Summary

  • Air Canada is Canada's largest airline and the latest provider of scheduled passenger services in the Canadian.
  • In 2019, it was among the top 20 largest airlines in the world.
  • Air Canada enhances its domestic and transborder network through a capacity purchase agreement with Jazz Aviation LP, a wholly owned subsidiary of Chorus Aviation.

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Company Overview

Air Canada (OTC:ACDVF, TSX:AC) is Canada's largest airline and the latest provider of scheduled passenger services in the Canadian market, the Canada-U.S. transborder market and in the international market to and from Canada. In 2019, it was among the top 20 largest airlines in the world. Air Canada is a founding member of Star Alliance™ providing the world's most comprehensive air transportation network.1

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Business Overview

Air Canada is the largest provider of scheduled passenger services in the Canadian market, the Canada-U.S. transborder market, and in the international market to and from Canada. Its mission is connecting Canada and the world.2

Air Canada enhances its domestic and transborder network through a capacity purchase agreement (“CPA”) with Jazz Aviation LP (“Jazz”), a wholly owned subsidiary of Chorus Aviation Inc., with regional flights operated on behalf of Air Canada under the Air Canada Express banner. Regional flying forms an integral part of the airline’s international network strategy, providing valuable traffic feed to Air Canada and Air Canada Rouge routes. On March 1, 2021, Air Canada announced an agreement (further discussed in this MD&A) revising its CPA and consolidating all its regional flying with Jazz.

In 2021, Air Canada together with its regional partners operated, on average, 448 daily scheduled flights to 154 direct destinations on six continents (although, as a result of the COVID-19 pandemic, operations to many destinations were suspended or did not operate continually throughout 2021). In comparison, in 2019, Air Canada, together with its regional partners, operated, on average, 1,531 daily scheduled flights to 217 direct destinations on six continents, consisting of 62 Canadian destinations, 56 destinations in the United States and 99 international destinations.

At December 31, 2021, Air Canada mainline had 175 aircraft in its operating fleet, which consisted of 97 Boeing and Airbus narrow-body aircraft and 78 Boeing and Airbus wide-body aircraft, including one Boeing 767 freighter, while Air Canada Rouge had an operating fleet of 39 Airbus narrow-body aircraft. At December 31, 2021, the Air Canada Express fleet comprised 50 Mitsubishi regional jets, 48 De Havilland Dash 8 turboprop aircraft and 25 Embraer E175 aircraft for a total of 123 aircraft.

Air Canada is a founding member of the Star Alliance® network. Through the 26-member airline network, Air Canada offers its customers access to a wide global network, as well as reciprocal participation in frequent flyer programs and the use of airport lounges and other common airport facilities.

Air Canada’s Aeroplan program is Canada’s premier travel loyalty program. The Aeroplan program allows individuals to enroll as members and accumulate Aeroplan points through travel on Air Canada and select partners, as well as through the purchase of products and services from participating partners and suppliers. Members can redeem Aeroplan points for a variety of travel, merchandise, gift cards, and other rewards provided directly by participating partners, or made available through Aeroplan’s suppliers. Aeroplan Elite Status recognizes Air Canada’s frequent flyers, as well as Aeroplan’s most engaged members, with a range of priority travel services and membership benefits.

Air Canada Cargo, a division of Air Canada, is a global cargo service provider, offering cargo services on passenger flights and on all-cargo flights, including on dedicated freighter aircraft. Air Canada Cargo uses cargo space available in Air Canada’s mainline wide-body aircraft, certain converted Boeing 777 and Airbus A330 aircraft with increased cargo space generated by the removal of seats from the passenger cabin, and one dedicated Boeing 767 freighter. Air Canada Cargo operated one Boeing 767 freighter as at December 31, 2021 and expects to have three more Boeing 767 freighters in service by the end of 2022.

In 2022, Air Canada Cargo plans to leverage its fleet of dedicated freighters to benefit from the growth in freight.

Air Canada Vacations is a leading Canadian tour operator, developing, marketing, and distributing vacation travel packages, in the outbound leisure travel market (Caribbean, Mexico, U.S., Europe, Central and South America, South Pacific, Australia, and Asia) and the inbound leisure travel market to destinations within Canada, and offering cruise packages in North America, Europe, and the Caribbean. Air Canada Rouge is Air Canada’s leisure carrier.

