Air Canada

TSX:AC

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, and welcome to Air Canada's First Quarter 2024 Results Conference Call.

[Operator Instructions]

As a reminder, this conference call is being recorded. I would now like to turn the call over to Valerie Durand, Head of Investor Relations and Corporate Sustainability at Air Canada. Thank you. Please go ahead.

[Valerie Durand, executive]

Thank you, Julienne. Hello. [Foreign Language] Welcome, and thank you for attending our first quarter call of 2024. Joining us this morning are Michael Rousseau, our President and CEO; Mark Galardo, our Executive Vice President of Revenue and Network Planning; and John Di Bert, our Executive Vice President and CFO.

Other executive team members are with us as well this morning. Mike will begin this call with a brief overview of the quarter. Mark will provide comments on our revenue, network updates and trends and John will speak on our financial performance before turning it back to Mike after which we will take questions from equity analysts.

I remind you that today's comments and discussion may contain forward-looking information about Air Canada's outlook, objectives and strategies that are based on assumptions and subject to risks and uncertainties. Our actual results could materially differ from any stated expectations. Please refer to our forward-looking statements in Air Canada's first quarter's news release available on aircanada.com and on SEDAR plus.

I now would like to turn the call back over to Mike.

[Michael Rousseau, executive]

Great. Thank you, Valerie. Good morning, Boujour, and thank you for joining us. Our first quarter results were solid and largely in line with our internal expectations. They show we performed well from both the financial and operational point of view in a more complex environment. This success reflects upon the quality of our management team and employees, our strategic execution, and the remarkable strength of our brand. For the quarter, we reported operating revenue of more than $5.2 billion, an increase of nearly $340 million from a year ago. Adjusted EBITDA was $453 million, up $42 million from the prior period, and our operating income shifted to a profit of $11 million, up $28 million from the prior year. Our leverage ratio improved to 0.9 at March 31 compared to 1.1 at the end of '23 and 5.1% at the end of '22. Also important in the long term, we continue to reduce gross debt as part of our ongoing commitment to strengthen our balance sheet. Very pleased to see our efforts were recognized by the credit rating agency community and welcome S&P's recent rating upgrade to BB.

At the close of the quarter, our total liquidity was $10 billion. We are confident about our performance for the balance of 2024 and that we will deliver on the full year guidance we provided in February. I take this opportunity to thank all our employees for their hard work this past quarter. Winter is challenging every year, and our employees rose as they always do to the task of safely transporting nearly 11 million customers to their destinations, with care and with class.

More than this, they did so while making meaningful improvements to our operations. Notably, our system-wide on-time arrival rate in the quarter increased a full 13 percentage points from the first quarter of '23. We achieved these and other improvements in operational metrics through careful planning, diligent execution and without regulatory intervention. These achievements are obviously important to our customers and there are also -- they also reflect increased efficiency of our airline, which in turn benefits our shareholders. I also thank our customers for their loyalty in choosing Air Canada. We are committed to continuing to earn this loyalty by making even more improvements to better serve them in the future. Thank you, Merci. Over to you, Mark.

[Mark Galardo, executive]

Thanks, Mike, and good morning, everyone. [Foreign Language] Thanks to all our employees for their commitment and passion in helping us deliver our Q1 results. I'll start with our passenger revenues, which increased 9% year-over-year to over $4.44 billion. We see that as expected, pent-up demand and events travel factors are slowing over time. Therefore, we witnessed the normalization of the yield environment in some markets in the first quarter of 2024 when compared to the same period in 2023. As discussed during our last earnings call, we had forecasted this normalization to occur in our 2024 outlook. I'd like to call out the performance in the domestic and pacific markets. Domestic yields outpaced capacity growth. As to our international network, you will recall, we plan to pivot capacity to the Pacific from the Atlantic in order to capture the tremendous Asia Pacific pent-up demand.

As a result, our Pacific revenues increased nearly 37% year-over-year, delivering yields that were in line with those seen in the first quarter of 2023. This is a great outcome as we saw yield strength even with the increased capacity and a longer average stage length. This speaks to the diversification of our network as we balance with other sectors of our network. Sixth Freedom traffic continued to perform extremely well with double-digit growth in both traffic and revenues year-over-year. Our network is designed to capture this traffic, which helps us even out the traditional seasonality peaks and valleys. Take, for example, the school year changes in the U.S., which now strengthened [indiscernible] with this traffic. We know that Sixth Freedom has some great runway and opportunities ahead, and this is supported by our joint venture with both United Airlines and Lufthansa, which enables each carrier to offer more destinations to customers.

