Photo credit: Air Canada is converting its cargo preighters back to passenger configurations as flyers return. Air Canada
Air Canada expects traffic and revenues to start matching 2019 levels by the first or second quarter of next year, with the full recovery now forecast for 2024, a sharp contrast from its peers in the U.S., which are increasingly bullish about the second half of this year.
Canada’s emergence from the pandemic has been slower than in the U.S., Air Canada Chief Commercial Officer Lucie Guillemette told investors on the company’s first-quarter 2022 earnings call on April 26. In particular, the return of what she termed “Corporate Canada” has lagged the resumption of business travel in the U.S. Air Canada’s large corporate accounts still are on the sidelines of the travel recovery, she said. By the second half of this year, Air Canada estimates business traffic in North America as a whole will be 20-30 percent off 2019. Now, systemwide, business travel is half of what it was in 2019.
But within business travel, there are bright spots, Guillemette noted. Small- and medium-sized businesses have been traveling more than their larger corporate counterparts, but these passengers tend to fly economy, in smaller groups, than corporate clients. “Our exposure is manageable given the size of our premium cabins,” she said. Transborder traffic with the U.S. — a key business market for Air Canada — is rising and is forecast to be 90 percent of 2019 levels this summer.
Business travelers may not be sitting in the front of the aircraft, but leisure travelers are. Air Canada’s premium cabins performed better during the depths of the pandemic than economy cabins, and this trend shows no sign of abating. And the premium economy cabin has performed the best of all fare classes across Air Canada’s network, Guillemette said. She did not, however, break out revenue figures for premium economy.
Air Canada expects summer capacity still to be down from 2019. The carrier is planning to operate 20 percent less capacity than it did three years ago systemwide. This, however, is 414 percent more than the carrier flew in the second quarter of last year, when Canadian travel restrictions were among the most stringent in the world. Although North America and transatlantic demand is expected to be strong, the carrier is planning for demand on its Asia network to be depressed through next year. Air Canada is focusing on its strengths for the balance of this year: Transborder and sixth-freedom connections from the U.S. to Europe, Guillemette said.
Another difference between Air Canada and its U.S. peers is that the airline is not suffering from a pilot shortage. Air Canada kept all its pilots on the payroll and current during the pandemic, so it does not foresee any difficulties operating its planned summer schedule. It has seen some shortages of ramp employees, but the carrier said it has the staff it needs for the summer.
Fuel prices could be an issue as the carrier plans to ramp up capacity for the summer. Prices for jet fuel are the most volatile they have been since the 2008 financial crisis, Chief Financial Officer Amos Kazzaz said. The crack spread — the difference between the price of crude oil and distillates, like jet fuel — are higher than they have been in memory. “You can’t hedge crack spreads,” he said. Air Canada, like its peers in the U.S., believes it can pass on the additional fuel costs to passengers.
The carrier is tankering in fuel from central Canada to Ontario and on flights to the East Coast of the U.S. and the Caribbean to avoid higher jet fuel prices in those regions. “We try to be agile and address the issues as much as we could,” Kazzaz said.
Air Canada is betting fleet renewal can help alleviate fuel costs. The carrier took delivery of three Boeing 737-8s in the quarter, bringing its total for the type to 34, and expects to take delivery of six more this year. The carrier also took delivery of one Airbus A220 in the quarter and now has 28 of the type in its fleet. It will take delivery of six more A220s this year.
Air Canada also took delivery of two Boeing 767Fs in the quarter, and they are expected to help fund the carrier’s cargo network expansion into Europe and Atlantic Canada. Cargo has been a bright spot during the pandemic, especially on routes to Asia; however, near-term Asian cargo traffic could take a hit with quarantines in effect in Shanghai and potentially in Beijing, Kazzaz said. But with passenger demand returning, Air Canada is re-converting six Boeing 777-300s and three Airbus A330 preighters back to passenger configurations.
“It was an interesting quarter,” CEO Michael Rousseau said. The first half was marked by the Omicron variant, giving way to the optimism of March. But that optimism couldn’t mask the numbers, which continued to be in the red.
Air Canada reported first-quarter operating revenues of C$3.1 billion ($2.4 billion), or more than 300 percent higher than last year. But it continued to lose money, reporting a pre-tax loss of C$814 million, down sharply from the C$1.4 billion pre-tax loss it reported last year. CASM is expected to remain 13-15 percent higher than in 2019 for the rest of the year, due in part to higher fuel prices, rising labor costs as the carrier recalls employees, and the costs associated with adding new aircraft to its fleet.