Air Canada (AC) Q1 2023 Earnings Call Transcript

Air Canada  ( TSX: AC) Q1 2023 earnings call dated May. 12, 2023

Corporate Participants:

Valerie Durand — Head of Investor Relations and Corporate Sustainability

Michael Rousseau — President and Chief Executive Officer

Mark Galardo — Executive Vice President, Revenue and Network Planning

Amos Kazzaz — Executive Vice President and Chief Financial Officer

Mark Nasr — Executive Vice President, Marketing and Digital and President of Aeroplan

Craig Landry — Executive Vice President and Chief Operations Officer

Analysts:

Andrew Didora — Bank of America — Analyst

Kevin Chiang — CIBC — Analyst

Fadi Chamoun — BMO — Analyst

Chris Murray — ATB Capital Markets — Analyst

Cameron Doerksen — National Bank Financial — Analyst

Walter Spracklin — RBC Capital Markets — Analyst

Konark Gupta — Scotia Capital Inc., Canada — Analyst

Savanthi Syth — Raymond James — Analyst

Presentation:

Operator

Good morning, ladies and gentlemen, and welcome to the Air Canada First Quarter 2022 Earnings Conference Call.

I would now like to turn the meeting over to Ms. Valerie Durand. Please go ahead, Madam Durand.

Valerie Durand — Head of Investor Relations and Corporate Sustainability

[Foreign Speech] Thank you. [Foreign Speech] Welcome, and thank you for joining us on our first-quarter earnings call of 2023. Joining us this morning are Michael Rousseau, our President and CEO; Amos Kazzaz, our Executive Vice President and CFO; and Mark Galardo, our Executive Vice President of Revenue and Network Planning. Also in the room with us today are Arielle Meloul, Executive Vice President and Chief HR Officer and Public Affairs; Craig Landry, Executive Vice President and Chief Operations Officer; Marc Barbeau, Executive Vice President and Chief Legal Officer; John Di Bert, our incoming Executive Vice President and Chief Financial Officer; and Mark Nasr, Executive Vice President, Marketing and Digital and President of Aeroplan. Mike will provide a brief overview of the quarter, Mark will discuss our revenue network and trends, Amos will provide more details on our financial performance before turning it back to Mike for an update on our corporate strategy. Following management’s overview, we will take questions from equity analysts. Mr. Kazzaz and Pierre Houle, Vice President and Treasurer will also be available for questions from term-loan B lenders and holders of Air Canada bonds. Note that our Investor Relations team remains available for questions after the call.

Finally, I would like to note that our comments and discussions on today’s call may contain forward-looking information about Air Canada’s outlook, objectives and strategies that are based on assumptions and subject to risks and uncertainties. Our actual results could differ materially from any stated expectations. Please refer to our forward-looking statements in Air Canada’s first-quarter news release that is available on aircanada.com and on SEDAR.

And now, I’d like to turn the call over to Mike.

Michael Rousseau — President and Chief Executive Officer

Well, thank you, Valerie, and good morning [Foreign Speech] Thank you for joining us on our first-quarter call today. I’m extremely pleased that Air Canada began the year so strongly with first-quarter operating revenues of CAD4.9 billion, 90% higher than the first-quarter of 2022. This is a record for our first-quarter revenue numbers. Our results exceeded all our expectations and as we look to the strong advance bookings for the remainder of the year, we expect demand to persist. For this reason and for the lower-than-expected fuel costs, we increased our adjusted EBITDA guidance last week. We have the strategy, the fleet the network, the product and certainly the people to make the most of the recovery. I thank our employees for their great teamwork, carrying our customers safely during the quarter.

The winter and the start of spring can be very challenging in North America, especially Canada. Apart from the weather disruptions that can affect all aspects of the air transport system, it usually comes with high-traffic flows, particularly with the spring break peak. The strong and improving collaboration between our people and our ecosystem partners has been key to our service delivery during this period and sets our expectation for continued strong performance through the summer.

In the quarter, passenger revenues totaled CAD4.1 billion, which is more than double that of a year-ago and a record for our first-quarter. We recorded adjusted EBITDA of CAD411 million, that is up CAD554 million from the same-period last year. And our adjusted EBITDA margin was 8.4%, one of the strongest among North American network carriers. Along with this, we remain diligent on costs with adjusted CASM down about 7% year-over-year. Cost control is and will remain a top priority for us.

We ended the quarter with total liquidity of over CAD10.5 billion. This certainly gives us the ability to constantly execute our business plans to take our company forward and to continue to grow. All components of our company contributed during the quarter. Air Canada Vacations produced remarkable results. And Air Canada Cargo continued to expand its network and the fleet.

I’m also pleased to share today that Aeroplan has already reached its original 2024 target of 7 million active members, despite the effects of the pandemic. In addition, gross billings have increased 50% when compared to the first-quarter of 2022. We’re proud of the record-breaking numbers of of enrolled members, gross billings and redemptions in our award-winning loyalty program. This is a significant milestone because it speaks to the importance of Aeroplan for us. Our growing membership base also unlocks more partnership possibilities, enabling members to enjoy benefits and earn points in their everyday lives. A larger customer database in the digital platform create additional opportunities to tailor our redemption offerings. All this translates into a key competitive advantage for us. And certainly I think all our customers for their loyalty and for choosing to fly with us.