Premium products accounted for 30% of the growth in total passenger revenue. Corporate demand remained steady as we are seeing positive indicators into Q2 for North America which is the bulk of where the traffic is for us. Air Canada Vacations delivered consistently driving higher ground package revenues versus the same period last year.

Now on to cargo. Despite higher volumes, revenues declined $23 million year-over-year due to softer yields. Volumes were in line with our expectations, and recently, we have seen encouraging signs of volume pickup. To adjust to market conditions, we have tempered our future freighter capacity growth and removed 2 planned Boeing 767 freighters from 2024 and 2025, which in aggregate, resulted in a onetime operating expense of $20 million for the quarter.

Our adjusted EBITDA of $453 million includes this onetime charge. Remember that our incoming Boeing 77-10 will have larger cargo capacity, driving our ability to take advantage of global cargo flows through our hubs. Cargo is a good complementary business for us and an important lever to differentiate our revenue streams. As we look to spring and summer, our booking curves indicate healthy demand across the system. It is, however, important to note that 2023 was a particular demand environment in which we experienced strong yields and load factors driven by pent-up demand and challenged capacity. We do not expect to replicate those exact same conditions in the first quarter nor do we expect them going forward. Demand itself is traditionally tied to GDP growth and economic surveys point to expected real GDP growth in the Canadian economy,

Moreover, the travel indicators show overall demand growth at the industry level and continue to show robust market growth for air travel to, from and within Canada versus 2023. Given the normalization that we're seeing, we're encouraged by the overall healthy demand signals and the overall composition of our traffic sources. And as we look into Q2, we see further strengthening of our domestic network versus the same period in 2023. We will continue to pivot capacity in the domestic sector. Our U.S. network is experiencing considerable capacity growth. It is, however, important to consider that this capacity investment is longer term in nature and part of the strategy to increase our share of the Canada U.S. transborder market.

We anticipate that Q2 will show better Sixth Freedom results in 2024 than in 2023, and we continue to believe in the potential of diversifying our international network traffic feed. New routes to Charleston from Toronto and to Austin and St. Louis from Montreal are all showing early promising signs, and we expect these routes to be financially accretive to our overall network. The Sixth Freedom opportunity continues to be an important growth lever to our overall commercial strategy. Internationally, we expect strong demand yields for the Pacific heading into summer.

We've reallocated capacity from Europe to Asia with new routes to Osaka from Toronto and to Seoul from Montreal. We've also launched a new historic service in Singapore from Vancouver. Each of these new routes looks promising this summer and should be performing above expectations. Demand to Japan continues to stand out. With respect to the Atlantic, we continue to see strength in the Mediterranean markets and we've increased capacity at various points in Italy, Greece and Spain, where demand is not only strong from Canada, but also on a 6-year basis. And early signals on our new Madrid-Montreal route also looked quite promising.

Our summer 2024 international capacity is growing by 30% into Asia Pacific and 25% to key leisure destinations in Southern Europe compared to last summer. And that gives our customers a wide variety of exciting options across Europe and Asia for plotting their summer holiday travels along with the choice of 120 destinations in North America. We continue to believe in the promise of international market growth. Canada is the fastest growing G7 economy among OECD countries. This, combined with our Sixth Freedom network, the natural geographic advantage of our 3 international hubs gives us multiple solid growth options globally in the medium- and longer-term horizons.

Turning back to the GDP premise supporting demand growth, we have some catching up to do considering we're still behind 2019 levels of capacity. And when we look at the Sixth Freedom traffic and immigration inflows and outflows, these sources of traffic are resilient and not directly linked to GDP. The different points of sales for this traffic also adds the diversification of our revenue with different currencies. So when you consider this and the fact that our customer base is diverse, meaning that we do not target 1 single type of customer, we remain confident in our unique and highly attractive business model. Thank you, Merci. John, over to you.

[John Di Bert, executive]

Thank you, Mark. Good morning, everyone. [Foreign Language]. I'll start by saying that I'm very pleased with the capital management actions we took in the quarter, which I'll speak to shortly and the continued focus on managing controllable costs, illustrating our ability to convert capacity growth into unit cost efficiency, notwithstanding some natural headwinds. In both cases, our progress demonstrated the continued strengthening of Air Canada's position as it readies for the next chapter of growth as Canada's global network carrier.

Let's get right into some specifics. Q1 delivered year-over-year capacity growth of 11%, while operating expenses grew 6% to $5.2 billion, including the benefits of an 18% decline in jet fuel prices. On a unit cost basis, our adjusted CASM grew 1.6% year-over-year, landing at $0.1476 for Q1 and reflecting improved productivity and the early benefits of scale as we restore capacity. Q1 performance was within our expectations, supports our yearly guidance and represents a solid performance relative to our peers. To better understand the underlying evolution of our costs, let me provide some color on expenses that increased faster than our capacity growth as well as the indicators of offsetting efficiency.

