Air Canada (TSE: AC) Q4 2022 earnings call dated Feb. 17, 2023
Corporate Participants:
Valerie Durand — Head of Investor Relations and Corporate Sustainability
Michael Rousseau — President and Chief Executive Officer
Craig Landry — Executive Vice President and Chief Operations Officer
Lucie Guillemette — Executive Vice President and Chief Commercial Officer
Amos Kazzaz — Executive Vice President and Chief Financial Officer
Analysts:
Savi Syth — Raymond James — Analyst
Kevin Chiang — CIBC — Analyst
Chris Murray — ATB Capital Markets — Analyst
Andrew Didora — Bank of America — Analyst
Matthew Lee — Canaccord Genuity — Analyst
Cameron Doerksen — National Bank Financial — Analyst
Fadi Chamoun — BMO — Analyst
Walter Spracklin — RBC Capital Markets — Analyst
Presentation:
Operator
Good morning ladies and gentlemen. Welcome to the Air Canada Fourth Quarter 2022 Earnings Conference Call. I would now like to turn the meeting over to Ms. Valerie Durand. Please go ahead, Ms. Durand.
Valerie Durand — Head of Investor Relations and Corporate Sustainability
Thank you, Ghizel. [Foreign Speech] Welcome to our 2022 full-year and fourth quarter year-end call. Joining us this morning are Michael Rousseau, our President and Chief Executive Officer; Amos Kazzaz, our Executive Vice President and Chief Financial Officer; and Lucie Guillemette, our Executive Vice President and Chief Commercial Officer; and Craig Landry, our Executive Vice President and Chief Operations Officer.
Also with us in the room this morning are, Arielle Meloul-Wechsler, Executive Vice President, Chief Human Resources Officer and Public Affairs; Marc Barbeau, Executive Vice President and Chief Legal Officer; and Mark Galardo, Senior Vice President, Network Planning and Revenue Management.
Following management’s overview, we will be available until 9:00 AM for questions from equity analysts. After which, Mr. Kazzaz and Pierre Houle, Vice President and Treasurer will be available to answer questions from Terminal B lenders and holders of Air Canada bonds.
Before we begin, please note that some of the statements made on today’s call may be forward-looking within the meaning of applicable securities laws. Please refer to our fourth quarter MD&A for cautionary statements relating to forward-looking information.
I will now turn it over to Mike.
Michael Rousseau — President and Chief Executive Officer
Great and thank you Valerie and [Foreign Speech] and thank you everyone for joining us today. In the fourth quarter, we reported record operating revenue of nearly CAD4.7 billion. For the full-year, we had operating revenues of above CAD16.6 billion. That was more than 2.5x that of 2021 and about 87% of our 2019 operating revenues. The progress is attributable to the deep resilience we have built into our company for long-term stability. This is largely a result of the dedication and the hard work of our employees.
I thank them for their commitment and professionalism. Not only in last quarter, but through recent years. They’ve shown incredible adaptability, scale, and teamwork in dealing with the collapse of travel early in the pandemic and then with the unprecedented resurgence of traffic that began this past spring with the travel re-ban in Canada.
I also commend the members of our management team who have remained focused on executing our strategy. Our ability to navigate through wide variety of conditions we saw in 2022 is due to our early and steady efforts initiated in the fall of 2021 to rebuild this depth. Proof of their success is that we achieved a full-year adjusted EBITDA margin of 8.8%, despite a very challenging fuel and inflationary environment. And within the guidance, we provided the analyst community on Investor Day in March of 2022.
Adjusted EBITDA was CAD389 million in the quarter. This was a significant increase from the adjusted EBITDA of CAD22 million in the fourth quarter of 2021. And for the full-year, our adjusted EBITDA was close to CAD1.5 billion, compared to negative adjusted EBITDA of about CAD1.5 billion 2021, a nearly CAD3 billion turnaround.
Our results also reflect the success of our strategy of diversifying our revenue sources. Air Canada cargo revenue in the fourth quarter of 2022 was 55% higher than that in the same period prior to the pandemic. Air Canada vacations also delivered a strong performance, and Aeroplan’s active membership is at an all-time high and continuing to increase.
The operational and commercial depth that enabled us to overcome the unprecedented increase in demand through the spring summer of 2022, was again on display at the end of the fourth quarter. Severe winter weather disrupted the operations of all North American carriers. Yet as Craig will tell you, we recovered very, very quickly.
On behalf of everyone at the airline, I want to thank our customers for loyalty. I assure all customers that we are working hard every day to earn and retain this loyalty and we look forward to welcoming even more customers aboard our aircraft 2023.
Now, before I turn it over to Craig, I would like to take a minute to acknowledge the incredible and outstanding contributions of one, Lucie Guillemette. As you know, this is Lucie’s last analyst call before her retirement. After a remarkable career with our airline. She has held a wide range of ever more responsible positions that are too long to list here. But the common theme is that with each role, she showed strong leadership, inspired her colleagues, and made us and myself all better. Congratulations, Lucie. I know I speak for everyone at Air Canada when I say thank you. And you will be greatly missed on both a professional and a personal level.
Now, over to Craig.
Craig Landry — Executive Vice President and Chief Operations Officer
Thank you, Mike. Good morning, and [Foreign Speech]. Before looking at operational performance in the quarter, let’s recap some of the context I shared on the second quarter call of 2022. As you will recall, compared to other markets, the degree in the duration of travel and health restrictions in Canada kept travel at a near standstill for almost two years. So, when travel rebounded in the second half of 2022, it did so at an accelerated pace.
To give you some color, in all of 2021, we operated approximately 162,000 flights and carried about 13.7 million customers. Whereas for the period of June 2022 until the end of the year, we operated over 217,000 flights and carried over 25 million customers. That was an increase of 83% and customers carried in just a seven-month period as compared to the full-year 2021.
