Canada Goosed

Gordon Smith and Jay Shabat February 2024 31 min read

Pushing Back: Inside the Issue

Air Canada has just delivered its best year since 2015 and is now one of the region’s most profitable airlines. Will the good times last? We probe this question and others in this week’s feature story.

Elsewhere in this edition, we examine the latest developments in the United States. Most major airlines—American and Spirit were notable exceptions—delivered investor presentations last week, in most cases expressing optimism about the year ahead.

Demand still looks good, especially to Europe and Asia but also domestically. Premium demand is still hot. Fuel prices are at manageable levels. And overcapacity pressures in markets like Las Vegas, Florida, and the Caribbean seem to be easing. One hot question across the U.S. airline industry now: Are the struggles of low-cost carriers a new reality, or just a momentary state of affairs?

In the earnings arena, Singapore Airlines produced another set of strong financial results, albeit with some cautionary statements about emerging trends. Korean Air’s extraordinary run of super-sized profits is fading, on the eve of its planned merger with Asiana. Down Under, Qantas continues to thrive. But across the Tasman, conditions are getting difficult for Air New Zealand. Back in Australia, meanwhile, Virgin Australia’s chief will step down before the airline’s planned (but long-delayed) public share offering. 

Meanwhile, Thai Airways made the biggest splash at the Singapore Airshow. American raised bag fees and will deny mileage benefits on bookings made through non-preferred travel agencies, in line with the carrier’s risky direct distribution strategy. The Canadian LCC Lynx will be no more. SpiceJet’s chairman appears to be on the verge of buying idled GoFirst. Even by aviation industry standards, it sure feels like a busy time.

A few airlines reported results late in the week. Latam posted a strong 11% operating margin for the fourth quarter. Thai Airways, the most profitable airline in the world in the 12 months through September (see last week’s issue), continued its incredible streak with a jaw-dropping 26% operating margin from October to December.

FlyDubai, which doesn’t officially report, said in a press release that it earned a $527m net profit on about $3b in revenues for all of 2023, which equates to a 19% margin. More on these carriers in next week’s edition. Also next week: coverage of earnings from European giants Air France-KLM and IAG. Buckle up for another busy one!

Airline Weekly Lounge Podcast

In this special episode, Skift Editor-in-Chief Sarah Kopit is joined by Airlines Editor Gordon Smith and Airline Weekly Senior Analyst Jay Shabat, to discuss some of Skift’s most “problematic” Megatrends. They cover the continuing supply chain issues faced by the aviation sector and the impacts of the burgeoning climate crisis on the business of travel. 

Listen to the episode here, and find a full archive of the Lounge here.

Weekly Skies

Crazy Rich Airline

  • The ASEAN region is home to some of the best-performing airlines financially during the current post-pandemic travel recovery. Several are carriers with a legacy of heavy losses and major structural deficiencies, now benefiting from drastic cost-cutting and downsizing—think Thai Airways, Malaysia Airlines, and Philippine Airlines. Then there’s Singapore Airlines, with a long record of financial excellence, tainted somewhat by lukewarm profit margins during the 2010s. But it too is now producing some of its best margins ever, thanks to cost-cutting yes, but more importantly a global boom in precisely the market where it stands out: premium intercontinental. Singapore thus finished 2023 with a fantastic 15% operating margin. In just the final quarter of the calendar year, operating margin slipped to 12%, which was down from 16% a year earlier—one reason is that cargo markets have cooled a lot. Still, 12% beats the 10% it earned in Q4, 2019.
  • Singapore said passenger demand was and remains robust, with forward bookings healthy. But it also said, “Yields are under pressure as capacity is restored.” It cautioned too about geopolitical tensions, supply chain constraints, inflation, and other industry-wide concerns. On that slightly gloomy note, also keep in mind that according to the Institute of International Finance, total world debt (including governments, households, and companies) is now at a record $313 trillion(!)
  • Strategically, Singapore Airlines is placing a big bet on India. It will hold 25% of the newly privatized Air India, which is in the process of merging with Vistara (AirAsia India and Air India Express are also in the mix). India’s airline market is growing rapidly, with no other homegrown carriers currently chasing intercontinental markets in the same way. On the other hand, India’s intercontinental markets are awash with tough foreign competition led by Emirates and other Gulf carriers. IndiGo, meanwhile, an extremely tough competitor on short-haul routes, might eventually enter the long-haul arena.
  • To battle low-cost carriers, of which there are many now throughout East Asia, Singapore Airlines operates Scoot. It will soon add E190 E2s for flying within the region. Scoot is gradually rebuilding its China network as demand recovers. At Singapore Airlines mainline, 31 B777-9s are on firm order.
  • Also at the Singapore Airlines mainline, a new route to London Gatwick will soon launch. Singapore-London Heathrow, for the record, is currently the airline’s busiest route measured by total ASK capacity. According to Cirium Diio schedule data for the trailing 12 months, the airline’s largest country markets by ASKs (including Scoot) are Australia, the U.S., Japan, the U.K., India, China, and Indonesia.
  • Note that Singapore Airlines does not deliver an investor presentation during calendar fourth quarters—it does so just twice a year, after calendar Q1 and Q3. In its Q3 call in November, management spoke about investing in industry-leading products and services, advancing environmental sustainability, growing its KrisFlyer loyalty program (it has about 8m members), and developing partnerships with other airlines, including many of its nearby ASEAN rivals (major partners include All Nippon, United, Lufthansa, SAS, Virgin Australia, Air New Zealand, Garuda, Vietnam Airlines, Thai Airways, and Malaysia Airlines).

