The airline has cut its summer capacity by 80% compared to 2019 and said the situation is made worse by ongoing blanket travel restrictions
Air Canada warned it may cancel future aircraft orders as the global COVID-19 pandemic continues to its bottom line. The airline’s president and chief executive Calin Rovinescu made the disclosure during a conference call with analysts Friday.
“Without government industry support and as travel restrictions are extended,” said Rovinescu during a prepared opening statement, “we will look at other opportunities to further reduce route costs and capital; including further route suspensions and possible cancellations of Boeing and Airbus aircraft on order including the Airbus A220 – the former Bombardier C Series – manufactured at Mirabel, Quebec.”
The move is seen as pressuring the federal Liberals to support Canada’s aviation industry. The Liberals hold 35 seats in the province, many of them in the Montreal area.
“We’re the only carrier amongst the top-20 that has received no financial support package,” said Rovinescu. “There are active discussions going on, but I would say this is influenced by policy and by various other geopolitical drivers that are unique, I would say, to Canada in a minority government.”
Rovinescu’s warning comes as the airline reported a $1.7 billion loss in April, May, and June. Revenues fell 89% in the quarter and the number of passengers was down 96%.
A220 Exceeding expectations
Cancelling aircraft orders would be a major shift in strategy. The airline is in the midst of a narrow-body fleet renewal, but is rethinking fleet plans as demand shifts.
“We do have aircraft on order and we do have optionality as we start rebuilding our fleet,” said Rovinescu. He predicts a recovery would take at least three years.
Air Canada has 24 grounded Boeing 737 MAX aircraft in its fleet with 26 on order. It has already cancelled orders for 11 MAX aircraft. The airline has ordered 45 Airbus A220s, and currently has seven in the fleet.
“The size and range of this aircraft helps mitigate the challenges of a low passenger demand environment and its unique capabilities are going to be a cornerstone of our longer-term recovery” said Lucie Guillemette, Air Canada’s Chief Commercial Officer. “Customer feedback on the Airbus 220 has been very positive, exceeding our already high expectation.”
As bad as the past quarter was, Air Canada warned the losses would continue through the summer. While it had planned to fly 25% of its 2019 capacity this summer, the real figure is closer to 20%. Air Canada said ongoing national and regional travel restrictions continue to hurt air travel. In March, the federal government closed the borders to most travel, while several provinces and territories restrict domestic travel.
Demand rising slowly
“The idea of staying in exactly the same position since March is the part that I find unacceptable,” said Rovinescu. “We are now migrating from a health crisis into a fairly severe economic crisis if we don’t start opening the economy in a more meaningful way.”
What demand has come back has been led by leisure travel, the airline reported.
“The domestic [segment] continues to be the one that is performing best,” said Guillemette. “We are seeing some sectors performing a little bit better out West from a corporate point of view, a few industries. But by and large, the vast majority of the content is in fact leisure traffic and [visiting friends and relatives] as well.”
Similar to Westjet subsidiary Swoop, Air Canada said travellers were only booking a few weeks ahead.
“There is pent up demand. It’s not massive, but there is pent up demand,” said Rovinescu. “We saw it immediately as the Europeans permitted Canadians to travel without quarantine.”
What hurts, said Rovinescu is that people who can now travel freely overseas have to quarantine when they get home.
“What I take issue with is not that it was shut down as tightly as it was shut down in March,” said Rovinescu. “I take issue with the fact that it has not been opened up on a much more thoughtful, scientific basis which would allow for some level of business to be done.”
#socialdistancing in the hands of @catsa_gc @AirCanada at @ATRIM #airport pic.twitter.com/rgq2oMvumQ— Jan Lisiecki (@janlisiecki) July 31, 2020
A smaller airline in a smaller industry
Air Canada said the small uptick in demand has allowed it to recall a few of its 20,000 laid off employees. But it is flying to only 90 or so destinations this summer, less than half what it was in 2019. It has dropped eight domestic cities from its network and 30 routes. May of the cuts are being felt in the Atlantic provinces.
“Our economy – and in particular, the tourism industry – has been decimated: first by the pandemic, then by government-imposed travel restrictions, which led to the permanent cancellation of 14 routes by Air Canada,” wrote Monette Pasher and Daniel-Robert Gooch in a post by the Atlantic Canada Airports Association. Pasher is the executive director of the ACAA and Gooch is the president of the Canadian Airports Council.
Rovinescu predicted that may be the shape of things to come, and not just in Canada.
“If you look at it on a global basis, I think that one could conclude that the industry will be smaller for some period of time,” said Rovinescu. “We will be smaller but we expect the industry to be smaller. Therefore as Air Canada comes out of this, we can be a nimble, competitive carrier that is going to be with a younger fleet having taken out the 79 older aircraft. We’ll have a very, very competitive airline in a smaller environment.”
Pandemic reinforces hubs
Rovinescu believes that smaller environment will force airlines – including his – to concentrate on driving traffic through their hubs. Air Canada has built a profitable business in the past decade by funelling traffic through its three main Canadian hubs – Toronto, Montreal, and Vancouver.
“Our vision on our main three Canadian hubs and our international gateway partners, that hasn’t changed at all,” he said. “For the traffic that wants to go to a place like Manchester, places like that, we’ll do it with a connection as opposed to direct service.”
In particular, the airline has concentrated on connecting passengers from the United States to Europe and Asia. While the pandemic has largely put the strategy on hold, the airline vows it will return.
“While we like our domestic business,” said Rovinescu, “[it] is less than one-third of what it is that Air Canada did last year. So we have every ambition to continue reestablishing the global network carrier that we became.”
A new abnormal
“For the first time ever, our cargo revenues exceeded passenger revenues in the quarter,” said Guillemette, the COO.
It’s all part of what Rovinescu calls an unusual and abnormal environment.
“You need to throw out every single basis in which you looked at the industry, as far as I’m concerned, for the foreseeable future,” said the chief executive. “Load factor here becomes largely irrelevant. We’re going to be making estimates of how much capacity to put into the market right now based on a new combination of demand that is based on customer confidence to fly intertwined with opening the border restrictions and quarantine.”
The airline is using artificial intelligence to estimate demand, but the number of variables makes it all a guess.
“Flexibility is going to be key,” said Rovinescu. “Our goal… will be to try to optimize revenue, not optimize load factor.
“Any of the historic drives of capacity and load and so on are going to be completely thrown out.”
The airline projects will be around $15 million a day through the summer. To minimize the losses, the airline will have to react quickly; substituting aircraft to match demand from both passengers and cargo.
“Although we will emerge smaller, with fewer aircraft, fewer people, fewer cities served, and slimmed down overall operations,” said Rovinescu. “will be nimbler and more competitive.”
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