we have a tremendous offset in interest income that with higher interest rates that are obviously providing more value to us as well.
I appreciate that. Thank you.
Thank you. Following question is from Chris Murray from ATB Capital Markets. Please go ahead.
Yeah, thank you, folks. Good morning. Amos, let me extend my congratulations to you on a retirement well earned. I guess just starting with the booking curves and thinking about this a little bit, you made the comment in the MD&A about the strength in premium cabin. If I go back to maybe Investor Day, there was some thought that business travel could be maybe 2 years out after leisure travel. Certainly, we've seen leisure coming back pretty strong. Can you talk about, you know, what you're seeing in the booking curve right now, and maybe some of the different segments that, and how they're behaving? You know, are we at the point now where you can kinda declare business travel's back full on to what you're expecting?
Hi, Chris. It's Mark Galardo. Let me take that in a few bite-sized chunks here. First point is that you're correct. We are seeing a significant uptake in the business recovery, the business cabin recovery. It's primarily driven by a combination of leisure travel, but in particular, redemptions on the Aeroplan side and retail. We've got a nice mix going on in 2023 that we didn't have in 2019, and that's bearing fruit in Q1 this year. From a corporate perspective, you know, the recovery has plateaued a little bit, but what we're really encouraged to see is the non-contracted business traffic continuing to recover significantly. That's giving us some further encouragement about our prospects in the business cabin going forward.
Okay, that's helpful. Thank you. I guess my next question is just thinking about, you know, Rouge and how you've used that in the past. Certainly Rouge was a part of the significant capacity reduction. How do we think about, how you're gonna use that in future, especially as you're still, it looks like pretty capacity constrained? Is that something that maybe you'll bring in the A321XLRs and bring that in? Just kinda any thoughts you have around, you know, with the strength in leisure, how do you deploy that and use that as a tool now with maybe some of the ULCCs also starting to get more active?
Yeah, excellent question. Rouge is a key and will remain a key part of our strategy going forward. You know, we thought during the pandemic, making Rouge a narrow body operator focused on the North America market and getting some of the seasonality out of that business was the way forward. We continue to see a strong opportunity for Rouge to grow in North America on leisure markets. You know, you saw the strength of the ACV performance in Q1, but also helping us in this sort of intense competitive dynamic that we find ourselves in. All this to say there is a very strong raison d'être for Rouge going forward.
Okay. I'll leave it there. Thanks, folks. Amos, congratulations once again.
Thank you very much, Chris.
Thank you. Following question is from Cameron Doerksen from National Bank Financial. Please go ahead.
Yeah, thanks. Good morning, let me echo my congratulations to Amos as well and welcome John to the AC team. I wanted to ask Amos maybe a question about free cash flow. You had, you know, really an exceptional performance in Q1. I mean, you've upped your EBITDA guidance for 2023 by, you know, $1 billion. It feels that the sort of $2.4 billion in cumulative free cash flow you've got is kind of a target. It feels too low.
I know you're not, you know, looking to update targets here, but maybe some commentary around, you know, the free cash flow kinda expectation for the next two years, 'cause it looks like it's gonna be, you know, much stronger than what you would have originally anticipated.
Morning, Cameron. Thank you very much for the question. You know, you're right. I'm not really ready at this point to provide guidance on that. You know, it gets into our 2024 target. Look, we've talked really about sort of the key elements here that are driving the performance, and that would, you know, ultimately then flow through into free cash flow. Don't wanna get too far ahead of our skis on this. Certainly, it's been the strong demand, continued strong recovery, advanced bookings. Of course, earnings at the end of the day, which is, you know, driving also a significant part of the free cash flow.
You know, right now is, you know, we look out through the year, given the strong demand and from what you've seen from our guidance, look and tell you it will clearly push forward on cash flow and free cash flow, but not ready to, you know, revisit that target at this point. We'll continue to do our planning and then we'll update.
Okay. That's fair enough. Maybe second question just on employment levels, you know, just looking at the full-time equivalent numbers. I mean, your staff is kind of well ahead of what we saw in 2019, and that's despite running a much smaller operation. I'm just wondering if this is a new norm? I mean, do you have enough, I guess, employees now that you'll fully ramp back up to 100% or higher of 2019 capacity? Just any thoughts around kind of employment levels, because it does seem as though we're kind of at a much higher level than we would have had pre-pandemic.