Old King Seoul 

  • It was bound to come down eventually. Korean Air’s remarkable profitability, after many years of mediocre margins, returned to earth last quarter. The airline’s Q4 operating margin fell below 5%, from 14% in the same quarter a year earlier. Still, this beat the slightly lower margin it posted in the same quarter of 2019.
  • Korean Air’s result for all of 2023 was strong, ending with an 11% operating margin. In 2022, its margin reached an uncanny 22%. And even in 2020 and 2021, Korean Air earned exceptionally high margins. Was there no Covid in Korea? Of course there was. The reason for its success? Its large cargo business, which boomed during the crisis. Last year, cargo revenues dropped 29% from 2022. But yields remained above where they were in 2019. And more importantly, passenger demand came roaring back.
  • Long-haul demand has been strong, along with premium. North America is a crucial market for Korean Air, which partners closely with Delta within the SkyTeam alliance. Korean’s passenger capacity is still about 20% below where it was in 2019, in part because the China market hasn’t fully recovered. But with North America-to-China nonstop frequencies way down, Korean has been able to capture demand between the two markets via Seoul Incheon. It’s also been busy flying North Americans to the ASEAN region (e.g. Vietnam, Singapore, Philippines) via Incheon. Outbound tourism to Korea is rising, especially to Japan where the weak Yen makes vacations there more affordable. Management also notes strong demand among Europeans traveling to various points in Asia via Incheon.  
  • For Korean Air, the biggest development of all is its pending merger with long-time arch-rival Asiana Airlines. The deal was just approved by European Union regulators, which followed approval by Japanese regulators. All that’s left is U.S. approval. The E.U. did apply two important conditions though: 1) it must sell Asiana’s cargo business and 2) it must allow another Korean airline to compete on routes to Europe—enter the low-cost carrier T’way Air, with plans to serve Paris, Rome, Barcelona, and Frankfurt (see last week’s edition). Korean Air also faces homegrown long-haul competition from Air Premia. And closer to home, it competes with Korean LCCs like Jeju Air.
  • If and when the merger is complete, the newly enlarged Korean Air will sport considerable market power. But it will have areas of weakness to address as well, like heavy debt and fleet complexity. On the latter point, Korean Air has a history of ordering just about everything Boeing and Airbus put in front of it—this is partly because Korean’s aerospace subsidiary is an important Boeing and Airbus supplier. A report from Bloomberg suggests that it might rid itself of A220s, which would help a bit with fleet simplification. Its passenger fleet also includes Maxs, Neos, A380s, B747s, B777s, B787s, and A330s. One conspicuous plane it hasn’t yet ordered, however: Boeing’s new B777X.

