Monday, 4 November 2019

Air Canada Reports Third Quarter 2019 Results

Air Canada has reported third-quarter 2019 EBITDA(1) (earnings before interest, taxes, depreciation, amortization and impairment) of $1.472 billion compared to third quarter 2018 EBITDA of $1.351 billion, an increase of $121 million or 9 per cent. The airline reported third quarter 2019 operating income of $956 million compared to third quarter 2018 operating income of $923 million. 

Record third quarter operating revenues of $5.553 billion
Operating income of $956 million
EBITDA of $1.472 billion, up 9 per cent over the prior year's third quarter
Record unrestricted liquidity of $7.355 billion and leverage ratio of 0.8
"I am pleased to report an excellent third quarter for Air Canada, in which we generated record operating revenues of close to $5.6 billion and reached record liquidity of nearly $7.4 billion. Impressive as such strong results are on their own, they are even more meaningful given that we achieved them despite the serious disruption to our operations and to our cost structure created by the Boeing 737 MAX grounding. Our record performance is a testament to the resourcefulness, skill and dedication of the entire Air Canada team, and I applaud and thank them for their hard work taking care of our customers since the Boeing 737 MAX grounding occurred," said Calin Rovinescu, President and Chief Executive Officer of Air Canada.




"During the quarter, our airline delivered on key metrics. This included EBITDA of $1.472 billion, an increase of 9 per cent from the previous year, higher operating income, and improved yields. Our leverage ratio(1) was 0.8 at the quarter's end, a decrease of 50 per cent from December 31, 2018. The significant progress we have made on our balance sheet was recognized in the third quarter and, earlier this year, by upgrades from major debt rating agencies, advancing us to one level below our goal of investment grade status.

"Through great effort and teamwork, we have successfully managed through the extremely challenging 737 MAX grounding for nearly eight months now, most recently adjusting our schedule to remove the aircraft until February 14, 2020 and wet leasing two Airbus A330 aircraft to ensure we have sufficient capacity this winter. However, the removal of a scheduled 36 737 MAX aircraft during our peak summer season exacted a toll from a financial, route, product, and human resources perspective and the grounding is preventing us from realizing our full potential," said Mr. Rovinescu.

"I nonetheless remain confident that if regulators unground the aircraft near-term, our on-going transformation will quickly regain its previous trajectory. For this reason, we have chosen at this time not to adjust our long-term financial targets presented at our last Investor Day. Much of my confidence flows from the professionalism our employees have demonstrated throughout this year since the aircraft was grounded, as well as the strong loyalty shown by our customers, and I thank both groups for their commitment to and support of Air Canada.

"As well, we were extremely pleased to see that during the third quarter Transat A.T. shareholders approved the definitive acquisition agreement with Air Canada, by a vote of nearly 95 per cent. This overwhelmingly favourable vote underscores the numerous benefits for all stakeholders from the proposed merger, which now remains subject to applicable regulatory approvals and customary conditions."

Third Quarter Income Statement Highlights

Air Canada began consolidating Aeroplan's financial results on the date of the acquisition of Aeroplan, January 10, 2019. Air Canada adopted accounting standard IFRS 16 - Leases effective January 1, 2019 and restated 2018 amounts (including for period-over-period comparisons).

On a capacity reduction of 2.1 per cent, record third quarter system passenger revenues of $5.164 billion increased $146 million or 2.9 per cent from the same quarter in 2018. The increase in system passenger revenues was driven by a yield improvement of 4.8 per cent, partly offset by a traffic decrease of 1.8 per cent. System yield in the third quarter of 2019 improved due to the constrained capacity resulting from the grounding of the Boeing 737 MAX aircraft as well as a generally improved pricing environment, mainly in North America. The yield increases also included additional revenues from Aeroplan flight redemptions and other revenues subsequent to the Aeroplan acquisition on January 10, 2019. 

In the third quarter of 2019, operating expenses of $4.597 billion increased $105 million or 2 per cent from the third quarter of 2018. Air Canada's cost per available seat mile (CASM) increased 4.5 per cent from the third quarter of 2018. The airline's adjusted CASM(1) increased 9.3 per cent over the same quarter in 2018. These increases reflected, in large part, the impact of the Boeing 737 MAX aircraft grounding which resulted in a system ASM decline of 2.1 per cent versus planned system ASM growth of approximately 3 per cent, in addition to creating higher costs associated with replacement aircraft, and on-going operating expenses, including depreciation and pilot wages, that continued to be incurred in relation to the Boeing 737 MAX aircraft despite their grounding. Given that the Aeroplan loyalty business was not consolidated in Air Canada's financial results in 2018, for a more meaningful comparison of the cost performance of the on-going airline business, Air Canada's adjusted CASM for the third quarter and first nine months of 2019 excludes the operating expenses of Aeroplan.