Air Canada, along with the rest of the global airline industry, continued to face a significant decrease in traffic in 2021, as compared to the year 2019, and a corresponding decline in revenue and cash flows, as a result of the COVID-19 pandemic and the travel restrictions imposed in many countries around the world, including Canada.

The impact of the COVID-19 pandemic began to be felt in traffic and sales figures commencing in early March 2020. The impact included drastic declines in earnings and cash from operations and it continued into 2021 as Canada had among the strictest travel restrictions and quarantine requirements in the world. When compared to 2020, operating revenues in 2021 increased 10%, while capacity and traffic declined 11% and 9%, respectively. When compared to 2019, in 2021, operating revenues, capacity, and traffic declined 67%, 70%, and 78%, respectively.

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Fleet

The tables below provide the number of aircraft in Air Canada’s and Air Canada Rouge’s operating fleet as at December 31, 2021 and as at March 31, 2022, as well as the planned fleet for the future periods indicated.3

 ActualPlanned
 Dec. 31,
2021
Q1 2022
Fleet
Changes
Mar. 31,
2022
Remainder
2022 Fleet
Changes
Dec. 31,
2022
2023 Fleet
Changes
Dec. 31,
2023
Air Canada Mainline       
Wide-body aircraft       
Boeing 777-300ER11617118-18
Boeing 777-300ER (cargo)7(6)1(1)---
Boeing 777-200LR6-6-6-6
Boeing 787-88-8-8-8
Boeing 787-929-29-29231
Boeing 767-300 freighters1-13437
Airbus A330-30012315116-16
Airbus A330-300 (cargo)4(3)1(1)---
Total wide-body aircraft78-78381586
Narrow-body aircraft       
Boeing 737 MAX 831334640-40
Airbus A32115-15-15-15
Airbus A32018-18(2)16-16
Airbus A3196-6(3)3-3
Airbus A220-30027128533-33
Total narrow-body aircraft9741016107-107
Total Mainline175417991885193
 Air Canada Rouge       
Narrow-body aircraft       
Airbus A32114-14-14-14
Airbus A3205-5-5-5
Airbus A31920-20-20-20
Total Air Canada Rouge39-39-39-39
Total Mainline & Rouge214421892275232
Air Canada Express       
Embraer 17525-25-25-25
Mitsubishi CRJ-20015-15-15-15
Mitsubishi CRJ-90035-35-35-35
De Havilland Dash 8-3009(9)-----
De Havilland Dash 8-40039-39-39(3)36
Total Air Canada Express123(9)114-114(3)111

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Financial Highlights

Air Canada and the rest of the global airline industry have faced significantly lower traffic than in 2019, and a corresponding decline in revenue and cash flows, as a result of the COVID-19 pandemic and the travel restrictions imposed in many countries around the world, including in Canada. Conditions have improved and travel restrictions have been lifted in many countries, but Air Canada cannot predict the timing and extent of the return to pre-pandemic levels.

Over the quarter, and until February 28, 2022, all travellers, regardless of vaccination status, were required to provide a negative pre-entry COVID-19 PCR test result taken within 72 hours of departure or a proof of a positive test result received in the previous 11 to 180 days. On February 15, 2022, the Government of Canada announced changes to certain travel restrictions for fully vaccinated travellers.

On March 17, 2022, the Government of Canada announced additional changes that came into effect on April 1, 2022, allowing for fully vaccinated travellers to no longer be required to provide a pre-entry COVID19 test result to enter Canada by air, land or water. Foreign nationals who do not meet the requirements to be considered fully vaccinated are not able to enter Canada unless they meet an exemption set out in the Orders made under the Quarantine Act. Unvaccinated or partially vaccinated travellers allowed to enter Canada, remain subject to the federal requirement to quarantine and take a COVID-19 PCR test at the time of arrival and on day eight after arrival.

Since the onset of the pandemic, Air Canada has actively managed its ASM capacity based on prevailing market trends and travel demand. In January 2022, in response to the emergence of the Omicron variant and the associated short-term decline in demand, Air Canada suspended flights to certain Caribbean destinations from January 24 to April 30, 2022.

