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 2018 Conference Call. I would now like to turn the meeting over to Kathy Murphy. Please go ahead, Ms. Murphy.
Thank you, Valerie, and good morning, everyone, and thank you for joining us on our fourth quarter call. With me this morning are Calin Rovinescu, our President and Chief Executive Officer; Mike Rousseau, our Deputy Chief Executive Officer and Chief Financial Officer; and Lucie Guillemette, Executive VP and Chief Commercial Officer. I'd also like to welcome Craig Landry, our Executive Vice President, Operations, who will be pleased to respond to questions. On today's call, Calin will begin by highlighting our financial performance for the full year and quarter. Lucie and Mike will then address our fourth quarter financial performance in more detail 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 am now going to turn it over to Calin Rovinescu, Air Canada's President and CEO.
Thank you, Kathy. Good morning, everyone, and thanks for joining us on our call today. I'm extremely pleased to report another very strong quarter, capping off a great year for Air Canada, where we delivered record revenues, record liquidity, carried a record number of passengers and produced a year-over-year PRASM increase of 3.8%. On the year, we generated full year EBITDAR of about $2.9 billion, an EBITDAR margin of 15.8% and a return on invested capital of 12.6%. On a GAAP basis, we reported operating income of close to $1.2 billion. In addition, our free cash flow for the year of $791 million significantly exceeded our guidance. These results underscore the resilience and effectiveness of our business strategy, which has greatly enhanced our competitive position. We ended the year with record unrestricted liquidity of more than $5.7 billion and a leverage ratio of 2.1x. Such unprecedented liquidity levels speak to the financial strength of our company and give us a level of stability it has never had before. With a record of nearly 51 million passengers carried, we generated record revenues in excess of $18 billion in 2018, an increase of about 11% from 2017. We managed to achieve these results while effectively managing our costs. Our adjusted CASM increased 0.3%, firmly in line with our projections. All-in CASM increased 6% versus the previous year, largely a consequence of higher fuel costs. With respect to our Cost Transformation Program which began a year ago, we made progress in the fourth quarter, and by year end, realized or identified $220 million or 88% of our $250 million target. We expect to fully achieve the remaining targeted savings by year-end 2019. Cost transformation is a fundamental component of our strategy and will continue to be a key priority for us moving forward. For the fourth quarter, we delivered record EBITDAR of $543 million. This is an increase of $22 million over last year and above analysts' consensus estimates. Our fourth quarter 2018 operating income amounted to $122 million. We achieved record fourth quarter revenue of $4.2 billion, reflecting a strong demand environment and favorable pricing trends which we see continuing into 2019. Our record revenue enabled us to fully offset the increase in the price of fuel in the quarter with a PRASM increase of 5.2%. From a cost perspective, on an adjusted basis, CASM increased 0.5%, better than what we had projected on our third quarter call. During the year, we successfully undertook 2 major transformational initiatives that we completed just last month. The first of these was our purchase of Aimia Canada and its Aeroplan program. With Aeroplan, we have reacquired what many Canadians consider the best travel rewards program in Canada, and with privileged access to Air Canada, the second-most valuable currency in the country after the Canadian dollar. This acquisition also brings tremendous capabilities and resources in analytics, loyalty marketing, technology and customer journey management. Our digital and loyalty teams are now comprised of over 200 people focused only in these areas, and we fully expect to deliver in 2020, not only the best loyalty program in the country, but one of the best airline loyalty programs in the world. Concurrent with the Aeroplan acquisition, we finalized commercial and credit card loyalty agreements with TD, CIBC and Visa Canada as well as an agreement in principle with Amex Canada. These ensure our new program receives wide exposure and will further drive consumer use and uptake. The second transformational initiative was the amended and extended capacity purchase agreement with Jazz and Chorus Aviation. This new CPA, retroactive to the start of this year 2019, extends the previous agreement by 10 years. Under the new arrangement, Air Canada projects annual savings of approximately $50 million in each of 2019 and 2020 and cumulative savings of an additional $53 million between 2021 and 2025, both as compared to the 2015 CPA framework. This new win-win agreement also provides us with significant operational advantages and network benefit, including greater fleet flexibility. As part of this agreement, Air Canada took a $97 million, 9.99% equity position in Chorus. From our perspective, this is a sound investment that signals our commitment to our partnership with Chorus, but there is no intention to take a larger position. Before turning it over to Lucie for a more detailed review of our fourth quarter revenue performance, I would like to sincerely thank our 30,000 employees for their central part in these accomplishments and for their continued focus on taking care of our customers in our highly competitive industry, and especially so during the extremely difficult winter conditions we face in Canada. I'd also like to welcome the Aeroplan team members into the Air Canada family and look forward to the exciting times ahead as we build a best-in-class loyalty program. Further, I also wish to thank the 51 million customers who flew with us in 2018. Everyone at Air Canada appreciates your loyalty in choosing our airline. And with that, I'll turn the call over to Lucie.
