Creating A Global Champion

Transcript

Duncan Bureau:Well, good morning. Thank you, CAPA, for inviting Air Canada, Air Canada Rouge, to this conference. We've been— we're 5 years old now, and we don't get invited to many parties because we're so young, I guess. But look, we want to just talk a little bit about Air Canada. First of all, that really started this whole airline, Air Canada Rouge, which has been incredibly successful. We are celebrating our 5th year this year. We've carried over 25 million people, and we've expanded from 3 aircraft to 53, and really been able to open up Canada into a number of new markets. In fact, we've introduced over 40 brand new markets to the Air Canada network since we started. A little bit about Air Canada. Air Canada, as you know, was a Crown corporation. We're 83 years old. We've grown over the last 6 years more than we did in the first 80. So we're an 80-year-old company that's growing at significant pace. Air Canada operates in a market, as you know, with a population of 30 million people. The benefit that we have, of course, is that our neighbor to the south of us one of the most mature aviation markets in the world, and we've been able to create a network of super hubs in Canada that we've been able to extract a lot of traffic out of the US onto our network and internationally. Obviously, that helped finance the introduction of Rouge. It also introduced a number of opportunities for us as we grew and continue to grow our Air Canada network, and I'll share a little bit of what's happening there. Oh, I forgot this. This is our lawyers. Does everybody have lawyers? Ours get paid by the word, so you all have to read that. So once everybody's done, just put your hand up. We'll probably pass on that. You know, Calin Rovinescu joined the organization at a time— again, a little bit of more history about Air Canada— at a time where we were really struggling. Obviously, Air Canada at the time was just about— well, we were heading into CCAA. Yeah. in Canada and like a lot of airlines were restructuring and needed to do a lot of work on their balance sheet. One of the things that Calin came in, when he came in he really established 4 priorities for the organization and those 4 priorities were obviously international growth, cost and revenue transformation, customer engagement and culture change. And I'll tell you how Rouge plays into all of those. But one of the things that we absolutely had to do was we had to get our financial house in order, which Calin was able to do. If you think about Air Canada, you know, our stock at the time when Calin took over was 88 cents, and so today we're north of 25. So he's created over 3,000% market cap growth for the organization in the last 6 years. We're one of the fastest growing stocks on the Toronto Stock Exchange and certainly outperformed most stocks that are traded. Last year, our market cap grew by 90%, again creating the opportunity for us to reinvest in the airline, acquire new aircraft, look at new markets, and just do things that we couldn't do historically. The health of the airline, health of mainline has really helped finance the things that we want to do at Rouge. So part of that recovery was creating an airline within an airline. And, you know, you don't get to create an airline in an airline just by painting airplanes, in our case Rouge. or pink or green or shortening the name. The reality is you have to have real substantial cost benefit, and the substantial cost benefit for Rouge really came in the form of looking at the cost structure and the densification of the aircraft. So we have a fleet of 53 aircraft today made up of 25 767s. So in fact, we were one of the first carriers to start a long-haul low-cost operation. As I said, we're 5 years old, and we've grown and added over 40 net new destinations for Air Canada, particularly in Europe and in Asia, South America, and obviously the Caribbean. And I had mentioned earlier, one of the things that we've been focused on is creating a superhub out of Toronto. That superhub allows us to move traffic both within the Air Canada network and the Air Canada Rouge network. And so we've been able to significantly grow our U.S. point of origin, point of sale traffic. In fact, over the last 3 years, we've grown well over $700 million point of sale, point of origin U.S. And yet we're still only less than 1% of the international traffic originating out of the United States. So we have a tremendous amount of opportunity there. And quite frankly, our friends at United have been able to help us with our joint venture on the transatlantic. Thank you. As well as Lufthansa. So the Superhub really allows us to connect Rouge into mainline. One of the comments earlier was about creating and making sure that you had flow and you had access to traffic. Obviously for us, a lot of that traffic comes from Air Canada. Air Canada will carry over 50 million people this year, and we continue to grow that network and that amount of volume. In fact, we had a record summer, and we continue to have record performance quarter after quarter, not only on the financial side but also passengers carried, with a significant focus on cost. So our 3 super hubs, obviously Toronto, Montreal, and Vancouver, and here's where the opportunity really lies in terms of connecting the Rouge network and flowing traffic through these hubs. Again, I talked a little bit about our performance over Over this summer, we carried over 15 million people. Remember, there's only 30 million people in Canada, and again, we continue to generate record performance across the entire network, a 6.5% increase since 2017, and obviously safety continues to be our number one focus. What we are focused on is network growth and international expansion, and again, if you look at Air Canada over the last 80 years, the significant portion of our network growth has been over the last 7. So we've almost doubled the size of our wide-body fleet. So we went from about 50 wide-body aircraft to 93 wide-body aircraft. With the introduction of Rouge, we added 25 767s, part of the fleet, and we migrated those over into the Rouge network. And the Rouge network has really grown significantly, introducing