Our labor expense increased 21%, driven by accruals for profit sharing and other wage-related initiatives and by 7% higher FTEs year-over-year. I remind you that this increase includes our accrual for a future pilot agreement. This accrual is based on our best estimates, considering the Canadian market and our desire to continue to be a leading employer of choice for Canadian pilots. IT expenses increased 27% year-over-year. While most of our technology costs are highly correlated to our 11% system capacity and traffic growth, we're also steadily increasing our investments in technology as we focus on modernizing our systems, transforming the way we do business and upgrading our cybersecurity resilience.

While some of the increase is related to the higher recurring license and cloud service costs, we do experience nonrecurring expenses for change management and cutover activities. The modernization of our technology stack will translate into a better airline, more agile and planning our operations, enhanced customer experiences, capable of real-time optimization and more secure for all stakeholders. And of course, our investments will drive cost efficiencies as we grow.

Maintenance expense increased due to a higher level of flying year-over-year and a higher volume of engine maintenance events, which is largely a function of timing, including some summer readiness work that was completed in the quarter. Maintenance costs have also been affected by a higher rate of inflation for parts, components and consumable supplies across the sector. The quarter demonstrated productivity and efficiency gains with FTE growth of 7% and 11% capacity expansion. Our labor productivity improvement should continue as we restore system-wide capacity to pre-pandemic levels and beyond. We expect sequential adjusted CASM improvements through Q2 and Q3, and we remain confident in the annual cost guidance we have issued.

Let's turn to free cash flow. Q1 free cash flow topped just over $1 billion compared to $987 million in the same quarter last year including CapEx spend of $536 million. Cash generation continues to be fueled by solid conversion of earnings to cash flow and seasonally positive working capital.

Fleet additions in Q1 2024 included the delivery of 1 Boeing 787-9 Dreamliner and 3 leased A320s. One freighter entered into service, bringing the total active freighters to 8, a level that we will sustain for the foreseeable future. All said, we are well on our way to generating significant free cash flow for full year 2024. With strong Q1 free cash flow, our balance sheet continues to strengthen and we continue to make progress on the total debt -- on total debt reduction. In the quarter, we significantly reduced our outstanding senior secured indebtedness by almost USD 1.1 billion and increased available undrawn amounts under the revolving facility by USD 375 million. We have cut our net debt by nearly half since the end of the first quarter of 2022. Having achieved our prior objective of below 1.5 net leverage, we will continue to look at gross debt reduction where it is economically favorable. Total liquidity was $10 billion at the end of Q1 2024. We've updated some of our full year assumptions. We now anticipate that the Canadian dollar will trade on average at 1.35 per U.S. dollar and that the price of jet fuel will average CAD 1.3 per liter.

Note that in April, we've decided to hedge roughly 50% of our projected fuel consumption for the second quarter. We remain confident in our ability to deliver on our plans and are reiterating our full year guidance for capacity, adjusted CASM and adjusted EBITDA. As a reminder, we are targeting capacity growth of 6% to 8%, expect our adjusted CASM to increase between 2.5% and 4.5% over 2023 and our yearly adjusted EBITDA to be within $3.7 billion and $4.2 billion. In the coming months, we expect to welcome another 787-9 aircraft, 2 A330-300s and 2 A220s. We remain in a tight capacity environment and are putting in place various measures to secure additional lift. To this end, we are in the process of arranging these agreements for some additional Boeing 737 MAX 8s that would be scheduled for delivery in 2024 and enter into service in 2025 upon the completion of their reconfiguration.

Our fleet commitments for the next few years are detailed in our disclosures. Looking further out into a decade, we believe that we are poised to capture structural growth in our key markets, driven by immigration trends, the continued evolution of our Sixth Freedom franchise, behavior or higher propensity to travel and a growing Canadian population. We remain focused on having the right fleet in the right place to capitalize on our opportunities. As we add capacity to our fleet, you can expect a balance of mixed and leased and owned aircraft additions. As time progresses, we will look to put in place various financing structures as appropriate. Our overarching guidepost will remain a net leverage ratio of approximately 1.5, strong liquidity, consistent free cash flow generation, and a more historically reflective leased versus owned fleet. We are confident that continued solid execution, capitalizing on our strengths and supporting our growth are creating value for all stakeholders. With a full recovery of financial foundation, further evidenced by our credit rating upgrades at S&P and Moody's and with our capacity approaching our prior peak levels. We are now well in position to support investments in growth and consider initiatives to directly reward shareholders.

Thank you, and back to you, Mike.