Before I give the call over to Mark Galardo, first I want to welcome John Di Bert to the team. I believe many of you know him and all of you will it should have the opportunity to meet him over the next several weeks. Also I want to welcome Mark Galardo and Mark Nasr to their first analyst calls. Both became Executive Vice President a couple of weeks ago, leading all commercial and digital areas. They are excellent leaders and will be critical to both our short-term and long-term future. And I will save my comments about Amos through the end of the call. Mark, over to you.

Mark Galardo — Executive Vice President, Revenue and Network Planning

Thank you, Mike [Foreign Speech] Good morning, everyone. [Foreign Speech] Mike touched on our record operating revenues. Passenger revenues more than doubled for the first quarter of 2022 with about half the increase coming from international and sun markets. The domestic market is performing as expected and transatlantic demand remains very strong. We are maximizing on the depth and reach of our diversified network through our hubs and extensive connectivity they offer globally.

Aside from strong results from transatlantic and sun markets, flights to Australia and Japan performed very well with the latter in particular back to 2019 levels. Seasonal routes like Vancouver-Bangkok clearly demonstrate that our network diversification strategy is working. This also counterbalances traditional seasonal patterns. Our average fares have increased above economic indicators, signaling that demand is not only strong, but that customer decisions around travel have evolved. Our premium cabin strength continues. To put this in perspective, the year-over-year growth in revenues from premium cabins represented 30% of the total increase in passenger revenues from Q1 2022, and it represented 49% of the passenger revenue growth versus Q1 2019.

Air Canada Vacations also produced remarkable results this quarter, even surpassing those in the first quarter of 2019, demonstrating the strong value proposition of its product, and elevated by a team that clearly rose to the challenge. You will recall that in January 2022, in response to the emergence and impact of the Omicron variant, Air Canada suspended flights to certain Caribbean destinations from January to April 2022. Our customers were eager to return to these previously unavailable sun destinations and to capture this demand we have successfully positioned Air Canada Vacations as a leading Canadian vacation brand. Looking ahead to the rest of the year, we continue to see solid advanced bookings in all markets. The system book load factor is trending ahead of 2019 and as we look into summer, our new routes to Copenhagen, Toulouse, Brussels and Amsterdam are performing to or above expectations.

We continue to deepen our relationships with our partners and expect sixth freedom traffic to continue to contribute favorably and we are seeing a significant improvement in yield stemming from these partnerships. These partnerships also allow us to further balance our seasonality as American and Canadian travel profile are highly complementary. This will allow us to maximize our sixth freedom potential. People want to travel, seasonality and customer segments are changing post pandemic.

There are two other related points that I’d like to emphasize. First, the importance of immigration and second, how this leads to visiting friends and relatives. Apart from its critical importance to our economy, immigration has a multiplier effect on the number of Canadians who travel to see their loved ones abroad and vice versa. As a global carrier, we connect Canada to the world, and we’ll continue to explore new routes that serve our current and future customers. A good example is our Vancouver to Dubai route, which is one of our latest additions to the network. It gives us access to regions such as Southeast Asia, from which many immigrants at Canada and foreign students originate. We also foresee good future opportunities in the China and India markets.

Finally, we continue to grow and deploy our cargo fleet. This has opened up additional opportunities in Basel and other European cities lately. Our cargo strategy is core to our diversification focus as it continues to create value, carrying cargo from global freight lanes onto our wider passenger network in the domestic North America and other international markets. This new and diversified revenue stream also counter some of the seasonality of the passenger business and is a key component of our future commercial strategy.

I will now pass it over to Amos [Foreign Speech]

Amos Kazzaz — Executive Vice President and Chief Financial Officer

[Foreign Speech] Good morning, everyone. Like Mike and Mark, I too am very pleased with our results for the first quarter. Alas, this is my final earnings call. I’ve enjoyed all of them and we’ll miss discussing our results with you as we continue our recovery and we’ll be following Air Canada’s progress from the sidelines very closely.

Last week, we updated guidance on certain key metrics for the year, including capacity, adjusted CASM and adjusted EBITDA. Although our capacity has remained relatively stable, you will have noticed a change in our cost expectations. In short, we’re in a different cost environment as we’ve spoken about. This is not isolated to Air Canada, it is being experienced across the industry. And of course, the anticipated growth in earnings and higher-than-expected traffic have an impact on our unit costs for the year.

Now turning to our results. Total operating expenses increased 57% from the first quarter of 2022, largely due to increased passenger revenue, traffic and capacity. More details on certain line items are outlined in the first quarter MD&A, which was published this morning. Our first quarter adjusted EBITDA of CAD411 million was better than expectations on a continuing strong revenue environment as explained by Mike. Fuel costs were also lower-than-expected in the first quarter coming in at CAD1.285 per liter, but still higher than Q1 of 2022 by 30%. That said, as always, we continue to maintain a strong focus on cost discipline. Adjusted CASM was about 7% lower than a year ago. The favorable impact of higher capacity and resulting efficiency gain was partially offset by a favorable maintenance cost adjustment recorded in Q1 of 2022. This adjustment represented 6 percentage points on adjusted CASM and if we exclude it from Q1 2022, our year-over-year adjusted CASM variants would have improved about 13%. We are determined to stay on track with our objectives, and we are managing our business for the long-term.

As to our liquidity and debt, our CAD10.5 billion in total liquidity consisted of CAD9.5 billion on the balance sheet and CAD1 billion available under undrawn credit facilities. It increased generated free cash flow of CAD987 million in the quarter, CAD896 million more than a year ago. We remain committed in investing in our future for sustained profitability, including by further deleveraging our balance sheet. Net debt at the end of the quarter decreased about CAD1 billion from the end of 2022, due to the increase in liquidity and debt reduction. The leverage ratio at March 31, 2023, was 3.2 times or a 1.9 turn improvement compared to December 31, 2022, which gets us closer to our goal.

