Air Canada

TSX:AC

Earnings Call Transcript 2021-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Air Canada Second Quarter 2021 Conference Call. I would now like to turn the meeting over to Valerie Durand. Please go ahead, Ms. Durand.

[Valerie Durand]

Thank you, Mote. [Foreign Language] Welcome, and thank you for joining us on our second quarter call. With me 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 Operating Officer.On today's call, Mike will begin by providing an overview of the quarter and the impact of the COVID-19 pandemic on our positioning for recovery. Lucie will touch on travel demand, our network, Aeroplan and cargo. Amos will provide additional details on our costs, liquidity and financial performance before turning it back to Mike. We will then open the call for questions from equity analysts, followed by questions from fixed income analysts.Before we get started, please note that certain statements made on this call are forward-looking within the meaning of applicable securities laws. This call also includes references to non-GAAP measures. Please refer to our second quarter press release and our management discussion and analysis for important assumptions and cautionary statements relating to forward-looking information and reconciliations of non-GAAP measures to GAAP results.That said, securities laws do not prevent us from unreservedly cheering and wishing all our athletes the best as they reach their personal goals while representing us proudly in the Olympics and Paralympics that will unfold in Tokyo starting today in the upcoming weeks. Their own journeys and resilience in preparing for these games during the pandemic are an inspiration to all Canadians. Go Canada go.I will now turn it over to Mike.

[Michael Stewart Rousseau, CEO, President & Director]

Well, thank you, Valerie, and good morning to everyone, and thank you for joining us on our second quarter earnings call. For Air Canada and the global airline industry generally, the COVID-19 pandemic continued to weigh heavily on second quarter performance. Our employees, as they always have done, focused on taking care of our customers while carrying them safely to their destinations and on the prudent and very strong management of our company. I thank them for their dedication, their creativity and professionalism in this very challenging and complex environment.Although overall bookings remain below pre-pandemic levels, customers are returning. In June, we began to see a significant increase in bookings, the result of our announced -- the announcement of eliminating the quarantine period for fully vaccinated returning Canadians and the removal of other travel restrictions. We are seeing steadily increasing bookings for the domestic, transborder and Atlantic markets and to sun destinations for the coming winter. In fact, for the next winter sun travel, future bookings during some weeks in June were ahead of the same period in 2019, that hard-to-remember-time before COVID-19.We are certainly pleased to see vaccination rates increasing and more recent announcements of the soon easing of travel restrictions in Canada. We can now optimistically say that we are turning a corner, and we expect to soon see correlated financial improvements. We are excited and ready to welcome back our value customers in greater numbers and to introduce them to the many improvements we have made to enhance the travel journey.Going back to our results. Today, we reported second quarter negative EBITDA of $665 (sic) [ 656 ] million compared to negative $832 million in the same quarter of last year. On a GAAP basis, we recorded an operating loss of $1.133 billion compared to an operating loss of $1.55 billion last year. Our net cash burn amounted to $745 million in the quarter or about $8 million per day on average, significantly lower than previously projected $13 million to $15 million. We attribute this to increased bookings and our continuing effective cost controls.The upward trend in advanced ticket sales has continued into the current quarter. We had nearly $9.8 billion in unrestricted liquidity at the quarter's end, including the funds available under the credit facilities with the Government of Canada. We have said we view the general purpose government facilities as an insurance policy, and this remains the case.Air Canada has more than adequate resources to compete effectively and manage through the end of the pandemic. We are now looking beyond COVID-19 and taking steps to ensure we are well positioned to seize the many opportunities we see before us in the emerging post-pandemic landscape.The skills of our highly talented, professional and committed employees have helped us carry us through the pandemic. Looking ahead with them, I am fully confident that Air Canada will rebuild stronger and rise higher than ever before.Thank you. And now I'll turn the call over to Lucie.

[Lucie Guillemette, Executive VP & Chief Commercial Officer]