[Michael Rousseau, executive]

Thank you, John. The strong first quarter performance reporting today shows Air Canada remains on track to deliver strong annual results. Over ambitions far exceed this achievement. We intend to grow our airline profitably, improve our product offering, drive continuous operational efficiency and create greater long-term value for our investors and all stakeholders. And to do so, we will remain disciplined with respect to risk and financial management, ensuring a responsible approach to cost control and capital allocation, so that we have the means to fund our future. Our strong balance sheet will serve as a foundation on which we will continue to grow our airline through investments in our world-class global network and capital allocation strategies. And as we said in previous calls, we do not simply manage quarter-to-quarter.

Instead, we maintain a long-term outlook when making investments and strategic decisions. Our strong improving focus on effective financial management gives us much needed flexibility to plan and ensure that we have the resources to deliver on those long-term plans. A good example is fleet planning. As John alluded to, given today's extended aircraft development, ordering and manufacturing cycles, we must look years ahead when making these decisions. This also requires anticipating changes to technology, market demand and even customer preferences so that we remain ahead of our competitors.

From there, it's a short step to our next priority of expanding our network, make no secret of our determination to reach new frontiers such as the launch last month of our new Vancouver Singapore route. This event was followed shortly by our ambitious summer schedule release, which features other new services already mentioned by Mark. And we see many opportunities ahead. There is also sustained demand for leisure travel from retiring baby boomers, established Gen Xers and millenials and Gen Z cohort eager to explore, all of which are growth segments within Aeroplan as well.

We plan to reach these markets and those fuel by immigration, and we will do so through our own growing network and the networks of our Star Alliance and other -- or other partners such as Emirates, which reach deeply into regions we presently do not serve. Another important layer capturing demand is through our Air Canada vacations. We intend to continue enhancing its products to provide even more compelling leisure travel options, meeting the needs of all customers brings us to our next priority of elevating the customer experience.

We are in the midst of a multiyear program to simplify, enhance and add value to each customer's journey. This includes our ever-improving onboard entertainment system and high-speed in-flight connectivity. Our IFE system has won rave reviews from customers and industry awards including the 2024 Apex Best Entertainment award in North America this past quarter. In March, we further elevated the customer experience with a comprehensive upgrade of our award-winning menus with more than 100 new rotating seasonal recipes, snacks, and new beverages.

Another major driver of customer choice and loyalty is Aeroplan. Our active member base has more than doubled since we relaunched the program in 2020. Revenues from air travel redemptions grew 6% and from the first quarter of '23. Gross billings were up 10% and its growth outpaced the competition with expanded credit card market share. Much of this success is due to the strong partnerships with Marquee Ever D brands.

In January, we celebrated our tenth anniversary with one of our anchor partners, Toronto Dominion Bank, and this longevity speaks to the loyalty of the program to our customers and to our partners. We continue to gain market share with the program and see exciting opportunities ahead. Another important group of customers are that we are innovating to serve better is the freight forwarding community that uses Air Canada cargo. Like ACV and Aeroplan, Air Canada Cargo is an important element of Air Canada's revenue diversification rate. In January, Air Canada Cargo was named a 2024 Cargo Operator of the Year in the 50th Annual ATW Airline Industry Achievement Awards.

We are the first Canadian operator to win the award. In doing so, ATW cited Air Canada Cargo's digital transformation that has created a customer-centric digital environment. Our final priority relates to our people. And because our people enact all other priorities, we know we must lift each other up. Our people are highly motivated and we work hard to support them in their jobs and to ensure we continually attract the best talent. For this reason, we're proud to be among the winners of the 2024 Montreal's Top Employer awards in February. This is the 11th consecutive year we have won this award.

Efforts from around the company accumulated to drive our brand to new heights. Air Canada had the strongest performance improvement on IPSOS most influential brands in Canada rankings released during the quarter, moving from 78 place to 38th place in just 1 year. As citizens of world, our work regarding ESG initiatives continues with strong environmental and social programs, supported by sustained community investments. We remain committed to making strategic decisions and investments that will yield benefits for everyone far into the future. We have the people, the plan and the resources to realize our ambitions. And we fully intend to consistently perform that and meet or exceed the goals we have set for ourselves. And with that, we'd now be pleased to take questions. Over to you, Valerie.

[Valerie Durand, executive]

Thank you, Mike, and thank you all for joining us this morning. [Foreign Language]

We're now ready to take your questions. Should you require further details following this call, our Investor Relations team is available for support. Back to you, Julienne.

[Operator]

[Operator Instructions]

Our first question will come from Savi Syth from Raymond James.

