Air Canada Q2 2023 Financial Highlights

“Air Canada’s second quarter results were driven by strong demand and show the effectiveness of our plan. As a result of the hard work of our people, the appeal of our growing global network, as well as our leading brand and product offering, operating revenues in the quarter reached $5.4 billion, an increase of 36 per cent from a year ago. Operating income was $802 million, a year-over-year improvement of over $1 billion, and our adjusted EBITDA reached $1.2 billion with an adjusted EBITDA margin of 22.5 per cent,” said Michael Rousseau, President and Chief Executive Officer of Air Canada.

*Adjusted CASM, adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization), adjusted EBITDA margin, leverage ratio, net debt, adjusted pre-tax income (loss), adjusted net income (loss), adjusted earnings (loss) per share, and free cash flow are referred to in this news release. Such measures are non-GAAP financial measures, non-GAAP ratios, or supplementary financial measures, are not recognized measures for financial statement presentation under GAAP, do not have standardized meanings, may not be comparable to similar measures presented by other entities and should not be considered a substitute for or superior to GAAP results. Refer to the “Non-GAAP Financial Measures” section of this news release for descriptions of these measures, and for a reconciliation of Air Canada non-GAAP measures used in this news release to the most comparable GAAP financial measure.

“I thank the entire team for its continued dedication to serving our customers, including collaborating with our partners, who also share the responsibility of ensuring a smooth customer journey. We safely carried over 11 million customers across our global network in the quarter, a year-over-year increase of about 23 per cent. However, despite having more trained resources than last summer and improved tools, our operations in June and July were not at expected levels. We are increasing our efforts to protect the customer journey from disruption, regardless of the cause. This includes using any influence we have, in such instances as pilot attrition at our principal regional partner or global supply chain issues, or working to mitigate the effects of situations beyond our control, such as disruptive storm activity in our key hubs and markets. We are confident that our efforts will generate positive outcomes.

“We are particularly pleased with our international performance, propelling nearly 70 per cent of the year-over-year increase in passenger revenues. Air Canada Vacations continued to see high demand for leisure travel packages, and Aeroplan added compelling new partners and grew its membership. Our cargo business, like others in the industry, experienced lower demand and yields than expected. Based on current passenger booking patterns, we see prevailing strength in travel demand over the second half of 2023, giving us confidence to increase the lower end of our adjusted EBITDA guidance range. We continue to focus intently on cost discipline and liquidity management. We ended the quarter with more than $9.6 billion in cash, cash equivalents and investments. This will enable us to further invest in our business, deleverage our balance sheet and ensure our company maintains the resiliency and adaptability needed for long-term success and to navigate through evolving market conditions,” said Mr. Rousseau.

Second Quarter 2023 Financial Results

• Second quarter operating revenues of $5.427 billion increased $1.446 billion from the same quarter in 2022, driven by a 42 per cent year-over-year increase in passenger revenues. Operated capacity increased 21 per cent from the second quarter of 2022, one percentage point lower than the projection provided in Air Canada’s May 12, 2023, news release.
• Operating expenses of $4.625 billion increased $391 million or 9 per cent from the second quarter of 2022, driven by increases in nearly all line items reflecting higher operated capacity and traffic year –over year, partially offset by a 31.4 per cent decrease in jet fuel prices.
• Operating income of $802 million, with an operating margin of 14.8 per cent, an improvement of over $1 billion from an operating loss of $253 million in the second quarter of 2022.
• Adjusted EBITDA of $1.220 billion, with an adjusted EBITDA margin of 22.5 per cent, an increase of $1.066 billion and of 18.6 percentage points, respectively, from the second quarter of 2022.
• Net income of $838 million improved $1.224 billion from the second quarter of 2022. Diluted earnings per share of $2.34 compared to a diluted loss per share of $1.60 in the second quarter of 2022.
• Adjusted net income* of $664 million improved $1.119 billion from the second quarter of 2022. Adjusted earnings per diluted share* of $1.85 compared to an adjusted loss per diluted share of $1.12 in the second quarter of 2022, an improvement of $2.97 per diluted share.
• Adjusted CASM* (adjusted cost per available seat mile) of 13.3 cents increased 1.6 per cent from the second quarter of 2022. The unit cost was impacted by higher passenger service costs due to higher traffic and higher selling costs, which are largely driven by revenues, and by a 24 per cent increase in wages, salaries and benefits resulting from a 22 per cent year-over-year increase in the number of average full-time-equivalent (FTE) employees. Second quarter 2023 CASM of 18.8 cents decreased 9.7 per cent from the second quarter of 2022 mainly due to lower fuel prices and higher capacity year over year.
• Net cash flows from operating activities of $1.490 billion increased $426 million from the second quarter of 2022.
• Free cash flow of $965 million increased $537 million from the second quarter of 2022.
• Net debt-to-adjusted EBITDA ratio* was 1.7 at June 30, 2023, an improvement from 3.2 at March 30, 2023, and 5.1 at December 31, 2022, due to growth in adjusted EBITDA and the reduction in net debt.

