Air Canada

TSX:AC

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to the Air Canada First Quarter 2022 Earnings Call. I would like to turn the meeting over to Ms. Valerie Durand, Head of Investor Relations. Please go ahead, Ms. Durand.

[Valerie Durand, executive]

Thank you, Donna. Hello, [Foreign Language]. Welcome, and thank you for joining us on our first quarter call of 2022. Joining us this morning are Michael Rousseau, our President and Chief Executive Officer; Amos Kazzaz, our Executive Vice President and Chief Financial Officer; Lucie Guillemette, our Executive Vice President and Chief Commercial Officer; and Craig Landry, our Executive Vice President and Chief Operations Officer. On today's call, Mike will begin with a brief overview of the quarter. Lucie will touch upon our revenue, our network performance, Aeroplan and Air Canada Cargo. Amos will provide additional details on our financial performance, fleet and liquidity, and then we will return it to Mike. We will then be available until 9:00 a.m. for questions from equity analysts. And of course, we will remain available for additional questions after the call through our Investor Relations team.

Immediately following the analyst Q&A session, Mr. Kazzaz and Pierre Houle, Vice President and Treasurer, will be available to answer questions from term loan B lenders and holders of Air Canada bonds.

Before we begin, please note that our comments and discussion on today's call may contain forward-looking information about Air Canada's outlook, objectives and strategies, which are based on assumptions and subject to risks and uncertainties. Our actual results could differ materially from any stated expectations. I therefore refer you to our forward-looking statement caution in Air Canada's first quarter news release, which is available on aircanada.com or on SEDAR. I will now turn it over to Mike.

[Michael Rousseau, executive]

[Foreign Language], Valerie. Good morning, everyone. [Foreign Language] Thank you for joining us on our first quarter earnings call today.

I'm pleased to report that we exceeded our internal expectations in key financial metrics like revenue, EBITDA and unrestricted liquidity despite the numerous challenges in Q1. It was an interesting quarter, starting slow due to Omicron and ending on a very positive note with the elimination of several travel restrictions, resulting in March bookings coming in over 90% of March 2019 levels, obviously a very positive leading indicator to a much stronger Q2 and Q3 results. Challenges around inflation, higher fuel prices and the uncertainty arising from the conflict between Russia and Ukraine continue to impact the entire industry. However, our incredibly strong and best-in-class management team is managing the risk profile very effectively. Lucie and Amos will speak to this in greater detail. We are very positive on the rest of the year and continued growth over the next several years.

Throughout the pandemic, we focused on core strengths pivoted to take advantage of new opportunities, continue to invest in the future and performed at a very high level despite some of the more restrictive travel restrictions in the world. For this, I must credit our employees. And together with our entire leadership team, I thank them for their hard work over the last 2 years. As today's results and our improved operating performance show, our teams are now showing the same level of determination, commitment and passion in executing on our recovery strategy. Customers continue to return. Because of the factors I mentioned earlier, traffic was down, but only marginally from the very busy fourth quarter of last year. We anticipate a renewed demand for travel, and we have been restoring capacity. We increased it by 2% from the previous quarter and almost 240% from the first quarter of 2021. This year's first quarter capacity represents about 55% of the first quarter of 2019.

Return of customers is translating into increased revenue. We reported operating revenue of nearly $2.6 billion in the quarter. While down from the previous quarter due to the impact of Omicron, it was up significantly from a year ago when we had revenues of only $729 million.

Our transformed Aeroplan program, Air Canada Cargo and Air Canada Vacations also contributed to revenues, showing the success of our strategy to expand and diversify revenue sources. We also showed cost discipline in the quarter, including from the benefits of our renegotiated maintenance contract and other structural changes we have made.

Our adjusted cost per available seat mile or adjusted CASM declined 6.6% from the fourth quarter of 2021. And we ended the quarter with nearly $10.2 billion in liquidity, almost unchanged from December 31, 2021. Our cash position acts in both a defensive and offensive fashion. Defensively, it helps manage the risk of unexpected events, which we saw was extremely important over the past 2 years.

As we exit the pandemic, more importantly and certainly more exciting, it also allows us to make strategic investments, such as the recent announcement to acquire new Airbus A321XLRs and the 2 new additional Boeing 767 freighters to better position ourselves for the post-pandemic marketplace, while increasing fuel efficiency and our overall cost and margin capabilities.

We held our very successful Investor Day about a month ago where we outlined our strengths, our strategy and financial goals. We are deeply committed to achieving our full potential.

And finally, before I turn the call over to Lucie, I would like to mention that we recently hit a milestone by flying more than 100,000 customers in a single day for the first time in more than 2 years. I thank our customers for their continued loyalty, either when flying with us or trusting us to ship their cargo. We are grateful and thank them for choosing Air Canada. And we look forward to welcoming many more of them back on board. Thank you. Lucie?

[Lucie Guillemette, executive]

Thank you, Mike, and good morning, everyone. I'm pleased to share that this quarter, passenger revenues rose to over $1.9 billion, a nearly fivefold increase compared to the first quarter of 2021. The increase in passenger revenues applies to all cabin categories, especially premium economy, which experienced over 6x the revenue in the first quarter of 2022 when compared to the same period in 2021. At the system level, capacity increased nearly 240%, while traffic increased close to 418%, which translated into 22.8 percentage point increase in passenger load factor.