This Kangaroo is Hopping

  • It’s a new era for Australia’s Qantas, following the long tenure of CEO Alan Joyce. Vanessa Hudson is now in charge, focused first on improving complaints about customer service and operational reliability. “I hope many of you have started to see how things are changing. We’re improving our on-time performance. We’ve invested in our customer product. We’ve hired and trained more people in our call centers, and we continue to improve the digital experience for our customers. And the early results are extremely encouraging.”
  • Hudson was speaking during the airline’s half-year earnings call covering the July-to-December period of 2023. Qantas did well as it usually does, earning a 12% operating margin. The superstar area of the company was again the airline’s mainline domestic operation, which earned a 17% operating margin.
  • Qantas has for many years outperformed rival Virgin Australia at home. And apparently, the arrival of Rex in the so-called triangle market (Sydney-Melbourne-Brisbane) hasn’t been too disruptive. Management did note however that same-day out-and-back triangle business travel hasn’t yet returned to pre-Covid levels. Mainline Qantas international earned a 7% operating margin. Jetstar’s figure was 13%. The group also runs a highly profitable loyalty program that produced a 21% margin (here again if needed, is evidence of how lucrative such plans can be).
  • Australia’s many natural resource companies (think mining) drove strong demand for domestic business travel. Leisure demand saw some shift to international markets. Jetstar is benefitting from new A321neos; all Jetstar units are now profitable including Jetstar Japan which was the last to recover. In the mainline international business, the key Los Angeles market has seen a lot of new capacity. But having American as a joint venture partner is helpful. And to Europe, “Perth-London continues to perform incredibly well. It continues to perform actually as the best across the network… Perth-Paris is doing incredibly well in the early phases as well.” That’s a prelude, remember, to Project Sunrise routes connecting Australia’s east coast nonstop to London and New York. 
  • All of that said, cost inflation is a concern. But Hudson and her team are confident they can counter with offsetting efficiencies, most importantly those expected from new airplanes like A220s, more A321neos (including XLRs), and A350-1000s. You’ll be shocked to learn that the A350s won’t be delivered on time, meaning Sunrise flights can’t start until 2026 at the earliest. Are ANY airplanes delivered on time these days? 
  • Looking ahead, Qantas sees second-half travel demand remaining strong “across the portfolio.” But it does “expect the group RASK to continue to moderate.”

Less Hop Across the Tasman

  • Things are a bit more troubled at Air New Zealand. The company reported just a 5% operating margin for the second half of 2023, not terrible but hardly inspiring. The airline, among other things, is a GTF victim—in other words, its business faces severe disruptions from having A321neos out of service due to problems with its Pratt geared turbofan engines. “We’ll see up to five of our newest and most efficient A321neo jets out of service at any one time across the next 18 months at least.” At the same time, B787s aren’t arriving on time (ugh), forcing management to sign short-term leases for B777s.
  • But aircraft problems are hardly the only issues at play. Earlier in the year, ANZ enjoyed “pent-up levels of demand in a capacity-constrained environment [that] drove a very strong performance.” In September however, it started flagging “early signs of softness in demand.” And now, it’s seeing domestic demand among corporate and government travelers track below last year. Intra-NZ yields are thus declining, prompting capacity cuts and attempts to hike fares. “We are cognizant that the leisure traveler is more price sensitive, and this will further impact demand somewhat, but we’ll manage this carefully and adjust as necessary.”
  • It’s not just domestic. Overall, based on forward bookings, “we expect continued yield pressure, particularly into the [fiscal] fourth quarter [April-to-June], which is our traditional low season.” This will be most evident on long-haul international, where the U.S. market is flooded with new capacity U.S. carriers, which ANZ moans, are “offering what we believe to be unsustainably low fares.” Premium demand on U.S. routes is fine, but economy is rough. Trans-Tasman links to Australia also face capacity pressures.
  • On the other hand, Pacific Island tourist markets are performing well. Same for outbound travel to Japan, Hong Kong, and Singapore. “And in the past six months, we’ve seen tremendous traffic from India coming to New Zealand via [Singapore]. ANZ intends to eventually start nonstop flights to India, but the market isn’t quite ready yet. China is “coming back” though constrained by visa issues.
  • But the good news seems to be the exception. Here’s an overall summation of how ANZ currently feels: “A number of continuing economic and operational conditions have deteriorated and are now expected to have a significant adverse impact on performance in the second half (January to June). These include the impact of additional competition on forward revenue performance, ongoing weakness in the domestic corporate and government demand, temporary cost headwinds… to alleviate customer impacts, and operational pressures as well as ongoing cost inflation.” Oh yeah, and cargo is weak too.
  • One side-note of interest: When the B737 Max 9 was temporarily grounded last month, ANZ said its “contact center was flooded with calls from customers with questions about their itineraries—even though we don’t operate that aircraft type.”

