- Record operating revenues of $19.131 billion
- Operating income of $1.650 billion
- EBITDA of $3.636 billion and EBITDA margin of 19 per cent
- Record unrestricted liquidity of $7.380 billion and leverage ratio of 0.8
Air Canada today reported 2019 EBITDA(1) (earnings before interest, taxes, depreciation, amortization and impairment) of $3.636 billion compared to 2018 EBITDA of $3.213 billion, an increase of $423 million or 13 per cent. The airline reported operating income of $1.650 billion in 2019 compared to operating income of $1.496 billion in 2018.
"I am very pleased to report strong fourth quarter and full year results for 2019, a year in which we generated record revenues in excess of $19 billion and reached record levels of unrestricted liquidity, despite the loss to Air Canada of approximately 25 per cent of our narrow-body fleet for most of the year following the worldwide grounding of the Boeing 737 MAX. These results underscore the airline's ability to overcome major challenges as well as the deep commitment of Air Canada's 37,000 strong team, which took care of our customers under extremely complicated operational circumstances. With this backdrop, I am especially proud that we were able to deliver on the outlook we provided for key financial metrics for the year. Our discipline was rewarded by an 87 per cent return on our shares in 2019, which, when added to our returns over the previous nine years, made Air Canada the top performing stock on the TSX for the past decade with a 3,575 per cent return," said Calin Rovinescu, President and Chief Executive Officer of Air Canada.
"The agility and consistency that we displayed in 2019 gives me confidence that we will successfully execute on the several key opportunities now before us. This includes the launch of our new loyalty program later this year, which we expect will be the best airline loyalty program in the world. We also look forward to completing our proposed merger with Transat A.T., which was approved by nearly 95 per cent of Transat shareholders last summer and now remains subject to applicable regulatory approvals. This is a wholly Canadian solution that will secure jobs and result in more travel options and benefits for both airlines' customers and other stakeholders.
"We start 2020 with uncertainty from the on-going Boeing 737 MAX grounding and the constraints it imposes, as well as emerging economic and geopolitical risks and route suspensions resulting from the COVID-19 virus. However, our strong balance sheet, globe-spanning network that diversifies our revenue sources, brand strength as North America's Best Airline as rated by Skytrax, young fleet, dedicated and talented employees and nimble management team equip us to respond effectively to any challenges that come our way. Our dedicated and professional team is highly motivated to deliver service excellence to our loyal customer base, and I thank both groups for contributing to our strong 2019 results in the face of adversity," said Mr. Rovinescu.
Full Year 2019 Income Statement Highlights
Air Canada began consolidating Aeroplan's financial results on the date of the acquisition of Aeroplan, January 10, 2019.
In 2019, on a capacity increase of 1.8 per cent, record system passenger revenues of $17.232 billion increased $1.071 billion or 6.6 per cent from 2018. The increase in system passenger revenues was driven by a yield improvement of 4.6 per cent and traffic growth of 1.9 per cent. System yield improved due to the constrained capacity resulting from the grounding of the Boeing 737 MAX aircraft as well as a generally improved pricing environment, mainly in North America. The yield increase also included additional revenues from Aeroplan flight redemptions and other revenues subsequent to the Aeroplan acquisition.
In 2019, operating expenses of $17.481 billion increased $974 million or 6 per cent from 2018. Air Canada's cost per available seat mile (CASM) increased 4.1 per cent from 2018. The airline's adjusted CASM(1) increased 6.1 per cent from 2018. These increases reflected, in large part, the impact of the Boeing 737 MAX aircraft grounding, which resulted in a system ASM increase of 1.8 per cent versus planned system ASM growth of approximately 4.8 per cent, in addition to higher costs associated with replacement aircraft, and on-going operating expenses, including depreciation and pilot wages that continued to be incurred in relation to the Boeing 737 MAX aircraft despite their grounding. Given that the Aeroplan loyalty business was not consolidated in Air Canada's financial results in 2018, for a more meaningful comparison of the cost performance of the on-going airline business, Air Canada's adjusted CASM for the fourth quarter and full year 2019 excludes the operating expenses of Aeroplan. Air Canada estimates that, had it operated the 36 Boeing MAX aircraft as originally planned during 2019, adjusted CASM would have reflected an increase of approximately 2.5 per cent when compared to 2018.
Air Canada's full year 2019 EBITDA margin of 19.0 per cent met the target margin of approximately 19.0 per cent projected in Air Canada's news release dated October 29, 2019. Air Canada estimates that its 2019 EBITDA margin would have been approximately 30 basis points higher at 19.3 per cent, when excluding two fourth quarter one-time items, each of which similarly contributed to this impact: (a) a one-time negative impact on revenue arising from Air Canada's transition, in mid-November, to a new passenger service system, and (b) higher than expected stock-based and other compensation expenses resulting from an increase in Air Canada's share price and from higher accruals in respect of employee profit sharing programs.
