Canada’s Airports in Context: Drivers of Recent Growth & Prospects
Presented by:
Mike Tretheway Chief Economist & Executive Vice President
Alex Welch Senior Vice President
30 May 2019
Page 1 GENERAL TRENDS IN CANADIAN AVIATION Canada Air Passenger Traffic 1988 – 2017
Canada Air Passenger Traffic Enplaned/Deplaned 160
140
120
100
80
60
40 Passengers (Millions)
20
- 1988 1992 1997 2001 2005 2009 2013 2017 Domestic Transborder International
Page 3 Source: Air Carrier Traffic at Canadian Airports. Statistics Canada Note: Most recent data available is 2017. US vs. Canada Passenger Traffic 1990 – 2017
Passenger Growth in United States and Canada 250 Canada +2.9% per year 200
150
100 Index Base 1990 50
- 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 US Canada
Source: InterVISTAS Calculations with data from: Canada: Air Carrier Traffic at Canadian Airports, Statistics Canada. Page 4 US: T-100 Enplaned-Deplaned Air Passenger Statistics; 1960-2006 ATA, 2003-2016 BTS. Note: Most recent data available is 2017. Canadian Air Carrier Revenue and Expenses: 2005 – 2015
Operating Revenues and Expenses 25
20
15
$ Billions 10 Finally some operating profits but margins are still thin 5
0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Operating Revenue Operating Expenses
Page 5 Source: Statistics Canada, 51-004-X Note: Most recent data available is 2015. Nominal Average Fares Canada – Not Adjusted for Inflation
Average Fare for Major Carriers $300
$250
$200
$150
$100 Average Fares Average
$50
$- 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: Statistics Canada Average Fare data, Cat. 51 -004-X Page 6 Major Air Carriers include Air Canada (Mainline, AC Jazz & regional partners, & AC Rouge beginning July 2013), WestJet, and Air Transat. Note: Most recent data available is 2017. Real Average Fares Canada – Indexed to 2017
Average Fare for Major Carriers $450 $400 Real fares falling 2.1% pa compare with 2.9% pax growth $350 $300 $250 $200 $150 Average Fares Average $100 $50 $- 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: Statistics Canada Average Fare data, Cat. 51 -004-X Page 7 Major Air Carriers include Air Canada (Mainline, AC Jazz & regional partners, & AC Rouge beginning July 2013), WestJet, and Air Transat. Note: Most recent data available is 2017. Caution on Measured Fare Decline
Pax respond to all-in fare, not airline base fare All-in fare not declining as fast
. Especially important is increase in ancillary charges paid by pax
. These likely are growing at roughly 1% per year suggesting a real fall in all-in fares also around 1% per year
. Nevertheless, there is a continuing steady decline in all-in fare
. Taxes and airport charges also must be added to all-in fare
Page 8 Passengers per Aircraft Canada: 1980-2017
Average Passengers per Aircraft 80
70 Major productivity gain 60
50
40 Passengers 30
20
10
- 1980 1985 1990 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: InterVISTAS Calculations with data from: Aviation in Canada (1980-1990) and Table 401-0009, Page 9 Statistics Canada and Air Carrier Traffic at Canadian Airports, Statistics Canada. Note: Most recent data available is 2017. Load Factors Canada: 1980 – 2017
Passenger Load Factor 90%
80%
70%
60%
50%
40%
30%
20%
10%
0% 1980 1985 1990 2001 2006 2011 2012 2013 2014 2015 2016 2017
Page 10 Source: Operating and financial statistics for major Canadian airlines, Statistics Canada. Transport Canada. Note: 2014 data not available from StatCan, statistics from Air Canada and WestJet used instead. Most recent data available is 2017. Pax vs. Aircraft Movements Canada: 1999 – 2017
Passenger Traffic vs. Aircraft Movements 200 180 160 140 120 100 80 70% traffic growth 60
Index (1999 = 100) with little increase in movements 40 20 - 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Aircraft Movements Passenger Traffic
Source: InterVISTAS Calculations with data from: Aviation in Canada (1980-1990) and Table 401-0009, Page 11 Statistics Canada and Air Carrier Traffic at Canadian Airports, Statistics Canada. Note: Most recent data available is 2017. Key Drivers of Passenger Growth
. Declining real fares . Increased airline capacity . First major capacity increases in almost all sizes/ranges . Supported by lower airline costs . New aircraft with lower operating costs . Lower input costs – fuel and capital . Higher seating densities . Higher load factors . New business models: e.g. ULCC . Airport and community incentives
Page 12 AIR CANADA & WESTJET Air Canada Main focus: Hub & Spoke Building
. Recent growth in AC US/Int’l Seat Capacity at Hubs international capacity driven (Cumulative Growth 2014 – 2018) by the 37 new 787 Dreamliners 93%
77% . Growth concentrated at the three largest hubs 47% . Future growth expected to slow as widebody fleet growth slows 16%
YYC YYZ YUL YVR
Page 14
Source: Innovata Schedules (via Diio) Air Canada Efficiencies Growing 787 fleet combined with continued 767 transfers to rouge have enabled Air Canada to expand aggressively into multiple market segments on a cost competitive basis:
efficiency range 787
new long-haul markets viable (e.g. YYZ/YVR – DEL)
25% CASM than same aircraft in mainline
