Air Canada
TSX:AC
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Air Canada
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Good morning, ladies and gentlemen. Welcome to the Air Canada Fourth Quarter and Full Year 2017 Conference Call. I would now like to turn the meeting over to Kathleen Murphy. Please, go ahead, Ms. Murphy.
Thank you, Valerie, and good morning, ladies and gentlemen, and thank you for joining us on our call today. With me this morning are Calin Rovinescu, our President and Chief Executive Officer; Benjamin Smith, President, Passenger Airlines; and Mike Rousseau, our Chief Financial Officer. On today's call, Calin will begin by highlighting our financial performance for the full year and quarter and the progress made on our strategic initiatives. Ben and Mike will then address our fourth quarter financial performance and turn it back to Calin, before taking questions from the analyst community. As usual, I would like to point out that certain statements made on this call, such as those relating to our forecasted costs, financial targets and strategic plans, are forward-looking within the meaning of applicable securities laws. This call also includes references to non-GAAP measures. Please refer to our fourth quarter press release and MD&A for important assumptions and cautionary statements relating to forward-looking information and for reconciliations of non-GAAP measures to GAAP results. I'm now going to turn it over to Calin Rovinescu, Air Canada's President and CEO.
Thank you, Kathy. Good morning, everyone, and thank you for joining us on our call. I'm delighted to report that 2017 was a record year for Air Canada, underscoring the effectiveness of our transformation strategy, our global expansion and the power of our comprehensive network. The numerous financial records we set last year following on the previous year's results are further evidence that our strategy is succeeding in transforming Air Canada into a company that can be consistently and sustainably profitable over the long term. For the year, we reported record EBITDAR of more than $2.9 billion, a $153 million above 2016. This is our fifth consecutive year of record EBITDAR results. We generated an EBITDAR margin of 18% and a return on invested capital of 13.9%. On a GAAP basis, we reported operating income of close to $1.4 billion. We met or exceeded all of our previously communicated Investor Day targets and market guidance for 2017. For the fourth quarter, we delivered record EBITDAR of $521 million and a record EBITDAR margin of 13.6%. On a GAAP basis, we reported fourth quarter 2017 operating income of $133 million. During the quarter, on capacity growth of 9.5%, we increased passenger revenues by 11.4% to a record $3.4 billion on traffic growth of 9.9% and a yield improvement of 1.4%. This is the second consecutive quarter where we experienced positive yield growth year-over-year before adjusting for stage length and the fourth consecutive quarter that our relative yield performance improved, a very important trend for us, given our capacity additions. On a stage-length-adjusted basis, yield increased 4% when compared to the same quarter in 2016. This speaks to a robust revenue environment, strong local market performance as well as improvements in premium cabin traffic and yields. During 2017, we continued to selectively and profitably expand our international services, with the launch of 30 new routes. 15 of these were new international city pairings, including Montréal-Shanghai, Toronto-Mumbai and Vancouver-Melbourne. We carried a record 48 million customers. This included growth of 20% in international to international connecting passengers via Canada, so-called sixth freedom flying, with a significant portion originating from the United States.Each of Air Canada Cargo and Air Canada Vacations had their best year ever in 2017 with record revenues. The airline recorded more than $1 billion in ancillary revenues.Looking at 2018, we continue to see a strong demand environment in growth and global connecting traffic, and we remain committed to meeting the key financial targets set out at our September 2017 Investor Day, namely, EBITDAR margin, ROIC, free cash flow and leverage ratio. Over the last several years, we have been a North American industry leader in reducing adjusted CASM. Indeed, in 2017, adjusted CASM decreased 3%, significantly better than the 3.6% average increase of other primary North American carriers. In fact, Air Canada's adjusted CASM level is now comparable to the average adjusted CASM of the 3 large U.S. carriers, both measured in local currency.Building on the momentum of our strategy and to underscore that cost transformation is a permanent ingredient in our DNA, we've undertaken a new company-wide Cost Transformation Program intended to deliver $250 million in savings by the end of 2019. Mike will discuss this initiative in a little more detail later on the call. This is particularly relevant now that capacity growth will slow with our wide-body fleet renewal being substantially completed and 2018 full year adjusted CASM projected to range between a decrease of 0.5% and an increase of 1.5% over last year. As we shift our focus to our mainline narrow-body replacement program, we will keep investing in products and services to bolster our objective of sustainable profitability over the long term. This will include our new loyalty program, technology to enrich the travel experience, investments in AI and enhanced airport services and amenities. As a result, adjusted CASM for 2018 is projected to be slightly higher than historical levels. We see long-term value to Air Canada in these nonrecurring, specifically targeted investments, making their shorter-term cost worthwhile.In 2017, we were extremely pleased to be named Best Airline in North America by Skytrax, given the very competitive context we find ourselves in. We intend to continue providing a superior product to our customers, whom I thank on behalf of all Air Canada employees for choosing to fly with us. But before turning the call to Ben, for a discussion of our revenue performance in the quarter, I'd also like to thank our 30,000 employees for their hard work in 2017, carrying a record number of customers safely to their destination, especially during the very challenging and disruptive winter conditions we experienced over the holiday period. Ben?