Full year 2019 net income amounted to $1.476 billion or $5.44 per diluted share compared to 2018 net income of $37 million or $0.13 per diluted share. The year 2019 included foreign exchange gains of $499 million while 2018 included foreign exchange losses of $578 million. Air Canada recorded a loss on disposal of assets of $188 million in 2018. Air Canada reported adjusted net income(1) of $917 million or $3.37 per diluted share in 2019 compared to adjusted net income of $738 million or $2.67 per diluted share in 2018.
Fourth Quarter 2019 Income Statement Highlights
In the fourth quarter of 2019, Air Canada reported EBITDA of $665 millioncompared to fourth quarter 2018 EBITDA of $619 million, an increase of $46 million or 7 per cent. As discussed above, the fourth quarter of 2019 was impacted by two one-time items which had the effect of reducing EBITDA by approximately $60 million. The airline reported fourth quarter 2019 operating income of $145 million compared to fourth quarter 2018 operating income of $179 million.
In the fourth quarter of 2019, on a capacity increase of 3.3 per cent, record system passenger revenues of $3.975 billion increased $199 million or 5.3 per cent from the fourth quarter of 2018. The increase in system passenger revenues was driven by traffic growth of 2.9 per cent and a yield improvement of 2.3 per cent. The yield improvement in the fourth quarter of 2019, particularly in North America, was in part due to the constrained capacity resulting from the grounding of the Boeing 737 MAX aircraft. The yield growth also reflected additional revenue from Aeroplan flight redemptions and other revenues.
In the fourth quarter of 2019, operating expenses of $4.284 billion increased $236 million or 6 per cent from the fourth quarter of 2018. Air Canada's CASM increased 2.5 per cent from the fourth quarter of 2018. The airline's adjusted CASM increased 5.5 per cent over the fourth quarter of 2018. These increases reflected, in large part, the impact of the Boeing 737 MAX aircraft grounding which resulted in a system ASM increase of 3.3 per cent versus planned system ASM growth of approximately 4.6 per cent. The grounding also resulted in higher operating costs driven by the factors discussed in "Full Year 2019 Income Statement Highlights" above.
Record fourth quarter 2019 net income amounted to $152 million or $0.56 per diluted share compared to a fourth quarter 2018 net loss of $360 million or $1.33 per diluted share. The fourth quarter of 2019 included foreign exchange gains of $92 million while the fourth quarter of 2018 included foreign exchange losses of $444 million. Air Canada reported adjusted net income(1) of $47 million or $0.17 per diluted share in the fourth quarter of 2019 compared to adjusted net income of $55 million or $0.20 per diluted share in the fourth quarter of 2018.
Financial and Capital Management Highlights
At December 31, 2019, unrestricted liquidity (cash, cash equivalents and short and long-term investments, and undrawn lines of credit) amounted to a record $7.380 billion (December 31, 2018 – $5.725 billion).
At December 31, 2019, net debt of $2.841 billion decreased $2.373 billion from December 31, 2018, reflecting an increase in cash, cash equivalents and short and long-term investment balances of $1.694 billion and a decrease in long-term debt and lease liabilities (including current portion) of $679 million. At December 31, 2019, Air Canada's leverage ratio was 0.8, in line with the leverage ratio not exceeding 1.0 projected in Air Canada's news release dated October 29, 2019. This compares to a leverage ratio of 1.6 at December 31, 2018.
In 2019, net cash flows from operating activities of $5.712 billion increased $2.242 billion from 2018. In 2019, free cash flow(1) of $2.075 billion increased $748 million from 2018 and was higher than the free cash flow of between $1.3 billion and $1.5 billion projected in Air Canada's new release dated October 29, 2019. The higher than expected free cash flow was due to a combination of factors, including higher cash from operations, a lower than projected level of capital expenditures due to certain projects being deferred to 2020, and to an initial settlement payment from Boeing as further described below.
For the 12 months ended December 31, 2019, return on invested capital (ROIC(1)) was 15.5 per cent, in line with the ROIC of between 15.5 per cent and 16.0 per cent projected in Air Canada's news release dated October 29, 2019. Air Canada's ROIC at December 31, 2019 was significantly higher than Air Canada's weighted average cost of capital of 7.0 per cent.
air Canada has been in discussions with Boeing and is seeking to settle the terms of an arrangement in relation to the grounding of the Boeing 737 MAX aircraft. Until such time as an arrangement is finalized, information regarding the outstanding purchase commitments for aircraft is subject to change. An initial settlement payment contemplated by the arrangement was made to Air Canada during the fourth quarter of 2019, with any further amounts subject to finalization of the arrangement. The compensation is accounted for as an adjustment to the purchase price of current and future deliveries and will flow through Air Canada's consolidated statement of operations as reduced depreciation expense over the life of the aircraft, and as a reduction to additions to property and equipment on the consolidated statement of cash flow.
