Air Canada, along with the rest of the global airline industry, is facing a severe drop in traffic and a corresponding decline in revenue as a result of the coronavirus (COVID-19) outbreak and travel restrictions imposed in many countries around the world, including Canada and the United States. Although the company expects this disruption to be temporary, as the full impact and duration of the outbreak is unknown, Air Canada is withdrawing its previously announced first quarter and full year 2020 guidance as well as its full year 2021 guidance (including its free cash flow guidance for the 2019-2021 period) while it takes steps to mitigate the financial impact on its business.
For the second quarter of 2020, Air Canada expects, on average, system ASM capacity to decline by approximately 50% versus the comparable period in 2019, reflecting capacity reductions in all key markets affected by COVID-19 or by travel restrictions. The reduction in capacity in Pacific markets for the month of April is expected to be approximately 75%. The company will continue to proactively adjust capacity as required.
A combination of significantly lower jet fuel prices, the projected cost savings associated with capacity reductions, including workplace reductions and other programs, and a general cost reduction program is expected to mitigate between 50 and 60% of the company’s total revenue loss for the second quarter of 2020. Air Canada believes that, excluding fuel and depreciation and amortization expenses, approximately 50% of its operating expenses are variable in nature. Air Canada has no current outstanding fuel hedge positions.
To preserve cash, Air Canada is initiating a company-wide cost reduction and capital deferral program, targeting at least CA$500 million.
Air Canada suspended its share repurchase program effective March 2, 2020 and drew down its US$600 million revolving credit facility. In addition, Air Canada is working with several parties to raise additional liquidity over the next several weeks, which will require pro-rata security from its unencumbered asset pool.
Air Canada assumes that the Canadian dollar will trade, on average, at C$1.39 per U.S. dollar for both the second quarter and the remainder of 2020 and that the price of jet fuel will average 47 CAD cents per litre for the second quarter of 2020 and 50 CAD cents per litre for the remainder of 2020.
Air Canada had cash, cash equivalents, short and long investments of CA$7.1 billion at March 13, 2020, which includes the proceeds from the draw-down of the U.S.-based revolving credit facility discussed above. In addition, it has a Canadian CA$200 million revolving credit facility which it intends to draw down in the next week.
