Air Canada bulks up capacity for the high season as long term labour stability improves


Air Canada continues to hold a positive outlook for the North American summer high season since the bulk of its capacity is pegged to international markets, including long haul trans-Atlantic and trans-Pacific routes. International expansion remains the airline's most important priority as it is attempting to build a long haul network that rivals its large global airline counterparts in the US.

The airline also continues to drive sixth freedom traffic flows from the US, with the goal of doubling its market share among those passengers over the next couple of years. Air Canada has also subtly capitalised on the anti-Trump sentiment in the US by creating a smart campaign urging US citizens to "test drive" Canada before picking up and moving to the country.

Counter to some large US airlines that are facing tough labour negotiations, Air Canada is enjoying a period of employee stability as all of its major labour groups are now under long-term contracts. The longevity of those agreements allows Air Canada a degree of certainty in labour expense that some of its US peers do not enjoy.

  • Air Canada's international expansion is a top priority as it aims to build a long haul network to rival its US counterparts.
  • The airline is focusing on driving sixth freedom traffic flows from the US, with the goal of doubling its market share among those passengers.
  • Air Canada is benefiting from employee stability as all major labour groups are under long-term contracts, providing a degree of certainty in labour expense.
  • The airline's international capacity growth is being absorbed, with a strong travel season expected in Canada during the third quarter.
  • Air Canada is leveraging its fleet flexibility to shrink its fleet if conditions worsen.
  • The airline has achieved labour stability after years of labour strife and is making progress in its business strategy shift.

Air Canada concludes that its international capacity growth is being absorbed

During the past few years Air Canada has been focused on growing in international markets to ensure that it has a global network that rivals its large US peers - American, Delta and United.

Although Air Canada has stopped issuing capacity guidance, its capacity growth in 2016 should remain at similar levels to the 9.4% increase recorded by the airline in 2015. The company has stated that 90% of its growth in 2016 is pegged for international routes, with one third of that total represented by new markets.

A snapshot of data from CAPA and OAG for mid-Jul-2016 shows that Air Canada's total international weekly seats for 13-Jul-2016 are up 20.4% year-on-year, while the company's domestic seats have grown just 5%.

Air Canada's weekly seats deployed into international and domestic markets for 13-Jul-2016 compared with the year prior

Market Weekly seats 13-Jun-2016 Percentage change year-on-year
International 590,850 20.4%
Domestic 644,281 5%

Air Canada's new long haul mainline routes debuting in 2016 include Vancouver to Brisbane and Delhi, Toronto to Seoul and Montreal to Lyon. Its low cost subsidiary rouge is adding flights from Montreal to Casablanca and from Toronto to Prague, Budapest, Warsaw and London Gatwick. Additionally, rouge is beginning service from Vancouver to Dublin.

New transborder service on offer from rouge in 2016 includes Vancouver to San Diego, Montreal to Miami and Toronto to Miami, Ft Myers and Palm Springs.

Recently the Air Canada CFO, Michael Rousseau, explained that Air Canada's booking curves suggest the capacity that the airline is deploying into international markets is being absorbed. He stated that the third quarter is a strong travel season in Canada, and Air Canada is adding a fair amount of capacity during that time period.

Mr Rousseau cited strength in European and Pacific markets, and concluded that South America was stable - with the exception of Brazil. Data from CAPA and OAG show that Air Canada offers approximately 2,097 one-way seats from Canada to Brazil for the week of 13-Jun-2016, 7% lower year-on-year. It operates flights from its hub in Toronto to São Paulo and Rio de Janeiro.

Air Canada aims to double its sixth freedom US market share over the next couple of years

In tandem with Air Canada's push into long haul Atlantic and Pacific markets, the airline has been placing significant emphasis on sixth freedom traffic flows from the US during the past two to three years. The airline is taking advantage of its position as the leading airline between the US and Canada. It holds a 42% share of seats for the week of 13-Jun-2016.

Canada to United States of America (seats per week, one way, 15-Jun-2015 and 13-Jun-2016)

Airline Week of 15-Jun-2015 seats Week of 15-Jun-2015 percentage share Week of 13-Jun-2016 seats Week of 13-Jun-2016 percentage share
Air Canada 119,215 seats 36.36% 142,380 seats (19.43%) 41.65%
Air Cargo Mongolia 352 seats 0.11% N/A N/A
Air Transat 1,101 seats 0.34% 804 seats (-26.98%) 0.24%
Alaska Airlines 12,566 seats 3.83% 10,529 seats (-16.21%) 3.08%
American Airlines 28,457 seats 8.68% 35,571 seats (25%) 10.41%
Cathay Pacific 1,974 seats 0.6% 1,967 seats (-0.35%) 0.58%
Delta Air Lines 38,258 seats 11.67% 42,346 seats (10.69%) 12.39%
Kenmore Air N/A N/A 374 seats 0.11%
National Airlines (US) N/A N/A 912 seats 0.27%
Philippine Airlines 1,044 seats 0.32% 1,480 seats (41.76%) 0.43%
Porter Airlines 13,090 seats 3.99% 14,000 seats (6.95%) 4.1%
Sunwing Airlines 561 seats 0.17% 188 seats (-66.49%) 0.05%
TAM Airlines 1,030 seats 0.31% 206 seats (-80%) 0.06%
US Airways 14,884 seats 4.54% N/A N/A
United Airlines 54,376 seats 16.58% 47,224 seats (-13.15%) 13.82%
WestJet 40,987 seats 12.5% 43,845 seats (6.97%) 12.83%
Total 327,895 seats 100% 341,826 seats (4.25%) 100%

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The company's strategy in leveraging sixth freedom traffic is to target passengers in markets such as Boston, Pittsburgh or Nashville to make one stop through Canada en route to trans-Atlantic and trans-Pacific destinations. Air Canada has worked with its various hub airports to make the transit process easier - by eliminating the need to reclaim bags, and allowing customers to proceed directly to US customs.