Now for a word our fleet and other expenditures. As planned during the quarter, we brought back a Boeing 777-300, added interim lift within Airbus A330 and we added a sixth Boeing 767 freighter to the fleet. We plan to add one more freighter to the fleet this year, one Boeing 787-9 Dreamliner was delivered in April and you expect one more this year. We welcome our 33rd Airbus A220 into the fleet, deliveries for the remaining 27 aircraft on firm order are planned between 2024 and 2026. The Airbus A321XLR deliveries are now scheduled to begin in 2025, with the final aircraft scheduled to arrive in 2028.

We also continue to invest in technology to improve the customer experience and optimize our processes. In April, we announced a significant change to how we distribute our content and work with travel agencies. At its center, the new distribution capability, or NDC, will offer agencies more options to connect with Air Canada with additional content to sell and will enable advances in our revenue management roadmap such as continuous pricing. This program and our new commercial arrangements with industry providers also create cost transformation opportunities. We are building for our future success and with every investment being made, which will then foster sustained benefits. So our committed and planned capital commitments now currently sit at around CAD1.6 billion for the remainder of 2023 and CAD1.9 billion for 2024.

As to our 2024 targets, we’ll continue evaluating them as we progress on our plan and execute on our strategic priorities. Any updates will be provided in due course. And finally, the aggregate solvency surplus in Air Canada’s domestic registered pension plans has been estimated at CAD4.6 billion.

Thank you. Back to you, Mike.

Michael Rousseau — President and Chief Executive Officer

Great. Thank you, Amos. Again, we are very pleased with the results of the first quarter. But as any sports fan knows, one good period or a strong quarter doesn’t mean you can relax for the rest of the game. For this reason, we intend to remain tightly focused on our operations, taking care of our customers and staying diligent on costs through the balance of the year and beyond. We are very encouraged by indications for the coming quarters, which are all positive. Our cash flow in the first quarter reflects in part strong advanced ticket sales. Yields, which improved in the quarter by about 9% from a year-ago, also remained strong.

To keep this momentum going, we remain steadfastly focused on elevating the customer experience. This includes new programs and training to support our employees and investments in new offerings for our customers. We’re introducing new and renovated lounges and we have also improved onboard meals. More recently, we announced a landmark partnership with Bell that will improve our in-flight offering through expanded live TV entertainment and the introduction of free Wi-Fi messaging services on all Wi-Fi equipped flights worldwide. This partnership will also enable us to introduce new Bell Point accrual opportunities for Aeroplan members.

Customer choice of routings and destinations also keeps expanding and we’re offering more convenient travel options through new partnerships, like our deep and transborder business arrangement with United Airlines and our strategic partnership with Emirates. For Aeroplan, we have introduced an attractive new partner in our agreement with Parkland and as popular brands across the country like Ultramar and Chevron. We’ve also expanded our partnership with Uber to include grocery and retail delivery, creating more earning and redemption options for members.

A key element of elevating customer experience is continued investment in new digital technologies. Beyond NDC, which Amos touched on, this includes new dynamic boarding passes, biometric facial recognition technology in airports and pre-order meals through our website and mobile app. We also continue to advance our ESG initiatives. This includes diversity, equity and inclusion, community partnerships in official languages, all of which bind Air Canada communities it serves and are critical to Air Canada’s culture.

One very bright note in this vein is that for the first time since 2020, we operated Dreams Take Flight excursions with flights from Winnipeg, Halifax and Toronto this spring. Dreams Take Flight is run by generous volunteers, many of them are Air Canada employees and retirees. It takes children that are faced with challenges in their lives to a magical place for a day of wish fulfillment. Eight Dream’s Flights are planned for this year from across Canada, and in total we will collectively make an expected 1,000 wishes come true.

On the environmental front, we recently announced a new SAP purchase agreement that will see increase the use of alternative fuels by 5 times. We’re in the preliminary stages of SAP use, but this agreement is one more step towards our ambitious commitment to reach net zero emissions by 2050. This goal is the centerpiece of our climate action plan, is very important to all stakeholders, including investors who takes sustainability into account when making investment decisions. However, we face an uneven competitive landscape, including in the sustainable aviation fuels area. Other countries have adopted various mandates and incentives to perform their production adoption. This is not about climate action, it’s about remaining imperative and continuing to fuel our Canadian economy. To make this happen, government involvement and support is required as we see in other countries.

We are excited about all business opportunities ahead, including those Mark touched on earlier regarding India and China, which we are exploring keeping in mind the current environment and its constraints. Ultimately, our objective is to connect Canada with the world safely. And we are very proud of the role we play in Canada. We create jobs and contribute to Canada’s social and economic development.

In closing, I want to acknowledge the incredible contributions of Amos over the past 13 years. He has been a critical senior leader involved in virtually every key decision. He was instrumental in bringing home significant strategic initiatives, such as the acquisition of Aeroplan and the subsequent credit card negotiations with our partner banks. He has created so much value for Air Canada, just not dealing with the most complex issues with creativity and a work ethic second to none, but also representing Air Canada with absolute care and class. He built an incredible team, leading with empathy and mentoring many more, leaving Air Canada with a solid foundation. And on a personal note, he has been a strong partner for me and a great friend. We all wish him the very, very best.