new non-stop services that fly over or fly around hubs that we historically used to flow traffic through. So that's where we are today. Significant growth again in terms of what we've been able to add to the network, and it's been incredibly accretive. So when you look at the value proposition that Air Canada brings to the introduction of a low-cost carrier, we obviously are part of the Star Alliance. We have Rouge, We have the Air Canada Express network, which is regional carriers that we have capacity purchase agreements with that continue to feed traffic into our hubs and onto both our domestic network and then obviously into our international network. We also then looked at Aeroplan, and as some of you know, we've acquired Aeroplan, or we're in the process of reacquiring Aeroplan, which we sold over 20 years ago. One of the things that we have learned is that certainly there's a tremendous amount of value in owning the customer information. Having a third party manage that in an off-balance-sheet loyalty solution for us really wasn't working. And again, as you would have known for those who are following Air Canada, we made the announcement last year that we were going to exit the Aeroplan agreement. And then that obviously translated into us now acquiring Aeroplan, and we're in the final stages of doing that, and hopefully we'll be able to conclude that deal by the end of the year. What that does is it gives a significant amount of our frequent flyers the opportunity to have stability not only in their currency balance, but also their access to the Air Canada network going forward. The other pillar and value proposition, which I'm here to talk about, is Rouge. And so Rouge started off again with 3 airplanes. Our first day we carried 775 people on 3 aircraft across a very limited network. Today we fly over 100 destinations and we have close to 2,000 employees operating the airline. So we have about 1,400 flight attendants and we have 600 pilots. The pilots come from mainline. And obviously we acquire or hire new flight attendants. One of the unique things about our flight attendants and onboarding and customer centricity is we actually send all of our flight attendants to Disneyland. And so they all go to Disney University, which is a significantly different training ground than your historical flight attendant training. Obviously they still have to go through Transport Canada training, they still have to pass all of those requirements from a Transport Canada perspective. But one of the things that we thought was incredibly important was to create a really different culture at Rouge. And if any of you have flown Rouge, you'll know that our crews, I think the average age is 7. I've— I'll tell you a funny story. I was at our first launch, or my first launch down at Disney. I went to the Disney University. And we were onboarding 168 new flight attendants. And I was talking and one of them put up their hand. I was talking about the number of flights they've had. One of them actually put up her hand and said the first flight she had ever been on in her entire life was her flight down to Disney to become a flight attendant, which is quite puzzling because you wonder, how did you even know that, A, you were going to feel comfortable flying? Right. What was really unique about that, 4 other people in the audience also put up their hand that it was the first time they'd ever been on an aircraft, the first time that they'd ever left Toronto. So we have a very young workforce, a very energetic workforce, and quite frankly, it is a huge differentiator. And the training that we put them through at Disney, again, it's about customer centricity, it's about delivering on that expectation. And again, if you think of the product that we're offering, we're offering a dense up 767. We're offering up a dense up 319. We don't have lie flat beds, but we do have the opportunity to take advantage of the rest of what Air Canada brings to the table, obviously, which is network, the frequent flyer program, access to lounges, connectivity, the infrastructure that we take advantage of. But we're again, what I talked about earlier is you don't get to paint. the aircraft Rouge and call it a low-cost carrier. The fact is we do have significant economic benefit from the productivity of our flight attendants, also our pilots, and we've been able to leverage that into growing the airline significantly. So, Canada. You know, we hear often that Canada is a duopoly. It really is WestJet and Air Canada. The reality is we compete against a lot of carriers. Operating into Canada, and that the number of carriers continues to grow. As you probably are aware, Vancouver is one of the largest airports with the number of Chinese carriers flying into North America. I think we're at 13 different Chinese carriers flying into North America. So a very competitive market. Hong Kong has become an incredibly competitive market if you look at what Hong Kong Airlines. is doing in that market, and Cathay's response, not only from a capacity perspective but also from a pricing perspective, has really forced carriers to rethink their investment in Hong Kong. So all of that to say, it's a very competitive market. Air Canada— or Canada now has the introduction of ULCC's WestJet Swoop and also Flair Airlines. Now the interesting thing about WestJet, a low-cost carrier introducing a low-cost carrier, Is we're a little puzzled about some of the deployment they've made, and again, they're very smart folks and they know what they're doing. But they are operating Swoop on some of the same markets that they operate WestJet on. So Edmonton Vegas is probably a great example. The Swoop or the Rouge model, we're not deploying on the same markets. So as an example, we at Rouge pretty much do well. We do all the flying into Florida. Our significant share. Growth in Florida has really been driven by the amount of markets that we're flying into Florida and the frequency that we have into Florida. We now are doing the same into California and some other markets. What we did learn as we continued to grow and we launched Rouge was that in some markets, the business traveler, the predominant business traveler, had a very strong