Mr Rousseau explained that when Air Canada began its focus on sixth freedom traffic a couple of years ago its market share on those routes was 0.4%. Now its share has doubled to 0.8%, and Mr Rousseau stated that the company is aiming for a share of 1.5% during the next couple of years, which he predicted should produce CAD600 million of incremental revenue.

Air Canada uses new ad campaign to leverage US citizens interested in moving to Canada

Air Canada is also wisely taking advantage of anti-Trump sentiment in the US by launching an ad campaign entitled "test drive Canada", targeted at US citizens who express interest in immigrating to Canada. The ad playfully advises US passengers to "check us [Canada] out first" before selling their homes and purchasing one-way tickets to Canada. The campaign - which does not mention Mr Trump by name - is targeted at residents of Los Angeles, San Francisco, New York, Boston and Washington, DC.

The ad has its own hash tag: #test drive Canada.

Air Canada is the second airline to use the US presidential campaign as advertising fodder. Aeromexico has created an advertisement with a much more serious tone, taking aim at Mr Trump's proposal to erect a border wall between the US and Mexico.

See related report: Aeromexico takes a bold stance against Donald Trump as its JV with Delta hangs in the balance

Air Canada continues to stress its fleet flexibility for weathering sudden worsening conditions

Although Air Canada is no longer issuing capacity, yield, or unit revenue guidance, throughout 2016 the airline has highlighted the flexibility it has to shrink its fleet if conditions worsen. Mr Rousseau has stated that Air Canada has approximately 40 aircraft that can quickly be removed from its fleet - 22 that are owned and unencumbered, and 18 with leases expiring in 2016 and 2017.

Air Canada Group fleet summary as of 17-Jun-2016

Aircraft In Service Inactive On Order*
Total: 212 0 123
Airbus A319-100 38 0 0
Airbus A320-200 42 0 0
Airbus A321-200 20 0 0
Airbus A330-300X 8 0 0
Boeing 787-8 8 0 0
Boeing 787-9 12 0 17
Boeing 737-8 0 0 33
Boeing 737-9 0 0 28
Boeing 767-300ER 34 0 0
Boeing 777-200LR 6 0 0
Boeing 777-300ER 19 0 0
Bombardier CS300 0 0 45
Embraer ERJ190-100IGW(AR) 25 0 0

Mr Rousseau has said that Air Canada - given its larger concentration of international growth compared with its US peers - has a different opportunity to expand margins. Air Canada's EBITDAR margin target for the 2016 to 2018 time period is 15% to 18%. During 2015 and 1Q2016 its margin by that measure was 18.3%.

Air Canada is well positioned in what seems to be a long period of labour stability

Four years ago Air Canada was mired in labour strife with its pilot and ground workers - the latter of which held wildcat strikes in 2012.

See related report: Air Canada faces a tough transformation as it celebrates a milestone anniversary

After getting help - with the government - to forge contracts with pilots and mechanics in 2012, the airline has gained a new agreement with in-flight crew schedulers, ratified in Jun-2016. The result is that the airline's 25,000 unionised employees are working under long-term contracts. Most of those collective bargaining agreements have a duration of 10 years or longer, giving Air Canada some welcome labour cost predictability.

In 2013 Air Canada declared its intent to reduce its unit cost by 15% over the medium term, and stated that in Apr-2016 that cost was trending to 21% (excluding fuel and exchange rate variations).

Several US airlines, including Southwest and Delta, are facing cost inflation in the medium term as they remain caught up in contract negotiations with various labour groups. Southwest is in talks with its pilots and flight attendants and Delta is in negotiations with its pilots. All three of those work groups have rejected collective bargaining agreements during the past year, and pilot market rates appear to continue their movement to the right.

See related report: Southwest Airlines pilot discontent as the union pushes to be paid for industry leading productivity

Much work is left undone, but Air Canada has made progress in its business strategy shift

Although Air Canada faces the same challenges in falling unit revenues as its US peers, its performance in that metric is driven by longer stage lengths and a higher mix of economy seats. There is also obviously some pricing pressure in the Canadian domestic market, and investors would no doubt like to see Air Canada work towards flat to positive unit revenue momentum.

After years of labour strife and attempting to define its strategy, Air Canada is enjoying a certain level of stability. Its business transformation is not wholly complete, but the airline is in the process of building network utility to compete with its transborder rivals.

There is much work left undone, but Air Canada has made solid strides during the past four years to lay the groundwork for financial stability and a cultural shift among its employees.

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