During the summer period, we managed our capacity and schedule conservatively, while continuing to recall, hire, and train staff on an unprecedented scale. During this initial ramp-up phase, we also observed unexpected levels of instability from a range of third-party support functions within the travel ecosystem. Combined with the unique challenges of this period, this contributed to the operating performance seen in June and July.
Following extensive efforts in collaboration by all parties, operations recovered in August and throughout the fall. By the fourth quarter, operations had stabilized with operating metrics progressing well towards pre-pandemic levels. We also continue to make prudent adjustments to our schedule, while continuing to hire and build the skill sets of our employees with extensive additional training.
As we entered December 2022, we had 35,874 employees in place. Maintaining our objective of having more employees than pre-pandemic levels to support less flying. We further built additional operational resiliency into our plan by setting aside 15 aircraft, including wide-body aircraft that were not scheduled to fly to ensure that we would have adequate backup aircrafts available for operational support and recovery.
Of course, as often happens during this time of the year, winter weather impacted our operations. This year though, the weather events were more extreme than usual, even for Canada. It also coincided with some of the highest peak travel dates of the holiday season. For example, during the week of December 19, a continent-wide weather event impacted all of our major hubs.
In Vancouver, 4-foot icicles formed on aircraft and bridges, rendering the assets unusable. In Calgary, the extreme cold exceeded safe conditions for deicing activities. And in Toronto, facilities such as airport baggage handling systems started to freeze. And of course, with such heavy snowfall, snow removal activities heavily affected takeoff and landing times. Because we are a network carrier, weather in one location can impact downline flights where weather impact is less present or even not present, both in the displacement of crews and aircraft.
Also, as flights take progressive delays due to weather, this can cause our crews to exceed their maximum duty days. In some cases, where this cannot be remediated, it can lead to unplanned flight cancellations. Ensuring our customers have flexibility during these types of events is critical. We worked hard to keep our customers informed. We provided our customers the option to change their flights at no cost or to cancel their plans and receive a full refund.
Furthermore, we also provided goodwill compensation to customers in many circumstances, even beyond our regulated obligations. For the full-year 2022, we spent approximately $290 million in hotels, meals, and other forms of compensation for our customers. All of this said, our holiday winter operation compared quite favorably to what was observed elsewhere in the industry over the same period.
Air Canada planes took off almost every 90 seconds of every day during the holidays. We operated nearly 1,000 daily flights on average. And on Friday, December 23, which is the busiest travel day leading into the holidays, which was also hampered by extreme weather, we operated the majority of our flights and carried about 90,000 customers.
For the quarter as a whole, the results were even stronger. We carried over 10 million customers, and our baggage handling success rate was close to 98%. We also reached a flight completion rate of over 95%. I would certainly like to recognize the professionalism and the commitment of our employees during this challenging operating environment.
As we enter 2023, our operational depth and resilience continue to bolster our stability even further. Our staffing and experience levels are on plan and a wide range of initiatives are underway to elevate our customer experience, leveraging our significant recent investments, including a new and modern reservations and departure control system.
Our operating results continued to improve with strong on-time performance in February, actually trending ahead of 2019 levels. We have the flexibility necessary to make the investments we view as a priority. But I would also highlight that as an industry, we remain dependent on improvements to airport facilities and infrastructure.
We would encourage government and airport authorities to urgently work together to address the shortcomings of the existing funding model for airports, which is unique to Canada. Travelers, airlines, and other on-site users fund this model, which has been a source of revenue for the government. This model fails to redirect the funds generated by the industry back into the industry and constrains the critical investments that are needed in our airports.
To conclude, we remain confident in our ability to execute on our plan, and we’ll work with all key industry stakeholders to ensure we collectively achieve and maintain pre-pandemic levels of operational stability.
And with that, I’ll pass it over to Lucie.
Lucie Guillemette — Executive Vice President and Chief Commercial Officer
[Foreign Speech] Thank you very much, Mike, for your kind words. [Foreign Speech] Good morning, everyone. Allow me to drive grade-in by discussing our passenger revenues, which surpassed CAD4 billion in the quarter, nearly doubling those in the fourth quarter of 2021. When compared with the fourth quarter of 2019, that’s an increase of about 2% on 85% of the capacity and 87% of the traffic. Yields in the quarter versus 2019 was 18% better and gains were observed in all geographies.
Our full-year results reflect the rapid surge in demand following the easing of travel restrictions in the second half of 2022. As we consider each geography, we performed very well in domestic Canada with passenger revenues of close to CAD1.2 billion for the quarter. That was an increase of 54% from the fourth quarter of 2021 or a recovery of 95% of Q4 2019. This was achieved in a competitive environment and speaks to the strength of our connecting network and our ability to successfully manage our capacity. Domestic yield improved despite the negative impact on yield of longer domestic stage length.
Our transcon markets performed very well. Transborder market capacity revenues of CAD916 million surpassed the fourth quarter of 2019 by 1% on 7% less capacity, as well as lower volumes of corporate traffic on short-haul flights. Long-haul and U.S. sun destinations performed very well, and I’m pleased to say our joint venture with United Airlines, although in the early innings is surpassing our expectations with benefits for Air Canada, our trade partners, and our customers.
We’re thrilled with the results from the transatlantic market. In the fourth quarter, Atlantic passenger revenues made up 27% of the total passenger revenues and reached nearly 1.1 billion, that was 16% above the fourth quarter of 2019. As expected, leisure and sun markets were very successful. Fourth quarter sun and South America passenger revenues were 40% ahead of those in the fourth quarter of 2019 with capacity increasing 5% from that same period.
Consistent with strong demand for sun and leisure destinations, other revenues were CAD62 million, or 23% higher than the fourth quarter of 2019 with an important contribution from ground package revenues at Air Canada Vacations. We saw positive performance in Asia and the Pacific, particularly in Australia, New Zealand, Japan, and Korea, since certain travel restrictions were eased.
Specific passenger revenues, traffic and capacity, respectively recovered to 74%, 52%, and 51% of fourth quarter of 2019 levels. These results are meaningful because they were achieved despite continued challenges, including older flight restrictions, we are subject to in China.