Thank you, Calin, and good morning, I would also like to thank our employees for consistently delivering exceptional service to our customers and for representing the best of Air Canada throughout the year. I also thank our customers for choosing to fly with us. Turning to our fourth quarter revenue results. We closed out the year strongly with record passenger revenues of $3.8 billion, up 386 million or an efficient 11.3% on capacity growth of 5.8% from the fourth quarter of 2017. Traffic grew 7.2% while yield improved 3.8% year-over-year. On a stage length adjusted basis, yields increased 4.5% versus last year. This yield increase was the highest we achieved in any 2018 quarter, building on the momentum seen throughout the year. Consistent with prior quarters, the yield growth was largely driven by increases in fares and carrier surcharges, growth in high-yielding local traffic and an improvement in the overall fare mix. We also saw greater proportional growth of high-yielding business and premium economy class passengers. The introduction of our new fare categories on domestic, U.S. transborder and Atlantic services is a key component of our comprehensive revenue optimization strategy and contributed to our improved performance versus last year. Our yield growth, combined with the 1.1 percentage point improvement in passenger load factor, produced our highest PRASM of the year, coming in at 5.2% year-over-year or 5.9% on a stage length adjusted basis. Revenue growth from the Business cabin was very strong, increasing $92 million or 12.5% year-over-year on traffic and yield increase of 9.3% and 2.9%, respectively. This strong performance in the quarter further demonstrates the continued strength of the franchise we have built with the high-yielding premium market as well as a clear return on investment in our premium products over the last few years, including the introduction of our Air Canada Signature Service, which provides an elevated premium experience throughout the entirety of our customers' journey. We also saw continued growth in international-to-international connecting traffic in 2018, with an increase of 15% when compared to 2017, driven by the strength of our joint venture within the Atlantic with United and Lufthansa as well as increasing shales contributions from our international points of sale. In addition, in 2018, we grew ancillary revenue by 13% year-over-year, a rate that continues to outpace our passenger revenue. Ancillary revenue growth was led by increases in revenue from baggage fees, paid upgrade, seat selection and preferred seats. Our new fare categories as well as our enhanced merchandising efforts through our sales channels, were important contributors to our ancillary sales performance. With that, let's turn to our key markets. In the domestic market, our modest capacity growth of 1.5%, revenue increased $65 million or 5.6% on yield growth of 3.9% and a traffic increase of 1.7%. Yield and traffic increases were recorded on all major domestic services. We achieved a 4.1% increase in PRASM attributed largely to our disciplined approach to capacity management, and we were particularly pleased with the PRASM performance of our transcontinental routes. Our domestic yield and PRASM improvement also reflected gains in the Business cabin, partially attributed to our new Signature Service product, a long-haul transcontinental flight which was introduced in the second quarter of 2018. In the economy cabin, yield improvements reflected increases to base fares as well as the favorable impact of new fare categories, where the comfort and basic fares are new versus Q4 of last year and continued efforts to optimize the buy-up levels between our suite of fare categories. We are pleased with our domestic performance in our hues in Montreal and Toronto and we continue to see gains in Eastern Canada. We continue to observe increased competition pressure and capacity from domestic ultra-low-cost carriers in the intra-west market, and more specifically Alberta regional routes, where we have a relatively small presence. Looking at the first quarter in the domestic market, we anticipate continued improvement in revenue and PRASM as compared to the first quarter of 2018. Our new Jazz agreement will benefit our customers as it gives us greater flexibility to operate the aircraft best suited to the communities we serve on convenient schedules, better connecting travelers to our global network. We look forward to begin realizing the benefits of our newly amended agreement this year. Moving on to the U.S. transborder market. We had a strong quarter in this market. On capacity growth of 9.7%, revenues increased $100 million or 13.4% on traffic and yield growth of 9.6% and 3.5%, respectively. Traffic and yield increases were recorded on all major U.S. transborder services for the fourth quarter. The U.S. leisure markets performed well while the eastern seaboard U.S. business market remained very competitive. The launch of our new fare categories, specifically our comfort fare, contributed to the positive yield performance as did the favorable foreign exchange impact of our U.S. dollar sales. Our transborder results also reflect continued strong traffic and revenue performance related to our customers transiting our hubs to and from the United States, which can be attributed to the success of our international transit strategy and the investments we have made to improve the connection process in all 3 of our hubs. We were particularly pleased with the performance of our service between Eastern Canada and California as well as between Eastern Canada and Florida, and these markets have been key drivers of our success in the U.S. We were also happy with the considerable value driven by our Hawaii strategy from Western Canada, with our services now operated by new Boeing 737 MAX, offering our customers an enhanced schedule and more options when traveling to the Hawaiian Islands. In the quarter, we were proud to open our new Maple Leaf Lounge in the newly constructed New York LaGuardia Airport terminal, making us first airline to open a lounge in the terminal and enhancing the experience for our premium customers traveling between New York and Canada. As we look to the first quarter in the transborder market, we continue to see the benefits of our new Signature Service on the transcontinental flights to Los Angeles and San Francisco from our Eastern hubs as well as to Newark from Vancouver, which connects seamlessly with our Australian service out of the Pacific hub. While the eastern seaboard business markets remain very competitive into the first quarter, we anticipate another strong quarter for our U.S. leisure markets. Our services into Texas continued to perform well for us and we see further opportunities to increase our position in this state with the enhancement of our Toronto-to-Austin service to 2 times daily later this year. Now moving to the transatlantic, which was the best-performing market in the quarter. On capacity growth of 9.5%, Atlantic revenues grew by a very efficient 18% or $136 million, driven by traffic growth of 14.5% and a yield improvement of 3%. These results demonstrate the very tangible results of our long-term strategy to expand our international network, leveraging both mainline and Rouge with a focus on hub-to-hub flying. Traffic and yield improvements were recorded on all major Atlantic services. In the fourth quarter, we extended many of our seasonal routes into November and December, including our service to Rome, Barcelona, Lisbon and Athens, and we were pleased with the performance of these extensions. Our Atlantic franchise grew with the introductions of new nonstop service to Dublin, Lisbon and Bucharest from Montreal; Shannon, Porto, Bucharest and Zagreb from Toronto and Zürich and Paris from Vancouver. For the