Passenger revenue per ASM in the first quarter of 2022 increased over 43% when compared to the first quarter of 2021. While we can see positive trends, we are not yet at 2019 levels. When compared to the first quarter of 2019, first quarter 2022 passenger revenues, operating capacity and traffic have experienced a decline of roughly 50%, 45% and 55%, respectively. We are, however, anticipating a turnaround as passenger ticket sales in March 2022 were close to March 2019 levels. In fact, advanced ticket sales as of March 21, '22, of $3.5 billion exceeded by almost $200 million, the March 2019 level. This is notable as it continues to show strong customer demand for Air Canada and a very encouraging sign that the recovery continues to gain momentum. Our operating capacity over the quarter more than tripled from the first quarter of 2021, while significant travel restrictions were in place. This means statement of capacity and traffic growth drove a turnaround in passenger revenues.

All markets are up for the first quarter of 2021, mostly notably the U.S., transborder, Atlantic and Pacific, primarily due to the easing of restrictions when compared to the operating conditions of the first quarter of 2021.

To provide a little more detail, U.S. transborder passenger revenues of $425 million increased $396 million from the first quarter of '21. Atlantic passenger revenues of $464 million increased $377 million from the first quarter of '21. And we saw passenger revenues on the Pacific of $98 million increased $82 million compared to the same quarter of '21. Keep in mind, however, that deployed capacity to the Pacific market remains significantly lower than that of other markets we serve, and this is mainly due to significant travel restrictions in key Asian destinations such as China. We are optimistic that by '23, '24, the Asia Pacific market will rebound as countries progressively open their borders to foreign travel.

The increase was also felt at Air Canada Vacations, where we saw higher volume in ground package sales, which supported the $205 million increase in other revenues from Q1 2021. With the headwinds of the pandemic behind us, I'd like to spend more time on the forward view as we see a favorable and exciting developing trend in our network rebuild and overall booking posture.

Our continued turnaround will be bolstered by the expansion of our network this coming summer as we are relaunching a new service on 4 transborder and 5 domestic routes and restoring 41 North American routes. We plan to operate to 51 Canadian and 46 U.S. airports this summer, offering customers the largest network and the most travel options of any Canadian carrier. With this, we expect to return to 90% of our pre-pandemic North American capacity this summer.

As mentioned at Investor Day, we are in the business of global connectivity. We will feature over 1,000 connecting city pairs from the United States to our international network this summer. This will only grow as we rebuild Asia and launch additional new routes from each of our hubs. Our expanded network also includes 34 international routes relaunching across the Pacific and Atlantic, with the latter expected to reach over 90% of 2019 ASM levels in the second half of this year.

We are pleased with the recovery on the Atlantic this summer, an important market for Air Canada. As we look ahead to our second quarter capacity, we plan to accelerate our recovery and fly roughly 73% of second quarter 2019 ASM capacity. This summer, we will be at nearly 80% of 2019, and we're targeting to be close to full recovery during 2024.

Our strategy of focusing on our hubs and growing their respective global connectivity, focusing on 6 freedom transit traffic to and from the United States and focusing on leisure VFR travelers, will pay dividends. Our advanced bookings are accelerating and continue to meet our expectations.

While the recovery in business market continues to lag the leisure markets, we are seeing signs of an accelerating recovery with steady signs of improvement week over week. We're also very encouraged by indicators of recovery for small and medium businesses and anticipate further rebound post Labor Day and into 2023. Until then, we will continue to focus on creating new products and seizing opportunities to mitigate the associated yield impact. In short, our exposure is manageable given the size of our premium cabins and the real opportunities we have to tap into other points of sales while corporate Canada returns.

While we await the return of corporate traffic, we're seeing more demand for our premium products from leisure customers. In fact, our premium cabin revenue recovery outpaced the economy cabin in the first quarter. We will continue to innovate with our service offering. Our recent agreement with Porsche is a good example.

Porsche Cars Canada will be the exclusive vehicle supplier of luxury hybrid and all-electric vehicles to the Air Canada chauffeur service in Toronto, offered to select signature class customers, connecting to Asia, Europe and South America. We're also expanding the service for the first time to Vancouver. And as well, our Signature Suite dining lounge in Toronto reopened during the quarter, while Vancouver will soon follow.

To support demand generation, we're investing more in retail advertising, led by our Ready to Europe campaign in the first quarter. And also, our holiday ad won bronze at the 2022 CLIO Awards, the world's most recognizable international advertising awards according to TIME Magazine. We are actively ramping up operations and are confident we have the necessary resources to operate our commercial schedule. In addition to this, we are actively working with our partners, the various agencies and airport authorities to make the necessary preparations. We have waited over 2 years for this and so have our customers, and we are prepared to welcome them back.

Now turning to 2 important strategic levers for our future, Aeroplan and Cargo. We're thrilled with Aeroplan's performance over the first quarter of 2022 and saw several KPIs performing at all-time highs. Our transport programs, digital enhancements and everyday partners are proving attractive. In fact, we saw our highest ever new member acquisitions in the first quarter. Air redemption bookings were also at an all-time high, up 19% over the same quarter in 2019.

The program generated gross billing from points sold to third-party partners exceeding Q1 2019 levels by 21%. It is also the first time since the onset of the pandemic that card acquisition volumes exceed pre-pandemic levels for all 3 of our Canadian card issuers. And we hit another record this quarter with the most points transferred into Aeroplan from other credit card programs, showcasing the increasing strength of Aeroplan's U.S. and international business.