Thank you, Mike, and good morning, everyone. I'd like to begin by thanking our customers for their steadfast loyalty and confidence in our airline throughout the pandemic as well thank you to the people of Air Canada who worked tirelessly to ensure we are well positioned as travel returns.We achieved passenger revenues of $426 million in the quarter, an increase of $219 million or more than double compared to the second quarter of 2020, which was the first full quarter to be impacted by the pandemic. We operated 78% more capacity in the second quarter in 2020, and 86% less when compared to the second quarter of 2019.Looking ahead, to seize the momentum in bookings due to the easing of the travel restrictions, we plan to operate approximately 85% more capacity in the third quarter than we operated in the same quarter of 2020. This represents a decrease of about 65% compared to the third quarter of 2019. As we've done since the onset of the pandemic, we will continue to dynamically adjust capacity as the situation evolves to ensure we meet demand.As we transition into a period of significant recovery, many of our initial assumptions on the rebuild are coming to fruition. First, our domestic recovery led the way. In August, our domestic capacity will be roughly 2/3 of what it was in 2019 as we witness demand growth throughout the country, especially in our transcontinental services. Furthermore, we are proud to retain our position as Canada's largest domestic airline as we resume service to 50 Canadian cities and communities from coast to coast this summer.Although the current demand is largely for leisure and visiting friends and relatives, based on feedback from our corporate partners, we believe that the fall period will feature the progressive return of corporate demand. We are encouraged by some of the commentary from our peers in the United States with regards to overall business travel recovery.We have also dramatically increased our capacity to the U.S. over the summer, which includes 55 routes and 34 destinations with up to 220 daily flights between the U.S. and Canada. The new schedule coincides with the easing of Canadian travel restrictions between the 2 countries as of August 9, including the removal of hotel quarantine requirements for all travelers, relaxed testing requirements for Canadians traveling to the U.S. for less than 72 hours, and allowing fully vaccinated citizens and permanent residents of the U.S. to enter Canada for nonessential travel, among other measures.We will continue to ramp up our operations to the United States, which has been significantly scaled back from the 57 cities we served pre-pandemic. Rebuilding our U.S. operation and restoring our position as the largest foreign carrier operating to the United States is key to our recovery. This will also expedite the rebuild of our international long-haul operations as we seek to achieve or exceed our fair share of the U.S. long-haul global market.Looking further ahead, we are seeing strong demand from Canadian leisure travels to the U.S., primarily to markets such as California, Florida, New York City, Hawaii and the various United Airlines hubs we serve with many of these markets on pace with 2019 level.Turning to our international markets. Following the government's recent announcement, we look forward to welcoming customers from around the world back onboard once Canadian travel restrictions on foreign nationals begin to ease as of September 7. On our transatlantic services, we are seeing demand growth in several leisure markets such as France, Italy and Greece, in addition to large VFR markets such as Egypt, Morocco, and the Indian subcontinent served through Toronto to Goa route.Our service to the hubs of our joint venture partner with Lufthansa Group is exceeding our expectations. We were unable to serve India during the quarter, but look forward to returning as soon as possible. India remains a key area of focus in our network, and we continue to be bullish on the long-term growth prospects of this market.Overall recovery in the Atlantic will be quicker than other parts of our long-haul network, given the combination of high vaccination rates, strong cultural and business ties between Canada and Europe, in addition to strong leisure demand interest from Canadians. We are already observing healthy demand signals for Europe into 2022.Looking to the Pacific market, the outlook remains uncertain as significant restrictions are still in place in many of the key markets we serve. We continue to monitor the market and adjust our strategy accordingly.When looking to the sun market, we are very optimistic about our recovery. As we look to Q4 2021 and Q1 of 2022, we are currently observing demand growth that is above 2019 levels with a corresponding strong yield environment. Led by the strong performance of our Air Canada Vacations Group, we anticipate operating year 2019 levels in this geography by the midpoint of winter '21/'22. Should demand trends continue, we will evaluate redeploying capacity from other parts of our network to serve this demand.As we've previously mentioned, the recovery will initially be led by demand recovery in leisure and VFR market segments. We continue to believe that Air Canada is better positioned than our peers to profitably capture these segments, given our investments in fleet, Air Canada Rouge and our overall advantage in onboard seating density versus our peers.Touching on Aeroplan's performance in the second quarter. Gross billings from points sold are up nearly 40% year-over-year, demonstrating solid member engagement. This represents a decrease when compared to 2019, due primarily to a reduction in points from air and hotel partnerships. However, gross billings related to our credit card and retail partnerships have held up during the pandemic and are tracking well towards the full recovery. In fact, average spend on co-brand cards were down only 7% when compared to the second quarter of 2019, despite widespread lockdowns and lower spend on travel and entertainment during the quarter.Co-brand card acquisition is gaining momentum with attractive welcome bonuses in the Canadian market offered by our banking partners. We've already acquired more American Express Aeroplan card members so far this year versus full year 2019 or 2020. Card retention rates continue to be in line with the historical norms. Point volumes converted to Aeroplan from brand proprietary credit card programs have seen an important lift in the second quarter as members transferred their backlog of points into other programs to Aeroplan to redeem for travel. We expect this flow to continue as travel rebounds, and we will also add a significant new partner in the third quarter when Chase's ultimate rewards begins to offer an Aeroplan transfer option.Solid redemption recovery is another sign of continued program health and returning member engagement. In June, members redeemed points for air travel at 92% of the rate they did in June 2019, despite major geographies and popular airtime destinations, such as Asia and South Pacific, still being substantially closed to travel. Interestintly, members are redeeming for proportionately more premium cabin tickets than in the prior program. This customer shift towards premium cabin redemption further increases Aeroplan's competitiveness in the Canadian market. We're uniquely positioned to offer the most competitive premium travel redemptions in Canada as our domestic competitors offer far fewer premium option.As noted premium travel during the quarter, Aeroplan launched a unique partnership with Rocky Mountaineer offering point earning redemption and benefits for our list and co-brand members. Importantly, the second quarter saw an increase in member enrollment, driven by both the return to travel as well as our new partnership with Starbucks, which continues to outperform targets. Building off this success, we expect to announce several new Aeroplan partnerships, which will expand the programs relevant to the infrequent traveler as well as reinforce the fleet in the travel space.Turning to our cargo results, we achieved a record $358 million in cargo revenue for the second quarter, which represented an increase of $89 million or 33% compared to the same quarter in 2020, and $181 million or 102% over the same quarter in 2019. Prior to the pandemic, our cargo network has been enhanced by the growth of our wide-body fleet, including delivery of the Boeing 787 as well as several Airbus A330s. The pandemic has accelerated the expansion of our cargo business, with the movement of critical goods as well as the growth of e-commerce.This fall, we are adding an additional layer with 2 Boeing 767s, fully dedicated freighters that will enter into service. Given the low cost of ownership of the Boeing 767s recently retired from our passenger fleet as well as the low cost to convert the aircraft to freighter and cargo infrastructure, we look forward to expanding this program to 8 aircraft in the next couple of years.We recently announced the international routes where freighters will be operating, linking Toronto to Miami, Quito to Lima, Mexico City and Guadalajara. Additional destinations to be served in early '22 include Halifax, St. John's, Madrid and Frankfurt as more freighters enter service. This business represents an opportunity to continue building on the success of our cargo flight and is an important part of our recovery, revenue diversification and long-term growth.As we have and since the onset of the pandemic, we continue to show industry leadership in our safety-first mindset to our CleanCare+ program across the customer journey. To meet growing demand at our hub airports, we have now reopened 4 of our Maple Leaf lounges with our domestic lounge at Montréal reopening in June. And given the positive booking and travel trends, we plan on opening an additional 10 of our lounges in the third quarter. The lounge experience in Toronto, Montréal, Vancouver and Calgary is complemented by enhanced safety measures, highlighted by contactless entry and mobile ordering available to facilitate delivery of complementary food and beverage directly to our customers' table.In addition, onboard our Boeing 737 Max aircraft, we introduced our Bistro on-demand service on select flights that allows our customers to order food and beverage items directly from their seats using the in-flight entertainment system. We look forward to expanding digital ordering in the future.To close, we have been relentlessly preparing for the recovery, always with our customers' top of mind. And we are so thrilled to welcome them back onboard. Our airline has become stronger, more resilient and with the foundational elements we have in place as well as key investments made in product, fleet, innovations and customer experience, we are well positioned to retain our leadership position as the top airline within Canada and as the top airline globally.With that, I will pass it on to Amos.

