Air Canada
TSX:AC
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Air Canada
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Good morning, ladies and gentlemen. Welcome to the Air Canada Second Quarter 2022 Earnings Call.
I would like to turn the meeting over to Valerie Durand. Please go ahead, Miss Durand.
Thank you, Donna. Hello; bonjour, [Foreign Language]. Welcome and thank you for joining us on our second quarter call of 2022. Joining us this morning are Michael Rousseau, our president and chief executive officer; Amos Kazzaz, our executive vice president and chief financial officer; Lucie Guillemette, our executive vice president and chief commercial officer; and Craig Landry, our executive vice president and chief operations officer. After management's overview, we will be available until 9:00 AM for questions from equity analysts. After the analyst question-and-answer session, Mr. Kazzaz and Pierre Houle, Vice President and Treasurer, will be available to answer questions from terminal B lenders and holders of Air Canada bonds.
Before we begin, please note that our comments and discussions on today's call may contain forward-looking information about Air Canada's outlook, objectives and strategies which are based on assumptions and subject to risks and uncertainties. Our actual results could differ materially from any stated expectations. I therefore refer you to our forward-looking statement in Air Canada's second quarter's new release -- news release, excuse me -- which is available on aircanada.com and on SEDAR. I will now turn it over to Mike.
Great and merci, Valerie. Good morning, everyone, and bonjour. Thank you for joining us on our second quarter earnings call today. Air Canada reported strong results for the second quarter, despite operational challenges in the air transport system. Credit for these results goes to our employees. On behalf of the entire leadership team, I want to recognize their incredibly hard work, tireless efforts, dedication and constant professionalism in safely caring and taking care of our customers in this operating environment. In the second quarter of 2022 alone -- a single quarter -- we carried about 70% of the total customers through the full year 2020. This gives you an idea of the depth of where we came from and of the resurgence we are seeing in air travel demand.
The industry worldwide is facing unprecedented operating challenges as it emerges from pandemic-related restrictions. In Canada, we have gone from a near 2-year shutdown of air travel back to capacity levels close to 80% of 2019. We prepared well ahead of 2022 for a surge in travel demand. We prudently planned and adjusted our capacity as the summer approached. As much as we shared our customers' excitement to see them return to air travel, in the face of surging demand we might have otherwise tried to capture, we stuck to our plan and managed our schedule conservatively. But despite all the planning, the increased traffic has created difficulties for all participants in the air transport system, a situation that we're seeing around the globe. For us at Air Canada, this has had a cascading effect on our own operations. Craig Landry, our EVP and chief operations officer, will go into further detail about this in a moment. The entire team at Air Canada is skillfully managing the unchartered waters of pandemic recovery, on top of what comes with operating in the airline industry.
Now, from a financial perspective, we generated $154 million of EBITDA in the quarter. This is a significant increase from the negative EBITDA of $665 million we reported a year ago. We have been showing consecutive and year-over-year improvements for the past several quarters, but in the second quarter it became clear that we are on a strong demand-driven recovery.
Our operating revenue neared $4 billion in a quarter, an improvement of about $3.1 billion, almost 5x what we recorded in the second quarter of 2021. At the same time, we also controlled costs effectively, despite the steep rise in fuel expense. Taken together, we recorded an operating loss of $253 million for the quarter. Still, it was a much narrower loss compared to the operating loss of $1.1 billion in Q2 of 2021.
We report a positive cash flow from operations and positive free cash flow, and that's the fourth quarter in a row, and we ended the quarter with $10.5 billion in unrestricted liquidity. That said, I want to assure you that everyone at Air Canada is focused on improving our operating performance, which, as mentioned, relies on many participants in the operating chain, such as airports, ground handlers, caterers, security screeners, customs and air navigation. Every link in the air transport system must work well for us to succeed, so we must all work together.
At the same time, we, the airline, have the most direct and continuous relationship with travelers. That is before, during and at the end of their journey. We understand and we feel firsthand the effect that any break in the chain has on our customers and their plans. The operational instability we saw at the end of the second quarter is of course not at all business as usual for us or anyone else involved. We know this has been a difficult period for some of our customers who were looking forward to a long-awaited dream vacation or reunion with loved ones. We acknowledge the inconveniences and disruptions some of our customers have faced, and we deeply regret this. We continue to work closely with our service providers and governments to keep addressing the issues aviation's facing in Canada and globally. And importantly, we are encouraged by the progress made in the past few weeks and we expect continuous improvement in the weeks to come.
Thank you. I will hand the call over to Craig now.
Good morning; bonjour. I welcome the opportunity to speak with you this morning. As Mike mentioned, the second quarter of this year featured some extraordinary operational impacts on our business, so I'd like to take a moment to provide some additional context. The first thing I'd like to highlight is that, in all cases, we view these factors as being temporary in nature and directly related to the unique challenges of the post-COVID ramp-up.
We've never seen demand increase at such a high rate in such a short period of time, particularly having been at a near standstill for almost 2 years. The same can be said of the many participants who are all part of the air transport system. These challenges are felt throughout every aspect of the operational delivery chain that supports air travel.
At the same time, while many participants play a unique and essential role in the air transportation system, we recognize that our customers experience these interconnected efforts as a single journey. As Mike pointed out, it is the airline that has the most direct relationship with the customer. We understand the unique role in which that places us, and we take that role very seriously.
