CEO Interview: Canadian North

Transcript

Helane Becker:

Good morning. Hi, Chris. Thanks very much for being with us this morning. [crosstalk 00:00:39]

So for those who don't know, Chris is president and CEO of Canadian North, which is an above-the-Arctic Circle airline. And when I was doing some work on it, because I don't know Canadian North that well, embarrassingly enough, I realized just how the route network was, and I'm thinking so I want to talk about a lot of different things, and I'll give you a chance to speak here. So why don't you tell us first a little about Canadian North, your mission, how important the airline is to the communities you serve? And we'll start with that.

Chris Avery:

Okay, great. Thanks, Helane. And it's a great pleasure to finally meet you and put a face to the voice. Canadian North, maybe I'll give an overview of our route network, as you brought that up, is we, in our network, we cover roughly around 40% of Canada's landmass. And within that 40% of Canada's landmass, we probably service about a little over 1% of Canada's population. So it's a huge geographical area in some of the harshest weather and harshest environments that an airline operate in for a very small population, but that very small population is really dependent on us for everything. So they're dependent on us for the things that you and I are used to going down to the store for milk and bread on the shelves and groceries, they're dependent on us for essential supplies to keep trucks and service vehicles operating. And dependent on us to move medical travel.

So people going down south to see doctors, to see specialists and so on, and then obviously to visit friends and relatives and get out their communities. So we say we are the highways and the roads for most of the communities because most of the communities we serve are not accessible by roads, not accessible by rail, and maybe accessible by sea, about two months of the year. So we provide an essential service. We do this without any government's assistance, absent of COVID of course. Absent of COVID, we don't get any government assistance to do this. We are a 100% Inuit owned. So the Inuit are the indigenous population in Canada's Arctic North. We're a hundred percent Inuit owned, owned by the Inuit beneficiaries. So we're owned by many of the same people we serve and many of the communities we serve.

So that's a big piece of our operation as well. That's a little bit about ourselves. We are Canadian North, it's recently, in the last two years, an amalgamation of Canadian North, which is based in Calgary, headquartered in Calgary and first year which is headquartered in Ottawa. So it's a merger of the two airlines, and as people have found in many parts of the world and certainly in the States, consolidation is required in order to be sustainable over the long-term. And certainly for our area where we were serving such a small population base, consolidation was very much overdue. And so that's where we are today.

Helane Becker:

Okay. Wow. I didn't realize you were owned locally. That's pretty, it must be pretty exciting, right? Or is it hard because you have a lot of different opinions? I know you have an advisory board including one observer and I guess that helps.

Chris Avery:

Absolutely. And like most of the airlines, I think a lot of the viewers would know, certainly for airlines that serve more rural populations and communities, those communities and the population generally know your schedule better than you do. They know when your flight is delayed or your service is for... Very loudly and very clearly. The whole population knows even before you know and head office sometimes.

And so, that's part of the challenge is the communities we serve are dependent on us and we can be very close to them. We are very close to them, so they're dependent on our service. And so we need to deliver a great level of service, but we're also owned by the Inuit beneficiaries where we're owned by the funds, their land claims funds. And so we have an obligation to protect that investment and provide adequate returns on investment. So this is kind of a unique situation where we have to provide great service to many of whom are the owners, but we also need to look after their investments.

Helane Becker:

Gotcha. So, when you think about... First of all, I want to talk about the fleet. You have the 737, mostly 400s, some combis. And I'm assuming when you talk about the service and being so far north, so think about there's three things. I have so many questions to ask you about. One is you're obviously carrying cargo, right? You're doing the milk, you're doing the kind of Home Depot type runs for people to get stuff right, to take care of themselves. And then how do you handle weather? And in all your communities, I don't think you're serving them every day. You're doing them three or four times a week. So I imagine that everybody comes in, helps you unload the plane, takes their goods and moves on. So how did the operations work in that regard and how do you keep the runways clear given, I'm assuming harsh weather? Or am I being really naive here? You can say that if I'm being naive, you can totally say that.