Thank you, Calin, and good morning. I'd like to start out by thanking all our employees for an incredible 2017 as well as our many returning loyal customers and new customers for choosing to fly with us and our many shareholders for their support of our plan. I would also like to acknowledge and thank all of our employees in the operation, who performed exceptionally well while facing extremely challenging weather that affected in many of our major markets during the holiday peak season and into the beginning of January.As Calin mentioned, it was a very strong year for Air Canada. Not only did we carry a record number of customers, achieved record EBITDAR and record revenues, we also began the next phase of our evolution with the introduction of our first Boeing 737 MAX 8 into our fleet. The delivery of this aircraft in the fourth quarter signaled the beginning of the rejuvenation and optimization of our narrow-body fleet, focused around the 737 MAX aircraft and the Bombardier C Series, the latter of which will begin delivery in 2019. We look forward to continue taking deliveries of the 737 MAX in 2018 and realizing the CASM benefits this aircraft provides as well as the additional flexibility we will have in our strategic deployment of narrow-body aircraft throughout our network. Throughout the year, we continued our focus on premium customers as well as profitable international growth, stemming from our 3 strong hubs in Toronto, Montréal and Vancouver. We successfully launched 30 new routes, 15 of which were international. We also introduced our Air Canada's signature suite in the fourth quarter, an exclusive premium lounge for eligible international business-class customers in Toronto, offering a best-in-class à la carte dining experience. These investments in our fleet, network and product strengthen our market position as the competitive landscape evolves, continuing to enhance the overall customer experience and enable us to reach our ultimate goal of sustainable profitability.With that, I am pleased to report on our fourth quarter results. As Calin mentioned earlier, we reported record passenger revenues of $3.4 billion in the quarter, an increase of $346 million or 11.4% from the previous year. We saw traffic increases in all 5 of the major markets we operate in, with system traffic growth of 9.9%. On a system basis, our yield increased 1.4% in spite of the average stage length in a quarter increasing by 4.6% year-over-year. We are pleased to report we achieved absolute year-over-year yield growth before stage-length adjustments for the second consecutive quarter. On a stage-length adjusted basis, yield grew 4.0% versus the same quarter in 2016. When looking to our cabin performance, we are particularly pleased with the strong performance of our business-class cabin in the fourth quarter, which reflected a continued strategic emphasis on our premium product offering. In this cabin, we saw traffic growth of 8.2% and revenues growing by 15.3% or $96 million resulting in a yield increase of 6.6% versus the fourth quarter of 2016. Our premium economy cabins also closed out the year with very strong results in all of our major markets and was aided by the introduction of our Premium Economy product on select wide-body aircraft within North America. Consistent with prior quarters, our strong revenue results were driven by our success in attracting larger volumes of higher-yielding local traffic, a strong performance of our premium products and improvement in our overall fare mix, increases in base fares, continued leverage of our revenue management capabilities and an increase in ancillary revenues. Speaking of which, we saw a 16% increase in ancillary revenues in the fourth quarter and it continues to be a key contributor to our overall revenue growth. We remain confident that our plan is delivering on our strategies to leverage the geography of our Canadian hubs, our industry-leading products and services, our extensive network and other competitive advantages. In terms of forward bookings, I can also share that we are pleased with what we see for the first 2 quarters of 2018 with advanced bookings in line with our expectations, mainly driven by booking volumes trending very positively for our international services.Turning to our key markets. In the domestic market, on capacity growth of 1.4%, revenues grew $58 million or 5.4% on a yield improvement of 3.5% and traffic growth of 1.6%. Our yield increase reflected growth on most major domestic services and included yield improvements on connecting traffic as well as in our Business cabin. Our traffic increase was driven by strong demand on services within Canada as well as driving higher connectivity from our hubs to the United States and international destinations. Lastly, we continue to be pleased with the performance of our service in the triangle of Ottawa, Montréal and Toronto. Looking forward to the first quarter of 2018, in the domestic market, we are expecting positive year-over-year traffic and revenue performance. To maintain and grow our competitive position in Western Canada, we have announced enhancements to our network into British Columbia with our nonstop Air Canada Rouge Service to Nanaimo and Kamloops from Toronto as well as our nonstop Air Canada Rouge Service to Victoria from Montréal. These announcements are made possible with the additional flexibility provided through the ratification of the amendment to our agreement with our pilots, which provides us with the opportunity to grow our Rouge narrow-body fleet within North America at a rate proportionate to the growth of our mainline fleet.On the U.S. transborder market, revenues were up $43 million or 6.3% on capacity growth of 6.7%. Traffic grew 7.1% with increases reflected on all our major services. Our traffic growth was driven by the launch of Air Canada Express Service, which included nonstop service to San Antonio and Memphis from Toronto, nonstop service to Dallas and Denver from Vancouver and nonstop service to Washington from Montréal. A yield decline of 0.7% largely reflected the impact of increased industry capacity on U.S. long-haul and short-haul routes, partly offset by yield growth on our U.S. sun routes, such as our services to Florida, Hawaii, Phoenix and Las Vegas. The strength of our U.S. leisure routes also helped offset the short-term currency pressure that we experienced in the fourth quarter. We anticipate that the strong performance of our leisure/sun routes will continue into the first quarter complemented by the introduction of our new nonstop service to Phoenix and Montréal. Looking to the first quarter, we are anticipating continued traffic and revenue growth from the United States. The strong performance in this market had given us confidence to further build out our transborder network as seen with the announcement of 7 new U.S. routes that we will launch in the first 2 quarters of 2018. We are pleased with the strong customer demand between Canada and the U.S., especially the incremental connecting traffic and in 2018, we are continuing our focus to enhance the process for our passengers transiting our hubs to and from the United States. Turning to the Atlantic, which was our best performing market in the quarter, revenues increased $138 million or 22.2% versus the same quarter in 2016. Our strong results were driven by an increase in traffic of 14.4% and a yield improvement of 6.8%. In 2017, the Atlantic market exceeded our expectations with its successful introduction of our nonstop service to Mumbai from Toronto, which has enhanced our presence into India as well as our strategic use of Air Canada Rouge to offer seasonal service to several new European leisure destinations. Looking ahead, we anticipate another very strong quarter over the Atlantic for Q1 from a traffic, revenue and yield perspective. We are anticipating a material shift of bookings over the Atlantic in the first quarter related to Easter Sunday, which is on Sunday, April 1, this year, as opposed to later in April, as it was last year. This will result in a softening of bookings for April, but a strengthening of bookings in March. We continue to be pleased with the outlook for our nonstop service to Delhi from both Toronto and Vancouver, which gave us the confidence to announce that our nonstop Vancouver to Delhi service will be year-round starting next summer.Moving on to the Pacific. On capacity growth of 12.2%, revenues increased $60 million or 13.5%, driven by traffic growth of 13.7%. This traffic growth was largely driven by the launch of year-round nonstop services from Montréal to Shanghai, Vancouver to Taipei and Vancouver to Melbourne. Yield was only slightly below 2016 levels, down 0.2%. This is the best year-over-year yield performance we have seen in this market since the first quarter of 2016, which we are very pleased with considering the competitive pressures.As we look ahead to the first quarter, the Pacific continues to face competitive pressures, particularly for the China and Hong Kong market, resulting in a slight downward pressure on yields. We do, however, anticipate continued strong year-over-year revenues and traffic performance. When we look to our remaining markets, on capacity growth of 18.7%, passenger revenues increased $47 million or 23.7%, driven by a traffic increase of 17.9% and a yield improvement of 4.8%. The traffic increase versus 2016 was largely driven by the use of larger aircraft on routes from Toronto to São Paulo, San Diego and Buenos Aires. Yields improved on services to South America, aided by a recovering Brazilian economy and on routes to traditional leisure destinations. Yield improvement seen in our services to our sun destinations represented the third consecutive quarter of yield improvement for this market, a promising trend we hope to continue into 2018.Looking ahead to the first quarter, we anticipate continued strong revenue and traffic results into South America, partially resulting from a significant turnaround in the Brazilian market, but also contributed to by our enhanced service into Peru and Colombia, which began last quarter with our nonstop service from Montréal to Lima as well as our nonstop service into Cartagena from Toronto. Similarly, we anticipate continued strong revenue traffic and yield performance to our traditional sun destinations. Now turning to our cargo performance, which generated, once again, very strong results. Cargo revenues increased $28 million or 18.4% year-over-year, driven by traffic growth of 19%. In the fourth quarter of 2017, both the Atlantic and Pacific markets reflected yield increases for cargo versus the same quarter in 2016. Looking ahead to the first quarter, we anticipate continued strong cargo performance year-over-year from a revenue, traffic and yield perspective. Strong demand to the Pacific market has been a primary driver of the continued growth and healthy industry-wide growth is also proving to be a positive factor. I'll now turn the call over to Mike, for a discussion on our cost performance and balance sheet metrics.