To help illustrate how far we've come from and the magnitude of the travel rebound, in the second quarter of 2021 we operated 20,603 flights and carried about 1.2 million customers. In the second quarter of this year we operated 84,643 flights and carried over 9.1 million customers. That is an increase of 4 times for flights operated and almost 8 times the customers carried for the same time last year.
In the second quarter, our operating capacity, measured by available seat miles, was 73% of the same quarter in 2019. This is somewhat unique when we look at other global markets where travel recovery grew more evenly throughout 2021 and into 2022. In Canada, it happened in a much shorter period as travel restrictions were in place for a longer period, holding back pent-up demand that much longer.
That said, the operational challenges our industry is facing are not limited to Air Canada or the Canadian market, as we can see very similar operational challenges being faced by airlines in the USA, Europe and elsewhere. Still, we assumed an increase in demand in the order we are seeing when we developed our 2022 schedule, yet, as Mike mentioned, we prudently planned and adjusted our capacity as the summer approached and managed our schedule conservatively, all while ramping up our operations.
Our first phase of preparation began in August of last year, where we saw some significant increases with close-in demand, indicating what we could expect for our peak travel period in Q2 and Q3 of this year. Rather than seasonally pause hiring, as we would naturally have done after the 2021 summer peak, we doubled down by recalling, hiring and training on a scale we had never done before throughout the summer and the fall, and then all through the winter period, including through the Omicron wave and when tight travel restrictions were still in place. As a result, and after more than 9 months of preparation, we entered the peak summer travel period at close to 90% of our pre-pandemic staffing levels, while prudently planning to operate about 80% of our pre-pandemic schedule during that period.
As we said, for air travel to be successful, a wide range of service providers must come together, often behind the scenes, to deliver services that form a chain. Normally this chain is very strong. However, during this period, this structure that successful air travel relies on began showing varying signs of unprecedented instability.
These effects were primarily driven by resourcing challenges and could be seen in airport security screening, Canada and US border customs processing, air traffic control, maintenance providers, equipment, supply chains, aircraft catering and fueling partners, just to name a few. An additional challenge for us has been a series of mechanical failures at the airport baggage handling systems at some of our key hubs, resulting in bags not reaching our baggage handling agents in time for planned departures.
This kind of instability in the delivery chain has a direct impact on our operations. It creates flight delays, flight cancellations and increased instances of misconnections and mishandled bags. In turn, this creates multiple knock-on effects where aircraft and crew are out of position for their next planned flight activities and demand for airport infrastructures such as gates result in backlogs and congestion. Customers who miss their flights need to be rebooked, and bags need to be reintroduced into the system to reunite with their owners. This collectively results in a higher level of activity than was planned, which itself, over time, further contributes to knock-on effects.
I should also point out that what's often overlooked is that, even given these circumstances, we are moving as many as 140,000 customers a day safely to where they want to go. For the second quarter, we had a flight completion rate of 96.3% system-wide. For our international overseas flights, flight completion was at 99.2% for the quarter. And even with significant challenges we've experienced on the baggage handling side, we saw a baggage handling rate of 97.7% for the quarter. At the same time, given the volume of customers we carry, we know that even this level of performance leaves too many customers affected.
The second phase of our stability efforts was implemented earlier this year with well-received customer initiatives, including enhanced notifications, new self-serve re-accommodation tools, free same-day standby options for earlier flights within Canada and transborder markets, and the ability for customers to voluntarily increase their connection time at our Toronto Pearson hub. We also increased our minimum connection times on some flights, adjusted our schedule to reduce volume at peak times and refined the timing of select international and transborder flights to provide additional operational flexibility.
And more recently, in a third phase, we proactively removed an average of 154 daily flights from the schedule. This represents about 8% of our scheduled flight system-wide for July and August. The emphasis was on easing pressure at our Toronto and Montreal hubs at peak travel times. These reductions were undertaken over and above the internal efforts taken by Air Canada and were designed to address the instability of the overall air transport system in the peak summer travel period.
They were also intended to drive meaningful staffing relief in airports, to increase narrow body overnight availability for maintenance to improve startup performance, and to facilitate aircraft catering and grooming activities. And we're not stopping there. Our operations control -- operations -- systems operation control team is collaborating with other key branches to focus on key flights during peak connection banks.
We are reviewing certain ancillary policies and services that can ease our operation in the immediate term. As a result of these measures and the increased focus and support being seen everywhere through the air transport system, we've already seen improvements on all key operational metrics.
To close, as Mike said at the beginning, this has not been business as usual at Air Canada, and we remain confident these factors are temporary in nature. We can also see that, despite our careful planning and subsequent mitigation efforts, we did not achieve an acceptable level of operational stability, and for that we apologize for our affected customers and employees. I can assure everyone, however, that our highest priority throughout the company has been and remains to work with all participants in the travel journey to remove any remaining instability and to return our operation to pre-pandemic levels of stability.
Now over to Lucie for a commercial update.
