Category Archives: Air Canada

Air Canada to strategically increase capacity on trans border routes, will deploy more Q400s on western routes

Air Canada Express-Jazz Aviation Bombardier DHC-8-402 (Q400) C-GKUK (msn 4369) BWI (Tony Storck). Image: 943463.

Air Canada has announced it is upgrading service and boosting capacity on key trans border routes from its Toronto and Montreal hubs.

These enhancements are in addition to Air Canada’s recent announcement it will launch new daily flights from Montreal to Raleigh and increase capacity by deploying larger aircraft with Business Class and wi-fi options on its Toronto to Raleigh and Charlotte flights.

Upgraded services this summer peak include:

 

Route

Frequencies

Capacity

Aircraft

Toronto-Nashville

2 daily flights effective June 1

152 daily seats

76 seat CR9 operated by Jazz Aviation LP effective June 1

Toronto-Washington (Dulles)

3 daily flights effective May 1

228 daily seats

76 seat Embraer E75 operated by Sky Regional effective May 1

Toronto-Memphis

1 daily flight effective May 1

76 daily seats

76 seat Embraer E75 operated by Sky Regional effective May 1

Toronto-Raleigh

3 daily flights effective May 1

228 daily seats

76 seat Embraer E75 operated by Sky Regional

Toronto-Charlotte

2 daily flights effective May 1

152 daily seats

76 seat Embraer E75 operated by Sky Regional

Toronto-Minneapolis

Adding 1 flight for 4 daily flights effective June 3

304 daily seats

76 seat Embraer E75 operated by Sky Regional

Toronto-Philadelphia

Adding 1 flight for 5 daily flights effective June 3

380 daily seats

76 seat Embraer E75 operated by Sky Regional

Toronto-Austin

Adding 1 flight for 2 daily flights effective April 29

152 daily seats

76 seat Embraer E75 operated by Sky Regional

Montreal-Baltimore

Adding 1 flight for 2 daily flights effective June 4

100 daily seats

50 seat CRJ operated by Jazz Aviation LP

Montreal-Raleigh

New daily flights launching June 3

50 daily seats

50 seat CRJ operated by Jazz Aviation LP

In other news, Air Canada also announced strategic changes to Eastern Canada including upgrading Air Canada Express regional aircraft to larger Air Canada Rouge aircraft with inflight amenities on its flights from Toronto to Fredericton, Moncton and Thunder Bay, and from Montreal to St. John’s.

Route

Frequencies

Montreal-St. John’s

2 daily Air Canada
Rouge A-319 flights
effective June 5

Toronto-Fredericton

2 daily Air Canada
Rouge A-319 flights
effective June 1

Toronto-Moncton

3 daily Air Canada
Rouge A-319 flights
effective May 1

Toronto-Thunder Bay

3 daily Air Canada
Rouge A-319 flights
effective May 1

Calgary-Halifax

1 daily Air Canada A
-320 flight effective
May 14

Following the recently finalized Capacity Purchase Agreement between Air Canada and Chorus Aviation, Air Canada is optimizing its fleet within its network strategy and deploying the aircraft best-suited to the communities it serves as it modernizes and simplifies its regional fleet.

Air Canada also announced it will boost capacity on regional routes across Western Canada this spring as it deploys more state-of-the-art Bombardier Q400 Next Gen aircraft (top).  The changes are part of an ongoing transformation of Air Canada Express that will result in enhanced services for customers.

Air Canada Express flights operated by Jazz Aviation LP are scheduled to provide convenient, point-to-point travel, as well as easy connections to Air Canada’s extensive domestic, US and international network at Vancouver and Calgary.  Customers also collect and redeem Aeroplan Miles through Canada’s leading loyalty program when travelling with Air Canada, and eligible customers have access to priority check-in, Maple Leaf Lounges at main airports, priority boarding and other benefits.

Increased services this summer peak compared to last year include:

 