[Amos S. Kazzaz, Executive VP & CFO]

Thanks, Lucie, and [Foreign Language]. Good morning, everyone. I will begin by reviewing our costs. Operating expenses were well controlled in the quarter. On a year-over-year capacity increase of 78%, operating expenses decreased $112 million or 5% from the second quarter of 2020. Recall that in the second quarter of last year, Air Canada recorded a charge of $236 million under special items due to measures taken in response to the COVID-19 pandemic.Turning to major expense categories in the quarter, fuel expense increased $115 million or 93% from the second quarter. This is due to the higher volume of fuel liters consumed because of an increased volume implying year-over-year. In addition, the impact of a 32% increase in fuel cost per liter accounted for a variance of $56 million when compared to the second quarter of last year. That is a net favorable -- that is net of a favorable foreign exchange variance due to the strengthening of the Canadian dollar year-over-year.Keep in mind that the Canadian dollar usually strengthens when oil prices increase, which partially reduces our exposure to fuel prices. Wages, salaries and benefits increased $33 million or 7% in the second quarter. Compared to the second quarter of 2020, wages and salaries increased $44 million or 14%, primarily on higher average salaries. This is because of the layoffs completed in June of 2020, led to a change in the employee mix and years of service.With higher levels of flying, when compared to the second quarter of last year, regional airlines expense, excluding fuel, increased $21 million or 12%. Depreciation and amortization expense in the second quarter was $404 million, a decline of $83 million or 17% from the same period last year. This reflects the accelerated retirement of certain older aircraft from our fleet, and the decline was partially offset by the addition of 5 fuel efficient Airbus A220-300s.Our fleet reduction also played a part in the decline by $54 million or 30% in aircraft maintenance expense from the second quarter. Also contributing to the year-over-year decline was a reduction in maintenance provisions resulting from updated end-of-lease cost estimates and a favorable currency impact.We recorded special items amounting to a net operating expense of $73 million, driven by $157 million related to the early retirement incentive programs and by $68 million for benefit plan amendments. These pension amendments will not impact our liquidity position as the amendments are funded from the surplus of the pension plans. The charges were partially offset by a net benefit of $158 million related to the Canada Emergency Wage Subsidy program, or CEWS. We plan to continue to participate in this program, which has been extended to September of 2021. Despite the decline in capacity compared to 2019 levels, we have managed to maintain approximately 50% of our workforce in part due to CEWS and are currently recalling employees to support our summer schedule.Turning to liquidity. Since the onset of the pandemic, we have taken measures required to stabilize operations and to be prepared for the recovery process. One of these critical measures has been raising liquidity to provide us with more flexibility to meet future challenges and better compete in the recovery phase in the post-pandemic marketplace. Since March 2020, we have raised significant liquidity, reinforcing what is even at the time one of the strongest balance sheets relative to our size in the global airline industry. One year later, at the end of March 2021, unrestricted liquidity amounted to nearly $6.6 billion.In April, we substantially increased our available liquidity through a series of debt and equity financing agreements with the Government of Canada. In addition to gross proceeds of $500 million from an equity investment, under this financial package, we have access, if needed, to close to $4 billion in additional liquidity through repayable credit facilities. There is also a separate $1.4 billion government credit facility to support the payment of refunds to customers, who did not travel due to COVID-19 and were holding nonrefundable tickets. On June 10, 2021, we extended the deadline for customers to seek a refund to July 12 of this year.As of June 30, we have refunded $997 million to eligible customers. It is projected that about an additional $200 million in refunds will be paid during the quarter of -- in the third quarter of 2021 to finalizing the processing of the COVID-19 refund claims all of which will be eligible for draws under the refund credit facility. At the end of the second quarter, $858 million in proceeds have been drawn under this refund credit facility, which matures in 2028 and carries an interest rate of about 1.2%.In addition to this, over the quarter, we received proceeds of $180 million in aircraft financing related to delivery of 5 Airbus A220-300s. And on April 15, 2021, we repaid USD 400 million of the 7.75% senior unsecured notes upon maturity. At the end of the quarter, unrestricted liquidity was $9.775 billion. On Monday, we launched a refinancing transaction of our Term Loan B and completed the syndication of a new senior secured revolving facility. With these, we will be able to seek -- we will be seeking total gross proceeds of USD 5.35 billion, subject to market and other conditions.The proceeds of the term Loan B are intended to: One, fund the refinancing of the $200 million principal amount of our 4.75% senior secured notes due 2023, and the $840 million principal amount of our 9% second lien notes due 2024; two, fund the refinancing of the indebtedness under the loan agreement dated October 6, 2016, comprised of a syndicated secured U.S. dollar term Loan B facility of USD 578 million and a syndicated secured U.S. dollar revolving credit facility of USD 600 million; and three, provide working capital and other general corporate purposes for Air Canada and its subsidiaries.The refinancing transaction is a significant step in our efforts to continue to improve our liquidity and reduce our overall financial risk by upsizing and pushing out the maturity of the existing term Loan B and senior secured notes to provide more runway as we go through the recovery period. Current market conditions are favorable for Air Canada to launch this type of transaction. To the obvious question of whether we will now opt out of the government's financing facilities, it's a decision we will make later in this year as we gain more line of sight on the recovery.Subject to market and other conditions, this financing will also unencumber some assets tied to the current term Loan B and increase our unencumbered asset pool by about $700 million for a total of $2.2 billion to support other financings should this be required. This pool excludes the value of Aeroplan, Air Canada Vacations and Air Canada Cargo.Moving on to cash burn. In the second quarter of 2021, our net cash burn was $745 million or at about an average of $8 million per day, better than it was previously communicated. Driving the improvement in cash burn was EBITDA, working capital and CapEx. EBITDA was better than expected, mainly due to continued strong cost control and the rapid adjustment of the capacity we made to adjust to market demand.Working capital improved due to stronger advanced ticket sales and forecast, and ongoing management of trade receivables and other working capital items. Capital expenditures were lower than forecast, in part due to the strengthening of the Canadian dollar. Together, EBITDA, working capital and CapEx contributed $5 million to the favorable variance.In June, we were encouraged by the strong rebound in advanced ticket sales, following earlier announcements on the easing of certain travel restrictions, our updated schedule and other service -- and other recent service announcements. Looking at the end of the third quarter -- looking ahead at the third quarter, in light of the most recent border announcements made by the Government of Canada, we estimate net cash burn to be between $280 million and $460 million, an average of $3 million to $5 million per day.For the third quarter, the net cash burn projection includes $2 million per day in CapEx, net of financing, and $4 million per day in lease and debt service costs. It also continues to exclude the remaining amount of eligible refunds of nonrefundable fares being processed pursuant to the change in refund policy announced on April 12.I must say it feels great to be delivering this guidance today. We are encouraged and excited as we look ahead to ride our skies. As we begin to look ahead with optimism, please allow me to pause here for a moment to recognize the boundless efforts, courage and tenacity of our employees. I admire them for their professionalism and commitment and for tremendous ability repeatedly to often -- to overcome often cascading challenges.To conclude, I look forward to continuing and further developing the transparent and positive relationship we have with the financial community. I am eager for our future conversations as well as our next Investor Day expected in early 2022, and we can better showcase with the actions we have already taken and the plans and targets we will be implementing to further strengthen our company.I will now turn it back over to Mike.