year, virtually all our new routes over the Atlantic performed well, having met or exceeded our expectations. Our fourth quarter performance into India was strong, which is encouraging, given the role this market plays in our efforts to reduce seasonality throughout our network. Looking ahead to the first quarter, we anticipate continued strong traffic, PRASM and revenue results over the Atlantic. In 2019, we will add new nonstop service from Toronto to Vienna as well as to Bordeaux from Montreal. Investing in a market like Vienna further illustrates how hub-to-hub flying remains the backbone of our transatlantic strategy. Our Pacific market saw significant improvement in most major services in the fourth quarter. On a capacity reduction of 0.8%, revenue increased $49 million or 9.7%, driven by a very strong yield improvement of 9.3%. The yield growth reflected increases in base fares and carrier surcharges as well as a general improvement in the overall fare mix. We saw significant improvement in PRASM in the quarter, up 10.6% year-over-year. Our strategy in Tokyo continues to exceed our expectations, where we consolidated our service from Toronto to Haneda and started our Narita service from Montreal. Previously, we had operated in both Haneda and Narita from Toronto. Reducing capacity over the Pacific has had a positive impact our performance and contributed to notable improvements in China and Hong Kong. Services to Australia continued to be slightly under pressure from the PRASM perspective due to the increased capacity from North America. Australasia remains an important part of our efforts to reduce seasonality throughout our network. Looking at the first quarter, we expect to see positive revenue, yield and PRASM performance over the Pacific, although point-of-sale Canada to China is under some pressure, partially due to geopolitical issues as well as ongoing competitive pressures. We're implementing tactical aircraft down gauges on our China exposure and redeploying the capacity to the Atlantic. As illustrated here, our fleet flexibility gives us the ability to adapt quickly to market changes. Revenues from the remaining services increased $36 million or 14.5% on traffic growth of 14% and, to a lesser extent, a yield improvement of 0.5%. The yield growth reflected strong improvements on services to the Caribbean and Mexico. However, the improvement on these services was largely offset by the continued impact of the significant increase in average stage length on services to South America. As you may recall, we removed the short-haul tag between Santiago and Buenos Aires as it now serves both markets on a nonstop basis. On a stage length adjusted basis, overall yield for the other markets increased 3.9% from the fourth quarter of 2017. Mexico continues to perform very well for us and we were able to successfully increase our capacity into this market with the Boeing 737 MAX. The MAX aircraft also enabled us to successfully defend our market position in Martinique and Guadeloupe from Montreal despite new low-cost competition. For the first quarter, we expect improved traffic revenue yield performance into our remaining markets. At the end of March, we will be reverting back to one-stop service to Buenos Aires, connecting to Santiago, as opposed to the nonstop service we see today. This will reduce our capacity into South America and we'll expect this initiative to yield positive results. We also continue to explore seasonal growth opportunities in South America. Moving on to cargo, which delivered another very strong quarter. Cargo revenue increased $19 million or 10% year-over-year, reflecting yield and traffic growth of 6.9% and 2.9%, respectively. Consistent with prior quarters, the Atlantic and Pacific cargo markets performed particularly well. Looking ahead to the first quarter, we project continued strong year-over-year cargo revenue, traffic and yield results. I will now turn the call over to Mike for a discussion on our cost performance and balance sheet metrics.
Thank you, Lucie, and good morning to everyone. I would also like to thank our employees for their significant part in these achievements and for their continued focus on taking care of our customers. In addition to the very robust revenue performance in the quarter, we also achieved a strong unit cost performance. On an adjusted basis, CASM increased 0.5% from the fourth quarter of last year, better than anticipated, on lower aircraft maintenance expense. The lower-than-projected maintenance expense was driven by favorable annual adjustments related to the end of lease maintenance provisions and to the timing of certain engine maintenance events. Cost control remains a central element of our strategy, and as Calin mentioned earlier, we had realized or identified $220 million of our $250 million CTP target by the end of 2018, with the remaining $30 million expected by the end of this year. Moving onto fuel. Fuel expense increased $244 million or 29% in the quarter, with higher jet fuel prices accounting for $151 million of the increase, an unfavorable currency impact accounting for $37 million and a higher volume of liters consumed adding another $27 million. We also recorded hedging expenses or costs of $26 million in the fourth quarter of 2018, a combination of hedging losses and option premiums. At this point in time, we have not entered into any hedging contract for 2019. The average price of fuel is CAD 0.84 per liter in the quarter, up almost 25% versus the same quarter in 2017. Looking ahead, our assumption is the price of jet fuel will average CAD 0.77 per liter in the first quarter of 2019 and CAD 0.82 per liter for the full year 2019. I'd like to touch on the loyalty program before moving on to our cost guidance. Following the closing of our acquisition of Aimia Canada Inc., Aimia Canada changed its name to Aeroplan Inc. Air Canada began consolidating Aeroplan's results on the acquisition date of January 10, 2019. From an accounting perspective, there are a number of complex fair value and accounting policy impacts that need to be determined before we can provide much in the way of additional information on the impact of the Aeroplan acquisition. One item we can provide a little color on now is that there is a timing difference in revenue recognition under Air Canada's ownership and when Aimia operated it separately. Aeroplan, as a stand-alone loyalty management company, recognize revenues at the time of redemption. Air Canada, being an airline, will recognize revenue at this time of passenger transportation. Given the estimated time lag of 3 months between redemption and air travel, the full impact of the incremental margin on passenger revenues will not be reflected until after Q1. This means Air Canada's consolidated Q1 results will include a small portion of the estimated annual revenues over a pro rata amount of the annual operating cost. Despite this transitional issue in Q1, as I've said in the past, historical Aimia annual EBITDA results for the segment can be used as a proxy for the steady-state 2019 impact to Air Canada's consolidated results, subject to adjustments for redemption levels and accounting changes. And this remains the case despite the average 3- to 4-month lag between redemption and revenue recognition, even in 2019. Given that the Aeroplan loyalty business was not consolidated in Air Canada's financial results in 2018, for comparative purposes, our adjusted CASM guidance for 2019 excludes any impact of Aeroplan. Once 2019 is behind us, we will revert back to providing adjusted CASM guidance on a consolidated basis. With respect to IFRS 16 leases, Air Canada has adopted this accounting standard effective January 1, 2019, with a full restatement of 2018 financial results. Please refer to Section 14 of Air Canada's 2018 MD&A for additional information. Our