Earnings call: Air Canada reports solid Q2 results, revises full-year guidance

Air Canada (AC.TO) has announced its financial results for the second quarter of 2024, revealing solid performance but a revision in its full-year guidance due to changing market conditions. The airline reported operating revenues of $5.5 billion and adjusted EBITDA of $914 million, resulting in a margin of 16.6%.

Despite this, the results did not meet the company’s internal expectations. Air Canada generated $1.5 billion in free cash flow year-to-date and saw improvements in on-time performance, alongside recognition at the Skytrax World Airline Awards.

Looking forward, the company plans to enhance its fleet with the delivery of A220s and leased Boeing (NYSE:) 737 MAX aircraft, with the A321XLR expected in 2025.

However, challenges such as increased operating expenses, primarily from capacity growth and rising fuel and labor costs, have prompted a cautious outlook.

Key Takeaways

• Operating revenues reached $5.5 billion with an adjusted EBITDA of $914 million.
• Free cash flow year-to-date amounted to $1.5 billion.
• On-time performance has improved, and the airline won multiple Skytrax awards.
• Full-year guidance revised due to market condition changes; focus on international markets and capacity shift from Europe to Pacific.
• Cargo revenues grew, yet yield softness may persist into Q3 2024.
• Increased operating expenses due to capacity growth, fuel, and labor costs.
• Fleet expansion with remaining A220s and additional leased Boeing 737 MAX; A321XLR to join in 2025.
• Capacity increase projected between 5.5% to 6.5% in 2024.
• Adjusted EBITDA expected to be between $3.1 billion and $3.4 billion for the year.
• Adjusted CASM likely to rise between 2.5% and 3.5% year-over-year.
• Focus on building a modern fleet, investing in employees, customer excellence, maintaining a strong balance sheet, and generating reliable free cash flow.

Company Outlook

• Air Canada plans moderate capacity growth in the Pacific for 2025.
• Delay in $1 billion of CapEx to 2027, possibly due to 787-10 issues.
• No current sale-leaseback assumptions in future CapEx.
• Margins expected to reach high teens in the medium term, despite cost inflation and capacity pressure.
• Consortium bid for VIA Rail concession without significant capital deployment expected.
• ECX program improvements in on-time performance.
• Negotiations with pilots underway, aiming for an agreement soon.

Bearish Highlights

• Full-year guidance revised due to changing market conditions.
• Anticipated yield softness in cargo to continue in Q3 2024.
• Operating expenses have increased, primarily from capacity growth, fuel, and labor costs.
• Weak demand in core European markets due to economic factors and events like the Olympics.

Bullish Highlights

• Strong leisure travel demand in Canada, the US, and Mediterranean Europe.
• Aeroplan membership program growth.
• Strong yields and margins in the Pacific region.
• Premium demand and yield environment remain stable and robust.

Misses

• Second-quarter results fell short of internal expectations.
• Revenue per available seat mile (PRASM) expected to reduce by around 4% compared to 2023.

Q&A Highlights

• Air Canada emphasized its focus on shareholder value, with stock buybacks being considered.
• The airline expects Q4 PRASM to stabilize on a year-over-year basis.
• Non-fuel, non-labor costs tracking with capacity growth.
• Fuel and labor identified as the main swing factors for cost per available seat mile (CASM) moving forward.
• No significant shift from premium to non-premium among frequent flyers observed.

Full transcript – None (ACDVF) Q2 2024:

Operator: Hello and welcome to the Air Canada Second Quarter 2024 Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Valerie Durand, Head of Investor Relations and Corporate Sustainability at Air Canada. You may begin.

Valerie Durand: Thank you, Sarah. [Foreign Language] Welcome and thank you for attending our second quarter 2024 earnings call. Joining us this morning are Michael Rousseau, our President and CEO; Mark Galardo, our Executive Vice President of Revenue and Network Planning and President of Cargo; and John Di Bert, our Executive Vice President and CFO. Other executive team members are with us as well. Mike will begin this call with an overview of the quarter. Mark will speak on revenue, network updates and trends and John will provide comments about our financial performance before turning it back to Mike. We will then take questions from equity analysts. I remind you that today’s comments and discussion 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 second quarter’s news release available on aircanada.com and on SEDAR+. With that, I’d like to turn the call over to Mike.

Michael Rousseau: Thank you, Valerie and good morning, [Foreign Language] and thanks for joining us. Our second quarter results were solid, although they did not achieve our internal expectations. We achieved second quarter operating revenues of $5.5 billion. Adjusted EBITDA was $914 million in the quarter, with an adjusted EBITDA margin of 16.6%, and we generated $1.5 billion in free cash flow on a year-to-date basis. We demonstrated progress in several areas. On-time performance improved 10 points on 4% more operated flights and 3% more passengers carried versus the same quarter last year. I was also very pleased that Air Canada won more awards than any other Canadian carrier at the 24 Skytrax World Airline Awards and that Star Alliance was named the Best Airline Alliance. Skytrax rated Air Canada among the top 30 airlines in the world and the best in Canada by a wide margin. Credit for this recognition and our results goes to our 39,000 employees. I thank them for their hard work and dedication in taking care of our customers and transporting them safely. As 2024 progresses, we can see that 2023 was truly a unique year. The rapid post-pandemic surge in demand, combined with constrained capacity, resulted in very strong yields and load factor of last year. We recently revised our full year guidance to reflect the impact of the changes in market conditions. Mark and John will discuss this in more detail. But before turning this over to Mark, I’d like to take this opportunity to thank our customers. We are grateful for your trust and loyalty. You are the reason for which we fly and we look forward to serving you with actions. Over to you, Mark.