[Michael Stewart Rousseau, CEO, President & Director]

Thank you, Amos. Throughout the quarter, we continued to make progress on rebuilding our business, preparing for the return of travel and pursuing new initiatives to further ensure we succeed in what will be a highly competitive environment. Most visibly, we have begun reestablishing our global network by announcing new strategic routes and restoring suspended services. In support of the summer schedule, we recalled approximately 2,900 employees for June and July. A key competitive attribute is customer service. Throughout the pandemic, our primary focus has been on the safety of our customers and employees, and this will continue.Many of our COVID-19 innovations will become permanent because they are also designed to enhance the travel experience. It includes a new mobile solution so that customers can obtain pre-approval for health documents before arriving at the airport. We have introduced many touchless features at check-in, baggage drop and in our lounges. And we will look to expand the use of facial recognition biometrics for boarding after a successful test in San Francisco.Lucie touched on Bistro, and we are developing new onboard features. These and other planned technological innovations will make the travel experience, particularly at the airport, safer, more convenient and quicker for all customers. Another important initiative is our Transform Aeroplan Loyalty program. In addition to the program compelling new attributes, we continue to enrich it through powerful partnerships to give members more weight to collect points and redeem rewards. We've always regarded Aeroplan as a key differentiator of Air Canada, setting it apart from domestic and international competitors. The ongoing improvements we are bringing to our industry-leading loyalty program will amplify this as well.We are also pretty pleased by the performance and future prospects of Air Canada Cargo, which recently operated its 10,000 all-cargo flight. Our dedicated freighters, which are converted aircraft retiring from our passenger fleet, will allow Air Canada Cargo to provide consistent capacity on key air cargo routes and facilitate the movement of goods globally.Even while dealing with the pandemic, we kept our eyes on the horizon and worked on other elements crucial to the long-term success of our business. Notably, our commitment to sustainability has been unwavering. In March, we set an ambitious goal of achieving net 0 emissions by 2050. Central to achieving this is the renewal of our fleet, which we progressed significantly by accelerating the retirement of certain older aircraft from the fleet at the outset of the pandemic. This continues today with the narrow-body program.During the quarter, we took delivery of 5 more Airbus 220 aircraft, and we expect 3 more to be delivered in 2021, along with another 3 Boeing 737 MAX aircraft. These aircraft types are much more fuel efficient than the older aircraft they replace and offer customers a greater level of comfort.We continue to work on other initiatives during the quarter as well. This included entering into an agreement with Edmonton International Airport to reduce carbon emissions, shipping critical COVID-19 medical supplies to India and celebrating the 15th anniversary of our Aeroplan Member Donation program. Since its inception, over 1.3 billion points have been donated by Aeroplan members in support of more than 1,400 causes.Air Canada and its employees are proud to be part of initiatives such as these, which are also important to investors, customers and other stakeholders. Updated information, our commitments and programs will soon be shared when we release our 2020 edition of the Citizens of the World, our annual corporate sustainability report.As I said at the beginning in the call, indications are that the worst effects of the COVID-19 pandemic may now be behind us. Based on what we are seeing in other markets that are further along in reopening in Canada, we anticipate travel will resume at a quickening pace. However, as we have historically done, we will continue to manage both our cost structure and our balance sheet very conservatively. Already, we are seeing green shoots of recovery. Bookings are accelerating, and our own customer surveys indicate a strengthening of attempt to travel within the coming months. We expect the most recent announcements of the Government of Canada of relaxing existing measures will further help strengthen the interest of our customers in flying again.Air Canada is well prepared from a financial, customer service and operational standpoint to ramp up our business, to meet the returning travel demand and welcome our customers back. In short, we are well positioned to emerge strongly into the post-pandemic world.Thank you, and I guess we're ready now for questions.

[Operator]

[Operator Instructions] Our first question is from Konark Gupta from Scotiabank.

[Konark Gupta, Analyst]

So maybe my first question, Amos, on cash burn guidance for Q3. So it seems like cap tax, lease and debt service payments, they account for $6 million per day of cash burn, and then your guidance for cash burn is $3 million to $5 million. So I'm curious what's the offset coming from? I mean what kind of assumptions are you making about operations and working capital?

