The venue for our Airline Business cover interview with Air Canada president and chief executive Calin Rovinescu inside the airline’s Montreal headquarters is a room known by fellow staff as the “lounge”.
Given that he has carved out a reputation for finding creative ways to solve management challenges, Ronvinescu’s choice of location for our tête-à-tête is apt. Unlike the carrier’s formal boardroom with uniform tall red chairs around the corner, this room, with its impressionist art books and orange armchairs, encapsulates a sense of curated style reminiscent of midtown Manhattan rather than a sprawling industrial street on the perimeter of an international airport.
The “lounge” contains a three-tiered glass cabinet displaying aircraft models for each Star Alliance member – a nod not only to Air Canada’s position as a founder member of the group, but also the fact that Rovinescu is chair of its chief executive board. This month he will be adding yet another achievement to his resume by succeeding Delta Air Lines chief Richard Anderson as IATA chairman.
This year marks Rovinescu’s fifth anniversary at the helm of Air Canada – a milestone that sets the stage for a conversation about the changes that he has implemented to transform the carrier from an airline struggling to turn a profit, to a firm turning the heads of Wall Street analysts after achieving successful financial results last year.
Rovinescu returned to the airline in 2009 as chief executive after serving as its chief restructuring officer between 2003 and 2004 following a filing for creditor protection in April 2003. He resigned in 2004 to co-found an investment bank, Genuity Capital Markets. Since then, Air Canada has achieved several goals – the most crucial of which was producing a solid balance sheet. Slowly, improvements have started to manifest.
“For me it was a very, very stimulating and interesting time to come back,” says Rovinescu. “The backdrop was perfect: the best time to come in and effect change is when there’s a crisis. And the 2008 fuel price spike followed by a liquidity crisis at the company and large pension deficit again created an opportunity to come in and look at significant change.”
After reporting an adjusted net loss of C$122 million ($112 million) in 2011, Air Canada turned its balance sheet around a year later with a C$53 million adjusted net profit. And in 2013, it made six times as much with C$340 million in adjusted net income.
IMPLEMENTING SIMULTANEOUS CHANGES
Effecting that change was not easy, Rovinescu recalls. He uses the analogy of a Rubik’s cube to describe the challenge: the airline was required to undertake several projects that depended on one another – raising financing from the capital markets, developing relationships with the government and suppliers, and stabilising labour while negotiating new contracts, to name a few.
“It was not something you could tackle successively; it was something that needed to be tackled simultaneously,” he recalls.
When Rovinescu started as chief executive on 1 April 2009, the carrier had a C$3.2 billion pension deficit while facing a need to re-negotiate labour contracts with several major employee groups. The airline also needed to raise liquidity from the capital markets.
To solve these, Rovinescu identified four tasks for the airline to focus on: cost transformation, international expansion, culture change and customer engagement. The narrative has changed dramatically in the past five years.
As of January, Air Canada’s registered pension plans were in a surplus position after seeing a C$3.7 billion deficit a year earlier. The carrier surpassed its goal as part of a cost transformation programme that sought to find C$500 million in annual savings by 2011, and has since taken on additional cost savings measures. Major labour contracts have been negotiated, after arbitration and strike actions.
Now that the airline has been profitable for two years in a row by implementing some of these changes, the airline’s strategy in 2014 and the coming years “is going to be about execution”, says Rovinescu.
“You want to be able to start converting some of these strategies that you’ve had into long-term, sustainable growth,” says Rovinescu. “So I look to 2014 to give us that opportunity.”
TRANSFORMATIONAL FINANCING MOVES
Rovinescu notes that in 2013 the airline made two “transformational” financing moves: tapping the enhanced equipment trust certificate (EETC) market for its five new Boeing 777-300ERs, as well as making a transaction allowing it to borrow $1.4 billion to refinance the equivalent of $1.1 billion in notes.
Air Canada is in the midst of putting forth a programme to lower its cost per available seat mile (CASM) by 15%, from 17.54 Canadian cents in 2012 to about 14.91 Canadian cents if implemented today, assuming that cost drivers, currency and fuel are the same.
Much of these cost-savings rides on Air Canada’s fleet renewal, which centres on adding the Boeing 787 to its fleet and transferring older aircraft to certain leisure routes under its year-old “lower-cost” carrier, Air Canada Rouge.
Through the plan, the airline is planning to see more than C$100 million in annual cost savings over the medium term and hopes to boost its return on invested capital from 11% in 2013 to as high as 13% in 2015.
The airline received the first of 37 787s on 20 May and has six 787-8s scheduled for delivery in the year. When Air Canada originally placed its 787 order in April 2005, it planned to take delivery of its first aircraft in 2010.
The carrier has ordered 15 787-8s and 22 of the -9 variant, which will be delivered from July 2015. The airline plans to receive the three-cabin aircraft through 2019 and expects the 787s to provide a 29% lower CASM compared with the Boeing 767-300ER aircraft it will replace on certain long-haul routes.
As the 787s enter the fleet, those 767s are being transitioned to the Rouge banner. The leisure airline plans to operate as many as 20 767s and 30 Airbus A319s under a lower cost structure than they would in the mainline fleet, the airline has said.
The airline’s path to receiving its Dreamliners was long, as the various issues that blighted the aircraft since the order almost a decade ago delayed deliveries by four years. But the all-new twinjet was worth the wait, says Rovinescu.