Thank you, Craig. Bonjour; Good morning, everyone. Mike spoke to our operating revenues, but I'll begin by saying that these recovered to about 84% of those in the second quarter of 2019. As Craig described, Air Canada had one of the steepest ramp-ups when compared to any major network airline in the Western world. What's really important to call out is, when we compare to pre-pandemic times, even though we operated less capacity -- or 73% of the same quarter in 2019, to be exact -- our passenger revenues were 80% of the second quarter of 2019. Also, 2022 second quarter advance ticket sales reached 94% of those in the same quarter of 2019.
Thanks in part to a very strong revenue performance in the month of June, Q2 2022 passenger revenue soared to over $3.4 billion. Average fares across the system were up 12% in Q2 versus Q2 2019, and 13% for June alone, which reflects fare increases we effected in relation to the higher price of fuel. When comparing to 2019, you will recall that the base period was severely impacted by the disruptions caused by the grounding of the MAX 737. This removed capacity in 2019 pushed passenger yield up to unprecedented levels. Given this comparison, we're very proud of our revenue results.
On the international front, results exceeded our expectations. At investor day, we mentioned the importance of sixth freedom transit traffic. June 2022 represented a record month in the amount of absolute sixth freedom customer in Air Canada's history, and we will continue to focus on further growing this traffic segment.
And although China and Hong Kong remain relatively closed, we continue to be encouraged by our Pacific results, especially in Australia. And while the domestic market was very competitive, our extensive remaining network gave us an advantage in all markets and communities we serve. If we look at the second quarter of 2019, our sixth freedom traffic between the U.S. and Atlantic accounted for approximately 5% of our total revenues.
In Q2 2022, it was 6%. We saw the biggest demand come in June, where this grew from 7% of our system revenues in June 2019 to about 10% in June 2022. Additionally in June, the Canada transatlantic market was within 91% of the revenues produced in June 2019, and domestic was 92% of June 2019. June 2022 showed the fastest acceleration towards 2019 we've seen since the onset of the COVID-19 pandemic.
Cargo revenues declined by 16% from the second quarter of 2021 due to yield normalization and less cargo-only flying in the Pacific region. This was partially offset by volume growth and revenue gains in other regions. We now have 2 Boeing 767 freighter aircraft in service and are expecting 7 in service by the end of 2023. In July, we agreed to purchase 2 new Boeing 777 freighter aircraft, with deliveries expected in 2024. We also used our freighters to deliver aid and medical supplies to support Ukrainian refugees. Over a hundred employees volunteered to support this mission.
We continue to experience very strong Aeroplan performance. The second quarter of 2022 beat most records set in Q1, with several KPIs setting new all-time highs. In the first quarter, we had seen our highest ever new member acquisitions, and we surpassed this again with close to 835,000 new enrollments in the second quarter. We also saw higher spend and solid acquisition on our co-brand card portfolio, which helped deliver a 50% lift in gross billings from points sold in the second quarter of 2019, despite the effect of lower interchange rates from 2020. Air redemption bookings and yields were also on an all-time high. Finally, our new retail partners continue to drive strong engagement, while additional leading brands seek to establish partnership arrangements with Aeroplan.
Now, looking ahead, as I discussed earlier, demand was solid in June, and this is continuing into the third quarter. At this moment, we are not seeing any noticeable impact from market forecast of a possible economic slowdown. Our advance bookings going into Q4 remain strong, with book load factors projected to be in line with 2019 levels. In fact, in many sun and leisure markets, we are currently running ahead of 2019. For the third quarter, we plan to increase our capacity to approximately 79% of third quarter 2019. For the full year of 2022, we expect to operate approximately 74% of 2019 capacity levels.
Premium traffic also remains strong, focused more on premium leisure travelers. We started seeing signs of recovery in corporate travel in March of 2022, and this accelerated through June, going from close to 40% of 2019 levels to over 60% by the end of June. We expect the corporate traffic to continue its rebound post Labor Day, building on the strength we saw in June. Despite the challenges Craig spoke of, we continue to focus on strategic initiatives to bolster our future results. We are pleased with our recent announcements regarding our joint venture on transborder markets with our long-time partner, United Airlines, and we're also looking forward to our new code share arrangement with Emirates. This winter, we will also commence service to Bangkok and restore our services to Mumbai and Lima.
And now on to Amos for more updates.
Merci, Lucie. Bonjour. Good morning, everyone. First, a quick financial overview of this quarter. It goes without saying that such a renewed interest in traveling increased our flying and therefore resulted in increases in nearly all line items. Most importantly, from a unit economics perspective, our PRASM or unit revenue increased 59% and our adjusted CASM improved, or in this case decreased, to 68% in the second quarter of 2022 compared to the same period in 2021. Managing these metrics is a key focus as we work to restoring our EBITDA margin. Fuel expense of $1.5 billion increased $1.2 billion due to 116% increase in the price of jet fuel, coupled with significant increase in flying seen this quarter. Fuel expenses represented about 53% of the total OPEX increase. We are encouraged by the recent decline in the price of fuel and, as always, continue to actively manage this line item closely.
Wages, salaries, and benefits of $749 million increased $252 million or 51% from the second quarter of 2021 due to a 79% increase in full-time equivalents. This was anticipated with the recall of thousands of our employees, as well as the recruitment we've undertaken to support the increase in flying volume year over year, including the planned schedule for the remainder of the year. For 2022, we now expect adjusted CASM to be about 15% to 17% above 2019 levels. The variance to prior guidance is mainly due to an increase in the number of customers carried, which translates into higher passenger service and distribution costs. To a lesser extent, it is also attributable to an increase in wages, salaries, and benefits.
