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Airline Restructuring, Bombardier, Canadian Operators, Commercial Airliners, Major Airlines, Regional Aircraft, Regional Airlines

Air Canada’s Cost Transformation and Revenue Improvement strategy is tied to its new Fleet Renewal Plan, while its Lesiure markets will be enhanced by its new low cost subsidiary ROUGE, and following the example of US major airlines it is diversifying its regional Air Canada Express partners to drive costs down by making them compete for the business

For 2013, Air Canada had an operating profit of $CDN 619 million on revenues of $CDN 12.38 billion for a 5% operating margin and a net income of $340m for a 2.74% net margin, nothing spectacular but an vast improvement from where the airline was just a few years ago. By comparison, WestJet Airlines had $CDN 3.66 billion in revenue in 2013 (only 29.5% of AC’s revenue).

Investors are loving Air Canada’s performance and its share price (AC-B.TO) is showing it, going from a low of $2.07 to 10.90 in the past 52 week range, today it is at $9.49, a 358% increase ! if you invested $10,000 a year ago you could cash out today at $45,845 ! and they say you cannot make money on airline stocks ? Investors are impressed and believers in Air Canada’s financial performance, some analyst have recently raised their target price on the stock to $12-$17 range one even to $30 IF ‘everything’ goes well, though sadly we all know it never all goes as planned.

AC B777

Air Canada’s has 5 new high density seat Boeing B777-300ER has 458 seats in 3 class including the new Premium Economy class, with 109 more seats than the current Air Canada B777-300ER fleet, these 5 aircraft will have 21% less CASM (cost per ASM, or seat mile) over existing B777, greatly improving Air Canada’s profit margins.


For those that do not know much about Air Canada, the airline is in the Top 20 airlines in the world, it serves 60 destinations in Canada, 49 destinations in the USA and 72 internationally, for a current total of 181 destinations with 350+ aircraft (Beech 1900D’s to Boeing B777-300ER’s), operating 1,500 daily flights that carried 36+ million passengers in 2013.

The current fleet is composed of:

5 x B777-300’s (high density seating) with 458 seats

12 x B777-300’s with 349 seats

6 x B777-200’s with 270 seats

27 x B767-300’s with 211 seats (average age 20) + 2 at lower cost subsidiary ROUGE (Jan 1/2014) with 264 seats (25.1% more seats), fleet going to 15 at ROUGE by end of 2016

8 x Airbus A330-300’s with 265 seats) (average age 13)

10 x Airbus A321’s (with 174 seats) (average age 10)

41 x Airbus A320’s (146 seats) (average age 21 years)

30 x Airbus A319’s (120 seats) (average age 16) + 8 at lower cost subsidiary ROUGE (Jan 1/2014) with 142 seats (18.3% more seat), fleet going to 30 at ROUGE by end of 2016

45 x Embraer E190’s (97 seats) (average age 7 years)

So at the beginning of the year Air Canada had 193 mainline aircraft, and will add 6 x B787-8’s in 2014 (37 on order), of the current fleet of aircraft 81 are owned (42%), 20 on financial lease (10.3%), 75 on operating leases (38.9%) and 17 on ‘special’ purpose finance leases ( (8.8%). I will discuss Air Canada Express in more detail later, but quickly it operates 159 aircraft and will add 5 x  CRJ-200’s in 2014 for a total of 164, breakdown of fleet will be provided further down).

While it is good to see Air Canada doing better, it still lags behind local rival WestJet Airlines, which turned in an operating margin of 10.9% and a net income margin of 7.3% on revenues of $CDN 3.66 billion. To the south, the US airlines have had a very successful 2013, with operating margins as high as 10.5% at US Airways (now American), 8.5% at Delta, 7.9% at JetBlue, 7.2% at Southwest and 6.8% at American while United still struggles with only 3.5% and surprisingly Alaska with a -7.3% and one has to wonder about its long term sustainability as Delta is moving into Seattle in a big way.

Air Canada’s President and CEO Mr. Calin Rovinescu , has done an excellent job at steering the once sinking ship into calmer waters, and 2014 is the year that several of the strategies should start kicking in and showing up on the Income Statement and Balance Sheet.