Mark Galardo: Thanks, Mike and good morning everyone. [Foreign Language] Thanks to all our employees for helping us deliver good Q2 results. Our operating revenues increased 2% year-over-year to more than $5.5 billion, almost 7% more capacity. Passenger revenues were almost $5 billion, up about 2%, translating into a 4.4% decline in PRASM from Q2 2023. The system load factor declined by about 2 percentage points in the same period last year landing at 85.7%, which remains higher than historical averages. Demand continues to be resilient. We had several strategic achievements over the second quarter. International markets continue to be the driving force behind our overall earnings. The new routes that we added are accretive in most cases, above the average profitability of our current route network and Sixth Freedom revenues grew year-over-year, notwithstanding the challenges we face with our A220 fleet and the regional network, which constrained its potential. However, we did observe some weakness in international markets compared to Q2 2023, which was above historical levels. Atlantic performance was particularly impacted by a weak point of sale in Europe and the competitive pressures on the Canadian point of sale. We are keeping a measured approach to capacity. We continue to see strong demand for leisure travel to Europe, in particular, the Mediterranean markets, and we are pleased with the results we achieved again this year. Overall, we believe that the Q2 – the result of our Q2 performance in Europe is less about consumer weakness and more about competitive supply growth above what the market can sustain in the short-term. We respond to this by reducing our full year Atlantic capacity by 8 points from our initial plan, landing at around 3% growth above 2023 and shifting these assets to the Pacific instead. Other airlines meanwhile increased transatlantic seat capacity by almost 20% for the full year. The Pacific market continues to perform well. The RASM decline can be explained by the difficult comparable environment of 2023. Market capacity to Asia was also significantly below market demand in Q2 2023. The strength of our network and our agility gives us opportunities to respond to a range of factors and pivot capacity to where it makes most sense. Diverting capacity away from Europe and into Asia was the right call for us. New routes to Seoul from Montreal and to Osaka from Toronto all performed exceedingly well and this would only having them on sale for 3 months prior to their respective launches. North American market did well as we saw control and deployed capacity as well as further improvements in the corporate recovery, especially on the Canada U.S. sector. It’s important to note, and as we mentioned on previous calls, our investment in the U.S. is longer term in nature. Our new routes launches here have performed in line with expectations. Our premium offering remains robust with growth in premium cabin revenues outpacing the overall revenue growth. Air Canada vacations also delivered consistently. Turning to cargo, revenues increased 1% year-over-year for two reasons: one, higher volume on chargeable kilos through the network and higher freighter revenues in the Americas. The yield dynamic in most markets and lower freighter operations in the Atlantic market particularly offset this increase. Continually and swiftly addressing the market conditions, we removed two 767 freighters from service in April. Taking a prudent approach, we have planned capacity to be up between 5.5% and 6.5% for the full year. This reflects sustained supply chain pressures and current market conditions and allows us to pursue more favorable yields. And as we look forward in international markets when compared to the same quarter last year, we expect the yield softness to continue in Q3 2024 declining around mid single-digits. We are seeing industry capacity stabilize over the Atlantic in Q4. For the Pacific, we have set our capacity plans to respond to anticipated demand and we expect to approach 2023 yields with double-digit growth from 2019 levels. If we go system-wide against for the third quarter of 2024, we anticipate the yield and PRASM declines will continue. It’s worth putting this in perspective as compared to prior Q3 periods, including the unique environment of Q3 2023. Our Q3 2024 PRASM will land above 2019 PRASM and we expect it will be above Q3 2022 levels as well. And if we look forward into Q4, we see year-over-year PRASM stabilizing. We are growing scale at our hubs, leveraging our expanding and globally competitive international network and growing our Sixth Freedom potential. We see that our strategic pillars are driving financial results. These pillars will become even more important as we fully leverage their potential with a new incoming fleet. Thank you, Merci and John, over to you.