Good morning. Yeah, it's Craig Landry here. For sure, I would say our priority as we came through the pandemic and the resulting ramp-up phase was operational stability. I mean, obviously we were in an environment that presented a lot of unique challenges. One of the key strategies, you know, we've deployed to try to address that has been through resourcing. You know, to an extent we have added hopefully more resources than we needed, and that's intentional to try to drive, you know, the maximum operational stability we can achieve. You know, now that we're starting to see a more stable environment, certainly our attention turns towards productivity and to try to better optimize that. We're starting to see improvements already.
As the level of capacity, gets closer to 2019 levels, there's certain efficiencies that are automatically coming through that. The remainder is now becomes a key area of focus for us, throughout the remainder of the year and beyond.
Okay. No, that's great. Thanks very much.
Thank you. Our following question is from Walter Spracklin from RBC Capital Markets. Please go ahead.
Yeah, thanks very much. Yes, good luck, Amos. John, looking forward to working with you again. That'll be great. Let me turn to my question, just two here. First on capacity, and correct me if I'm wrong, it feels like as I travel, I see the time to destination, seems to be lengthened a little bit versus if I remember it correctly for some of my flights pre-COVID. Is that you building in some buffer on time ratios and to give yourself some leeway there?
More importantly, as congestion in the airports ease and we get back to the new normal, does that allow you to tighten that back in and thereby increase capacity without having, you know, increased capacity at no cost effectively, if indeed you have done that? You know, any color on that'd be great.
Hi, Walter. It's Mark Galardo . You are correct. Good observation. Our times are longer. Should we go back to the, you know, pre-pandemic, you know, our OTP was always towards the bottom of the rankings. We've decided to, you know, increase those block percentiles so that we, you know, from at least at the first point, you know, get to somewhere in the middle of the pack, in terms of OTP ranking. We're starting to see the result of that, you know, those block percentile changes. That being said, we don't foresee us changing those percentiles as we certainly don't want to be at the bottom of the OTP rankings going forward. We're pleased with where we're with the percentile that we've shown so far.
Okay. That, yeah, makes sense. Okay. Then on the cost side, I know you're comparing to last year now, but even if I do go back and compare to pre-COVID, you are running, you know, meaningfully higher CASM-ex. And I know there's some inflation there, but it can't be just inflation given the magnitude. My question there is this systemic? Do you think that once again we, can we get back down to somewhere around pre-COVID levels? I mean, that would suggest a very meaningful decline over time.
Is there something systemic to cost that, look, it's a new paradigm, a new world we're living in, and the guidance that you're giving out to 2014 is probably the best kind of run rate guidance to go, 2024, to 2024, the best run rate guidance to use going forward.
Yeah. Good morning, Walter. I think, you know, it's the latter there. At the end of the day, the cost world is different. We're in a different dynamic than we were pre-COVID. When you just look at all the fundamental inputs into running the business. Does that mean that we take our eye off costs? Absolutely not. You know, we've talked about before on the calls the impact on productivity as we hire up in advance of building up capacity. There's some elements that are transitory, but for the most part, the underlying input costs to the business have gone up. Also, you know, keep in mind that we're also generating higher, you know, revenue and traffic beyond 2019 levels, which is then driving the other element of higher costs.
You know, fundamentally, there are elements that are driven by the underlying revenue side of the business, and on the cost side, we have inputs that we know from food costs, ground handling, items we've spoken about before, that, in this environment, we continue to look for ways to offset them, and we will always be focused on cost discipline, you know, within the organization and targets for everyone to try to always do better and improve productivity, and that will happen as we continue to ramp back up and get back to 2019 capacity levels.
Okay. just to follow up on that, Amos. As now taking away the X and including fuel, as fuel costs came down, is there an automatic factor that brings your pricing down? I know you have some surcharges in place, but is there either public pressure or anything? Can you know, as my view, you can, you know, the price out there is what the market determines, can you hold onto that price even if, you see fuel costs as we've seen come down?
It's a good question, Walter. Look, that key critical input cost is, continues to be volatile, and, you know, there isn't sort of pressure right now. We have strong demand environment. There is capacity that is limited from OEM's ability to put new aircraft out in the marketplace. Fundamentally in this environment, there isn't that pressure, and fundamentally, we need to recover our costs. As that volatility remains in fuel, we don't really see a long-term trend that sort of says fuel is down at $50 a barrel and that changes that one of the critical input costs.