And now turning to our fleet, at the end of the second quarter 30 Airbus A220-300 aircraft had been delivered, with 3 aircraft yet to be delivered by the end of this year. Also 39 MAX 8s had been delivered, with one to be delivered in the third quarter, completing our fleet of 40 Boeing MAX 8s.
As for liquidity, we ended the second quarter with unrestricted liquidity of $10.5 billion, up from $10.2 billion at the end of the prior quarter, which includes $972 million in undrawn revolvers. In the second quarter, we generated $441 million in free cash flow, which is an improvement of just over $2 billion from the same quarter in '21 and reflects the higher net cash flows from operations and strong advanced ticket sales. We continue to require an estimated minimum unrestricted liquidity balance of $5 billion to support our ongoing business operations, which also includes a buffer to manage cost risk and unplanned disruptions. Minimum unrestricted liquidity includes funds available under credit facilities.
I'll now pass it back over to Mike.
Thank you, Amos. The current challenges facing the entire global airline industry, including Air Canada, are certainly the focus of our immediate attention. As you heard from Craig, we are working with our partners to resolve the issues affecting our industry. This will allow us to deliver our standard of customer service once again, on a consistent basis. At the same time, we also know we must run our business with a view to the future. This means that we continue working to position ourselves in a highly competitive industry-leading in the post-pandemic global airline sector. It involves executing on our long-term strategy, investing for the future and making new plans to take our business to the next level.
Since the quarter ended, we made 2 significant commercial announcements that Lucie spoke about. One of these was a joint business arrangement with United Airlines. The agreement will offer customers more choice, greater convenience, and enable us to better optimize our hubs and schedule. It will also strengthen our leadership in the all-important transborder market and broaden our global network connectivity. We also agreed to work closer together to advance our sustainability objectives. The second is our strategic partnership with Emirates. We're still finalizing this arrangement, but we intend to establish a code share relationship later in 2022. This too will mean more choices and convenience for our customers and further extend our global reach.
International expansions is one of our key priorities coming out of the pandemic. It is also why we have selectively added new destinations within our network. In addition to the new service at Bangkok and returning to Mumbai and Lima, we have restarted services to Australia and this winter are returning to New Zealand. And for our western Canada customers, we're launching a new service between Vancouver and Miami, as well as between Edmonton and Cancun. Similarly, Air Canada Cargo extended its reach in the quarter, with new services from Halifax and to Madrid. Our cargo operation also continued to innovate in other ways to better service customers, including innovative digital offerings for a more seamless user-friendly experience. In the quarter, we won 5 awards for excellence in leisure and lifestyle travel, which is important given leisure travel is leading the recovery.
Another significant recognition came when Aeroplan won 2 Freddie awards, which recognized our loyalty program as the best for redemptions and as the top trending program. Aeroplan remains key to our company for customer acquisition and retention, and a strategy to increase Air Canada's appeal through strong partnerships took another step forward with nearly a dozen new or expanded agreements in the works during the quarter, many of which will be announced in the current quarter.
An important milestone we're celebrating is the 10th anniversary of the Air Canada Foundation. Apart from the good it has done helping tens of thousands of children over the years, the foundation also reinforces Air Canada's greater commitment and leadership to ESG. In this respect, another significant development was the recent announcement that we will work with Airbus and select other carriers on advanced carbon capture technology. If successful, this will help contribute to Air Canada's long-term goal of achieving net zero emissions. All of these, and the other actions we have taken during the quarter, are ample proof that Air Canada's set to rise higher in a post-pandemic world. While contending with immediate challenges, we have maintained our focus on the long-term goal of being an airline as agile, resilient and an industry leader in all aspects of our business.
And with that, I'll return the call to Valerie.
Thank you, Mike, and thank you all for joining us today. [Foreign Language] We are now ready for questions. In the interest of time, we kindly ask that you each limit yourself to 2 questions or one question and one follow-up. Should you have additional questions, we invite you to contact us at investor relations. Over to you, Donna.
Thank you. We will now take questions from the telephone lines. [Operator Instructions] And the first question is from Savi Syth from Raymond James.
First question, just could I ask you about kind of the cargo business and how that's going? And particularly I was curious about the strategy of kind of getting new 777 freighters in terms of both new versus kind of using converted as well as kind of introducing a second fleet type that operation, which I would think increases complexity and cost.
Thanks for the question there. So yes, as you saw, we did announce the 2 new 777 freighters. What those 777 freighters do is, as we see the demand from our customer segments and markets, is the ability to carry additional tonnage. So right now, as you look at a 767, carries about 56,000 tons of cargo, and a 777 has about treble that capability, but more importantly, also from a size and dimension perspective into the into the market.
Additionally, so we see sort of strong demand that really the growth in the market, that we really need the additional capacity that a 777 offers. And yes, it does add some additional complexity, but we do have 777s in our base fleet, so it doesn't really introduce a new pilot type, if you will, and for introductions we can use the efficiencies that we have in our current 777 capabilities from a maintenance perspective, operating perspective, pilot and so forth.