One of Air Canada’s main goals is to lower its CASM (cost per ASM), which in 2013 was an average $CDN 0.173/ASM, by comparison WestJet’s CASM in 2013 was $CDN 0.1361/ASM, or 21.3% lower than Air Canada’s, and that is where WestJet today has its biggest advantage over Air Canada, this 3.69 (cents) per ASM spread between the two carriers is and has to be the #1 priority at Air Canada and the on-going fleet renewal is driving CASM down, slowly but surely.

On the yield side of the equation, Air Canada and WestJet were very similar in 2013:

Passenger Yield ($/RPM):                  AC $0.191, WJ $0.1869 (AC advantage 2.2%)

Average Load Factor:                          AC 82.8%, WJ 81.7% (AC up 1.1 percentage pts)

PRASM (Pax Revenue per ASM):    AC $0.159, WJ $0.152  (note: RASM = yield x LF) and AC’s OPRASM (with cargo, etc.) is 0.181/ASM

So what we have is the fact that Air Canada on a unit revenue basis, does slightly better on yield and load factor than WestJet, though it is not apples to apples comparison, as Air Canada generates 42% of its revenue from international services (where it has a 37% market share), 20% of AC revenue comes from transborder services (where it has 35% market share) and only 38% of AC revenue comes from domestic services where it has 55% market share. With transborder and international flying making up 63% of AC revenue, one can see why the $CDN slide versus the $US dollar has hurt the carrier in 2013 and will continue to do so in 2014.

WJ Q400

WestJet and Air Canada have 91% of the Canadian market, so as  always Canada has a duopoly (2 airlines) its a battle between the two, Air Canada’s main priority is to reduce the CASM spread disadvantage with WestJet of 3.69 cents per ASM, the new high density seat B777’s, B787 Dreamiliners and B737MAX aircraft will help drive that lower, while the WestJet Encore Q400’s are driving up WestJet’s CASM, up 1% (1Q/2014).


Westjet generates roughly 45% of its revenue from transborder/international services (with 20% transborder market share and only a 4% market share of international), while domestically it generates 55% of its revenue (where it has a 36% market share). As a side note, Air Canada and WestJet have 91% market share of the Canadian domestic market, leaving 9% for carriers like First Air, Canadian North, Air Inuit, Air North and the few regional turboprop operators like Porter (#3 in Canada), Calm Air, Pacific Coastal, etc.

This domination by only 2 carriers is why we do not have low air fares in Canada like in the USA, because we sadly have a duopoly of 2 producers to choose from, its been like that for decades, Air Canada was challenged by CP Air, Canadian, PWA and now WestJet, I will address in a future article the prospects for a true LCC in Canada.

So, in simple terms, Air Canada’s biggest challenge has been its high unit costs, and Air Canada has been slowly putting together its global strategy for sustained value creation and profitability, which is based on 4 key priorities that are being  executed in 2014 after some significant cost and revenue achievements in 2013 that were needed to be in place to lower its cost structure, improve its balance sheet, increase ROIC (return on invested capital), improve its customer service, de-risk its pension plans and provide a more stable and positive environment for its employees. The priorities are:

  1. Cost transformation and revenue improvement
  2. International growth
  3. Customer engagement
  4. Cultural change

While I can write a long detailed blog on the whole strategy, I am going to focus on point #1 from above, cost transformation and revenue improvements as a great deal of the cost and revenue improvements is about Air Canada’s well thought our fleet renewal plan, which should reduce its unit CASM by at least 15%, from its 2013 of $0.173/ASM to $0.147/ASM in a rather short order (+/- 3 years).

Side note here, 1Q results for WestJet show the continuing CASM increase at WestJet, now at $0.1398 up 1%, so while Air Canada is slowly reducing its CASM, WestJet’s CASM continues to rise and slowly the CASM spread between the two airlines (3.69 cents in 2013) is shrinking, and  this is Air Canada’s number #1 priority now, lower unit costs.

The numbers for 1Q 2014 were not good for Air Canada, operating loss was $62m (-2.0% operating margin), net loss was $341m, versus 1Q 2013 load factor was down 0.7 pp (percentage points) to 80.3%, yield was $0.191/RPM and therefore PRASM (passenger revenue per ASM) was $0.1533 (down 0.5%), OPRASM (operating revenue per ASM) was $0.183/ASM below the CASM of $0.186 (though down 1.5%), which resulted in the operating loss (note: operating profit = OPRASM-CASM, in this case OPRASM < CASM=operating loss), so Air Canada still has much work to do on top line (revenues) and bottom line (costs).