— Jay Shabat 

Fleet

Highlights from the Singapore Airshow

  • As it telegraphed clearly in advance, Thai Airways stole the show—the Singapore Airshow—with a big Boeing widebody order. The suddenly thriving airline ordered 45 GE-powered B787s, with flexibility to take different variants—Boeing produces the Dreamliner in three versions: the -8, the -9, and the -10. The 45 planes will arrive over the span of ten years, operating alongside the A350s that Thai is also taking.
  • At least as interestingly, Thai also “secured a pathway” to acquire B777-Xs. That’s Boeing’s updated B777 which frankly hasn’t been selling too well. What exactly “secured a pathway” means is not immediately clear.
  • Also at the Singapore Airshow, Royal Brunei ordered four B787-9s. It currently operates -8s, which are roughly 20% smaller in terms of seat capacity. The -9 is not only larger but can also fly farther (very few airlines order -8s anymore). The -10, for the record, is larger still but with less range.
  • Airbus won a modest Singapore Airshow order from Starlux, the ambitious Taiwanese airline challenging EVA Air and China Airlines. Starlux is acquiring another three A330neos, as well as a lone A350-freighter.
  • If Airbus and Boeing are having so much difficulty supplying the market with jet aircraft, does China’s Comac have a golden opportunity to enter the market? For now, its products aren’t nearly as advanced or economically efficient. But it continues to chalk up orders from captive domestic customers, including Tibet Airlines which finalized an order for 40 C919s at the Singapore Airshow; it’s buying ten regional ARJ21s as well. Keep one important thing in mind about Comac though, as analyst Richard Aboulafia astutely noted on the Bloomberg OddLots podcast last week: “These are not really Chinese aircraft. They’re western systems and engines and avionics all assembled with Chinese aluminum over them.”

Breeze Orders More A220s

  • It hasn’t really made the impact that founder David Neeleman hoped it would. At least not yet. But Breeze Airways continues to invest, announcing orders last week for another ten A220-300s. It’s now ordered 90, with 20 currently in service. By the end of this year, all its planes will be A220s.

— Jay Shabat 

Conference Commentary

Highlights from Citi’s 2024 Global Industrial Tech and Mobility Conference, and Barclays 41st Annual Industrial Select Conference

United in Optimism

  • During any opportunity to speak in public, United’s executives are quick to affirm their view of a new world order, one in which low-cost carriers are inherently disadvantaged. CFO Michael Leskinen (at the Citi event) stressed this point again last week, stating confidently: “The low-cost carriers are formerly low-cost carriers.” They previously had a big labor cost advantage, he explains, “and that really was the biggest advantage.” But now, with capacity growth coming down, keeping labor costs low by constantly adding lower-paid new hires is no longer possible. “Wages have gone up for everybody, but they’ve gone up for the low-cost carriers more.” 
  • Carriers like United, meanwhile, have established a revenue advantage by de-commoditizing their product. “So, what you’ve seen is a complete inversion in the margin structure of the industry where previously the low-cost carriers had margins that were 2x the legacy carriers. That has flipped. In fact, it’s more than flipped right now because most of them are losing money right now. And so, they face some very tough choices.” Leskinken added, “United and our major competitor in Atlanta, we’re taking a very differentiated approach in de-commoditizing this business and giving customers choice. If they want to be in a first-class cabin, they want to be in a premium economy cabin, if they want to have a window seat, we’re going to give a broad menu of options so that… different customers can choose different levels of service.” 
  • Notice how he referred to Delta there but not American, whose margins have lagged. He went on to discuss United’s frustrations with Boeing, and how B737-Max deliveries are disrupting a central tenet of the airline’s business plan—and a central means by which it aims to alleviate unit cost pressure. United will adjust its plan to use more Max 9s and A321neos rather than Max-10s, which aren’t yet FAA-certified. He again teased an upcoming announcement on Mileage Plus, one that should “help the capital markets recognize [its] value… Stay tuned for our May 1 Investor Day.” He said United won’t have a standalone cargo business like its partner Air Canada. Nor will it buy an oil refinery like its rival Delta.

A New Normal for Delta?