[Amos S. Kazzaz, Executive VP & CFO]

Konark, good question. So really, the difference is coming from positive cash from operations. And also in the debt service cost, the interest cost is also included. So when you consider these items, these couple of factors there that brings you into the $3 million to $5 million average per day cash burn.

[Konark Gupta, Analyst]

Okay. And then secondly, if I can ask about, maybe it's more for Lucie. And I don't know, Mike, if you want to take it as well, yield. So how -- like you talked about new bookings coming in and these different markets you talked about, right, like especially sun, Atlantic, transborder, domestic, et cetera. How does the kind of pricing or the fares trending on these new bookings as you compare them to the existing bookings that were made before COVID for future travel?

[Lucie Guillemette, Executive VP & Chief Commercial Officer]

It's Lucie. Maybe let me just give you a little bit of comparison here because there's a couple of points that are pretty important. Up until such point is the new government measures were announced, we have to keep in mind that we could only generate demand from point-of-sale Canada. So we have no upside potential from currency from other points of sale. And given the fact that corporate demand is also somewhat challenged at this time, we didn't have the potential for high yield.So setting that as a sort of an initial comment, when we look at the pricing environment in the international markets, the environment is quite stable. And I would say the environment is competitive, but we are well set up to deal with the VFR market. We have upsell opportunities, for example, into our premium cabins. And generally, the pricing environment is quite stable.In the North American environment, it's a little bit different. If you look at -- when most of the domestic competition started to enter the market, it really started in June. So when you look at the yield environment, at the early start of the second quarter, the environment is a little bit more stable. But as the competition really started to ramp up, the pricing environment became a little bit more challenging in domestic Canada. The good thing is, from that perspective; A, we're very encouraged because we know corporate demand will come back. We know we will get some yield upside from international connections.And at the same time, we do have the right levers and we do have the right tools to be able to manage our way through this, so through branded fares, we talked about Aeroplan in our early statement. The Aeroplan program is also providing very good opportunity for us on the yield side to be able to monetize our premium cabins, for example. So the environment is very competitive, but we're confident that we're well equipped to be able to deal with it.

[Konark Gupta, Analyst]

And then last one for me before I turn it over. The fuel price seems to be obviously going up here. I think it's still below 2019 levels, I guess. But it's kind of -- maybe it approaches there as demand for jet fuel goes up. That's the expectation by energy markets, I guess. I mean from your perspective, I guess it's a good problem to have as fuel price goes up, which means demand is going up. But historically, we have seen fuel being a challenge at times. So how do you like in this -- coming out of the COVID, how do you plan to mitigate the fuel headwind potentially here? I guess is pricing a tool or do you kind of reconsider hedging? Or is there anything you can change with suppliers? Any thoughts there?

[Amos S. Kazzaz, Executive VP & CFO]

Konark, it's Amos. At this point, certainly, as you mentioned, it's a little bit of a good problem to have if we have increasing sort of fuel and demand and adding capacity back. But overall, we will manage it not through hedging at this point in time. It's a little bit, as we look at that hedging, historically has been more of an insurance policy and to deal with the spikes in fuel price. I think what the industry is seeing sort of over time, as fuel prices increase, the industry has been able to push along fares to compensate for that. So we would not expect that scenario or that outcome would not be again repeated going down the road.

[Operator]

The following question is from Helane Becker from Cowen.

[Helane Renee Becker-Roukas]

So I'm not sure who wants to answer this. But as you think about cargo going forward, I know the converted freighters are permanently in the mix now. How should we think about cargo? Is this going to be a major revenue generator? I mean historically, it's not your core business, and yet you have a lot of opportunity, I would think, to really participate in the dedicated cargo business. So how should we think about that going forward?

[Michael Stewart Rousseau, CEO, President & Director]

Helane, it's Mike. There's no doubt, it's -- like we said, it's a big part of our future, from a whole bunch of different perspective, certainly, diversification, strong margins. And we're good at it, and we're going to get better at it, frankly. So the cargo -- the dedicated cargo freighters are one aspect. But the other aspect that equally, if not more exciting, is our entry into the e-commerce business under a brand name called Revolt, where we've partnered with last mile and first mile providers to provide a point-to-point delivery. And we're not expecting to replace major players in this area, but this market is growing, and we have the skills and the technology now to take advantage of that marketplace.So long-winded answer to tell you that it will be a more important part of our future going forward. And I think we'll save maybe to Investor Day as to what our expectations are. But certainly, we see the growth rate in cargo exceeding -- well exceeding what our passenger rate might be. But we're still going to be a passenger airline. And opening up new markets from a cargo perspective is going to be very, very important to us and an opportunity, given our brand and given the strength of our management team.

[Helane Renee Becker-Roukas]

Okay. That's very helpful, Mike. And then my other question is just related to how you're thinking about -- I know you're talking about bringing back capacity, I guess, as demand comes back, is that how we should think about it? So you'll see demand and then you'll add capacity or you'll add capacity and then be price-sensitive to gain the demand. Like I'm not sure how to think about the Sixth-freedom traffic and so on that was such a big part of the business pre-pandemic?

[Lucie Guillemette, Executive VP & Chief Commercial Officer]

Right. It's Lucie. Maybe I can start and if Mike wants to add. But since the start of the pandemic, we had a very disciplined process here to try and understand the triggers that would inform us in terms of what the demand could be, so including observing what occurred in other markets when some restrictions were lifted, et cetera. And of course, looking at our own advanced bookings, we've developed quite a few scenarios. So basically, now that we know that the restrictions have been lifted, we had already planned for that. So we had a scenario where the capacity that we loaded was based on the existing booking velocity, but we were also prepared for the opening of the market.So for example, we could see -- it was evident that the sun market, for example, in the fourth quarter of the year would be very, very strong. So we hedged our best and we planned for that. We put the capacity in. So we're very disciplined, obviously, because it's important for us to be. But with the indicators we had, we didn't only focus on one option. We had several capacity plans. And as soon as indicators gave us confidence that these markets would rebound, we added.Secondly, we talked about strong VFR market. So if you look at the makeup of our routes, we took some risk which paid off. We introduced Doha, we introduced Cairo. These are highly VFR markets. And we made sure that we have the right capacity into our partners' hubs in order for us to be able to do, as you say, extract the most potential we could from Sixth-freedom market.So as we move forward, now that the restrictions are open, we have another view of capacity. If things materialize the way we think they may, we will be ready to have capacity in the market. And this is for every service. It's pretty clear that there are some areas that are clearly showing some strength, and we've been able to jump on that pretty quickly, and we'll continue to do that.But at the same time, of course, we're very mindful of ensuring that we have a ramp-up that's coordinated with my colleague, Craig, here in the operation, to make sure that we can deliver on that, and at the same time that we're mindful of costs. But as you know, we do not like to leave a cent on the table. So as soon as we see opportunity, we are ready to load.