Our strategy to diversify our network has allowed us to protect ourselves from the lingering impacts of the pandemic. At the cabin level, in the first quarter of 2022, passenger revenues and the premium cabins increased 13%, while those in the economy cabin reached 98% of fourth quarter 2019 levels. We saw yield gains across all cabins in all markets, reflecting both strong demand and a favorable pricing environment.
Better fare mix in premium and economy cabins and higher average fare levels contributed to the strong yield performance. Aeroplan also contributed to our yield and revenue upside and continues to exceed our expectations. Membership is at an all-time high, and the program continues to grow. Gross billings from points sold to third parties were up nearly 50% over the fourth quarter in 2019. And we also observed a 50% growth in total points redeemed over the same comparable period.
We also continue to make solid progress with our strategy of growing Aeroplan by diversifying beyond Canada. In 2022, international gross billings were 76% higher than in 2019, making up an increased share of Aeroplan’s third-party billings.
Now, as we look ahead, we plan to operate approximately 84% of first quarter 2019 capacity, and we’re planning to reach 90% of 2019 for full-year 2023. We’re very encouraged with several key indicators. Ticket sales in the fourth quarter of 2022 were 102% above those in the same period in 2019 on less capacity, and these remain strong in all services and in all cabins in 2023.
Advanced booking trends remain solid, both from a volume and fair pay perspective, particularly in our international services, giving us the confidence to continue rebuilding our international network. We’ve recently started to service to Bangkok, our first nonstop service to Southeast Asia and the only one between North America and Thailand, allowing us to balance seasonality. Japan and Korea are also showing good future demand.
[Indecipherable] is also expected to be very strong in the second and third quarters of 2023 with a solid yield environment out in the United States. New routes such as Toronto – Sacramento are designed to capture this opportunity and drive further benefits from our joint venture with United Airlines.
We also expect ACV to deliver a strong performance in the first quarter with average package prices and margins holding very well. We expect the domestic and leisure sun markets to remain competitive, but we are well equipped with strength in our commercial model to successfully manage.
Now, turning to cargo. Revenues declined CAD202 million from the fourth quarter of 2021. All converted cargo aircraft have returned to passenger service. We have three Boeing 767 freighters currently in service with more on the way this year. By the end of 2024, we plan to have a total of nine 767 freighters and two 777 freighters.
Yields and demand, particularly in the Pacific region, have normalized, and we expect this softening to continue in Asia. That said, it’s important to keep in mind that when compared to the same period in 2019, fourth quarter 2022 cargo revenues still increased 55% or CAD102 million.
Lastly, before I turn it over to Amos, I would like to say how much I have valued my engagement with the financial community. I also feel blessed to have worked 36 years for an industry I love, a brand I adore, and with dedicated caring colleagues throughout the organization, I highly respect. I’m extremely proud of the revenue optimization culture we fostered in the commercial products over the years, rooted in a desired win to excel and to be better, while always being mindful that our customers have choices and our competition is watching.
So, Mike thank you for your support, your leadership, and your guidance. I, too, will miss you and the team, but will cheer from the sidelines. I wish Mark Galardo and Mark Nasr the very best for the future. [Foreign Speech]
Amos Kazzaz — Executive Vice President and Chief Financial Officer
[Foreign Speech] Good morning, everyone. Let’s start with a quick financial overview of the quarter. As Mike previously mentioned, we reported fourth quarter operating revenues of nearly CAD4.7 billion. These were 71% higher than the fourth quarter of 2021 and about 6% higher than the fourth quarter of 2019.
Adjusted EBITDA was CAD389 million in the fourth quarter, CAD367 million better than a year ago. On a year-over-year increase in traffic of 93% and an operated capacity of 59%, total operating expenses were CAD4.7 billion in the fourth quarter that’s an increase of CAD1.5 billion or 46% from the same period in 2021. In addition to the growth in traffic and operating capacity, the increase is also driven by a 60% year-over-year increase in fuel prices.
Now, allow me to quickly discuss two line items, in particular, starting with fuel. Fuel expense of about CAD1.5 billion increased CAD794 million from the fourth quarter of 2021. The increase was largely due to the increase in fuel prices, a 37% increase in liters used due to the increase in flying and an unfavorable foreign exchange variance.
We certainly remain vigilant on monitoring the price of fuel and are taking various actions where possible to manage its impact. This includes alternate supply options and taking pricing actions as needed and of course monitoring our fuel efficiency.
We have not changed our view on hedging and are not doing so at this time. Wages, salaries, and benefits of CAD892 million increased CAD88 million or 11% from the fourth quarter of 2021. The increase was driven by an increase of 32% in employees related to the increased capacity, partially offset by a one-time net charge of CAD104 million recorded in Q4 of 2021. You can obtain more information on these changes in our 2022 annual consolidated financial statements and notes.
Turning to the full-year, in 2022, operating expenses of roughly CAD16.7 billion rose about CAD7.3 billion or 77% compared to 2021. The year-over-year increase in nearly all-line items reflects the surge in traffic and operated capacity of about 3.2 times and 2.5 times, respectively. The variance was also attributable to a 74% increase year-over-year in fuel prices, compared to 2019 operating expenses decreased CAD738 million or about 4% on capacity that represented 73% of 2019 levels.
Still a direct comparison versus 2019 total operating expenses is not necessarily meaningful as we still had pandemic-related challenges in the first half of 2022 and 2019 was impacted by the grounding of the MAX. We continue to exercise diligent cost control. In 2022, CASM decreased 28% and adjusted CASM declined 43% from 2021 versus 2019, adjusted CASM increased 19%.
You will note that this is just 1 percentage point above the upper range of the guidance provided for adjusted CASM for the year and was mainly due to the higher sales and distribution costs, inflationary pressures on all line items, also higher disruption costs and higher employee benefits expense.
As we look across the industry, inflation has run higher for airlines. We are, however, pleased with our relative performance against the U.S. network carriers, in particular and we can feel we can compete effectively from a cost perspective. For 2023, we expect adjusted CASM to be about 13% to 15% above 2019 levels.