  • Delta’s President Glen Hauenstein, speaking at the Barclays event, agreed with United that “there is something different” about the airline industry now. The trick, he said, is finding ways to generate more revenue, given the post-pandemic inflationary challenges that make success through cost advantages difficult.
  • Much more so than in the past, airlines such as Delta are today equipped to sell premium products and services to people who want them. “The profitability of the industry has generally been led by the LCCs and ULCCs. And this time, it’s quite different. The profitability of the industry is being led by the legacy carriers.” There’s no question that the Big Three benefited from extremely strong demand on overseas routes. But Hauenstein says this year is looking even better. “The one I’m really excited about for this year is the Pacific,” especially Japan where the weak Yen is fueling American tourism; the Seoul Incheon hub operated jointly with Korean Air is also underpinning Asian strength. Demand overall is “incredibly strong” yet still trailing its historic correlation with GDP. 
  • Retiree travel should be a further engine of demand, especially to places like Europe. Hauentein talked about “incredible” early results from Delta’s joint venture with Latam (Latin and Caribbean beach markets, however, are currently beset by overcapacity). Delta in the meantime is working to optimize its aircraft cabins with a bias toward more premium seats. Hauenstein said SkyMiles credit card signups are “incredibly strong,” supporting Delta’s ultra-lucrative relationship with American Express. The airline shared $1.4b of its profits with employees earlier this month. Paying down debt is a priority. Fuel prices are always a wild card. But Hauenstein feels optimistic. “I think that this can be a great year.”

Banishing the Blues

  • Meanwhile, at the Citi event, JetBlue executives stated clearly that the airline’s “number one priority is getting this business back to sustained profitability.” How so? For one, it wants to “double-down” on “coveted geography” where capacity is constrained, namely New York and Boston (New York by the way, has lagged in recovery but more recently has started to improve). 
  • JetBlue will continue to focus on the leisure traveler, making changes and adjustments to the network as needed. As discussed in its Q4 earnings call, the company is targeting $300m in new revenue, two-thirds of which will come from new ancillary products. Currently, its Mint offering is performing well, and its Even More Space seats “very, very well.” It will look for further opportunities to “evolve the product offering to the leisure customer… ensuring that we’re capturing value from customers who are willing to pay a little bit more for an enhanced experience.” 
  • Aside from ancillaries, JetBlue aims to improve its distribution and partnership network—might it join a global alliance like Alaska just did? It seems ready to work more closely with GDSs, OTAs, and CTMs (that’s global distribution systems, online travel agencies, and corporate travel managers). Its loyalty plan, along with its associated credit card partnerships, is certainly a priority. Of course, it hasn’t been able to grow through acquisition, with Uncle Sam having outlawed (barring appeal) its planned takeover of Spirit. That followed Washington’s banishment of its northeastern alliance with American. “We’ve tried very hard over the last few years to gain scale in this industry, and the government has not been our friend, not just once, but twice, which is unfortunate.” 
  • If that weren’t frustrating enough, JetBlue’s exposure to the GTF engine issue is further stifling its growth, which in turn stifles one of its most effective ways of lowering unit costs—growth creates economies of scale. It’s still replacing E190s with A220s though, and “we’ve also been attacking our fixed cost base” while continuing to focus on operational reliability. Overall this year, ASM capacity should grow in the low single digits, with on average 11 aircraft out of service at any point in time, peaking at between 12 and 15 during Q3 (peak season for transcon). The GTF issue, alas, will continue to be a problem in 2025 as well. “It’s really painful to pay such a significant amount of money for these brand new aircraft and then have them sit on the ground.” 
  • JetBlue, separately, deferred some aircraft deliveries to relieve pressure on its balance sheet. For now, demand still looks good, with even some overcapacity pressures in the Caribbean/Latin region now normalizing. Demand is also improving for bookings close to departure, which tend to be higher-yielding. “We’re seeing strength… that have exceeded our expectations compared to recent quarters.” Finally, executives addressed the upcoming changes to the company’s board of directors following an investment by the notorious stockraider Carl Icahn (often blamed for a part in TWA’s demise). Icahn now owns 10% of JetBlue and will join the company this week as an advisor. He’ll control two of 13 board seats as well, starting in May.