John Di Bert: Thanks, Mark and good morning, everyone. [Foreign Language] I echo Mike and Mark’s comments about the focus and hard work of our employees and I thank them for their support in helping us deliver our Q2 results. We reported an operating income of $466 million and our adjusted EBITDA of $914 million. Adjusted net income was $369 million or $0.98 per diluted share. For the second quarter, operating expenses increased 9% year-over-year driven primarily by an almost 7% growth in capacity. Fuel expense increased 12% due to higher jet fuel consumption related to increased flying and a 3% higher jet fuel cost, which included a $25 million hedging loss and the impact of the weakening Canadian dollar. Labor expense increased 10% due to accruals for wage-related initiatives and increased headcount to support the capacity growth. Maintenance expense increased 22%, primarily resulting from a greater number of maintenance events, both scheduled and due to the increased flying activity and higher average rates year-over-year. We continue to work through the ongoing challenges affecting some of our A220s as well. We anticipate some supplier compensation on the PW 1500 to offset a portion of the incremental costs experienced. IT-related costs also contributed to the year-over-year operating expense increase as we invest in customer experience and productivity initiatives while we continue to enhance the security of our technology infrastructure. We maintained cost discipline and generated productivity gains. Adjusted CASM was well contained and grew 1.7% year-over-year. Turning to free cash flow. We generated $451 million in the quarter and $1.5 billion year-to-date. Given strong first half cash generation and even with net cash usage expected in the second half, we are confident that we can deliver free cash flow in line with our initial expectations. Our leverage ratio was 1.0 at the end of Q2. Over the last 18 months, we’ve reduced our leverage and improved our balance sheet significantly. Rating agencies have also acknowledged our progress. In April, S&P raised our corporate rating to BB and the rating of various secured debt instruments by one notch. Going forward, we’ll continue to maintain our strong balance sheet. Our current leverage ratio provides us flexibility for capital allocation choices over time. As to our fleet, we will soon start taking delivery of our remaining A220s. We recently announced 8 additional leased Boeing 737 MAX aircraft. These aircraft are expected to enter into service in the summer of 2025, and they are included in our disclosed committed expenditures. Looking ahead, we are excited about the recent ACA certification of the Airbus A321XLR, which we expect will join our fleet in 2025. We now also expect deliveries of the Boeing 787-10s to occur over a 2-year period starting in 2026, providing a more balanced flow of CapEx and aircraft entry into service. The A320s, A321 XLRs and the 787-10 additional aircraft are critical components of our fleet strategy and network optimization. I want to emphasize that we are proactively managing our fleet plans and are ensuring through options and other rights that we have the flexibility to work with different economic scenarios. As indicated in July, we expect capacity to increase between 5.5% and 6.5% in 2024 and our full year adjusted EBITDA to be in the range of $3.1 billion to $3.4 billion. This is largely driven by an expected full year PRASM reduction of around 4% versus 2023 as opposed to our previous flattish year-over-year expectation. We see second quarter load factor trends continuing into Q3 2024, ending with a low single-digit decline in Q4 ‘24 when compared to the same quarter last year. Guidance reflects our updated assumptions relating to the price of jet fuel and the weakened Canadian dollar against the U.S. dollar. We expect 2024 adjusted CASM to increase between 2.5% and 3.5% year-over-year. As always, we will continue to adapt to market conditions, manage capacity proactively and contain costs through productivity and other initiatives. Our focus remains on building the underlying sustainable cost structure that supports our long-term growth, competitiveness and profitability while also rewarding our employees for their hard work and dedication. Our adjusted 2024 CASM guidance contemplates some headwinds shifting to the right, like APPR amendment as an example. We forecast maintenance expense patterns to remain in line with what we’ve seen year-to-date. And while we’re still experiencing supply chain issues, as previously mentioned, we are addressing these and looking to adjust with our suppliers. We remain confident in our long-term strategy and continue to be focused on key priorities, including building a modern, efficient, mission-ready fleet as the foundation of our long-term network strategy allowing us to capitalize on our unique growth opportunities, investing in our people, premium products and customer excellence, maintaining a strong balance sheet and a responsible risk profile and by focusing on shareholder value creation, by returning to margin expansion and by generating reliable and consistent free cash flow. With that, thank you very much. Over to you, Mike.

Michael Rousseau: Well, thank you, John. The airline industry is highly regulated and extremely dynamic, competitive and complex. We serve passengers in moments that are important and often deeply meaningful to them. We don’t live up to expectations. We understand the criticism and disappointment. At times, though, there are misleading or misinformed comments or judgments from self-proclaimed experts that mischaracterize our industry, our company and are an injustice to the incredible work our employees carry out for our customers. We accept accountability to our investors and to our stakeholders. We look to being successful in an industry in an environment that has become more complex post-pandemic. Our success is contingent on having a strong and cost competitive business model, having experienced, creative and nimble leadership team and having employees who are proudly engaged to provide the best service possible. Our business model, which places an emphasis on building our major hubs to capture international and 6 p.m. traffic, is ideal for our company and our geography. It creates value for all stakeholders. For example, it allows us to support more regional routes, which normally do not provide an adequate financial return, connecting communities to the rest of Canada and the world for both personal and business objectives. Some of criticized the cost of travel in Canada. To do so selectively without comparing the different and unique user pay model in Canada as compared to other jurisdictions, it’s not only completely misleading and simplistic but frankly disconcerting. In addition, our Q2 unit costs, excluding fuel, have increased by over 22% from the second quarter of 2019, in part due to new government policies. Now withstanding we are steadfast in our plans. We continue to invest in products and customer excellence, like our complementary snacks, beer and wine offering, our Winterson network and our strategic expansion into India. We have also extended our partnership with the Canadian Olympic and Paralympic Committees as Team Canada’s official airline through 2030. It is truly an honor to carry our Canadian athletes to and from the Paris games and I celebrate all athletes for their dedication and efforts leading up to and during the event. Aeroplan marked its 40th anniversary last month. Our award-winning program continues to grow and active members are at an all-time high. Third-party gross billings were up 6% versus Q2 2023, mainly driven by growth across all financial partners on increased purchase volume and increased point conversions. We are carefully and continually monitoring customer behavior and market dynamics to ensure we maximize the opportunities of both growth and margin expansion into 2030. We Market dynamics domestically and internationally continue to intensify with new entrants and lower-cost business models, some without the costly constraints imposed on Air Canada. We are transforming and shaping our company for the long term, keeping in mind the demands from various stakeholders in the shorter term. We are committed to our success, and we will update you on our plans in more detail within the next 6 months. We are investing in our fleet, network, people and customer experience while maintaining a solid balance sheet and reducing our environmental footprint. We are building resilience and agility into our operations while enhancing our digital capabilities and innovation. Yes, there are some steps needed to support this white path like entering into new stages of certain labor agreements, which have to be cost competitive in the Canadian environment for us to be successful. I know all employees want a strong Air Canada, allowing it to grow, invest and increase value for all stakeholders. Meanwhile, we will continue to adapt, make short-term tactical adjustments as necessary to remain on course with a focused objective to deliver value both long term and short term. Like our shareholders, we’re disappointed with our stock price performance year-to-date especially coming off our record 2023 and having completely repaired the balance sheet. We also know that most global airline stocks are having similar challenges. We are proud of our role as Canadians Canada’s flag carrier and we are deeply committed to serving our customers, communities and country with safety, care and excellence. We are equally proud and confident that we have everything we need to create value for all stakeholders. Thank you, Merci and we will now be pleased to answer your questions.