And with that Valerie, we’re now ready to take questions

Valerie Durand — Head of Investor Relations and Corporate Sustainability

Thank you, Mike, and thank you all for joining us this morning. [Foreign Speech] We are now ready for your questions. Keep in mind, you may always reach out to our Investor Relations team should you require further details. Over to you, Mos [Phonetic]

Questions and Answers:

Operator

Thank you. Thank you. We will now take questions from the telephone lines. [Operator Instructions] Our first question is from Andrew Didora from Bank of America. Please go ahead.

Andrew Didora — Bank of America — Analyst

Hi, good morning, everyone. So like the CAD561 million in other revenues was much stronger than we anticipated. So I know there’s a lot of seasonality in this figure with 1Q the strongest. Was there anything in that figure that might be one-time or would alter kind of the way this trends throughout the year?

Michael Rousseau — President and Chief Executive Officer

Good morning, Andrew. This is Mike. No, there’s certainly no one-time issues in that number. That really reflects the commentary we’ve made around ACV and Aeroplan.

Andrew Didora — Bank of America — Analyst

Yeah, okay. Makes sense. And then Mike I know, balance sheet repair is a top priority, in pre-pandemic you really didn’t get aggressive in capital returns with the buyback until you got to about a turn of leverage. Should we think about it the same way or did COVID change the way you’re thinking about balance sheet and capital returns? Thank you. And Andrew, a great question. No, no, deleveraging remains a top priority for us and we’re on a path to get back to where we were pre-pandemic. And again, that remains the top priority for us. All right. Thank you.

Operator

Thank you. Our following question is from Kevin Chiang from CIBC. Please go ahead.

Kevin Chiang — CIBC — Analyst

Thanks for taking my question and congrats Amos on your pending retirement, it’s always been great working with you and John congrats on joining Air Canada here. Maybe just my first question on seasonality. Historically, we’ve seen [Indecipherable] its been unique environment, but historically Q1 has been your lowest load factor quarter and you also had a very strong Q1 in 2023. So just wondering how you think about utilization rates as you get through the remainder of the year? Do you think you hold here as you add capacity? Do you think it actually grinds higher and exhibit historical seasonal patterns? Just give it a pent up demand. Any color there would be helpful.

Mark Galardo — Executive Vice President, Revenue and Network Planning

Hi, Kevin. It’s Mark Galardo here. So prior to the pandemic we had discussed a lot about dis-utilizing the business and we had invested a lot of capacity into markets like Australia, India, leisure sun markets and I think you see some of the results of that in Q1. And going forward, we expect to have that same type of performance in Q2, in particular on the strength of some of the decisions we made on our network and of course, sixth freedom traffic that’s helping us be seasonalized the business going forward.

Kevin Chiang — CIBC — Analyst

That’s a great point and that’s helpful, and leads to my second question. I’d be curious to wonder, you hit a milestone here with Aeroplan 7 million members. I guess what’s the target moving from here? Is it 7 million to 9 million, 7 million to 10 million. And then just wondering how much the Chase partnership might have accelerated that membership growth as you expanded the program into the U.S.?

Mark Nasr — Executive Vice President, Marketing and Digital and President of Aeroplan

Sure. Good morning. It’s Mark Nasr, and thanks for the question. So we will release new targets for Aeroplan, but we’re not prepared to do that this morning. So stay tuned. But we do believe that there is additional growth available from the program and from the business. In terms of the U.S., Chase has been a great partner and the performance from that relationship has exceeded our expectations. I think on the last call, Amos also talked about in general how the international business of Aeroplan has grown significantly more quickly than the Canadian business, while the Canadian business has grown as well. Other than that, we don’t segment out specific performance of partners.

Kevin Chiang — CIBC — Analyst

That’s helpful. Again, congrats Amos and John. And thank you for taking my questions.

Amos Kazzaz — Executive Vice President and Chief Financial Officer

Thanks, Kevin.

Operator

Thank you. Our following question is from Jamie Baker from J.P. Morgan. Please go ahead.

James — J.P. Morgan — Analyst

Hey, good morning. This is James [Phonetic] on for Jamie, Mark. Just want to talk about the rating agency sensitivities, if you can remind us what those are given the positive outlook changes you received over the quarter? And if you could just remind us of the internal leverage targets, if you think ending at 3.2 this quarter is sufficient to receive those upgrades?

Amos Kazzaz — Executive Vice President and Chief Financial Officer

Yes. Good morning, James. It’s Amos. So in terms of our target our — the target that we had out there for 2024 was 1.5 times churn. So right now we’re down to 3.2, we had 1.9 churn improvement in the quarter. So we’ll continue our progress there. I think we’re in good shape as we look at that and that clearly deleveraging remains our priority.

As far as the rating agencies, it always takes them a bit longer to catch up with the performance and so it’s not automatic as soon as we hit a — our leverage ratio, or let’s say if we get to investment grade credit rating metric sometimes of 1 times or we were before 0.8 times back at the end of 2019. So there from the rating agencies, what they want to see is continued strong performance. And I think the performance that we have this year, we’ll continue to inform them in their decision making process.

James — J.P. Morgan — Analyst

Okay, got it. That’s helpful. And then just a quick follow-up, if you haven’t — given any thought onto how you will account for labor costs coming through in the coming quarters? Will it be at accrual basis? Or we kind of just update the cost guidance as the contracts are reached?

Amos Kazzaz — Executive Vice President and Chief Financial Officer

So right now in terms of our CASM guidance that we provided, it really includes everything that we know of us now and our assumptions going forward on all of the cost line items. And we just don’t break all of that out, but it has our perspective for what we know now.

James — J.P. Morgan — Analyst

Got it. Appreciate the questions. Thanks.