[Savanthi Syth, analyst]

Just I wonder if you could talk a little bit more about the transporter. I know you mentioned making investments there and growing. And it seems like you're seeing a lot of competitive capacity in those markets as well. So I wonder if you could provide just a little bit more color on what you're seeing in those markets and kind of -- and how maybe the competitive capacity is playing out there?

[Mark Galardo, executive]

Sure. Savi, when we look at the transborder market, there's a couple of submarkets in there. You've got the traditional business markets to major metro areas in the U.S. and then you've got also a very strong leisure sun focused elements as well when we look at that market. So on the Canada U.S. sector in terms of transborder, we're definitely growing our capacity increasing the amount of frequency and new routes that we're offering. And like we said, this is more long term in nature, especially as we build up our international network in Sixth Freedom ambitions and we like what we see in terms of our ability to execute, but also drive x revenue. On the leisure side or the Sun market, it has been more competitive this winter. We have seen Canadian carriers move capacity into traditional markets like Florida, Arizona, California, et cetera. And we're that market is a little bit sort of difficult this winter compared to last year, but still demand remains strong, and we're happy with our performance there.

[Savanthi Syth, analyst]

That's helpful. And Mark, maybe I can also allow just what you're seeing on the kind of the business recovery side. Some of the U.S. airlines talked about seeing a step-up in large corporate demand. I'm curious what you're seeing and how it compares either year-over-year or relative to 2019?

[Mark Galardo, executive]

Yes, good question. So in Q1, it was relatively stable. We didn't see a big growth as some of our American peers did. But as we look late into the quarter and into Q2, we're starting to see some very encouraging signals on corporate demand to the tune of almost 10% to 20% greater on a year-over-year basis. And it's a little bit early to spike the ball on that, but we're seeing some very, very strong signals. But it's also the composition of who's traveling and in Q1 and early into Q2, we're starting to see the emergence of the tech sector traveling again, transportation sector, which is a very, very good sign for a rebuild on the corporate demand side.

[Operator]

Our next question comes from Chris Murray from ATB Capital Markets.

[Chris Murray, analyst]

If I can go back maybe a little bit to the comment about maybe putting together capacity constraints and some of the comments around alliances and Star or maybe A-plus-plus, I'm sure you've been looking at this, but is there anything on the regulatory front that could think of or any other opportunities you could see that would maybe create some more capacity for either transborder internationally with some of your partners? Because I think everybody is facing some of the other challenges that you guys are seeing with being able to find a lift at this particular point.

[Mark Galardo, executive]

Timely question, Chris, because we've got a very robust and strong relationship with United. And in fact, United Airlines this summer, they do a lot of flying, a lot of additional service between Canada in the U.S. whether it be to our hub cities or even to secondary cities in Canada, like Winnipeg or in Ottawa, for example. So we've definitely had our JV peers step up and certainly help us on the capacity front. In fact, just last week, United announced a new Montreal San Francisco play that complements our existing service. So we're definitely in coordination with our JVs to make sure that from a JV perspective, we've got the capacity that we need.

[Chris Murray, analyst]

And is there anything -- like I think we've talked about a Pacific JV or something like that. Anything like that on the horizon that you think would [indiscernible].

[Mark Galardo, executive]

We're always looking at what the options are. But for now, we've got a very strong partnership with ANA with our partner, [indiscernible]. We have a joint venture with Air China. Obviously, we know that the Canada-China demand is a little bit subdued at the moment. But we're always assessing what new partnerships might look like in that part of the world.

[Chris Murray, analyst]

All right. That's helpful. My other question, and I'm not sure if he wants to take this. I mean certainly, we've seen the commentary around the accruals you've made for employee costs. I guess we're getting closer and closer to the drop dead date intersections of the cloud. Can you just provide us some color and some update on how the process is going and what we should be looking for as the next steps?

[Michael Rousseau, executive]

Chris, it's Mike. So I don't think there's any drop-dead date. First of all, we're in discussions with our pilots with the help of a mediator at this point in time and that process continues. And we're going through many elements and making progress. But again, that process will continue for at least for the next little while. And then we'll determine then we'll hopefully, we'll come to an agreement as that process winds up.

[Operator]

Our next question comes from Andrew Didora from Bank of America.

[Andrew Didora, analyst]

Just wanted to touch on the other revenue line item, kind of decelerated more sharply than you kind of saw throughout last year, barely showing any growth year-over-year in 1Q. Is this credit card, are you seeing any change in terms of consumer behavior in that product? Or is there something else going on in that line item?

[Mark Galardo, executive]

Sure. It's Mark, no issues of credit cards. In fact, we've seen the growth in our portfolio outpaced market in Canada. And for the first time in several years, increase in our overall share of credit card spend in Canada. So no issues there.