opinion about which product they wanted to fly into specific So we did introduce Rouge into Los Angeles. We found out very quickly that that was a market that didn't want or wasn't looking for a high-density, low-cost solution, and we went back to mainline. So we are learning as we grow the airline. We are deploying aircraft into markets, and sometimes we have to adjust. So our motto really has been about fail early, put it into a market, see how it goes, how the market reacts and see if we can extract the type of yield and margins that we need in order to continue to grow and be accretive to the mainline carrier. So if anyone tells you there's no competition in Canada, I'll send you this slide and you can be an advocate for me that it's not a duopoly. In fact, I wish it was a duopoly. It'd make my job a lot easier. So again, in terms of this notion of building a global champion, You know, we did start Rouge on Canada Day in July of 2013, and again, this slide is actually dated— that's 100 destinations with a fleet of 53. We'll be adding 3 more aircraft into our network next year with the acquisition of 3 A320s, which will join the fleet in June. So we actually take possession of those in somewhere around February. And they'll join the system in June. So that will be 3 fleet types into our system. We'll have the 319s, the 320s, and the 321s from the Airbus fleet, plus the 767 fleet. Rouge itself has done incredibly well, and again, has now become the dominant carrier into a lot of sun destinations, which originally was the plan that we would operate these into sun destinations into the Caribbean, into the US, into European leisure destinations, and again, it's been incredibly successful and has grown significantly. Obviously, the focus has been on business efficiency, making sure that we're deploying these airplanes and this brand into markets where we believe it's the right product, the right aircraft with the right economics in order to be accretive to mainline. What I will tell you is I like to call Rouge the defibrillator for mainline. The fact is, without Rouge, there probably is no Air Canada. You know, Rouge was introduced at a time where Air Canada's financial structure, financial systems, or health, not systems, was a bit challenged. So what we've been able to do with Rouge is operate into markets that we would have otherwise had to exit or we would've had to operate at a significant loss. So our ability to be in Florida, our ability to be in California, our ability to be in some of these European markets with the right airplane and the right cost structure has allowed us to be very, very competitive and in fact grow our share and be accretive in terms of margin contribution to the airline itself. Obviously delivering the Rouge experience, I talked about that a little bit earlier. putting people through Disney University on the customer service side. You know, when you walk onto a Rouge aircraft, if you're not familiar with Rouge and you're expecting an Air Canada product, it's a very different experience. Obviously, Air Canada mainline is the only 4-star carrier in North America by Skytrax, and so it's a very premium product. It's a premium product, and we're extremely proud of that product, and we continue to invest in the premium product. Globally, domestically, and on the transborder side. So when you do walk onto Rouge, it's a very different experience. What we've been able to do with our crew and the training that we put them through is create an experience that people really enjoy. And so no, there is no lie-flat bed, and we get that question often when people get on the flight. Why is there no lie-flat bed on a 767? Well, that's not the product that we have. So again, our foundation in terms of Rouge and how we've been building Rouge is really around safety, friendly, vacationy— I'm not even sure that's a word, but we use it, must have come from Disney— and efficiency. So we want to deploy these airplanes, keep them in the air as long as we can. You know, in the summer we had 2 spare aircraft. The reality is we flew every asset we had at almost maximum capacity. We were operating 92% load factors in the month of August, so we were generating record load factors and record profitability or a contribution to the airline. So we're extremely happy with how the summer went. And I'll share a little bit with you about what that looks like. Again, over the last 5 years, it's been 25 million passengers. You know, I would certainly argue Air Canada's been in the long-haul low-cost business for 5 years, probably one of the first airlines to start operating profitably in that space. So we're available for consultation if anyone needs it. That was a joke. It must be. That was a lot of wine you guys had last night. Just laugh. If you laugh at one of my jokes, it'll make me feel better. So, okay, so again, I talked about the 3 A320s that are joining the fleet. One of the things that obviously Rouge was built to support was our vacations business and our tour operator business. Again, Air Canada Vacations, since the introduction of Rouge, has grown significantly and become one of the top tour operators in the country. And again, having that vertical integration of our own tour operator feeding our low-cost carriers combined with a significant expansion of Air Canada Vacations into Europe driving traffic into Canada. This business used to be only focused on sun destinations, point of sale, point of origin Canada. Anyone following the weather in Canada today? It's -8,000 in Calgary, about 48 centimeters of snow. They actually called in other cities' snow equipment In order to help dig them out, so that's great for the leisure business, and it's great for Rouge because, as you know, when it starts snowing in Canada, Canadians get very frustrated and want to go south, or they want to go to Europe, or they want to go to anywhere where there is a beach and some towels and some and no snow, and the only ice available would be in their drinks. So it's good news from that perspective. Obviously if you're commuting to work, kind of sucks. But overall the Rouge business has been extremely accretive for Air Canada Vacations and Nino Monteghese who runs that