Amos Kazzaz — Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. A following question is from Fadi Chamoun from BMO. Please go ahead.

Fadi Chamoun — BMO — Analyst

Good morning, and congrats for both Amos and John. And Amos, way to go on a high note here, so — so the load factor at almost 85% in Q1, I think that’s highest that we’ve ever seen for Q1. And Mark talked about the durability of the demand going forward, I’m wondering how you’re thinking about your lift capacity going into next year if we continue to see kind of the strength in demand. Are you looking to add some lift? Is there an opportunity kind of in the leasing market? Like how is the — how are you thinking about the lift capacity going into next year?

Amos Kazzaz — Executive Vice President and Chief Financial Officer

Hi, Fadi. Thanks very much for the comment. Yes, it is. It’s nice to go out on a high note here. So listen, overall we continue to always hunt for lift as we said before in our process when we see recovery and strong demand. We have the ability to go out and search for additional interim lift. And we’re constantly in the market looking for lift and we’ll see our ability to bring that in and be able to line up with what Mark has on network plans.

Fadi Chamoun — BMO — Analyst

Okay. But there is consideration to adding some lift to the current existing fleet right now lust given the demand. Okay, my quick question — second quick question. I mean, obviously your balance sheet position has gotten a lot better but your interest cost, you’re still I think just over CAD200 million this quarter. Is there an opportunity to start making the dent in some of the higher interest-bearing secured loans or the debenture to kind of cut into this cash outflow?

Amos Kazzaz — Executive Vice President and Chief Financial Officer

Yeah, it’s a good question, Fadi. As we look at that, we have a couple of items that are couple of loans that are floating rate and so certainly that’s some of the EDC loans that you see out there. There’s always an opportunity to pay those down, but again when we sort of look at our overall weighted average cost, it’s essentially about 4.4% on a weighted average basis. Some of the higher notes that we have out there, we continue to take a closer look at and see if there’s opportunities to pay that down. Again, trying to keep within our perspective of always deleveraging and looking for the right opportunities.

Now interestingly when the cash balances that we have right now and liquidity is really providing also a very large offset in terms of interest income. So there’s a little bit of a — when we look at the interest expense and the interest income, there’s a couple of months sort of lag delay between the ability really to cover that. So our perspective on having a strong liquidity and looking for the right opportunities to pay down debt sort of is balancing each other out a little bit at this point. So we aren’t, again just want to continue to see the perspective of the recovery, the pace of the recovery and then we’ll make more determined measures in terms of taking other early debt reduction opportunities or paying off some floating rates.

Michael Rousseau — President and Chief Executive Officer

And just to add to that. Fadi, it’s Mike. I mean, we’re very comfortable with our balance sheet. I mean, 70% of our debt is fixed rate debt and to Amos’s point at a fairly low interest rate, 30% floating, which we can — which we have time to make decisions on as to whether we pay it down or not. And as Amos said, we have tremendous offset in interest income, but with the higher interest rates that are obviously providing more value to us as well. Appreciate that. Thank you.

Operator

Thank you. Our following question is from Chris Murray from ATB Capital Markets. Please go ahead.

Chris Murray — ATB Capital Markets — Analyst

Yeah. Thanks, folks. Good morning. And Amos, let me extend my congratulations to you on a retirement well earned. I guess just starting with the booking curves and thinking about this a little bit, you made the comment in the MD&A about the spreads and premium cabin. And if I go back to maybe Investor Day, there was some thought that business travel could be maybe a couple of years out after leisure travel, certainly seeing leisure coming back pretty strong. Can you talk about what you’re seeing in the booking curve right now and maybe some of the different segments and how they’re behaving? And are we at the point now where you can kind of declare business travels back full on to what you’re expecting?

Mark Galardo — Executive Vice President, Revenue and Network Planning

Hi Chris. It’s Mark Galardo. Let me take that in a few bite sized chunks here. First point is that you’re correct, we are seeing a significant uptake in the business recovery — the business cabin recovery. And it’s primarily driven by a combination of leisure travel, but in particular redemptions on the Aeroplan side in retail. We got a nice mix going on in 2023 that we didn’t have in 2019 and that’s bearing fruit in Q1 this year. From a corporate perspective, the recovery has plateaued a little bit, but what we’re really encouraged to see is the non-contracted business traffic continuing to recover significantly, so that’s giving us some further encouragement about our prospects in the business cabin going forward.

Chris Murray — ATB Capital Markets — Analyst

Okay. That’s helpful. Thank you. And then I guess my next question is just thinking about Rouge and how you viewed that in the past. Certainly, Rouge was a part of the significant capacity reduction. How do we think about how you’re going to use that in future, especially as you’re still — it looks like pretty capacity constrained. Or is that something that maybe you’ll bring in the 321XLRs and bring that in? Just kind of any thoughts you have around with the strength in leisure, how do you deploy that and use that as a tool now with maybe some of the ULCCs also starting to get more active?

Mark Galardo — Executive Vice President, Revenue and Network Planning

Yeah, excellent question. So Rouge is a key and will remain a key part of our strategy going forward. We thought during the pandemic, making Rouge a narrow body operator focused on the North America market and getting some of the seasonality out of that business was the way forward. And we continue to see a strong opportunity for Rouge to grow in North America. On leisure markets, you saw the strength of the ECD performance in Q1, but also helping us in this sort of intense competitive dynamic that we find ourselves. And so all this to say, there is a very strong hazel and dikes for Rouge going forward. Okay. I’ll leave it there. Thanks, folks. And Amos, congratulations once again.