Route

Frequencies

Capacity

Vancouver-Nanaimo

7 daily Q-400 flights

546 daily seats, 14% increase

Vancouver-Comox

4 daily Q-400 flights

312 daily seats, 23% increase

Vancouver-Sandspit

2 daily Q-400 flights

156 daily seats, 52% increase

Vancouver-Prince Rupert

2 daily Q-400 flights

156 daily seats, 5% increase

Vancouver-Smithers

2 daily Q-400 flights

156 daily seats, 14% increase

Vancouver-Kamloops

4 daily Q-400 flights

312 daily seats, 25% increase

Vancouver-Penticton

3 daily Q-400 flights

234 daily seats, 17% increase

Calgary-Kelowna

3 daily Q-400 flights

234 daily seats, 13% increase

Calgary-Saskatoon

4 daily Q-400 flights

312 daily seats, 7% increase

Calgary-Winnipeg

2 daily A320 + 1 daily CR-900 flights

368 daily seats, 19% increase

Vancouver-Anchorage

1 daily 320 and 1 daily 319 flight

266 daily seats, 80% increase

On the financial side, Air Canada reported full year 2018 EBITDAR (earnings before interest, taxes, depreciation, amortization, impairment and aircraft rent) of $2.851 billion compared to full year 2017 record EBITDAR of $2.928 billion.  Air Canada reported an EBITDAR margin of 15.8 per cent, in line with its projections.  Air Canada reported 2018 operating income of $1.174 billion compared to 2017 operating income of $1.371 billion.  Adjusted pre-tax income(1)amounted to $952 million in 2018 compared to adjusted pre-tax income of $1.165 billion in 2017.  On a GAAP basis, the airline reported net income of $167 million in 2018 compared to net income of $2.029 billion in 2017.  The decrease of $1.862 billionin net income year-over-year is mainly due to an increase in net tax expense of $981 million, unfavourable foreign exchange results of $437 million and Air Canada having a recorded a loss on disposal of assets of $188 million in 2018.

“I am very pleased with Air Canada’s solid fourth quarter results with record EBITDAR of $543 million, and operating income of $122 million.  These quarterly results showed an improvement over last year’s fourth quarter on many fronts – including passenger revenues, traffic and yield – and complete a strong fiscal year.  Moreover, they demonstrate the resiliency of our business model and affirm that Air Canada has positioned itself for long-term, sustainable profitability. During the year, we successfully managed many challenges, including intensifying competition and a volatile fuel price environment which resulted in approximately $1 billion in additional costs or 30 per cent more than 2017,” said Calin Rovinescu, President and Chief Executive of Air Canada.

“Our strategy generated record operating revenues of more than $18 billion in 2018.  Combined with a strong adjusted CASM performance, we ended the year with record unrestricted liquidity of more than $5.7 billion and a leverage ratio of 2.1, positioning us well on our path towards investment grade.  The added financial flexibility these results give our company further bolsters our already confident outlook, based on current positive business trends.

“We carried a record 50.9 million customers in 2018, which is evidence of the success of our commercial strategy and the strength of the Air Canada brand. To further heighten our customer appeal, we are investing strategically in product and service enhancements, including a new enhanced reservation platform system planned to start operating later this year, a new loyalty program launching in 2020 to strengthen our recently completed Aimia Canada acquisition and our ongoing fleet renewal.

“Another outward sign of Air Canada’s success in 2018 was the number of significant awards won by our airline, notably Eco-Airline of the Year, a global recognition, and, for the second consecutive year, Best Airline in North America from Skytrax. These and a variety of other talent and sustainability awards are proof of the professionalism and commitment of Air Canada’s 30,000 employees, whom I thank for their hard work and dedication. I also thank our customers for their continued loyalty and for continuing to choose to fly Air Canada in record numbers,” said Mr. Rovinescu.

Top Copyright Photo (all others by Air Canada): Air Canada Express-Jazz Aviation Bombardier DHC-8-402 (Q400) C-GKUK (msn 4369) BWI (Tony Storck). Image: 943463.

Air Canada Express-Jazz Aviation aircraft slide show:

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Bombardier sells nine CRJ900 aircraft to Chorus Aviation, Jazz to become the first Canadian operator of the ATMOSPHÈRE cabin

Air Canada Express-Jazz Aviation Bombardier CRJ900 (CL-600-2D24) C-GDJZ (msn 15049) DCA (Brian McDonough). Image: 941182.

Bombardier Commercial Aircraft announced today that a subsidiary of Chorus Aviation Inc. has finalized a firm purchase agreement for nine CRJ900 aircraft. These aircraft will be operated by Jazz Aviation LP, a subsidiary of Chorus Aviation, under the Air Canada Express banner, making them the first Canadian operator of the new ATMOSPHÈRE cabin for CRJ Series regional jets.

Based on the list price of the CRJ900 aircraft, the order is valued at approximately $437 million U.S.

Jazz, under the Air Canada Express brand, will operate the CRJ900 in a dual-class cabin configuration with 76 seats. The airline intends to take delivery of their first aircraft with the latest enhancement to the CRJ Series regional jets – the ATMOSPHÈRE cabin in the first half of 2020.

About the ATMOSPHÈRE Cabin

The new ATMOSPHÈRE cabin (below) sets new standards of passenger experience in the regional jet market segment. Key features of the new interior are comprised of larger passenger living space, wheel-first roller bag capability, more spacious lavatory, increased cabin connectivity options, all integrated in a contemporary design and material choices. In fact, the ATMOSPHÈRE cabin design allows passengers to carry and store an “oversized” roller bag within the aircraft cabin bins which minimizes the need to check bags at the counter or the gate.