business should probably buy me lunch every day, but he doesn't. Air Canada Rouge, again, the things that we're really looking for that differentiate us from mainline is the fact that we're obviously our behavior standards are Fairly similar. Safety continues to be our number one priority, obviously, as every airline in this room would attest to. We don't save money on safety, ever. In terms of friendly, again, tying in the Air Canada University as well as the Disney University from a training and customer service perspective has really set us aside, and it is a very different product, and it's allowed us to compete with those carriers like WestJet and some of these international carriers, low-cost carriers and ultra-low-cost carriers, from a product and a service perspective. Who flies Rouge? So there's a great question around yield, and I think one of the speakers was talking about the acquisition or the access to better yield. The reality is, because of our network and our flow with Air Canada mainline, we do have access to business travelers. We do have our super elite travelers flying on Rouge to their homes in Florida, to their homes in California. So we hear from them often in terms of the product and obviously how they accrue their currency and how they redeem their currency across the Aeroplan platform into the mainline platform and obviously then onto Rouge. But what we are seeing is a significant growth in the amount of business traffic that we're carrying, and that's partly a function obviously of the markets that we're flying. we're now taking over some domestic flying. So we're doing Toronto to Victoria, we're doing Toronto to Nanaimo, we're doing Toronto to Kamloops, and some of these markets there's some significant business traffic and government traffic, particularly the Toronto-Victoria with Canadian government and military. So what we are seeing is we are getting a very good yield on Rouge, obviously at a much lower cost of operating costs, so we are contributing margin. To the mainline carrier, we have we do have a lower percentage of elite thirty-five altitude members, and again, what we're getting from those flyers, those who aren't part of our loyalty program, we we have to do a much better job of managing the expectation of the consumer with the product that we're putting into the air, and again educating them what is Rouge because there's still a bit of a challenge with. The Air Canada because you do buy Air Canada Rouge product across the Air Canada network. So you're going to the Air Canada website, you are dealing with the Air Canada call center, but again, it's a Rouge product and we do everything we can to ensure the customer understands this is a Rouge product you're flying, this is Rouge operating, and here's what Rouge is. But again, as all of you know, you can never overcommunicate. In terms of building a global champion, you know when Kalen Rovneski took over Air Canada, it literally. Was on the— on its deathbed is probably a good analogy. When Calin took over, one of the things that he had told the market was that he was going to build an airline that was going to be one of the top 10 airlines in the world and build a global champion. And what he meant by that obviously is an airline that was extremely healthy, that had a global network, and had a culture where people would want to come to work every single day. and would want to contribute and want to be there. You know, he uses a phrase, and I use it quite often as well, is, you know, he doesn't have to go to work, he gets to go to work. And if we could create that environment at Air Canada, not only Air Canada Mainline, but at Air Canada Rouge, we really believe that we've got a world-class airline, and we're excited about what we're doing in that space. This is sort of coming together if you look at all of the accolades and all of the rewards and recognition that Air Canada is getting, not only in Canada, but globally. in terms of the product. And it's both mainline and Rouge that are getting significant accolades. Not only for the product, the hard— I mean, airplanes are airplanes and the investment in the airplanes, but the fact is the customer service side. But where we're really winning is engagement with our employees. We're probably one of the— well, we are the only airline that has a 10-year deal with our pilots. There's airlines around the world that would love to have our deal with our pilots. That then translated into the rest of our unions having long-term labour agreements That creates economic stability, but it also creates an environment of team. And we really do have a team, and we're all wearing the same jersey. We're not fighting amongst each other between labor and management. In fact, we spend a lot of time with our labor folks and our unions talking about strategically how do we grow the business, how do we improve the product, and what is a win for the customer. And I'm sure that a lot of airlines would like to be having that conversation instead of dealing with grievances. So just to wrap up in terms of building a global champion, you know, we think we have a proven strategy. The Rouge product, the Rouge airline within an airline, has been extremely successful and it contributes margin to the organization. We've been able to improve our financial targets significantly. The markets, or the targets we've given to the market, we've been able to deliver on, on a quarter-after-quarter basis, and that's created a significant amount of market capital growth. We have tremendous opportunity ahead with new efficient narrow-body aircraft. We have an order of over $12 billion of new aircraft, which include the 787s, the, the what was the Bombardier, now the Airbus A220, launch of our own loyalty program as we bring it in-house, and then obviously we have new credit card programs, and obviously the significant improvement or opportunity around the Rouge product. So that's it for me in terms of Rouge. So I do hope you have an opportunity to fly with us. I do hope you have an opportunity to come and join us in the Rouge product. So thank you very much from the entire team at Rouge. Thank you, Duncan.

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