AC:CC - Air Canada (ACDVF) Q2 2023 Earnings Call Transcript
2023-08-11 14:20:02 ET
Air Canada (ACDVF)
Q2 2023 Earnings Conference Call
August 11, 2023, 08:00 AM ET
Company Participants
Valerie Durand - Head of IR and Corporate Sustainability
Michael Rousseau - President and CEO
Mark Galardo - EVP of Revenue and Network Planning
John Di Bert - EVP and CFO
Mark Nasr - EVP, Marketing and Digital and President of Aeroplan
Conference Call Participants
Helane Becker - TD Cowen
Kevin Chiang - CIBC
Fadi Chamoun - BMO Capital Markets
Cameron Doerksen - National Bank Financial
Walter Spracklin - RBC Capital Markets
Stephen Trent - Citi
Chris Murray - ATB Capital Markets
Savanthi Syth - Raymond James
Konark Gupta - Scotiabank
Andrew Didora - Bank of America
Presentation
Operator
Good morning, and welcome to Air Canada's Second Quarter 2023 Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to turn the call over to Valerie Durand, Head of Investor Relations. Thank you. Please go ahead.
Valerie Durand
Thank you, Julianne. Hello. [Foreign Language] Welcome, and thank you for attending our second quarter earnings call of 2023. Joining us this morning are Michael Rousseau, our President and CEO; Mark Galardo, our Executive Vice President of Revenue and Network Planning; and John Di Bert, our new Executive Vice President and CFO. Welcome on board, John.
Also in the room today are Arielle Meloul-Wechsler, Executive Vice President and Chief HR Officer and Public Affairs; Marc Barbeau, Executive Vice President and Chief Legal Officer; Mark Nasr, Executive Vice President of Marketing and Digital and President at Aeroplan; and Kevin O'Connor, Senior Vice President, Global Airports and Operations Control.
To begin, Mike will give us a brief overview of the quarter; Mark will talk about our revenue, network and demand trends; and John will touch on financial performance and guidance before turning it back to Mike. Following this, we will take questions from equity analysts.
Our comments and discussions today may contain forward-looking information about Air Canada's outlook, objectives and strategies that are based on assumptions and subject to certain risks and uncertainties. Our actual results could differ materially from any stated expectations. Please refer to our forward-looking statements in Air Canada's second quarter news release that is available on aircanada.com and on SEDAR.
And now I'd like to turn over the call to Mike.
Michael Rousseau
Great. Thank you, Valerie, and good morning to everyone. [Foreign Language] Thank you for joining us. And John, welcome to Air Canada. I look forward to seeing your leadership help our entire company and the finance organization continue to excel.
Our quarterly operating revenues reached $5.4 billion, up 36% from the second quarter of 2022. Operating income totaled $802 million, a year-over-year improvement of over $1 billion. Adjusted EBITDA of $1.2 billion was up by more than $1 billion as well in the same period last year. Our adjusted EBITDA margin reached 22.5%.
We carried more than 11 million customers over the quarter. That is 23% greater than in the same period of last year. Traffic growth outpaced capacity growth, with an impressive system load factor nearing 88% in the quarter. And this continues. Our load factor reached almost 91% in July, reflecting the overall strong summer demand.
Passenger revenues totaled $4.9 billion, about 42% higher than a year ago. As we look ahead, advanced passenger bookings remained solid for the balance of 2023 and now into Q1 2024. Mark will expand on the demand environment in his remarks.
I thank the entire team for their dedication to customer service and for collaborating with our partners who also share the responsibility of ensuring a smooth customer journey. And I congratulate all employees on delivering a strong quarter and recently winning some very important awards. This includes a recognition of our people spirit and expertise at the 2023 Skytrax World Airline Awards in June.
For Canada, our employees won the Best Airline Staff and Best Airline. Air Canada Rouge also won Skytrax Best Low-Cost Airline. And Air Canada received the inaugural global award of World's Most Family-Friendly Airline. These are significant as a market leader in leisure travel. We're all very proud of these awards, but know there's still working ahead of us.
We had more employees trained, better coordination with our key ecosystem partners and improved tools last summer, which resulted in strong operational results in both April and May, yet our June and July operations were not at expected levels due to several factors. We are increasing our efforts to protect the customer journey from disruption, regardless of the cost.
This includes using any influence we have in such instances as with attrition at our principal regional partner or global supply chain issues. We're working to mitigate the effect of situations beyond our control, such as increasing disruptive storm activity in our key hubs and markets. We are confident that our efforts will generate positive outcomes.
Cost discipline and deleveraging remain top priorities for us, and John will cover both in more detail. We ended the quarter with $9.6 billion in cash and cash equivalents and investments. That includes an early repayment of $650 million in EDC loans in the quarter. Our cash position enables us to confidently execute our business plans, move forward with new initiatives and continuously invest in customer service.
I thank our customers for entrusting their travel to us and for their loyalty. We're more determined than ever to deepen this loyalty through elevated customer service.
And Mark, over to you.
Mark Galardo
Thanks, Mike, and good morning, everyone. [Foreign Language]
We're pleased with our second quarter performance. We owe these results to the effectiveness of our network diversification strategy and to a strong performance in several areas, and we're excited with what we're seeing ahead. For Q3 2023, we plan to increase Air Canada's system-wide capacity by roughly 11% from the same quarter in 2022. For the full year, we are looking at a year-over-year capacity increase of about 21% versus 2022.
Now let me get back to our results. Passenger revenues reached $4.9 billion in the quarter. These results stemmed from the strength in passenger demand for our wide-ranging international network, record Sixth Freedom revenues and continued Aeroplan redemption churn.