I think, Walter, just to expand on that, it's always a difficult discussion talking about pricing anywhere. We price the market and, you know, we have, as you know, tons of competition, both domestically and internationally. So we are price competitive. Certainly as Amos said, input costs like fuel remain a component of our overall decision process as it does other airlines, I assume. We are competitive with the marketplace.
Yeah. That's, that's a very fair point. Appreciate the time and, good luck, Amos, again.
Thank you, Walter.
Thank you. Our following question is from Konark Gupta from Scotiabank. Please go ahead.
Thanks, operator. Good morning, everyone, and extend my congratulations to Amos and John as well. My first question is on the guidance you guys provided last week, up by CAD 1 billion for 2023 EBITDA. I know you said demand and fuel, and I'm pretty sure you have a pretty good handle on demand from the booking curve you are seeing. Can you provide some context on where the spot jet fuel prices are today relative to your full year assumption of CAD 1.09 per liter? Have you factored in any contingency plan should fuel prices rebound again?
Good morning, Konark. You know, right now in our guidance, we've called for $1.09 for the year. Right now the spot market is probably down closer to, maybe $1.00, $1.01. You know, we continue to see that, you know, that volatility is there and, you know, given New York Harbor and the supply and refinery issues that we have out there, it's not something that we, you know, we're sort of taking to a point that we included a lower fuel forecast, lower spot as, you know, our longer term guidance for 2023. $1.09 is pretty much where we, where we see it right now. As you noted, it's trading a little bit lower, but that's just a transitory point in time.
Fundamentally, again, as we've talked about before, the best mechanism to adjust for the volatility and the higher fuel price is through pricing. In a strong demand environment, that has been helpful in terms of being able to recover the cost of fuel. As you saw, like quarter-over-quarter, fuel cost is up 30%. You know, you look at the demand, the pricing environment and demand environment, so being able to recover that was sort of critical to our earnings.
That's great color, Amos. Thank you. My second question is on the competitive landscape. I think we are seeing some new entrants in the market and even the not so new entrants are planning significant capacity expansion from their perspective. You know, on the other hand, you have your primary competitor, which has scaled back from Eastern Canada to some degree and transatlantic as well while taking out a weaker competitor. I know the history is not supportive of the ultra-low fare models in Canada, but for now, can you help us provide, you know, any data points that might suggest you're not losing market share to the new players?
Konark, I'll start and maybe Mark can fill in. Again, like pricing is difficult for us to talk about competition. You know, we're competitive. We're watching very closely obviously, the expansion of certain carriers within Canada. There's no doubt Canada is seeing an influx of narrow body capacity today and certainly planned over the next several years. We're very cognizant of that. The fact that we're so well diversified around the world and with different businesses like ACV, Aeroplan, and Cargo, gives us comfort that, you know, we'll continue to do very well. Certainly there'll be some pressure in domestically and we're aware of that and we plan for that as we go forward.
The fact that we are so well diversified is, you know, again, gives us comfort that we can compete in any environment. Mark, you wanna add anything?
Sure. Hi, Konark. It's Mark Galardo. Just to piggyback on what Mike just said, you know, the strength of our network and the diversification and the hubs that we've built in Canada, you know, makes us a little bit less exposed to this type of competitive phenomenon as, you know, other players would be
We're feeling pretty good about our position in the domestic market, and so far, we're pleased with the results that we're seeing on domestic.
Yeah, that's great, Colin. If I can squeeze just one quick one. I understand on the balance sheet, Amos Kazzaz, you mentioned the leverage ratio target is 1.5 still for 2024. I know if I take your current net debt and take your 2023 EBITDA guidance, I'm like, you'll probably be close to 1.6, 1.7 by the end of this year, before even like you get more free cash flow. My question really is, you know, like, if the stock remains pretty low here compared to the U.S. peers, is share buyback even like a remote possibility this year? Or would you say like still like a 2024 event if conditions persist?
Konark, thanks for the question, but I'll put an end to that. No.
Okay.
No share buybacks at this point in time. We're just focused on deleveraging and getting that down.
That's fair. Thanks, Amos. Thanks and congrats again. Thank you.
Thank you.
Thank you. Our following question is from Savanthi Syth from Raymond James. Please go ahead.
Everyone. Hey, good morning. Amos, congrats on the well-deserved retirement and leaving on a high note here. If I might, and maybe to Mark, you know, the operations have kind of significantly improved, and you've done a lot to invest in there. If there is maybe one area that may be falling short, it's probably Jazz continues to perform poorly regardless of the weather. Could you talk about, you know, what if, kinda if there's any line of sight into that operation improving and especially as you head into the peak summer season?