Alaska’s Chorus of Questions

  • Alaska at the Citi event, like United, reiterated its disappointment with Boeing. On the other hand, it expressed excitement over its plan to buy Hawaiian Airlines. CFO Shane Tackett reviewed the expected benefits of the deal, including the network gains, the loyalty synergies, and the opportunity to grow cargo revenues. He is confident that Hawaiian’s recent troubles will ease. In fact, it’s already seeing a recovery in tourism from Japan and tourism to Maui (after the fires there). 
  • For Alaska, West Coast business travel continues to recover slowly but surely. Interestingly, Tackett spoke about the changing economics of regional flying, noting the convergence of regional and mainline costs. At smaller airports, he wonders, “Will it make sense to mix in mainline flying with regional flying because the marginal economics are that much closer.” He adds, “My guess is you’ll see lower rates of growth on the regional side of the business than you will on the mainline side of the business.”
  • Alaska, keep in mind, performed well financially in 2023 (operating margin was 8%). And it would’ve done even better if not for a distinct disadvantage: elevated refining spreads for jet fuel on the U.S. West Coast. It’s been paying between roughly 10-30 cents more per gallon for fuel than everyone else. The CFO also said price-sensitive demand is currently growing relatively slowly, following a decade or more of rapid growth. Middle-tier demand is growing roughly on par with economic growth. As for the top end? It’s the hot area of the market. “A lot of people in the middle are also trading up into premium, which is why you’ve seen the carriers who have more premium exposure do not only just relatively better on the margins… but significantly better…. People, once they trade up, tend to not want to trade down on the next trip. They also prefer premium economy or first class again.” 
  • Finally, regarding Alaska’s loyalty plan, “there’s more opportunity for us to get greater levels of penetration in some of our non-core markets.” Tackett, furthermore, is mindful of how United for one used its loyalty program as collateral to borrow money on better terms.  

A Feisty Frontier

  • At the Barclays event, Frontier’s CEO Barry Biffle came out swinging against United and its anti-LCC diatribes. Biffle suggested “$5,000 fares across the Atlantic” might be the real reason why the Uniteds of the world are performing better financially at this moment. These carriers have also experienced much more benign competitive capacity trends. LCCs like Frontier, in contrast, have found themselves locked in bloody fare battles, notably in Florida and Las Vegas. It’s as if, Biffle says, everyone was “opening a Costco, a Walmart, a Sam’s Club, and a Target all on the same block.” It’s not a demand problem—the demand is “fantastic.” It’s an oversupply problem, and one that Frontier is now addressing by reallocating capacity to markets with higher fares. 
  • The big question is can Frontier find new places to make money? It still plans to grow ASMs from 12% to 15% this year. “I wouldn’t worry about the growth. I can guarantee you that we’re finding much better homes for this capacity… We’re moving it into Dallas. We’re moving it into Philadelphia. We’re moving it into Cleveland. We’re moving it into other places that are generally high-fare, underserved markets.” 
  • Frontier is also adding business-friendly and premium economy-like products. It’s adapting its loyalty plan and debuting a new website and app later this year. It’s adopting IATA’s new distribution capability (NDC) standard to improve third-party sales. “We are not going away. We’ll have the lowest cost, and our cost advantage will continue to stay there or widen as we have seen.” 
  • Biffle reminded his audience that as recently as 2023’s second quarter, Frontier earned a solid 8% operating margin (however weak that might be compared to United’s 17% that quarter). Then again, was it truly 8%? Biffle angrily rebuffed criticism of Frontier’s controversial accounting for aircraft sale-leaseback gains, which are added to operating profits. The airline, by the way, also hasn’t yet secured a new pilot contract, which will elevate costs significantly, notwithstanding some productivity gains it’s seeking from ALPA. “We’ve also got to have competitive work rules.”

It’s Always Sunny in Minneapolis

  • There’s only one publicly traded U.S. scheduled airline that earned better margins in 2023 than it did in 2019. It was Sun Country, that assured attendees at the Barclays conference that demand remains strong in early 2024. The airline is unique in so many ways, including its charter and cargo operations. It’s also a rare airline that peaks in Q1; it’s expecting a stunningly strong Q1 operating margin between 17% and 21%. 
  • It said last week that about 55% to 60% of its demand originates in its hometown of Minneapolis. And to underscore its Allegiant-like variable capacity model, it said its March ASMs will likely be 60% greater than its January ASMs. “The beauty of the model and the whole point of it is not to necessarily drive CASM as low as possible through high utilization. It’s to fly when demand is strongest and capture high unit revenues. We’re tight on cost control as well, but it’s not a utilization-focused model. It is a high unit revenue-focused model, and that’s what’s sort of driven the success of the business.” 
  • As for its biggest challenge during the past year, it’s been staffing the airline, notably with pilots. “It’s really been getting people to upgrade into the captain seat.” But it added, “I think we’re largely through that problem. There’s more progress that we need to make, but we are largely able to grow pretty close to where we want to grow at this point.”
  • — Jay Shabat 

Feature Story

Canada Goosed: Air Canada is Now One of North America’s Most Profitable Airlines. Will the Good Times Last? 