The redesigned Aeroplan program continues to enjoy positive reviews from customers, industry experts and the media. Last week, Aeroplan won 2 Freddie Awards, including being recognized for offering the best points redemption ability in the Americas. Our revenue management and loyalty teams have optimized the program to deliver better value to members while also driving a 30% increase in yield on redemption tickets when compared to 2019.

As for Cargo, a high demand for cargo, especially in the Pacific market, combined with our new freighter flying, has led to a strong performance in this area. In the first quarter of '22, Cargo revenues of $398 million increased $117 million or about 42% from the first quarter of '21. Looking ahead, we expect this to soften as we reconvert aircraft back to passenger configuration and receive our new freighter aircraft. The Cargo team is working diligently to prepare for the future freighter deliveries scheduled over the remainder of the year. Amos will speak to you about the changes in this fleet, but just before I turn it over to him, I will quickly go over a few other updates.

Air Canada Cargo has expanded its freighter network to Europe and Atlantic Canada beginning with the start of service to Halifax this month. Service to Frankfurt, Golan, Instanbul and Madrid is expected to begin in May, thanks to addition of a second Boeing 767-300ER freighter.

To build our presence in additional space for cargo bookings, especially from freight forwarders, Air Canada Cargo's capacity is now available on several platforms that allow real-time pricing and e-booking for customers such as web cargo, cargo AI and an expanded presence on Cargo One. This is part of a continued adaptation, digitization and investment by Air Canada Cargo in its commercial strategy during the COVID-19 pandemic.

I also take this opportunity to thank our employees across our company who are giving our recovery efforts their all as we welcome our customers back and aim to rise higher together.

And with that, I will pass it on to Amos.

[Amos Kazzaz, executive]

Thank you, Lucie. [Foreign Language] Good morning, everyone. First, let's take a quick look at the financial overview of the quarter. On a GAAP basis, we recorded operating revenues of $2.573 billion compared to the first quarter operating revenues of $729 million in 2021, an increase of $1.844 billion or about 3.5x. Compared to the first quarter of 2019, operating revenues decreased $1.861 billion or 42% due to the impact of the COVID-19 pandemic. EBITDA, excluding special items of negative $143 million, improved $620 million from the first quarter of 2021. For 2022, we continue to expect an annual EBITDA margin of about 8% to 11%.

Operating expenses for the first quarter were $3.123 billion. The $1.345 billion increase from the first quarter of 2021 can largely be attributed to year-over-year growth in operating capacity as well as to the impact of the increase in jet fuel prices. For 2022, we continue to expect our adjusted CASM to remain about 13% to 15% above 2019 levels.

I will now touch on the more notable year-over-year variances in operating expenses in the first quarter of 2022 compared to the first quarter of 2021. Beginning with fuel, in the first quarter of '22, fuel expense of $750 million increased by $550 million from the first quarter of '21. This is following a 57% increase in jet fuel prices as well as more jet fuel liters used because of the higher volume of flying compared to the first quarter of '21.

Since the beginning of April, we have seen a rapid increase in the price of jet fuel with record crack spreads as market forces have driven jet fuel, in particular, to record highs. We expect this to continue through another month or so and then become more normalized, albeit still high. We believe that much of this increase can be recovered through fares, other revenue optimization tools as well as through our continuing focus on cost reduction initiatives. We now expect the price of jet fuel will average $1.24 per liter for the full year of 2022.

As our recovery continues, restrictions ease and customers fly again, we have been able to call back employees and welcome new colleagues. To illustrate, on a full-time equivalent basis, Air Canada and its subsidiaries had over 27,000 active employees in the first quarter of '22 versus just a little over 16,000 employees in the first quarter of '21. This is the primary reason for the rise of $179 million or 34% from the first quarter of 2021 for wages, salaries and benefits.

Over the quarter, regional airlines expense, excluding fuel and ownership costs, also increased $121 million or 62% from the first quarter of '21. Again, the increase is primarily driven by higher expenses due to higher volume of flying compared to the first quarter of '21 and continues to be partially offset by savings from the consolidation of regional flying.

Aircraft maintenance expense of $26 million decreased by $124 million or 83% from the first quarter of '21, in part, thanks to an amended agreement between Air Canada and a third-party maintenance provider. As a result, a favorable adjustment of $159 million was recorded in aircraft maintenance expense from the adjustment to maintenance accruals and the recognition of future credits that will be available under the amended agreement. This agreement not only provides a significant period cost savings, it rightsizes future costs and gives us more flexibility on future maintenance events and fleet decisions.

Turning to our fleet, early in the pandemic, as a response to surge in demand for air cargo space, we innovated by operating all-cargo flights using passenger aircraft temporarily converted into an all-cargo configuration. 6 of those Boeing 777-300s and 3 Airbus A330s will return to passenger service over the quarter with 1 more of each aircraft type to be converted back to passenger service by year-end.

On the other hand, we have acquired 2 new Boeing 767-300ER freighters that will be added to the fleet this year. These additional freighters are expected to enter service in 2023. We took delivery of 3 MAX 8s over the quarter and now have 34 in the fleet. We purchased these 3 aircraft with cash. We also took delivery of 1 A220, bringing the total to 28 in the fleet. An additional 6 MAX 8s will be introduced as well as 5 A220s, bringing those totals to 40 and 33, respectively, by the end of this year.