Chris Avery:

No, not at all. It is a harsh environment. We definitely run into the limits of the operating temperatures of the aircraft, which when I've worked in airlines in the south before that, that conversation has never come up. But certainly in our airports there are times when the temperature gets to a certain degree low enough that it's below the operational capabilities of the aircraft. Whether it's a Boeing we operate or the ATRs that we operate. So, you're right. We do operate in some unique and harsh environments. Our businesses is threefold. It's like you said, it's cargo. So, we carry cargo. We have a good partnership with Amazon. We carry a lot of Amazon boxes up north as well. And recently we opened a Amazon pickup facility in Iqaluit which is the capital of Nunavut.

We opened that up in partnership with Amazon. And so we have a sizable cargo business, and then of course the scheduled passenger business up north, and then we have a charter business as well. In terms of our operations, we have the infrastructure up north, whether it's in the capital, where our hub is and from that hub we fly and we operate ATRs further north to the smaller airports. And as you say, in some cases it's less than daily frequency and then certainly we have combi, ATRs as well. So ATRs carry a combination of passengers and cargo and that allows us then to have more frequencies for passengers and more frequency of cargo, because you want your vegetables, your milk and breads to be as fresh as possible so that's certainly the case. We work hard at recovering from [inaudible 00:09:06] because when the weather happens in the north, that can happen for several days at a time. So we built our infrastructure and we built our fleet planning around, trying to, as fast as possible, recover quickly, as quickly as possible once the weather clears.

Helane Becker:

Gotcha. Wow. That's amazing. It really is. And then the light and dark, right? So this is the time of year where I think you're getting, you're starting to get more hours a day of sunlight. I mean obviously the day's always 24 hours, but it's not always that much sunlight.

Chris Avery:

That's right. [inaudible 00:09:47] Kudos to our crews and our pilots. They operate some challenging airports and challenging runways and they're specially trained to do that in the middle of the winter. It could be a midday arrival that's in the dark, they're trained well. Our pilots are doing an amazing job making sure we're reliable and safe.

Helane Becker:

That's great. I'm sure you're really proud of everybody. So let's talk a little bit about reopening and the pandemic which really has laid Canada low. The quarantine rules...

First of all, the country seems closed to international travel. Second, the quarantine rules seem pretty onerous still, at least here in the U.S. Things are starting to open up and we've seen what I call a jailbreak as people have been waiting to get out of Dodge, so to speak. I know once I got vaccinated my attitude was,"Hey I'm vaccinated. I should be able to go and do things maybe not like I used to do, but certainly whatever my next normal is going to be."

So how are you thinking about, first of all, surviving this pandemic? And especially because your services are so important to your community, how is, and you serve a broad section of Canada, you said 40% of the landmass. And when I was looking at the root structure, it really is from west to east and then down to Ottawa, Calgary, Yellowknife and I guess Montreal would be, I didn't see that you serve Toronto, but I did see the other markets. And then, your citizens, I guess, could connect to international flights, but I mean, obviously Canada shut down. So, how are you thinking about the reopening phase now?

Chris Avery:

Right. Well mean maybe if you don't mind, I'll back up a step it's a...

Helane Becker:

Yes, go right ahead.

Chris Avery:

At the beginning when, I mean, it's over a year ago now, I think at the beginning, we were maybe hopeful, maybe naive that things were happening internationally. We saw Air Canada pulled down capacity to Asia, to China. We were hopeful that we, because of the essential nature of art, the travel and the area we cover that we might see a decline in bookings, but certainly not to a levels that, that materialize. So we were hopeful for that. Having said that, we prepare for the worst and made our plans for the worst. And then about March of last year, we started to see just like everyone else, our bookings disappear. And essentially, 80%, 90% of our bookings disappeared. It hit us just as hard as everyone else.

And then we saw the territories, the territories we serve close off their borders. So you were saying earlier that Canada serve seems more closed off than the U.S. Maybe take that one step further and go up north, Northern part of Canada. As an example to this day, in order to travel up to Nunavut, whether you're a resident or a visitor, you have to stay two weeks in a government run contracted hotel for two weeks to quarantine before you're allowed to travel up to Nunavut and that's today. So you can imagine what that does to passenger traffic for us. We support the measures because it's a small population. It's a tight-knit population and the prospects of COVID are challenging for the north. It doesn't have the infrastructure, the south. So we support those closures, but it's devastating for business, as you can imagine.