Top Copyright Photo: Air Canada Express-Jazz Aviation Bombardier CRJ900 (CL-600-2D24) C-GDJZ (msn 15049) DCA (Brian McDonough). Image: 941182.

Air Canada Express-Jazz aircraft slide show:

Air Canada and Chorus Aviation finalize amended and extended Capacity Purchase Agreement for Jazz

Air Canada and Chorus Aviation Inc., parent company of Jazz Aviation LP, today confirmed that all conditions have been met and the previously announced amendment and extension of the Capacity Purchase Agreement (CPA) between Air Canada and Jazz has become effective.  As announced on January 14, 2019, the improved CPA is effective retroactively as of January 1, 2019 and extends to December 31, 2035.

As part of the agreement to amend the CPA, Air Canada has also completed the $97.26 million equity investment in Chorus previously announced on January 14, 2019. Air Canada has acquired 15,561,600 Class B Voting Shares in the capital of Chorus, representing approximately 9.99% of the issued and outstanding Class A Variable Voting Shares and Class B Voting Shares of Chorus on a combined basis.

Highlights of the CPA Amendment

  • With this amendment, the parties will effectively address increased domestic and international competition, changing market demand, and fluctuating fuel prices, through significant changes that will modernize and up-gauge the fleet.
  • In total, the 17-year contract will provide Jazz $2.5 billion in minimum contracted revenues, of which $1.6 billion, or 65%, will be generated from aircraft leasing revenue, supporting the continued transformation of Chorus’ business through the migration of CPA earnings to aircraft leasing. The amended CPA will provide for total incremental contracted revenue of $940 million; $310 million in fixed fees and $630 million in aircraft leasing under the CPA;
  • Projected annual savings to Air Canada of approximately $50 million in each of 2019 and 2020, and cumulative savings of approximately $53 million between 2021 and 2025, both as compared to the 2015 CPA frame-work (from both fixed fee and performance incentive reductions); Beyond 2025 – a market competitive fixed fee for the extension period. This supports Air Canada’s Cost Transformation Programs;
  • Chorus will secure preferred partner status on the operation of aircraft with up to 50 seats and Air Canada will consolidate its existing CRJ regional capacity into the Jazz operation;
  • Air Canada Deputy Chief Executive Officer and Chief Financial Officer, Michael Rousseau, will be appointed to the board of directors of Chorus.

In other news, Chorus Aviation Inc. has announced the pilots of its subsidiary, Jazz Aviation LP (‘Jazz’), have ratified the amendments to their collective agreement which was tentatively agreed on January 14, 2019. The Air Lines Pilots Association, International (‘ALPA’) represents Jazz’s pilots based in VancouverCalgaryToronto and Montreal.

Ratification of this tentative agreement was a condition of implementing the amendments to, and extension of, the capacity purchase agreement (‘CPA’) between Air Canada and Jazz, as announced on January 14, 2019. The amendment and extension of the CPA remains subject to completion of Air Canada’s $97.26 million equity investment in Chorus, which contains customary conditions to closing. Chorus anticipates closing the equity investment by no later than February 8, 2019, upon which the amendment and extension of the CPA will become effective.

The pending amendments to the CPA provide for a number of significant benefits including fleet modernization with the addition of 14 larger-gauge CRJ900 (76-seat) aircraft of which nine new aircraft will generate additional lease revenue under the CPA.

Air Canada will consolidate more of its overall regional capacity in the Jazz operation. Chorus will also secure preferred partner status on the operation of aircraft with up to 50 seats through a right to match third-party offers.  Additionally, an enhanced pilot mobility agreement will provide Jazz pilots access to careers at Air Canada. The amended CPA will ensure that Chorus and Air Canada are well positioned to respond as allies to an ever-changing industry.

Roots and Air Canada partner to mark “International Sweatpants Day” onboard Air Canada’s longest international flight

Iconic Canadian brands, Roots and Air Canada, partnered to make a long journey even more comfy in celebration of International Sweatpants Day. The two companies surprised more than 250 customers on Air Canada’s longest nonstop flight from Vancouver, Canada to Melbourne, Australia with a gifted set of Roots signature Salt & Pepper™ sweatpants, hoody and a handcrafted made-in-Canada Roots leather passport holder, bringing Roots quintessential cabin-meets-city style to the airplane cabin.

Landing at 10:05 a.m. in Melbourne, Australia and sporting Roots stylishly comfortable sweats, customers onboard the Air Canada flight will be some of the first people in the world to celebrate International Sweatpants Day in 2019.

