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Clearing the air

Air Canada's profits and share price have been flying high. Can you blame CEO Calin Rovinescu—who saved the airline from crashing back in 2009—for wanting to avoid talking about anything negative?

Prior to 2009, it was one damn thing after another for Air Canada. The few years after its 1987 privatization saw record losses, union battles and a hostile takeover bid. Then came bankruptcy protection and pension plan woes. Through it all, the Montreal company's shares swooped and dived, from a high of $20.75 in May, 2000, to a low of 5¢ in August, 2004, as creditors loomed. After a corporate restructuring and rebirth through an IPO in 2006, its shares started at $19.75, only to plunge below a dollar in spring 2009. Finally, Air Canada's board hired the man who'd led its restructuring to restore order. Calin Rovinescu immediately began cutting costs and revamping systems. The stock stumbled back below a dollar in 2012, but in the years since, it has steadily climbed above the clouds, with soaring profits and a share price to match. All that success, however, has come at a time when air travel feels increasingly stressful. Growing delays and disruptions have left many passengers, including some Air Canada customers, feeling overcharged and underserved. But in the glow of his financial triumphs, Air Canada's CEO would rather not dwell on the negatives. Or even hear about them, apparently.

You've come a long way since 2009. Your airline is now profitable and your stock is up 2,100%. Was it as easy as you thought it would be?
[Laughs] Yeah, piece of cake. No, I mean, obviously I am extremely pleased to see the progress we've made on many, many fronts.

Profitability being one of them.
When we announced our 2016 results, we had a record EBITDAR (1) of $2.8 billion. We have had several consecutive years of sustainable profitability. The company is an entirely different organization now from a stability perspective.

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What's the big driver of the turnaround?
Our key competitive driver was reducing CASM (2) gradually over the last number of years.

The cost cutting has been pretty profound. You've been described as a "hard ass." Is that fair?
Well, I'll leave it to others to describe me, but I would say it wasn't so much cost cutting as opposed to cost transformation. We didn't do this through wage reductions or anything like that, but just becoming more efficient. It's the configuration of the airplanes, the type of airplanes. The creation of Rouge has helped.

We were talking about stability. Your share price was around $20 in November of 2006.
Correct. That was the IPO coming out of ACE (3).

So essentially it's gotten back to where it once was.
The share price [in 2006] was based on a lower number of shares.

Was the stock ever split, though?
No.

So for investors, it's the same. Somebody who bought in 2006 at $20 has seen their investment return to where it was. Correct?
Yeah. With the company being three times as valuable. Yup.

The company is, but the investment isn't, in that scenario.
In the scenario where somebody would have bought on the IPO?

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Yes. The shares have finally gotten back to that level.
I wouldn't characterize it like that. But I hear what you're saying.

In the interim, the price has fallen twice to below a dollar. Right? So how does an investor look at that and feel as though Air Canada is a stable investment?
Here are some sound bites. One, total revenue in 2009 was $9.7 billion, and total revenue in 2016 was approaching $15 billion. So, a much more solid revenue base. The EBITDAR margin, which is another main driver, in 2009 was 7%, and in 2016 was 18.9%. And return on invested capital was negative 1.5% in 2009, and at the end of 2016 was 14.7%. Leverage ratio, which is the level of debt relative to EBITDAR, was an unsustainable 8.3 times in 2009, and at the end of 2016 was 2.6 times. Unrestricted liquidity, meaning cash on hand, exceeded $4 billion after Q1, relative to the amount we had at the end of 2009—about $1.4 billion. Pension plans, which have always been a major source of angst, had a deficit that exceeded $4 billion. And now there's a surplus of about $2 billion.

But the airline industry is notoriously volatile. Warren Buffett doesn't believe in investing in airlines. You yourself have said that, "Historically, airlines have not rewarded shareholders." So even though Air Canada is in much better shape, it's hard to make the case that it's a great place for long-term investors.
Well, I mean, ironically, you use our friend Mr. Buffett—

I use you as well.
No, I never said that. I don't recall where that would have come from. But I would suggest, Trevor, that you take a look at what our friend Mr. Buffett has done over the last year. He's invested something in the range of $2 billion to $4 billion in the airline industry (4). When Warren Buffett invests in four or five airlines, it's a pretty good indicator that he may have reversed his position.

Fair enough. The quote I'm attributing to you was in a June, 2015, story in Globe Investor. "Historically, airlines have not rewarded shareholders, but we are focusing on profitability and margins," is the full quote.
Exactly, yeah.

You admit it has been true.
Yes, historically. You look at the amount of value that would have been created in major stock markets over a 15- or 20-year time frame, and the North American Airline Index over that same time would not have delivered value. This is precisely the point I'm making, which is to say that the transformational exercise that has gone on here is specifically rewarding shareholders. I don't think there are too many companies that have delivered a 2,100% return on their shares over this time frame.