In the quarter, we saw year-over-year gains in yield and unit revenues across the board. Domestic performed to expectations and our transborder revenues grew 36% in the second quarter of '22 on a 21% capacity increase. Sixth Freedom revenues were above what they were in the second quarters of both 2022 and 2019.
In fact, Q2 2023 was the strongest Sixth Freedom quarter Air Canada has ever seen. This traffic is an important contributor to our diversification strategy as it evens out some traditional seasonality peaks and valleys. We believe that we're still in the early phase of reaching our full potential in leveraging Sixth Freedom traffic through our hubs.
Further to our strong Sixth Freedom performance, our transborder network performed above expectation, anchored by the initial success of our joint business arrangement with United Airlines. This allowed us to start new routes, such as Toronto-Sacramento and in many cases, restore pre-pandemic frequencies to a variety of routes on the transborder network.
We're particularly pleased with our international performance, representing about 70% of the year-over-year increase in passenger revenues. Demand for transatlantic services was stronger as compared to last year, translating into a 19% capacity growth and a 9-percentage-point increase in load factor.
This year, we restored services, increasing frequencies of certain destinations, like Toronto-Rome and Toronto-London and launched new routes on the European market, including Montreal to Amsterdam, Toulouse and Copenhagen. We're pleased with the results from our new routes, which met or exceeded expectations.
We saw strength in leisure demand, particularly to markets in Southern Europe. Our strategic partnership with Emirates led to very strong results on our Dubai route, and the outlook for transatlantic demand continues to be favorable in the second half of 2023.
In the Pacific, we more than doubled our capacity to that of last year. We restored services to Osaka-Vancouver and Tokyo Haneda from Toronto. In fact, we've restored more than our full 2019 capacity to Japan. The higher loads on the Pacific, reaching a 93% load factor, reflect continued strong demand.
The growth in capacity and traffic led to strong RASM yield gains, even though capacity to China remains limited. Our pacific passenger revenues increased 2.5x compared to the second quarter of 2022. We also announced new services, such as Vancouver to Singapore and Dubai, demonstrating our commitment to rendering Vancouver as a global international hub for Asia Pacific travel from North America. Our comprehensive network, which is bolstered by our strong international presence, has us well positioned to capture the demand we're seeing.
Air Canada Vacations continued to see strong demand for leisure travel. I want to underscore that this demand is an important barometer of leisure demand sentiment, and this indicator continues to be favorable as compared to both 2022 and 2019. Another indicator of strength and projected future demand is Aeroplan's continued record growth rates, which delivered proportionately strong travel redemptions.
We recently unveiled our most extensive winter-summer schedule. We added frequency and capacity to popular destinations, like Cancún, Los Cabos and Punta Cana. In fact, we are increasing our capacity from all of our major hubs to spend on destinations this winter.
Air Canada Cargo expanded its network in the quarter, adding services to Punta Cana, San Jose, Costa Rica and Basel. And as we saw with our peers, our cargo business experienced lower volumes and yields in the second quarter of 2023. This was somewhat expected given the normalization in cargo yields for the extraordinary highs at the beginning of the pandemic.
Still, we made good progress, expanding our fleet to six freighters from three that we had at the end of 2022. We're closely watching how this market evolves to capture strategic opportunities. Our overall cargo diversified revenue stream can also offset some of the seasonality in the passenger business.
Now over to you, John. I look very much forward to working closely with you. Thank you.
John Di Bert
Thank you, Mark.
I'm thrilled to join you, Mike and Valerie on this call, and I'm excited to work with all of you. Good morning. [Foreign Language] It's truly a pleasure to speak with you today. It's exciting to join this dynamic industry as well as the passionate and talented Air Canada team. I'm grateful for the warm welcome that I've received, and I'm looking forward to building strong relationships with all of you.
Onto to the results. Mike spoke to our financial performance generally, and Mark touched on our strong passenger revenues. So I'll begin with our second quarter operating expenses. These totaled just over $4.6 billion for the quarter, increasing 9% from the second quarter of 2022, primarily due to the higher levels of flying and customers we saw in the period. The increase was partially offset by an 18% decline in aircraft fuel expense, stemming from a 31% decrease in jet fuel prices from the same period in 2022.
Overall, second quarter adjusted CASM was $0.133, roughly 1.6% in the second quarter of 2022. The unit cost was impacted by higher passenger service costs from increased traffic and higher selling costs, which are directly correlated to greater revenues and the year-over-year growth in full-time equivalent employees.
In fact, you'll have noticed that wages, salaries and benefits grew 24% in Q2 2023 from the same period a year ago. This reflects a 22% growth in full-time equivalent employees year-over-year as we rebuilt our operations throughout 2022 and hired and trained people to prepare for this summer. We have now reached stable levels, and employee turnover has normalized to historical rates. As we continue to grow the airline and add capacity, you can expect to see meaningful improvements in productivity.
Our optimized and efficient fleet is central to our strategy. In the second quarter, we added one Boeing 787-9 and one Airbus A330. Our second quarter delivered strong free cash flow of $965 million, $537 million more than the same period in 2022. We ended the quarter with $10.6 billion in total liquidity and a leverage ratio of 1.7, down from 5.1 at the end of last December.
Our strong cash flow and liquidity position allow us to fund our future and to deleverage, and we've been paying down where it makes the most sense. The recent EDC loan repayment and the repurchase in 2022 of some Air Canada's outstanding 4% convertible senior notes results in a combined reduction of about $72 million in annual interest expense.