And certainly from ground equipment, and really sort of it doesn't really require any additional investments that would add complexity of introducing, let's say, a brand new fleet type if we were to go and buy a 747 freighter, for example. And from a perspective of return, we certainly looked at this. Obviously, ownership cost is much higher, as our approach to this business had been with 767s -- used owned aircraft, if you will -- at low ownership costs, but we believe the return that we can get on the 777 certainly justifies the investment.
That's helpful. And if I might ask, secondly, just have you seen any kind of pilots leaving in a bigger way from Air Canada to the US, kind of using that EB-2 employment visa? I was just kind of curious. I know there's no risk of having the same issues that you're having in the US, but was wondering if there was any risk of some of the issues here being -- spilling over to Canada.
No, we're not seeing any attrition of our pilot base to US or any other country. We still are an unbelievably attractive employer for our -- for pilots, and so we do not face the challenges some of the US carriers or other carriers around the world are facing.
The next question is from Walter Spracklin from RBC Capital Markets.
So I guess my first question's on competition. We've heard that WestJet now has returned to the west and has kind of stopped taking 787 -- new delivery of 787s. Just curious how that is impacting how your capacity rolls out, both internationally and domestically -- whether the -- whether you're rethinking how you're rolling out domestic, and are you taking advantage of how you're rolling out international, given WestJet's move there? And related to that, obviously, is Porter's expansion with their jet purchase program with a focus on the east, and does that also have any implications on how you you're coming out with your capacity plans over the next couple years?
So, as you know, it's always difficult to have these type of discussions on competitive environment. Certainly we've watched very carefully and analyzed both WestJet's moves and Porter's moves. It doesn't change our strategy. We -- our expansion international will continue. We believe we have a leading product into international markets, and as well as domestically. We've got a great fleet with 220s and MAXs and with regional, and so we will continue to compete very, very effectively with -- against both WestJet as they move more capacity into the west, and as Porter adds more capacity into the east, basically. So again, like any competitor, we're watching what others do in the marketplace, but we're very comfortable with our expansion plans and how we compete in the marketplace.
Okay. That's great, understanding the difficulty in discussing that on a public call, for sure. Second question here on the challenges that you're facing from an operational standpoint in the recent weeks and months. I know it's easy to point the finger at Air Canada, but I know it's not -- it's certainly, I think, the ecosystem of your overall -- of the travel network that you mentioned is really a play here. And by extension, while it's not all -- certainly not all your fault, it's also not under your control on the rebound or the improvement of it.
How much risk do you consider to be that if others outside of Air Canada -- other of your partners outside of Air Canada -- I mean, your -- the infrastructure, the customs -- players in the customs side, security lines and so on -- if they're not able to improve their level of service, how much does that put at risk your own plans this for this year and next year in terms of growing back the capacity toward your prior pandemic levels?
So, Walter, we don't see much risk at all, because we are working very, very closely with all those partners, and we know they're deeply engaged and deeply committed to restoring collectively the same service levels that we had at least for 2019, if not improvement. We're working very, very closely with all those partners on a constant basis, looking for solutions again that may, and hopefully will, improve performance levels as we go forward. It will take some time.
However, I'm not, and we're not as a leadership team, concerned, given the engagement and the commitment from all our partners, including Air Canada, obviously, to work together to restore the service levels. And again, Walter, as Craig said, and I said, I think, in our comments, we are seeing improvements in operational metrics right now. Baggage is improving, on-time performance is improving, cancellations are being reduced, and that is the collective effort of everyone working together over the last X number of months to ensure that we can deliver consistent service level to our customers.
The next question is from Konark Gupta from Scotiabank.
So my first question is on the booking. So I just wanted to understand what's sort of the mix you are seeing between travel credits, Aeroplan points and cash purchases, as well as any color on the booking curve left.
Let me start -- maybe I'll just expand a little bit on the comment I made in some of the opening remarks. From the corporate perspective, we're now looking at approximately 60% of what we would've had in 2019. So the mix of business and premium traffic, other than from leisure premium, is increasing. With respect to redemptions, we have a golden opportunity here because we have 2 means for customers to be able to access our inventory when they book redemptions. So we are seeing a higher mix of Aeroplan members redeeming for not only leisure, but across the network. But I would say that roughly 80% of our revenues are generated by non-Aeroplan bookings.
Okay. That's great, Lucie. Thank you. And then maybe just a broader question perhaps for Mike. In terms of the culture, you've been hiring a lot of people and recalling a lot of employees, obviously, and media outlets, as we all know, have been writing about how low some of the airline frontline employee morale is due to frustration in traveling public. Obviously call center wait times have been long, etc. How do you motivate employees in these times and maintain the culture and the brand?
That's a great question, and we're very aware and sensitive to that issue. So we're doing a number of things to help all our employees, including the front-line employees. And we just did an engagement study or survey, and our engagement levels -- and that's hopefully a good reflection of culture -- were still very strong compared to 2019. And so that was encouraging that: one, we have -- and we know we have incredible employees; and two, the, the initiatives we're putting in place, whether they're bonuses or pizza or just walking around management and a ton of communications from the leadership group, are working to what we expected.
Your next question is from Jamie Baker from JPMorgan.
So just a quick question on the air traffic liability. It increased materially from the first quarter to the second, to what appears to be a record. And we we've seen this elsewhere. The question is whether this is solely indicative of future demand. There were no accounting changes, breakage assumptions in there that changed. Just confirming that.
No, it's really -- it's the demand, and there are really no other accounting changes or any changes in breakage or any sort of assumptions that sort of change with that. I would say there is probably one other aspect that is also driving the increased air ticket liability or ticket sales is -- essentially is yields are higher as well, so that is also contributing to the increase in what you see there -- what's on the balance sheet.
And would you forecast another build from the second to third quarter, which would be a bit unusual, or are we at the point where we should sort of revert or begin reverting closer to what the pre-COVID trend looked like for this particular metric?
Yes, and I think that's a safe assumption there, Jamie. I don't think it'll build beyond sort of what we see here, and it'll just more revert back to more traditional change from Q2, Q3 into Q4.
The next question is from Kevin Chiang from CIBC.
Lucie, you mentioned sixth freedom traffic had a record month in June. I guess I'd be interested in what you're seeing as you look up at the balance of the year in terms of sixth freedom traffic. Pearson and Trudeau have gotten some negative press in terms of what's happening at those 2 airports. And then maybe, just at a bigger picture, just what does the United relationship, or the deepening relationship, do in terms of increasing your sixth freedom revenue opportunities?
Okay, so maybe I'll take the first question with respect to sixth freedom. So, as you know, we -- for several months, we've been speaking about the focus that we have here to grow our presence in this segment. So what we've seen in June, as a record -- I think we also have confidence that, as we move forward -- set aside seasonality a little bit here -- we will still be able to produce much better numbers on the sixth freedom front that we had in 2019.
So I think we've unlocked some opportunities here. Relatively speaking, compared to this summer, it may not be as large, but regardless I think our presence there is going to be much better. There's no doubt that, with some of the cancellations that we observed in some of our transborder markets, it did impact our sixth freedom traffic.
But again, we view this as temporary, because we are confident that some of those issues will get corrected in the short term. And the reality of it is the market in the United States is so large, there's opportunity for us to continue to grow in this segment. So if there's one thing that we're really pleased about for this quarter is how we were able to really unlock some opportunities for ourselves in the US.
On your second question regarding the joint agreement with United Airlines, this is really for the transborder sector. But the halo effect of that is, as we work better and closer with United in terms of the schedule design, it will of course provide more transborder flying. It'll provide a better schedule, and the halo effect of that will be that we may have a better schedule to offer for sixth freedom.
We have -- we may have more markets that we'll be able to offer. But the JV is really for transborder, keeping in mind that we have the joint venture with United and Lufthansa for the transatlantic market. So the sixth freedom sector is covered under the joint venture that we have with United and Lufthansa. So, overall for sixth freedom, I think we're in a very good place. We're very pleased with these, right -- these numbers -- but we're also very excited about the future.
That's very helpful. And then just a follow-up from an earlier question, just on the 777 freighters. Is that a change in your broader cargo strategy as you bring on these bigger aircraft that can fly further, obviously take on more capacity? Does it change what end markets you're pursuing or some of the routes that you're contemplating today versus maybe 6 months ago at the time of your investor day?
You're right. I mean, one of the things that certainly with the 767, it's range limited, and certainly there's a big market in Asia that we serve right now through belly space and through the schedule. But we see that as -- really as a growing opportunity, so the 777s really enable us to round out the network, and from a range perspective and lift capability.
The next question is from Cameron Doerksen from National Bank Financial.
Just wanted to come back to the United Airlines agreement. I'm just wondering if you can go into a little more detail on what sort of the incremental changes are with your relationship with United with this new agreement. I mean, you mentioned some schedule design improvements, but what else are you able to do with this agreement now that maybe you weren't doing previously?
Okay, so in the current agreement, with ATI -- with antitrust immunity -- we were able to coordinate on schedule and to coordinate on price, of course with the exception of the few cargo markets that exist. But in the new agreement we will be sharing in the risk and in the rewards. So, in the future, you can expect to see a schedule that's more optimized. In the current context, at times we may have found ourselves in a situation where we had wingtip to wingtip flying or the schedule wasn't necessarily optimized for transborder.
But the fact that we go into an agreement where we're actually going to be sharing some of the revenues and some of the risks, it will really allow us to be able to expand, which means perhaps new markets, more flying, more choice, more option for customers. And in this new agreement you will see things that will make the offer better also for customers. In the current platform we don't have, for example, one-to-one class mapping, which means that, at times, customers will find de-syncs between Air Canada and United.
These are all things that we're going to be able to do under the new agreement, which, A, will make it better for us to be able to maximize revenue, so it would be good for both airlines, but at the same time, it will also be good for customers. And of course we're fully integrated in terms of our redemption programs, but certainly this new joint venture will allow us to really broaden the reach that we have on the transborder routes.
Okay. And if I could just ask about, maybe, I guess, the regulatory, I guess, approval of this, I mean, has anything changed on that front? Because I know in the past there's been some issues from the regulator on the transborder JV you tried to do in the past. I'm just wondering, has anything changed or is this just a kind of agreement that's designed to, you know, fully comply with the existing rules?
No, nothing has changed. I mean, it's -- we still have some of the carveout markets that were part of the agreement with the Canadian Competition Bureau, and now the joint venture is approved for a revenue share model, but there's nothing different, no.
The next question is from Chris Murray from ATB Capital Markets.
Maybe turning back to your cost guidance and just trying to understand a couple things, you talked about CASM-X, but you also talked about being able to get back to that 8% to 11% margin. Can you talk a little bit about some of the cost impacts you're facing and your ability to offset that with yield right now? Just trying to try to dovetail how all this kind of moves through the balance of the year.
So, look, in terms of the guidance, certainly we had a slow start to the year with Q1. We had Omicron sort of facing us, so it was a slow ramp-up. Second quarter, you've seen sort of the results here. So, as you can see from what we've been able to do in terms of yields and what we're covering in terms of fuel, that we're confident and we've confirmed our guidance on our margins. So certainly the last half of the year, second half of the year, will be where we make it all up, if you will. And so, again, in terms of getting into line items specifically or what's driving that, the large items I had said in my commentary was the additional traffic, so all of the various passenger-related expenses, distribution, so forth, salaries and wages, and really all the lines that you see there are really incorporated in that CASM-X guidance of 15% to 17%, so getting down on a line-by-line basis is probably not very helpful at this point. And I think it's just all factored within what we have in guidance, both for margin for the full year and for CASM-X.
Okay. And then just one quick question on the 777 purchase. Just to confirm, so are these going to be, like, brand new aircraft coming from Boeing, or are these new aircraft to you that you're going to convert and get the hulls either from your own fleet or from a third-party fleet?
No, these are brand new off the production line into our fleet, so it's…
777, freighters, yes.
Freighters, yes. 777s are brand new into the fleet. They are not any of our 777s converted etc. These are factory fresh.
The next question is from James from TD Securities.
I guess my first question, probably for Lucie here. I'm thinking long term. I know we're on the process of normalization here. There's still a few things to fall into place on the international travel scene in particular. I'm wondering, as you look out and from what you can see today, do you think there are any differences in the opportunities that Air Canada has in international travel relative to the way the world looked in 2019, before the pandemic? Do you -- if you went back and kind of looked at your route plan, your network plan, pre pandemic, would it look any different today, just based on the way the travel recovery is taking shape? And then -- and maybe it's a 2-part question -- if you could talk about it not only sort of from a geographic perspective, but also from a fare bucket perspective as well.
For sure, the network looks a little bit different and, even looking ahead, may look a little bit different, and there's a couple of reasons for that. One, we know that, post pandemic, certainly the VFR market or the leisure markets have had -- rebounded much quicker. And, as a result of that, we did introduce some routes post COVID that we intend to keep.
And if you look, for example, at the announcement that we recently made to work closer with Emirates, this is another demonstration of an opportunity here for us that perhaps, in 2019, we would not have contemplated. But the fact that we can grow Dubai and have access to several markets where there are high immigration, enough demand from Canada, those are all examples of how we are adapting the network with the new reality.
India is another one where we plan to expand. But the answer to your question would be yes, the network is a little bit different. Now, keeping in mind that there are many, many markets that are core, we have solid relationships with, as we mentioned earlier, United and Lufthansa. So if you look at Europe, there are core markets there that we will continue to serve, but there's no doubt that, as we move forward, we're looking at opportunities to get into markets that perhaps, in 2019, the opportunity would not have been there. Bangkok is another one that we've just announced, and there are many like that. There are many -- there are many like that.
Thank you. And, Lucie, from your comments, is it fair to assume that if we kind of think out 2 to 3 years, and from Air Canada's kind of view of the world at this point, then that a greater percentage of revenue will come from VFR market -- from the leisure market -- relative to corporate and business cabin travel?
The corporate -- like, we're confident that the corporate demand, I mean, whether it's 2023 or early 2024, we expect that the corporate revenues will return. And keeping in mind, for us at Air Canada, corporate is by and large, in large part, travel within north America. There's a smaller content of corporate traffic on international routes. The core of corporate for us is domestic, whereas from an international point of view, and as our fleet changes over time, for sure there will be opportunities for us to be able to grow into some of those markets.
Okay. And then I guess my second question -- I'm just wondering if Air Canada is able to differentiate at all between normal kind of recurring leisure travel at this point in the recovery and any that might be travel that was delayed or would've otherwise occurred during the pandemic. And I -- and I'm just trying to get a sense for if you think about, or if you believe, there's any material bump in demand right now that maybe is not recurring going forward but is kind of working its way through the system because it was delayed, or maybe there's just extra demand as a result of the last couple of years.
I think probably what we're seeing now -- there's no doubt that there's a large, you know, pent-up demand here, but as we look to the future, we believe that, that demand will come back. Leisure travel from Canada to the sun, for example, or to the Caribbean in the winter -- that will remain solid. There's no doubt now that there's a bit of shift, but we don't have concerns that, once this has flown, that there'll be a demand shortage. And certainly our advance bookings don't indicate that, and we also spend a fair amount of time working on a demand forecast model to help us assess where the next opportunities are. But at this point in time, we certainly don't believe that this is -- this demand is just pent up and that we're going to face issues in the future.
The next question is from Stephen Trent from Citi.