First quarter 2022 operating revenues of $2,573 million compared to first quarter operating revenues of $729 million in 2021, an increase of $1,844 million or about 3.5 times. Compared to first quarter 2019, operating revenues decreased $1,880 million or 42% due to the impact of the COVID-19 pandemic and travel restrictions imposed.

First quarter 2022 operating expenses of $3,123 million versus operating expenses of $1,778 million in the first quarter of 2021, an increase of $1,345 million or 76% on a capacity increase of 239.5% and the impact of a 57% increase in fuel cost.

First quarter 2022 operating loss of $550 million decreased by $499 million from the first quarter of 2021.

First quarter 2022 EBITDA (excluding special items) of negative $143 million improved $620 million from the first quarter of 2021.

Net cash flows from operating activities of $335 million in the first quarter of 2022 versus net cash used in operating activities of $888 million in the first quarter of 2021, reflecting the significant recovery in advance ticket sales and the improvement in operating results. Refer to section 7.5 “Cash Flow Movements” of this MD&A for additional information.

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System Passenger Revenues

In the first quarter 2022, passenger revenues of $1,917 million increased nearly five-fold from the first quarter of 2021. At the system level, capacity increased by 239.5% while traffic increased 417.9%, which translated into a 22.8 percentage point increase in passenger load factor. The 239.5% capacity increase was generally in line with the 243% increase projected in Air Canada’s news release dated February 18, 2022, mainly due to the greater impact of the Omicron variant as well as additional travel restrictions placed on some operations in Asia. Passenger revenue per ASM (PRASM) in the first quarter of 2022 increased 43.1% when compared to the first quarter of 2021. These results are largely attributable to the impact of the COVID-19 pandemic and the significant travel restrictions in the first quarter of 2021 compared to the first quarter of 2022. The airline has started re-introducing service on many U.S. and International routes that were fully suspended last year due to these restrictions.

Cargo Revenues

In the first quarter of 2022, cargo revenues of $398 million increased $117 million or 41.7% from the first quarter of 2021. Robust demand supported by increased capacity led to strong revenue performance for the quarter with yield increasing 30% year-over-year. Demand for cargo services in the Pacific market was strong during the first quarter of 2022. As a result, Pacific cargo revenues increased $86 million from the first quarter of 2021, representing about 73% of the total cargo revenue improvement.

Other Revenues

In the first quarter of 2022, other revenues of $258 million increased $205 million from the first quarter of 2021, representing a growth of about 4.9 times. The increase was primarily due to a higher volume of ground package sales at Air Canada Vacations, reflecting the increased demand for vacation packages and the impact of the suspension of flights to Mexico and the Caribbean between January 31, 2021 and June 26, 2021. Increases in on-board revenues from passenger volumes and non-air revenues related to the Aeroplan program also contributed to the improvement.

Operating Expenses

In the first quarter of 2022, total operating expenses of $3,123 million increased $1,345 million or 76% from the first quarter of 2021. The variance was mainly the result of increases in nearly all line items largely reflecting the year-over-year growth in operating capacity of 239.5% and in traffic of 417.9%.

In the first quarter of 2022, fuel expense of $750 million increased $550 million from the first quarter of 2021. The increase was a result of a 57.2% increase in jet fuel prices, as well as more jet fuel litres used as a result of the higher volume of flying compared to the first quarter of 2021.

In the first quarter of 2022, wages, salaries, and benefits of $707 million increased $179 million or 34% from the first quarter of 2021. The variance was mainly due to an increase in wages and salaries reflecting the increase in FTEs compared to the same period in 2021 as Air Canada increased its flying volume yearover-year. The increase was partially offset by lower average salaries largely as the result of a change in active employee mix.

In the first quarter of 2022, regional airlines expense (excluding fuel and ownership costs) of $316 million increased $121 million or 62% from the first quarter of 2021. The increase was primarily driven by higher expenses due to higher volume of flying compared to the first quarter of 2021 and was partially offset by savings from the consolidation of regional flying.

In the first quarter of 2022, depreciation and amortization expense of $403 million decreased $10 million or 2% compared to the first quarter of 2021. The additions of new Airbus A220-300 and Boeing 737 MAX aircraft and refurbishment of the Airbus A330 cabin were offset by the return of leased aircraft and retirement of certain older aircraft from the fleet.