Now, for some updates on our fleet. All 40 Boeing MAX 8s from order have been delivered. At the end of 2022, we had 32 A220s in the fleet and a 33rd was received in the second week of January. As you know, we now have full orders for 60 A220s. For the remaining 27 aircraft, we are expecting six in 2024, six in 2025, and 15 in 2026.
Our A220 and MAX deliveries, complemented with our announced 30 A321 XLR aircraft, will complete the renewal of our narrow-body fleet. The deliveries for the remaining three 787s have shifted. They are now scheduled to be delivered in 2023, one in the spring and the other over the summer and the last one in 2024.
Now for a quick word on liquidity. We began the quarter with about CAD10.2 billion of total liquidity and ended 2022 with total liquidity of more than CAD9.8 billion. The change in liquidity considers general capex and debt repayments, as well as the repurchase and cancellation of convertible senior notes, due in 2025 that we made in the quarter.
You may recall that back in September 2022, we repurchased some of our outstanding convertible senior notes for an aggregate cash price of approximately CAD249 million, including accrued interest. Following this repurchase in the fourth quarter, we repurchased an additional $362 million [Phonetic], aggregate principal of notes. That repurchase was down for an aggregate cash price of approximately $330 million [Phonetic], including accrued interest.
Now, a total of CAD274 million remains outstanding. For 2023, deleveraging the balance sheet will remain a priority, as you will have seen from our leverage ratio target for 2024. This target has been adjusted to account for the additional freighter investments that previously forecast. Net cash flow from operations in the quarter were CAD647 million, compared to net cash flows from the operations of CAD508 million in the fourth quarter of 2021. On a full-year basis, these were close to CAD2.4 million as opposed to a negative CAD1.5 billion at the end of 2021.
Now for the portion I know you are all waiting for, what about those 2024 targets? You will have seen in our fourth quarter release that along with our guidance for 2023, we have restated some of our 2024 targets for capacity, adjusted CASM, adjusted EBITDA, leverage ratio, annual return on invested capital, and cumulative cash flow. I won’t go over all of these, as I know you have carefully read the release.
The one that I will call out is the adjusted EBITDA target. You will have noted that we have moved from an adjusted EBITDA margin to an absolute number for our adjusted EBITDA target range. We feel this new target is a better indicator to assess our financial performance. At the core, this new target for adjusted EBITDA range is in-line with the adjusted EBITDA reflected in the margin target communicated at the 2022 Investor Day.
I will now turn the call back over to Mike.
Michael Rousseau — President and Chief Executive Officer
Thank you, Amos. Certainly, the strong demand environment that we experienced in the second half of last year continues throughout the future booking curve, and we expect a solid demand environment throughout all of 2023.
Our strong liquidity position, pricing power, ability to generate revenue from multiple sources and markets, diligence regarding our cost structure and our ability to execute on the overall strategic direction provides us a foundation to effectively compete and be very successful.
In 2022, Air Canada was named The Best Airline in North America for the fourth consecutive year by our customers and the readers of Global Traveler. We know we must work hard to maintain the status and stay ahead of the competition, and we’ll do this by improving processes, introducing new features, and investing in our business, especially in customer service.
We believe customer service will be a key differentiator. And for this reason, last year, we launched our ECX program, elevating the customer experience. It is a multiyear plan that mobilizes virtually every part of the company to consistently deliver service excellence. And we’re investing to support ECX. For example, we improved our onboard economy class dining and continue to invest in and upgrade our Maple Leaf Lounges.
In November, we launched complementary live TV throughout our in-flight entertainment systems. And we’re the only Canadian carrier offering this product, which has proven popular with sports and news fans. Our ongoing narrow-body fleet renewal program with 30 Airbus A321 XLRs and an additional 27 Airbus A220s will not only offer customers the latest technology and better comfort, but also allow us to cost-effectively expand our global reach by entering new markets.
An essential element of customer service is making it easy to interact with us through technology. We continue to develop new personalized mobile and web services. In airports, we are testing biometrics to speed up various processes such as boarding and lounge access, and we’re adopting new technology for baggage tracking.
Another important group of customers is our cargo shippers. Air Canada Cargo continues to expand its network and will keep increasing options for customers, for example, through our new cargo agreement with Emirates. We also know that competing for customers is one thing, but the true value lies in keeping their loyalty.
So along with excellent service, we are also focused on Aeroplan. We are on track to exceed our target of 7 million active members by the end of 2023. Aeroplan is a compelling new frontier to help our core business acquire, engage and help customers travel more and travel better.
We plan to continue upgrading the program such as through exciting new partners and appealing programs like hotel savers. It is difficult not to overstate the importance of Aeroplan. It is an attribute, we believe, provides a unique value proposition to our customers in a more fragmented airline market.
Its success was recognized by many awards in 2022, and it is Canada’s leading travel loyalty program. Another important driver of loyalty is brand and reputation, especially with respect to ESG. All of our stakeholders, customers, investors, employees, the communities we serve and others, demand that we act responsibly.
And for this reason, because it is the right thing to do, Air Canada is committing significant resources to ESG. With respect to the environment and climate change, each one of the government, industry and others in the climate action chain must play its part. We critically rely on each other to reach our collective goals.
In addition to our own internal programs to reduce fuel consumption, waste, and emissions we are investing with partners in new technologies, including SaaS, electric aircraft, carbon capture, and a new offset partner. And we know investors value comprehensive disclosures, so we’ve reduced our first TCFD report available on our website.
And finally, part of our ESG is developing our people. Our success was highlighted in 2022 as among other recognitions we were named by Forbes as one of the world’s best employers and one of Canada’s best employers for diversity. And for the ninth consecutive year, we ranked among Montreal’s top employers. And we won the best corporate social responsibility strategy at the Canadian HR Awards in 2022.