[Operator]

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

[Cameron Doerksen, Analyst]

I guess just a couple of kind of outlook questions for me. One is just on the booking trends and specifically the domestic markets. Certainly, it sounds like August and peak summer is looking pretty positive for you. I'm just wondering if you can comment on what you're seeing in September, October or kind of past the summer peak? I mean do you see enough demand there in the booking trends that will support kind of level of capacity you brought back domestically in August?

[Lucie Guillemette, Executive VP & Chief Commercial Officer]

We're actually very confident with the schedule that we have planned for the fall, for September and beyond. Now we're very excited because, obviously, this week, I mean, it's the first week where we can actually observe new velocity based on the opening of the restrictions. Early July, the hotel quarantine was removed, which meant that it gave us a little bit of opportunity for returning Canadians that were coming back from abroad, so we saw an upside there, a bit of an uptick there.But as you know, the provinces also had pretty tight restrictions for travel within Canada. When that was lifted, we saw a surge in the domestic environment. So as it stands, we're confident with what we have loaded. And as I said earlier, if things didn't materialize exactly how we planned, we would have opportunity to redeploy or to rightsize. And we also do have a little bit of ability or flex to be able to add. But I will tell you, this is probably the best we got, certainly had in the last year. The early indications with the easing of travel restrictions is very, very encouraging, very encouraging.

[Cameron Doerksen, Analyst]

Okay. No, that's great to hear. Just second question, I guess, is somewhat related is just with regards to business travel. I suspect we'll see more companies start back with the business travel in the fall. I'm just wondering if you've had any survey data or discussions with your corporate clients that you can maybe discuss that sort of give you some confidence in how business travel is going to start to recover come September?

[Lucie Guillemette, Executive VP & Chief Commercial Officer]

Yes. So we did see -- just even for the month of June, we did see a little bit of improvement versus what we've seen in April and May, particularly in the domestic market, slight, but some improvement. We always assumed 2 things that perhaps in Canada, the recovery would be a little bit later than what we were observing in the United States. So we always assume that post Labor Day, we would see some returning of business travel. We are encouraged because, in fact, yes, in discussions with several of our agency partners or corporate accounts, there is a sentiment where corporations are now starting to talk about return to travel for business in the fall.And also, when we look at what's occurred in the United States, if we overlay the ramp-up that they saw on the business markets once restrictions started to ease and we overlay that to our markets, we're thinking that by September, October, we will start to see some positive signs. We were also very encouraged with some of the restrictions that were put in, that allow actually passengers who are really traveling on very short-haul destinations for very short periods of time that they can use the same test predeparture for their return or reentry into Canada.And that's going to be meaningful also for those who are contemplating business travel to United States, New York, Boston, Washington and that kind of thing. So that's another positive indicator. We really look forward to seeing the booking curve post holiday to start to see how things shape up for September. But definitely, the domestic market will be #1, followed by trend order. The international routes, I suspect, it probably will be similar to what we've heard from our peers. It will take a little bit longer to recover for long-haul international.

[Operator]

The following question is from Kevin Chiang from CIBC.

[Kevin Chiang]

Maybe I'll just ask a question on Rouge. You removed all the widebodies during the early parts of the pandemic. And it sounds like the VFR market is improving. I suspect you'll see some improving trends on the international market as well. But I also suspect it will take years before some of these border restrictions are fully removed. And I think -- and correct me if I'm wrong, I think the thought process was you could flow some traffic through hubs versus using point-to-point as you might have done with the old 767s. Are you seeing any apprehension from your -- from customers in hubbing in another country when choosing an international vacation spot? And does that change how you think about reintroducing widebodies back into Rouge to reintroduce those point-to-point options for customers?

[Michael Stewart Rousseau, CEO, President & Director]

Kevin, it's Mike. No, I think we made the conscious decision to exit the widebodies from Rouge, and to your point, flow the traffic through our partner hubs. We see no reason at this point in time to change that strategy or change that direction, full stop. Obviously, we're focused on the narrowbody part of Rouge now. We'll be launching that in September, with a very strong ramp up to take advantage of all the sun traffic that Lucie spoke about earlier. And so we think that is a key differentiator for Air Canada and an important part of our future growth. Again, I think on balance, we will flow traffic internationally through the partners -- through Lufthansa's hubs, and we think we can capture the majority of the traffic that we otherwise had flown directly.

[Kevin Chiang]

Okay. That's helpful. And maybe just a second question here. Maybe to Lucie, just a follow-on on Cam's question there on corporate travel. I guess I'm trying to figure out when you're looking at the trends over the next few months and quarters and you're talking about being a bit delayed with the U.S. because we reopened a little bit later than the U.S. here in Canada, is the feeling that the ramp will be the same, though, when things start moving? Or is it feeling that the ramp might be a little bit slower? It just feels like corporate Canada has been a little bit more cautious in bringing people back to work. So I'm just thinking through, does that mean they're a little bit more cautious in putting their employees back in the year as well as we start to reopen the economy further?