And I respectfully call it, it's like minimum security prison, right?. You have to be, you can't leave your cat, brought through this brought in for you for two weeks. So that's where we're at, more recently in Nunavut, in Iqaluit. I think it was about three weeks ago in Iqaluit, they, and it turned out it was one of our rotational workers. One of our workers was the first case of a positive COVID in Iqaluit. And that was three weeks ago. So you can imagine it. So that's, it's a victim of its own success being the capital of Nunavut. It had not had a case of a positive case of COVID for almost 14 months.

Helane Becker:

Wow.

Chris Avery:

And so in fact that turned out to be quite an event, I believe it's getting under control in Nunavut. Our operations was hampered part because many of our workers either test, some of our workers tested positive, and many of them had to isolate because they were in close contact with people who were positive.

So you can imagine how hard it is to manage planes, handled aircraft, unload cargo. You were asking him about unloading cargo, how difficult it is, time to load cargo and get it all to the right places when you lose 70 plus percent of your ground handling staff. So we've worked through that luckily, and we've worked closely with the government. So that's where Nunavut it's at right now. It is still in many ways, just a victim of its own success, I call it. It's still a learning to manage through COVID, having said that the target, I believe the number is about 50% of the population have their vaccine, so, and their second shot. And so that leads Canada, that's much higher than Canada and maybe more on par with the States.

And if we expect that about 70% to 80% of the population who are eligible for it will have their second shots by the end of the summer. So that's really good news. So we're really optimistic for the future. Having said all that, for super optimistic for, for the recovery and the rebound, we believe the travel up north is essential. So people get to go and see doctors, people need to leave to see friends. Teachers need to teachers go out to work for the year and may travel down in the summer and have friends and families who does it, businesses up there probably are businesses that very much need to see where their, where the, what their environment is, who they're doing business with them, where their operations are. Maybe even more so than in itself. So we're very confident to have a recovery. It's just a matter of timing. And the timing is, it's probably hard to predict in the south. And it's even harder to predict in the north.

Helane Becker:

Yeah. Yeah. It sounds like when, so when you're thinking about travel now, can people travel within the north? Can they go from one, like from Northwest territories to another, to another state and can they travel around easily or are there limitations? With borders and so on within the north?

Chris Avery:

I think within the north, within between the territories, last year more recently opened up, but then with the recent positive COVID cases in Nunavut, and then some in Northwest territories as well. Now borders have closed down and the government has mandated the quarantine periods again.

Helane Becker:

Gotcha.

Chris Avery:

And that then discouraged travel within the communities because some of the communities are very small. I mean, there are some communities with less than a thousand people. So we're, the government, the territorial governments are working very hard to get everyone vaccinated quickly in those communities. And then also stopped COVID from getting up there before that happen.

Helane Becker:

I imagine the airline was a big part of vaccine distribution as well.

Chris Avery:

That's right. I mean, we were proud to deliver the first vaccines up to Nunavut and continue to do that. So it's part of the essential services we did. We provide.

Helane Becker:

Gotcha. And then you said before, that everybody, whatever the definition of everybody is, let's just say 70% or 80% of the population have their second dose by the end of the summer. And so are you seeing an increase in bookings for the fourth calendar quarter and for the holidays? I guess Canadian Thanksgiving is in October. So if you're vaccinated by August or September, you might have a chance to have your immunity in place and be able to travel for Canadian Thanksgiving. And then of course, Christmas and New Year's comes about the same time for everybody. Are you seeing that ATL build as the year goes on?

Chris Avery:

You know, we are a team that build at all. And part of, that doesn't, I don't mean to sound pessimistic because knowing the audiences operates in other parts of Canada, North America and the world. It's very unique to us. Again, it's the victim of the territory successes right now, Nunavut has a higher number of COVID cases, positive COVID cases than it's ever had in the past 14 months. So again, a victim of it's own success been successful in keeping it out, but now dealing with it. So, we haven't seen the lifting of restrictions for quarantines and so on. And in fact, we've seen tightening up with those restrictions because of the reason that's... So therefore we aren't seeing the positive booking trends yet. Having said that, like I said before, we're a hundred percent, we're optimistic about it. There will be a recovery. We believe it will be a strong recovery. It's just a matter of when, and maybe in the north that might be a little later, or it might be faster because it's more essential, more essential travel. We just don't know yet, but we know it's [inaudible 00:20:40]

Helane Becker:

Right. Gotcha. And then you guys, I think are members of Aeroplan? So is that a big part of your, of what, I don't know, of your client and your customers? Do they find, I mean, has that stimulated demand at all? Has that really helped your revenue line at all?