disclosure in Section 14 is very fulsome, and -- as it restates the 2018 consolidated statement of operations and EBITDAR and provides Air Canada's consolidated statement of financial position with the initial application of -- on January 1, 2018. Our Vice President and Controller, Chris Isford, will expand on this on our February 21 conference call. Our cost guidance takes into account the impact of the new accounting standard, which has minimal impact on the adjusted CASM guidance. Under the new standard, aircraft rent is eliminated and replaced with amortization of related leased assets. Therefore, going forward, we will be reporting EBITDA rather than EBITDAR, and EBITDA margin will become a key financial target for Air Canada on Investor Day. Moving on to our cost guidance. For the first quarter, we expect adjusted CASM to increase 2% to 3% when compared to the first quarter of 2018. For the full year 2019, we also project that adjusted CASM will increase 2% to 3% when compared to 2018. The increase in adjusted CASM versus 2018 is driven by projected higher customer service expense, including to comply with the regulations being made under Bill C-49, principally in the second half of this year, and to a lesser extent the impact of a weaker Canadian dollar versus the U.S. dollar on U.S.-denominated expenses. In addition to our fuel and economic assumptions, our projections are based on the assumption that the Canadian dollar will trade on average at CAD 1.32 per U.S. dollar during the first quarter and for the full year 2019. Now turning to our balance sheet and liquidity. Unrestricted liquidity amounted to a record $5.7 billion at the end of the year. Fourth quarter free cash flow of $141 million increased $184 million from last year's quarter on a lower level of capital expenditures. Adjusted net debt of $5.858 billion decreased $258 million from December 31, 2017, as higher cash and short-term investment balances more than offset increases of long-term debt and capitalized operating lease balances. Our leverage ratio was 2.1 at the end of December. At quarter-end, our return on invested capital was 12.6%, in line with our guidance, while the weighted average cost of capital was 7.2%. Additional information can be found on our financial statements and MD&A which were posted on our website and filed on SEDAR this morning. Before passing it back to Calin, I'd like to mention that Chris Isford, our VP, Controller; and Cathy, will be hosting a second special conference call to go over the accounting policies related to the loyalty program. The call will take place in late March. A news release with timing and webcast details will be issued in the coming weeks. And with respect to the upcoming February 21 call on IFRS 16, please note that presentation slides will be available on aircanada.com shortly before the call is scheduled to begin. And with that, I'll turn it back to Calin.
Thanks, Mike. 10 years ago, Air Canada undertook to repair a badly broken business model with the aim of transforming itself into a global champion that could be sustainably profitable over the long term. Our 2018 performance, following on other record results of recent years, can leave no doubt that we are achieving these ambitious goals. Our 2018 results demonstrate Air Canada's resiliency. Despite fuel price volatility, including a year-over-year incremental fuel expense of more than $1 billion; economic uncertainties; fears of a recession; major trade wars; and geopolitical events that should impair airline performance, Air Canada delivered on its financial targets and produced more record results. 2019 will be no different in terms of testing our resiliency as we prepare for the implementation of Bill C-49, a proposed Canadian passenger right legislation, which will add regulatory and administrative complexity as well as associated costs to a business model that already faces some of the highest airport ground rents, security surcharges, fuel excise taxes and airport improvement fees in the industry without yielding the targeted benefits for passengers. Our cross-departmental task force is working to understand all the business requirements and to ensure clear communication and seamless implementation of any new processes for customers. For shareholders, in the year that the TSX index fell 11.6%, the Dow fell 5.6% and North American airlines fell 22.35% on average, our shares retained their value, and we are already up 23.2% since the start of 2019. On the commercial front, we continued to elevate the customer experience. In 2018, we introduced more new aircraft; opened new Maple Leaf Lounges as well as North America's best airport premium dining facility, the Air Canada Signature Suite at Pearson, featuring the equivalent of a 5-star full-service restaurant; expanded premium services; rolled out onboard satellite WiFi; introduced a new fare structure offering more travel options; and began service to 29 new destinations in our global network. We were named Best Airline in North America by Skytrax for the second consecutive year, the seventh time in 9 years, and we remain one of Canada's Top 100 Employers for the sixth year in a row. In addition, our sustainability programs were recognized when we were named Eco-Airline of the World for 2018. Proud as we are of these achievements, what they most importantly show is Air Canada's transformation is continuing, even accelerating. Later this year, we will launch our new reservation system platform, the Altea Suite by Amadeus. This massive IT project will transform our most fundamental business processes to make us far more agile. Also this year, with the arrival of the last 2 of our 37 Dreamliners, we will complete our highly successful wide-body fleet renewal, just as our narrow-body program moves into its next phase with first deliveries of the game-changing A220 and continued deliveries of the efficient Boeing 737 MAXs. The modern and diverse fleets we have assembled gives us the capability to profitably serve markets from the regional to the global level with tremendous flexibility to allocate capacity to those places where returns are highest. Finally, one further area of transformation, and the one that I am most proud of, is our culture. Essential to our success is the dedication and hard work of our employees. Their professionalism has been continually on display in recent weeks and months, keeping our customers safely moving in the face of often unbearably harsh winter weather. The awards we've won, both for customer service and employee engagement, attest to the strong culture Air Canada has developed. I'm very proud of the work our employees do and the often extraordinary efforts they make taking care of our customers each day. And with that, I'll be pleased to take some questions.
[Operator Instructions] Our first question is from Fadi Chamoun with BMO.
Congratulations on the Aeroplan transaction and a good year overall.
Thank you very much.
So maybe just one quick clarification first. The 2% to 3% CASM increase, that we should consider to be off of the restated results that you put in the MD&A?
That's correct, Fadi.
The fuel expense that you've guided for 2019 seemed a little bit higher than what we are seeing in the spot market today. Can you explain why that is the case?
That's a good perception, Fadi. Certainly for the first quarter, we would use the curve. For the year, we're going to lean more towards consensus average. There's a number of analysts out there, over 30, that provide a fairly robust consensus average and we're moving to that as a baseline for the year.
Okay. And I wanted to ask you, on the capacity side. So you're adding some planes to Rouge. Can you talk a little bit about the opportunities you see there? And if you can give us a little bit of color on what should we think about capacity growth in 2019.