Now let me turn to our full year expectations and provide some color as we update our guidance. Our first half performance was strong. We entered into the second half with good visibility, given $5.7 billion in advanced ticket sales, continuing strength in demand and notwithstanding some headwinds that lie ahead, a good view on cost.
As such, we are raising our lower end and narrowing our range on full year EBITDA guidance to between $3.75 billion and $4 billion. We also modified our adjusted CASM guidance for 2023 to reflect our revised full year capacity assumptions and to adjust for various expense items due to the evolving cost environment. We now expect full year adjusted CASM to land roughly within 0.5% to 1.5% above 2022 levels.
Notwithstanding the fact that this is a full year number, I can tell you that leading into Q2, we have made good sequential progress. We also expect to continue to see further productivity improvements flow into our cost structure through the summer.
In preparing our updated 2023 guidance, we assume that the Canadian dollar will trade on average $1.34 per U.S. dollar and that the price of jet fuel will average CAD 1.08 per liter for the full year 2023. Going forward, we have taken a position to hedge a portion of our Q3 fuel. You can refer to our public disclosure file for information on this.
As to our 2024 targets, we are not providing updates at this time. We will continue to evaluate them as we progress with our plans and execute on our strategy through the second half of 2023.
Let me now turn it back to Mike. Thank you.
Michael Rousseau
Great. Thanks, John.
We're now in the middle of our busiest period of the year. Our load factors are high this summer, which while positive, also adds complexity to running an airline when disruptions occur.
In advance, we have made extensive preparations by hiring more people and changing our schedule to reduce our traffic peaks and smooth customer flows to some degree. Our employees are more experienced than last summer, and this has contributed to our operational stability. Our flight completion level and baggage delivery ratios are stable, and we continue evaluating and making adjustments to protect the customer journey.
The air travel ecosystem comprises many persons, and we're doing our part to help each partner fulfill their roles for which they are accountable. We've seen significant improvement in industry metrics over the last summer. And together, we are committed to strengthening the system.
We are doing so while navigating through an evolving regulatory environment, which is affecting crew availability and ultimately, our flying schedule. We welcome the opportunity to work with Canada's new Transport Minister, Pablo Rodriguez, to bolster the air transport sector. There are many critical files, such as the production of staff in Canada to support the Net Zero by 2050 ambition, the need to invest in airport infrastructure to safeguard operational efficiency and support GDP growth, as well as ensuring airport costs become more competitive with global competitors.
This last matter continues to be a challenge with the recently announced review of the Passenger Protection Regulations and increased costs to be performed by the industry. Our user pay model is not appropriate for the current environment. We've taken other steps that are reinforcing our operations, securing interim lift, including by partnering with PAL Airlines and signing a wet lease arrangement with Omni.
But we're also looking further ahead. We have continued to diversify our network, shifting capacity to where we can generate better returns on our aircraft, like the new international routes Mark spoke to. Our partnerships like the one with flydubai are key as these will expand customer choice with flying between Canada and the world. We anticipate increased immigration. We'll continue to strengthen the vibrant visiting friends and relatives market and continue to trade, furthering corporate travel opportunities.
We're also transforming the way we sell and distribute the product by introducing new modern technology options for the travel agency community and additional choices for our joint customers. These capabilities are supported by IATA's new distribution capability or NDC.
During the quarter, we expanded our successful long-standing partnership with Amadeus and we announced a strategic distribution and retailing agreement with Sabre. These arrangements, when combined with other elements of our strategy, are already delivering substantially lower distribution costs. Additionally, they will enable us to scale continuous pricing, dynamic offers and other exciting revenue optimization strategies in the quarters ahead.
Our digital investments now extend throughout the customer experience. This includes increasing the use of technology such as expanding our biometric facial recognition pilot program for customers to board aircraft and to welcome guests into our lounges. We also continue to integrate AI into our business, most recently in our contact centers. And we've begun renovating cabin interiors on our narrowbody fleet, upgrading our WiFi and in-flight entertainment offerings and launching exclusive original programs, like Mattel and Apple TV+.
We're elevating the customer experience through key investments, including new lounges, a Maple Leaf Lounge in San Francisco and a new Aspire Air Canada Cafe at Billy Bishop, both opening to great reviews from both customers and media alike. We've also added facilities at Newark Liberty with a co-located lounge within the United Club, a novel model that further builds upon our successful transporter joint venture.
Aeroplan is a key component of customer loyalty and continues to grow at record levels on all key metrics. This success opens incredible opportunities. And throughout the quarter, Aeroplan launched key initiatives to promote engagement.
This included new and expanded partnership with Bell, Parkland and Uber for groceries. Aeroplan's success was affirmed at the prestigious Freddie Awards, where it led North American loyalty programs, winning Airline Program of the Year, Best Promotion and Best Redemption Ability.
Another aspect of loyalty is a premium that customers place on corporate responsibility. And throughout the quarter, we announced several initiatives to advance our ESG goals. One is our partnership with the in-service aircraft for global observing systems or AGOS, an international research organization that uses commercial aircraft as a platform to monitor climate data. Through this agreement, we are outfitting an Airbus A330 aircraft with special diagnostic sensors.
We also announced agreements to purchase sustainable aviation fuels in San Francisco and Amsterdam from Neste. Apart from reducing emissions, these agreements also demonstrate the viability of SAF and its importance to our industry. Once again, we urge governments in our country to be part of the global opportunity. We, in Canada, need to recognize the potential of SAF, both commercially and for our environment and invest appropriately in the development of these fuels as other countries do.