To further mark International Sweatpants Day, Roots and Air Canada are calling on Canadians to enter the Roots x Air Canada contest. Entrants will have the opportunity to win the ultimate journey in comfort and style. Prizes include two Air Canada round-trip airfares to any destination in Canada as well as two Roots comfort and style travel packages, containing Roots sweats, a Banff Bag and more. The contest is open from January 21 to 25, 2019. For more details on how to participate, please see the following link.

Established in 1973, Roots is a premium outdoor lifestyle brand. We unite the best of cabin and city through unmistakable style built with uncompromising comfort and quality. We offer a broad range of products including: women’s and men’s apparel, leather goods, footwear, accessories and kids, toddler and baby. Our valued consumers can experience Roots through 118 stores in Canada, seven stores in the United States, 115 partner-operated stores in Taiwan, 30 partner-operated stores in China and a global eCommerce platform (as at November 3, 2018). Roots Corporation is a Canadian corporation doing business as “Roots” and “Roots Canada”.

There once was a Roots Air.

Bottom Copyright Photo: Roots Air (Skyservice) Airbus A320-231 C-FRAR (msn 447) YYZ (TMK Photography). Image: 944260.

Airline Color Scheme - Introduced 2001

Air Canada announces improvements to the Capacity Purchase Agreement with Jazz Aviation LP, Jazz will grow and get bigger aircraft

Air Canada Express-Jazz Aviation Bombardier CRJ200 (CL-600-2B19) C-FEJA (msn 7983) BWI (Tony Storck). Image: 944193.

Air Canada today announced an agreement to amend and extend the Capacity Purchase Agreement (CPA) with Jazz Aviation LP, a wholly-owned subsidiary of Chorus Aviation Inc., under which Jazz currently operates certain regional Air Canada Express flights.

The amendments should provide long term stability for Chorus, reaffirming Jazz as Air Canada’s most significant Express carrier well into the future, as well as enabling growth on Chorus’ leasing business through Air Canada’s equity investment and the predictability of Jazz’s cashflow from CPA operations until 2035.  The amendments will bolster the strength and competitiveness of the Air Canada Express brand and its coast-to-coast regional network, and provide significant CPA savings for Air Canada, while optimizing network and fleet flexibility when compared to the current agreement.

Highlights of the CPA Amendments:

  • Extension of the CPA term by ten years from January 1, 2026 to December 31, 2035;
  • Simplification and modernization of the Jazz fleet with growth through more, larger gauge aircraft. The Amendments will include various minimum levels of covered aircraft at different points in time providing Air Canada the flexibility to optimize its fleet within its network strategy;
  • Continuance of a fixed fee structure, including new terms mitigating risk and market- oriented compensation to make the CPA more competitive given new competitors entering the market;
  • Projected annual savings to Air Canada of approximately $50 million in each of 2019 and 2020, and cumulative savings of approximately $53 million between 2021 and 2025, both as compared to the 2015 CPA frame-work (from both fixed fee and performance incentive reductions); Beyond 2025 – a market competitive fixed fee for the extension period. This supports Air Canada’s Cost Transformation Programs;
  • Continuation of a highly successful pilot mobility agreement that provides Air Canada Express pilots with access to pilot careers at Air Canada on a planned basis;
  • Air Canada will consolidate more of its overall regional capacity into Jazz’s footprint, thereby lowering Air Canada’s overall regional costs in the future;
  • The Amendments will be effective retroactively as at January 1, 2019, subject to a number of conditions, including completion of Air Canada’s equity investment in Chorus and ratification of a new tentative collective agreement between Jazz and the Air Line Pilots Association, International (ALPA), the union representing Jazz pilots.

Highlights of the Equity Investment:

  • Air Canada has agreed to subscribe for 15,561,600 Class B Voting Shares in the capital of Chorus, representing approximately 9.99% of the issued and outstanding Class A Variable Voting Shares and Class B Voting Shares of Chorus on a combined basis. This represents an investment of ~$97,260,000 by Air Canada;
  • The Chorus shares will be issued to Air Canada at a price of $6.25, representing a 5% premium to the five-day volume weighted average price of the shares as of the close of trading on Thursday, January 10, 2019;
  • Air Canada and Chorus will enter into an investor rights agreement under which, among other things, Air Canada will hold the investment shares, for a period of at least 60 months and will participate in Chorus’ dividend reinvestment plan and agree to customary standstill provisions, subject to certain limited exceptions;
  • On closing of the equity investment, Deputy Chief Executive Officer and Chief Financial Officer of Air Canada, Michael Rousseau, will be appointed to the board of directors of Chorus.

Air Canada does not intend to provide further comment pending the ratification process in respect of the tentative agreement between Jazz and ALPA; a news release updating the market will be issued when all the closing conditions to the completion of the foregoing transactions are met.