Okay. So you may have seen yesterday, we made an announcement -- Fadi, it's Calin here. Yesterday we made an announcement which talked about some of the regional markets where we are deploying Rouge aircraft in lieu of regional aircraft replacing, in some cases, the 319, for routes that previously operated the Q400, an example. This is one of the great advantages that we negotiated in the last reopener with our pilots for the ability for us to deploy Rouge narrow-body aircraft on some regional routes. This makes us more competitive, it services the communities extremely well. We've already received, from some very avid travelers from New Brunswick in particular, great congratulations on that announcement. So we're very enthusiastic about it. But basically, the major opportunity here is to use larger aircraft with, obviously, more capacity than our regional aircraft, and we expect it to be a more compelling product, and in some cases delivered at a materially lower seat cost.
Our next question is from Doug Taylor with Canaccord Genuity.
Mike, I wanted just to clarify some of the comments you made around the projected contributions from Aeroplan this year, and I know we'll be going into more detail later. But you said that the revenue impact should be delayed by 3 months. And the EBITDA impact should be delayed 3 months as well? Or...
No. We believe we'll -- again, using historical results as a proxy, we believe we'll achieve that in, principally the 9 remaining months of the year.
So would that imply then that on a full year basis you expect to achieve more than the EBITDA of Aeroplan stand-alone?
Again, depending on redemption levels and some accounting changes. But that's a natural conclusion, yes.
Okay. And I know we'll talk more about Aeroplan at the Investor Day, but I mean from your perspective, have the redemption profiles and the bookings through Aeroplan or Aimia into Air Canada changed significantly since the transaction was announced and approached and has now been concluded?
The short answer, Doug, is no. The behaviors of customers have not changed yet. We suspect they will change over time, but it's going to take some time because we do believe this program will grow. And certainly, when we launch our new program in next summer, we expect certainly some growth off that marketing as well.
Right. Doug, it's Calin here. And I say that certainly, expectations as well as from the generation of credit card business, which in an environment where there was a period of uncertainty that Aimia and Aeroplan went through over the last several years, you would not have seen the growth that you would normally see in it. And I think that the natural evolution of our transaction through stabilization is that there will be greater credit -- more credit card transactions, more new membership on those credit cards that, obviously, are very linked to Air Canada, and that therefore, that should translate as well into increased opportunities.
That's great. And one last clarification for me. I noticed the increased depreciation and amortization expense forecast. Is that part -- or what -- to what extent is that part of the CASM increase expected for this year? Is that completely excluded, given that it's related to Aeroplan, or at least a chunk of it is?
Only a small part of that is related to Aeroplan. So that -- I believe that small part of the incremental depreciation expense which is related to Aeroplan is excluded from the CASM guidance.
So the $225 million in incremental, the majority of that is part of the CASM increase, so therefore non-cash.
Absolutely. And again, that's over -- exactly. Yes, yes, absolutely.
Our next question is from Konark Gupta with Macquarie.
So thanks for providing the disclosures on the IFRS 16 impact. That's really helpful. Just wanted to clarify, because there seems to be a lot of confusion, I think, amongst investors on the initial reflection of guidance on the CASM side. So just wanted to make sure I understand correctly. The 2018 adjusted CASM would be down 2.7% due to IFRS 16. Is that understanding correct?
I don't have the number in front of me, but certainly, we'll -- that's the purpose of the conference call next week, to go over some of those granular details for the most part. But let's assume that's correct.
Okay. Perfect. So I mean that effectively offsets the 2% to 3% CASM inflation guidance, I guess. And any sense on -- like I saw the 2017 net debt and leverage ratio improvement from IFRS 16. So we can expect something similar for 2018, right, Mike?
I'm sorry? The leverage ratio does improve with IFRS 16. And again, I know the market would love more information, but we're holding some back for Investor Day. And we will talk more about the leverage ratios and EBITDA margins and other key financial metrics at -- 2 weeks from today. But certainly, IFRS 16, in our situation, does improve the leverage ratio.
Okay. That's great. That's helpful. On Aeroplan, want to clarify. So I think you made a comment that D&A includes a small Aeroplan impact to the $225 million increase. So like, my guess is something like 1/3 of the D&A increase is coming from Aeroplan. Or more than 1/3, maybe?
Yes, we'll have to get back to you on that one. The -- again, the accounting for Aeroplan is very complex. There will be -- there's a normal depreciation charge for their assets, but there's going to be a larger depreciation charge -- or amortization charge for the deferred asset that we put in our books, which is what we're trying to determine right now. We have to go through the valuation process to put on the goodwill and intangibles onto our balance sheet. And that will -- the intangible side will generate a fairly significant depreciation charge as well.
Okay. That's fair. And I think you kind of suggested on Aeroplan that the revenue and EBITDA run rate they have disclosed, like, should be good enough as a proxy for 2019, right? So like I'm taking that as like $1.2 billion revenue and almost $250 million EBITDA. Is that fair numbers?
Yes. I mean, Konark, you have access to the numbers just as well as we do. And so I think those are reasonable proxies, again, subject to redemption levels and changes in accounting rules.
Okay, that's fair. And you haven't disclosed the Visa payment yet. I mean like, is there any reason why? That was probably disclosed in...
Yes. We just -- Visa didn't want that disclosed, in all honesty, and that's their choice. It -- we'll provide a little more color on the net cash proceeds at Investor Day, which will include obviously Visa, and hopefully, Amex at that point in time.
Perfect. And lastly, on CapEx. So I noticed that there is some increase in CapEx between '19 and 2020. I mean, like, is there any CapEx pushout from 2018? Or is it mostly FX and IFRS 16?
No, it's mostly FX and the impact of -- well, IFRS 16 will increase capital expenditures because we'll be capitalizing more maintenance than we had in the past. And then on top of that, Konark, we just -- as you know, we had the great opportunity to pick up 4 WOW planes, and we bought that with cash. And those will be great assets for us to utilize over the next long period of time.
Our next question is from Andrew Didora with Bank of America.
I guess, Mike, maybe my first question. So the core CASM ex guide of up 2% to 3%, can you walk through some on the key areas of inflation you're seeing in 2019? And then just as a follow-up to that, with the movement of the leases now to the CASM line, how much pressure does this removal put on CASM growth, given this lease line had been a CASM good guy for a couple years?