Outlook

For the third quarter of 2023, Air Canada plans to increase its ASM capacity by about 11 per cent from the same quarter in 2022. Air Canada is providing the following update for the full year 2023 guidance as described below.

Major Assumptions

Air Canada made assumptions in preparing its updated guidance and making forward-looking statements, including moderate Canadian GDP growth for 2023, that the Canadian dollar will trade, on average, at C$1.34 per U.S. dollar for the full year 2023, and that the price of jet fuel will average C$1.08 per litre for the full year 2023.

Air Canada is modifying its 2023 adjusted CASM guidance to reflect the change in full year ASM capacity guidance, as well as adjustments to various expense items related to the ongoing cost environment.

The revised guidance for full year adjusted EBITDA reflects expected earnings stemming from anticipated traffic and yield and a continued strong demand environment.

Air Canada is not updating its 2024 targets at this time and will continue evaluating them as it progresses with its plans and executes on its strategic priorities.

Non-GAAP Financial Measures

Below is a description of certain non-GAAP financial measures and ratios used by Air Canada to provide readers with additional information on its financial and operating performance. Such measures are not recognized measures for financial statement presentation under GAAP, do not have standardized meanings, may not be comparable to similar measures presented by other entities and should not be considered a substitute for or superior to GAAP results.

Adjusted CASM

Air Canada uses adjusted CASM to assess the operating and cost performance of its ongoing airline business without the effects of aircraft fuel expense, the cost of ground packages at Air Canada Vacations, impairment of assets, and freighter costs as these items may distort the analysis of certain business trends and render comparative analysis across periods less meaningful and their exclusion generally allows for a more meaningful analysis of Air Canada’s operating expense performance and a more meaningful comparison to that of other airlines.

In calculating adjusted CASM, aircraft fuel expense is excluded from operating expense results as it fluctuates widely depending on many factors, including international market conditions, geopolitical events, jet fuel refining costs and Canada/U.S. currency exchange rates. Air Canada also incurs expenses that are related to ground packages at Air Canada Vacations, which some airlines, without comparable tour operator businesses, may not incur. In addition, these costs do not generate ASMs and, therefore, excluding these costs from operating expense results provides for a more meaningful comparison across periods when such costs may vary.

Air Canada also incurs expenses that are related to the operation of freighter aircraft, which some airlines, without comparable cargo businesses, may not incur. Air Canada had six Boeing 767 dedicated freighter aircraft in its operating fleet as at June 30, 2023, compared to four Boeing 767 dedicated freighter aircraft as at June 30, 2022. These costs do not generate ASMs and, therefore, excluding these costs from operating expense results provides for a more meaningful comparison of the passenger airline business across periods.

Adjusted CASM is reconciled to GAAP operating expense as follows:

EBITDA and Adjusted EBITDA

EBITDA (earnings before interest, taxes, depreciation and amortization) is commonly used in the airline industry and is used by Air Canada as a means to assess operating results before interest, taxes, depreciation and amortization as these costs can vary significantly among airlines due to differences in the way airlines finance their aircraft and other assets. In calculating adjusted EBITDA, Air Canada excludes impairment of assets as this may distort the analysis of certain business trends and render comparative analysis across periods or to other airlines less meaningful.

Adjusted EBITDA Margin

Adjusted EBITDA margin (adjusted EBITDA as a percentage of operating revenues) is commonly used in the airline industry and is used by Air Canada as a means to assess the operating margin before interest, taxes, depreciation and amortization as these costs can vary significantly among airlines due to differences in the way airlines finance their aircraft and other assets.

EBITDA, adjusted EBITDA and adjusted EBITDA margin are reconciled to GAAP operating income (loss) as follows: