Air Canada Rouge - First Five Years

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Air Canada logo
Air Canada

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Transportation

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February 16, 2018

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#1at the 622 825 BUSY 375 69 1217 8663 +80.25 1822 5939 +7436 2453 933 AIR ADA 425% 375.69 9.56 24.35 TO 445 255 225 6353 OS 367 363 956 2435- 6.85% 282.80 217 83.bo Feb Feb +53835 536% 37569 256 2435-4523 825 6.35% 896.00 5635 835 24835 458 65.36 ALTA CORP CAPITAL 7th Annual 763 4445 255 635 8.35% 28280 217 8368 +8025 1321 120% 3.56 2435-46.23 825 6.35% 896.33 7.63 4445 45.23 825 6.35% 375.69 9. B 458 65.36 48025 1321 1.20% 896.33 7.63 4445 255 635 -95.36 282.80 217 83.68 +80.25 1321 56:39 +7466 245.3 9.33% 896.33 763 4445 255 825 6.35% 256.36 2.78 56.39 +74.36 245.3 523 825 6.35% 282.80 217 8368 +80.25 1321 3.35% 37569 956 2435 -45.23 82.5 5375.69 956 2435 -45.25 6.35 Institutional Investor Conference 99633 354 3223 +533 335 5.36% 375.69 9.56 2400 121 1201 896.33 763 4445 255 635 835% 28280 217 83.68 88337569 956 2435-45.23 825 6.35% 896.33 7 Amos Kazzaz C-GJWI 1821 120% 88633 Senior Vice President, Finance Toronto AIRBUS A321-200 January 10, 2019#2Caution Regarding Forward-Looking Information This presentation includes forward-looking statements within the meaning of applicable securities laws. Forward-looking statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These statements may involve, but are not limited to, comments relating to preliminary results, guidance, strategies, expectations, planned operations or future actions. Forward-looking statements are identified by the use of terms and phrases such as "preliminary", "anticipate", "believe", "could", "estimate", "expect", "intend", "may", "plan", "predict", "project", "will", "would", and similar terms and phrases, including references to assumptions. Forward-looking statements, by their nature, are based on assumptions, including those described herein and are subject to important risks and uncertainties. Forward-looking statements cannot be relied upon due to, among other things, changing external events and general uncertainties of the business. Actual results may differ materially from results indicated in forward-looking statements due to a number of factors, including without limitation, our ability to successfully achieve or sustain positive net profitability or to realize our initiatives and objectives, industry, market, credit, economic and geopolitical conditions, energy prices, currency exchange, competition, our dependence on technology, cybersecurity risks, our ability to pay our indebtedness and secure financing, our ability to successfully implement appropriate strategic initiatives or reduce operating costs, war, terrorist acts, epidemic diseases, airport user and related fees, high levels of fixed costs, liquidity, our dependence on key suppliers including regional carriers and Aimia Canada Inc., the successful conclusion of the transactions among Air Canada, the other members of the Consortium and Aimia relating to the acquisition of Aimia's Aeroplan business, our success in transitioning from the Aeroplan program and launching our new loyalty program, casualty losses, employee and labour relations and costs, our ability to preserve and grow our brand, pension issues, environmental factors (including weather systems and other natural phenomena and factors arising from man-made sources), limitations due to restrictive covenants, insurance issues and costs, our dependence on Star Alliance, interruptions of service, changes in laws, regulatory developments or proceedings, pending and future litigation and actions by third parties and our ability to attract and retain required personnel, as well as the factors identified throughout this presentation and those identified in section 18 "Risk Factors" of Air Canada's 2017 MD&A dated February 16, 2018. The forward-looking statements contained in this presentation represent Air Canada's expectations as of the date of this presentation (or as of the date they are otherwise stated to be made), and are subject to change after such date. However, Air Canada disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required under applicable securities regulations. This presentation also includes references to non-GAAP measures, such as EBITDAR margins, Returns on Invested Capital, Free Cash Flow and Leverage Ratio. Please refer to Air Canada's news release dated October 31, 2018 for additional information on non-GAAP measures, as well as major assumptions relating to Air Canada's financial targets. 