Fleet:

Top Copyright Photo: Air Canada Express-Jazz Aviation Bombardier CRJ200 (CL-600-2B19) C-FEJA (msn 7983) BWI (Tony Storck). Image: 944193.

Air Canada Regional-Jazz aircraft slide show:

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ACPA: Canada’s aviation fatigue rules less safe than US

The Air Canada Pilots Association, the largest single pilot group in Canada – representing more than 4,000 professional pilots across Canada who fly the vast majority of Canadian overseas flights, is gravely disappointed that Minister Garneau and the federal government are moving forward with substandard fatigue rules.

“To say that we are profoundly disappointed is an understatement. These substandard rules leave a two-hour gap between the maximum flight time for Canadian pilots flying at night, compared to what’s recommended by NASA’s Ames Research Centre, and two and a half hours longer than what U.S. pilots are allowed to fly,” said Captain Matt Hogan, Chair of the ACPA Master Elected Council. “It is unbelievable that in the face of scientific evidence and international best practice our government expects pilots to fly two hours longer than what NASA says is safe.”

The new rules will significantly impact Air Canada pilots flying for Air Canada Rouge, who will be subject to weaker fatigue regulations than on Air Canada’s mainline. ACPA had proposed that measures be put in place to protect all pilots flying overseas long-haul flights at night.

“This is the first time in 20 years that Canada has updated its fatigue rules, yet here the government is delaying implementation until 2022 for smaller operators,” said Milt Isaacs, CEO of ACPA. “The government’s own statistics conclusively prove that it’s these very pilots who need the most protection. It’s unacceptable that they’re forced to wait the longest for the new rules.”

Almost every prescriptive limit set out in the government’s regulations can be bypassed, thanks to the government’s Fatigue Risk Management System (FRMS). The government spent a decade developing these new rules, and operators now have a way to bypass the new regulations. By the government’s own estimation, FRMS is expected to be implemented by operators on up to 20% of regulated flights, meaning that one fifth of flights would essentially have no effective oversight.

Air Canada reports third quarter 2018 results

Air Canada today reported third quarter 2018 EBITDAR(1) (earnings before interest, taxes, depreciation, amortization, impairment and aircraft rent) of $1.265 billion compared to third quarter 2017 EBITDAR of $1.360 billion.  Air Canada reported operating income of $840 million compared to operating income of $976 million in last year’s quarter.  The airline reported third quarter adjusted pre-tax income(1) of $793 million compared to adjusted pre-tax income of $922 million in the prior year’s quarter.  On a GAAP basis, in the third quarter of 2018, Air Canada reported income before income taxes of $876 million compared to income before income taxes of $965 million in the third quarter of 2017.

“I am extremely pleased with both our unit revenue performance and our adjusted CASM(1) results for our all-important third quarter.  Quarterly operating revenue grew 11 per cent, exceeding $5 billion for the first time in our history, and our year-over-year PRASM performance was among the best in the North American airline industry.  Strong revenue and cost management substantially offset the challenges we faced in the quarter, principally the significant increase in fuel prices.  Once again, the strength of our brand and of our people shone through in the quarter,” said Calin Rovinescu, President and Chief Executive of Air Canada.

“Going forward, we expect our revenue momentum to continue in the fourth quarter and into next year.  Indeed, with the trends we are seeing now, we expect our PRASM performance, both in the domestic market and throughout the network, to continue to improve in the final quarter of 2018,” said Mr. Rovinescu.

“Complementing our record revenue generation was a disciplined and efficient approach to costs. Adjusted CASM rose 1.1 per cent from the third quarter of the prior year, well below the 2 to 3 per cent increase projected for the period with our second quarter results in July. Largely driven by higher fuel prices, Air Canada’s CASM increased 9.8 per cent from the third quarter of 2017.  Cost control will remain central to our strategy and we have already identified or realized two-thirds of the $250 millioncost transformation program initiated early this year. Furthermore, we reached record unrestricted liquidity of $5.3 billion and achieved a leverage ratio(1) of 2.0.

“Our business model is creating substantial value.  We have a powerful and comprehensive network with three strong global hubs.  We have a compelling product and customer offering.  In July, Air Canada was named the Best Airline in North Americafor the second consecutive year and for the seventh time in nine years by Skytrax, which has also reaffirmed Air Canada’s rating as North America’s only four-star international network carrier.

“I thank our 30,000 employees for their hard work in taking care of our customers during a challenging but satisfying summer. We set a new, single-day record for passengers carried of more than 178,000 in August.  Finally, I also thank our customers for their continued loyalty. It is our unwavering commitment to continue improving and providing superior, award-winning service as we transport them safely to their destinations,” concluded Mr. Rovinescu.