Thank you, Ben, and good morning to everyone. I also want to thank all our employees for another excellent year of record financial results including a record fourth quarter. Turning to our unit cost performance in the quarter. On an adjusted basis, CASM declined 1.2% from the fourth quarter of 2016. This is in line with the 0.5% to 1.5% decrease projected in our Air Canada Q3 news release. All-in CASM also decreased 1.2% from last year.Moving on to fuel. Our average price of fuel for the quarter was CAD 0.675 per liter, up 13.8% versus the same quarter in 2016. Fuel expense increased $159 million or 23% in the quarter, with higher jet fuel prices increasing fuel expense by $151 million and a higher volume of liters consumed adding another $55 million. The stronger Canadian dollar and our hedging program partly offset these increases lowering fuel expense by $47 million. We currently have no fuel hedging contracts in place, although we continue to closely monitor the market and may add hedges later this year.We certainly continue to benefit from the natural hedge that the U.S. Canadian foreign exchange rate provides.Looking forward, our assumption is the price of jet fuel will average CAD 0.72 per liter in the first quarter of 2018 and CAD 0.70 for the full year 2018. And now to provide some guidance on costs. For the full year 2018, we project adjusted CASM to range between a decrease of 0.5% and an increase of 1.5% when compared to 2017. Of this, approximately 0.75 percentage points will be driven by nonrecurring items and investments. These nonrecurring items and investments include expenses related to branding and new uniforms, investments in customer service, including training, technology, airport services and amenities to enrich the travel experience, accelerating depreciation for our Embraer 190s and start-up cost related to the launch of our new loyalty program in 2020. Loyalty start-up costs are expected to amount to $10 million in 2018. Shifting to the first quarter. We expect adjusted CASM to increase 2% to 3% when compared to the first quarter of 2017. 1/3 of this increase is the onetime event relating to new uniforms, which are being delivered to employees in the first quarter. Our projections are based on the assumption that the Canadian dollar will trail on average at CAD 1.25 per U.S. dollar in the first quarter and for the full year 2018.We continue to aggressively focus on lowering our cost structure. In fact, in 2017, through the execution of company-wide initiatives, we realized savings of approximately $90 million. Moreover, through the renegotiation of agreements with key suppliers, our procurement team executed 211 agreements, which will generate realized savings and avoid cost increases totaling $120 million over the life of these agreements.Looking ahead and building on what we achieved in 2017, we've undertaken a new cost transformation program aimed at securing incremental savings of $250 million by the end of 2019. This speaks to the ongoing efforts to foster a culture of continuous cost improvement across the organization. This type of program involves digging deeper and looking at all aspects of our business to find efficiencies and implementing cross-functional improvement projects. It includes initiatives around procurement events, maintenance material and repair processes, aircraft leases and return conditions, internal engineering cost efficiency, streamlining our overhead structure and simplifying our business processes.Air Canada's 2018 outlook is not dependent on the new cost transformation program. With respect to the loyalty program, through extensive research with over 10,000 customers, bloggers and Air Canada employees, we've received valuable feedback on what stakeholders' value in a loyalty program. We've also identified opportunities unserved or underserved by existing programs. We continue to design the program and the process is running on-schedule and on-budget.In the fourth quarter 2017, we contracted for a leading cloud-based customer data platform as well as a customer identity and access management provider. Both are critical foundations for the new program. In addition to the RFP launched last September for a co-branded credit card partner, we recently launched a procurement process for our loyalty technology platform partner. Decisions for both these RFPs are expected by the end of 2018. Turning to balance sheet and liquidity. We ended the year with unrestricted liquidity levels of $4.2 billion. Given this high level of cash, we plan using excess cash to purchase some of our new aircrafts scheduled for delivery in 2018 and potentially, in 2019. We reported record cash -- free cash flow of over $1 billion in 2017, $1.2 billion above last year. This reflects a lower level of capital expenditures, net of the proceeds and sale leaseback transactions as well as the impact of higher cash flows from operating activities versus 2016. This was also above the range of our $600 million to $900 million projected in our October 25 news release on higher-than-expected cash flow from operations, including a greater-than-anticipated increase in advance ticket sales. For 2018, we project free cash flow of $250 million to $500 million. We are not contemplating any aircraft sale or leaseback transactions in 2018. We took delivery of 11 new aircraft in 2017, 3 of which we purchased with cash, increasing the number of owned and unencumbered aircraft to 56 at year-end 2017.At December 31, we have adjusted net debt of $6.1 billion, down $974 million from December 31, 2016. Our leverage ratio was 2.1, a reduction of 50 basis points from the end of 2016. We achieved a return on invested capital of 13.9%, 630 basis points above our weighted average cost of capital of 6 -- 7.6%. At quarter-end, our weighted average cost of debt stood at 4.5%. Now turning to pensions. As disclosed in our year-end MD&A, on a preliminary basis, we had an aggregate solvency surplus of $2.5 billion in our domestic registered pension plans on January 1, 2018. This is an increase of $600 million from January 1, 2017. Total pension funding contributions are forecasted to be $90 million in 2018.When we began our transformation, we said, the objective was for Air Canada to become sustainably comparable over the long term. This involves substantially lowering the risk profile of the company. I would just like to take a moment now to review the steps taken to materially derisk the company. One, our cost structure on a ASM basis has declined significant over the past 4 years and now our adjusted CASM is comparable to the average of the 3 large U.S. network carriers, both in local currencies. Two, liquidity levels are -- have been at all-time highs. Three, debt levels are declining. Four, our leverage ratio has never been lower with a path to investment grade credit ratings by the end of 2020. Five, our return on invested capital has been well in excess of our cost of capital. Six, we have significant pension solvency surplus versus the cash draining deficit. Next, our major labor contracts are in place for the next 6.5 to 8 years. And we presently have 56 unencumbered aircraft, with that number expected to grow versus null or 0 unencumbered aircraft only a few years ago. And this, as we spoke about in the past, provides us with additional financial flexibility.We believe that Air Canada's share prices deserves a higher multiple given our significant global risk profile and our confidence in attaining the financial targets we described at our Investor Day, last September.Turning to the fleet. We have taken delivery of 2 Boeing 777s and 2 Boeing 737s since year-end. We expect to take delivery of another 3 787s and 14 737s in the first half this year. Furthermore, in 2019, we plan on replacing 5 mainline Boeing 767s with 4 leased Airbus 330s.We've also made a decision