2#3Path to Global Champion Financial Stability Pension solvency surplus Record financial results • CTP / CASM • reduction / lower debt Labour Stability Long-term agreements with all major unions • Record liquidity level • Improved credit ratings Increased flexibility and cost certainty • Fleet • • Modern wide- body fleet Seat densification Swing capacity Narrow-body fleet replacement (737 MAX and Airbus A220- 300) Network & Hubs • Extensive & expanding global network Geographically well-positioned hubs & efficient in- transit facilities processes Air Canada Rouge Competitive cost structure in leisure markets • Provides flexibility to swing capacity between markets & seasons Customer Engagement . Improved • Regional Feed Diversification (Jazz, Sky Regional, Air Georgia, EVAS) • Improved competitive cost structure at Jazz customer experience Award-winning products & services Launch of new loyalty program Investments in technology Solid foundation allows Air Canada to leverage its unique competitive advantages 3#4Materially Reduced Risk Profile • Network diversification • Fleet flexibility • • • • • Pool of unencumbered assets Long-term labour contracts Fully-funded pension plans Fuel and foreign exchange programs Lower leverage and cost of debt, and access to several financing sources Significantly higher liquidity levels. 4#5Four Priorities INTERNATIONAL CULTURE ENGAGEMENT GROWTH REVENUE RANSFORMATION sss EV COST & ☑ CUSTOMER CHANGE ос 5#61 International growth 2 Cost & revenue transformation 3 Customer engagement 4 Culture change 6#7Growth Directed to International Markets • Over 90% of growth in last several years has been directed at U.S. and international markets • • • On a system basis, capacity increased 40% over last three years Broadening footprint with commercial alliances and leveraging A++ revenue sharing joint venture Increased international-to-international connecting traffic through major Canadian hubs (6th Freedom) • International and U.S. routes represented 68% of total passenger revenue in 2017 • Expect rate of capacity growth to steadily decline as focus shifts from wide-body growth to mainline narrow-body fleet replacement programs 7#8• Air Canada Rouge - First Five Years were a Major Success • > 25 million customers carried since 2013 launch 70 destinations on five continents 53 aircraft (22 Airbus A319s, 6 Airbus A321s and 25 Boeing 767s) New routes in summer 2018 included: Toronto & Montreal to Bucharest; Toronto to Porto & Zagreb; Toronto to Nanaimo & Kamloops, B.C.; Montreal to Lisbon & Montreal to Victoria, B.C. Alternating between Atlantic (summer) and Sun (winter) is a major competitive advantage Air Canada Rouge was voted the Best New Long-Haul Airline - BUD Annual Awards Gala Vancouver Calgary Montreal Toronto Nagoya Osaka o Mexico City Belize City Liberia Cartagena Panama City Bogotá San José a Colpey Limać Finame City Dublin Reykjavik Edinburgh clasgow Manchester Berlin Warsaw Prague Lisbon Porto Nice Marseilles Barcelona Algiers Casablanca Budapest VeBucharest Summer 2018 (Atlantic) Winter 2018 (sun) Athens 8#9Growth of Traffic Transiting Canada to/from the U.S. (6th Freedom) Growing market share to 2% would represent $930M of incremental annual revenue AC 6th Freedom Passengers Carried Market Share of International to/from U.S. 2013 2014 + 101% 2015 2016 2017 11.1% 10.9% Traffic to/from U.S. 41.9% 7.3% 6.9% 5.2% 3.2% 3.0% 2.4% 2.1% 1.9% 1.9% 1.1% DL UA AA BA LH AF VS KE KL CX JL AC Other US-ATL □ US-PAC Increasing U.S. revenues provides more U.S. net coverage and reduces net U.S. FX exposure 9#10455 EV 1 2 3 4 International growth Cost & revenue transformation Customer engagement Culture change 10#11Strong Revenue Growth Continues (in millions $) CAGR +7.0% 16,252 14,677 13,868 13,272 12,382 2013 2014 2015 2016 2017 • • Yields expected to improve - - - - - - Maturity of new routes. Stage length growth rate declines Passenger mix impact diminishes Focus on higher-yielding corporate customer Effective yield management through O&D system - Expanded suite of fare offerings Building up diversified revenue streams New PSS to provide robust full retailing platform Launch of new loyalty program 11#12Improving Margins through Premium Products • International growth strategy is fueled by premium traffic Air Canada Signature Class • Premium products (Air Canada Signature Suite, Maple Leaf Lounges, Priority check-in areas, concierge, priority boarding, quality in-flight cuisine) enhance the experience AIR CANADA SIGNATURE SUITE Premium products enable revenue growth to keep pace with capacity growth 12#13Investments in Technology Driving Future Benefits Passenger Service System Principal IT system supporting reservations and departure control operations Better partner integration • Improved efficiency • Improved shopping Branded Fares Expanded suite of fare offerings • Increased fare differentiation Improved product recognition • Increased customer buy-up Fuel Management System Petroleum administration, inventory control and expenditures system • To provide visibility to fuel movements from refinery to wing Mobile 3.0 • AC mobile application upgrade . Plusgrade To allow customers to bid on premium seats OTHER TECHNOLOGY INVESTMENTS SmartSuite • To replace operating system on critical digital devices Customer Relations System • To replace customer relations and baggage claims system Workday • New HR system • Data Roadmap Improved enterprise data capabilities 13#14New Boeing 737-8 MAX Aircraft Expected to Provide 11% CASM Reduction versus Air Canada's A320 Aircraft -11% A320 CASM Fuel Crew Maintenance Airport User Fees & Other Ownership Boeing 737-8 CASM 14#15New Airbus A220-300 Aircraft Expected to Provide 12% CASM Reduction versus Air Canada's Embraer 190 Aircraft -12% E190 CASM Fuel Crew Maintenance Airport User Fees & Other Ownership A220-300 CASM 15#16• • • Cost Reduction Program Adjusted CASM declined 6.1% over the last four years Company-wide initiatives - savings of $90 million in 2017 Procurement initiatives - savings of $120 million over life of agreements Jazz CPA compensation declines $55 million per year from 2021 New Cost Transformation Program to secure $250 million in savings by end of 2019 MR 78 5 6 4 ဟ) လ 3 16#17осиб 1 2 International growth Cost & revenue transformation 3 Customer engagement 4 Culture change 17#18Strengthening Customer Loyalty through Digital Experience Enhanced Customer Relationship Management system Holistic view of the customer and their journey covering the online, offline & on-board worlds Redesign & optimize digital channels Mobile investments achieving revenue growth & behaviour shift Personalize customer content, offers & services Monetize customer data by enabling personalized offers and services based upon context, customer behaviour and commercial value CRM •Loyalty •Reservations • Operations Traveler A Leisure Low frequency Value: $ Traveler B Business High frequency Value: $$$ Leisure Content Offer Business Content Offer 18#19Loyalty Program Expect to unlock significant value through the launch of loyalty program Program design in process after extensive research Process on schedule and on budget November 2018 Air Canada entered into a definitive share purchase agreement with Aimia Inc. to acquire the Aeroplan loyalty business - Air Canada, TD, CIBC and Visa concluded credit card loyalty program and network agreements for future participation in Air Canada's new loyalty program Acquisition of Aimia Canada remains subject to Aimia shareholder approval and certain other closing conditions Completion expected in January 2019 19#20Industry Awards Four-Star ranking (Skytrax) Best Airline in North America (Skytrax) WORLD AIRLINE SKYTRAX AWARDS 2018 Best Business Class in North America (Skytrax) Best Long-Haul Airline in the Americas (AirlineRatings.com) 4 STAR AIRLINE SKYTRAX 20 0#21International growth 1 2 Cost & revenue transformation 3 Customer engagement 4 Culture change OC 21 221#22Long-Term Collective Agreements with Unions ACPA Long-term collective bargaining agreements