Acquisition of Aimia’s Aeroplan Loyalty Business

On August 21, 2018, Air Canada, The Toronto-Dominion Bank, Canadian Imperial Bank of Commerce, Visa Canada Corporation (collectively, “the Consortium”) and Aimia Inc. (“Aimia”) announced that they had entered into an agreement in principle for the acquisition of Aimia’s Aeroplan loyalty business.  The transaction is subject to the satisfactory conclusion of definitive transaction documents, Aimia shareholder approval, and certain other conditions, including due diligence, receipt of customary regulatory approvals and completion by the Consortium of credit card loyalty program and network agreements for future participation in Air Canada’s new loyalty program.  The transaction is expected to be completed by the end of 2018.

Third Quarter Income Statement Highlights

In the third quarter of 2018, on capacity growth of 6.7 per cent, record system passenger revenues of $5.018 billion increased $504 million or 11.2 per cent from the third quarter of 2017.  The increase in system passenger revenues was driven by traffic growth of 7.5 per cent and a yield improvement of 3.4 per cent, despite an increase in average stage length of 1.3 per cent which had the effect of reducing system yield by 0.7 percentage points. On a stage-length adjusted basis, system yield increased 4.1 per cent year-over-year.  Passenger revenue per available seat mile (PRASM) increased 4.2 per cent over the same quarter in 2017, or 4.9 per cent on a stage length adjusted basis.

In the business cabin, system passenger revenues increased $98 million or 13.0 per cent from the third quarter of 2017 on traffic and yield growth of 8.9 per cent and 3.7 per cent, respectively.

In the third quarter of 2018, operating expenses of $4.575 billion increased $671 million or 17 per cent from the same quarter in 2017, mainly driven by higher fuel prices year-over-year and by the increase in capacity.

Air Canada’s cost per available seat mile (CASM) increased 9.8 per cent from the third quarter of 2017.  The airline’s adjusted CASM increased 1.1 per cent from the prior year’s quarter, better than the 2.0 to 3.0 per cent increase projected in Air Canada’s news release dated July 27, 2018.  Air Canada’s better than expected adjusted CASM performance was largely driven by lower than forecasted Regional airlines expense, the impact of cost reduction initiatives related to Air Canada’s cost transformation program, and other operating expense reductions.  The lower Regional airlines expense was primarily due to certain engine maintenance events being recorded as capitalized maintenance versus operating expense in the third quarter of 2018, as well as timing of maintenance activities related to the Air Canada Express fleet.

Air Canada reported adjusted net income(1) of $561 million or $2.03 per diluted share in the third quarter of 2018 compared to adjusted net income of $922 million or $3.33 per diluted share in third quarter of 2017.  On a GAAP basis, the airline reported third quarter 2018 net income of $645 million or $2.34 per diluted share compared to third quarter 2017 net income of $1.723 billion or $6.22 per diluted share. The net income in the third quarter of 2017 included an income tax recovery of $758 million.

Financial and Capital Management Highlights

At September 30, 2018, unrestricted liquidity (cash, short-term investments and undrawn lines of credit) amounted to $5.309 billion, the highest level in Air Canada’s history (December 31, 2017$4.181 billion).

At September 30, 2018, adjusted net debt of $5.620 billion decreased $496 million from December 31, 2017.  In the nine months ended September 30, 2018, increases in long-term debt and finance lease balances of $559 million and capitalized operating lease balances of $63 million were more than offset by an increase in cash and short-term investment balances of $1,118 million.  At September 30, 2018, Air Canada’s leverage ratio was 2.0 versus a ratio of 2.1 at December 31, 2017.

Net cash flows from operating activities of $371 million in the third quarter of 2018 decreased $122 million compared to the third quarter of 2017.  Free cash flow(1) of $470 million in the third quarter of 2018 represented an increase of $146 millionfrom the third quarter of 2017.  Third quarter 2018 free cash flow included net proceeds of $293 million from the sale of 25 Embraer 190 aircraft.

For the 12 months ended September 30, 2018, return on invested capital (ROIC(1)) was 12.7 per cent, significantly higher than Air Canada’s weighted average cost of capital of 7.4 per cent.

2017 Investor Day Targets and Current Outlook

At its September 2017 Investor Day, Air Canada provided guidance on key financial metrics:

  • Annual EBITDAR margin (EBITDAR as a percentage of operating revenue) of 17-20 per cent in 2018, 2019 and 2020:
    As disclosed in its news release dated July 27, 2018, Air Canada continues to expect to achieve an annual EBITDAR margin of approximately 16 per cent for the full year 2018.  This decrease in projected EBITDAR margin takes into account a significantly higher fuel price per litre than that assumed in Air Canada’s Investor Day news release dated September 19, 2017.  As additional mitigation measures take effect, including further pricing and productivity improvements and the airline’s $250 million Cost Transformation Program due for completion in 2019, Air Canada is confident that its EBITDAR margin and ROIC will normalize by year-end and that it will realize these Investor Day targets post-2018.