But in all fairness to Air Canada 2013 was a big year for preparing the airline for putting the final touches on the implementation of of its various strategies and tactics and surely 2014 “is going to be about execution” says AC CEO Mr. Calin Rovinescu, and over the next few years we shall see big changes in Air Canada’s financial performance, and hopefully exchange rates and global political/economic situation will cooperate, as any problems there will affect Air Canada when 42% of its revenue ($CDN 5.2 billion) comes from international services.

air canada rouge 319

Air Canada rouge a new low cost leisure airline is aimed at making Air Canada’s cost competitive in the price sensitive leisure markets to Europe and to the sunny destinations to the south. The Airbus A319’s coming from Air Canada will have 142 seats instead of 120 seats at Air Canada (18.3% more productive/more seats) will have 21% lower unit costs (CASM) than at the mainline carrier.



Major achievements for Air Canada in 2013 as far implementing its unit cost reduction and revenue enhancement strategies, were the following:

  • Air Canada rouge was launched on July 1st, a lower cost medium and long haul leisure airline.
  • Four new B777-300ER with a new high density seating in 3 classes, inc. new premium economy.
  • Ordered and optioned 109 Boeing 737MAX airliners to replace the older 319/320/321’s.
  • Transferred all 15 x Embraer E175’s to Sky Regional Airlines (Air Canada Express partner).
  • Selected Air Georgian (Air Canada Express partner) to operate 5 x CRJ200’s.
  • Financed 5 x new high density B777-300ER’s with enhanced equipment trust certificates (EETC’s) valued at $US 715 million.
  • Completed $1.4 billion refinancing of the 2010 high yield notes at much lower rates, thereby lowering its debt costs.

The above initiatives are estimated to deliver Air Canada annual savings of $100+ million over the medium term (5 years) and bring the CASM down by 15% to below $0.150/ASM which in 5 years time will be close to WestJet’s CASM which I calculate will rise to at least $0.1481/ASM by 2018.

WestJet’s CASM has been creeping up ever so slowly and the introduction of more of Q400’s at Encore will accelerate this , especially once all of the ordered  45 Bombardier Q400’s are in operation with Encore, as the Q400 will be roughly 1/3 of the WestJet fleet. The Q400 is off course in no way close to the B737 fleet in CASM, as just direct operating costs per ASM are at least $0.190/ASM for the Q400 (or 32% higher than existing WJ CASM, and that does not include any overheads applied to the Q400, which probably are at least 40% on top of the DOC, so total CASM for the Q400 is around $0.266/ASM ), and pushing WJ’s total CASM’s up, when its own costs are going up as well, like salaries.

This is why mainline carriers should not operate small regional aircraft below say 100 seats, anything less and you get a CPA (capacity purchase agreement) in place with a regional airline or set up a totally separate regional operation.

The cornerstone of Air Canada’s Cost Transformation and Revenue Improvement is primarily centered on the following initiatives:


  1. The launch of Air Canada rouge its lower cost leisure airline.
  2. Introduction of 5 brand new high density Boeing B777-300ER’s.
  3. The introduction of the first of 37 fuel efficient Boeing 787 Dreamliners.
  4. The order for up to 108 Boeing B737Max narrow body aircraft.
  5. Regional diversification of its Air Canada Express partners.

AC rouge

Air Canada rouge is putting 264 seats into its B767-300’s while the mainline carrier operates them with 211 seats, these extra 53 seats will help reduce the B767-300’s CASM by 29% making it very competitive against Air Transat’s A310’s and A330’s. Air Canada Vacations is expecting big growth and rouge will have 15 x B767-300’s and 30 x A319’s by the end of 2016, trouble for competitors like Sunwing Airlines, Air Transat and WestJet, while CanJet’s contract for 11 B737-800’s for Air Transat end after this summer ?


1. Air Canada rouge

It has been a been a long time since Air Canada has ventured into LCC (low cost carrier) market, after the failed attempts with Tango and Zip. It is designed to be low cost, competitive and be profitable, its cost structure has to be consistent with that of its competitors. It took a big fight with the unions in arbitration to get this airline up and running, they have to get it right, and so far it looks good the high density B767-300 and A319 can compete with the competitions A330’s and B737-800’s.