We announced we will be introducing 30 Airbus 321XLRs, and we have selected IAE to supply Pratt & Whitney PW1100G-JM engines, spares and related maintenance services. 10 will be purchased and the other 20 will be leased with deliveries expected to begin in the first half of 2024 and concluding in 2027. So there are now 4 aircraft added since our 26 Airbus 321XLR order that was announced last month. We also have purchase rights to acquire an additional 15 of these 321XLRs between 2027 and 2030.

Turning to liquidity, we began the quarter with about $10.4 billion of unrestricted liquidity, which included $950 million in undrawn revolvers. During the quarter, we generated $59 million in free cash flow, an improvement of $1.221 billion when compared to the same period last year, reflecting higher net cash flows from operations and strong advanced ticket sales. We ended the quarter with nearly $10.2 billion in unrestricted liquidity, close to 2021 year-end levels. This is comprised of cash and cash equivalents, short- and long-term investments of $9.212 billion and $950 million available under undrawn credit facilities.

Going forward, we estimate that we will require a minimum unrestricted liquidity balance of $5 billion to support ongoing business operations. This also includes a larger buffer to manage cost risk and unplanned disruptions. Minimum unrestricted liquidity includes funds available under credit facilities.

I will close by thanking our employees for their efforts and dedication. I will now turn the call back over to Mike.

[Michael Rousseau, executive]

Great, and thank you, Amos.

Traffic is returning; the revenues are growing; our networks being restored; and our finances, including our liquidity position, are very strong. Furthermore, we are continuing to invest to build on our highly competitive position we already enjoy in the emerging post-pandemic marketplace.

To maintain and accelerate our momentum, we have begun a new strategic focus to drive continuous improvement called Rise Higher. It's guiding our actions and is part of our strategic decision-making as we move through the recovery and beyond. Rise Higher builds on our corporate priorities, aiming to increase revenue while controlling costs, expanding internationally, engaging employees and delivering superior customer service.

Our announcement of the acquisition of 30 Airbus 321XLRs is a good example of Rise Higher in action with all 4 pillars working in a coordinated fashion. The fuel efficiency of these aircraft will reduce operating costs. And as Lucie said, this long range opens new market opportunities internationally. New aircraft have been welcomed by employees as a signal optimism about our future while providing many additional benefits.

We know customers will love the new aircraft with the state-of-the-art amenities as we have leveraged and conducted several focus groups. This is important because we are putting particular emphasis on the third pillar of Rise Higher, elevating the customer experience. The customer journey is where all priorities converge. This is especially relevant in the ever more competitive world in which we operate where customer service will be a key distinguishing selling point for airlines. We plan to remain a recognized market leader in this respect and elevate our game.

The 321XLR order will also enable us to reduce our carbon footprint. Customers, along with investors, employees and other stakeholders, are holding brands and corporations to greater account on sustainability issues. Air Canada has been a leader in this critically important area and will continue to set the standard because it is our responsibility to do so and we want to set an example for other airlines to follow and join a collective effort.

Air Canada is deeply committed to meeting its ESG goals. For example, despite the pandemic, we carried on with environmental programs and even strengthened them by adopting last year a goal of net-zero emissions by 2050. Through our leadless travel program, we are sourcing sustainable aviation fuel, allowing us to reduce greenhouse gas emissions at the source. And just last week to mark Earth Day, we dedicated sustainable aviation fuel to 4 commercial flights departing from San Francisco to our major hubs in Toronto, Vancouver, Calgary and Montreal.

As part of this, we're also enhancing our disclosure. In addition to our annual systems of World CSR report, in 2022, we will be releasing our first TCFD report to increase reporting of climate-related financial information. And ESG is about more than just the environment. It also includes other contributions that corporations can and must make to the communities they serve. For this reason, we were very proud last week to announce we will be donating 100 million Aeroplan points to help Ukrainians come to Canada. And just yesterday, we also carried a second cargo shipment of humanitarian supplies for Ukraine with over 100 employee volunteers helping assemble the relief packages.

In closing, it is difficult to describe fully the excitement and optimism we're all feeling as we look to our path forward. We continue our recovery with arguably the most solid foundation in Air Canada's existence, made concrete by extraordinary efforts and talents of our employees, who I deeply thank for their loyal dedication and trust.

Through our cost discipline ingrained in our DNA, investments in our fleet, our hubs, global network and loyalty partnerships, our revenue management and other technologies as well as our product and especially our WIN as ONE culture, we are poised to not only exceed but enhance our leadership position on all the key building blocks we have spoken about today.

And with that, I'll turn it back now to Valerie.

[Valerie Durand, executive]

Thank you, Mike, and thank you all for joining us today. [Foreign Language] We are now ready for questions. [Operator Instructions] Over to you, Donna.

[Operator]

[Operator Instructions] And the first question is from Kevin Chiang from CIBC.

[Kevin Chiang, analyst]

Maybe this is for Amos. You talked about the increase in your fuel price assumption and some of the levers you're pulling on and, I guess, pricing is first and foremost. But I guess just wondering how you're thinking about fuel hedging, especially as you look out into the summer and expectations of a continued recovery in demand? And then secondly, just maybe flexibility around your purchasing strategy. We saw jet fuel prices retracting levels earlier this month in New York Harbor. Were you able to adjust your purchasing strategy to help maybe average down your exposure to that market?

[Amos Kazzaz, executive]

Okay. Kevin, thanks for those questions. And certainly, fuel has been something we've continued to watch very, very closely. With respect to hedging, we aren't hedged. And one of the problems in terms of hedging right now is the fuel price escalation is really driven a lot by the crack spreads. The crack spreads are just at the levels we haven't seen historically, and I don't even know how far back you can look to see if actually you've ever seen those sorts of crack spreads. And you can't really -- and you can't hedge crack spreads.