Chris Avery:

Right. I think you mentioned that earlier about connecting to networks and connecting to other airlines we know. We have a great partnership [inaudible 00:21:13] partnership with both Air Canada and WestJet. So that allows us to provide an extended network for our customers, but it allows those airlines to have access to a very important part of the country that as albeit a small population, but in small amounts of travel. But it allows both our airlines, national airlines to expand their network. So we have a great partnership with both airlines. I would say people in the north travel a fair bit, probably more, more so per capita and per year on a per year basis, out of necessity than most people in Canada and maybe in North America. So certainly they value their Aeroplan points. And I hear about it, if we do anything to change our Aeroplan program, whether it's our decision or Aeroplan's decisions, we hear about [inaudible 00:22:16].

Helane Becker:

Okay. All right, I think we have...

Chris Avery:

In fact, I think sometimes our customers believe we have more influence at Air Canada and what Aeroplan than we actually do.

Helane Becker:

Okay. I think we have time for just one more question, ESG, environment and sustainability. Are you guys, I mean, obviously you have the 737-400s, you have the combis, so maybe the fuel efficiency isn't as great because you don't, you're not spreading it over as many people, but you also the ATRs, which is an efficient aircraft. So how are you thinking about aircraft replacement longer term to the 400s, need to be replaced at some point, what are your thoughts on that?

Chris Avery:

Right. Well, maybe it's... It's a great question, I mean, first and foremost, I mean the communities and the customers we serve see firsthand the impact of global warming. As I travel up north and I travel with my board chairman and other board members who live in the north, they will point to, as an example, point to a bay and say in the middle of winter, in January or February. And they say, when I was a kid, we walked across this bay to the other side, to the peninsula, and that's where we would hunt or whatnot. Now, when you look across it's, you can't walk across anymore. The water is still there and it hasn't frozen over it, despite it being at the peak of winter. And that impacts the communities hunting, gathering food supplies, impacts the trends of how the wildlife move and et cetera.

So we see firsthand through our, the communities we serve our customers and our ownership group, the impact of global warming. So we feel a strong responsibility for that. Having said that, we have to fly airplanes to deliver the services. So, we through COVID, we've, where there's crisis, there's sometimes opportunity we through COVID we have taken the opportunity to upgrade some of our fleet. So we were taking, we will have three 737-700 next generation aircraft into our fleet by the summer. And pre-COVID [inaudible 00:24:52] you can think back to pre-COVID, the MAX were grounded, that demand was strong, getting hold of in engineer aircraft 737 NG aircraft was cost-prohibitive for us because our business, our scheduled business is reliant on low utilization here as in the large population.

So if we add another flight to Clyde River, it's not the same as adding another flight to Las Vegas. So we won't stimulate that much in many people. So our business is low utilization. We also have a sizable charter business in the west specializing in workforce movement for the oil sands. And more recently the liquefied natural gas work in Northern BC. And again, that's low utilization flying because we're flying for the customers when they want. So as a result, we can't afford the new planes with higher ownership costs of the airplanes. Cause we can't spread that up across lots of fly, but because of COVID, we're now able to access next generation 737 aircraft at lower ownership costs, which are more fuel efficient, and better for the environment than the classic aircraft that we operate.

So we're moving up the chain and moving up to more fuel efficient aircraft. So COVID has given us that opportunity and we continue to be in talks with ATR and Boeing on possibilities of further renewing our fleet. They understand our economics. So we explained to them clearly not, we can't fly by aircraft as much as we might be able to, someone might be able to do it themself. So here, this is our economics. So how can you help us overcome? Yes, we're absolutely very cognizant of that.

Helane Becker:

Okay. Okay. Well I think we're out of time. So I'm going to say thank you very much, Chris. I really enjoyed our conversation this morning and thanks for being here with us.

Chris Avery:

Well, thank you. Again, great to finally put a face to the voice. Next time I hear your voice, I'll know what you look like.

Helane Becker:

Well, next time in person, that's what I can say. We have to get the... hopefully when CAPA does their next America's conference, it'll be in-person and we can meet then.

Chris Avery:

Definitely. And hopefully we can host to you up north as well.

Helane Becker:

Yes. I never been up that far north and I'd love to be. So thank you very much.

Chris Avery:

Thank you.

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