to accelerate the removal of the Embraer 190s from our mainland fleet. To do this, we will retain the Airbus A319 aircraft a little bit longer than initially planned, as a bridge to the deliveries of the Bombardier C Series scheduled to commence in late 2019. The Airbus A319 aircraft typically has a lower CASM than the E190.On the Rouge front, we recently transferred one mainline Boeing 767 to Rouge for a total wide-body fleet of 25 aircraft. We've also recently leased an Airbus A321 aircraft and are planning to transfer 2 Airbus A319s from our mainline fleet to Rogue, with all 3 aircraft expected to be in operation this summer.As a result of our improved financial condition including leverage ratios and profitability, in mid-2017, we successfully lowered the margin on our term loan B by 50 basis points. In addition, in connection with the financing of 4 787s and 9 737 MAXs arriving in 2018, we recently closed a private offering of 3 investment-grade tranches of EETCs. These have a combined weighted average interest rate of 3.4% per annum, the lowest rate of the 4 EETC offerings we've conducted in the last 4.5 years.With respect to the outstanding deliveries in 2018, some are expected to be debt-financed and as I mentioned earlier, some will be purchased with cash. This will further increase the number of fully owned and unencumbered aircraft in our fleet. We currently have a pool of unencumbered assets, including aircraft, valued at over USD 2 billion. We continue to leverage our normal course issuer bid. In 2017, Air Canada repurchased approximately 4 million shares. This program is in effect until May 30 of this year and we will be looking to renew it.And now moving to more technical issues. Past accounting new accounting standards. In 2017, Air Canada determined that it was probable that substantially all of its unreported deferred income tax assets, including noncapital losses, would be realized. Accordingly, a tax recovery of $787 million was recorded in the third quarter, representing the initial income statement recognition of previously unrecognized tax assets. Beginning in the fourth quarter of 2017, adjusted net income is determined net of tax and includes the income tax effect of adjustments included in the measurement of adjusted net income. A tax expense of $16 million effective both fourth quarter and full year 2017 adjusted net income results.Additional detail, more results for the year and fourth quarter can be found in the financial statements and MD&A, which were posted on our website and filed on SEDAR this morning.And just before passing it back to Calin, I want to take a few minutes to update you on certain accounting standard changes. For 2018, we have planned to adopt IFRS 15, the new international financial reporting standard for revenue recognition, which took effect January 1. Changes to Air Canada's reporting under this new standard are limited. Credit card cost and global distribution fees will now be capitalized at the time of past year ticket booking and expensed at the time of revenue recognition, which is when the flight occurs. Previously, these costs were being expensed at the time of ticket bookings. This change better aligns the timing of expense recognition with the related revenue recognition. The anticipated impact in the balance sheet as of December 31, 2017 with an increased prepaid expenses and other current assets of $64 million and an equivalent increase to opening retained earnings.Moving forward, the amount of prepaid expense will fluctuate on a quarterly basis in line with changes in the advance ticket sales liabilities.We will also be reclassifying certain passenger and cargo-related items from other revenues to passenger revenue and Cargo revenue. This is a presentation change only. It does not impact the timing or total operating revenues previously reported. Based on Air Canada's full year 2017 result, the amount expected to be reclassified is $122 million to passenger revenue and $58 million to cargo revenue. A recast of prior [ quarter ] will be included in our first quarter MD&A.And in 2019, we'll be applying a new standard for leases, IFRS 16. We're still evaluating, which transition method to apply in the full impact of the standard. It introduces a single on-balance-sheet recognition model, eliminating distinction between an operating and a finance-lease for leases. This will have a significant impact on our balance sheet, as most operating lease aircraft including those, which are operated for us by our CPA carriers, are expected to be recognized as right-of-use assets and lease liabilities. Lease facilities and property will also be -- have to be valuated.Finally, the expenses relating to those leases will change, as IFRS 16 replaces a straight-line operating lease expense with a depreciation charge for right-of-use assets and interest expense on these liabilities. This certainly will disclose additional information including transitional methods and estimated financial impacts during 2018. And with that, I'll turn it back to Calin.
Thanks, Mike. So Air Canada celebrated its 80th anniversary in 2017. And we did so with the vitality and sense of urgency of a new economy start-up. We carried more passengers than ever, won numerous industry awards including being named Best Airline in North America. We generated record EBITDAR of over $2.9 billion and record operating revenue of close to $16.3 billion, an increase of nearly $1.6 billion in revenue year-over-year. We also further strengthened our business for the long term. We reduced adjusted CASM by 3%, our unrestricted liquidity reached $4.2 billion, we lowered adjusted net debt by almost $1 billion, and we advanced our $10 billion fleet renewal program and spent more than $2.4 billion on CapEx. Air Canada's shares outperformed those of all of its North American network carrier peers for the second consecutive year, appreciating nearly 90% during 2017. This was our fifth consecutive year of record EBITDAR. Set in the context of these ever-stronger performances, we fully expect to deliver on our commitment of long term sustainable profitability as well as the specific financial targets that we made in our most recent Investor Day. In fact, as you've heard, we're raising the bar higher with this new CTP program to secure additional $250 million in savings by the end of 2019. But also, as you heard, we will continue to invest in technology, in loyalty, in CRM, in artificial intelligence. In fact, just yesterday, the Québec's supercluster on artificial intelligence and robotics in supply chain was approved by the Canadian government and we are one of the key partners in the transport category. Our strategy has given us the financial resilience and the operational flexibility to thrive in changing economic circumstances and compete in any arena, whether that be globally against other full-service international carriers or domestically, against our existing competitors or new ULCC entrants. As well, our strategy has also brought about important culture change, which our employees have fully embraced and which have been recognized by Canada's Top 100 employers several years running. Culture change has been a key to our success and is shown not only by this and other awards we won for service, workplace engagement, our HR practices and diversity, environmental and sustainability, but also, from the daily commitment our employees demonstrate taking care of our customers. Their dedication, as I said earlier, was fully on display in the past quarter when frigid temperatures and storms disrupted the entire industry, but our employees faced down the elements and worked tirelessly to move hundreds of thousands of holiday travelers safely to their destinations. I'm extremely proud of the work that they do. And with that, I'll turn it over to you for some questions.