We look at corporate responsibility as a whole and are focused on all aspects of our business, our people and the communities in which we live and work. To this end, we continue to pursue our diversity, equity and inclusion policies and initiatives. Our accessibility plan is an example of this, affirming our commitment to enhance accessibility for our customers and employees with diverse abilities. And we're very proud to contribute to Canada's objective to be barrier-free by 2040.
We're also pleased to continue with one of our most popular community activities. Air Canada operated three Dreams Take Flight missions in the second quarter, flying children from Winnipeg, Halifax and Toronto to Florida to experience a trip of a lifetime. Another five such flights are scheduled for the rest of the year.
The Air Canada Foundation continues to elevate communities in Canada. In the second quarter, we dispersed the $1.6 million raised last year to Canadian charities to help children spread their wings. I invite you to visit the foundation's website and read our recently published impact report to get an in-depth look at the magnitude of Dreams.
As these examples show, aside from producing solid financial results, Air Canada has a significant positive impact on our communities and does a lot of good for all stakeholders. This is ingrained in our core values of care and empathy and contributes to our employees' commitment and motivation to work hard every day to meet expectations, even when we face difficulties. It cannot be said how often enough and how proud we are of this.
We are determined to rise higher in an increasingly complex industry and environment, continuously striving to meet our customers and other stakeholder expectations. Thank you to our employees, our investors, our customers and our suppliers. Their support is key for securing a bright and sustainable future.
And with that, I'll turn it back to Valerie.
Valerie Durand
Thank you, Mike, and thank you all for joining us this morning. [Foreign Language] We're now ready to take your questions. Should you require further details following this call, our Investor Relations team is available for support. Back to you, Julienne.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Helane Becker from TD Cowen. Please go ahead. Your line is open.
Helane Becker
Thanks very much, operator. Hi, everybody, and thank you very much for the time. Bonjour. So I just have a couple of questions. The first question has to do with cargo. We're seeing FedEx and UPS in the U.S. We're seeing cargo volumes decline, and you mentioned that in your prepared remarks. Just wondering, is it too aggressive to have six aircraft in service and maybe three was right? Or how are you really thinking about cargo over the next few years in this declining volume? And then I have another unrelated question.
Mark Galardo
It's Mark Galardo speaking. So on the cargo freighter piece, it's important to note that our strategy here is more long-term focused and the strategy is meant to be resilient to go through the ups and downs of what the cargo market is.
So to that extent, we're taking a longer-term view. And the view of the freighters is basically to bring freight into our hubs and connect it onto our extensive passenger belly business. And we see a lot of good long-term prospects in that strategy to really optimize our bellies on our passenger business to that extent. Although we have some challenges near term, focus is really median to long term on this business.
Helane Becker
Okay. That's helpful. And then the other question actually came from a client this morning. I was -- and I know this to be a fact, too. I was looking at on-time performance and Air Canada tends to be in the bottom half of the crowd.
Not sure of North American Airlines, not sure how impactful that is. But when you think about your operations and you think about your customers, what's the compensation you have to do? And how are you thinking about improving on-time performance in on -- in an environment where things are really busy?
Michael Rousseau
Helane, it's Mike. So that's a big question and something that we're very, very focused on. First of all, there are compensation rules under the APPR here in Canada. If we're delayed by more than X number of hours, we pay the customers, much like Europe. In fact, there's some changes going into APPR right now that will make it much more aligned to European model. That's one aspect. And then we obviously fulfill our obligations under that system.
We're spending a lot of time improving our on-time performance. And again, April and May were very solid. June and July for a whole bunch of reasons, a lot of uncontrollable, like severe weather in Toronto, Montreal and the East Coast of the United States, where we have large franchises affected our OTP.
But we're powering through that and building in more resiliency to the operation. So -- and I spoke in my prepared remarks about some of the things we've already done, and we will continue to elevate that strategy. And certainly, an objective of ours is to continue to improve OTP so that we are -- we don't have articles like we had yesterday morning.
Helane Becker
Okay. That's very helpful. Thanks, Mike.
Operator
Our next question comes from Kevin Chiang from CIBC. Please go ahead. Your line is open.
Kevin Chiang
Hi, good morning. Thanks for taking my question. Maybe if I could just turn to your guidance, and I know this is maybe overly simplistic, especially given all that's happening as you come out of the pandemic and maybe have labor negotiations upcoming in the back half of the year. But if I look at historically, at least pre-pandemic, your Q3 EBITDA was anywhere from 1.6 to 1.7x what you did in Q2 versus more than double. If I apply that seasonality, it seems like you're tracking at the very upper end of your guide and maybe through it, depending on how the summer plays out, which sounds like it's very strong.
Just wondering how we should think about the puts and takes as to maybe why historical seasonality or that range might not hold or maybe it's just conservatism in your outlook. Or maybe it's a little bit of a buffer because of the labor negotiation. Just -- if you can frame how you think about the back half of the year, given what you've done in the first half of the year.
Michael Rousseau
Kevin, it's Mike. I'll start with a couple of comments, and I'll turn it over to John for some further comments. We provided guidance for a long time for the company. And obviously, our objective is to ensure that we make the guidance. There are a lot of factors involved in putting the guidance together. It's an evolving environment, as I said in my prepared comments.
In Q2, the work that Mark and others have done here has allowed us to do better in Q2 with -- especially with the Sixth Freedom traffic that is typically more beneficial to Q2 than it is to Q3. And so that's a good thing from a seasonality perspective, from our perspective. So that's issue number one. And then issue number two, we are seeing rising fuel prices. And so we have had to ensure that we covered the sensitivity of rising fuel prices. But, John?