Amos Kazzaz — Executive Vice President and Chief Financial Officer

Thank you very much, Chris. Thank you. Our following question is from Cameron Doerksen from National Bank Financial. Please go ahead.

Cameron Doerksen — National Bank Financial — Analyst

Yeah, thanks. Good morning, and let me echo my congratulations to Amos as well and welcome John to the AC team. So I wanted to ask Amos maybe a question about free cash flow. You had a really exceptional performance in Q1 and you’ve upped your EBITDA guidance for 2023 by CAD1 billion. It feels that these are the CAD2.4 billion in cumulative free cash flow you’ve got as kind of a target, it feels too low. I know you’re not looking to update targets here, but maybe some commentary around the free cash kind of expectations for the next two years because it looks like it’s going to be much stronger than what you would have originally anticipated.

Amos Kazzaz — Executive Vice President and Chief Financial Officer

Good morning, Cameron. Thank you very much. But for the question, you’re right, I’m not really ready at this point to provide guidance on that and it gets into our 2024 target. And look, we’ve talked really about sort of the key elements here that are driving the performance and I would ultimately then flow through into free cash flow. But don’t get too far ahead of our skis on this. Certainly, it’s been the strong demand, continued strong recovery, advanced bookings, and of course, earnings at the end of the day which is driving also significant part of the free cash flow. So right now is we look at through the year, given the strong demand and from what you’ve seen from our guidance, I can tell you it will clearly push forward on cash flow and free cash flow, but not ready to revisit that target at this point and we’ll continue to do our planning and then we’ll update.

Cameron Doerksen — National Bank Financial — Analyst

Okay. That’s fair enough. Maybe second question just on employment levels, was looking at the full time equivalent numbers. I mean, your staffed kind of well ahead of what we saw in 2019, and that’s despite running a much smaller operation. I’m just wondering if this is a new norm? I mean, should we — do you have enough, I guess employees now that you can you’ll fully ramp back up to 100% or higher of 2019 capacity. Just any thoughts around kind of employment levels because it does seem as though we’re kind of at a much higher level than we would have had pre-pandemic?

Craig Landry — Executive Vice President and Chief Operations Officer

Good morning. Yeah, it’s Craig Landry here. For sure, I would say our priority as we came through the pandemic and the resulting ramp up phase was operational stability. Obviously, we were in an environment that presented a lot of unique challenges. And one of the key strategies we’ve deployed to try to address that has been through resourcing. So to an extent we have added hopefully more resources than we needed and that’s intentional to try to drive the maximum operational stability we can achieve. Now that we’re starting to see a more stable environment, certainly our attention turns towards productivity and to try to better optimize that, and so we’re starting to see improvements already as the level of capacity gets closer to 2019 levels, there’s certain efficiencies that are automatically coming through that. And the remainder now becomes a key area of focus for us throughout the remainder of the year and beyond.

Cameron Doerksen — National Bank Financial — Analyst

Okay. No, that’s great. Thanks very much.

Operator

Thank you. Our following question is from Walter Spracklin from RBC Capital Markets. Please go ahead.

Walter Spracklin — RBC Capital Markets — Analyst

Yeah, thanks very much. And yes, good luck, Amos and John. Looking forward to working with you again. That would be great. So let me turn to my question just two here. First on capacity and correct me if I’m wrong. It feels like as I travel, I see the time to destination seems to be lengthened a little bit versus if I remember it correctly for some of my flights pre-COVID. Is that you building in some buffer on time ratios and to give yourself some leeway there? And more importantly, as congestion in the airport’s ease and we get back to the new normal, does that allow you to tighten that back in and thereby increase capacity without having increased capacity at no cost effectively, if indeed you have done that. Any color on that would be great.

Mark Galardo — Executive Vice President, Revenue and Network Planning

Hi, Walter. It’s Mark Galardo. So you are correct at observation, our times are longer. Should we go back to the pre-pandemic, our OTP was always towards the bottom of the rankings and we’ve decided to increase those block percentile so that we — from at least at the first point get to somewhere in the middle of the pack in terms of OTP ranking. And we’re starting to see the result of that, you know, those block percentile changes. That being said, we don’t foresee us changing those percentiles as we certainly don’t want to be at the bottom of the OTP rankings going forward. So we’re pleased where we are with the percentile that we’ve chose so far.

Walter Spracklin — RBC Capital Markets — Analyst

Okay. That makes sense. Okay, and then on the cost side, I know you’re comparing to last year now, but even if I do go back and compare to pre-COVID, you are running meaningfully higher CASM-X, and I know there’s some inflation there, but it can’t be just inflation given the magnitude. My question there is, is this systemic? Do you think that once again can we get back down to somewhere around pre-COVID levels? I mean, that would suggest a very meaningful decline over time or is there something systemic to costs that, look it’s a new paradigm and new world we’re living in and the guidance that you’re giving out to 2014 is probably the best kind of run rate guidance to go 2024, the best run rate guidance to use going forward?

Amos Kazzaz — Executive Vice President and Chief Financial Officer

Yeah. Good morning, Walter. I think it’s the latter there at the end of the day, the cost world is different. We’re in a different dynamic than we were pre-COVID. When you just look at all the fundamental inputs into running the business. Does that mean that we take our eye off costs? Absolutely not. We talked about before on the call the impact on productivity as we higher up in advance of building up capacity. So there’s some elements that are transitory, but for the most part the underlying input cost to the business have gone up. But then also keep in mind that we’re also generating higher revenue and traffic beyond 2019 levels, which is then driving the other element of higher costs.