The new airline rouge, is part of Air Canada Leisure Group, which also includes IT (inclusive tour) operator Air Canada Vacations, targeting sunny warm destinations in the winter and European destinations in the summer. Air Canada had to make some moves to counter the competition which has taken a great deal of market share in the leisure market away from Air Canada. This segment is price sensitive, it is all about price, do well here you need to have low costs to counter the low yields and that is what Air Canada has not been able to offer and make a good profit at it, now it has the chance to really eat away at the competition and raise its rather dismal 14% market share (Winter season to sunny destinations).

Air Canada says it learned a lot from the Tango and Zip experiment and that Delta and United came to study what Air Canada did with those LCC’s. Sadly, both LCC Song (Delta) and LCC TED (United) were disasters like Tango and Zip ! so they picked bad advise on how to do a LCC subsidiary, lesson here is when when copying some new business idea from another company, make sure it works ! before you incorporate it into your business model.

There was little good out of Zip and Tango, poorly thought out by Air Canada, Zip with its 12 x B737-200’s under Mr. Steve Smith (ex-President Air Ontario/Air Toronto and WestJet) should have checked WestJet’s growth ambitions, but it was just ill conceived and poorly managed to execute its mission, Mr. Robert Milton (CEO/President of Air Canada) dropped the ball on that one, the appointment of Mr. Steve Smith after he was terminated at WestJet Airlines, to run Zip while on the outside seemed like a good idea, probably was not.

How many failed LCC attempts were made by major airlines that failed ? too many, no one has got it right yet, Song (DL), TED (UA), Continental Lite (CO), Metro (US), Snowflake (SAS), Buzz (KLM) etc. though Mr. Willie Walsh, CEO at IAG (owner of BA/Iberia/Vueling) is doing a good job of with Vueling under CEO Alex Cruz.

The airline was launched July 1, 2013 and started with 2 x B767-300’s and 2 x A319’s with early destinations being Athens, Venice, Edinburgh and Dominican Republic, Cuba, Costa Rica and Jamaica, and by the end of 2013 the airline had 2 x B767-300’s and 8 x A319’s which are good for the Caribbean/sunny destinations.

The airline will grow to 15 x B767-300’s and 30 x A319’s by the end of 2016, a sizable fleet that has to make WestJet, SunWing and Air Transat worried. The business model is based on having lower operating costs through lower paid employees than at AC, better work rules in labor agreements and increasing aircraft seating capacity which combined should lower the CASM for the A319’s by 21% and for the B767-300’s by 29% compared to mainline Air Canada unit costs.

Rouge operates its A319’s in 142 seat configuration versus 120 seats at AC (18.3% more seating), which means all else equal, the CASM saving from seat density configuration alone is 15.5%, or 73.7% of the total 21% saving expected for the A319. So why not go all the way and lower the costs to their minimum by putting in the maximum 156 seats and lower seat costs due to seat density by 23% instead of just 15.5% ?

I believe you go all the way when you are a LCC, this middle of the road hybrid model in the leisure market does not work in the long run. So while employee costs have been lowered, the total cost saving is only 5.5% (26.1% of the 21% savings in CASM), they can do better, increasing seat density is an easily copied competitive strategy.

On the B767-300’s, rouge expects to save 29% on its CASM compared to mainline Air Canada, as its B767’s have 264 seats versus 211 at Air Canada, so 20.0% savings in CASM is attributed to the higher seat density (69.2% of the total 29% savings), so once again only 9.0% savings comes from labor savings.

I think the airline could have done better in cost savings, it may look impressive 21% and 29% off from one’s CASM, but when 70% of those savings are from just putting in more seats into the aircraft, it really is not a full hearted cost cutting effort by Air Canada rouge, and very disappointing to me after all the hoop la.

The airline will have “bring your own device” inflight entertainment system (IFE) which is very appreciated by travelers and almost a must on long haul flights.

By the end of the year, 47 international routes will be transferred from Air Canada to rouge and 7 new destinations, but no domestic routes are planned, yet ! The airline undertakes extensive analysis of each route’s profitability, yield, load factor, RASM, seasonality and then a “withdraw, reduce or replace” decision is made, those routes where yields are low that is where Air Canada wants rouge to fly to.