    • As mentioned above, Air Canada continues to expect to achieve an annual EBITDAR margin of 17-20 per cent in 2019 and 2020.
  • Annual ROIC of 13-16 per cent in 2018, 2019 and 2020:
    As disclosed in its news release dated July 27, 2018, Air Canada continues to expect its annual ROIC to be approximately 12 per cent in 2018.  This decrease in projected annual ROIC reflects Air Canada’s expectation of a lower level of adjusted net income than previously anticipated.

    • As mentioned above, Air Canada continues to expect to achieve an annual ROIC of 13-16 per cent in 2019 and 2020.
  • Cumulative free cash flow of $2.0 billion to $3.0 billion over the 2018-2020 period.
    • Air Canada continues to expect to achieve this target.
  • A leverage ratio not exceeding 1.2 by the end of 2020 (measured by adjusted net debt over trailing 12-month EBITDAR):
    • Air Canada continues to expect to achieve this target.

Full Year 2018 Free Cash Flow

Air Canada now expects positive free cash flow in the range of $500 million to $600 million in 2018, as opposed to the range of $350 million to $500 million projected in Air Canada’s news release dated July 27, 2018, largely due to higher than expected cash from operations, including working capital.

Fourth Quarter and Full Year 2018 Adjusted CASM

For the fourth quarter of 2018, Air Canada expects adjusted CASM (which excludes fuel expense, the cost of ground packages at Air Canada Vacations and special items) to increase 1.5 to 2.5 per cent when compared to the fourth quarter of 2017.

Air Canada now expects full year 2018 adjusted CASM to range between no increase to an increase of 0.75 per cent when compared to the full year 2017, instead of the range of a decrease of 0.5 per cent to an increase of 1.0 per cent projected in Air Canada’s July 27, 2018 news release.  Approximately 0.75 percentage points of this range are driven by non-recurring costs for branding initiatives and new uniforms, customer service and technology investments, accelerated depreciation and sale-leaseback rent expense for Embraer 190 aircraft, and 2018 start-up costs of approximately $10 million related to Air Canada’s new loyalty program scheduled to launch in 2020.

Additional Guidance

For the full year 2018:

Depreciation, Amortization and Impairment Expense

Air Canada continues to expect depreciation, amortization and impairment expense to increase by approximately $125 millionfrom the full year 2017.

Employee Benefits Expense

Air Canada continues to expect employee benefits expense to increase by approximately $75 million from the full year 2017.

Aircraft Maintenance Expense

Air Canada now expects aircraft maintenance expense to increase by approximately $95 million from the full year 2017, as opposed to the increase of $90 million projected in Air Canada’s news release dated July 27, 2018.

2018 Outlook – Major Assumptions:  Assumptions were made by Air Canada in preparing and making forward-looking statements. As part of its assumptions, Air Canada assumes continued relatively modest Canadian GDP growth for the fourth quarter and full year 2018. Air Canada also expects that the Canadian dollar will trade, on average, at C$1.30 per U.S. dollar in the fourth quarter and at C$1.29 per U.S. dollar for the full year 2018 and that the price of jet fuel will average 86 CAD cents per litre in the fourth quarter and 81 CAD cents per litre for the full year 2018.

The following table summarizes the above-mentioned outlook for the fourth quarter and the full year 2018 and related major assumptions:

 

Full Year 2018

EBITDAR Margin

Approximately 16%

ROIC

Approximately 12%

Free Cash Flow

$500 – $600 million

Fourth Quarter 2018 versus

Fourth Quarter 2017

Full Year 2018 versus

Full Year 2017

Adjusted CASM

Increase of 1.5% to 2.5%

Range between no increase to an
increase of 0.75%

Depreciation, Amortization and
Impairment Expense

Increase by $125 million

Employee Benefits Expense

Increase by $75 million

Aircraft Maintenance Expense

Increase by $95 million

Major Assumptions

Fourth Quarter 2018

Full Year 2018

Canadian GDP

Relatively modest growth

Relatively modest growth

Canadian dollar per U.S. dollar

1.30

1.29

Jet fuel price – CAD cents per litre

86

81

 

The outlook provided constitutes forward-looking statements within the meaning of applicable securities laws and is based on a number of additional assumptions and subject to a number of risks.  Please see section below entitled “Caution Regarding Forward-Looking Information”.