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Okay, let's focus on the passenger. Your success has come at a time when air travel is more stressful than ever. Complaints to the Canadian Transportation Agency are way up. Would you agree travelling by air has become an ordeal for many?
I would not say that it's an ordeal. We come at this, you probably are aware, from being recognized as North America's best airline. So, you know—

You've ranked quite high in the North American context. But you are 29th on the Skytrax ranking. There's still a lot of room, as you've said, for improvement. Why is it that North American airlines can't get higher on that list?
North America has a very mature, well-established dynamic of legislation. Of labour laws. Of taxation laws. And so the reality is such that you are going to see differentials that exist between something in the Gulf States, for example, and something in North America. That's just a fact of life. We're proud of what we've achieved. It's a complex business.

But overbooking and all the delays people are experiencing are quite disruptive. Many people related to that passenger being dragged off the United Airlines plane.
Look, obviously I'm not commenting on the United situation. I'll talk about our company, which has got a terrific track record. This is unlike the business of manufacturing t-shirts or cheese or, for that matter, ETFs or component parts for automobiles. This business is a little trickier. I'm not going to start debating other carriers.

You want to speak about Air Canada, and that's fine. Tell me, how much overbooking does Air Canada do?
Any network carrier will do a certain amount of overbooking based on operational requirements. And while it is perhaps, as a sound bite, interesting to say, "Well, how can that possibly be, I've paid for my seat and I should be able to get my seat no matter what," what happens when you don't show up for your seat as a result of some other operational dynamic that exists elsewhere in the network?

You feel good about how Air Canada deals with this. Can we talk about that case last April when the 10-year-old boy was bumped?
No. I'm not getting into specific customer dynamics with you, Trevor. And that's not what I expected this interview to be about, and I'm happy to end it here if that's—I'm not getting into discussions with respect to specific customer experiences.

Let's talk about the disruptions coming from things like climate change. What is Air Canada doing to deal with this new reality?
Short of being able to control the weather, I don't think there's a lot we can do. I think that you will see some extreme weather situations which will result in disruptions.

You're saying there's nothing you can do to plan around that?
No, that's not what I'm saying. There is a tremendous amount of planning that goes on through a complex operating system. But being able to control the weather is not within our business plan.

In terms of the terrorism threat, is there something Air Canada can do to face that and prevent it?
There are many, many different strategies, which obviously I'm not at liberty to discuss with you.

I'm presenting a bunch of things that are potential disruptors, and I'm trying to get a sense of your approach to dealing with them.
Well, look, this is the reality we face. We've seen major disruptions in Europe as a result of some of the activities there. Unfortunately that's the dynamic that we face, and that's part of our business modelling.

Do you factor things like runway construction into your scheduling when you're selling tickets?
Yes, of course, if we know it. And if we have been communicated accurate information, which is not always the case.

In the spring, when runways were being reconstructed at Pearson, was that a case where you didn't get full information? Because there were a lot of delays.
Yeah, there were a lot of delays around it, and I encourage you to speak to the GTAA.

So it was the GTAA's fault?
I'm not the one who's doing the runway construction, Trevor. I think it would be great if I was in an environment where I could control the weather, avoid terrorism, build the runways myself, own all the airports, and ensure that the universe was all capable of being seen through rose-coloured glasses.

Air Canada took some criticism last spring when flights were delayed and people were stranded. Are you willing to say that Air Canada could have done a better job of scheduling and selling tickets around that problem?
First of all, do you think that Air Canada was the only carrier affected by that?

But you don't want to talk about other carriers.
I know. But it affected the entire airport. And I think what we've said previously is that there could have been significantly better communication from the airport and navigational authorities as to what needed to happen. And that's the reality. Yup.

Can you talk to me about pilot error? (5) Just in terms of—
Trevor, I'm not sure I'm loving the direction of your interview here. I thought we were talking about a more generic dynamic around what the airline has achieved.

If there was one thing you could change about the airline industry in Canada, what would it be?
I would look to have the overall infrastructure costs in Canada, being the airport costs, the security surcharges, the fuel excise taxes, the airport ground rent, reduced to a competitive level, because Canada tends to be at the bottom of competitiveness.

Thank you for your time.
You're welcome.


1. Earnings before interest, taxes, depreciation, amortization and rent (of airplanes) is a standard metric in the airline industry.

2. Cost per available seat mile.

3. ACE Aviation Holdings Inc. was the parent company of Air Canada at the time of the IPO.

4. As of February, 2017, Buffett's Berkshire Hathaway holding company had invested almost $10 billion in American, Delta, United and Southwest Airlines.

5. In July, an Air Canada plane carrying 140 people nearly landed on a taxiway at San Francisco International Airport, where four loaded planes were lined up. The near-disaster is being
investigated.


This interview has been edited and condensed.

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