Air Canada today reported full year 2018 EBITDAR(1) (earnings before interest, taxes, depreciation, amortization, impairment and aircraft rent) of $2.851 billion compared to full year 2017 record EBITDAR of $2.928 billion. Air Canada reported an EBITDAR margin of 15.8 per cent, in line with its projections. Air Canada reported 2018 operating income of $1.174 billion compared to 2017 operating income of $1.371 billion. Adjusted pre-tax income(1) amounted to $952 million in 2018 compared to adjusted pre-tax income of $1.165 billion in 2017. On a GAAP basis, the airline reported net income of $167 million in 2018 compared to net income of $2.029 billion in 2017. The decrease of $1.862 billion in net income year-over-year is mainly due to an increase in net tax expense of $981 million, unfavourable foreign exchange results of $437 million and Air Canada having a recorded a loss on disposal of assets of $188 million in 2018.
"I am very pleased with Air Canada's solid fourth quarter results with record EBITDAR of $543 million, and operating income of $122 million. These quarterly results showed an improvement over last year's fourth quarter on many fronts – including passenger revenues, traffic and yield – and complete a strong fiscal year. Moreover, they demonstrate the resiliency of our business model and affirm that Air Canada has positioned itself for long-term, sustainable profitability. During the year, we successfully managed many challenges, including intensifying competition and a volatile fuel price environment which resulted in approximately $1 billion in additional costs or 30 per cent more than 2017," said Calin Rovinescu, President and Chief Executive of Air Canada.
"Our strategy generated record operating revenues of more than $18 billion in 2018. Combined with a strong adjusted CASM performance, we ended the year with record unrestricted liquidity of more than $5.7 billion and a leverage ratio of 2.1, positioning us well on our path towards investment grade. The added financial flexibility these results give our company further bolsters our already confident outlook, based on current positive business trends.
"We carried a record 50.9 million customers in 2018, which is evidence of the success of our commercial strategy and the strength of the Air Canada brand. To further heighten our customer appeal, we are investing strategically in product and service enhancements, including a new enhanced reservation platform system planned to start operating later this year, a new loyalty program launching in 2020 to strengthen our recently completed Aimia Canada acquisition and our ongoing fleet renewal.
"Another outward sign of Air Canada's success in 2018 was the number of significant awards won by our airline, notably Eco-Airline of the Year, a global recognition, and, for the second consecutive year, Best Airline in North America from Skytrax. These and a variety of other talent and sustainability awards are proof of the professionalism and commitment of Air Canada's 30,000 employees, whom I thank for their hard work and dedication. I also thank our customers for their continued loyalty and for continuing to choose to fly Air Canada in record numbers," said Mr. Rovinescu.
Full Year Income Statement Highlights
In 2018, on capacity growth of 7.1 per cent, record system passenger revenues of $16.223 billion increased $1.63 billion or 11.2 per cent from 2017. The increase in system passenger revenues was driven by traffic growth of 8.5 per cent and a yield increase of 2.5 per cent. An increase in average stage length of 2.1 per cent had the effect of reducing system yield by 1.2 percentage points. On a stage-length adjusted basis, system yield increased 3.7 per cent year-over-year.
In the business cabin, system passenger revenues increased $376 million or 13.2 per cent from 2017 on traffic and yield growth of 9.4 per cent and 3.5 per cent, respectively.
In 2018, operating expenses of $16.891 billion increased $2.01 billion or 14 per cent from 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) increased 6.0 per cent from 2017. The airline's adjusted CASM(1) increased 0.3 per cent from 2017, in line with the range of no increase to an increase of 0.75 per cent projected in Air Canada's October 31, 2018 news release.
Air Canada recorded adjusted net income(1) of $677 million or $2.45 per diluted share in 2018 compared to adjusted net income of $1.145 billion or $4.11 per diluted share in 2017. On a GAAP basis, the airline reported 2018 net income of $167 million or $0.60 per diluted share compared to 2017 net income of $2.029 billion or $7.31 per diluted share. In 2018, Air Canada recorded foreign exchange losses of $317 million and a loss on disposal of assets of $188 million. In 2017, Air Canada recorded a deferred income tax recovery of $759 million and foreign exchange gains of $120 million.
Fourth Quarter Income Statement Highlights
In the fourth quarter of 2018, on capacity growth of 5.8 per cent, record system passenger revenues of $3.795 billion increased $386 million or 11.3 per cent from the fourth quarter of 2017. The increase in system passenger revenues was driven by traffic growth of 7.2 per cent and a yield improvement of 3.8 per cent. An increase in average stage length of 1.2 per cent had the effect of reducing system yield by 0.7 percentage points. On a stage-length adjusted basis, fourth quarter system yield increased 4.5 per cent year-over-year.
In the business cabin, system passenger revenues increased $92 million or 12.5 per cent from the fourth quarter of 2017 on traffic and yield growth of 9.3 per cent and 2.9 per cent, respectively.
In the fourth quarter of 2018, operating expenses of $4.124 billion increased $437 million or 12 per cent from the fourth quarter of 2017, mainly driven by higher fuel prices year-over-year and the increase in capacity.
Air Canada's cost per available seat mile (CASM) increased 5.7 per cent from the fourth quarter of 2017. The airline's adjusted CASM increased 0.5 per cent from the fourth quarter of 2017, better than the 1.5 per cent to 2.5 per cent increase projected in Air Canada's news release dated October 31, 2018. Air Canada's better than expected adjusted CASM performance was largely due to lower aircraft maintenance expense, driven by a favourable annual adjustment related to end-of-lease maintenance provisions, as well as the timing of certain engine maintenance events.