[Operator Instructions] Our first question is from Walter Spracklin with RBC.
Just my first question here is on margin. You had indicated for 20 -- for your longer-term '18 -- 2018 to 2020, a range of 17% to 20%. Now you didn't give any guidance on 2018, and you indicated that there's -- there -- you gave some color around your new CTP. My question is, is there any color that you can provide with regards to that band, whether it will be toward the top end or low end of that band in 2018? And just further clarity as to the CTP, therefore, was embedded in this 17% to 20% 2018 to 2020 guidance that you gave in September?
Walter, it's Mike. First of all, the guidance for '18 is incorporated in our long-term guidance of 17% to 20% EBITDAR margins for 2018 to 2020, as we talked about at our Investor Day. Second, at our Investor Day, we had not contemplated $250 million CTP program. And so as a result, that is not incorporated in our expectations when we set those targets back in September.
So do you have a new range now that includes the CTP?
No. I mean, 17% to 20% is a fairly broad range based on our revenue. And so we've -- the $250 million program is still to be developed. We've got some ideas and some aspects of it. But as we've talked about, both Calin and I spoke about it, it's important for us to maintain the DNA and challenge our company on looking for productivity improvement, and this is one way of doing it.
And Walter, Calin here. If you'll remember, we launched the $500 million CTP program in 2009, and as you know, we ended up outperforming that, we did about $575 million, I think, of that $500 million target. What it did for the organization is it set this new tone for cost transformation as being something in our DNA, and it worked very, very well. And you saw the CASM reduction performance over the last 5 or 6 years. And I think, now that, obviously, we're achieving record results, we need to continue to ensuring that the organization sees the importance of this CASM reduction going forward. Obviously, we don't need the cost reduction to give us additional liquidity. We've got lots of liquidity. We need the CASM reduction to continue driving the -- toward these kinds of margins that we're committing to, while continuing to spend on the things that we've called out. We're spending on technology. We're going to continue spending on technology. Not all technology investments can be capitalized, so we know some of that will be -- have the short-term cost. We're going to continue spending on updating uniforms and doing this sort of thing. So all that to say that while we will not stop spending on things that make sense, we need to have that cost dynamic as sort of embedded into the culture of Air Canada. In good times -- we showed we can take cost out in bad times. But we now need to show we can continue to having that cost discipline in good times.
Okay. And then, looking at your capacity evolution and how it will be -- the growth rate will be coming down, when we look at your fleet plan, it would appear that you're early in the year, kind of Q1, maybe Q2 will continue at the same kind of growth rate as the fourth quarter but then come down quite substantially in the third and fourth. Is that a fair rate -- fair read into your fleet plan? Am I reading your fleet plan correctly? Or should I -- or is there something you would add to that?
No, that's correct, Walter. It's Ben. What we tried to do, and it's, I'd say, for the majority of our fleet, new fleet that's coming in, we try to time the aircraft deliveries in Q1 and Q2. So we have the full use of the capacity in our most important quarter, Q3. And that is taking place this year with the remaining 787s that we have, and the final 787 deliveries, we'll do the same in 2019, they will come in Q1, Q2.
Okay. That makes sense. And last question here is on your strategy with regards to fuel prices and how you're -- you'll be passing those through. Calin, are -- is this -- I've been noting, your yield is up 100 basis points sequentially now for the last couple of quarters, is there still some pricing that you've put into the quarters recently that will filter into the bookings that will come into play in forward quarters and, therefore, is this trend of 100 basis points per quarter reflecting your strategy to cover fuel? And is it your target to cover fuel on a one-for-one basis?
Right. I mean, obviously, if I could design it in such a way that we could price as well as the stock markets price macroeconomic events, we would absolutely be doing that. The reality is that we fully expected fuel to be bouncing around this year and to be somewhat unpredictable, as we've seen over the last 2 weeks. And so it's -- as much as we'd like to, it's not a perfect methodology. We certainly expect to be -- continue pricing based on what fuel is doing. And obviously, we are facing a competitive dynamic, and so we're not going to be calling out exactly what our strategy is on pricing for the next period of time. But you -- rest assured that our sensitivity to fuel is well-embedded in our pricing strategy. And while we would hope for a stable fuel price, of course, we haven't seen that over the last few weeks. And so we know what we need to do for the rest of the year going forward.
Our next question is from Andrew Didora with Bank of America.
I guess, Mike, you alluded to the -- you mentioned this in your prepared remarks, just in terms of the $4.2 billion in total liquidity. Looks like it's about 25%, 26% of your trailing revenues. This has been 10 points higher than your U.S. peers, and a significant amount of your liquidity is in cash as opposed to just on available lines of credit. So why not -- is there anything stopping you from using this cash now to pay down some more debt, keep lowering your interest expense, so that you can start buying back stock now when it still trades at what you view as a pretty deep valuation discount?
Well, as we talked about, Andrew, our priority is reducing debt, and so there's a couple ways to do that with excess cash. You can even buy planes for cash, which we've been doing, and we'll probably accelerate over the next 12 months, or you can pay down debt. And we wanted to place the December debt, the WTC, because we have -- [indiscernible] up, and we picked an awful time to fix a 3.4% rate for a long period of time. But going forward, as we talked about, we will use the excess cash to buy planes and/or pay down debt. And we did pay down some debt in 2017. It's not evident, we didn't call it out, but over $800 million of debt was paid off in 2017. Some of that was just amortization of existing debt, but we did take the opportunity, for example, to pay off all the Embraer 190 debt that was higher yielding than our average.
So if I could just ask you a different way, what level of liquidity do you feel comfortable with?
That's a great question. Certainly, I think, we have, probably, at least $1 billion of available cash to pay down debt and/or buy planes over the next 12 or so months.
Got it. And then, just, I guess, more of a housekeeping question. With the loyalty program, can -- I mean, can you remind me, have you given a number in terms of total start-up costs to be spent out between now and 2020, and are these going to be expensed or capitalized?