So fundamentally there are elements that are driven by the underlying revenue side of the business. And on the cost side, we have inputs that we know from food costs, ground handling items we’ve spoken about before that in this environment we continue to look for ways to offset them and we will always be focused on cost discipline within the organization and targets for everyone to try to always do better and improve productivity and that will happen as we continue to ramp back up and get back to 2019 capacity levels.

Walter Spracklin — RBC Capital Markets — Analyst

Okay. Just a follow-up on that, Amos. As the — now taking away the X and including fuel and as fuel cost came down, is there an automatic factor that brings your pricing down? I know you have some surcharges in place, but is there either public pressure or anything? Or can you — as my view, you can — the price out there is what the market determines and can you hold on to that price even if you see fuel costs as we’ve seen come down?

Amos Kazzaz — Executive Vice President and Chief Financial Officer

Its a good question, Walter. Look, that critical input cost is — continues to be volatile and there isn’t sort of pressure right now. We have strong demand environment. There is capacity that is limited from OEM’s ability to put new aircraft out of the marketplace. So fundamentally in this environment, there is that pressure and fundamentally we need to recover our costs. And as that volatility remains in fuel, we don’t really see a long-term trend that sort of says fuel is down at CAD50 a barrel and that changes that one of the critical input costs.

Michael Rousseau — President and Chief Executive Officer

I think Walter just to expand on that, and it’s always difficult discussion talking about pricing anywhere. We price the market and we have, as you know, tons of competition both domestically and internationally and so we are price competitive. And certainly as Amos said, input costs like fuel remain a component of our overall decision process as it does to other airlines, I assume. But we are competitive with the marketplace.

Walter Spracklin — RBC Capital Markets — Analyst

Yeah, that’s a very fair point. Appreciate the time, and good luck Amos again.

Amos Kazzaz — Executive Vice President and Chief Financial Officer

Thank you, Walter.

Operator

Thank you. Our following question is from Konark Gupta from Scotiabank. Please go ahead.

Konark Gupta — Scotia Capital Inc., Canada — Analyst

Thanks, operator. Good morning, everyone, and extend my congratulations to Amos and John as well. So my first question is on the guidance you guys provided last week up by CAD1 billion for 2023 EBITDA. I know you said demand and fuel and I’m pretty sure you have a pretty good handle on demand from the booking curve you are seeing. But can you provide some context on where the spot jet fuel prices are today relative to your full-year assumption of [Indecipherable] per liter? And have you factored in any contingency plan should fuel prices rebound again?

Amos Kazzaz — Executive Vice President and Chief Financial Officer

Good morning, Konark. So right now in our guidance we’ve called for CAD1.09 for the year. Right now the spot market is probably down closer to maybe CAD1, CAD1.1, but we continue to see that volatility is there and given New York Harbor and the supply and refinery issues that we have out there, it’s not something that we’re sort of taking to a point that we included a lower fuel for just lower spot as our longer term guidance for 2023. So CAD1.09 is pretty much where we see it right now. As you noted, it’s trading a little bit lower, buy that’s just a transitory point in time. But fundamentally, again as we’ve talked about before, the best mechanism to adjust for the volatility and the higher fuel price is through pricing. And in a strong demand environment that has been helpful in terms of being able to recover the cost of fuel, as you saw like quarter-over-quarter fuel cost is up 30%. So you look at the demand — the pricing environment and the demand environment, so being able to recover that was sort of critical to our earnings.

Konark Gupta — Scotia Capital Inc., Canada — Analyst

That’s great color, Amos. Thank you. And then my second question is on the competitive landscape, I think we are seeing some new entrants in the market and even the not so new entrants are planning significant capacity expansion from their perspective. So — and on the other hand you have your primary competitor which has scaled back from Eastern Canada to some degree in transatlantic as well while taking out a weaker competitor. I know the history is not supportive of the ultra-low fare models in Canada, but for now can you help us provide any data points that might suggest you’re not losing market share to the new player?

Michael Rousseau — President and Chief Executive Officer

Konark, I’ll start and maybe Mark can fill in. Again, like pricing is difficult for us to talk about competition. We’re competitive, we’re watching very closely, obviously, the expansion of certain carriers within Canada. And there’s no doubt Canada is seeing an influx of narrow body capacity today and certainly planned over the next several years. We’re very cognizant of that. The fact that we’re so well diversified around the world and with different businesses like ACV, Aeroplan and Cargo gives us comfort that, that we’ll continue to do very well. Certainly, there’ll be some pressure domestically and we’re aware of that and we plan for that as we go forward. But the fact that we are so well diversified is, again gives us comfort that we can compete in any environment. Mark, do you want add anything?

Mark Galardo — Executive Vice President, Revenue and Network Planning

Sure. Hi, Konark. It’s Mark Galardo, just to piggyback on what Mike just said. The strength of our network and diversification and the hubs that we’ve built in Canada makes us a little bit less exposed to this type of competitive phenomenon as other players would be. So we’re feeling pretty good about our position in the domestic market and so far we’re pleased with the results that we’re seeing on domestic.

Konark Gupta — Scotia Capital Inc., Canada — Analyst

Hat’s great color. And if can squeeze just one quick one. I understand on the balance sheet, Amos, you mentioned, the leverage issue target is 1.5 still for 2024. I know if you — if I take your current net debt and take your 2023 EBITDA guidance somewhere, you’d probably be close to 1.6, 1.7 by the end of this year before even like you get more free cash flow. So my question really is like if the stock remains pretty low here compared to the U.S. peers, is share buyback even like a remote possibility this year or would you say like still like a 2024 event if conditions persist?