John Di Bert
Yes. I think Mike, you covered in the comment on Q2. I think that Q2 was an exceptionally strong quarter, and it's true that seasonality is always the case that Q3 will come off quite stronger than Q2. But for Q2 here, this year was very strong. And I think from that point of view, applying maybe the 1.6 wouldn't totally apply in the same way that you may have done so in the past.
So when you look at full year guidance, I think Mike said it well. We've moved up the range because we feel strongly that the demand environment is holding the way we expected. The first half performance has been quite good and Q2 has given us the confidence to move up the range. But I'm not sure that the 250 space that we left I think is the right one.
Kevin Chiang
Okay. No, that's great color. Maybe if I could just follow up on the cargo question. You discussed the 767s you have. But does -- what's happened in the cargo market recently? Have you been rethinking your -- what your plans are for the 777s that come in next year and beyond? Do you think you need to add more capacity on top of what you have? Like does the long-term plan still support that?
Michael Rousseau
Kevin, it's Mike. So like Mark said to the question from Helane, it's a long-term play from our perspective. And there is a as strong synergy about putting product or cargo from our freighters onto our narrowbodies to go across Canada and into the U.S. And so we see that as a very, very viable business strategy as we go forward.
Again, listen, Q2, like other cargo operators, was not very strong. We expected some decline post-pandemic, and we had budgeted that, frankly, and expected that. So we're going to continue to add capacity over the next little while for our business plan. And we're comfortable that we can make efficient use of that capacity.
Operator
Next question comes from Fadi Chamoun from BMO Capital Markets. Please go ahead. Your line is open.
Fadi Chamoun
Good morning. Thank you. And, John, welcome to these calls. I have a question on the CASM. I'm not sure how to characterize it, but ultimately, I'm trying to think about if there is a way for you to explain to us how much of these CASM inflationary pressures are kind of core inflation in wages and kind of overall economy? And how much of these pressures on CASM we're seeing are a function of just the aviation ecosystem being -- underperforming in its normal fluidity?
And John, I think you talked about potential for productivity gain going into -- like how should we think about the trajectory of your CASM in a more fluid or kind of normalized environment? How much of the increase is in that CASM in the last couple of years as you ramp up capacity has been a function of those maybe transitory issues longer term?
John Di Bert
Yes. Thanks, Fadi. So I think more color will come as we look forward when we look at '24. But just to give you some color on this now, I think we're up roughly, I think, 6,500 employees from the summer of last year to the summer of this year, right? And I think that's maybe a little bit of what you're referring to as well, and that's certainly what I'm referring to in my commentary on productivity.
We will grow into some of that capacity, but it was important for us to get ahead of it here for the summer of '23. And I think it's proved to be the right decision. And we've seen very significant loads and what have you. And then obviously, the traffic and we're being rewarded for that.
But that is a piece of the cost structure that I think will alleviate a little bit relative to CASM as we grow. There are some elements that it is a different cost environment, and that's just something that we -- I think we absorb into our own business planning here. The regulatory changes, the duty times, things like this are a little part of that structural change.
And then ultimately, I think that we have seen, like everybody else, some inflation. Don't forget, some of the cost in our CASM is also coming from costs that are very revenue correlated, right? So it's kind of the good -- I mean the -- what you pay for when you get that volume and traffic, and we're seeing more premium cabinet that's helping as well overall profitability, but it's a more costly component of the airline as well as we support those customers with premium service.
So altogether, I guess, the last piece I'll maybe just say there before I wrap up is we did take a bit of a touch down on that capacity in the year. You saw we went from 23% year-over-year growth down to 21%. There's a few things that are impacting that. Some of the regional challenges with just pilot availability and some of our own fleet just availability with respect to some of the aircraft that we're trying to put back in service, the 777, for example and some of those A220s that do have some engine delays.
So all of that does kind of impact us as well, when you look at the CASM expectation. I would say that over time will heal itself, but when and how, that will take a little longer. Looking at 2024, we'll be looking at ourselves internally here for productivity that's to come from the overall cost structure as we grow in. And we do expect also that kind of the whole ecosystem will be better, and that will help our cost as well.
Fadi Chamoun
Okay. Just a couple of follow-ups. I know you're not guiding to '24, but do you still have kind of visibility or plan to ramp up capacity? I think it was 100% of 2019 previously? Or is that not the right framework to think about for 2024 at this point and we should wait for your guidance?
And just connecting to the first question, I wanted to -- like why go back on the hedging, you have been kind of not hedging for quite some time and you've managed to do that with pricing? And why did you decide to kind of hedge fuel again now?
John Di Bert
Okay. Great. Well, Fadi, you haven't left off at all from the last time we talked. I guess, let me cover both of those very quickly. So -- you asked one about hedging and the one prior to that was about '24 capacity. Yes, thank you. So yes, we do -- obviously, we do have plans and scheduled capacity to come online for 2024. So we'll grow back towards those 2019 levels.
My sense, and you should wait for '24 guidance to be more conclusive. But I think my sense is that we get to '19 levels through the year at some point, we hit that pace. Will it be on a full year basis? We'll see. I mean let's get through the next couple of months here, and then we'll see how we can get a better bead on it. But certainly, our intent here and our objective is to bring it to '19 levels in '24 and then go from there.
