Air Canada today reported third quarter 2019 EBITDA(1) (earnings before interest, taxes, depreciation, amortization and impairment) of $1.472 billion compared to third quarter 2018 EBITDA of $1.351 billion, an increase of $121 million or 9 per cent. The airline reported third quarter 2019 operating income of $956 million compared to third quarter 2018 operating income of $923 million.
“I am pleased to report an excellent third quarter for Air Canada, in which we generated record operating revenues of close to $5.6 billion and reached record liquidity of nearly $7.4 billion. Impressive as such strong results are on their own, they are even more meaningful given that we achieved them despite the serious disruption to our operations and to our cost structure created by the Boeing 737 MAX grounding. Our record performance is a testament to the resourcefulness, skill and dedication of the entire Air Canada team, and I applaud and thank them for their hard work taking care of our customers since the Boeing 737 MAX grounding occurred,” said Calin Rovinescu, President and Chief Executive Officer of Air Canada.
“During the quarter, our airline delivered on key metrics. This included EBITDA of $1.472 billion, an increase of 9 per cent from the previous year, higher operating income, and improved yields. Our leverage ratio(1) was 0.8 at the quarter’s end, a decrease of 50 per cent from December 31, 2018. The significant progress we have made on our balance sheet was recognized in the third quarter and, earlier this year, by upgrades from major debt rating agencies, advancing us to one level below our goal of investment grade status.
“Through great effort and teamwork, we have successfully managed through the extremely challenging 737 MAX grounding for nearly eight months now, most recently adjusting our schedule to remove the aircraft until February 14, 2020 and wet leasing two Airbus A330 aircraft to ensure we have sufficient capacity this winter. However, the removal of a scheduled 36 737 MAX aircraft during our peak summer season exacted a toll from a financial, route, product, and human resources perspective and the grounding is preventing us from realizing our full potential,” said Mr. Rovinescu.
“I nonetheless remain confident that if regulators unground the aircraft near-term, our on-going transformation will quickly regain its previous trajectory. For this reason, we have chosen at this time not to adjust our long-term financial targets presented at our last Investor Day. Much of my confidence flows from the professionalism our employees have demonstrated throughout this year since the aircraft was grounded, as well as the strong loyalty shown by our customers, and I thank both groups for their commitment to and support of Air Canada.
“As well, we were extremely pleased to see that during the third quarter Transat A.T. shareholders approved the definitive acquisition agreement with Air Canada, by a vote of nearly 95 per cent. This overwhelmingly favourable vote underscores the numerous benefits for all stakeholders from the proposed merger, which now remains subject to applicable regulatory approvals and customary conditions.”
Third Quarter Income Statement Highlights
Air Canada began consolidating Aeroplan’s financial results on the date of the acquisition of Aeroplan, January 10, 2019. Air Canada adopted accounting standard IFRS 16 – Leases effective January 1, 2019 and restated 2018 amounts (including for period-over-period comparisons).
On a capacity reduction of 2.1 per cent, record third quarter system passenger revenues of $5.164 billion increased $146 millionor 2.9 per cent from the same quarter in 2018. The increase in system passenger revenues was driven by a yield improvement of 4.8 per cent, partly offset by a traffic decrease of 1.8 per cent. System yield in the third quarter of 2019 improved due to the constrained capacity resulting from the grounding of the Boeing 737 MAX aircraft as well as a generally improved pricing environment, mainly in North America. The yield increases also included additional revenues from Aeroplan flight redemptions and other revenues subsequent to the Aeroplan acquisition on January 10, 2019.
In the third quarter of 2019, operating expenses of $4.597 billion increased $105 million or 2 per cent from the third quarter of 2018. Air Canada’s cost per available seat mile (CASM) increased 4.5 per cent from the third quarter of 2018. The airline’s adjusted CASM(1) increased 9.3 per cent over the same quarter in 2018. These increases reflected, in large part, the impact of the Boeing 737 MAX aircraft grounding which resulted in a system ASM decline of 2.1 per cent versus planned system ASM growth of approximately 3 per cent, in addition to creating higher costs associated with replacement aircraft, and on-going operating expenses, including depreciation and pilot wages, that continued to be incurred in relation to the Boeing 737 MAX aircraft despite their grounding. Given that the Aeroplan loyalty business was not consolidated in Air Canada’s financial results in 2018, for a more meaningful comparison of the cost performance of the on-going airline business, Air Canada’s adjusted CASM for the third quarter and first nine months of 2019 excludes the operating expenses of Aeroplan.
Air Canada’s third quarter EBITDA of $1.472 billion was 9 per cent higher than the third quarter of 2018, and better than the increase of approximately 5 per cent projected in Air Canada’s news release dated July 30, 2019. This better than expected EBITDA performance was primarily driven by a lower fuel price per litre than what Air Canada had previously assumed in its guidance.