(1) Non-GAAP Measures

Below is a description of certain non-GAAP measures used by Air Canada in an effort to provide readers with additional information on its financial and operating performance. Such measures are not recognized measures for financial statement presentation under GAAP, do not have standardized meanings, may not be comparable to similar measures presented by other entities and should not be considered a substitute for or superior to GAAP results.  Readers are advised to review the section entitled Non-GAAP Financial Measures in Air Canada’s Third Quarter 2018 MD&A for a further discussion of such non-GAAP measures and a reconciliation of such measures to Canadian GAAP.

  • Adjusted net income (loss) and adjusted earnings (loss) per share – diluted are used by Air Canada as a means to assess the overall financial performance of its business without the after-tax effects of foreign exchange gains or losses, net financing income (expense) relating to employee benefits, mark-to-market adjustments on derivatives and other financial instruments recorded at fair value, gain on sale and leaseback of assets, gains or losses on debt settlements and modifications, gains or losses on disposal of assets, and special items as these items may distort the analysis of certain business trends and render comparative analysis to other airlines less meaningful.  Starting as of and including the fourth quarter of 2017, adjusted net income (loss) is determined net of tax.
  • Adjusted pre-tax income (loss) is used by Air Canada to assess the overall pre-tax financial performance of its business without the effects of foreign exchange gains or losses, net financing income (expense) relating to employee benefits, mark-to-market adjustments on derivatives and other financial instruments recorded at fair value, gain on sale and leaseback of assets, gains or losses on debt settlements and modifications, gains or losses on disposal of assets, and special items as these items may distort the analysis of certain business trends and render comparative analysis to other airlines less meaningful.  Air Canada uses adjusted pre-tax income (loss) before interest to determine return on invested capital.
  • EBITDAR is commonly used in the airline industry and is used by Air Canada as a means to view operating results before interest, taxes, depreciation, amortization, impairment and aircraft rent as these costs can vary significantly among airlines due to differences in the way airlines finance their aircraft and other assets.  Air Canada excludes special items from EBITDAR as these items may distort the analysis of certain business trends and render comparative analysis to other airlines less meaningful.
  • Adjusted CASM is used by Air Canada as a means to assess the operating and cost performance of its ongoing airline business without the effects of fuel expense, the cost of ground packages at Air Canada Vacations® and special items, as such expenses may distort the analysis of certain business trends and render comparative analysis to other airlines less meaningful.  Aircraft fuel expense is excluded from operating expense results as it fluctuates widely depending on many factors, including international market conditions, geopolitical events, jet fuel refining costs and Canada/U.S. currency exchange rates.  Air Canada also incurs expenses related to ground packages at Air Canada Vacations® which some airlines, without comparable tour operator businesses, may not incur.  In addition, these costs do not generate ASMs and therefore excluding these costs from operating expense results provides for a more meaningful comparison across periods when such costs may vary.
  • “Leverage ratio” refers to adjusted net debt to trailing 12-month EBITDAR leverage ratio and is commonly used in the airline industry and is used by Air Canada as a means to measure financial leverage.  Leverage ratio is calculated by dividing adjusted net debt by trailing 12-month EBITDAR (excluding special items). As mentioned above, Air Canada excludes special items from EBITDAR results (which are used to determine leverage ratio) as these items may distort the analysis of certain business trends and render comparative analysis to other airlines less meaningful.
  • Free cash flow is commonly used in the airline industry and is used by Air Canada as an indicator of the financial strength and performance of its business, indicating the amount of cash Air Canada is able to generate from operations and after capital expenditures.  Free cash flow is calculated as net cash flows from operating activities minus additions to property, equipment and intangible assets, and is net of proceeds from sale-leaseback transactions.
  • Return on invested capital (ROIC) is used by Air Canada as a means to assess the efficiency with which it allocates its capital to generate returns. Return is based on adjusted pre-tax income (or loss, as applicable), excluding interest expense and implicit interest on operating leases. Invested capital includes average year-over-year long-term debt, average year-over-year finance lease obligations, average year-over-year shareholders’ equity, net of excess cash not required to run its core business operations, and the value of capitalized operating leases (the latter calculated by multiplying annualized aircraft rent by 7).  Air Canada calculates invested capital based on a book value-based method of calculating ROIC, as described above.  Refer to the definition of adjusted pre-tax income (loss) for a discussion as to why Air Canada uses adjusted pre-tax income (loss) to assess the overall pre-tax financial performance of its business.

Air Canada’s Third Quarter 2018 Interim Unaudited Consolidated Financial Statements and Notes and its Third Quarter 2018 Management’s Discussion and Analysis of Results of Operations and Financial Condition are available on Air Canada’s website at aircanada.com, and will be filed on SEDAR at www.sedar.com.

Photo: Air Canada.