The question on hedging. I'll simply say that when we looked at kind of, let's call it, the end of Q2, we looked at Q3 bookings, very solid. And we -- no speculative kind of objective, but we looked at fuel and that kind of had stabilized at a low level, and despite some pressure of oil cuts and what have you. And so we thought that just good to protect what was already sold tickets in terms of the fuel component of it. And so we took a position to hedge some of that Q3 demand.
And relative to a bigger comment on different philosophy or strategy, I would say not. I would just say that I think it was a prudent thing to do in an environment where taking a position on fuel for Q3 that were kind of sold through -- the fuel was already sold through our ticket, was the right thing to do and it just locked in at least some portion of that dynamic. And from here on in, we'll just kind of continue probably to behave much the way we have in the past. And if we have a different view, then we'll talk about that as well.
Operator
Thank you. Our next question comes from Cameron Doerksen from National Bank Financial. Please go ahead. Your line is open.
Cameron Doerksen
Thanks. Good morning. Maybe a couple of demand questions. I mean clearly, demand is very, very strong. Advance ticket sales well above what we would have seen pre-pandemic. I'm just wondering if you're seeing any signs of weakness, particularly in the domestic market? I mean we've seen some of the U.S. carriers cite maybe a little too much capacity that's in the network, given where the demand is. Just wondering if you're seeing any of that in your advanced bookings.
Mark Galardo
Cameron, it's Mark. On the domestic network, one of the things that we always said is, one of the strengths of our domestic network is the connecting network that we have, two or three hubs, and that gives us access to a wide geography. So to that extent, the domestic indicators continue to look stable. And we're feeling generally pleased about what we saw in Q2. But going forward, it continues to be relatively stable on investment power.
Cameron Doerksen
Okay. And maybe just a follow-on to that is around, I guess, business travel. I mean you must have some visibility now on the post Labor Day kind of demand. Are you seeing any signs of that picking up from sort of the stable we've seen in the last few quarters?
Mark Galardo
Yes. In fact, we're seeing a slight uptick in two sort of channels and one is sort of managed corporate. That's been roughly in the minus 30% range for quite some time, so we're seeing a slight uptick there. But what's more encouraging is the non-contracted corporate, SMB small business, and that's recovering much quicker and quicker than anticipated. So we're starting to see, post Labor Day, some pretty positive signals there.
Cameron Doerksen
Okay. No, that's great to hear. Thanks.
Operator
Our next question comes from Walter Spracklin from RBC Capital Markets. Please go ahead. Your line is open.
Walter Spracklin
Yes, thanks very much operator and good morning everyone, and welcome John to the call. I want to turn to load factors here and tie it in with your -- the new configuration in your fleet and the service -- a little bit of the on-time service issues that you've had and correlate the two.
And what I'm looking for is you've got a different fleet than you've had previously. Does that mean you can run at higher load factors going forward on a long-term basis? Or in your efforts to improve your on-time, do you have to bring load factors down? What I'm trying to do is see if load factors that we assume going forward can be sustainably higher than where they were pre-pandemic or again, do you have to bring them down in order to address the service issues?
Michael Rousseau
Walter, it's Mike. Interesting question. So we don't think there's a high correlation between high load factors and OTP performance. So we think we can run at 84% or 88%, and it's not going to materially impact on-time performance. It may impact if we have to cancel a flight. We've got less seats to put people on, but it shouldn't affect materially OTP performance.
Can we run at those levels going forward? That's -- yes, but it does mean potentially that we're spilling traffic. And so that is why we're bringing some more capacity on site because we'd like to ensure we don't spill good traffic basically to our competitors. So there is a balance there to some degree.
Walter Spracklin
Okay. That makes sense. Okay. And my second question is coming back to cargo. And one of your answers to cargo really makes sense to me that you've got some really good opportunities to scale some of that cargo into your -- to make it much more economical into your belly as opposed to on your dedicated freighters.
I guess my question is, are you still targeting the same number of freighters that you were targeting previously? And is there an opportunity with the tight labor environment to achieve some of the goals you had with your freighters, but not necessarily with freighters owned by you?
Michael Rousseau
Possibly, but we're not spending a lot of time thinking about that option right now. Right now, we're really focused on improving the performance of our freighters and obviously, bringing the freighters into the operation.
Walter Spracklin
Okay. Fair enough. Thanks very much for the time. Appreciate it.
Operator
Our next question comes from Stephen Trent from Citi.
Stephen Trent
Can you guys hear me, by the way?
Michael Rousseau
Yes.
Stephen Trent
Okay. Sorry, just having some trouble with my phone. Just one thing there. First, my heart goes out to you guys up north with the terrible wildfires and what have you. I'm wondering if those events have had any impact on your operations. Have you had to reroute? Have you had to transport fire crew? And maybe there's been some incremental flow on your network. Just wanted to get a sense of that.
Michael Rousseau
It's Mike. Thanks for the question. I mean we, obviously, given our community perspective, we'll do whatever we can. We are doing whatever we can to support the situation. As it's affecting our operation marginally, we didn't call it out as an issue, frankly. And it's mostly on the regional side. So it hasn't had much of an impact to date.
Stephen Trent
And just one other quick question. I appreciate what you've mentioned about the airports and the sort of pay system in the Canadian airports. In order to have a change occur there, is this something that Mr. Trudeau could make some kind of decree and changes? Or would it have to be something that would have to pass through a long legislative process of some kind?
Michael Rousseau
Okay. Now you've asked me a question I could spend about another half hour on. There have been several studies by very intelligent committees and very knowledgeable committees about our business model up here, our airport model, recommending certain changes.