provide: 1. Cost certainty 2. Significantly enhanced efficiency 3. Team engagement 4. Additional flexibility to respond to competitive threats and internal business challenges 5. Solid platform from which to invest in increased team engagement initiatives APAC CUPE Canadian Union of Public Employees U UNIFOR the Union lesyndicat OF MACHINISTS INTERNATIONAL ASSOCIATION A www SAND AEROSPACE M 22#23Fostering Positive Culture Change with Engaged Workforce Employee surveys and several awards demonstrate marked improvements in employee culture and engagement as Air Canada is voted one of: - - - - Canada's Top 100 Employers (2019) 50 Most Engaged Workplaces in North America (2018) Montreal's Top Employers (2018) Canada's Best Diversity Employers (2018) Top 20 employer brands in Canada (2018) North American Candidate Experience Award (2018) Canada's Top 100 Employers 2019 2018 Achievers 50 Winner MOST ENGAGED WORKPLACES 2018 Montréal's Top Employers 2018 Talent Board 2018 CANADA'S BEST DIVERSITY EMPLOYERS 2018 THE CANDIDATE EXPERIENCE AWARDS 23#24Financial Targets 801 24 24#25Investor Day Targets and Current Outlook (1) Annual EBITDAR Margin approximately 16% in 2018 17% - 20% in 2019 and 2020 Annual ROIC approximately 12% in 2018 13% 16% - in 2019 and 2020 Free Cash Flow $500-$600 million in 2018 Leverage Ratio (1) As reported on October 31, 2018 $2.0-$3.0 billion cumulative over 2018 to 2020 period 1.2 by end of 2020 25#26Expect Continued Strong EBITDAR Margins • • Expect revenue growth to continue - - - - - Leveraging unique competitive advantages and fleet investments Air Canada Rouge Revenue enhancement initiatives Revenue diversification - International points of sale revenue Ancillary sales Technology Continuous focus on cost transformation - - New more-efficient narrow-body aircraft - - - Lowering cost structures of regional partners Cost reduction initiatives Process/productivity improvements Technology Outstanding customer service Expect EBITDAR margin of approximately 16% in 2018 (1) and an annual EBITDAR margin of 17% to 20% in 2019 and 2020 (1) (1) As reported on October 31, 2018 26#27Expect Improvement in ROIC and Growth in Free Cash Flow Free Cash Flow - ROIC (1) As reported on October 31, 2018 - Plan on using excess cash to purchase new aircraft to effectively reduce gross debt Will continue to leverage Normal Course Issuer Bid (NCIB) opportunities - Will consider other uses of cash as plan matures - - Expect cumulative free cash flow of $2B to $3B over 2018-2020 period (1) Continue to expect ROIC to continue to exceed weighted average cost of capital by a wide margin Forecast annual ROIC of approximately 12% in 2018 (1) and 13% to 16% in 2019 and 2020 (1) 27#28Projected Capital Expenditures (1) $ millions Remainder of 2018 2019 2020 2021 2022 Projected committed expenditures $176 $1,623 $1,422 $775 $716 Projected planned but 100 718 340 305 226 uncommitted expenditures Projected planned but uncommitted capitalized 39 173 175 56 95 maintenance Total projected Expenditures (1) As reported on October 31, 2018 $315 $2,514 $1,937 $1,136 $1,037 28#29Lower Leverage Supports Investment Grade Credit Ratings • . • Creating shareholder value by lowering gross debt and leverage remains a top priority followed by shareholder distributions via share buybacks Forecast continued improvement in financial leverage as debt is paid off and gross debt is reduced Reduced overall risk profile by aggressively managing our financial leverage, leading to credit rating upgrades - Standard & Poor's BB with positive outlook (from B- in 2010) Moody's Ba2 with stable outlook (from B3 in 2010) Expect projected decline in leverage ratio to 1.2 by the end of 2020 (1) to support drive for investment grade credit ratings 460 AIR CANADA 00000 (1) As reported on October 31, 2018 29#30Air Canada - A Global Champion · Proven strategy • • • Sustainable business model Improved financial targets De-risked the airline Many opportunities ahead, including: - - - - - New more efficient narrow-body aircraft Launch of loyalty program - RFP for new credit card partner New Passenger Service System Digital initiatives - Lower-cost Rouge growth 30#31Thank you aircanada.com

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