Air Canada reported record EBITDAR of $543 million in the fourth quarter of 2018 versus the previous record EBITDAR of $521 million in the fourth quarter of 2017. On a GAAP basis, the airline reported fourth quarter 2018 operating income of $122 million compared to fourth quarter 2017 operating income of $133 million.
Adjusted pre-tax income amounted to $68 million in the fourth quarter of 2018 compared to adjusted pre-tax income of $77 million in the fourth quarter of 2017. On a GAAP basis, the airline recorded a loss before income taxes of $216 million in the fourth quarter of 2018 compared to income before income taxes of $20 million in the fourth quarter of 2017. The fourth quarter of 2018 included foreign exchange losses of $269 million while the fourth quarter of 2017 included foreign exchange losses of $62 million.
In the fourth quarter of 2018, Air Canada recorded adjusted net income of $54 million or $0.20 per diluted share compared to adjusted net income of $60 million or $0.22 per diluted share in the fourth quarter of 2017. On a GAAP basis, Air Canada reported a net loss of $231 million or $0.85 per diluted share in the fourth quarter of 2018 compared to net income of $8 million or $0.02 per diluted share in the fourth quarter of 2017.
Financial and Capital Management Highlights
At December 31, 2018, unrestricted liquidity (cash, short-term investments and undrawn lines of credit) amounted to a record $5.725 billion (December 31, 2017 – $4.181 billion).
At December 31, 2018, total long-term debt and finance leases (including current portion) of $6.652 billion increased $533 million from December 31, 2017. The unfavourable impact of a weaker Canadian dollar, as at December 31, 2018 compared to December 31, 2017, increased foreign currency denominated debt (mainly U.S. dollars) by $501 million. New borrowings of $1.210 billion were largely offset by debt repayments of $1.167 billion.
At December 31, 2018, adjusted net debt of $5.858 billion decreased $258 million from December 31, 2017 as increases in long-term debt and finance lease balances of $533 million and capitalized operating lease balances of $112 million were more than offset by an increase in cash and short-term investment balances of $903 million. At December 31, 2018, Air Canada's leverage ratio was 2.1, unchanged from December 31, 2017.
Net cash flows from operating activities of $2.695 billion decreased $43 million compared to 2017. In 2018, free cash flow of $791 million decreased $265 million from 2017 and exceeded the $500 million to $600 million range projected in Air Canada's news release dated October 31, 2018. The better than expected free cash flow can be attributed to a combination of lower than projected capital expenditures, better than expected cash from working capital and stronger than anticipated income from operations.
For the 12 months ended December 31, 2018, return on invested capital (ROIC(1)) was 12.6 per cent, in line with approximately 12 per cent ROIC projected in Air Canada's October 31, 2018 news release, and significantly higher than Air Canada's weighted average cost of capital of 7.2 per cent.
With the adoption of accounting standard IFRS 16 "Leases" on January 1, 2019 and the acquisition of Aimia Canada Inc. on January 10, 2019, the 2017 Investor Day targets for annual EBITDAR margin, annual ROIC, cumulative free cash flow and leverage ratio are no longer relevant. Updated targets are being reviewed and will be announced in conjunction with Air Canada's 2019 Investor Day scheduled for February 28, 2019.
Following the closing of Air Canada's acquisition of Aimia Canada Inc., Aimia Canada changed its name to Aeroplan Inc. Air Canada began consolidating Aeroplan's results on the January 10, 2019 acquisition date. Given that the Aeroplan loyalty business was not consolidated in Air Canada's financial results in 2018, for comparative purposes, Air Canada's adjusted CASM guidance for 2019 excludes any impact of Aeroplan.
The following outlook includes the impact of the new accounting standard IFRS 16 "Leases". The guidance for 2019 is compared to restated 2018 financial results. Refer to section 14 "Accounting Policies" of Air Canada's 2018 MD&A for additional information on the estimated impacts of the adoption of IFRS 16 "Leases".
First Quarter and Full Year 2019 Adjusted CASM
For the first quarter of 2019, Air Canada expects adjusted CASM (which excludes fuel expense, the cost of ground packages at Air Canada Vacations, the operating expenses of Aeroplan, and special items) to increase between 2.0 to 3.0 per cent when compared to the first quarter of 2018.
Air Canada expects full year 2019 adjusted CASM to increase between 2.0 and 3.0 when compared to the full year 2018.
Except as stated below, the following guidance includes the impact of Aeroplan.
For the full year 2019:
Depreciation, Amortization and Impairment Expense
Air Canada expects depreciation, amortization and impairment expense to increase by approximately $225 million from the full year 2018. This increase includes the impact of Aeroplan except for the amortization expense related to the fair value of intangible assets recorded upon the acquisition of Aeroplan. Such amount will be determined and reported with the first quarter 2019 results.
Employee Benefits Expense
Air Canada expects employee benefits expense to increase by approximately $25 million from the full year 2018.
Aircraft Maintenance Expense
Air Canada expects aircraft maintenance expense to increase by approximately $80 million from the full year 2018.
2019 Outlook – Major Assumptions: Assumptions were made by Air Canada in preparing and making forward-looking statements. As part of its assumptions, Air Canada assumes relatively modest Canadian GDP growth for the first quarter and full year 2019. Air Canada also expects that the Canadian dollar will trade, on average, at C$1.32 per U.S. dollar in the first quarter and for the full year 2019 and that the price of jet fuel will average 77 CAD cents per litre in the first quarter and 82 CAD cents per litre for the full year 2019.