Air Canada expects to increase its margins on its leisure routes be they operated by AC or rouge.

air transat 310

Air Transat in the midst of restructuring, operates 8 older Airbus A310-300’s (249 seats) and 12 A330-300’s (342 seats) and has been using Can Jet for up to 11 B737-800’s in the winter (8 of the aircraft are leased from several European operators like XL Airways (out of business now), Transavia France and Jetair-Belgium), now that relationship with CanJet is to end and Transavia France will provide the B737-800’s next year while Enerjet will cover some of the flying this year as well, the Canadian leisure market is going to get a whole lot tougher this winter for all operators and a shake up of the industry is coming.


The onslaught that will come to the Canadian Leisure market with rouge having 33 aircraft at the end of 2014, 42 aircraft end of 2015 and 45 at the end of 2015 will be adding a great deal of capacity to the market, and the worst affected will be Air Transat, which runs 12 x A330-200/300’s, 8 x A310-300’s and B737-800’s from CanJet which supplies 3 in the summer and up to 11 in the winter (5 of its own rest ACMI from Europe), but that ends after this summer, to be replaced by Transavia France which operates 9 x B737-700’s and 27 x B737-800’s.

The sun destinations market is highly competitive with seasonal and differentiation challenges, a lifestyle discretionary purchase with no substitution, but has solid demand and growth and customers expect affordability first but also quality. Up to 90% of sales are made through travel agencies, OTA’s and call centers, and a market Air Canada needs to compete in after years of market decline. A recent study shows 83% of Canadian travelers are extremely or very much interested in visiting the Caribbean, Hawaii, Mexico or Bermuda, in fact in 2013 0ver 8 million Canadians took outbound trips to non-US destinations, a big market indeed.

The seasonality of the market is very challenging, for instance Air Transat’s summer market (May-October) is 90% transatlantic and 10% south, while the winter season (November to April) is 80% south and 20% transatlantic, so for operators like Air Transat and Sunwing Airlines, ACMI (aircraft, crew, maintenance andinsurance) or ‘wet’ leasing is very popular, with up to 15 ‘foreign’ aircraft in Canada during the winter, mostly B737-800’s usually with the maximum 189 seats, to keep CASM or per seat to a minimum.

Flair 400sunwing1enerjetblog5-2231209Air North-400

Lots of competitors in the Canadian leisure market, Flair Airlines (3 x B737-400’s above), SunWing Airlines (8 x B737-800’s + up to 17 more on ACMI lease from Europe, one company I know very well, Travel Service of the Czech Republic, I set up its LCC Smart Wings in 2004 and was there when they got their 1st B737-400, has 5+ B737-800’s here every winter), Enerjet (3 x B737-700’s ,but brought in as President former CFO at LCC Spirit Airlines Mr. David Lancelot, something is up there ?), WestJet Vacations always a tough competitor especially to sun destinations and then you have Air North (2 x B737-200’s, 2 x B737-500’s and 1 x B737-400 with GECAS to supply 2 more B737-500’s soon, more charter work ?)



With a competitive Air Canada rouge, we can expect a whole new landscape in the Canadian leisure market come 2015, as competition heats up, prices will come down (if they can).  This winter’s market share for sunny destinations from Canada was:

Air Transat 28%,  WestJet Vacations 22%,  Sunwing/Signature 30%,  Air Canada Vacations 14%,  Others 6%

This market share breakdown will be significantly different in 2 years time, as Air Canada Vacations wins more market share, mostly at the expense of Air Transat, Sunwing/Signature and to a lesser degree WestJet Vacations, as Air Canada will be much more competitive now. We may see some changes soon as Can Jet is up in the air about what it’s future is, and rouge will be taking big on the trans-Atlantic services which is Air Transat’s market and come winter expanded sun destinations will hurt the B737-800 operators (WestJet and Sunwing).

Lastly the way, we do have several small airlines in Canada operating all kinds of charters as well with B737-200/300/400/700 aircraft such as Air North, First Air, Canadian North, Flair and Enerjet. The inclusive tour (IT) charter business was always relatively easy to get into, and Canada has had its share of bankruptcies over the last 40 years in that segment:

Skyservice,  ZOOM AirAirlines,  Canada 3000,  Roots Air,  Royal Airlines,  Wardair,  Greyhound Air,  Harmony Air,  Nationair,  Oddyseey International,  Quebecair,  Nationair,  Worldways Canada,  Vista Jet,  etc. etc.

It is a tough business, but the last few years it is now ‘rather’ stable we do not know what will happen to Can Jet after its contract with Air Transat end at the end of this summer, 11 x B737-800s takes a lot of business to keep them busy, we shall see what IMP its owner comes up with.

ac 777-300

Air Canada has 23 Boeing B777’s (5 x high density B777-300ER, 12 x B777-300ER and 6 x B777-200), with the arrival of the B787 Dreamliner they will get an upgrade in interiors and IFE (infligh entertainment) to the B787 standard.


 2. Introduction of 5 brand new high density Boeing B777-300ER’s

Air Canada received the last of 5 high density Boeing B777-300ER which seat 458 passengers in 3 class seating, with 36 in International Business (44” pitch), 24 in Premium Economy (38” pitch) and 398 Economy (31” pitch). The current B7777-300ER’s in Air Canada’s fleet seat 349, so those 109 extra seats (31.2% more seats) should produce CASM savings of 23.8% as DOC (direct operating costs are the same for all B777-300ER’s and allocated IOC’s (indirect operating costs) should also be the same,

BUT Air Canada says the CASM reduction is only 21% compared to the current B777-300ER fleet ? a minor difference, still a very good aircraft configuration and very economically effective. The aircraft list price (2013) is $US 320.2 million, so at list price it was a $US1.6 billion deal, though I am sure they got a good discount, specially with the B737MAX deal. This aircraft is truly a “game changer” with 31.2% more seats than the current B777-300ER fleet the aircraft is designed for low CASM operation.

Now these aircraft will be able to produce growth, with 458 seats you are looking at roughly 229,000 ASM’s per flight hour, at 3,600 hours a year, that is 824 million ASM’s per aircraft which at 82% load factor comes to 676 million RPMS’s per aircraft, or 2.38 billion ASM’s for the 5 aircraft, which potentially can generate at least 3.38 billion RPMs or a minimum $608 million in revenue (based on $0.1800/RPM) for Air Canada, which may want to get more high density seat B777-300ER’s aircraft in the future as they see what they deliver in 2014.

With Air Canada’s plan to increase system wide capacity by 65.% to 8.0% in 2014, most of which will be international services, the high density B777-300ER will surely drive that capacity growth as well as the higher capacity B767-300’s at rouge, Air Canada is driving growth by increasing seat capacity over adding frequencies.

Air Canada is planning to upgrade its existing 12 x B777-300ER’s and 6 x B777-200’s with new interiors and IFE (inflight entertainment) of the new B787’s a new standard for the B777, which includes a 10 seat across economy cabin, which will increase seating by 11%-15%, and know that Airbus is negatively marketing the tightness of such tight seating very heavily !

The high density B777-300ER’s have unique seats and cabin configuration and are deployed on very specific routes where the 21% CASM reduction will drive much higher margin

AC 787

Air Canada has 37 Boeing B787’s on order (15 x B787-8’s and 22 x B787-9’s), with 1st flight set for July 15th Toronto to Tokyo Haneda. The aircraft will great lower Air Canada’;s CASM as they will replace and augment the older B767-300 and A330-300 fleet. In fact, The B787-8 is expected to lower CASM by 29% over the B767-300, so the future looks good for Air Canada’s strategy to lower its CASM, probably its biggest headache at this time. By the time Westjet launches its long haul services Air Canada will already be operating the B787’s and keep WestJet ‘s international ambitions in check.


3. The introduction of the first of 37 fuel efficient Boeing 787 Dreamliners

Air Canada received its 1st Boeing B787-8 (C-GHPQ) on May 18th, this is the first of 15 B787-8’s due this year and 22 of the larger  B787-9’s are due starting July 2015. The B878’s will operate existing routes presently operated by B767-300’s and will allow the airline to pursue new international growth opportunities.

The B787-8 will have 20 Business Class seats, 21 Premium Economy seats and 210 Economy seats for a total of 251 seats which is close the A330-300 (265 seats) and the B767-300 (211 seats) both of which will be replaced one way or another within 3-5 years as all 37 B787’s are delivered.

Of the current 27 B767-300’s, 15 will be transferred to rouge for the added 53 seats (264 from 211). Air Canada estimates that the B787’s will reduce unit costs per ASM by 29% compared to the B767-300’s, through better fuel efficiencies and lower maintenance costs, while offering better reliability, passenger comfort and service.

First flight for AC with the B787 is July 15 on the Toronto-Tokyo Haneda route.

AC 320

Air Canada will be replacing its 20+ year old Airbus A320’s with a order for up to 109 Boeing B737MAX airliners, a another move that should lower CASM by at least 10%.


 4. The order for up to 109 Boeing B737Max narrow body aircraft

In a surprise move on December 2013, Air Canada announced a huge 109 aircraft order for the Boeing B737MAX narrow body aircraft to replace its 81 strong A319/320/321 fleet which is now between 12 to 21 years old, and to add more capacity in that market segment.

This was a major coup for Boeing which lost out to Airbus 20+ years ago in a deal many questioned, this time around Boeing really wanted to win, and surely dropped its list price significantly, in 2013 list price for the B737MAX8 was $US 103.7 million, $109.9 million for the B737-900MAX9 and $US 85.1 million for the B7370MAX7, based on list price for all 109 the deal will ultimately be around $US 11.98 billion, with discount probably +/- $US.8.0 billion.

Boeing also agreed to take in 20 of Air Canada’s Embraer E190 (97 seats) leaving 25 still in service. Hats off to Air Canada for rejecting Bombardier’s pressure to replace the E190’s with the CSeries, which desperately needs a customer like Air Canada, the home country flag carrier, after detailed analysis AC decided to keep the +/- 7 year old E190’s “to avoid more capital expenditures”, but when you see what AC is now doing with its fleet, it is all about more and more seats, to drive the CASM down, and that is something you would not get from the CSeries, just like the Q400’s at Encore are driving WJ’s CASM, up the CSeries would do the same to AC, just as it is doing its best to drive it down 15%.

The order as it stands now, is for 61 aircraft (33 x  B737MAX8 and 28 x B737MAX9 aircraft) with substitution rights between them and the B737MAX7, plus options for 18 and a certain right to purchase an additional 30 aircraft. Deliveries begin 2017 with 2 aircraft and the remaining deliveries between 2018 and 2021.

Air Canada estimates a CASM reduction of 10% compared to the existing Airbus narrow body fleet.

AC dhc8

Air Canada Express operates 60 DHC-8-100/300’s, all operated by Jazz/Chorus Aviation. Once the exclusive operator of regional aircraft for Air Canada as Air Canada Jazz, now it has lost its way, lots it competitiveness and watched as new Air Canada partners started to fly Q400’s, CRJ-200’s and E170’s. Presently Jazz operates 122 aircraft for Air Canada, only 74% of the Air Canada Express fleet of 164 aircraft. It’s average fleet age is now 16.8 years old, with the DHC-8-100’s now 26.3 years old and the 300’s 24 years old, they will need to be replaced at some point, but with what ? only the ATR-42-600 is produced below the 70 seat market.


 5. Regional diversification of its Air Canada Express partners

Air Canada enhances its domestic and transborder network through CPA’s (capacity purchase agreements) with several local regional airlines, that operate a total of 159 aircraft under the banner of Air Canada Express, basically as ACMI providers (aircraft, crew, maintenance and insurance), though even several of the aircraft are owned by Air Canada. They fly where AC wants them to fly, no marketing, no fleet planning, no route analysis they just operate and maintain the aircraft as cheaply as possible.

In 2013, Air Canada spent 1.123 billion (5% increase on 2012) on its capacity purchase costs, so its big costs for Air Canada to keep its regional operations going, in fact it is 9.5% of its operating costs and AC has pushing those costs down by increasing the number of operators at the expense of Jazz Aviation, and there should be some alarm bells going off in Halifax as to where Jazz/Chorus is headed.

Jazz Aviation was formed in 2001 and consolidated all the Air Canada Connectors from Air BC, Air Nova, Air Ontario and Canadian Regional Airlines, under the former CEO of Air Nova, Mr. Joseph D. Randell.

At one time Air Canada owned and used Jazz Aviation exclusively, under the Air Canada Jazz brand name, but that relationship ended in 2012 as Air Canada phased out Air Canada Jazz in favour of Air Canada Express and Jazz Aviation became public and changed its name to Chorus Aviation.