So there is other options available, but it would take a change in law basically, that would take some time. I would say the pandemic really has exposed the weakness of our user pay model. And we are pushing hard to ensure that our airport infrastructure system continues to support operational efficiencies, investments and also growth.
And the airports, obviously, suffered through the pandemic, taking on greater debt. And so do we. And so it would be important for the government to support that type of growth opportunity with some injection to accelerate some of the objectives we have in mind. And that -- it also goes to SAP, as I said in my prepared comments.
Operator
Our next question comes from Chris Murray from ATB Capital Markets. Please go ahead. Your line is open.
Chris Murray
Yes, thanks. Good morning. Just turning back to the Sixth Freedom traffic a little bit. Can we talk a little bit about -- maybe what are the drivers that I think got you to this number this quarter? I guess what I'm trying to figure out is how much of this is sort of tied to the fact that the U.S. market itself has been pretty tight? Or has there been something going on that maybe has changed Sixth Freedom in the last little while, be that Aeroplan or something else that you guys have been working on?
Mark Galardo
It's Mark. There's a combination of reasons for this, but one of the things that we did during the pandemic is completely change the structure of our network in our operation, our hub airports, to maximize Sixth Freedom.
So we've piqued up our hubs a little bit to really facilitate that traffic flow, and we're starting to see results basically almost every single geography, and, in many cases, almost every single hub in Q2 on the Sixth Freedom network, which is something we didn't necessarily do as well pre-pandemic.
Mark Nasr
It's Mark Nasr. Just to add one thing. The region in which Aeroplan is growing the fastest is the United States. And between that and our relationships, principally with JPMorgan, we're also able to introduce the brand and our product and service proposition to Americans more effectively than we were able to previously.
Chris Murray
Okay. That's helpful. My other question is just going to the regional network. Historically, this has been kind of slow and steady, but it certainly has always been able to get the job done. I guess a couple of questions on this. I mean is this a function of aircraft or people? Or what's going on in the regional network that's really affecting its performance as much as it is? And does this force a change into you looking to have to do what was historically considered a regional lift inside Air Canada or maybe a different view on strategy as we go forward?
Michael Rousseau
Chris, it's Mike. I don't think the strategy has changed. There's a transitional challenge right now with pilot availability. A series of factors cause stress on pilot availability at that level -- at that entry level.
One, flight duty times came in, which caused all airlines to -- in Canada to add 10% to 15% more pilots to fly the same schedule, given the new rules around flight duty time. Two, we have a lot of new entrants into Canada, all at the same time, who are flying bigger planes and can't afford to pay more money. And then three, during the pandemic, we have a very, very elaborate school system -- pilot school system here in Canada, which our regional partners is heavily involved in. And that didn't provide the supply that it normally would.
So we have this almost perfect storm that exists at this point in time. And so that has caused our regional partners to lose more pilots than they otherwise would to a higher attrition. And so as a result, we've had to make some modifications to the schedule. So we're working hard with our partner, Jazz, on solving that problem right now. And it will be solved, but it will take some time to transition.
On the operational side, if we have disruptions -- weather disruptions or anything else, we would typically want to cancel a Jazz flight because it impacts less customers than canceling a 777, for example. And so you will see higher -- in weather and other disruptions, you will see higher cancellations for the Jazz fleet, which makes it difficult for them to operate because it -- we also have to put those customers on another plane in the next couple of hours, in the next day. But that is trying to minimize the impact to our customer in weather-related disruptions.
Chris Murray
Okay. I'll leave it there.
Operator
Our next question comes from Savanthi Syth from Raymond James. Please go ahead. Your line is open.
Savanthi Syth
Hi, good morning, everyone. I know you've been doing kind of rolling out NDC -- kind of various aspects of NDC. I was wondering if you could talk about that a little bit more, especially in the sense of kind of where will we see the benefits of that? Is that revenue or costs, and time line of when we might see some of these can benefits flow through?
Mark Nasr
For sure. It's Mark Nasr. So there's four principal elements to our distribution strategy that we rolled out during the quarter. The first is all new technology supported by NDC, including a variety of options for travel agencies anywhere in the world connected to Canada.
The second is improved and expanded commercial agreements with not just the GDS as we've already announced Sabre and Amadeus, but also direct agreements with many of our large agency partners that allows for more efficiency in terms of cost perspective, expands our products that are on their shelf, in particular, ancillary revenue products, opening them up really for the first time in a meaningful way to third-party sales.
And then the third is content differentiation. So you've seen a lot of this in other markets, but now we have content that's exclusively available via NDC, and it's just the beginning, that will expand over time. causing more of a shift to those channels.
And the final one, the fourth element is the DCR, the distribution cost recovery program. So bookings now that are conducted through the less efficient or older technology platforms GDS incur a cost recovery.
And so all those four things together are driving both decreased costs as well as increased revenue. Mike talked about the fact that our distribution costs are now materially lower. It affects both RASM and CASM. So there's some CASM in there that's taken out, but there's also a lot of -- in terms of the DCR, a RASM offset. Because as we assess the DCR, even though it's meant as a cost recovery, it counts in the top line.
Savanthi Syth
In terms of kind of time line as to -- I mean I'm guessing this doesn't kind of turn on, on day 1. How should we think about this building up over the next kind of two, three years?
Mark Nasr
Sure. So the DCR is fully rolled out globally and all points of sale already. And that's what led to Mike comment -- Mike's comments in the opening there. And then NDC itself right now for us is available in Canada. We'll roll out our three or four largest points of sale, including the U.S., before the end of this year.