These are important recognitions. Engaged and motivated employees are essential, if we’re going to succeed in our ambitions to remain as North America’s leading airline and a Canadian global champion. That is our commitment and we have the people, the resources, and the plan to achieve these goals and much more.
Thank you, and over to you, Valerie.
Valerie Durand — Head of Investor Relations and Corporate Sustainability
Thank you, Mike, and thank you all for joining us today. [Foreign Speech] We are now ready for questions. As usual, please limit yourself to two questions. Should you have additional questions, we invite to contact us at Investor Relations. Over to you, Ghizel.
Questions and Answers:
Operator
Thank you, Ms. Durand. [Operator Instructions] We will take the first question from Savi Syth, Raymond James. Please go ahead.
Savi Syth — Raymond James — Analyst
Hey good morning everyone and congrats and best wishes Lucie on the [Indecipherable] retirement. And maybe, Lucie, if I can start with you with the first question. Just curious on the cargo front, what your expectations are, yields have been coming down quite a bit and yet your performance is fairly good in the fourth quarter as we, kind of look to 2023 and 2024 against the falling yield environment, but growing capacity from Air Canada. Just what are your, kind of targets or expectations there?
Lucie Guillemette — Executive Vice President and Chief Commercial Officer
So, first of all, thank you for the kind words, I appreciate it. With respect to cargo, definitely on the yield side of the business, particularly in the Asian markets, we are seeing — we sort of say the yield is normalizing. What we were experiencing in 2021, particularly in those markets, was a little bit inflated. So that is normalizing. And as we bring in the new freighters, few opportunities ahead for us.
We have the opportunity to capture some business and some other transatlantic markets that will be very good for us on the cargo front. And we also have the ability to focus on connectivity. Even in the cargo business, there’s a huge opportunity for us to be able to connect some of this cargo traffic.
So, we’re in a little bit in a transition phase here because as I think I noted and Amos noted as well that the new freighters are en route. We have a few that are — will be in-service momentarily. And then by the time we reach the end of 2024, we’ll have our full complement. So, now we’re a little bit in a transition, but we’re still very confident that in other markets, Asia might take some time. But in other markets, we’ll be able to produce some solid results.
Savi Syth — Raymond James — Analyst
That’s helpful. Thank you. And then if I might ask, I don’t know if this is for Craig or the team, but if I look at your cancellations, it seems like Air Canada mainline and Rouge are performing really well. But Jazz has had poor performance throughout — and good and bad days. And I realize the regional pilot dynamics, I know we’re near as bad as it is in the U.S. as it is in Canada, but I was wondering if this is a result of pilot supply issues at Jazz and can generally, kind of what your expectations are as we move through 2023?
Craig Landry — Executive Vice President and Chief Operations Officer
Hi. It’s Craig. Yes, for sure, it’s been a challenging operating environment for a number of reasons. When we have constraints at airports, there’s a variety of factors that come into play in terms of how we determine which flights need to be canceled, that has to do with volume of connecting passengers.
Our goal is always to maximize our customers to be able to get to their final destination on time. So at times, some of the smaller aircraft can free up the gate for larger aircraft to be able to operate, and it makes better sense for the overall operation for our customers. And that’s always what’s sort of our driving force.
With respect to the pilot supply side, as I mentioned earlier, we don’t have any issues on the Air Canada side. On the regional side, there is some movement between the regional airlines. There’s a flow-through arrangement in place where regional pilots move into the mainline environment. And to a certain extent, that is creating a temporary amount of dislocation in terms of some pilot resources. We view it as temporary and not material.
Savi Syth — Raymond James — Analyst
Is that just as Air Canada builds that capacity? And then as you kind of normalize your hiring, that should normalize on the Jazz side, is that what you mean there?
Craig Landry — Executive Vice President and Chief Operations Officer
That’s quite right, yes.
Savi Syth — Raymond James — Analyst
Appreciate it. Thank you.
Operator
Thank you. The next question is from Kevin Chiang, CIBC. Please go ahead.
Kevin Chiang — CIBC — Analyst
Thanks for taking my question and I echo the congratulations Lucie, all the best in your pending retirement here and congratulations to [Indecipherable] moving forward. Maybe just a question on the 2024 adjusted CASM guide. It looks like some of these costs are maybe structural. Maybe some of these are related to the faster ramp-up of capacity. And I’m trying to get a sense of maybe where adjusted CASM eventually ends up as you, kind of get through this accelerated ramp-up phase?
Because if I just look at it simplistically, it looks like your ASMs are going to be up about 10 points year-over-year. But your adjust CASM is down 5 roughly on either end of the results. So, just wondering how we should be thinking about that trend as you look even past 2024 as some of those costs start to come out as you normalize your growth?
Amos Kazzaz — Executive Vice President and Chief Financial Officer
Yes, thanks. Good morning, Kevin. So yes, our adjusted CASM, if you sort of go back in time of when we put that target out, it was — we were building our plans for Investor Day, it was back in March. And certainly, back in that time frame, we put the plan together in January-February, rolled it out in March and sort of targets. And the world certainly has moved in terms of inflation as we, sort of saw after the Ukraine war. And so that’s put pressure really on all sort of our cost items.
And then, of course, as we began building up and then as we’re putting capacity out, we’re adding headcount before all the capacity comes in for all the reasons we’ve talked about relative to operational performance. So, expect sort of from a productivity efficiency side, once we get sort of past 2024, we’ll be more into an operational [Technical Issues] back to sort of matching capacity with employees and driving productivity. So we have this, sort of interim piece here as we get through that.
So, on the one hand, we have inflationary pressures on the lines. We have some productivity items that we think will come back, but then fundamentally, as you know us, we are relentlessly focused on cost and cost transformation. So, we don’t take this — the additional guidance as perhaps a notation that we’ve held our foot off the accelerator and going to push forward on cost reduction programs.
It is still part of the DNA here and we can certainly well control that in terms of our spend. We have a very strong procurement department that really does battle in terms of finding — mitigating options, driving essentially battle with suppliers, but also ensuring that we have supply chain for what we need to drive the operations. Aside from that, we’ve made, as you’ve seen, technology investments, and we’ll continue to reap some of the benefits of that.