Delta? No. United? No. Certainly not American. And you know about the post-pandemic struggles of low-cost carriers like Southwest, JetBlue, Spirit, Frontier, and even Allegiant. None of these airlines—with respect to their operating margins— managed to reproduce in 2023 what they earned in 2019. They all, in other words, are less profitable airlines today. There’s one North American giant, however, that just delivered its best year since 2015.

Air Canada, which reported a 10.9% operating margin in 2015, came within a whisker of matching that in 2023 (10.6%). In 2019, its margin was 8.6%. Keep in mind that 2015 was a golden year for North America’s airlines—their best year in decades—thanks to an oil market crash combined with solid demand. Something is clearly going very right for Air Canada, which begs the question: Why?

Start with strong intercontinental and premium demand, the twin superstar sectors of 2023. Air Canada—no surprise given what other global airlines are saying—said in its Q4 earnings call that “international markets, notably Atlantic and Pacific, performed very well in the quarter.” It added: “Revenue from our premium cabins performed well.” 

With its relatively small home market, Air Canada is a much more internationally-oriented airline than its U.S. peers. It’s a more intercontinentally-oriented carrier too, which excludes short-haul routes to the U.S. and upper Latin America. According to Cirium Diio schedule data for the upcoming second quarter, a full 22% of Air Canada’s seats for sale are on flights of 3,000 miles or greater (roughly speaking, 3,000 miles is like Montreal-Dublin). Interestingly, just 6% of American’s seats are 3,000-plus miles, which perhaps explains some of its post-pandemic financial lassitude. The figure for thriving Dela is 8%. United’s figure is 12%.

Star Partners

Speaking of United, the airline is closely allied with Air Canada. The two have long cooperated as joint venture partners on transatlantic journeys, alongside Lufthansa. They’ve more recently operated a revenue-sharing joint venture on transborder U.S.-Canada routes as well. As Air Canada’s revenue chief Mark Gallardo remarked, “We witnessed stronger-than-anticipated results of our joint business arrangement on transborder, with multiple new routes and enhanced services to many Canadian cities.” 

In the meantime, Air Canada continues to harvest more and more intercontinental expansion from its long-held sixth-freedom strategy, whereby its hubs (primarily Toronto, Montreal, and Vancouver) are positioned as global gateways to and from the U.S. Quebec’s natural ties to French-speaking markets across Europe, Africa, and the Middle East likewise yield a perpetual fountain of new international route opportunities. So does Canada’s large immigrant population. So do new alliances, including a new one with longtime adversary Emirates. So does the utility and range of its Dreamliners—Air Canada ended 2023 with 30 B787-9s and eight B787-8s, accompanying its older fleet of B777s and A330s. 

Last year, it placed firm orders for 18 B787-10s, a larger but shorter-range version of the Dreamliner (that’s still smaller than its B777-300ERs). The -10s—with a range to handle most of Air Canada’s routes even to Asia—will be ideal for example on markets like Toronto to European leisure spots like Italy in the summer. Barring delay (that’s never an issue!), the airline will get its first -10 late next year.

The Route of the Issue

Air Canada’s route map is already dotted with cities from all corners of the globe: The major capitals and business centers of Europe and northeast Asia of course, but also cities like Sao Paulo, Santiago, Delhi, Dubai, Sydney, Brisbane, Casablanca, Algiers, Cairo, Bangkok, and Auckland; Vancouver-Singapore starts in April. From Montreal to France alone it serves Paris, Toulouse, Nice, and Lyon. 

Give Ottawa a bit of credit for helping Air Canada develop intercontinentally—it’s historically imposed significant barriers to entry for foreign airlines like Emirates, Qatar Airways, and Turkish Airlines. That said, local authorities are becoming more liberal, granting the U.A.E. more flight rights last year for example, and signing an open skies pact with India in 2022. In 2020, Ottawa allowed Turkish Airlines to add a third Canadian city: Vancouver (it previously flew to just Toronto and Montreal).

Air Canada will also seek overseas opportunities with narrowbody A321XLRs; it has 30 on order. The future of its core narrowbody fleet, meanwhile, rests with B737 Max 8s and A220-300s. It’s also planning to deploy electric hybrid aircraft currently under development at Heart Aerospace. It expects these to start arriving in 2028, for use on ultra-short feeder routes.