Valerie Durand: Thank you, Mike, and thank you all for joining us this morning. [Foreign Language] Before we go forward with questions, we would like to welcome Sheila Kahyaoglu and her team to the call and also congratulate Helane Becker on her successful career. Helane you have been a great model for women in the industry and a warm welcome to Tom Fitzgerald. We’re now ready to take your questions. Should you require further details following this call, our Investor Relations team is available for support. Back to you, Sarah.

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Konark Gupta with Scotiabank. Your line is open. I’m sorry. Your first question comes from the line of Matthew Lee of Canaccord Genuity. Your line is open. Sorry, Savi Syth, Raymond James. Your line is open.

Savi Syth: Hey, good morning, everyone. Can you hear me?

Michael Rousseau: Yes. Good morning.

Savi Syth: Great. Thanks. And I was wondering if – you mentioned kind of strength in the corporate market and because of the U.S., Canada. But could you talk a little bit in general on what you’re seeing on the corporate side? Because clearly, some of the concerns about the economy probably related to that as well. And I’m curious as to how corporate today looks versus kind of pre-pandemic, I suspect there’s a much smaller mix of your overall revenue than it was back then. Thanks.

Michael Rousseau: Good morning, Savi. As we are – our corporate overall for the quarter basically grew about 4%, and most of that came on the Canada U.S. sector, and summer travel – summer periods are normally not a very important period for corporate travel. So really, what we’re looking at is September and October and we continue to see momentum in terms of the corporate recovery, particularly on the Canada U.S. sector. That being said, we’re still about 25% to 30% below where we were in 2019. And the big question that we’re now in ourselves is to what extent some of the network challenges that we have in terms of fleet contributing to that, and that’s a bit of an exercise that we’re conducting internally because some of our schedules have to facilitate CMD business travel. So a bit of a review internally as well to make sure that we’re well set up to stimulate the corporate recovery as well.

Savi Syth: That is helpful. Thank you. And if I might, on the capacity plans, could you flesh out a little bit more as to kind of what your expectations are into the second half and maybe into next year as you kind of – with the current kind of fleet plan, where you expect the growth to be focused in the various regions?

Michael Rousseau: So for Q4, late Q3, Q4, we’re looking at around 5% growth. And the majority of that growth is going to be on the Pacific sector we see some strength. We’re also investing a bit into India. We’ve reduced our exposure to Europe or basically flat to slightly negative, and we’re now taking another look at our domestic capacity for Q4. Too early to say exactly what 2025 will look like right now.

Savi Syth: Appreciate your answers. Thank you.

Operator: Your next question comes from the line of Konark Gupta with Scotiabank. Your line is open.

Konark Gupta: Hopefully, you can hear me okay this time?

Michael Rousseau: Yes.

Konark Gupta: Great. Thank you. I just want to understand the demand environment and the yield environment a little bit here. Back in May, I think you guys were expecting paying the strong Pacific yields to continue or sustain this summer. But we saw in Q2, I think there was some weakness there. Though you seem satisfied special mark with the capacity pivot to Asia Pacific. So – are you expecting – like if you keep capacity intact in Pacific, are you expecting demand to sort of catch up here? Or would you expect some sort of competitive capacity to pull back?

Michael Rousseau: Yes. Good question, Konark. So in terms of the yield decline on the Pacific, I think it’s a question of the compares. I mean the base last year was unrealistically high. That being said, even if we suffered a yield RASM decline in Q2 in the Pacific from a profitability perspective, we’re very satisfied. In fact, most of our Pacific routes are some of the best rents that we fly from a profitability perspective. That being said, capacity returning to that sector also depends on the outcome of China. Too early to comment on that. But overall, we expect things to be stable on the Canada Pacific sector. And in terms of capacity growth. While we had a bit of a bump in Q4, for 2025 we expect capacity growth to be moderate at best on the Pacific.

Konark Gupta: Okay. That’s great. And if I can follow-up with John perhaps on CapEx, so seems like there’s about $1 billion plus of CapEx got pushed out to a 2027 time frame and it seems to be driven more so by the 787-10 perhaps. How much of that is by design versus by OEM issues that you’re seeing? And are you baking in any sale-leaseback assumptions in future CapEx. Thanks.

John Di Bert: Yes. So no new assumptions with respect to sales leasebacks. I mean those will be options that alternatives in terms of financing aircraft we’ll look at in the future. But with respect to any of the changes here, no changes. And I’d say it’s a mix, some and some. We work with Boeing all the time. And of course, we want to make sure that we can rely on the capacity. And so just having that planned out so that we can incorporate it and they can deliver on time, and that’s kind of the thinking behind the movement of the 787.

Konark Gupta: Okay, that’s great. Thanks for taking my questions. Thank you.

Operator: Your next question comes from the line of Matthew Lee with Canaccord Genuity. Your line is open.

Matthew Lee: Good morning. Thanks for taking my questions. Maybe more of a big picture one. I know there are a number of factors that go into it. But – prior to the pandemic, AC was sort of running at 18% to 19% EBITDA margin. And I think at your Investor Day a couple of years back, it was suggested you kind of get back to those levels. I mean given pilot cost inflation, some other cost inflation, maybe some pressure on capacity. Is that still the medium-term goal? Or are we maybe in for a new normal for the airline?