We’re investing a lot in terms of AI, in terms of optimizing maintenance planning, continuing optimization of different elements of the revenue management world, and continued sort of process improvements, Mike talked on some of them on the airport side, as we move into more self-service.
So, there are many factors here, many items that we’re moving forward, but we have this ability as we’re going in through 2024 in terms of guidance that was anywhere was obviously higher than what we had thought back in March. So, a long answer to your question, Kevin, but overall, we still are focused on costs and still focused on improving productivity and efficiency, and we’ll continue to take every opportunity to do so.
Kevin Chiang — CIBC — Analyst
Yes, and it does not want to be some of these costs, as you mentioned, kind of roll off as your growth normalizes here [Speech Overlap] maybe upfront cost rollover as well?
Amos Kazzaz — Executive Vice President and Chief Financial Officer
Yes. And certainly, that will, as that sort of normalizes. And then inflation, yes, there’s been some slight reductions here as well. So that should — that environment should improve and we’ll certainly look for opportunities there as that it comes down in the inflationary environment.
Kevin Chiang — CIBC — Analyst
That’s great. Maybe just a quick follow-up here on — you talked about ACV, the outlook is pretty good here. Just wondering what the impact of Sunwing has had on the demand environment for more leisure travelers, especially in your ACV brand? And obviously, they had some difficulties in December, it seems like there’s an opportunity to gain market share.
Lucie Guillemette — Executive Vice President and Chief Commercial Officer
It’s a very good question. And looking at the performance that we had with Air Canada Vacations, I would say to you that it virtually had no impact. Our load factors were solid. We saw margin growth across all the routes that we operate in. So, I would say to you that it did not impact us. We did very, very well.
Michael Rousseau — President and Chief Executive Officer
Right. Kevin, it’s Mike. Just to further, I mean, we — ACV is an important part of our program here. And we’re investing in ACV to allow it to compete much better and if possible, take market share away from just not Sunwing, but all the other competitors that we compete with.
Kevin Chiang — CIBC — Analyst
Thank you very much and have a great long weekend everybody.
Operator
Thank you. The next question, is Chris Murray, ATB Capital Markets. Please go ahead.
Chris Murray — ATB Capital Markets — Analyst
Yes. Thanks, folks. So, going back maybe a little bit to the cost side of things. And maybe I’m just trying to understand a little bit about the guidance. And maybe to follow on Kevin’s question a bit. Thinking about costs as we go forward, you’ve talked about a little bit about labor, but are there any other costs? I noticed like the other bucket was higher. I’m just trying to get a sense for — is there anything structural that we should be thinking about? Or are some of these costs may be related to things like the cargo operation or Aeroplan or other things that maybe — might be unusual or maybe worked kind of like-for-like from 2019?
Amos Kazzaz — Executive Vice President and Chief Financial Officer
I think when you sort of look at — is there anything structural that’s changed? I would say the dynamic that has changed in terms of our various line items are essentially, sort of ground handling costs, anything that has a labor component to it. And then on the catering side, we have certainly pressure sort of on the food side. So, you look at those line items and you get into technology, so all of those areas are — we’re seeing significant inflationary pressures, again, because of labor shortages a little bit around the world.
So, ground handling contracts through — across the world are pressured up, catering costs from essentially the commodity cost of food are going up and the labor component. And then again, technologies. So, I would say those are sort of three items that would expect that pressure to come off as we’re seeing both commodity prices coming down in certain areas, labor, dislocation now that’s sort of coming back in, labor is available again.
And so, it’s something that I think it’s temporary. We’re getting through it through 2022 and seeing into 2023, but I think as we get out into 2024 and 2025, we should see that abate to a certain extent.
Chris Murray — ATB Capital Markets — Analyst
Okay. That’s helpful. And then my other question is around cargo and maybe just this is, kind of a longer-term question. I’m trying to get a nice sense as the cargo operation matures. How do we think about that relative to either your longer-term EBITDA margin or margins or EBITDA [Indecipherable]. Should we be thinking that this — and I appreciate that you did it to diversify your revenue streams was part of the strategic rationale. But is this, sort of a, we’ll take the incremental dollar contribution — or is this — do you see cargo longer-term actually being overly margins on a percentage basis?
Amos Kazzaz — Executive Vice President and Chief Financial Officer
Look, Chris, we have invested in the cargo business. We view it as a growing opportunity for us and we wouldn’t have made the investments in 777 freighters and 767, so we converted and purchased to be — it will be a contributor. And again, as you said, part of the revenue diversification, and it also helps offset our seasonality that we have started in through the first quarter. So, fundamentally, cargo will be a contributor to EBITDA as we go forward.
Chris Murray — ATB Capital Markets — Analyst
And will it be a contributor similar to passenger or would it be kind of maybe additive, but not — but dilutive longer-term?
Amos Kazzaz — Executive Vice President and Chief Financial Officer
It’s certainly not — it’s certainly additive, but not dilutive. Our primary business is on the passenger side and — but cargo will grow, and it will contribute.
Chris Murray — ATB Capital Markets — Analyst
Okay. Thanks folks.
Operator
Thank you. The next question, Andrew Didora, Bank of America. Please go ahead.
Andrew Didora — Bank of America — Analyst
Hi, good morning everyone. Amos, just a quick question on your 2024 cost outlook, do you include any new labor deals in the 2024 CASM guidance?
Amos Kazzaz — Executive Vice President and Chief Financial Officer
Good morning, Andrew. Thanks for the question. I know you’re always good at trying to get to the details here. But I’m not going to go into the detail what’s included into the — in the adjusted CASM targets for 2024.
Andrew Didora — Bank of America — Analyst
Okay. I guess I asked and I know that the pilot deal is up in September, just curious when will you start to fold that in, but I’ll wait for future calls on that one. Second question, just around the capex, I think in the MD&A, the CAD2 billion per year coming up in the MD&A is that a good number to use in our model or is there something else that we need to think about?
