Air Canada is warning the Boeing 737 Max crisis will hurt its summer results as the airline was forced to shrink capacity, instead of growing as it originally planned, as would normally be expected in the busy summer months.
“It’s not as good as it would have been,” said Air Canada chief executive Calin Rovinescu in a conference call with investors.
The airline posted a $916 million profit between April and June this year, on record revenues of almost $4.8 billion. But while the results for the spring were impressive, with revenues up 10% over the same time in 2018, the airline warned the summer may not be a rosy.
“Third quarter projected capacity is expected to decline approximately two per cent compared to the third quarter of 2018,” said Rovinescu, “as opposed to an originally planned capacity increase of approximately three per cent. In our planning, we will be removing the Boeing 737 MAX from our schedule until at least January 8th, 2020.”
Air Canada planned to have 36 Boeing 737 Max aircraft in the fleet this summer, operating 100 flights per day. The airline replaced that planned flying by keeping some aircraft in the air longer, redeploying capacity, hiring new capacity, bringing other aircraft into the fleet faster, and consolidating or cancelling some flights.
The Max was grounded around the world in March following a pair of crashes, less than five months apart. Boeing said it would take a $5.6 billion (U.S.) hit as a result of the crisis.
“We are hopeful that this is a short to medium term issue,” said Michael Rousseau, Deputy Chief Executive Officer and Chief Financial Officer. “It has been extremely frustrating to manage.”
Air Canada had 24 Max aircraft in the fleet when the type was grounded, and expected another dozen new aircraft to be delivered by this summer, which have been built and are parked at various Boeing locations. In total, Air Canada expected to have 50 Max aircraft in the fleet by next winter. Those plans have been completely thrown into disarray.
Once the Max is approved to fly, Rousseau said Max planes already in the fleet would be flying within two or three months, but it could take up to a year to get all the expected new aircraft delivered and in air.
Rovinescu acknowledged the timeline for return to service may seem long compared to other North American carriers, but he pointed out Air Canada does not fly the older 737NG, which is a double-edged sword. On one hand, the airline has the only Max simulator in North America, because it needed to train pilots on the type. However, it also has more than 400 pilots who are being paid not to fly.
“[It’s] not most efficient use of their talents since they’re not flying,” said Rovinescu. Air Canada will need more than 800 pilots once the full fleet is in the air, meaning a hiring spree will be needed once the Max is in the air.
“The delivery schedule and Max fleet plan are in complete flux,” said Rousseau.
As a result of the crisis, Rovinescu is projecting that Air Canada’s summer profits will be up five per cent, less than half the increase of the previous quarter. This is felt particularly hard at the airline, since the summer is historically the most profitable quarter.
Rovinescu refused to say what Air Canada expected to receive from Boeing as compensation for the grounding.
Despite the adversity, results were impressive across the board at the airline in the spring. Domestic passenger revenues rose more than 10% with a traffic increase of 1.9%, the airline reported.
“The pricing environment was also more stable in 2019, and was not impacted by potential Westjet strike threat,” said Lucie Guillemette, Air Canada’s Executive Vice President and Chief Commercial Officer. “As a result of the Max, we’re seeing some traffic reflow. Those are some of the things on the North America front helping push up yields.”
Guillemette reported that revenues to the United States were up 11%, with services to business centres and from Eastern Canada to California performing particularly well. The airline said it would protect transborder services through the Max crisis, since part of the strategy is to fly passengers between the U.S. and Europe through its Canadian hubs.
However, the Max grounding has forced the airline to postpone the start of seasonal transborder services, as well as reduce frequencies from Vancouver to Hawaii, which is being served by a leased Boeing 767 aircraft from Omni.
And Guillemette said while services to Europe were performing particularly well, with increases in ancillary revenues for services such as baggage fees and seat upgrades, services to Asia were being hurt by ongoing political and trade tensions across the Pacific.
“The geopolitical situation between Canada and China continues to impact traffic between Canada and China and Canada and Hong Kong,” said Guillemette. The airline has responded by downguaging aircraft, and redeploying the capacity to Atlantic routes, a change that will be particularly noticed starting in September.
Guillemette said capacity to routes in the South Pacific, in particular Australia, are being affected by stiff competition.
Air Canada said the challenges would not affect plans to launch service to Auckland, New Zealand in the winter. Guillemette said the airline was deepening its ties with Air New Zealand to augment the service.