John Di Bert: I know what I think that the airline is capable of bringing margins to the high teens, and we won’t kind of – I won’t put a number out there right now for longer-term, but I would tell you that we’re working through here a yield environment that’s kind of compressed a little bit. So that obviously has some immediate impacts, and we’re also working through Mike said in his comments that you all know an environment that has brought quite a bit of cost on. We’re still not back to 2019 levels in terms of scale and the size of the airline. I think that will make a big difference. You’ve got a modern fleet of aircraft that’s kind of being deployed over the next 3 to 4 years. So the CapEx on and it’s going to count to expanding those margins. And we still offer the best product for Canadian travelers and that will continue to deliver value and a lot of other components that we do leverage like Aeroplan different parts of our business and franchise that can grow faster than GDP. So, a combination of all that to me just confirms the fact that yes, sure, today, a little bit compressed, but over a longer period, the ability to go back to strong margins.

Matthew Lee: And sorry, in your view, do you believe that it’s more of a yield kind of conversation or more of a cost management conversation in terms of returning to that 18%, 19%?

John Di Bert: Well, I think it’s both. I think the piece of it that we control is driving scale and productivity. 2019 and the period in between that affect productivity quite a bit. We’re growing back into the airline side that we once had, like I said, still below 2019 levels. A modern fleet of aircraft, a lot of very important technology investments we’re making in IT that will drive productivity. So a combination of all those things, scale, modern fleet and productivity are the pieces that we control to drive a very competitive cost structure. And of course, over time, we will kind of stabilize here and work our way through that, and I’m sure that will contribute as well on the yield side.

Matthew Lee: Alright. That’s very helpful. Thank you very much.

Operator: Our next question comes from the line of Stephen Trent with Citi. Your line is open.

Stephen Trent: Good morning, everyone. Thanks very much for taking my questions. Some high-level ones for you. I definitely appreciate your comments on Fifth and Sixth Freedom traffic opportunities and the Star Alliance strength. Could you envision kind of longer-term doing anything kind of joint business agreement, style? Could you possibly see any opportunities to do something like that?

Michael Rousseau: Hi, Stephen, with respect to joint ventures and joint business, we already have 1 with Lufthansa and United across the North Atlantic called we have a joint business arrangement with United on the Canada U.S. sector and one with Air China (OTC:) to China. So we already have quite a few joint business arrangements today.

Stephen Trent: Appreciate it. And I actually meant ask any incremental in addition to the ones you have, but that’s very clear. I appreciate the color. And sorry, just one other quick item. I also appreciate that you guys have seen some good improvement in flight completion factors and lower delays and what have you. Have you changed anything made any specific adjustments on your boarding process? Or are there technological factors behind that, that have supported that improvement. Thank you.

Michael Rousseau: Stephen, this is Mike. Good question. I’m going to turn that over to Craig Landry, who heads up operations sitting in the room.

Craig Landry: Good morning. We have a program that we’ve been working on for a few years now that we call ECX, which is both elevating the customer experience. And the two main areas that we have focused on that have been around on-time performance and disruption management. So there’s been a lot of initiatives in place that includes a lot of technology, self-service and digital capability improvements, which allow a customer to be able to handle more aspects of their servicing on their own. This eliminates a lot of time and friction within the operation. We’ve made changes to a variety of aspects of our airport operations, both in the terminal. You mentioned boarding. We’ve made changes to how we handle everything from boarding sequencing to carry on baggage handling and others below the wing, how we handle baggage loading and pushback processes on the tarmac. So there’s a fairly comprehensive program and it’s led to about a 10-point improvement year-over-year and on-time performance this year. So we see – are seeing a significant improvement from that. There are a variety of efficiencies that come from that as well. I mean there’s – you can envision less mishandled baggage, less delay compensation costs and so on and so forth. So we see that as a win-win win.

Stephen Trent: Okay, very helpful. And thank you for taking my questions.

Operator: Your next question comes from the line of James McGarragle with RBC Capital Markets. Your line is open.

James McGarragle: Hey, good morning. And thanks brought me on. Can you give us some color on your new cost guidance. I mean, Q2 came in really, really good. Anything to flag specifically in the quarter? And then more generally on 2024 the range got a lot tighter on lower capacity. Can you just give us some color on what’s driving that?

John Di Bert: Yes. So thanks for the question. I think it’s just we’ve continued and we’ll continue to be disciplined. And as we kind of progress through the first half of the year, we’ve been very careful with adding head count, and we’ve gotten some good productivity overall. And we rely on that as the capacity adds, and that allows us to contribute some dilution to the CASM. I think the range of being tighter is just we had a 2.5% to 4.5% range. We’re tracking well on cost as the year progresses and it allows us to kind of take the top end of the range out. And I mentioned in my comments as well, a little bit of delay in some of the policies that we are anticipating on APPR so that – which is a little bit of cost. But all this to say that I think we’re executing well with respect to the ramp-up in productivity relative to the capacity we added.

James McGarragle: I appreciate the color. And I saw an interesting announcement this morning that you were part of a consortium bidding on a concession for via traffic. Can you just give us an update on the strategy there? Any potential CapEx outlays related to that anything else flag surrounding that agent that you think is pertinent. Thank you.

Michael Rousseau: It’s Mike. A very interesting project. I’m going to turn it over to Mark Galardo, our Chief Legal Officer, who’s been leading that opportunity.

Mark Galardo: Good morning. And thank you for the question. Thank you for the question. we’re part of a group of companies that is bidding for this project. It’s a very important project for Canada. But at this point in time of the process, we’re unable to comment in any way, shape or form. It’s a very strict and rigorous bidding process that is being led by the federal government. But we can confirm, as you’ve seen that we are part of the Cadence Consortium, which is being led by CDPQ Infra.