Okay. So the first part, on the 2% to 3% for the year, roughly half of that at the midpoint are the 2 issues identified. The weaker Canadian dollar. And as you know, we've talked about in the past, we do have a natural hedge offset with RASM on that. But when you only look at CASM, it is a negative issue for CASM, adjusted CASM 2019. And the other item is our anticipated impact of Bill C-49, the new passenger Bill of Rights that will be implemented and we believe will be effective midyear this year. And so those 2 items are driving roughly, on a total basis, about half the overall adjusted CASM. Yes. The rest of the cost buckets are up inflation, maybe slightly higher than inflation. We provided some guidance on maintenance already, which is slightly higher than inflation. But again those 2 first items, foreign currency and C-49, are probably representing almost half of the overall CASM increase. Okay. Thank you.
Great. And then just on the share buybacks, it looks like you didn't purchase any more stock outside of the October buyback that you discussed on the last call. Were you restricted, just given what was going on with Aeroplan or the upcoming Investor Day or anything like that?
No. We weren't restricted. We were obviously in a blackout period. We have some parameters with our broker to buy back stock, and luckily, those parameters weren't achieved. So we didn't buy back any stock in the last couple of months.
Overall, over the last -- since we started the buyback program, Andrew, we bought back about 8% of our stock.
Our next question is from Walter Spracklin with RBC Capital Markets.
So you've been getting some good trends, obviously, you're indicating in PRASM and you pointed to a strong pricing environment. Just looking out now with what you're seeing in terms of pricing behavior, everything considered, you gave us some guidance previously that -- to give us a parameter or range bound for PRASM. Can you give us some indication as to where you see PRASM directionally? I know they did -- you mentioned 3.8% for 2018. Should we see that moderate? Or is that a good number to look at going to 2019?
Yes. Walter, it's Calin here. As you know, we're not providing any guidance per se on expected PRASM, RASM growth. But we can say that, based on what we are seeing -- and again, this is something that we will look at the forward bookings and trends for the next several months and for the rest of the year, we continue to see a strong market. And I think this is the fundamental message that we need to send, which is despite all of the backdrop of the noise that we hear about fears of a recession and trade wars and the rest of it, we do see a fairly strong and bullish market. So the reduction in the price of fuel is a catalyst, in some respects, for us as well. This is something that we're quite positive on, but we're not, at this stage, providing guidance as to what we see in terms of progression on yield or RASM.
Understood. Perhaps from a -- just in terms of managing your costs, companies with good pricing power like yours can generally pass on the cost of things like Bill C-49. And so is it a fair view that you expect to pass on your cost in 2019 through pricing?
Yes. Well, that's is an excellent question, Walter. And I think the jury is still out, far out, on of Bill C-49. And I think that there are a lot of airlines that are still lobbying in terms of being very dissatisfied with the level of the Bill C-49 process. We've heard from many, many, many other airlines. We've heard from IATA. We heard from NACC, which is the association that represents larger carriers. And we understand, from the smaller carriers, that ATAC, their carriers are also really displeased with the level of process here. I think that one of the consequences could indeed be the passing on of some of these expenses because an unintended consequence of this Bill C-49 is that it will drive fares up. We've made that clear to the government, I think all of the airlines have. And we've seen that consequence occur in jurisdictions that have already implemented it, like Europe and the United States. So I think your point is extremely well taken.
Okay. For capacity, you had kind of ballparked us in that, I think it was below last year 7%, but above what you would normally, kind of our 3% run rate. Taking the midpoint, I think a lot of people are taking 5%. Is there any reason why we should move a little bit off that? Or is that a good estimate as any to use?
Walter, it's Mike. I think that's a reasonable proxy for 2019.
Okay. Perfect. And then my last question. The domestic cross, where you've made a lot of announcements with regards to your realignment of your Q400 in the west and Rouge in the east. Net of all of that, is there any capacity impact from that realignment that we should look at?
No. Not a material capacity. Not something that moves the needle. I think that, for sure, there is some capacity additions where you've seen a 319 coming on top, replacing a Q400. But in some cases, there will be a consolidation of the number of frequencies that we'd have had. So net-net, there's not a significant increase in capacity domestically.
Our next question is from Helane Becker with Cowen.
Just a couple of questions here. I was surprised to hear you talk about the strength in the transatlantic because we're starting to hear from some of the other airlines that there's been weakness in Europe, and maybe they just mean within Europe. So I'm just wondering if you could maybe count that out a little bit better for us with respect to what you're seeing in the market, a. And b, is it a combination -- I don't know if you can do this actually, but is it a combination of growth in capacity from Rouge that's driving that strength? Or is it more on the business side? So I'm wondering if you can help us out there.
Sure, it's Lucie. On the transatlantic front, the demand that we're observing is still quite solid on the transatlantic. There are a few considerations, though. One would be from a fuel surcharge point of view. So I think we spoke briefly before, as we see the changes in the cost of fuel, we may also see some changes to the fuel surcharges. So there could be some variations from a yield point of view that would be driven as a result of that. What we are observing is our premium cabins have performed very, very well on the transatlantic front. And we also said that part of our strategy was to ensure that we had solid hub-to-hub flying, and we are seeing very good results from a local demand point of view. So what we are observing is still very healthy in terms of demand.
Do you think, Lucie, there's a shift in traffic -- or leisure traffic from the U.S. to Canada, and you're benefiting from that?
Well, we're -- in other words, no, we're definitely seeing some of this connecting traffic, Helane. We're seeing some of this connecting traffic. We mentioned some of the numbers that we -- [ often a purchase in flying ], but -- which is traffic that connects over the Canadian hubs. So frankly, our product has been seen as the best international product for North America. And as a result of that, yes, we're definitely seeing some traffic coming from the United States over our Canadian hubs, Toronto, Vancouver and Montreal, to our international network, including to Europe. So we're seeing some of that. But that in and of itself is not something that would move the needles for the U.S. carriers, but it certainly is important from our perspective and is a cornerstone of our strategy.