Normal Course Issuer Bid
In 2019, Air Canada purchased, for cancellation, a total of 9,082,487 shares at an average cost of $41.64 per share for aggregate consideration of $378 million. At December 31, 2019, a total of 17,877,551 shares remained available for repurchase under Air Canada's issuer bid which is scheduled to expire May 30, 2020.
Outlook
In addition to the Additional Guidance and Major Assumptions noted below, Air Canada's 2020 first quarter and full year outlook in relation to both EBITDA and ASM capacity growth assumes that Air Canada's mainland China and Hong Kong services will be fully recovered by the third quarter of 2020 and that the Boeing 737 MAX aircraft will gradually return to service commencing late in the third quarter of 2020.
First Quarter 2020
As noted above, the Boeing 737 MAX aircraft will not fly during the first quarter of 2020, as compared to 24 Boeing 737 MAX aircraft operating for the majority of the first quarter of 2019. In addition, due to the impact of recent service suspensions to mainland China and from Toronto to Hong Kong, combined with a higher proportion of projected annual operating expense increases in both aircraft maintenance and employee benefits in the first quarter of 2020 (as described below), Air Canada expects first quarter 2020 EBITDA to be approximately $200 million lower than the first quarter of 2019.
Full Year 2020
For the full year 2020, Air Canada projects an EBITDA margin of approximately 19 per cent, which would result in a small increase in EBITDA versus the reported EBITDA of $3.636 billion in 2019.
For the full year 2020, Air Canada expects ASM capacity to increase 1 to 2 per cent when compared to the full year 2019.
Additional Guidance
For the full year 2020:
Aircraft Maintenance Expense
Air Canada expects aircraft maintenance expense to increase by approximately $150 million from the full year 2019, with one-third of the increase expected to be incurred in the first quarter of 2020. The projected increase includes the impact of additional Airbus A330 aircraft in the operating fleet (which are under power-by-the-hour arrangements) and a higher volume of engine maintenance activity year-over-year.
Employee Benefits Expense
Air Canada expects employee benefits expense to increase by approximately $105 million from the full year 2019, with one-third of the increase expected to be incurred in the first quarter of 2020. The projected increase is mainly driven by lower discount rates related to pension and post-employment benefits.
Depreciation and Amortization
Air Canada expects depreciation and amortization expense to increase by approximately $35 million from the full year 2019. The projected increase primarily reflects aircraft acquisitions.
Major Assumptions
In addition to the above assumptions relating to the return to service of Air Canada's Boeing 737 MAX aircraft and the recovery of Air Canada's mainland China and Hong Kong services, Air Canada is making the following assumptions in preparing and making forward-looking statements. As part of its 2020 assumptions, Air Canada assumes:
- Modest Canadian GDP growth for the first quarter and full year 2020.
- That the Canadian dollar will trade, on average, at C$1.33 per U.S. dollar in the first quarter and for full year 2020.
- That the price of jet fuel will average 71 CAD cents per litre in the first quarter and 74 CAD cents for the full year 2020.
- That six of 12 undelivered Boeing 737 MAX aircraft originally scheduled for delivery in 2019 will be delivered in 2020 with the remaining six delivered in 2021, and that 14 undelivered Boeing 737 MAX aircraft originally scheduled for delivery in 2020 will be delivered in 2021.
The assumptions related to the Boeing 737 MAX aircraft and the recovery of the mainland China and Hong Kong businesses also apply to the 2021 financial guidance discussed below.
Investor Day Targets
The financial guidance provided in Air Canada's news release dated February 28, 2019 for 2021 with respect to annual EBITDA margin and annual ROIC, as well as the cumulative free cash flow over the 2019-2021 period, remains in place. The targets are as follows:
- Annual EBITDA margin of 19 to 22 percent
- Annual ROIC of 16 to 20 percent
- Cumulative free cash flow of $4.0 billion to $4.5 billion over the 2019 to 2021 period
(As noted above, Air Canada generated free cash flow of $2.075 billion in 2019.)
It is premature to assess what the impact of Air Canada's planned acquisition of Transat A.T. would be, and it is therefore not factored into Air Canada's guidance.
The outlook provided constitutes forward-looking statements within the meaning of applicable securities laws and is based on a number of assumptions (including those provided above) and subject to a number of risks. Please see the section below entitled "Caution Regarding Forward-Looking Information".