So -- absolutely, Andrew. It's Mike again. So we told the market that our upfront cost between 2017 and 2020, June 2020, will be $85 million, a combination of both capital and operating. We called out the operating cost this year at 10 -- for 2018, $10 million. That will round up a little bit over the next couple of years as we build staff. And I can also tell you that our capital cost this year for royalty will be also around $10 million, and as we start getting into the technology RFP process. So overall, on the $85 million, it's going to be roughly a 50-50, 60-40 split between op cost and capital cost.
Our next question is from Helane Becker with Cowen and Company.
So just a couple of things on your cost reduction program. Are you looking at things like early retirement programs and other things to help lower cost? Or is that not on the table?
Helane, Calin here. Thank you. So similar to what we did in the 2009 program, we will have -- we would be looking at programs across all branches and all initiatives. And so we do have an overhead cost program, for example, that our HR team is going to be looking. That's, first of all, that's starting up as to where there are opportunities. So it could well be that, that is something that could be considered. But obviously, as you know, there's often a cost to some of that, so we will look at that. But the objective is to have something that is real and sustainable, not only sort of short-term wonder, so to speak. So our sense is that there should be a lot of initiatives in all branches of the company. It will be a broadly based program. So you've seen, we have not -- this is the first one we've announced as a specific company-wide program since we announced our $500 million program a few years ago. And so we'll be looking at all branches. And initiatives like that will be considered, based on a business case.
Okay. And then, my follow-up question is one on the pension, probably for Mike. Can you -- I think, your pension is frozen, right? No new members go into it. So can you immunize it at this point?
It's Mike. So we have been immunizing it, and that's been a very successful strategy where we've matched, internally, the bond portfolio to the liability. And that has eliminated, certainly, significantly reduced interest rate risk, which is, by far, the biggest risk to pension plans. So we've been applying a program, both from an overlay perspective and from a mix perspective, to have more bonds in our portfolio to match the liability stream. And to answer your first question, yes, our -- essentially, our plan is closed, and it was closed roughly in 2012. All new employees since 2012, for the most part, are going to a defined contribution plan, much like a 401k program is based.
Our next question is from Cameron Doerksen with National Bank Financial.
Just a question on the cost reduction program. I mean, is it safe to assume that sort of the benefits will be really seen more materially in 2019, 2020, or some of the initiatives that you're contemplating to have any impact potentially on -- later in 2018?
There will be some for 2018, for sure. And we have already started the initiative. We've had our executive off-sites. We're working with an advisor to help us get at the lowest-hanging fruit, so to speak. And so we definitely expect to have -- see some impact in 2018. We also have some opportunities respecting some -- Mike indicated, some lease renegotiations, some return condition dynamics, some of those things. And we could certainly see some of that in 2018.
Okay. Very good. Just second question, just on the Embraer 190 fleet. I mean, you've accelerated depreciation here, and you mentioned that you'd fully paid off the debt there. So as you -- as these aircraft exit the fleet, I mean, is there any sale -- or cash proceeds from a sale that potentially could -- to come in?
We certainly hope so. We will market these planes as they leave our fleet over the next 18 months or so. Our expectation is that we will sell them into the marketplace.
They certainly have value. They're not -- as you know, they're not that old aircraft. And there are quite a few operators that have these aircraft in their fleet. And so we do see some value in these aircraft as they exit the fleet.
Right. And that expectation, I can't give you a number because I've been telling the people that might be buying the planes what I expect, but that -- well, our expected proceeds are not included in the free cash flow number that we posted to the market this morning.
Our next question is from Turan Quettawala with Scotiabank.
I guess, I was just wondering, Mike, I know you don't really provide capacity guidance anymore, but just wondering if you could give us a bit of sense on capacity growth for 2018? Obviously, a little slow from last year. But just wondering, is it sort of in the high-single digit range? Is that sort of a reasonable range to think about?
Okay. You know what? I'll give the market a present this morning, and I will tell the market that the capacity guidance is what the -- from the analyst community, in and around 7% is not unreasonable from our perspective.
Our next question is from Chris Murray with AltaCorp Capital.
Ben, maybe want to take this one. I'm just -- I'm thinking about, I guess, part of the discussion that we had at the Investor Day about the able -- the ability to use Rouge on regional routes and domestic routes, and it sounds like you're going to start taking advantage of that. Can you maybe go through what the limits you may have in being able to deploy Rouge, and whether or not you see this being a way to maybe be more cost effective? Or is there a stimulation or a new route opportunity with that?
Chris, Calin here. I'll start, and I'll turn it over to Ben. It's a very good question, and it's an important one. So this was one of the main benefits that came out of our pilot discussions last year out of our reopener discussions last year. This was the main benefit from Air Canada that was bargained, which was to say that we have the ability to increase the Rogue narrow-body aircraft. So exactly as you say. So what is the purpose of that? That gives us the ability, one, to introduce it on some regional routes where we can put that size of an aircraft. Obviously, some of the regional routes have much, much smaller aircraft. That doesn't make sense for us and we would not do that. But in those markets where we're using a less efficient regional dynamic, where the regional costs are much higher based on the CPA costs that we're paying, it does give us that opportunity. And at the same time, as I know that our regional partners are looking to reduce their cost to kind of compete for that traffic in the fullness of time. So one, it gives us the ability to introduce it on those regional routes at a reduced cost. Secondly, we fully expected, as we're seeing coming into the market, some additional competition from ULCC entrants, including our main domestic competitor introducing a ULCC product, which we'll see how successful that is or that isn't. But the point being that we needed to have the capability of introducing a lower-cost competitive vehicle, both on offense and on defense. And that, fundamentally, is what we sought to achieve with that. So I'll turn it to Ben to maybe just talk a little bit about stimulation in the marketplace. But that was the philosophy behind what we did with the expansion of the Rouge narrow-body.
Okay. Just adding to what Calin said, to clarify, some things that are not well-understood in the market is the current clause or the clause that we had prior this amendment that's written out in our collective agreement with our pilots at a maximum number of aircraft in Rouge, and that was 50 aircraft. And with this reopener that we had negotiated in our 10-year deal for every 3 years, still no strike, no lockout, this was negotiated in the first reopener, which was successfully negotiated, gives us 2 abilities to grow Rogue. One is, under the current formula, where there needs to be additional growth at mainline, and there's no maximum to the number of new aircraft we can put in. It is limited to the narrow-body fleet. So there is an agreed to formula to do that. And we can fly those aircraft anywhere we would like. And there's a second new flexibility that's been included, and that's what Calin was just mentioning, around regional flying. So this is a new portion of the deal, where we can put Rogue aircraft on any existing regional routes and there is no maximum and there is no requirement to grow mainline to be able to do that. And that is something new. And there are -- I mean, if you look at some of the routes we currently fly under the regional network where we may have 8 to 10 frequencies, we can now use the Rogue fleet to be able to replace and reduce some of those frequencies. So in a roundabout way, that has given us the ability to fly larger aircraft on regional routes. So it does give us a modified scope cost increase all the way up to a 320 size airplane.