And then of the CAD1 billion of lower free cash flow, cumulative free cash flow that you talked about in your release, how much of that comes from the freighter investments? Because I think I count about maybe five new freighters from your — versus your prior release. So, just trying to bridge that gap on the CAD1 billion free cash flow guide down. Thanks.
Amos Kazzaz — Executive Vice President and Chief Financial Officer
Yes. So, I’ll take the second part first. It is the majority of the freighter investments, so 777 freighters and new 767 freighters. So, those are the items that are driving the cash flow change in guidance from 3.5 down to 2 that we’ve sort of talked about there in the release. So, that’s the first part. And then — I’m sorry that was the last part of your question, and I forgot the first part of the question was?
Andrew Didora — Bank of America — Analyst
Just — is CAD2 billion a year in capital this year and next reasonable, I think that’s what was disclosed in the MD&A this morning.
Amos Kazzaz — Executive Vice President and Chief Financial Officer
Yes. So that is what we have right now, and I think that’s the number to be using we have in the MD&A.
Michael Rousseau — President and Chief Executive Officer
I just want to add on — this is Mike. I just want to add on to — it was response and kind of combining with Chris’ question. I mean cash flow is down because of the significant investments in cargo. And there’s not a lot of economic benefit or income benefit in the 2024 year because they’re just coming on stream. But that benefit will be in 2025 and 2026 and so unfortunately, we have to show a free cash flow number for that year without the corresponding economic improvement to EBITDA. But again, as in the early response to Chris, we expect additive EBITDA in post-2024.
Andrew Didora — Bank of America — Analyst
Got it. Thank you.
Operator
Thank you. The next question is from Matthew Lee. Please go ahead.
Matthew Lee — Canaccord Genuity — Analyst
Hi. It’s Matt Lee from Canaccord. Congrats Lucie and thanks for taking my questions. On the premium cabin, it sounds like 2023 still won’t have business travels return 2019 levels, but in your booking data, are you still seeing enough demand from consumers to fill that gap or is there a potential slowdown just given what we’re seeing in the macro level [Indecipherable]?
Lucie Guillemette — Executive Vice President and Chief Commercial Officer
First, thank you for your good wishes. With respect to corporate demand, on the North America side, things have stabilized a little bit. So we operate around minus 30% for North America, compared to what we would have had in 2019, but what we are seeing is a steady growth on corporate for international markets.
So that has started to return a little bit later than what we were observing for North America. But now with respect to the J cabins, as we developed a lot of these VFR markets and we look at opportunities for leisure premium travelers, as we started to work on the Aeroplan redemption models, we were able to find really good sources of revenue for our premium cabin.
So, if you look at the load factor, for example, in North America, it would be 10 points better than it was in 2019. So, there’s many products that we brought online, and we had opportunity to generate new demand for the international cabins. And if you look at the international market in the premium cabins, not only do we see a solid demand there, but we also see a very, very interesting yields improvement as well.
So, we would like the corporate demand to come back to greater levels, but keeping in mind that the pricing environment is also better than it was in 2019. From a revenue standpoint, it’s pretty solid. And it gives us confidence as well that if we ever faced slow down for whatever reason, there’s other market segments for us to be able to recapture, but J cabin, our premium cabin and also Premium Lounge [Phonetic] did very, very well, very well.
Operator
Thank you. The next participant is Cameron Doerksen, National Bank Financial. Please go ahead.
Cameron Doerksen — National Bank Financial — Analyst
Thanks, good morning. Also my congratulations to Lucie. And maybe a question for you. Just wondering if you can talk a little bit about what you’re seeing on the domestic markets. So, obviously, there’s a lot of moving pieces here with WestJet kind of retrenching out of Eastern Canada into Western Canada, but you also got the, I guess, announced plans per quarter starting up operations out of Pearson. So, just wondering what you’re seeing from a pricing point of view in Eastern Canada and where you see the competitive environment?
Lucie Guillemette — Executive Vice President and Chief Commercial Officer
Well, listen, there’s no doubt that from a domestic standpoint, pure domestic traffic, we are in a very competitive environment, but looking at advanced bookings, so basically, the posture looking forward for domestic is still good. And despite the fact that we have this competitive environment, we are still able to produce very nice yield improvement.
In fact, if you adjust for stage length on domestic in the fourth quarter and even looking at ABRs, our yield is in the 7% or 8% improvement. And the J cabins so what we’re able to produce premium, of course, helps us. This new redemption demand that we’ve been able to unlock with Aeroplan, but the fact that we also have the ability to feed our domestic network from our international services also helps us.
So, we have what we need commercially to be able to hold our position domestic. And some of the key markets, of course, like the Transcon, we obviously watch those very, very closely, and we continue to see very good advance bookings, but we’re very mindful of the competitive landscape, and we will continue to be very mindful of it.
Cameron Doerksen — National Bank Financial — Analyst
Okay. That’s great. And maybe just a follow-up on, I guess, on China. Obviously, China now reopened. I guess there are still very severe restrictions on a number of flights between Canada and China just through the bilateral there. But I wonder if you’ve got any indication as to when some of that capacity might be able to be added back for Air Canada?
Lucie Guillemette — Executive Vice President and Chief Commercial Officer
At this point in time, we don’t — we hope to — here in a relatively short period, but at this point in time, we continue to operate the schedule we have, given the oversight rules, but at this point, we don’t know what the next step will be.
Cameron Doerksen — National Bank Financial — Analyst
Okay. Fair enough. Thanks very much.
Operator
Thank you. Next question is from Matthew Lee, Canaccord Genuity. Please go ahead.
Lucie Guillemette — Executive Vice President and Chief Commercial Officer
I think we already had Matthew’s question, if we could move to the next question.
Operator
Fadi Chamoun, BMO. Please go ahead.