John Di Bert: And I’ll just close on – you had a question on CapEx. There’s no significant commitment of capital or CapEx to envision at this time. So yes, it doesn’t come with any meaningful deployment of capital.

Operator: Your next question comes from the line of Chris Murray with ATB Capital Markets. Your line is open.

Chris Murray: Yes. Thanks folks. Good morning. Maybe turning back to the Atlantic and trying to understand a little bit about what’s going on there. Can you maybe break it down a little more granularly between business and leisure traffic? And maybe is there – are there particular regions where you’re seeing some of these challenges. And we’re just trying to understand, is this, call it, the conventional peers that you’re having issues with in terms of excess capacity? Or is there like a low-cost carrier or something else going on. I’m just trying to understand the dynamics that you’re seeing in that market. And then as part of that, some of your competitors have also called out the fact that a number of travelers have decided to try to avoid France during the Olympics. But just wondering if that also creates an opportunity once that’s over for picking up some additional load maybe in the September time frame.

Michael Rousseau: Sure. Good morning, Chris. So if we break down the latter’s kind of multiple components here. So firstly, leisure strength, point-of-sale Canada, point-of-sale U.S. to the Mediterranean Europe in general is pretty strong. We’re looking at demand at 5% or 6% better year-over-year in terms of absolute demand. And we’re seeing a lot of strength in the markets like Italy, Greece, Portugal, South of France, etcetera, like we did last year. What we saw in particular, is core Europe, markets like France, Germany, where there’s a significant point-of-sale Europe component, that was quite weak. One, the European economy is kind of stagnant right now. Secondly, to your point, the Olympics and a bit of the Euro soccer tournament all contributed to some of those declines. And as well, there is a lot of additional capacity on the North Atlantic in general. So while demand was up, supply was larger than the demand increase. So that being said, what we’re seeing in September, October is definitely a rebound in France. But that’s September and October, November, December is a little bit too early right now to call. But in particular, demand to the Mediterranean really held up, and we’ll be looking to do a little bit more of that in 2025.

Chris Murray: Okay. That’s helpful. And then just one other question. You’re in the process right now, of course, of negotiations with your pilots, and I appreciate the sensitivities around this. But just trying to understand maybe any key milestones in the process that we should be thinking about timing around where you guys feel that an agreement can be reached. So any color you could add that would be helpful.

Michael Rousseau: Sure, Chris. It’s Mike. Yes. We’ve actually posted all the up-to-date information on our web. And it’s really – right now, we’re in the process being overseen by a federal conciliator. And so we’re in negotiations right now, and again, this is under the review or under the guidance of a federal conciliator. We have reached agreement on several items. There’s more to all agree on. And we’re hoping you can obviously do that over the next several weeks, basically.

Chris Murray: Great. Thant’s helpful. Thanks folks.

Operator: Your next question comes from the line of Cameron Doerksen with National Bank Financial. Your line is open.

Cameron Doerksen: Yes. Thanks. Good morning. I just want – maybe you could go into a little more detail on what you’re seeing from competitive capacity as we head into the fall here. I mean you guys have basically said that you’re going to take your capacity down a little bit here. Just wondering what you see from some of the competitors, has there been an adjustment made there as well?

Michael Rousseau: Good morning, Karen. So on the North Atlantic, in particular, like to Europe, we see some discipline. We have seen is growth in India, in particular, just recently, Air India announced double daily service between Toronto and New Delhi. So there’s some capacity there. On the domestic side, we see some growth from some of our competitors, but in particular, we see some of our competitors put capacity into the U.S. in some markets. And that’s normal as we chase kind of the seasonal patterns here in Canada that our competitors move some of that capacity into those regions where there is a shift in demand.

Cameron Doerksen: Okay. And second question, just on your own capacity. I am just trying to square a couple of things here. One is, just in light of what there appears to be maybe too much capacity out there in multiple markets. But at the same time, if I look at your fleet plan, you are adding some of these 737 MAXs, I mean I see a couple of 767 passenger planes coming back in 2025. So, I am just trying to understand the rationale there. Is that more a backfill because you have got some of the supply chain-related engine issues, or is that just capacity that you think will be necessary as we look ahead to 2025.

Michael Rousseau: I think it’s a combination of everything. And in particular, we are not at 2019 level of capacity yet. We still project some demand growth into 2025 and as well, we want to continue executing on some of our strategic pillars in particular, growing our Sixth Freedom franchise, and we are going to – we need some airplanes for that to occur, so a combination of all.

Cameron Doerksen: Okay. Thank you.

Operator: Your next question comes from the line of Andrew Didora with Bank of America. Your line is open.

Andrew Didora: Hi. Good morning everyone. John, just on costs, nice work on 2Q unit costs, and they were certainly better than we were thinking even with all the accruals. But I think about the back half of the year, any puts and takes on the quarter, just can you give us a sense of which quarter in the back half could have the highest potential year-over-year growth and how to think about that?

John Di Bert: Well, I would say for Q3, it will be better than Q2 and Q4 will be better than Q1. So, maybe it will kind of give you a range, but that’s our expectation is we will end the year on a good note relative to where we started the year. And you have a pretty tight range with the year-over-year cost growth. So, obviously, Q3 is going to be our best quarter of the year.

Andrew Didora: Great. Perfect. And then just curious, when you kind of outside of the pilots, where do you see the most pain points or most inflationary pressures still within your P&L? And how do you think about those pain points as you move into 2025? Thank you.

John Di Bert: Thanks. Not much else to say on it. So, yes, I think we talk about pilots though, right. Just can you repeat the question? Oh, you said other than pilot.