“We’re disappointed and Boeing knows we’re disappointed, both by the delays and by the issues around the battery and other issues they’ve had, says Rovinescu. “However, our expectation is that the 787 will be a great airplane. Whenever you develop a game-changing aircraft like that, you are going to have issues.”
Another fleet change that is contributing to Air Canada’s boosting capacity is the introduction of the Boeing 777-300ER, which was launched on flights between Montreal and Paris last year and now also flies to London and Hong Kong from Vancouver and performs seasonal services to London from Montreal.
The five new three-class, high-density aircraft with 458 seats are each expected to have a 21% lower CASM than the 349-seat 777s that preceded them. Air Canada is also making plans to renew its narrowbody fleet, inking a deal for the Boeing 737 Max earlier this year. The airline will start receiving the first two of 33 737-8s and 28 -9s in 2017.
SWITCH TO BOEING
Air Canada’s decision to switch its Airbus narrowbody fleet to the 737 Max was a “very, very complex assessment” that came down to myriad factors, says Rovinescu.
“[There were] well over 100 drivers to that,” says Rovinescu, noting that the airline spent more than a year analysing these factors. “The obvious ones [were] efficiency, fuel, maintenance, expected maintenance reliability. Cost of the aircraft – in other words, how much of a discount from the list price would we be able to negotiate.”
Air Canada focused on factors beyond aircraft performance, such as the value it would receive from removing its Embraer 190s – purchased at a time when fuel prices were less volatile, says Rovinescu. Boeing agreed to buy back 20 of these aircraft as part of the Max deal.
The airline had considered purchasing a new aircraft type with between 100 to 150 seats to replace the remaining 25 Embraers, however it decided in May that it would keep the remaining aircraft to avoid more capital expenditures.
Adding aircraft like the 787 and high-density 777s is an integral part of the airline’s strategy to expand internationally because it frees up the Rouge fleet and the aircraft are tailored to serve certain destinations better than the 767s and Airbus A330s in the carrier’s fleet today, says Rovinescu.
The carrier sees the domestic market as “adequately saturated”, so the “real opportunity” lies in serving international markets now that it can operate a mix of 787s, 777s and some A330s, says Rovinescu.
“We did not have the right aircraft because the backbone of our international fleet was the 767, which didn’t have the range,” he says.
Air Canada plans to increase its system-wide capacity between 6.5% and 8% in 2014, of which the focus is international. The 109 additional seats on the high-density 777s and higher capacity of the Rouge 767s will account for a lot of the growth, he says.
In January, the carrier entered into a five-year co-operation agreement with the Greater Toronto Airports Authority, which provides the carrier with perks like fixed aeronautical fees and will allow the carrier to add more capacity at cheaper rates, and increase the range of destinations it serves, says Rovinescu.
“We’d expand to Rio, we’d expand to India, we’d expand to places like that – and the 787 will be a key driver for us in doing that,” says Rovinescu, weeks before launching year-round services three times per week between Toronto and Rio de Janeiro with the 767.
Rovinescu hopes the expanded hub would allow the Canadian market to serve as a foundation for the airline to garner sixth-freedom traffic from the USA to create a global hub comparable to what KLM has developed at Amsterdam Schiphol airport.
“I come back to the example of a Schiphol in Amsterdam, because when you see the multiple destinations that are served from that fairly thin market, I can envisage the same thing happening from Canada,” says Rovinescu. “Not just from Toronto, but primarily Toronto, Vancouver secondarily, Montreal third, and Calgary four.”
The airline will launch the first daily 787 flight between Toronto’s Pearson airport and Tokyo’s Haneda airport in July – the only flight from Canada and the only one in North America with daytime slots. It will also launch Toronto-Tel Aviv flights in that quarter.
In addition, Air Canada began services from Toronto to Seoul and Istanbul last year and raised frequencies between Beijing and Toronto as well as Vancouver. It will also add capacity on several routes from other hubs, including Calgary to London Heathrow and Frankfurt, as well as Montreal to Brussels and Geneva.
Air Canada is also embarking on a European expansion with Rouge, which this summer will begin flying year-round between Toronto and Milan, as well as add new seasonal flights from Toronto to Lisbon and Manchester, and from Montreal to Barcelona and Nice.
Another main facet of the CASM programme is changes to Air Canada’s regional fleet. Under a new pilot contract formed in 2012, the airline can now operate up to 60 76-seat jets at the regional level.
As a result, Air Canada has been able to transition its fleet of 15 Embraer 175 regional jets to be operated by Montreal-based regional carrier Sky Regional, which is expected to provide CASM savings of 11% for the aircraft type.
The airline’s main regional competitor, WestJet’s Encore, is moving to Toronto this month after serving short-haul routes from Calgary since last June. Although Encore only has 10 aircraft in its fleet today, Air Canada is striving to cut down on regional costs to be in line with its competitor and US regionals.
“Right now it’s not an issue, but over the passage of time it could well be an issue, so we’ve communicated that to all of our regional partners,” says Rovinescu.
But no matter what competitive moves other players take, one of the biggest challenges is one that has affected carriers in recent months: the weakness of the Canadian dollar.
“It’s an industry that has its challenges even when things are good,” says Rovinescu. “So we’ve lived a couple of decent years here, and the objective in the case of our company is to make it such that we can make money in good times and bad.”