So in effect, there really isn't much we can do in terms of hedging the crack spread. And then the underlying fuel price, whether WTI or Brent hedging, at this point with the volatility in the marketplace, it doesn't make sense. It's not really attractive for us to hedge. That said, our major competitors aren't hedging either. So in an environment where, for the most part, our competitors aren't hedged, the ability to pass on increases in fares and managed through optimization and cost discipline is really sort of what's key on how we're trying to manage through this dislocation of the market pricing.

Then you brought up your other part of the question on New York Harbor exposure. That is something, again, we try to take a couple of actions to mitigate that. First, we try to move some additional fuel into Ontario from the Prairies. So we're successful in doing some of that. We also then tankered as much as we could. So we were carrying additional fuel into various East Coast stations and into the Caribbean, again, to help hedge and deal with the dislocation in New York Harbor pricing. So we try to be agile and address the issues as much as we could. And with that, we're continuing to keep a close eye on it. New York Harbor's pricing has come down. It's got a little bit of ways to go, but we're in -- feeling fairly good position right now.

[Kevin Chiang, analyst]

That's great color. And maybe just a follow-up here. I noticed you're backing out freighter cost in your adjusted CASM. How should I think about that $11 million if you're pulling out in Q1? Is that essentially the incremental costs you're carrying to run a dedicated cargo business versus maybe the cargo business you had prior to the pandemic, which utilized just the belly capacity? I guess the cost seemed a lot lower than I would have imagined with you starting off a dedicated freighter operation.

[Amos Kazzaz, executive]

Yes, it is right now -- it is specifically sort of as we're looking at the dedicated freighter. So it's a small amount right now. And as additional freighters come on, then we'll -- you'll see that number grow a bit.

[Operator]

The next question is from Cameron Doerksen from National Bank Financial.

[Cameron Doerksen, analyst]

Just a question on rising interest rates. I know I guess there's a couple of different potential impacts for Air Canada, so maybe a question for Amos. What is, I guess, an acceleration of interest rate hikes here mean, I guess, for your cash pension payment expectations and also for your interest expense? I mean I think for the most part, your debt is mostly fixed, but I think you do have some variable rate exposure there. So maybe you can just talk about the impact of rising interest rates.

[Amos Kazzaz, executive]

Yes. Cameron, so on interest rates, sort of the effect -- if take a look at pensions, right now, we have a surplus, I think, as reported, about $4.7 billion pension surplus. And interest rates in that environment, in a certain extent, certainly help that surplus, if you will. So no real impact that we see on pensions. And if we look then at the rest of our debt profile, right now, we're -- our fixed to floating is about 73% fixed and 27% floating. So in a rising rate -- interest rate environment, we are really fairly well protected. So that's the color I can offer on that.

[Cameron Doerksen, analyst]

Do you have any, I guess, interest rate swaps on the variable portion? Or is that basically kind of unhedged?

[Amos Kazzaz, executive]

Unhedged. And if you want to look sort of it at a sensitivity on, it was another 1% increase in interest rates on the floating portion of our debt. That's equivalent to about $45 million per year annually.

[Cameron Doerksen, analyst]

Okay. Perfect. And just a quick question just operationally. I mean I see that Pearson Airport is undergoing a runway rehabilitation, I think, on one of the busier runways there. Any concerns, I guess, around the impact on your operations from that this summer?

[Amos Kazzaz, executive]

It's Amos again, Cameron. So no, no impact on the operations. We've been working very closely with GTAA or Pearson folks and NAV Canada with respect to still being able to maintain operational capability on that runway and capacity. So I do not see an impact at all.

[Operator]

The next question is from Walter Spracklin from RBC Capital Markets.

[Walter Spracklin, analyst]

I guess my first question is on business travel trends. I know in your Investor Day, you had indicated -- I know Lucie mentioned 75% to 80% of 2019 levels by 2023 and then kind of back to normal by 2024. Just following up on that, that's a key area of focus. You mentioned that it's recovering. But is there any way for us to track that? Where are you right now as a percentage of 2019 so that we can see how far you are from that and track the ramp-up as we go through the years out to 2023 and '24? In other words, what percentage of total business or total travel would you say a business travel are we at versus 2019 today?

[Lucie Guillemette, executive]

It's Lucie. So first, I would say, right now, we sit at approximately minus 50% of where we would have been at in 2019. And of course, for us, domestic and transporter are the 2 largest services where we have corporate business. And the reason why in my comments earlier, I did show some large signs of optimism here is twofold. If I look at May and June, so if I project a little bit further, we're already seeing ourselves passing the threshold of the minus 40% or so.

And secondly, when we look at indicators of small and medium business travel, so basically, customers who would be flying short durations when there's 1 single passenger on a PNR, for example. And even if we don't have contractual agreements with some of these SMEs, we are seeing that, that traffic is coming back.

So I think for North America, we're going to see steady progress. And I think by the time we reach September and October, we could be in the minus 30%, minus 20% range within North America. International might take a little bit longer. The good thing for us is from an international point of view, because we've also solidified our U.S. schedule, our transborder schedule, it also gives us the opportunity to go and capture some of this corporate demand in the United States, which, of course, has recovered faster than the demand in Canada. But I would say of all segments, we're very excited to see the return it would be in this area because we're definitely seeing signs of recovery.