Andrew Didora: Outside of the pilots, where do you see the most inflationary pressures and how you think about that going to ‘25?

John Di Bert: Yes. Okay. Well, thank you for that. Okay, because I didn’t have much more to say on the pilots. I have put everything I know that in our guide. So, that’s great. On ‘25, I think on the one hand, I think we are going to continue to leverage any growth we get in capacity to continue to manage the cost structure. I think that we have talked about it earlier this year. I think airport costs are going to continue to be pressure on the airline, and that will be for multiple years to come. There are growth projects and ultimately, those benefit Air Canada. But at the same time, they are going to add to our cost structure. And I mentioned it a little bit earlier, but there was some push out of the legislation. I think that comes back as that firms up maybe later in the year, that will probably be year-over-year pressure with respect to cost as we had anticipated this year that didn’t fully materialize. So, from that point on, I think we are going to continue to put our head down and work on cost discipline and really work on continuing the pressure on the cost structure and leveraging growth as a way to do that.

Andrew Didora: Great. And just to clarify on your – the answer to my first question, when you – on the CASM in the back half, you are talking about absolute not year-over-year growth, correct?

John Di Bert: Correct.

Andrew Didora: Thank you.

John Di Bert: Yes, the 2.5% to 3.5% of the year-over-year number and the rest is really just to give you a sense for how the curve will play out.

Andrew Didora: Great. Thank you, John.

John Di Bert: Thank you.

Operator: Your next question comes from the line of Tom Fitzgerald with TD Cowen. Your line is open.

Tom Fitzgerald: Hi everyone. Thanks very much for the time and thanks for the warm welcome. If we could just – we get a lot of questions about the Canadian consumer into 2025 with the mortgage reset. So, would you just mind walking us through how you see travel demand evolving in Canada next year? And just – I appreciate some of the investor concerns on the interest rate sensitivity, but it also seems like there is a higher floor on demand, just given the immigration flows and then also possibly just from maybe older Asia demographics that are – have a little bit stronger consumer balance sheet. So, I just love to see what you are seeing there, and if you have maybe any indications on the – any read-through from your Aeroplan data? Thanks.

Michael Rousseau: Sure. Good morning Tom. So, in general, demand, we expect demand to be from Canada to be continue to be pretty strong for Q4, for Q3, and we saw demand to and from Canada about plus 5%. And as we observe some of the things that we follow KPIs as we fall into Q4, Q1, leisure demand sentiment, we obviously track the bookings at our counted action to see what kind of sun appetite and those metrics are up year-over-year. And as we look into international demand, Q4, Q1, we continue to see stable indicators. So, no real slowdown observed yet from the Canadian consumer. And again, we are diversified in terms of our customer stream. We have got not just – we are not reliant on just the Canadian consumer. We have various points of sale, U.S. Sixth Freedom and premium customers, etcetera. So, all of that leads us to believe that we are in a stable environment and that we should continue to see some growth from Canada to Canada for next year.

Tom Fitzgerald: Okay. Thanks. That’s really helpful, and that will make sense. And then just any like you guys have obviously had a lot of great progress with Aeroplan membership sign-ups. Is there any just how are you thinking about longer term growth in members and where you want that program to end up? Thanks again for the time.

Michael Rousseau: Hi Tom, it’s welcome aboard. It’s Mike Rousseau. I am going to pass that question to Mark Nasr, who has oversight on Aeroplan, among other things.

Mark Nasr: Sure. Good morning Tom. Thanks for the question. So, when we acquired the program, we were running at about 4.5 million, just under active members, and we have more than doubled the size of the program since then. And that growth is now coming not just from Canada, but from membership base where in the United States and in other geographies. And so we are building out a product portfolio and partnerships that allow us to have relevance increasingly in Canada, but also in other geographies just because of obviously, the limits of the market size of air travelers here.

Operator: Your next question comes from the line of Fadi Chamoun with BMO. Your line is open.

Fadi Chamoun: Okay. Good morning. Thank you. The advances, the liability on the balance sheet, John, we saw flat quarter-over-quarter. I think looking at the 10-year historical average, the typical Q2 to Q1 is up 10%, 11%. I don’t think there was one single year where Q2 was flat versus Q1, except maybe 2020, which was down a little bit. So, I am just wondering, like is this kind of just the context of normalization we are seeing pretty much across the travel demand in the post-COVID here, or how do you think about this liability as we go forward in terms of its contribution to cash flow or lag there?

John Di Bert: I don’t think that they are anything structurally different or fundamentally different. I just think that, yes, I mean we are a little bit of inflection here. So, that may have had a little bit of pressure, but we still have a pretty strong first half of cash generation and working capital is an important part of that. And from a go-forward point of view, we continue to expect that as we have some restoring of capacity and growth, particularly over the next couple of years that, that will continue to track as a positive. And we typically convert a quite high percentage of our EBITDA to cash from operations before CapEx. And we believe that, that’s going to continue to be an important part of our ability to generate cash flows.

Fadi Chamoun: Okay. And my kind of second question is, Michael expressed frustration with the stock, I think shareholders do as well. But there is some uncertainty, obviously, here this year and maybe a bit of a normalization reset in the post-COVID world here. But you are on track to maybe your third best profit EBITDA in the last 20 years, and you have got a strong balance sheet and solid liquidity obviously. Why not take a more opportunistic approach and take some stock buyback potentially off stable to create kind of long-term value on the equity side.

John Di Bert: Yes. I will talk about the direct question. So, of course, Fadi, I think we have indicated that we are focused on creating shareholder value and capital allocation to shareholders and returning value to them is high on the priority list. And we will do that in due course. I think we have managed here in steps, and we will continue to make sure that we carry out our capital allocation strategy to do both, grow and reward shareholders. So, the answer is that, that is on the radar on a high list of priorities.