It intrigued me that you guys are doing the agreement with Emirates, and you talked well about your sixth freedom strategies going forward. Has Air Canada ever considered going for a minority investment in a foreign carrier, as we've seen with the US majors and some of the Middle Eastern airlines, given the significant operational dislocation we've seen in the industry over the last 2 years?
That's a real loaded question. Certainly it's not our priority. Let's say it's not our priority. We'd rather spend our capital on investments that are closer aligned to our strategic plan that we -- that we've laid out. And so, obviously we look very carefully at capital investment and what the return is, and we -- although we've explored that scenario in the past, we have not come close to stepping into it, for the reasons I just spoke about -- that we believe our capital is better spent on new aircraft and investment in products that makes us a stronger brand.
The next question is from Chadi Chamoun from BMO -- Fadi Chamoun, very sorry.
So I guess you gave us CASM guidance and EBITDA margin, and we came back into some numbers here for -- but I was curious, on the PRASM side, it feels like you had several rate increases through the second quarter. Like, is there a way we can figure or understand what would've been the passenger RASM gross kind of in June or kind of exiting the second quarter versus what you started off with in kind of April or early May time frame?
So, as Lucie talked about, June was our strongest month of the quarter, and so I think you could take from that, that there was some acceleration of PRASM throughout the quarter, with June being the stronger month, reflecting all the initiatives and other aspects that we put in place.
Okay. And maybe one follow-up question on this demand story and equation. I mean, you spend a lot of time thinking about the demand and kind of staffing up for it and preparing for it. If we end up do in a kind of slower economy or even a mild recession next year, do you think that this kind of post-pandemic recovery can still drive RPM and drive capacity higher going into 2023? How are you thinking about kind of this macro outlook and the challenging story on the economy side versus how you're kind of planning for the next 12 months, not only for the next 3 or 6 months?
Again, as Lucie said, we're not seeing any evidence in our advance bookings that there's a slowdown coming, but we -- like everyone, we read the newspapers, we listen to the economists. We've run recession scenarios -- mild recession scenarios -- and we're quite comfortable with our plan going forward, including our agility to ramp up or ramp down, depending. And obviously we've -- unfortunately, over the last 20 years, we've had some practice doing this. And so we're quite comfortable, as a leadership team, that we can manage any environment that comes forward. But again, we're not seeing any evidence of a slowdown. And your theory is interesting -- whether the pent-up demand continues and pushes through a possible model recession. That may be the case, and -- but I can assure everyone that we are ready for any scenario that exists to take advantage of.
The next question is from Helane Becker from Cowen.
So, just on the 84,000 flights that you were able to do in the second quarter, how should we think about that going forward? Is that kind of the level you're going to want to do? Can you do more than that? Is that stretching it anyway and you should think about doing less? Because that's a pretty big increase, right, from the -- from 2019, and maybe the number of employees hasn't increased as much. So just wondering how we should think about that in terms of growth, maybe one year out as opposed to maybe one quarter out.
I'll sort of cover it from a bit of an operational perspective. I mean, I think that the phenomenon we saw was a little bit of a delay in terms of the timing of some of the resources we needed to come in versus the acceleration of, you know, the ramp-up we saw in the second quarter, and that kind of led to some of the challenges. But as the quarter finishes, and, as Mike mentioned earlier, as we come out of the second quarter and are starting to look ahead, we're feeling a lot more resilient in terms of meeting the operational demands versus what the commercial demand is. So, on a going forward basis, we don't view -- we will follow the commercial demand and the capacity that's deployed, and we don't anticipate from an operations perspective there being any constraint around that.
That's great. Thanks. And then, if I could just ask one follow up of Amos, you talked about having free cash flow. How should we think about the balance sheet and liquidity? You mentioned the minimum level that you want to have, and free cash flow deployment in maybe 2023, as opposed to maybe, again, next quarter.
So, as you know us, we -- our priorities still on cash and liquidity are -- right now is de-levering, and we're doing that through essentially purchasing aircraft with cash and then funding our capital plan, which you've seen sort of includes these product investments -- aircraft investments specifically -- and other CAPEX items. So those are still really our priorities, and then we'll continue to look for opportunities, again, as to delever as we look at cash and cash on next year and continue sort of recovery. So -- and our goal, as we stated back in investor day, is to get to leverage ratio of 1 by 2024 -- end of 2024, so we continue to sort of look at the capital priorities in that order.
And the next question is from Andrew Didora from Bank of America.
Lucie, appreciate all the color that you gave with regards to kind of fares and your booking commentary. Would you be able to provide -- give us the revenue cadence across the months in 2Q so we can get a sense of what the trajectory was like?
Yes, actually. Give me one second here. Where's the little slide I'm looking for? Here -- from April to May -- so if we look at within the quarter, the progression on revenue from April to May was in the 15% range, and if we look at from May to June, we were almost in the 25% or 30% range. So the ramp-up for June -- the results for June -- really significantly drove the quarter.
Got it. And just one point of clarification: did you say that June fares were up 13% or 30%? I couldn't quite understand.
No, the average fares were up 13% at the system level, not 30%. 13%.
Thank you. There are no further questions at this time. I'd like to turn the meeting back over to Ms. Durand.
Once again, thank you very much for joining us on our second quarter call today. Should you have any additional questions, we invite you to contact us at investor relations. Thank you and have a great day.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.