[Andrew Didora, analyst]

I guess what was the driver of kind of basically no growth in 1Q after several quarters of double-digit growth there. And it just seemed like an outlier versus our estimates.

[John Di Bert, executive]

Yes, we'll have to get back to you on that. And I think it's -- we do have make up anything that's nonperforming.

[Andrew Didora, analyst]

Okay. And then lastly, just for me, John. I think you mentioned in your remarks that [ CASM x ] would improve sequentially. Was that a comment on absolute CASM sense figure or a CASM growth figure year-over-year.

[John Di Bert, executive]

Yes. So it's a sequential quarter. So we'll see good continued improvement in CASM as obviously, we continue to grow capacity through the year and we get good efficiencies. Year-over-year, you'll see some pressure last year. Q2, Q3, we had like double-digit sequential quarters there. I think we grew Q1 to Q2 and '23 was 11%, if I'm not mistaken, in Q2 to Q3 was almost 15% quarter-over-quarter growth. So the improvements last year, we probably won't match this year, but we still feel pretty good about how we're making progress. And I think we're starting to see the benefits just of that early scale up in '22, '23, and now we're set to give back a little bit of productivity. We did see some here in the first quarter and we still feel pretty good about the full year guide of 2.5% to 4.5%.

[Operator]

Our next question comes from Matthew Lee from Canaccord Genuity.

[Matthew Lee, analyst]

I wanted to maybe start with headcount. It looks like you added another 500 employees on the staff this quarter. Can you maybe talk about where those people are being deployed? And whether we should expect to see further FTE growth as you go deeper into the year?

[John Di Bert, executive]

No. So we -- I mean we typically do add some staffing at the beginning of the year, and we continue to have another year that's going to be some pretty decent growth as you know, 6% to 8%. So staffing is basically operational focused. And I would say probably a little bit of IT folks as well in there as we are stacking up some of the technology improvements. Overall, I would say that we're seeing a good gap between the capacity growth and our FTEs in the quarter, I think, 11% of capacity on 7% staffing. And I think that continues to get better through the year and probably into next year as well. I think that there's probably -- A couple of years here, we're going to start to get better efficiencies. The airline works better at a certain scale, and we're coming back to '19 levels. And then from there, we should continue to see good benefits.

[Matthew Lee, analyst]

Okay. Okay. Great. And then maybe you mentioned a 30% increase in Pacific travel for the summer, 25% increase in certain European locations. Just given the overall capacity is kind of going to be high single digits for the year. Can you help us understand which areas you to capacity from? And maybe whether those routes were underperforming or if they'll be back once deliveries come in?

[John Di Bert, executive]

I'll take a quick -- give some quick color and then Mark can add here. But late last year, we made the decision to reposition some of our Transatlantic fleet to Transpacific. And so that's really what's driving and fueling that growth transpacific. I mean it was an opportunity for us to happen to a market that was underserved and it also produces a very good yield. So it's a very planned growth in the Pacific and was not a reaction. It was actually a strategy for 2024.

[Operator]

Our next question comes from Helane Becker from TD Cowen.

[Helane Becker, analyst]

Two questions. One on liquidity. You mentioned it was $10 billion at the end of the quarter. What is it actually now, can you say?

[John Di Bert, executive]

I mean not materially changed. I mean we -- as you know, in Q1, we took down some debt. So we did use some there. We added some capacity to our revolver. So that would have added some liquidity about USD 375 million. We continue to have a very strong liquidity position. So nothing really to comment very different than what the Q1 end of period-wise.

[Helane Becker, analyst]

Okay. That's very helpful. And then the other thing in the MD&A you talked about and you just mentioned it as well, lower yields in long-haul transatlantic routes. And we're kind of curious about that statement. I know you -- and just wondering about declining yields, I sort of didn't get that from your prepared remarks.

[Mark Galardo, executive]

Yes, Helane, no, very good point. On the transatlantic, it's important to note, it's about the comparison. And last year, on the Transatlantic, we had a very, very robust environment. and it was normal to expect that we'd have some kind of decline on the transatlantic given the normalization that we're seeing. But from a profitability perspective, we're very pleased with what we see in the transatlantic. And as you know, this -- this is one of the sectors that really drives our airline forward. So although we're seeing some yield declines, it's expected, and the transatlantic market in general is quite resilient, and we're seeing year-over-year that demand continues to trend favorably. So no major issues there.

[Operator]

Our next question comes from Jamie Baker from JPMorgan.

[Jamie Baker, analyst]

I'm following up on Savi's corporate question. So are you seeing any differences relative to pre-COVID in terms of corporate booking patterns, for example, trip duration, how far in advance bookings are taking place, that sort of thing. And also, if it is too early to spike the ball near term, do you think that corporate ends up being the variable that in the event you exceed your revenue ambitions for the year, do you think that's going to be the category, the upside to the model?