Third quarter 2019 net income amounted to $636 million or $2.35 per diluted share compared to third quarter 2018 net income of $702 million or $2.55 per diluted share. The third quarter of 2019 included foreign exchange gains of $27 million while the third quarter of 2018 included foreign exchange gains of $145 million. Air Canada reported adjusted net income(1) of $613 million or $2.27 per diluted share in the third quarter of 2019 compared to adjusted net income of $580 million or $2.10 per diluted share in the third quarter of 2018.
Financial and Capital Management Highlights
At September 30, 2019, unrestricted liquidity (cash, cash equivalents and short and long-term investments, and undrawn lines of credit) amounted to a record $7.355 billion (September 30, 2018 – $5.309 billion).
At September 30, 2019, net debt of $2.999 billion decreased $2.215 billion from December 31, 2018, reflecting an increase in cash, cash equivalents and short and long-term investment balances of $1.654 billion and a decrease in long-term debt and lease liabilities of $561 million. At September 30, 2019, Air Canada’s leverage ratio was 0.8 versus a ratio of 1.6 at December 31, 2018.
Net cash flows from operating activities of $834 million increased $284 million from the third quarter of 2018. In the third quarter of 2019, free cash flow(1) of $533 million decreased $64 million from the third quarter of 2018. In the third quarter of 2018, Air Canada received proceeds of $293 million from the sale and leaseback of 25 Embraer aircraft while no such proceeds were received in the third quarter of 2019. In the third quarter of 2019, the increase in cash flows from operating activities over the third quarter of 2018 was partly offset by an increase in capital expenditures of $55 million. Excess cash amounted to $2.683 billion at September 30, 2019. Refer to section 6.1 “Liquidity” of Air Canada’s Third Quarter 2019 MD&A for additional information on excess cash.
For the 12 months ended September 30, 2019, return on invested capital (ROIC(1)) was 15.5 per cent, significantly higher than Air Canada’s weighted average cost of capital of 7.2 per cent.
Normal Course Issuer Bid
In the third quarter of 2019, Air Canada purchased, for cancellation, a total of 2,111,800 shares at an average cost of $43.15 per share for aggregate consideration of $91 million (6,426,287 shares at an average cost of $38.87 per share for aggregate consideration of $250 million for the first nine months of 2019). At September 30, 2019, a total of 20,533,751 shares remained available for repurchase under Air Canada’s issuer bid which is scheduled to expire May 30, 2020.
Full Year 2019 Outlook and 2020-21 Investor Day Targets
As indicated in its October 16, 2019 news release, Air Canada removed Boeing 737 MAX flying from its schedule until February 14, 2020. Final decisions on returning the Boeing 737 MAX aircraft to service will be based on Air Canada’s safety assessment following the lifting of government safety notices and approval by regulatory authorities.
Air Canada’s projected capital expenditures, discussed in section 6.6 of Air Canada’s Third Quarter 2019 Management’s Discussion and Analysis of Results, reflect Air Canada’s assumption that the remaining 12 Boeing 737 MAX aircraft previously scheduled for delivery 2019 will now be delivered in 2020. Air Canada continues to expect the 14 737 MAX aircraft scheduled for 2020 to be delivered in 2020.
For the full year 2019, Air Canada projects the following:
- EBITDA margin (earnings before interest, taxes, depreciation, amortization and impairment, as a percentage of operating revenue) of approximately 19.0 per cent
- ROIC of between 15.5 per cent and 16.0 per cent
- Free cash flow of between $1.3 billion to $1.5 billion.
Free cash flow for 2019 is being positively impacted by a number of factors, including the deferral of the delivery of 12 Boeing 737 MAX aircraft from 2019 to 2020, lower capital expenditures across many different areas (mainly timing-related), a stronger working capital performance, the impact of aircraft lease extensions which defers the end of lease maintenance obligation, and the favourable impact of higher cash and investment balances on net interest expense.
- A leverage ratio not exceeding 1.0 at December 31, 2019 (measured by net debt over trailing 12-month EBITDA)
The financial guidance provided in Air Canada’s news release dated February 28, 2019 for the years 2020 and 2021 with respect to annual EBITDA margin and annual ROIC, as well as the cumulative free cash flow over the 2019-2021 period, remains in place.
Assumptions were made by Air Canada in preparing and making forward-looking statements (including EBITDA margin, ROIC and free cash flow guidance referred to above for the years 2020 and 2021).
As part of its assumptions, for 2019, Air Canada assumes:
- Modest Canadian GDP growth for the fourth quarter and full year
- That the Canadian dollar will trade, on average, at C$1.33 per U.S. dollar in the fourth quarter and full year
- That the price of jet fuel will average 77 CAD cents per litre in the fourth quarter and full year
Air Canada’s assumptions as they pertain to the 2020-to-2021 period are provided in Air Canada’s news release dated February 28, 2019. Air Canada’s guidance for 2020 and 2021 also assumes the return to service of the Boeing 737 MAX aircraft in the first quarter of 2020.
It is premature to assess what the impact of Air Canada’s acquisition of Transat A.T. would be, and it is therefore not factored into Air Canada’s guidance.
(1) Non-GAAP Measures