Air Canada's third quarter EBITDA of $1.472 billion was 9 per cent higher than the third quarter of 2018, and better than the increase of approximately 5 per cent projected in Air Canada's news release dated July 30, 2019. This better than expected EBITDA performance was primarily driven by a lower fuel price per litre than what Air Canada had previously assumed in its guidance.

Third quarter 2019 net income amounted to $636 million or $2.35 per diluted share compared to third quarter 2018 net income of $702 million or $2.55 per diluted share. The third quarter of 2019 included foreign exchange gains of $27 million while the third quarter of 2018 included foreign exchange gains of $145 million. Air Canada reported adjusted net income(1)  of $613 million or $2.27 per diluted share in the third quarter of 2019 compared to adjusted net income of $580 million or $2.10 per diluted share in the third quarter of 2018. 

Financial and Capital Management Highlights

At September 30, 2019, unrestricted liquidity (cash, cash equivalents and short and long-term investments, and undrawn lines of credit) amounted to a record $7.355 billion (September 30, 2018 – $5.309 billion). 

At September 30, 2019, net debt of $2.999 billion decreased $2.215 billion from December 31, 2018, reflecting an increase in cash, cash equivalents and short and long-term investment balances of $1.654 billion and a decrease in long-term debt and lease liabilities of $561 million. At September 30, 2019, Air Canada's leverage ratio was 0.8 versus a ratio of 1.6 at December 31, 2018.

Net cash flows from operating activities of $834 million increased $284 million from the third quarter of 2018. In the third quarter of 2019, free cash flow(1) of $533 million decreased $64 million from the third quarter of 2018. In the third quarter of 2018, Air Canada received proceeds of $293 million from the sale and leaseback of 25 Embraer aircraft while no such proceeds were received in the third quarter of 2019. In the third quarter of 2019, the increase in cash flows from operating activities over the third quarter of 2018 was partly offset by an increase in capital expenditures of $55 million. Excess cash amounted to $2.683 billion at September 30, 2019. Refer to section 6.1 "Liquidity" of Air Canada's Third Quarter 2019 MD&A for additional information on excess cash.

For the 12 months ended September 30, 2019, return on invested capital (ROIC(1)) was 15.5 per cent, significantly higher than Air Canada's weighted average cost of capital of 7.2 per cent.

Highlights
The financial and operating highlights for Air Canada for the periods indicated are as follows:




(Canadian dollars in millions, except where indicated)
Third Quarter
First Nine Months
2019 (1)
2018 (2)
$ Change
2019 (1)
2018 (2)
$ Change
Financial Performance Metrics






Operating revenues
5,553
5,415
138
14,763
13,819
944
Operating income
956
923
33
1,505
1,317
188
Income before income taxes
878
954
(76)
1,603
619
984
Net income
636
702
(66)
1,324
397
927
Adjusted pre-tax income (3)
857
815
42
1,207
968
239
Adjusted net income (3)
613
580
33
870
683
187
Operating margin %
17.2%
17.0%
0.2 pp
10.2%
9.5%
0.7 pp
EBITDA (3)
1,472
1,351
121
2,971
2,594
377
EBITDA margin % (3)
26.5%
24.9%
1.6 pp
20.1%
18.8%
1.3 pp
Unrestricted liquidity (4)
7,355
5,309
2,046
7,355
5,309
2,046
Net cash flows from operating activities
834
550
284
5,035
2,922
2,113
Free cash flow (3)
533
597
(64)
1,649
1,039
610
Net debt (3)
2,999
4,992
(1,993)
2,999
4,992
(1,993)
Return on invested capital ("ROIC") % (2)(3)
15.5%
NM
NM
5.5%
NM
NM
Leverage ratio (2)(3)
0.8
NM
NM
0.8
NM
NM
Diluted earnings per share
$2.35
$2.55
($0.20)
$4.86
$1.44
$3.42
Adjusted earnings per share – diluted (3)
$2.27
$2.10
$0.17
$3.19
$2.47
$0.72
Operating Statistics (5)