Yeah, it's, Craig Landry here. I'll speak to that. You know, certainly the first quarter was, you know, was challenging. You know, there was significant weather events in the first quarter, that impacted us not only in Canada, but across North America. Everything from, you know, ice storms to extreme fog. It was certainly a very challenging quarter operationally, as the first quarter, you know, can often can often be. Coming out of the first quarter, you know, looking at our April performance and even into the month of May, there's been significant improvement. You know, we see operational performance at this point that's very much in line with pre-pandemic, and is a significant improvement.
As soon as the, you know, the very challenging weather subsided, we're able to reestablish for all the reasons we discussed earlier, a much more stable operation. Jazz is part of that, you know, and obviously in the first quarter, to the extent that some of these weather events happen in certain parts of Canada, and at different times of day, the Jazz network was, you know, was impacted by that, in some cases, a bit disproportionately so. I can tell you that Jazz's performance, like Air Canada's, has recovered in April and May, and we feel very confident for the summer.
Is that, Craig, I mean, if I look at the completion factors that are at least publicly available, I mean, Jazz continues to be, I mean Air Canada and Rouge seem to be doing really well and Jazz seems to be worse. Is that something maybe the public data is wrong, or how should we think about that?
Well, I suppose it perhaps depends what timeframe you're looking at. Certainly in the 1st quarter, you know, when we have difficult decisions at times, to cancel flights to accommodate for restrictions and aircraft traffic control or weather or other related events, there typically would be a lower passenger impact on canceling a flight that has a small number of passengers than a much larger aircraft with a larger number of passengers. At times those flights, you know, can be targeted for a cancellation in a way that's different from our larger wide-body international flights. The recovery of those cancellations is also easier in some cases, so it's the right thing to do for our customers. I think you may have seen that, as I mentioned in the 1st quarter during the disruptive period.
More recently, we're seeing, flight completion levels at Jazz, very much in line with Air Canada.
Understood, I appreciate that. Maybe if I can, Amos, turn to just on the cost line, you know, talking about it, I appreciate the, kind of the newer costs that the industry is working with and also maybe cost related to good guys, which is higher revenue. As you kind of look into 2024, could you talk about like some of your major items and line items and, you know, just the trends as you kinda get through this year and into next year if, you know, if there are kind of pretty big increases continuing or if we could see some improvement in any of the kind of major line items?
I think we see. Good morning, Savvy. I think, you know, for the most part, we continue to sort of see the pressures that we have around some of the line items, but they're, I think, now sort of holding off. We've, you know, called out before food catering costs, ground handling costs. Maintenance, we have a good handle on from long-term contracts, IT costs. I think those are all beginning to, you know, from what we've seen now, stabilize as we're getting into next rounds of contracts, contract renewals as we've been going through the year there in, carrying out some of those contract revisions.
You know, we think pressure, you know, there'll still be some pressure, and we'll continue to do what we can to offset it from an organization perspective and continue to focus on driving efficiencies and productivity. You know, for the IT costs that we see that are higher, we're making, you know, IT investments, and those investments will produce, you know, improvements in terms of both costs and productivity and efficiency, which, you know, net-net at the end of the day, should actually drive improved performance. I'm not ready to call out what that is, but we'll continue to look at that as we update our long-term plans and next year's plan and guidance.
Savvy, it's Mike. I just pile on Amos' comment on costs. I mean, this is a, as we said, key priority for us. I think what we need to provide the market maybe later this year is a series of initiatives we have that somewhat centered around new technologies and new approaches that will help our cost productivity. There are a number of different initiatives underway right now, but I think we'll provide the market some more visibility on that. Certainly as we provide the market visibility on 2024 CASM guidance, we'll provide some background as to why we think that's the case and some of the good things we're doing from a, from an investment perspective.
That's all helpful. Thank you.
Thank you. Once again, please press star one at this time for any questions or comments. Our following question is from Stephen Trent from Citi. Please go ahead. Mr. Trent has just disconnected from the queue. We have no further questions registered at this time. I would now like to turn the meeting back over to Ms. Durand.
Merci beaucoup, Maude. Thank you, and thank you once again for joining us this morning. Once more, we invite you to contact us at investor relations should you have any further questions. Thank you very much and have a nice day.