Air Canada reported second-quarter EBITDAR (earnings before interest, taxes, depreciation, amortization, impairment and aircraft rent) of $646 million compared to second quarter 2017 EBITDAR of $681 million.
Air Canada reported operating income of $226 million compared to operating income of $292 million in the second quarter of 2017. The airline reported adjusted pre-tax income(1) of $163 million in the second quarter of 2018 compared to adjusted pre-tax income of $229 million in the prior year's quarter. On a GAAP basis, in the second quarter of 2018, Air Canada reported a loss before income taxes of $71 million, compared to income before income taxes of $314 million in the second quarter of 2017. The second quarter of 2018 included a loss on disposal of assets of $186 million and losses on foreign exchange of $25 million while the second quarter of 2017 included gains on foreign exchange of $68 million and a gain on sale and leaseback of assets of $26 million.
"I am pleased to report another solid quarter of revenue growth, cost containment and unrestricted liquidity, in the face of significantly higher fuel prices. Our record revenues this quarter demonstrate the appeal of Air Canada's brand and underscore the continuing strong demand for air travel in all of our main markets. I thank our 30,000 employees for their hard work and dedication in taking care of our customers, which was recognized this month when Air Canada was named the Best Airline in North America for the second consecutive year at the Skytrax World Airline Awards celebrated in the U.K. Winning the award for the seventh time in nine years is a testament to the sustained progress we have made, something which all our employees should be very proud of, as I am," said Calin Rovinescu, President and Chief Executive Officer of Air Canada.
"During the second quarter, passenger revenue climbed 10.4 per cent to a record $3.921 billion and we generated EBITDAR of $646 million. We reported a solid 2.7 per cent increase in passenger revenue per available seat mile (PRASM), primarily driven by a higher yield, and also delivered a 1.0 per cent decrease in adjusted cost per available seat mile. Our unrestricted liquidity totaled a record $5.064 billion at quarter-end. We achieved these results despite contending with a 31 per cent rise in jet fuel price per litre from a year ago, showing the strength of our business plan.
"We did, however, revise our 2018 guidance for certain key financial metrics given the rapid increase in fuel prices in the first half of 2018. Nevertheless, we believe that the impact is short-term, that our robust business will enable us to stay on track and, as a result, we continue to expect to achieve our longer-term targets that were communicated at our last Investor Day. We estimate that we will be able to mitigate approximately 75 per cent of the expected 2018 annual fuel price increase through fare increases, other commercial initiatives and our cost transformation program.
"Everywhere, our ongoing strategy was on full display this past quarter. We launched 25 new routes this summer, introduced Air Canada Signature Service for North American premium customers, began offering satellite Wi-Fi on our wide-body international fleet, and we were recognized as one of the top five brands to work for in Canada. We also completed a complex joint venture agreement begun four years ago with Air China, making Air Canada the first North American carrier to negotiate a joint venture with a Chinese airline. This gives us unrivalled access from North America to the fastest growing and soon-to-be largest aviation market in the world, said Mr. Rovinescu.
"The Skytrax Award shows that our customers appreciate our progress and are rewarding us with their loyalty, with our aircraft flying 83.1 per cent full on average during the quarter. I thank our customers for choosing to fly Air Canada and we are committed to giving them ever more reasons to keep doing so," concluded Mr. Rovinescu.
Second Quarter Income Statement Highlights
In the second quarter of 2018, on capacity growth of 7.5 per cent, record system passenger revenues of $3.921 billion increased $371 million or 10.4 per cent from the second quarter of 2017. The increase in system passenger revenues was driven by traffic growth of 8.2 per cent and a yield improvement of 2.0 per cent, despite an increase in average stage length of 2.4 per cent which had the effect of reducing system yield by 1.4 percentage points. On a stage-length adjusted basis, system yield increased 3.4 per cent year-over-year.
In the business cabin, system passenger revenues increased $98 million or 13.7 per cent from the second quarter of 2017 on traffic and yield growth of 10.3 per cent and 3.1 per cent, respectively.
In the second quarter of 2018, operating expenses of $4.107 billion increased $489 million or 14 per cent from the same quarter in 2017, mainly driven by higher fuel prices year-over-year and by the increase in capacity.
Air Canada's cost per available seat mile (CASM(1)) increased 5.6 per cent from the second quarter of 2017. The airline's adjusted CASM decreased 1.0 per cent from the prior year's quarter, better than the 0.5 per cent to 1.5 per cent increase projected in Air Canada's news release dated April 30, 2018. Air Canada's better than projected adjusted CASM performance was largely driven by the acceleration of aircraft lease extensions (mainly from the third quarter of 2018) which resulted in a decrease to maintenance provisions, the impact of cost reduction initiatives related to Air Canada's cost transformation program, and other operating expense reductions.