No, I know that part. I was actually thinking tourists, who can vote with their money, instead of going to the U.S., are just going to Canada. You know what I mean? It's kind of like that, that shift away from this market which may have rolled up its welcome mat. That's kind of where I was coming from.
Yes. I'd say that would be marginal. That would not be a major driver of what we've seen here, Helane.
Okay. And then just on those WOW aircraft, are those going into service in the Rouge network? Or are they going to be reconfigured in the mainline Air Canada?
No. They're going to be Rouge.
Okay. And then my last question is I think, Calin, you said that last year, you started service to 29 new cities. And then I feel like that's a lot, and I know some of it is on a seasonal basis. And obviously, you did a really great job. But what's the steady state in terms of how many cities you feel that you can add every year?
If you speak to the cities and to the mayors of the cities, they would say that we should aspire to do even more than that. But no, it is a large number and it's been a large number for the last number of years. I think that as we go forward, you probably will see the total number of cities per se slowing down because we're not having the same incremental number of aircraft coming in. We've had this large growth of the 787s and the Rouge rollout and so on and so forth. But we will continue to -- we have, in our network planning team, a hit list of key cities that we want to go to, which still includes some very exciting international destinations. And I think you'll continue to see that roll out. 2018 also included many U.S. destinations which feed some of these international routes. And remember, there is this seasonal -- it's very, very -- our capacity -- a lot of our additions are in the summer. And for us, some of the opportunities that we are seeking are -- Lucie mentioned this in her remarks, are counter-seasonal opportunities in various destinations, which would be attractive in the Canadian winters. So we're going to continue to look for those and we'll roll those out in the fullness of time.
And we also extended some of our transatlantic flying into November and December that traditionally would have terminated at the end of the summer. So we're also looking at those opportunities to expand the network.
Got you. And then just one other question that I just thought of. Are there any provisions to reopen the CPA agreement with Jazz and Chorus over that, what is it now, 15-year time frame?
No. That's the one that we announced. So the answer is yes. We just -- we announced 2 weeks ago that we have indeed done that. So we've extended -- this was in the remarks I made earlier. We have extended that by an additional 10 years. And so we -- this gives us the capacity to reallocate airplanes as needed and to have larger regional airplanes inside the Jazz network that are more efficient. So we have definitely optimized the Jazz network. I think we had always said in the past, and we'll talk a little bit about this at Investor Day, that 2 of the drivers between the multiple differentiator between U.S. carriers and ourselves is the fact that we had divested of our loyalty program, the Aeroplan business, and that we had a higher cost for the regional lift with some constraints. And I think that both of those issues have largely been settled. And I think we'll see some good news coming on both fronts in Investor Day.
Right. I was kind of -- right. I guess I'll wait for Investor Day. I was kind of thinking, like between 2020 -- like, 2020 and 2035, are there any chances to reopen the contract? Or like, are there provisions for rate increases and things like that? But we can...
Okay. We'll deal with it at Investor Day, Helane.
Our next question is from Chris Murray with AltaCorp Capital.
Just a couple quick questions, first of all on the narrow-body fleet. So couple thoughts or questions, I guess around how the transition to the Boeing MAX is going and how we should be thinking about utilization. And as we sort of ramp into the transition, any concerns around the fleet transition or anything we should be thinking about as that fleet does transition?
Chris, it's Mike. On the 737 transition, no, there's no concerns from our perspective. It's meeting its financial metrics, the expectation that we had on the CASM improvement. Customers love it. As Lucie said, it's opening up some markets for us, especially Hawaii, that is doing much better than what we had before. So it's achieving the objectives we had intended.
Okay. And still -- I mean I think we talked about it before, but you figured there was something like around a 12% to 14% CASM gain, like-for-like. Is that it...
I think as we -- yes. I think it was around 12%.
Okay. And then just one other question, and if you want to take it, any thoughts around free cash flow for '19? But the -- just looking at the CapEx schedule and I guess just trying to make sure that we're not getting too ahead of ourselves. When we look at capital spending as we get into some of the out years, certainly you start coming off the fleet renewal program. In some of the outer years now on the schedule, you're starting to show numbers for CapEx which are dramatically lower, sort of the $500 million to $600 million to $700 million range. I mean historically or previously, you've sort of talked about $1.2 billion roughly as kind of a normalized CapEx number run rate. Is that still about the right way to think about it? Or should we be thinking of it as a bit lower?
No. I think that's still the way to think about it, $1.2 billion to $1.4 billion type of range, which would reflect -- roughly half of that would be non-aircraft, the other half would be aircraft, for growth -- for normal growth and/or replacement.
Reconfigurations.
Reconfigurations, so. And Chris, again, we'll provide some more clarity around CapEx at Investor Day, and certainly on free cash flow as well, which is a key metric for us.
Our next question is from Cameron Doerksen with National Bank Financial.
I guess maybe just a follow-up on this Bill C-49 impact. I'm just wondering when those additional costs do come in, what line items would we potentially see that show up in?
It'll be in other, Cameron. It's buried in other. But if you go to the back of the MD&A, you'll see a schedule that breaks down other, and well, there's a caption for our customer service cost in there.
Okay. Perfect. And just a second question, just on markets. And you mentioned China as one, understandably, that's been seeing a little bit of pressure recently. I'm wondering if you can maybe also talk about the U.K. market. Are you seeing any negative impact about -- related to concerns around Brexit or anything like that?
No. At this time, we're not -- no. No. Our U.K. is holding.
Our next question is from Turan Quettawala with Scotiabank.
I guess I just wanted to touch upon maintenance expenses here a little bit, Mike. This obviously continued to be a source of a beat here for the last few quarters. That's great expense control. I'm just wondering, is there a potential catchup that's somewhat included in 2019? Or is that just -- some just -- really some good expense control there?
No. I think it's good expense control, and we again, provided some pretty specific guidance on maintenance expense for 2019, so there's no catchup from '18.
Perfect. And just one more quick one for me here in terms of the dollar, we talked quite a bit about the dollar here. Is it possible to give us an updated number for your sort of international or U.S. dollar, U.S. revenue?