% Change


% Change
Revenue passenger miles ("RPM") (millions)
27,954
28,465
(1.8)
72,710
71,559
1.6
Available seat miles ("ASM") (millions)
32,457
33,137
(2.1)
86,383
85,268
1.3
Passenger load factor %
86.1%
85.9%
0.2 pp
84.2%
83.9%
0.2 pp
Passenger revenue per RPM ("Yield") (cents)
18.5
17.6
4.8
18.3
17.4
5.5
Passenger revenue per ASM ("PRASM") (cents)
15.9
15.1
5.1
15.4
14.6
5.8
Operating revenue per ASM (cents)
17.1
16.3
4.7
17.1
16.2
5.5
Operating expense per ASM ("CASM") (cents)
14.2
13.6
4.5
15.4
14.7
4.7
Adjusted CASM (cents) (3)
10.0
9.2
9.3
10.8
10.1
6.4
Average number of full-time equivalent ("FTE") employees (thousands) (6)
33.2
30.2
9.8
32.8
29.7
10.4
Aircraft in operating fleet at period-end
404
409
(1.2)
404
409
(1.2)
Average fleet utilization (hours per day)
11.8
11.6
1.3
10.8
10.6
2.0
Seats dispatched (thousands)
17,780
17,970
(1.1)
49,147
48,615
1.1
Aircraft frequencies (thousands)
148.1
159.5
(7.1)
418.2
441.2
(5.2)
Average stage length (miles) (7)
1,825
1,844
(1.0)
1,758
1,754
0.2
Fuel cost per litre (cents)
74.7
83.0
(10.0)
76.4
79.2
(3.5)
Fuel litres (thousands)
1,633,120
1,652,137
(1.2)
4,364,351
4,304,169
1.4
Revenue passengers carried (thousands) (8)
14,627
14,806
(1.2)
39,495
38,995
1.3


(1)
Air Canada began consolidating Aeroplan Inc.'s ("Aeroplan") financial results on January 10, 2019, the date of its acquisition of Aeroplan.  Refer to section 9 "Accounting Policies" and section 10 "Critical Accounting Estimates and Judgements" of Air Canada's Third Quarter 2019 MD&A for additional information.
(2)
Air Canada adopted accounting standard IFRS 16 - Leases effective January 1, 2019 with restatement of 2018 amounts.  ROIC and leverage ratio as at September 30, 2018 are not meaningful ("NM") as trailing 12 months financial data is used in the calculation of both measures and 2017 amounts have not been restated for the adoption of IFRS 16 - Leases.
(3)
Adjusted pre-tax income (loss), adjusted net income (loss), EBITDA (earnings before interest, taxes, depreciation, amortization and impairment), EBITDA margin, free cash flow, ROIC, leverage ratio, adjusted earnings (loss) per share – diluted and adjusted CASM are each non-GAAP financial measures and net debt is an additional GAAP measure. Refer to section 16 of Air Canada's Third Quarter 2019 MD&A for descriptions of Air Canada's non-GAAP financial measures and additional GAAP measures.
(4)
Unrestricted liquidity refers to the sum of cash, cash equivalents and short and long-term investments, and the amount of available credit under Air Canada's revolving credit facilities. At September 30, 2019, unrestricted liquidity was comprised of cash, cash equivalents and short-term investments of $5,869 million, long-term investments of $492 million and undrawn lines of credit of $994 million. At September 30, 2018, unrestricted liquidity was comprised of cash, cash equivalents and short-term investments of $4,922 million and undrawn lines of credit of $387 million.
(5)
Except for the reference to average number of FTE employees, operating statistics in this table include third party carriers (such as Jazz Aviation LP ("Jazz"), Sky Regional Airlines Inc. ("Sky Regional"), Air Georgian Limited ("Air Georgian") and Exploits Valley Air Services Ltd. ("EVAS")) operating under capacity purchase agreements with Air Canada.
(6)
Reflects FTE employees at Air Canada and its subsidiaries. Excludes FTE employees at third party carriers (such as Jazz, Sky Regional, Air Georgian and EVAS) operating under capacity purchase agreements with Air Canada.
(7)
Average stage length is calculated by dividing the total number of available seat miles by the total number of seats dispatched.
(8)
Revenue passengers are counted on a flight number basis (rather than by journey/itinerary or by leg) which is consistent with the IATA definition of revenue passengers carried.

SOURCE Air Canada


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