Air Canada recorded adjusted net income(1) of $114 million or $0.41 per diluted share in the second quarter of 2018 compared to adjusted net income of $226 million or $0.82 per diluted share in second quarter of 2017. On a GAAP basis, the airline reported a second quarter 2018 net loss of $77 million or $0.28 per diluted share compared to second quarter 2017 net income of $311 million or $1.13 per diluted share. In the second quarter of 2018, Air Canada recorded a loss on disposal of assets of $186 million related to the expected sale of 25 Embraer aircraft and losses on foreign exchange of $25 million. In the second quarter of 2017, Air Canada recorded gains on foreign exchange of $68 million and a gain of $26 million on the sale and leaseback of two Boeing 787 aircraft.
Financial and Capital Management Highlights
At June 30, 2018, unrestricted liquidity (cash, short-term investments and undrawn lines of credit) amounted to $5.064 billion, the highest level in Air Canada's history (December 31, 2017 – $4.181 billion).
At June 30, 2018, adjusted net debt of $6.111 billion decreased $5 million from December 31, 2017. In the second quarter of 2018, an increase in long-term debt and finance lease balances of $889 million was largely offset by an increase in cash and short-term investment balances of $866 million and a decrease in capitalized operating lease balances of $28 million. At June 30, 2018, Air Canada's leverage ratio(1) was 2.1, unchanged from December 31, 2017.
Net cash flows from operating activities of $853 million in the second quarter of 2018 improved $24 million compared to the second quarter of 2017. Negative free cash flow (1) of $13 million in the second quarter of 2018 represented a decrease of $318 million from the second quarter of 2017 mainly due to Air Canada having received proceeds of $371 million from the sale and leaseback of aircraft in the second quarter of 2017 while no such sale and leasebacks were effected in the second quarter of 2018.
For the 12 months ended June 30, 2018, return on invested capital (ROIC(1)) was 13.7 per cent, significantly higher than Air Canada's weighted average cost of capital of 7.5 per cent.
2017 Investor Day Targets and Current Outlook
At its September 2017 Investor Day, Air Canada provided guidance on key financial metrics:
Annual EBITDAR margin (EBITDAR as a percentage of operating revenue) of 17-20 per cent in 2018, 2019 and 2020:
Air Canada now expects to achieve an annual EBITDAR margin of approximately 16 per cent for the full year 2018. This decrease in projected EBITDAR margin takes into account a significantly higher fuel price per litre than that assumed in Air Canada's Investor Day news release dated September 19, 2017. As additional mitigation measures take effect, including further pricing and productivity improvements and the airline's $250 million Cost Transformation Program due for completion in 2019, Air Canada is confident that its EBITDAR margin and ROIC will normalize by year-end and that it will realize its Investor Day targets post-2018.
Air Canada continues to expect to achieve an annual EBITDAR margin of 17-20 per cent in 2019 and 2020.
Annual ROIC of 13-16 per cent in 2018, 2019 and 2020:
Air Canada now expects its annual ROIC to be approximately 12 per cent in 2018. This decrease in projected annual ROIC reflects Air Canada's expectation of a lower level of adjusted net income than that previously anticipated.
Air Canada continues to expect to achieve an annual ROIC of 13-16 per cent in 2019 and 2020.
Cumulative free cash flow of $2.0 billion to $3.0 billion over the 2018-2020 period.
Air Canada continues to expect to achieve this target.
A leverage ratio not exceeding 1.2 by the end of 2020 (measured by adjusted net debt over trailing 12-month EBITDAR):
Air Canada continues to expect to achieve this target.
Full Year 2018 Free Cash Flow
Air Canada now expects positive free cash flow in the range of $350 to $500 million in 2018, as opposed to the range of $250 million to $500 million projected in Air Canada's news release dated April 30, 2018. This change takes into account a significantly higher fuel price per litre than that previously assumed for the full year 2018 and now includes net proceeds of $296 million from the anticipated sale of 25 Embraer 190 aircraft which are expected in the third quarter of 2018. After the sale is completed, Air Canada will operate these aircraft under sale-leaseback agreements until they gradually exit the fleet between 2018 to 2020, in line with Air Canada's current fleet plans.
Third Quarter and Full Year 2018 Adjusted CASM
For the third quarter of 2018, Air Canada expects adjusted CASM (which excludes fuel expense, the cost of ground packages at Air Canada Vacations and special items) to increase 2.0 to 3.0 per cent when compared to the third quarter of 2017.
Air Canada continues to expect full year 2018 adjusted CASM to range between a decrease of 0.5 per cent to an increase of 1.0 per cent when compared to the full year 2017. Approximately 0.75 percentage points of this range are driven by non-recurring costs for branding initiatives and new uniforms, customer service and technology investments, accelerated depreciation and sale-leaseback rent expense for Embraer 190 aircraft, and 2018 start-up costs of approximately $10 million related to Air Canada's new loyalty program scheduled to launch in 2020.