[Michael Stewart Rousseau, CEO, President & Director]

Kevin, let me take that because it's a very interesting point. One, we don't think the ramp up is going to be any different. And I think corporate Canada has to realize that they do have to get out to visit customers and clients because the U.S. is doing that right now. And I think a lot of corner offices in Canada, to Lucie's earlier point, are saying, what are we missing here now that we're almost fully vaccinated or getting 75% vaccinated because they do have to build business. And there's a lot of surveys and talk about how corporate travel will change over time.We certainly believe that traveling to see clients and customers will continue to be very strong. And there might be actually some pent-up demand to do that once the market opens up, and once companies get back somewhat into their offices. Obviously, internal meetings might have a little bigger impact from the virtual world that we've all been -- unfortunately, been forced to utilize over the last little while. But we do believe, based on our conversations with many, many corporate leaders that, that kind of customer traffic will come back fairly strong.

[Operator]

The following question is from Savi Syth from Raymond James.

[Savanthi Nipunika Syth, Airlines Analyst]

Lucie, I wonder if you could share how you're thinking about the kind of the potential path and timing to capacity restoration in kind of the individual entities? I realize things are highly uncertain and you have several different plants. But just as you know it today, like how do you envision that recovery in the individual entities?

[Lucie Guillemette, Executive VP & Chief Commercial Officer]

From a capacity perspective? I'm sorry, I didn't...

[Savanthi Nipunika Syth, Airlines Analyst]

Yes, capacity perspective, exactly.

[Lucie Guillemette, Executive VP & Chief Commercial Officer]

Okay. Well, so when we commented in our introduction, we said that in the third quarter, we were expecting capacity to be approximately 65% in Q3. And you're highlighting a very good point because, in fact, we have to keep in mind that there are many ultra long-haul markets that we do not plan to operate in the third quarter. So for example, if you think of Australia, we had a significant franchise on China. And as we know, those markets for the time being, we have limited capacity. So there are several markets like that, ultra long haul, that we don't have in the plan for the third quarter, which means that overall at 65%, there's a very large difference when you look at it from a North America perspective.If you look at domestic, for example, that would probably be closer to a minus 40% range. And if you look at the acceleration between June, July, August, September, if you look at the ramp-up, for example, on domestic or the sun routes, there's a pretty large acceleration. So there's no doubt that the 2 -- or I would say, the 3 largest sectors where the ramp-up is fastest or largest would be the domestic, U.S. and sun networks. So U.S. leisure, and then looking at Q4, the sun routes and then, obviously, followed by the transatlantic and regrettably, the Pacific and Australia is somewhat delayed.

[Savanthi Nipunika Syth, Airlines Analyst]

And along those lines, Lucie, like when do you think domestic can get back to like pre-COVID levels and some of these other ones that are stronger today? Like, how long do you think that those can take to get back to pre-COVID levels?

[Michael Stewart Rousseau, CEO, President & Director]

Savi, it's Mike. To Lucie's point, we're seeing strong return into those markets. The Pacific, and to some degree, South America are the ones that are lagging. And we kind of see that probably in the back half of next year. And that would be kind of where we -- when those 2 last components come back into play, we would -- our expectation is we've come close if -- to where we would otherwise be in pre-COVID levels.

[Savanthi Nipunika Syth, Airlines Analyst]

Got it. And just 1 last question. I'm curious with the transborder still -- I don't think the U.S. has opened the border yet. I'm kind of curious about your point-of-sale mixes in the transborder. And what component is still missing, I guess?

[Michael Stewart Rousseau, CEO, President & Director]

Right. So just to clarify, the land border is not open. The air border has always been open. And now it's easier to travel. So there's no restrictions on air. But there is still, at least August 21, restrictions on land for Americans. So we're not seeing any constraints in our ability. And you saw that very quickly when we announced the expansion of our capacity in the U.S. on the Monday -- past Monday, and we'll be entering that market with some aggressive marketing programs as well to drive traffic.

[Operator]

The following question is from Walter Spracklin from RBC Capital Market.

[Walter Noel Spracklin, MD & Analyst]

So you indicated that domestic is obviously coming back quicker, but -- and there's been some interesting moves by your 2 primary domestic competitors. I'm just curious as to what your thoughts are on how that might play out? And let's start with Porter having announced what can only be described -- it's very significant for them investment in Embraer aircraft on the regional side, clearly making a push into the domestic market outside of their core Toronto Island Airport, so into some of the more traditional airports. Just what's your thoughts on the competitive landscape, particularly with regards to Porter? I'll get back to WestJet in a moment, but with regards to Porter and that effort on their part to significantly expand their domestic fleet?

[Michael Stewart Rousseau, CEO, President & Director]

Walter, it's Mike. Nice to hear from you. It's a really fair question. And certainly, it has not gone unnoticed that Porter has -- is looking to expand. Now again, they're not going to start expanding until the second half of next year. As you can appreciate, we can't speculate on their plans, and we certainly welcome healthy competition. But suffice to say, we will be ready to deal with that situation as they start ramping up in the second half of next year.We have a lot of things to work with, starting with our Aeroplan program. And we're confident that, one, the competition will make us better; and two, that we'll be able to deal with it effectively as they ramp up their expansion. And the same aspect with Flair. As they expand -- a different set of, some degree, challenges. But we internally, and also I can't comment on detailed plans, but we are all working on ensuring that we get better and retain our market share at a profitable margin over that period of time.

[Walter Noel Spracklin, MD & Analyst]

Makes sense. And then with WestJet, it was interesting that they declined government support. Now there could be 1 of 2 buckets of reasons. They're a private company. They didn't want to have any kind of limitations from a disclosure or any other related factors, or operationally, they saw the restrictions that the government may have been requesting as to onerous. Do you see -- if it's that second bucket, is there any risk here that WestJet will be -- have some more flexibility that you perhaps do not have, given your decision to go with government support versus theirs not to? Or do you see it more as a first bucket type of decision?

[Michael Stewart Rousseau, CEO, President & Director]

Yes. That's another fair question, but one which I really can't speculate on. But let me give you the bottom line from our perspective is that we believe there is -- we have the full ability to compete effectively with the existing agreement in place. There is nothing from our perspective that restricts our ability to compete very well with WestJet or any other domestic competitor or any other international competitor, frankly, that exists in our current agreement with Government of Canada.