In the first quarter of 2022, aircraft maintenance expense of $26 million decreased $124 million or 83% from the first quarter of 2021.

In the first quarter of 2022, ground package costs of $129 million increased $124 million from the first quarter of 2021. The increase was due to higher volume of ground packages sales at Air Canada Vacations compared to the first quarter of 2021. Air Canada suspended its flights to Mexico and Caribbean destinations between January 31, 2021 and June 26, 2021.

Net Debt

As at March 31, 2022, net debt of $7,031 million decreased $89 million from December 31, 2021, reflecting the impact of net cash from operating and investing activities in the first quarter of 2022. The impact of a stronger Canadian dollar at March 31, 2022 compared to December 31, 2021, decreased foreign currency denominated debt (mainly U.S. dollars) by $132 million.

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Commenting on the result Michael Rousseau, President and Chief Executive Officer of Air Canada said.4

"The substantial year-over-year improvement in Air Canada's first quarter results is clear evidence that a recovery is underway. The company's strong improvement is a testament to its employees, and I thank them for their hard work taking care of its customers throughout more than two years of a global pandemic. Now, its employees are demonstrating this same level of determination, commitment and passion in executing on its recovery strategy,"

"The year began with weakness brought on by the Omicron variant and travel restrictions. However, the company quickly rebounded in March with passenger volumes exceeding the strong December levels and passenger ticket sales in March 2022 over 90 per cent of March 2019 levels, a leading indicator to much stronger 2022 second and third quarter results. For the quarter, Air Canada had operating revenues of $2.573 billion, more than triple that of the same quarter in the prior year.  This was accompanied by a strict cost discipline that reduced adjusted CASM by over six per cent from the fourth quarter of 2021. Quarterly EBITDA, while a negative $143 million, improved $620 million over last year and the company ended the quarter with $10.162 billion in unrestricted liquidity, close to 2021 year-end levels.

"In anticipation of its recovery, Air Canada has kept the course with key long-term projects to increase and diversify revenue and lower costs. One such program is the expansion of Air Canada Cargo, with quarterly revenue up 42 per cent to $398 million from the first quarter of 2021, and now further expanded with the addition of two new Boeing 767-300 freighters to be delivered in 2022.  The renegotiation of key engine maintenance contracts completed in the quarter, will also yield savings over the remaining life of the contracts.  Aeroplan air redemption bookings in the quarter exceeded those of the same quarter in 2019 by 19 per cent.  The relaunched program saw the highest new member acquisitions and redemptions in a quarter, and generated third-party gross billings exceeding first quarter 2019 levels by 21 per cent," said Mr. Rousseau.

"Air Canada is rapidly adapting for the post-pandemic world. Air Canada is doing its part by contributing to the travel of Ukrainians to Canada, with a substantial donation of 100 million Aeroplan points.  Air Canada has also advanced its ESG goals in the quarter by announcing an order for 26 fuel-efficient Airbus A321XLR aircraft, which Air Canada has now increased to 30 aircraft. As well, Air Canada has recently entered into a long-term agreement with International Aero Engines, LLC (Pratt & Whitney) for the selection of the PW1100G-JM engines, spare engines and related maintenance services for these new aircraft.  Air Canada is responding to the evolving competitive landscape through its Rise Higher strategy to elevate all aspects of its business, particularly as it relates to the customer experience. Given pent-up travel demand, the demonstrated loyalty of its customers, and the expected further removal of travel-related government restrictions, Air Canada anticipates its recovery will gain momentum through the balance of 2022 and beyond," said Mr. Rousseau.

References

  1. ^ https://investors.aircanada.com
  2. ^ https://filecache.investorroom.com/mr5ircnw_aircanada/379/2021_ar.pdf
  3. ^ https://investors.aircanada.com/image/Q1+2022+Air+Canada+MD%26A+-+FINAL.pdf
  4. ^ https://investors.aircanada.com/2022-04-26-Air-Canada-Reports-First-Quarter-2022-Financial-Results
Tags: US:ACDVF CA:AC
Created by Asif Farooqui on 2022/05/10 19:28
     

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