Jazz has struggled to diversify its business, it has tried operating 6 x B757’s for Thomas Cook Canada in 2010, but that was cancelled 2 years into the 5 year contract., and took a 33% share in Uruguay’s national airline Pluna which operated CRJ900’s, but failed, and now Jazz once the exclusive regional aircraft provider, watches as it only operates 122 out of 164 (74%) aircraft for Air Canada Express and slowly it is loosing business to new AC partners.

Today there are 4 airlines that operate aircraft under the Air Canada Express brand:

 Jazz/Chorus operates 122 aircraft (25 x CRJ-200, 16 CRJ-705, 34 x DHC-8-100, 26 x DHC-8-300, 21 x Q400) operates all over Canada.

Sky Regional operates 20 aircraft (5 x Q400, 15 x E175) operates Q400 and E170 in Ontario and trans-border routes.

Exploits Valley Air Services (EVAS) operates 5 aircraft (5 x Beech 1900D) operates in Newfoundland & Labrador and Quebec out of gander.

Air Georgian operates 12 aircraft (12 x Beech 1900D) and later this year will be adding 5 x CRJ-200. Flies 1900D’s out of Calgary, CRJ-200’s out of Toronto.


In 2012 Air Canada completed a collective agreement with ACPA (Air Canada Pilots Association) which allows the airline to better manage its fleet and compete in the market with lower costs, and allows multiple regional partners. Now Air Canada is allowed to operate up to 60 regional aircraft up to 76 seats. In mid-2013 it transferred all of its 15 E175’s to Sky Regional which already operated 5 x Q400’s for Air Canada, the E170 move has saved Air Canada 11% off the E170 CASM.

Most recently, Air Georgian got a contract to operate 5 x CRJ-200’s for Air Canada out of Toronto and that is something Jazz should have got, but I am assuming it is not very competitive on cost anymore, 2013 CASM for the Chorus Aviation fleet was $0.2717/ASM and excluding fuel its $0.2052/ASM.

Of course regional airlines have higher unit costs than large airlines, smaller aircraft always will, but having 34.4 employees per aircraft seems very high (4,371 full time employees/127 aircraft), especially given it is basically an ACMI operation, with no marketing, revenue management, just operations people. With the DHC-8 fleet in need of replacing over the next 5-8 years, Chorus has many challenges on its plate, and they should be worried with all the latest 25 larger aircraft going to other operators (5 x Q400’s, 15 x E170’s, 5 x CRJ-200’s), very worried.

So we are seeing Air Canada on its way up, slowly it has put in the pieces of the puzzle that will make it more competitive and profitable. The new aircraft, from high density B777-300ER’s, B787 Dreamliners, B737Max coupled to the rouge high density seating configuration will drive Air Canada’s need to lower its CASM, once it closes that gap with WestJet Airlines, Air Canada’s future will be brighter than anytime in the past 30 years !




















About Aviation Doctor - Helping aviation companies to transform the present into a more profitable tomorrow

I am a Canadian and EU national with an MBA and 33+ years experience in aviation business development with 20 years overseas and work in 30+ countries. A former investment/merchant banker (mergers and acquisitions to corporate turnarounds). airline and OEM senior executive and past owner of 6 successful aviation companies in 3 countries (executive jet charter/management companies, aircraft sales, aircraft broker, airline/aerospace consulting to aircraft insurance). I have a very diverse aviation background with 75+ aviation companies (50+ airlines of all sizes, OEM's, airports, lessors, MRO to service providers) as consultant, executive management, business analyst and business development adviser. Excellent success track record in International Business Development. Most work with airlines is with new start-ups and restructuring of troubled carriers. I sold new business jets, turboprops and helicopters for Cessna, Raytheon, Gulfstream to Eurocopter as an ASR as well as undertaking sales and marketing of commercial aircraft for Boeing, de Havilland, Dornier, Saab and Beechcraft. Brokered everything from LET-410's to B747's and from piston PA31 to G550 business jets. I look beyond the headlines of the aviation news and analyze what the meaning and consequences of the new information really means. There is a story behind each headline that few go beyond. Picked the name Aviation Doctor, as much of my work has been with troubled companies or those that want and need to grow profitably. I fix problems in the business for a better tomorrow. You can reach me with comments or suggestions at: Tomas.Aviation@gmail.com I write a lot of Articles and Posts on LinkedIN: https://www.linkedin.com/in/tomas-chlumecky-3200a021/


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