Going the Long-Haul

But it’s the success of Air Canada’s intercontinental network that’s central to its emergence as one of North America’s most profitable airlines, on par currently with Delta and United. Its investment in premium products has likewise proved a winning bet. It never did manage to buy Transat due to European regulatory resistance—that would have further strengthened its transatlantic muscle. But it did succeed—five years ago—in buying back Aeroplan, its loyalty program. To be clear, Aeroplan is no United Mileage Plus or Delta SkyMiles. It has about 8m members, compared to well in excess of 100m for the large U.S.-based platforms. Still, Aeroplan is a major profit contributor to Air Canada.

The airline has other tools at its disposal, to either boost revenues or restrain costs. It operates Air Canada Vacations. It outsources regional jet flying to Chorus/Jazz. It has a lower-cost operation called Rouge. Paying down Covid-era debt is a top priority. So is improving passenger services and operational reliability. But is 2023 an aberration? Is Air Canada’s success at risk?

Fiscal Fortunes

The airline does have cost concerns. Unlike its U.S. peers, it’s yet to secure a new pilot contract. Note that the company’s Q4 results do include an estimate of what a new pilot contract might cost. That brought its Q4 operating margin to below 2%, far below what even American earned. But don’t dwell too much on that—Air Canada is a hyper-seasonal airline that usually makes more money than its U.S. peers in the summer. Any Q4 profit is a victory and, sure enough, one it was unable to achieve in 2022. Comparing Q4, 2023 with pre-pandemic times, 2019 was a bit better (operating margin was 3%). A new pilot union agreement with Jazz, by the way, took effect in September, just before the start of Q4.

Labor costs aside, Air Canada is also concerned about the costs associated with new regulations governing compensation to passengers for flight disruptions. Rising airport and infrastructure fees will pressure costs as well, though that’s a “mixed blessing” because better infrastructure is certainly in Air Canada’s interests. 

Maintenance costs, in the meantime, are rising industry-wide. An ASM capacity increase of between 6% and 8% will offer some offsetting economies of scale. Over time, the new planes it is getting will further push costs downward. New technology deployment and a more experienced workforce will help with unit costs too. Nevertheless, management expects unit costs (ex-special items) to increase between roughly 3% and 5% this year versus 2023. Note that Air Canada still flies fewer ASMs today than it did in 2019 (about 7% fewer this quarter). A final point on costs: The airline is not currently hedging any of its fuel needs.

Canada’s Crystal Ball

Back on the demand side, the intercontinental and premium booms are masking—for how much longer, nobody knows—the reality of a weak Canadian economy. As U.S. GDP has grown faster than expectations, Canada’s GDP has barely grown at all—big differences include the latter’s greater dependence on commodity exports and greater sensitivity to interest rate hikes (mortgage rates aren’t typically locked in for 30 years as in the U.S.). The weak U.S.-Canadian exchange rate too, is pushing Air Canada to rely more on U.S.-sourced traffic.   

Within the Canadian domestic market, the competitive dynamics are mixed. On one hand, the sector has become more crowded, with low-cost carriers like Flair and Jetlines now competing for traffic, and Porter Airlines growing rapidly with its new E195-E2s. On the other hand, WestJet’s domestic seat capacity is down by roughly a quarter since 2019, mimicking Air Canada’s own domestic contraction. WestJet, meanwhile, closed its lower-cost Swoop operation, merged with Sunwing, and scaled back its overseas Dreamliner network. Porter and Air Transat, furthermore, are now working together. And Lynx, another low-cost carrier, has just announced it is shutting down. 

Back on the international front, Air Canada makes clear that “We still see very strong demand on the transatlantic, in particular for leisure destinations in Southern Europe.” Asia is another area “where we see strength.” There are exceptions, like China for sure and perhaps London (it specified strength in “continental” Europe). In addition, executives highlighted “some pressure on yields in leisure and sun destinations given the increased capacity in those markets.” Cargo is another area that boomed for Air Canada during the pandemic, prompting expansion, but which turned cold in 2023—cargo revenues plummeted 24% from the year prior, on “softness in volume and yield.” It now operates seven cargo-dedicated B767-300ERs, distinguishing itself from the belly-only cargo operations of its U.S. peers. As an aside, Air Canada’s prioritization of cargo—along with its multiple overseas passenger routes well-suited for B777-300ERs—makes it a potential customer for Boeing’s struggling B777-X.

Is Air Canada a potential candidate to replace Delta as North America’s most profitable intercontinental airline? It didn’t quite catch Delta in 2023. But it came close. 

— Jay Shabat