[Mark Galardo, executive]

Jamie, it's Mark. So we're not assuming that just yet. We want to see a few more months of that trend being positive. But again, in Q1, we saw corporate demand to and from the U.S. rise year-over-year to the tune of almost 10%. And demand within Canada was relatively flat. Again, we're very bullish and favorable on the U.S. prospects. So if we see a few more months of this, that might change your view of the year. But for now, we're not materially changing our assumptions.

[Jamie Baker, analyst]

Got it. And then second, probably for Mike, a theme that's been coming up with at least 2 of the U.S. airlines relates to competitive moats that they believe exist around their business. So what do you think are Air Canada's most important moats. I certainly have my opinion. I just want to hear if mine align with yours, which is why I'm asking that question.

[Michael Rousseau, executive]

Well, we could spend the rest of the time on what we think our competitive strengths are. But certainly, our diversification, our international franchise, our partnerships that we have in place the strength of our 3 key hubs and the ability that we sit on top of the largest travel market and are able to attract traffic plus the efficiency of our fleet. I know we have different types of planes in our fleet, Airbus and Boeing, but we believe we have a very, very efficient fleet. And with our fleet plans going forward, this will become even more efficient.

[Jamie Baker, analyst]

That's a differentiated aspect. I appreciate that.

[Michael Rousseau, executive]

yes, absolutely. And there are other aspects as well. Our onboard product, our LOPA, we run a very efficient airline that can meet the needs of many, many different customers.

[Operator]

Our next question comes from Stephen Trent from Citi.

[Stephen Trent, analyst]

The first question pertains to regulation. What we've seen here in the U.S. is the DOT looking like it wants to impose strictures for flights that are delayed, lost bags, canceled flights and what have you. Could you refresh my memory as to any potential adjustments you might be seeing on the Canadian side?

[Michael Rousseau, executive]

It's Mike. So Canada has already a lot of those rules in place. And we've been living and working within that regulatory environment. The only one that obviously is in front of us is some enhancements to the APPR rules that our CTA, our regulatory body, is currently considering. We -- those are not publicly available yet. They should be later this year. And we do believe that they will, to some degree, increase the cost of compensation for customers for delays. And again, we'll be smarter and we see -- have visibility. Now obviously, we're part of a many different stakeholders that are speaking to the CTA and others about these rules. But again, that regime already exists within the Canadian regulatory environment.

[Stephen Trent, analyst]

I appreciate that, Mike. And just one quick follow-up here. some of your U.S. competitors have been mentioning sort of overcapacity going into Mexico's beach destinations, for instance? I know it's not a big piece of the pie for you guys, but I do believe you might be launching service to the new [ Talon ] airport. So I was wondering what you guys are seeing in terms of metal going into that market.

[Mark Galardo, executive]

Stephen. So I think when we look at the Canadian context of other Canadian peers, I think they're coming to the realization we came a long time ago that seasonality is a big factor. And where to put aircraft in the winter in Canada has always been a challenging feat. So there's no doubt that they're putting material capacity into [ sun ] markets, including Mexico. But like where we stand. And in particular, this winter, we actually did quite well in Mexico. So I'm not overly concerned. But going forward, we do expect the sun market to be competitive because that's one of the few areas that you can offset your traditional summer seasonality with.

[Operator]

Our next question comes from Konark Gupta from Scotiabank.

[Konark Gupta, analyst]

Just wanted to kind of follow up on margin, John, again. So it seems like the adjusted CASM inflation is likely to ramp up in Q2 and Q3 as you kind of reach your full year outlook on that. Yields are normalizing right now, clearly. But you have hedged Q2 feel about half of that at a very attractive price. Any comment on margin performance year-over-year as you get into sort of Q2 and Q3, you have some tough comps probably there.

[John Di Bert, executive]

Yes. I mean I think the story is more in the comp than it is in the Q2, Q3 '24 numbers. But last year, we had some very strong margin production particularly if you look at Q3, I think on a full year basis, and you can do the math, but we have some compression, right? And I think that we highlighted where that compression was coming from when we gave our guidance, there's some structural costs that we're going to be absorbing this year. And I think that over a longer period of time, the real end game is going to be taking advantage of the growth that the airline has the efficiency of the new aircraft, the technology that we're deploying and just bringing the system back up to its most efficient productive state. So I'm actually positive on margin expansion over the next couple of years. But yes, I mean, 2024 is going to be kind of, call it, a base year on which to rebuild. I think what we feel good about it, and we've come through a lot here over the last 4 years. And we brought the airline still here solid margins for '24 even as we kind of fully absorb the impacts of the inflation environment that we've gone through. And so I generally feel pretty good about it. But yes, there's a little bit of work to do from here.