Great. That's some great color. My next question is just, unfortunately, we've been listening to Aimia over the last few weeks, and certainly, the stock market has its own opinion on where it's going. I guess, when you think about the broader bucket of risk management, I guess, a couple pieces to this. One, if there were something to happen with Aimia between now and say, 2020 -- a couple of things, one, we look back in your history and certainly, Aimia has always been supportive of Air Canada financially. So I'm just wondering, are there any contingency plans around needing to stabilize the company on your part? Any updates if -- on the ability of Air Canada if they need to secure trademarks or any other intellectual property that you might need, just before your system is ready? And then, I guess, the third piece of this is, is there any way, if you needed to, that you could accelerate your own royalty program, if you had to?
So Chris, when you look at the dynamic, and you're right, we've had a good relationship with Aimia going back many, many years and with Aeroplan, and certainly, since our announcement, since our decision was made, we know that, obviously, they've gone through some challenges, but the relationship has continued to be extremely good. And we've been very, very involved, our teams have been very involved with lots of different initiatives, ranging from technology to the day-to-day operation of the program. And so it continues to be an extremely positive relationship and one that we value tremendously. Secondly, I'd say that our expectation is that they are well-funded. They still have a lot of liquidity on their balance sheet and we don't expect there to be any issues with them pre the turnover to 2020. And so we're kind of mindful of that. And our philosophy on this is that this contract has a term. There might be -- we read in the marketplace about investors looking at some alternatives over there. That's all fine and good. But from our perspective, we think that the company is in solid position. And we certainly expect to continue to live up to our side of the bargain under our contract until the end of the contract. And so we're not expecting, at this stage, any negative outcome until cutover in 2020.
Our next question is from Tim James with TD Securities.
I guess, my first question, probably for Ben here. You mentioned in the MD&A the aggressive pricing activities that are impacting the Pacific revenue in the fourth quarter. And it sounds like that's continued here into the first quarter. But as you look forward through the balance of the year now being mid-February, are you seeing any signs of plans by your competitors, or yourselves for that matter, that would alleviate some of that pricing pressure through, say, the second half of 2018?
So what's happened on the Pacific is, there's a new entrant on -- Hong Kong Airlines on Vancouver to Hong Kong on that route. And in response to that, Cathay Pacific has added several capacity. We have not added any incremental capacity. But the overall market between those 2 cities. It isn't an overcapacity situation. So we're dealing with that. And then China, there's been a big increase in capacity into Vancouver in particular from various Chinese carriers from secondary cities. Under the current bilateral agreement between China and Canada, China has now reached the maximum number of frequencies permitted. So there is no ability under the current bilateral for the Chinese carriers to grow. On the Canadian side, we've reached 50%, so there still is ability for Canadian carriers to grow into China. We have not done that. The bulk of our focus to increase yields and maintain our margin for Pacific has been to really focus on Australia, Taiwan and Korea as well as Japan. All those markets are performing extremely well. So it's a Hong Kong and China issue for us that we see stabilizing with improvements on some of the other areas I just mentioned.
Okay. Great. And then, my next question would be for Mike, really following up on an earlier question. You mentioned that you have approximately $1 billion available for aircraft purchases or debt reduction. If you add to that the plans for $250 million to $500 million in free cash flow in 2018, which, presumably, is after accounting for planned aircraft purchases, you then sit with $1.25 billion to $1.5 billion in cash available for debt reduction effectively. What debt would you look to use that on first? And is there any reason we shouldn't anticipate some of that additional debt reduction in 2018?
Tim, it's Mike. Great question. And we've gone through our debt profile. Certainly, we would like to take out the unsecured, which is the highest yielding debt. Unfortunately, it has a non-call to 2021. And so I can't take that out, and it's trading well above par at this point in time. Again, as I said to the earlier question, we did take out some more expensive debt, Embraer debt, just at year-end. But again, our average cost of debt right now is 4.5%. And so the negative carry of holding some cash is not significant from our perspective. And so that's why I will look at both to get the opportunity to accelerate some paydown of debt, or maybe buy out some debt on existing planes and to make them unencumbered, and/or buy planes for cash. Again, we've got 20 planes coming in next year, principally narrow-bodies, so we certainly have the opportunity to utilize the cash to buy the majority of those planes with no debt.
Our next question is from Konark Gupta with Macquarie Capital Market.
Just had a follow-up question on margin, Mike. So am I reading correctly that you have some sort of comfort in the revenue management techniques that you can keep EBITDAR margin sort of flattish at about 18%, or within the range you guided in 2018, despite the fuel volatility and flat to modest cabin inflation this year?
The short answer to that is yes. And you can look at the 2017 experience, because it was similar. Fuel prices went up in late '16, early '17. And we had these similar conversations. And you saw, we delivered a record Q2, Q3 and Q4 results, with yield performance probably exceeding expectations, certainly from a market perspective. And so based on that experience, and I have full confidence -- collectively, we have full confidence in our revenue management team in achieving their lever to ensure that we'll lead to 17% to 20% margins.
Konark, it's Ben here, I can add another point or 2. This year, we are not adding the same number of international long-haul routes versus 2017. So we've got all the experience from 2017. We don't have the start-up pricing that we need to put in the market, and we're focusing a lot more on premium. So we have that advantage. And also, the capacity increases that we saw last year, we don't foresee same level this year. And most international carriers load their schedules at least 6 months in advance. And from what we're seeing, we're in a very good position for the summer.
Perfect. And on CASM, Mike, how much is CASM down versus 2012 now, excluding fuel and FX, consistent with what you have guided previously? And CTP, could that have any impact on CASM this year on your guidance?
To answer the second question first, absolutely. As Calin spoke about earlier what we expect to realize some of those savings in 2018, which will benefit the CASM -- adjusted CASM guidance we provided this morning. With the first part of your question, in 2012, we'll have to get back to you. We can take that off-line. We can -- but certainly, the FX adjusted were close to that 21% we had guided the market a couple of years ago as to the overall cumulative reduction in adjusted CASM 2012 to 2017, '18.