Fadi Chamoun: Okay. Thank you.

Operator: Your next question comes from the line of Sheila Kahyaoglu of Jefferies. Your line is open.

Sheila Kahyaoglu: Hey. Good morning guys and thank you so much for the warm-up. You gave a lot of great color in the script in terms of yields regionally. Maybe I wanted to ask about Pacific specifically as you redeploy seats into the region, and it remains undersupplied. How do we think about just how you manage PRASM as capacity is restored in the region and how we think about ASM growth there?

Michael Rousseau: Sure. Good morning Sheila, and welcome to the call. So, on the Pacific, again, the comps are very tough. Last year, we had an abnormally high RASM contributed by some other supply and some other issues, but in particular, we expected RASM declines this year. But on aggregate, the yields that we are experiencing in the Pacific, the overall demand situation, supply situation continues to be very favorable. And we are very happy with the margins that we are driving overall in our Pacific routes. And we mentioned in the script, two new routes that we launched this summer with three months lead time to sell, all did exceedingly well, and we see that continuing into Q3, Q4. Too early to say what we see in 2025 because some variables are outside of our control like capacity coming from China. But I think you can expect the Pacific to continue to be relatively robust all the way to the end of the year.

Sheila Kahyaoglu: Got it. Maybe we will follow-up on that. As you continue to add new routes and new capacity, and then maybe just on the trans-border market, if we could talk about that a little bit, given the U.S. mainlines and they are seeing their domestic weakness given oversupply of the lower-cost carriers diluting their pricing in hubs, your transporter results were down 3% on a healthy 7% increase in capacity. So, how do we think about any overcapacity headwind that you might see in the second half of this year in the trans-border market?

Michael Rousseau: Good question. At the moment, we are not seeing the same weakness in the U.S. domestic market because we are relatively shielded by in the sense that we don’t have ultra-low cost carriers operating between Canada and the U.S. So, the environment is still pretty healthy. The distinction I would make on the Canada-U.S. sector is some of our investments are longer term in nature, we are trying to build a sizable and scaled Sixth Freedom network. In the short-term, there might be some yield pressure. But in the long-term, it will deliver significant value to our international networks. And that’s a perspective that we are taking. And again, relatively happy with some of the early results that we are seeing on a lot of the adds that we put into the U.S. market.

Sheila Kahyaoglu: Got it. Thank you.

Operator: Your next question comes from the line of Kevin Chiang with CIBC. Your line is open.

Kevin Chiang: Hi. Good morning. Thanks for taking my questions. Maybe just on the comment around Q4 PRASM stabilizing on a year-over-year basis, is that primarily steps you are taking related to mix as you redeploy capacity in different markets relative to maybe expectations earlier this year, or is that also a function of maybe some of the things you see in the competitive dynamic? I wasn’t sure how to kind of think of what’s driving that stabilization in PRASM as we kind of exit 2024 here?

Mark Galardo: Hi Kevin, it’s Mark. Just on the Q4, the comps become a bit easier. We start to see last year in Q4 some of the yield normalization. So, that’s what makes the compares kind of interesting year-over-year, whereas Q3 where still in this kind of euphoric state. In Q4, we started to notice some of the changing profiles. Now, we are making some changes to our capacity allocation, reducing capacity on the North Atlantic, moving it. India, taking some measured approach on the Pacific, so that’s also leading to some of the stabilization in the RASM that you are seeing.

Kevin Chiang: Okay. That’s helpful. And maybe I will ask, I know there has been a lot of questions on this call around costs. Maybe I will ask it a different way. If I look at your non-fuel, non-labor costs growth in the first half of this year and in Q2, it’s essentially tracked your capacity growth, which would suggest you have seen more manageable unit cost inflation in those non-fuel, non-labor costs. Just wondering as you think through the rest of ‘24 and into ‘25, is that kind of the right way to think about those cost buckets and really fuel and labor, maybe APPR, those are kind of the swing factors as we think about where CASM goes from here?

John Di Bert: Yes, I think so. I think that’s – I think that’s a fair comment.

Kevin Chiang: Okay. Perfect. Thank you.

John Di Bert: Thank you.

Operator: Your next question comes from the line of Jamie Baker with JPMorgan. Your line is open.

Jamie Baker: Hey. Good morning everybody. Most of my questions have been answered, but I do have one. So, as you track the individual flight behavior of your frequent flyers, is there any evidence of any sort of I don’t know, like a pivot from premium back to non-premium. I mean I guess another way to ask is when you look at the growth in premium that you spoke to before, is it largely driven by existing passengers, or is there still a measurable phenomenon where non-premium passengers are trading up? Any color on consumer behavior vis-à-vis premium would be helpful. Thanks.

Michael Rousseau: Sure, Jamie, on the premium side, a lot of the trends that you have been seeing over the last year are continuing into Q3 and Q4. We don’t see at this time very much trading down, if you will. But we do see in the economy cabin, there is more pressure there from leisure price-sensitive customers. But the premium demand and yield environment is still pretty stable and strong going into Q3 and beyond, so don’t see that as of now.

Jamie Baker: Okay. Helpful. Thank you very much.

Operator: This concludes the question-and-answer session. I will turn the call to Valerie Durand for closing remarks.

Valerie Durand: Thank you very much for your attention and great questions today. Once again, should you have any further questions do not hesitate to contact us at Investor Relations. [Foreign Language]

Operator: This concludes today’s conference call. We thank you for joining. You may now disconnect.

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