[Konark Gupta, analyst]

That's great color, John. I appreciate it. And then if I can follow up on the shareholder returns. You mentioned that you have prepared the math with the capacity kind of restoring back to the pre-pandemic levels almost now you guys are looking into some form of shareholder return. So maybe twofold. And maybe there, what kind of shareholder return would you be leaning toward? And what can we expect from timing there?

[John Di Bert, executive]

Yes. So I won't be specific today, but I can tell you this that traditionally, you see that we have been able to return cash to shareholders and buybacks have always been a tool that has helped reward those that are supporting the stock in the company. I think that we're consistently looking at what the airline needs to look like as we get to the end of the decade, we have a long cycle of planning. And so we're going to balance those investments, that growth. Mark talked about a lot of strong drivers about why we believe the airline can continue to grow, whether immigration, Sixth Freedom, just generally speaking, economic growth. And at the same time, we believe that we can generate cash as we do both, then there'll be an opportunity to share that with investors. As far as timing, nothing you announced today, but let's just say that liquidity and balance sheet is in the right place for us to be able to think about these things.

[Operator]

[Operator Instructions]

Our next question comes from Cameron Doerksen from National Bank Financial.

[Cameron Doerksen, analyst]

Just wanted to ask about the fleet. I mean, you've mentioned here that you're sourcing some additional 737s on lease. I'm just wondering, I guess, the rationale for the decision here to add more narrow-body capacity. Is that a reflection of what you see as growing demand or new route opportunities? Or is there, I guess, some concern over availability of maintenance slots or engine problems that some other aircraft operators are experiencing. Just just wondering what the rationale was here for looking ahead and sourcing those aircraft now.

[Michael Rousseau, executive]

Cameron, it's Mike. I'll take the question and maybe Mark, John will add because it's really important. So we do see opportunity to add more capacity at profitable margins, first of all. So there is a strong business case to take these planes into our fleet and do some reconfiguration and then run them in '25. But also to your question, the comments, it's also defensive to some degree because we do have some challenges with the Airbus 220 engines where some of those planes are sitting in the ground with other engines right now. That's going to take some time to come back. We're working closely with [indiscernible] on that, and there are solutions, but it will take time. And so we -- so it's also from a defensive perspective as well. So it's -- it's a good and correct business decision from our part.

The opportunity came up, and we stepped into it fairly quickly. We're still negotiating certain things around that, but we should be able to announced a final deal in the next short time as to how many planes and some more details behind it.

[Mark Galardo, executive]

And Cameron, this is Mark Galardo here. Not only is there a short-term impact of the ability to kind of mitigate those issues and also increase capacity. But medium to long term, we have an aging fleet of Airbus 320, 319, 321 [indiscernible]. And taking these planes also allows us the opportunity maybe to age down the fleet a little bit. So kind of a win on all dimensions.

[Cameron Doerksen, analyst]

Okay. Makes sense. On the A220, I guess, engine issue, you mentioned some aircraft on the ground. Is the -- I guess, the cost -- is that reflected in the numbers now? Is it significant? And is there any opportunity for compensation? I know some other airlines are seeing that?

[Michael Rousseau, executive]

Yes. So we're no different than other airlines. We've got -- at this point in time, probably 6 or 7 planes sitting on the round, 7 planes sitting on the ground. That may change over time. It's over, we will be discussing compensation with Pratt and we are in all discussions. But certainly, to your point, we are incurring the cost right now. And those costs are in our numbers at this point in time. And hopefully, we can get some recovery of that in the not-so-distant future.

[John Di Bert, executive]

Yes. And Cameron, I mean we're also making some choices in terms of running a little bit more regional aircraft and things like this. So it shows up in kind of direct cost and also the aircraft not available, but it also in how we deploy some smaller, less cost-efficient aircraft on routes that otherwise A220, which was very efficient, was running. So all those things kind of are in there. And we meet with Pratt regularly, and we're confident that they're going to work through all of this. But at the same time, we don't think this is going to solve itself in the next quarter or 2. So there's a little bit of time ahead. And Mike just spoke about the [ MAX ] decision that plays into all of this. And so I think we're always trying to balance the risk reward here. And I think these are the right decisions and a little bit of pain here in the short term. But longer term, we're still very happy with the A220 fleet.

[Operator]

We have no further questions. I would like to turn the call back over to Valerie Durand for closing remarks.

[Valerie Durand, executive]

Thank you, Julienne. Thank you once again for joining us this morning. Once more, if you have any follow-up questions, feel free to contact us at Investor Relations. [Foreign Language] Have a nice day.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.