Fadi Chamoun — BMO — Analyst
Thank you. Good morning and congrats Lucie on the retirement. Amos, can you give us guidance about CASM X for Q1? What do you expect to have in Q1?
Amos Kazzaz — Executive Vice President and Chief Financial Officer
Good morning, Fadi. No, at this point, we’re not going to get into quarterly CASM guidance or CASM X guidance. Right now, we’re just providing guidance for the year, as we’ve outlined in the release.
Fadi Chamoun — BMO — Analyst
Okay. The second question is on FTEs. You kind of finished the 2022 at 33.2, which is about the same level you were at in 2019, obviously, with capacity still far less behind, is this a number that you think, kind of stays stable-ish going into the next couple of years you grow into it? Is there drivers that are pushing the FTE numbers higher, despite the productivity story on the technology side?
Craig Landry — Executive Vice President and Chief Operations Officer
It’s Craig. Just picking up on a comment Amos made earlier. To the extent that we’re operating less than 100% of our pre-pandemic capacity, there’s a certain inherent lack of productivity in that because you need employees to be able to staff a full day of operations, let’s say, at an airport. But you’re not operating, you have a bit of peaks and valleys during the course of the day. So, as capacity increases, we’ll grow into that productivity, and we expect that to happen over the next 12 to 18 months. So, that’s our primary expectation at this point.
Fadi Chamoun — BMO — Analyst
Okay. So, we should expect that to be kind of more or less stable as you grow into it. Okay. Really, the main question I have is the guidance for 2024, the middle of the range is about 3.7. Obviously, that’s in-line with where you were in 2019, but at the same time, you have a stronger loyalty program, you have a bigger cargo business by 2024 versus 2019. It just feels like the environment isn’t absorbing these inflationary cost issues that were highlighted. Is this a competitive issue? Is this market more competitive than maybe you’d expect it before or are there other things at play here?
Michael Rousseau — President and Chief Executive Officer
Yes. Fadi, it’s is Mike. Good morning. Interesting question. Certainly, I would say the domestic market is probably more competitive than what we had envisioned in March 2022. And as Lucie said, we’ll get through that with all the strengths we have and some of the responses to some of the new competitors.
The international markets continue — are before performing the way we thought they would perform, frankly. And so it’s impossible for us to reconcile your expectations versus our guidance on 2024 EBITDA, obviously. But obviously, our goal is to overachieve we are consistent with where we were in March 2022 as to EBITDA levels.
And again, you’re absolutely right, Aeroplan is stronger than we expected. Cargo will continue to add more to our profitability, but I would say, on the other hand, the domestic market is probably a little more competitive than what we had initially envisioned.
Fadi Chamoun — BMO — Analyst
Okay, great. Thank you.
Operator
Thank you. The next question is from Walter Spracklin, RBC Capital Markets. Please go ahead.
Walter Spracklin — RBC Capital Markets — Analyst
Yes. Thanks very much and good luck, Lucie, I’m sure you’re going to miss these calls dearly. Mike, you mentioned in your prepared remarks that you expect the demand environment in 2023 to remain strong. In the press release, you mentioned that you’re assuming, I think, it’s a moderate GDP growth in 2023. So, am I correct in assuming that the underlying assumption for your 2023 is that there is no recession or that you expect travel demand to remain robust even during a recession in 2023?
Michael Rousseau — President and Chief Executive Officer
Yes. Another really interesting point, Walter. So, obviously, we’ve got the benefit of a forward curve. And we said to the market, demand is very strong through that forward curve, in fact, better than 2019 levels basically. And that’s with all the concern about either a soft landing or some level of recession. And again, historically, and we’ve been in this business a long time, Walter, that airline travel is typically a multiplier of GDP.
I don’t know if that exists at this point in time in this kind of transition period. And time will tell whether travel behaviors have changed permanently or on a transitional basis. But certainly, we’re taking full advantage of it while it’s here. And so, we’re continuing to see strong demand through the booking curve.
Despite the fact, as Lucie said, corporate travel is not coming back to 100% at this point in time, but certainly leisure and VFR is making more than that up. And we’ve pivoted as a company to be able to take advantage of that demand. And so, from an economic perspective, I think that historical relationship is — shouldn’t — we should — again, time will determine whether that it comes back to that historical relationship, but today, we don’t see that.
Walter Spracklin — RBC Capital Markets — Analyst
Okay. That’s great. On the cargo side, given that it’s becoming a bigger part of your business now, can you talk to us a bit about the strategy, particularly around how you get new contracts here or new business? Is it under contract? Are you going ACMI on any of this stuff? And what is the risk to your belly capacity, presumably many of your customers, when we start a new freight or you go with your — some of your existing customers, how much is that cannibalizing, if at all, what’s going into the belly of your aircraft?
Lucie Guillemette — Executive Vice President and Chief Commercial Officer
Yes. In fact, it’s a little bit the opposite because most of the freighters are operating in markets where we don’t have enough belly capacity or they’re operating markets where we don’t actually operate passengers. So, we actually have an opportunity, as I mentioned a bit earlier, for feed, but it does not cannibalize at all.
Now, with respect to where do we go get these customers? It’s a little bit like on the passenger side, meaning when we enter some of these new markets, there are, at times, customers who specialize in the type of cargo that is destined to those destinations.
So, of course, our sales team has been very busy in the last 18 months securing that business, but we do work with most of the large freight for orders and cargo operators. But there is virtually no risk of cannibalization because again, some of the large cargo markets where we operate passengers the incremental — the market can take that demand.
Walter Spracklin — RBC Capital Markets — Analyst
Fantastic. Appreciate the time.
Operator
Thank you. This is all the time we have for the question-and-answer session. I would now like to turn the meeting back over to you, Mr. Durand.
Valerie Durand — Head of Investor Relations and Corporate Sustainability
Thank you, Ghizel. Thank you very much for joining us this morning. We were on a tight schedule. So, if we did not get to your question, please contact us at Investor Relations, and we will be in contact with you. [Foreign Speech] Have a nice day.
Operator
[Operator Closing Remarks]