AC can deploy into lower yield leisure/VFR segments historically dominated by WS and charters
Page 15 Air Canada Narrow body
. Starting the phase in of 737 MAX 8 (and 9) . 61 on order with purchase options for an additional 48 . 24 delivered as of May 2019 . Needed for . Replacement of aging A320s . Replacement of narrow body capacity that was diverted to feed new 787 routes . 45 A220-300 on order . Planned entry into service: Dec 2019 . Replace E190 & A319
Page 16 Air Canada Regional - shift to higher capacity aircraft Air Canada Regional Fleet 2012-18
140 Beginning to retire 120 50 seats or less: – 39% Dash 8-100 and CRJ100/200 100
80
60 Fleet Count
40 greater than 50 seats: +417% Replacing with larger 20 Q400 (74-78 seats) and CRJ900/E175 (76 seats) - 2012 2015 2016 2017 2018
Page 17 Note: Median fleet count taken for years where AC gave a range. Source: Air Canada investor Presentation . WestJet The long-term business model is evolving
. Increasingly Hub and Spoke
. Encore – fleet of 47 Q400 aircraft
. Link – fleet of Saab 340B aircraft operated by Pacific Coastal
. Expanding internationally – 787 Dreamliners (ordered 10 + options for 10)
. Taken delivery of first few and deployed on transatlantic
. Joint venture with Delta (planned) and codeshare agreement with Air France
Page 18 WestJet The long-term business model is evolving
. Introducing full service product
. New business class – offered on the 787 with lie-flat seating
. Premium product for 737 (2x2 seating)
. Rewards program – targeting high value customers and premium travelers
. Lounge access at airports
. Focus on corporate bookings
Page 19 WestJet Shifting towards larger 737 aircraft
. To reduce unit seat cost, the 737 fleet mix has shifted considerably over the past 6 years towards a greater share of the larger 737-800 and 737 MAX 8 (174 seats) at the expense of smaller 737-700s (134 seats).
2012 2019
737-600 737-600 737-800 13% 10% 18%
737-800 & Max 8 48% 737-700 42%
737-700 69%
Page 20
Source: WestJet annual reporting, investor presentations. WestJet Short-term focus on managing growth
. “Prudent Growth” in 2019
. The airline will take a prudent “We’ve grown too big, approach to capacity as it grows too fast”
. 787s and Swoop providing most – Ed Sims, CEO WestJet, 2018 of capacity growth
. Limited 737/Q400 growth in flying
. Labour relations issues persist (threat of pilots striking, unionization of flight attendants)
Page 21 WestJet & Onex
Page 22
Source: Google Finance. ULTRA LOW COST CARRIERS (ULCC) Model: Point-to-Point
Page 24 Model: Leisure Focus
GRR spoke
PHX focus city
Page 25 Price Stimulation LCCs can stimulate traffic levels via lower fares
1.4 Bellingham Airport – E/D Passengers (2003 – 2017)
1.2 2017 Exchange Rate: 0.77 US$ per 1 CAD$ 1.0 2007 Exchange Rate: 1.07 US$ per 1 CAD$ 0.8
0.6
0.4 E/D Passengers (millions) 0.2
0.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Allegiant (E/D) BLI Total (E/D)
Page 26 Source: World Bank Official Annual Average Exchange Rates Flair
Focused on big stations - moved some operations from secondary stations to primary ones
. Still operating with 7 older 737-400s . Being replaced by 737-800s. . Except 11 aircraft by end of year
Page 27 Swoop
Launched by WestJet in June 2018: point-to-point + 40% cheaper fares
. Operating with seven 737-800s that were transferred from WestJet
. 3 additional aircraft to be transferred by summer 2019
Page 28 Other ULCC update
. Recently announced that they . Planned launch for December plan to relaunch in 2019 as a 2019 ULCC . Entered into agreement with . Currently working with investor SmartLynx Airlines SIA to lease (2) group, including Claridge Inc., A320 for delivery in fall 2019 Stephens Management Inc., and Indigo Partners . Appointed new CEO, Javier Suarez (VivaAerobus) . Indigo Partners has extensive experience starting ULCCs (Spirit Airlines, Tiger Airways)
Page 29 SUN CARRIERS Sun Carriers – adapting to increased competition
Continues to focus almost exclusively on vacation sun markets (e.g. Caribbean and Mexico)
Serves a number of small Canadian communities, but mostly in eastern Canada
Route decisions based more on needs of broader travel group rather than on pure market demand
Page 31 Air Transat – AC Acquisition (Merger?)
. Announced May 16, 2019
. 30 day exclusive negotiation period
. Merger / acquisition review (complicated)
. Competition Bureau review on competition impacts
. Potential Minister of Transport review on national interest
. Prescribed timelines go beyond election
. There is some scope for shorter review
Page 32 Concluding Thoughts
. Aircraft Transition
. CRJ 50 seat, Dash 8-100/300 not in production
. Future is for regional operations with 70+ seats
. Narrow-bodies will be mainly larger variants
. Wide-bodies will be higher density
. Result -> Lower unit cost (lower fares) -> Growth
Page 33 Concluding Thoughts
. Is Growth Sustainable?
. Yes, and aircraft are being built to materialize this growth
. But there are business risks
. Economic cycle is 3rd longest in history . Individual carriers may not survive
. Long-term trends support growth
. Lower fares will stimulate demand
. Millennials have air travel as a key element of lifestyle
Page 34 THANK YOU!