[Walter Spracklin, analyst]

Okay. That's very encouraging. My follow-up question here is on fuel. And rising fuel prices but maintaining your EBITDA guidance suggested that you're able to pass that on through higher and higher ticket or fare prices. Do you think there's a limit to that? And do you have any indication or any sense of what the -- because I guess, on one hand, you've got some pent-up demand that's making the traveler almost price agnostic. But I guess the concern is how long does that last when the pent-up demand is satisfied. If fuel prices remain high, do you think travelers are going to be willing to pay higher ticket prices after the pent-up demand is satisfied?

[Lucie Guillemette, executive]

There's -- just a couple of comments on that. There's no doubt that as we work to mitigate the incremental cost of fuel here, fare is one thing. And obviously, we continue to do all possible to recover either through base fare or fuel surcharges or even revisiting some of our ancillary revenues. But where the opportunity lies as well for us is to really do our very best to manage the yield here.

So there's no doubt that maybe for some segments of the market, the demand may be more challenged with fares. But there's still opportunities for us to be able to bring in more money here using other levers than just the basic fare increase. There's no doubt that for the very, very price-sensitive markets and also given the competitive environment in Canada, we need to manage that wisely here. But we do have means to be able through better mix, et cetera, to bring incremental revenue in the door to compensate for the escalating cost of fuel.

[Operator]

The next question is from Konark Gupta from Scotiabank.

[Konark Gupta, analyst]

So maybe the first question is on advanced ticket sale liability. I think you guys pointed out, it's above March 2019 levels, looks like it's 5% above. I'm just wondering if your booking curve suggest that passenger revenue could exceed pre-pandemic levels this summer? Or are you seeing bookings more so driven by 2023 demand?

[Lucie Guillemette, executive]

I would like to think that it could exceed 2019 levels, but we're planning to have capacity in the range of minus 20% approximately for this summer. So to reach 2019 levels this summer would not be achievable as a result of that. But perhaps by the time we look at early Q1, maybe Q1 or early Q2 of next year, we could reach that. But we wouldn't reach 2019 levels this summer.

[Konark Gupta, analyst]

Okay. And a quick follow-up on Walter's question on demand elasticity. I just wanted to understand, historically speaking, obviously, we are in very different and unprecedented times here. But historically speaking, at what point have you seen the demand elasticity come into play where you have seen fuel pricing or fuel prices go up steadily or not coming down quite materially and that has impacted demand? So just trying to put some context behind where we can see the elasticity come in this time.

[Michael Rousseau, executive]

It's Mike. Let me try and take that one because it's a very difficult question. Because typically, fuel prices are very volatile in periods of instability. We obviously, as you know, have had relatively stable fuel prices up until the Ukraine crisis. And the last time it was volatile was during the financial crisis of 2008, 2009. And so that whole debate about demand elasticity is very, very difficult to provide color on because we've had a fairly stable environment between those in the last 10 years.

Lucie's group is excellent at putting in place all the levers that you spoke about in the last question and ensuring that we meet our demand objectives. And that's a constant retooling and revamping of our practices. And so Konark, I'm not trying to avoid the question, it's just that it's very difficult to have answer a question where really fuel price has only been volatile in a very unstable environment, which impacts demand in so many other ways, frankly. And I would say the point that was made earlier, we are in a period of pent-up demand right now, and we are very, very cognizant of that. And that's why we're being very prudent on capacity management as we go back into 2019 levels.

[Konark Gupta, analyst]

That makes sense, Mike. And hopefully, the fuel comes down in the next month or so, until you avoid this question then.

[Operator]

The next question is from Justin Church from BMO.

[Justin Church, analyst]

Mr. Rousseau and Air Canada as a whole, a very impressive quarter. As Air Canada may be aware, there is still a barrier with certain individuals that are unable to board on an Air Canada flight and fly domestic or international flights as per vaccination status. As COVID restrictions ease even more, does Air Canada expect even higher ticket sales to positively trend higher as there are currently approximately 6 million Canadians or about unable to board an Air Canada flight as per vaccination policy? Does Air Canada expect the Canadian government to drop these mandates? Can you provide any insights? And/or if when, how will that impact ticket sales going forward?

[Michael Rousseau, executive]

Okay. Thank you for the question. One, we don't think those 2 events are connected regarding higher ticket prices and potentially unvaccinated passengers flying.

As to your question -- second part of the question as to -- the government of Canada is considering this right now, and they're reviewing the situation like most countries are around the world as to mass mandate and vaccine requirements. And -- but again, the government will review that in due course and make a decision. And we'll be asked our opinion at some point in time, and we'll provide that. But again, this is what many countries around the world are doing right now.

[Justin Church, analyst]

Just a quick follow-up question as well. At what point in time, in terms of pricing power, will you flip the switch in terms of the increasing ticket prices? Obviously, Air Canada revenues have tripled, and I'm just curious as to when you will potentially do that?

[Michael Rousseau, executive]

As we spoke about before in some of the earlier questions, pricing is a dynamic situation based on competitive pressures. And so pricing does change all the time, somewhat due to cost inputs, as we spoke about regarding oil prices. But really, it's a function of the competitive environment that we're in. And the rise in revenue is primarily the result of increased traffic.

[Operator]

The next question is from Savi Syth from Raymond James.

[Savanthi Syth, analyst]

Just Lucie, if I might just follow up on the color you provided on business recovery, is that volumes or revenue? I was just kind of curious what you're seeing on the yield front because in the U.S. at least, we're finally seeing kind of business yields up versus 2019.

[Lucie Guillemette, executive]

The numbers that I've provided earlier, that was traffic. But on the yield side, in Canada as well, we are seeing positive yields versus 2019 for returning corporate travel. Maybe not to the same extent as obviously because the demand levels are much higher in the U.S., but definitely, our corporate travel is also a positive yield year-over-year versus 2019.

[Savanthi Syth, analyst]

That's helpful. And then, Amos, I might follow up on the maintenance, the new agreement and the savings there, just $159 million just seems like an adjustment. So how should we think about kind of the benefit going forward from that? And is that different than what you had kind of anticipated as you thought about 2022 CASM acts and beyond?

[Amos Kazzaz, executive]

Savi, thanks for the question. It's really -- for the most part, it helps. It is clearly sort of driven in terms of, took us longer to reach the agreement with the third-party provider. So we had been accruing maintenance expenses going forward based on previous contract rates. And then through the negotiations, we then essentially were able to now recognize the benefits of the new agreements, which then will benefit us, obviously, this quarter and then going forward in ongoing maintenance events.

Relative to maintenance CapEx, no real change in that. So what we had assumed before, I don't remember quite off the top of my head what we had provided, there's really -- there's no material change in that.

[Savanthi Syth, analyst]

So on the unit cost, as you walked us through how that unit -- your expectations for unit costs in 2022 and beyond, is that still pretty consistent then even with this savings?

[Amos Kazzaz, executive]

Yes, that is pretty consistent. We had an idea that was happening, but -- so it is consistent with what we had seen when we had this...

[Operator]

The next question is from Stephen Trent from Citi.

[Stephen Trent, analyst]

I was intrigued by your ESG comments and plans for increased disclosure. When I think about your hiring pilots, mechanics, flight attendants and even managerial positions, are there any kind of long-term guidepost we should think about with respect to the carrier's efforts to onboard women and minorities?

[Michael Rousseau, executive]

We're going to pass this question. It's a great question. Thank you for the question. We're going to pass this question to Arielle, who is our Exec VP of HR, who's leading the charge on the issue that you spoke about.

[Arielle Meloul-Wechsler, executive]

It's a really good question because it's something that we keep an eye on all the time. The fact that the world is changing a little bit and hiring may be a little bit more difficult, it doesn't mean that we're going to put this in any way on the back burner. So we will always continue to have an eye on diversity as we hire, and that shrank by at every level of the company. We are very proudly diverse already. We're very proudly bilingual, which is part of our diversity efforts, and that will continue. So we don't see any of the challenges or the fact that it may be a little bit higher to attract talent as a reason to take a backseat.

[Operator]

The next question is from Andrew Didora from Bank of America.

[Andrew Didora, analyst]

Mike, I guess, clearly here in the U.S., the airlines are having some operational problems due to kind of labor and pilot availability, beginning to see a few issues over in Europe as well. Can you maybe speak to what you're seeing within Canada on the labor front? And are there any limitations that you see to your ability to keep restoring your network at your planned pace because of any kind of labor disruptions? That would be helpful.

[Michael Rousseau, executive]

Great question, Andrew. Short answer is we're not seeing any barriers for us to be able to get back to where we were in 2019 from a capacity perspective. Pilots are not an issue for Air Canada given our number of wide-bodies that we have in the fleet and a very attractive employer to come to. And as you probably remember, we kept all our pilots on payroll through the pandemic and kept them trained. And so that allowed us to recover quicker as the businesses come back.

There's no doubt there are some areas -- the Canadian labor market is tight. And so there are some positions under the wing potentially that are a little bit more difficult to recruit for right now. But again, our operations team led by Craig Landry is spending a lot of time staffing up for the summertime. And we're not seeing any issues in attracting and retaining and training the staff that we need to run this summer.

[Andrew Didora, analyst]

Got it. That's helpful. And then last one from me. So you were able to eke out a little bit of free cash flow in 1Q, with still a really tough environment. Outside of maybe some lumpiness in CapEx going forward, is there any reason to think you cannot generate more consistent positive free cash flow on a quarterly basis from here given what you see in the recovery?

[Amos Kazzaz, executive]

Andrew, it's Amos. As we look at free cash flow, we had our -- in Investor Day, we gave you sort of a view in terms of our long-term cash flow generation here on it. Looking more specifically guidance in the quarters, we aren't really prepared to do that at this point in time given a little bit of volatility. And of course, we have a lot of CapEx investments. One of the things, as you know, that we're doing to begin our deleveraging efforts is basically not take on additional debt.

So as we spoke about the MAXs, we're paying cash for them, we're looking at really spending our cash on investments in aircraft rather than financing them. So I don't want to try to get ahead here and give you sort of a quarterly perspective as we really look at -- as we consider it really over the long term right now. So as soon as we have any more guidance to give on a quarterly basis, we'll introduce that, but for now, not ready to.

[Operator]

The next question is from Chris Murray from ATB Capital Markets.

[Chris Murray, analyst]

Just thinking about Air Canada Vacations and passenger revenues, certainly a good step-up in Q1, maybe not all the way back. But just thinking about how ACV is going to evolve maybe into Q2, Q3, I guess 2 pieces in this. One, as we're probably rotating to more leisure traffic, are we going to see additional package dropping? I'm just trying to understand maybe the advanced ticket bookings. Is there more -- is it fair to think that there's more packages in that advanced ticket number than there would be normally in most years?

[Lucie Guillemette, executive]

It's Lucie. Maybe I'll answer that one. There's no doubt that even when we look at Air Canada Vacations, so advanced bookings for packages, for end of Q3, Q4, well ahead of 2019. And on the ACV front, we have 2 opportunities. One is obviously with the in/out margin with respect to the sale of land packages, which, of course, we do extremely well on the sun -- all of the sun destinations. And for the summer where we do have an opportunity, and I say summer all the way through to end of October, we have an opportunity for Air Canada Vacations as well to sell on to the Air Canada transatlantic network as well. So Air Canada Vacations is ready to be able to grow their performance on some of these transatlantic routes. But there's no doubt when you look at the sun, no concerns there at all. Volumes are solid, margins are solid, things are quite good there.

[Chris Murray, analyst]

Okay. That's helpful. And then just maybe turning to cargo for a second, just looking at that 30% year-over-year number on yield. As yourselves and, I guess, a number of airlines start bringing back belly capacity, how should we think about that trending at least what you're seeing kind of near- to medium-term in terms of into the rest of the year and into next year?

[Michael Rousseau, executive]

Chris, it's Mike. Another good question. It's hard to see where that's going to go. But you would think as belly capacity comes back in, those yields will go back to '19 levels over some period of time. That might be a year or 2 years. It really depends on how quickly the belly capacity comes back into the marketplace. But our expectation or kind of our long-range plan is for yields to come back into '19 levels.

The wild card to some degree is Asia and how fast that comes back and what kind of disruptions they have. As you know, Asia is a fairly strong cargo market, and we've taken full advantage of that. But with obviously total shutdowns of Shanghai and potentially Beijing, it's going to affect some short-term performance on cargo.

[Operator]

The next question is from Tim James from TD Securities.

[Tim James, analyst]

Just want to get in one question, if I could here. The Aeroplan, the redemptions and the billings in the quarter was quite intriguing to becoming quite an impressive result. You called out the strength relative to 2019. I'm just wondering if you could characterize a little bit how much of that you think or maybe you've got data on this was related to changes for the relatively new program? How much of it was related to levers that you can pull? And how much of it was just overall sort of behavior related to the recovery?

[Lucie Guillemette, executive]

It's Lucie. Maybe I'll try and answer that one for you. It's a little bit of each factor that you mentioned. So first of all, from a program point of view, the fact that we now have a much, much better means for customers to access redemption, so when we say customers can access all seats on all aircraft, gives us flexibility in terms of how we build the back end to determine how many miles the customers will actually pay. That, of course, is -- look at it from -- it's almost as if we bought RM into the Aeroplan redemption discipline. That's one thing that's working very well for us.

Number two, we're also seeing a mix in terms of the traffic that we're carrying. I would say, too, from a redemption point of view, in the past, premium redemptions internationally might have been a little bit stifled. It was a fixed rate, fixed grid. And because we have limited premium J-class capacity, we were not able to satisfy customer demand simply because the economics were not there.

With this new model, it allows us to be able to produce more volumes in the premium cabin, which we are seeing, and that's also been very, very positive. And of course, from a behavior point of view, we're very proud of the fact that the program is being recognized by our customers because they appreciate the changes we've brought to the program. So from a behavioral point of view, there's no doubt that we've made redemptions more accessible. And certainly coming out of the pandemic, that's also been helpful.

But when you say these levers that we can control, absolutely they are. And I'll say to you, I think we've only begun to scratch the surface here. There's a lot of opportunity for us with redemption.

[Operator]

And we do have the final question from Jim Baker from JPMorgan.

[Jamie Baker, analyst]

I'll keep it quick. Just on this question of demand elasticity that came up a few times during Q&A, could you just comment on the longer-term relationship between Air Canada revenue or if you prefer Canadian industry revenue to Canadian GDP? It's a popular reconciliation everyone uses here in the States, and it does speak to that elasticity question.

[Michael Rousseau, executive]

James, it's Mike. There have been, in the past, relationships of GDP to industry revenue. And I'm trying to remember what they were like, 1.2:1?

[Amos Kazzaz, executive]

1.2, yes.

[Michael Rousseau, executive]

1.2?

[Amos Kazzaz, executive]

1.2.

[Michael Rousseau, executive]

1.2:1, basically. So I think it's -- I forget what the U.S. is, but I thought it was fairly comparable to the U.S. environment as well.

[Jamie Baker, analyst]

And where do you estimate it to be right now? Which really is my point because here in the U.S., we're so far below what the economy can bear that I think a lot of questions on elasticity are highly misplaced. So I'm just kind of wondering your perspective on that.

[Amos Kazzaz, executive]

We haven't looked at it as to where we are now. But as I said earlier, Jim, we know we're in a pent-up demand environment, and we're very, very -- that's why we're managing the capacity where we are. We'll take obviously full advantage of the opportunity in front of us as we always have, but we're also very cognizant that we'll have to be very agile if things change over the next little while.

[Jamie Baker, analyst]

Perfect. We're not particularly worried in that regard.

[Operator]

And then there are no further questions. I'll turn the call back over to Ms. Durand.

[Valerie Durand, executive]

Thank you, Donna. Thank you again for joining us on our Q1 2022 call today. If you have further questions, please do not hesitate to contact us at the Investor Relation's e-mail address. [Foreign Language] Thank you, and have a nice day.

[Operator]

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.