Amos Kazzaz — Executive Vice President and Chief Financial Officer

Konark, thanks for the question, but I’ll put an end to that. No share buybacks at this point in time. Again, we’re just focused on deleveraging and getting that down.

Konark Gupta — Scotia Capital Inc., Canada — Analyst

That’s fair. Thanks, Amos. Thanks and congrats again. Thank you.

Amos Kazzaz — Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Our following question is from Savi Syth from Raymond James. Please go ahead.

Savanthi Syth — Raymond James — Analyst

Hey, good morning. And Amos congrats on the well-deserved retirement and leaving on a high note here. If I might, and maybe to Mark, the operations have kind of significantly improved and you’ve done a lot to invest in there. And if there is maybe one area that may be falling short is probably Jazz continues to perform poorly regardless of the weather. And could you talk about what if there’s any line of sight into kind of that operation improving and especially as you head into the peak summer season?

Craig Landry — Executive Vice President and Chief Operations Officer

Yeah, it’s Craig Landry here, I’ll speak to that. So certainly the first quarter was challenging. There is significant weather events in the first quarter that impacted us not only in Canada, but across North America, everything from ice storms to extreme fog, it was certainly a very challenging quarter operationally as the first quarter can often be. Coming out of the first quarter, looking at our April performance and even into the month of May, there’s been significant improvement. We see operational performance at this point that’s very much in line with pre-pandemic and is a significant improvement as soon the very challenging weather subsided, we’re able to reestablish for all the reasons we discussed earlier a much more stable operation. Jazz is part of that and obviously in the first quarter to the extent that some of these weather events happen in certain parts of Canada and at different times of day, the Jazz network was impacted by that. In some cases, a bit disproportionately so. But I can tell you that Jazz’s performance like Air Canada has recovered in April and May and we feel very confident for the summer.

Savanthi Syth — Raymond James — Analyst

Is that — Craig then, I mean, if I look at the completion factors that are at least publicly available, I mean Jazz continues to be — I mean Air Canada and Rouge seem to be doing really well and Jazz seems to be worse. So is that something maybe the public data is wrong or how should we think about that?

Craig Landry — Executive Vice President and Chief Operations Officer

Well, I suppose — it perhaps depends what timeframe you’re looking at. Certainly in the first quarter when we have difficult decisions at times to cancel flights to accommodate for restrictions and aircraft traffic control or weather or other related events, there typically would be a lower passenger impact on canceling a flight that has a small number of passengers than a much larger aircraft with a larger number of passengers. So at times those flights can be targeted for cancellation in a way that’s different from our larger wide body international flights. The recovery of those cancellations is also easier in some cases. So it’s the right thing to do for our customers. So I think you may have seen that as I mentioned in the first quarter during the disruptive period. But more recently, we’re seeing flight completion levels at Jazz very much in line with Air Canada.

Savanthi Syth — Raymond James — Analyst

Understood and appreciate that. And maybe if I can, Amos, to turn to just on the cost line into talking about it. I appreciate the kind of the newer cost that the industry is working with and also maybe cost related to good guys, which is higher revenue. But as you kind of look into 2024, could you talk about like some of your major items and line items and just the trends as you kind of get through this year and into next year if there are kind of pretty big increases continuing or if we could see some improvement in any of the kind of major line items?

Amos Kazzaz — Executive Vice President and Chief Financial Officer

I think we see — good morning, Savi. I think for the most part we continue to sort of see the pressures that we have around some of the line items, but they’re I think now sort of holding off. We’ve called out before, food catering costs, ground handling costs, maintenance we have good handle on from long-term contracts, IT costs. I think those are all beginning to — from what we’ve seen now stabilizes we’re getting into next rounds of contracts — contract renewals as we’ve been going through the year there in carrying out some of those contract revisions.

So we think pressure — there will still be some pressure and we will continue to do what we can to offset it from an organization perspective and continue to focus on driving efficiencies and productivity. And for the IT costs that we see that are higher, we’re making IT investments and those investments will produce improvements in terms of both cost and productivity and efficiency, which net-net at the end of the day should actually drive improved performance. I’m not ready to call out what that is, but we’ll continue to look at that as we update our long-term plans and next year’s plan and guidance.

Michael Rousseau — President and Chief Executive Officer

Savi, it’s Mike. Just pile on Amos’s comment on cost. I mean, this is as we said a key priority for us. And I think what we need to provide the market maybe later this year is that the series of initiatives we have that somewhat centered around new technologies and new approaches that will help our cost productivity. And there are a number of different initiatives underway right now. But I think we’ll provide the market some more visibility on that. And certainly as we provide the market visibility on 24 CASM-X guidance, we’ll provide some background as to why we think that’s the case and some of the good things we’re doing from an investment perspective.

Savanthi Syth — Raymond James — Analyst

That’s all helpful color. Thank you.

Operator

Thank you. [Operator Instructions] Our following question is from Stephen Trent from Citi. Please go ahead. Oh, Mr. Trent has just disconnected from the queue. So we have no further questions registered at this time. I would now like to turn the meeting back over to Ms. Durand.

Valerie Durand — Head of Investor Relations and Corporate Sustainability

[Foreign Speech] Thank you, and thank you once again for joining us this morning. Once more, we invite you to contact us at Investor Relations if you have any further questions. Thank you very much, and have a nice day. [Foreign Speech]

Operator

[Operator Closing Remarks]