Okay. Can you clarify just the rent aspect of the CASM. So aircraft rent, as you take out leases with the 737 MAX coming in, should the rent sort of continue to go down over the next few years?
I think that's a fair assumption, is that our intention is to -- is probably to lease less going forward. Today, we're -- half our fleet's leased, half our fleet is owned or financed. I think that mix will change more to the owned/financed over the next couple of years. So lease expenses result will not increase.
Okay. And lastly, on CapEx, so I saw the 2018 CapEx, your commitment ramped up slightly from the prior guidance. Any particular driver in that?
Not off the top of my head. It may be some technology additions. But we can get back to you with a little bit more color on that off-line.
Our next question is from Kevin Chiang with CIBC.
Just a couple of quick ones. One, maybe just to follow up on Tim's question, I apologize if you went through this. On some of the pressures you're seeing on the Pacific market, just wondering how a potential Air China JV may help with that? How's that going? And does that help you combat some of yield pressure you're seeing out of China and Hong Kong?
Ben will discuss that first part. I'll give you some color on where we are with the JV.
All right. Definitely, working closer with Air China will help. They have an extensive network, as you know, within China. We have 2 flights a day into Beijing. So additional connectivity to through cochair, through alignment of schedules and all the other benefits that a joint venture provides will definitely improve our performance on those 2 routes. Their -- the network they have out of Hong Kong is not that extensive, so the joint venture will benefit Beijing and, to a lesser extent, Shanghai.
And Kevin, this is -- as you know, we've been working on a joint venture now for about a year, 1.5 years, and our expectation is to complete the joint venture by this spring. We have a meeting scheduled, all things being equal, in the May timeframe to see whether we can put the finishing touches on that. And as I'm sure you know, when you negotiate this sort of joint venture, it does take a certain amount of time. We want to make sure that, on both sides, we get it right. And certainly, our expectation is that Air China will be a great partner for us in -- really we have Montréal now as well because Air China is flying into Montréal, Montréal-China-Vancouver. And flying into -- starting out with Shanghai and Beijing in the initial stages, and we'll see where it goes from there. But it should certainly, as Ben indicates, it should certainly be of assistance to us in competing more aggressively.
That's helpful. And just last one for me. You had mentioned, Mike, you're currently unhedged, but you could look at hedges later this year. I'm just wondering, what are some of the variables you're looking at, or triggers that would determine whether you decide to, again, go and buy out of the money call options or whatever other hedge strategy you would look to pursue?
So we certainly will not move off the covered hedges, which is call options. We are going to looking at the pricing of those options. Obviously, those options -- or the call options have gotten more expensive given the volatility of fuel recently. So that's an important consideration from our perspective. Last year, we focused a lot on Q3, given the importance of that quarter to the full year. And so we're centering our views right now on Q3.
Our next question is from Nish Mani with JPMorgan.
Can you give us some color on the new agreement, the PSS to Amadeus? And can you help us understand perhaps, qualitatively, what some new revenue upturn this would be as we get into late 2018 and 2019, when that system becomes more fully implemented?
Well, it's not going to be implemented in 2018. This is Calin here. It won't be implemented in 2018. We're looking at it being implemented towards the end of 2019. But let me just ask Ben to comment on 3 or 4. We're very, very excited about Amadeus Altéa Suite. It's going to provide a lot of incremental benefits on so many different fronts, ranging from loyalty to the airport dynamic to ancillary revenues. So many, many, many different dynamics. Let's ask Ben to comment. But it is a 2019 implementation dynamic and also being in place ahead of our loyalty repatriation initiatives for 2020.
Nish, it's Ben here. So the new PSS is going to help us in 2 major areas: one is our reservations platform. So the integration of our reservation platform and our new loyalty system and CRM activity is taking place in between those 2 functions, are a big step forward. Our current platform, our current reservation system is 22 years old. So the flexibility in offering more customized price point and more customized unique benefits, getting the right pricing for that driving higher margin is enormous. There's all kinds of new flexibility we're going to gain by introducing this system. The second major focus will be at the airport, our departure control system will be completely overhauled with this new PSS. So our ability to service customers at every step of the journey, all the way from check-in through baggage delivery, will greatly be enhanced.
[Operator Instructions] Our next question is from David Tyerman with Cormark Securities.
My first question is on the cost transformation program. So the target, is that an annual $250 million? And does it -- is this over and above the items that you discussed in the Investor Day?
David, it's Mike. So it certainly is over and above what we've talked about at Investor Day. And then, on whether it's run rate or not, to be determined, but we would expect the majority of this to be run rate.
Okay. Helpful. And then, just on the ULCC side and what you're doing with Rouge. So WestJet is targeting a $0.06 non-fuel CASM with their Swoop entity. It would seem to me that one of the key things here is newer aircraft, and I'm wondering whether you feel you need to get newer aircraft in Rouge to be competitive, at least against that [indiscernible] ?
When you look at Rouge, there's no question that there will be, at some stage in the future, a replacement. Obviously, 767s are not being manufactured anymore and so that's the reality that we're going to have to, at some stage, look at that. But what we have been doing on a tactical basis is identifying newer versions and introducing into the fleet newer versions of the 767 than some of our older aircraft, and that has helped keep the aircraft somewhat more current. There will be a [indiscernible] . That's not a capital expenditure that we're looking at for the next several years. That's a beyond 2020 event. And I think Ben is going to add some more comment there.
David, so for the transcon and domestic market response to ULCCs, our 320s and 321s in Rogue are very competitive. Right now, we have them in a dual-class cabin, and that's working for us from a market perspective. Very easy for us to convert those into single-class, as we've mentioned in the past, which makes them even more competitive. And as of a year from now, we will have full flexibility under our pilot contract to replace any of our Rogue narrow-bodies with many type of aircraft. We have a lot of flexibility on what type of aircraft to use in that marketplace. We could even put some MAX airplanes in. There's no plant to do that. But 320s, 321s in a densified configuration, extremely competitive.
Okay. So you said you could put MAXs into Rogue?
We're not going to do that as of yet. But we do have -- I think I have read some people not having clarity around that, we do have full flexibility once we have our last 787 delivered to put whatever type of narrow-body we'd like into Rogue on a replacement basis or in combination of fleet that we have there already.
There are no further questions registered at this time. I would like to turn the meeting back over to you, Miss Murphy.
Thank you, Valerie, and thank you, everyone, for joining us on our call today. Thank you very much.
Thank you.
Thank you, everyone. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.