Our non-Canadian -- or non-dollar revenue, it's -- Lucie, it's...
As a percentage of the...
No. Just total.
A little over $2 billion.
For U.S. And then non-U.S. would be another $1 billion or so, probably.
One point -- yes, probably...
So $3 billion to $3.5 billion.
$3 billion to $3.5 billion? Sorry.
Yes.
That's total, right? Non-Canadian?
Non-Canadian, that's right.
Our next question is from Nish Mani with JPMorgan.
I was hoping we could dig a little bit deeper on the Pacific market and kind of thinking about whether it's rightsized in its current iteration and thinking about kind of the competitive landscape going into 2019. Because this is a market where you guys have developed some accelerating unit revenues of the back of slower than system-wide capacity growth. So I guess if you could help me understand how the 2019 Pacific market will look like relative to '18 and how the competitive environment kind off of the West Coast of Canada has changed over the past several months, that would be very helpful.
It's Lucie. I noted in my earlier comments that, particularly on the Pacific markets, we have made some adjustments on the capacity front, particularly on China and Hong Kong, and some of it's for geopolitical reasons, which is -- the flexibility that we have with our fleet provides us with that capacity to be able to shift capacity into markets that are a little bit more difficult. On the Pacific, there were a few things. There was this particular item, but there was also a lot of pressure on the yield front as well going into the first quarter. There's a lot of market capacity as well. So with those adjustments, we feel much, much better in terms of how the Pacific will look going forward.
Okay. That's very helpful. And in terms of the competitive environment, is there any comment you could give on kind of what you're seeing in terms of either capacity growth or pricing trends that has either surprised you to the upside or the downside?
Well, particularly on the Pacific, I mean the environment has been very competitive for quite some time. So it's much of the same. I'm not observing anything different. It's very highly competitive.
Our next question is from Kevin Chiang with CIBC.
Just 2 for me. If I look at that IFRS note you have in your MD&A, it looks like, under -- at least under the new accounting standards, if my math is correct, that your leverage ratio falls from 2.1x to below 1.5x I guess, based on some of the movements there. I know you'll probably give more details in terms of some of the longer-term leverage targets at your Investor Day. But I'm wondering, have the credit rating agencies changed how they look at what defines an investment-grade rating or target for an airline? And I think in the past, you talked about 1.2 being kind of a good bogey as to when you thought you'd get to investment grade. Are those good numbers to still use, even under IFRS 16?
It's a great question. And we're meeting the credit agencies in a couple of weeks, and so we'll have a better answer at that point in time. But right now, our understanding is the major credit agencies will not adjust for IFRS 16. They won't make any adjustments, they will take the numbers as they are. Now I don't know if their targets will fall regarding investment grade, because as we've spoken about historically, we always use the 1.2 as a proxy for investment grade. But we'll be a lot more intelligent in a couple of weeks after we meet with the credit agencies. But what's interesting from our perspective, of course, is it does show that when we capitalized operating leases at 7x in the past, we were capitalizing too much. We were putting too much debt in our balance sheet. And we were conservative, and so although there are a lot of accounting standards that I don't like, this one certainly does show a better representation of our true debt on the balance sheet, and therefore our true leverage ratio. And I think that's the argument we're going to make with the credit agencies, that this is more -- has more substance than what we had before.
That's a fair point. And just lastly for me, just want to understand some of the cost inflation related to Bill C-49. It still sounds like there's still some moving parts, or at least some level of uncertainty as to what those costs will look like, in I guess the back half of the year. Are you making an assumption, like, the worst case scenario? And obviously, if things are better than you expected, you'll walk it back because of that uncertainty? Or are you pretty comfortable that the costs coming -- you have good visibility on the cost coming through, so that half so that 2% to 3% is pretty much locked in here?
Right, right. No. So first of all, there are -- you're absolutely right. There are many moving parts, still. There's still representations that are being made to the people making the rules, and including not just from us, but from virtually all of the carriers that operate into Canada and inside Canada, and as well as I said earlier, by the associations who have had experience with this in other jurisdictions. So there are -- a, there are moving parts for sure. Two, we have looked at other jurisdictions to take some level of a proxy as to what happened to costs in those jurisdictions. So we do have a sense of that. And three, we frankly think we deliver a very high level of customer service, and we continue -- we intend to continue improving. That, in fact, it's one of the mandates that Craig Landry, who we mentioned in the beginning, who's our new EVP, Operations, will be focusing on. So the better job you do in terms of dealing with customer issues, the lower the cost will be. So with those 3 caveats, it is an estimate. But obviously, we'll have a better sense after we go through the 6 months post implementation, if indeed it is to be implemented this year.
[Operator Instructions] Our next question is from Tim James with TD Securities.
A question for you, Mike, and I apologize by -- on going back to the Aeroplan discussion. But just to clarify a comment that you made earlier about revenue recognition. Now I understand the timing difference in recognizing revenue at Aeroplan versus that same revenue being recognized by Air Canada when Aeroplan is under Air Canada's ownership. However, forgetting about Air Canada's revenue reporting for a minute, am I correct that the timing of revenue recognition for Air Canada doesn't change for a redemption when Aeroplan was independent versus when Aeroplan is owned by Air Canada? I mean it went independent, and Aeroplan acquired a seat from Air Canada due to a redemption, Air Canada still recorded revenue at the time of flight, which is unchanged from the way…
Right. That's exactly right, Tim. Exactly.
Okay. Okay. And then just wondering, thinking about costs in 2019. Are there any fleet transition costs related to the MAX and the A220s, and whether it's training or maintenance or spares? I'm just wondering if there's any kind of nonrecurring expenses in '19 that should dissipate going forward. Or is it immaterial, really?
It's -- year-over-year, it's immaterial because we had some onetime costs, like uniform expense last year, and we've got some onetime costs this year primarily around training with our new PSS system that Calin spoke about. So that, on a year-over-year basis, it's relatively minor.
Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to you, Ms. Murphy.
Thank you, Valerie, and thanks, everyone, for joining us on our call today.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.