And then by the end of next year, we'll be substantially fully rolled out in our online points of sale globally. And all of our GDS and agency agreements are global in nature for the footprint of those companies.
Savanthi Syth
That's helpful. And if I might, just on the Aeroplan. I know back in pre-pandemic, I think the thought was lack of Aeroplan was maybe a 3-point or so margin drag for Air Canada. Just how much of that is unlocked? And now that you have the plan in-house and then seeing the real value of it, just any kind of revised thoughts on if there's more to kind of margin contribution that you would expect?
John Di Bert
For sure, so we don't segment out Aeroplan's results that impact on our profitability. But what I can say is the program has grown significantly from the point at which we took it over, and we're seeing that growth contribute both top line and profitability, but we just don't segment out the results of the business.
Operator
Our next question comes from Konark Gupta from Scotiabank. Please go ahead. Your line is open.
Konark Gupta
Thanks, operator. Good morning, everyone. Just wanted to get back to the CASM question. Is there any specific factor that has been most difficult to predict over the last six, seven months or so that has kind of caused the guidance to kind of go up on the CASM side? And can you remind us if the CASM targets you laid out for '23 and '24 previously, do they reflect any potential implications of upcoming labor agreements?
John Di Bert
Yes. I'm going to call a friend on this. Maybe Mike, in terms of just maybe the historical...
Michael Rousseau
It's Mike. We've modified the guidance on -- partly because of capacity cuts, partly because of costs that are coming in place, some of which are revenue-based costs, not all inflationary-based costs. We're obviously not going to disclose or talk about pilot agreements or what's in there or what's not in there for any one of the pilot agreements that we're talking about.
So we -- as John said, we're continuing to look at productivity. We had to staff up to ensure that
we ran as good as possible. We've done that. We'll see that productivity gain come back to us over the next little while as we grow into it. And so a lot of different factors.
But like I said in my comments and John said in his comments, this is a high, high focus area for us. And we'll continue to look at improvements in productivity using technology and other process improvements.
Konark Gupta
Okay. No, that's great color. And welcome, John, about -- to Air Canada. Just one more question quick on the balance sheet. I think you guys have done decent progress on retiring some debt early on. Are there any more opportunities to utilize your excess cash sitting on the balance sheet? And obviously, free cash flow is kind of running ahead of your expectations so far. Any opportunity...
John Di Bert
Yes. Thanks for the question. And definitely, we will continue to be focused and active and look for opportunities to take down that -- where we see opportunities where it makes economic sense. And there are still opportunities ahead for us to do that. You've seen us be, over the last year, between the convertible notes and the aircraft financing in the first and the second quarter. I think we'll continue to look at opportunities to deploy some of that cash against the more expensive debt. So that's, I think, par for the course.
Konark Gupta
All right. Thanks for the time.
Operator
Our last question will come from Andrew Didora from Bank of America. Please go ahead. Your line is open.
Andrew Didora
Hi, good morning, everyone. John, just on the fuel guide. At first, I was a little surprised you lowered it given the crude prices, but the hedge makes sense. I haven't gotten through all the disclosures, but can you give us some color in terms of where you are hedged in 3Q on fuel? And then what have you assumed in your 108 full year guide in terms of hedge gains?
John Di Bert
Yes. So I would say that the hedge we took in Q3 is the only assumption we've made. So it was locked in when we made that assumption for the second half of the year. It's proving to be now quite favorable to the run rate on fuel today.
I think that overall, the oil prices did run up a little bit in the last week or so. So I would say that the 108 really reflects kind of the status quo on our prior guide, plus the hedge and the fact that Q2 was actually a little bit better and then actually was a lift. So that's kind of, I would say, the big picture math.
I said it before, I'll just reiterate it again. We feel pretty good about our range. We feel good about all the components that come into that guide. Fuel is always going to be a little bit of a put and take, and it will kind of drop where it drops. But I'd say that we feel pretty comfortable that the guide range will protect against any kind of reassessment.
Andrew Didora
Got it. And then one big picture question for Mike. Obviously, earlier this week, I know China opened up some more group travel opportunities. How are you thinking about the build back there? What needs to happen? And given your success in other markets in the Pacific, do you think China will ever get back to where it was pre-pandemic?
Michael Rousseau
It's Mike, Andrew. And I might turn some of this to Mark, who is very, very close to this file. Obviously, China is a very important market to us. I think we're flying there 4x a week right now. Pre-pandemic we were flying 35x a week.
We all see it now has the Russia overflight situation, so it's difficult to have flights from Eastern Canada in Toronto, Montreal primarily to China without using a Russia overflight. We are -- we'd like to see that market come back. It was a strong market for us pre pandemic. Will it come back to 35 a week? Certainly not without the Russia overflight situation being removed, and we have certainly no visibility on that situation. We hope that it happens sooner than later. But certainly, that market continues to be a strong market, and we'll expand as we can into that market.
Mark Galardo
And just to piggyback a little bit here. So our desire, obviously, is to get back to our daily frequency on Shanghai at some point and restore our service to Beijing. And if we can do that from Vancouver over the medium term, that would already be a major step.
Operator
We have no further questions. I would like to turn the call back over to Valerie Durand for closing remarks.
Valerie Durand
Once again, thank you very much for joining us this morning. [Foreign Language] Should you have any further questions, please do not hesitate to contact us at Investor Relations. Thank you. We wish you a lovely day.
Operator
This concludes today's conference call. Thank you for your participation. You may now disconnect.
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Air Canada (ACDVF) Q2 2023 Earnings Call Transcript