[Operator]

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

[Christopher Allan Murray]

Just thinking about as we're starting to get restarted with bookings, just a question about channels and the evolution. We've seen and kind of got lost in the pandemic, but certainly a lot of new programs. And I'm just wondering if you could maybe give us some idea of how you're seeing passengers engage with you in terms of booking new travel? And certainly, how you think that the travel agent channel may have evolved over the last little while?

[Lucie Guillemette, Executive VP & Chief Commercial Officer]

That's a very good question. And certainly, during this time, we've spent a lot of time and energy ensuring that our channels are the absolute best where you can find Air Canada content. And same is true for travel agencies to be able to come to our direct channels as well. So many initiatives were put in place during the pandemic to continue to improve our websites for both general consumers, B2B and also B2C. Now as we start to expand and introduce new international markets, it's a given that for some of these markets, we have to be where the demand is. So we still have access, obviously, to all other channels.But of course, we -- our preference is for customers to be able to come directly to Air Canada or have agencies come directly to Air Canada where they can actually see the full suite of products that we have to offer, the ability for customers to choose the best on aircanada.com. We also have upside potential with ancillary, et cetera, in those direct channels. So we will continue to do that. But at the same time, being very, very conscious that some markets, the channel captains are in other areas that we're there as well to make sure that all our moves are successful.

[Christopher Allan Murray]

Okay. Have you seen any shift though in channel usage? And I guess what I'm kind of interested in is has there been any significant damage to the agent channel such that you're going to end up with more traffic directly into your direct channels?

[Lucie Guillemette, Executive VP & Chief Commercial Officer]

Well, the distinction that we made there is we have a very good relationship with the travel agency community. And in fact when the whole refund file occurred, it was very important for us to make sure that the travel agency community was also considered in our decisions. When we talk about direct channels, it doesn't only limit general consumers coming directly to aircanada.com. We also have a portal for our travel agents, and we do encourage them to come through those channels if they can.So from a travel agency perspective, we continue to work very, very closely with them. They've supported us through the pandemic. We're thankful for that. And at the same time, as we return to business, we are in contact with them, of course, to make sure that we capture our fair share of that demand.

[Christopher Allan Murray]

Okay. Fair enough. And then just turning maybe to thinking about how you see the cargo business evolving, I did notice that on the fleet plan, you've got the two 767s coming in, in the second half. But then you did also show that you've got the two 330 freighters coming out. So should we be thinking about you bringing those converted passenger aircraft back into passenger service kind of on a one-to-one basis as the dedicated freighters come in? Or is there some other way to think about this on a go-forward basis?

[Michael Stewart Rousseau, CEO, President & Director]

Chris, it's Mike. No, that's not really the alignment we're looking at. The growth of the 8 freighters is independent of bringing back the converted freighters. The converted freighters are being brought back because we've got demand from the passenger side, and we want to convert them back to full passenger. So that's really the plan of attack.

[Lucie Guillemette, Executive VP & Chief Commercial Officer]

And as we introduce these international markets, then we are now opening up belly space for our cargo customers. So some of it, the freighters that are operating today are operating because there was no passenger demand. When the passenger aircraft come back, we open up the belly space for cargo.

[Operator]

The following question is from Hunter Keay from Wolfe Research.

[Hunter Kent Keay]

Mike, how many planes have you retired early? And how many can you unretire if demand snaps back and the competitive environment ramps? And then in the same vein, of the 50% of employees that you had to let go, how many are still available to come back? And how quickly can you bring those people back?

[Michael Stewart Rousseau, CEO, President & Director]

Hunter, great question. So we retired 79 planes, the 25-or-so widebodies for Rouge and then 190s that we're going to retire, frankly, in due course as the 220s came in, and some Airbus narrowbody product as well, again, as a Master coming in as well. So with our current fleet configuration and what's in front of us from a delivery perspective -- committed delivery perspective, we can get back pretty close to where the pre-COVID capacity was. And so we're comfortable with our positioning from a fleet perspective.Now if capacity does go up faster than we anticipate, we'll go hunt planes and we'll find. But again, we don't see a reason to do that at this point in time, but that would be a good problem to have from our perspective.On the labor side, we've been calling back people already. I mentioned that we're calling back 2,900 for June, July. We'll call back more for the fall season. We're finding everyone's coming back. We are not getting -- we're getting virtually no one saying, "Listen, I found something else, I don't want to come back." Our pilots, as -- I think as we talked about in the past, were never furloughed. We furloughed some small percentage, but everyone else, the vast majority of them, were kept current. And so there's no issue from a pilot perspective here at Air Canada. And as we bring back flight attendants and ramp workers and call center people and airport people, we're getting everyone to come back.

[Hunter Kent Keay]

Okay. That's great. And then as we contemplate the Transat deal that fell apart, what's the upside of that deal not happening? Is there a lot of integration expense and pain that you were potentially preparing for then now you can kind of reallocate those resources elsewhere? Can you get simpler? What good can come of that?

[Michael Stewart Rousseau, CEO, President & Director]

Yes. I think you've hit the major benefit and the fact that we are spending 100% of our time focused on Air Canada and all the opportunities we have in front of us versus having a very complicated potential merger and integration added on to our list of things. It's not like -- I think we're gluttonous for how much work we want to get done. But certainly, today -- as we sit here today, this restart is complex. And I'm happy that this management team and this entire company is focused entirely on making this a complete success for our customers. And having Transat, although might have good long-term benefits to overall for Canada -- for Air Canada, I think, would have been a very, very difficult thing to integrate at this point in time.

[Operator]

So that's all the time we had for questions. I would now like to turn the meeting back over to Ms. Durand.

[Valerie Durand]

Thank you, everyone, for joining us on our second quarter call. Should you have any further questions, you may contact Investor Relations. Have a great day. [Foreign Language]

[Operator]

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