transformation risk management practices - … chapter...• effective fuel hedging strategy...
TRANSCRIPT
Transformation – Risk Management Practices
FEI Canada – Toronto Chapter
Mike Rousseau
Executive Vice President & Chief Financial Officer
October 12, 2017
Progress on our Business Plan Record Levels of EBITDAR and EBITDAR Margin
2
679
1,386 1,242 1,320 1,433 1,660
2,542 2,768 2,715
7.0
12.8
10.7 10.9 11.6
12.5
18.3 18.9
17.6
0
2
4
6
8
10
12
14
16
18
20
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
TTM-June-2017 2016 2015 2014 2013
$ Millions EBITDAR Margin %
2012 2011 2010 2009
EBITDAR (excluding special items)
EBITDAR Margin (excluding special items)
3
Strategy Increases Value Share Price Up 3,400% $7.4 Billion of Value Created
June 2/15 AC hosts Investor Day
Sept 26/16 AC announced a debt
refinancing transaction of C$1.25B
June 10/13 AC hosts Investor Day
Nov 7/16 AC reports record
Q3 2016 results
May 11/17 AC announced its intention
to launch its own loyalty program in 2020
Sept 19/17 AC hosts Investor Day
* As at October 10, 2017
Aug 1/17 AC reports record Q2
2017 results
Financial Stability
Pension and liquidity risks addressed
Record financial results
Fleet
Modern WB fleet
Seat densification
Swing capacity
NB fleet replacement
Award winning product
Network & Hubs
Extensive & expanding global network
Geographically well-positioned hubs
Air Canada Rouge
Competitive cost structure in leisure markets
Provides new growth opportunities
Labour Stability
Long-term agreements with most major unions
Increased flexibility and cost certainty
Regional Feed
Diversification
More competitive cost structure at Jazz
Loyalty
Improved customer experience
Significant financial value to Air Canada
Credit card RFP
Our Path to Global Champion
4
Solid foundation allowing Air Canada to leverage its unique competitive advantages
Managing our Risk
Key Mitigants:
• Route diversification
• Increased fleet flexibility
• Fully-funded pension plans
• Long-term labour contracts
• Fuel and foreign exchange programs
• Lower leverage and cost of debt
5
6
Route Diversification
• Broad scope of network provides for diversification
– Avoids concentration
– Mitigates risk of changes in domestic and global markets
• 90% of growth directed at U.S. and international markets
– Limited growth opportunities in domestic market
– Historically, operating margins have been the highest in international markets
• Proportion of passenger revenue has shifted
– Domestic 39% in 2012 vs 34% in 2016
– U.S./International 61% in 2012 vs 66% in 2016
7
Fleet Flexibility
• Built tremendous flexibly into our fleet to effectively react to different economic
environments
• Flexibility to adjust to shifting market conditions (swing capacity):
– Conscious decision to increase number of unencumbered aircraft
– By end of 2017 – 50 fully unencumbered aircraft in fleet (narrow-body and wide-body)
– September 11th/2008 and 2009 recession capacity was reduced through utilization
• Diverse fleet types increases flexibility to manage capacity to match demand
– Lower-cost aircraft (Rouge and higher density) improves ability to compete
• 51 aircraft with leases expiring in the next three years
• Ability to defer a portion of Boeing 737 aircraft deliveries
• Boeing 737 and C-series orders include options
8
Fully-funded Pension Plans
• Solvency surplus in domestic registered pension plans of $1.9B at January 1,
2017 versus a deficit of $4.2B deficit at January 1, 2012
• Two agreements with Canadian government to limit payments (2009 and
2014)
• $6.1B turnaround - $1B in union-negotiated benefit reductions; $1B in cash
contributions; $4.1B due to value-added investment strategy
• Risk significantly mitigated by introduction of liability-driven initiatives
- 75% of pension liabilities matched with fixed income products
- Overall risk profile lower by 50%
• All new employees in DC plan which reduces DB plan volatility
• Improved financial flexibility to fund capital expenditure programs,
lower debt levels and return value to shareholders
10-Year Labour Agreements with Most Major Unions
• Concluded long-term agreements with
most major union groups
• Employees are engaged and aligned
with long-term goals
• New agreements have binding
arbitration provisions
• Provides labour stability and long-term
cost certainty
9
Fuel and Foreign Exchange Programs
• Volatility in fuel and foreign exchange over last 10 years
– CAD-USD High $1.09 / Low $0.69
– WTI per barrel High US$145 / Low US$26
• Effective fuel hedging strategy designed to lock in booking curve profitability
– Use of call options protects against short-term price spikes while allowing to participate 100% in
fuel price declines
• Foreign exchange risk strategy is to cover 70% of net U.S. exposure on a rolling 18-
month basis using derivatives and U.S. cash reserves
– U.S. dollar revenues together with foreign currency net revenues converted to U.S. dollars
essentially cover non-fuel U.S. dollar costs
– Fuel expenses are a significant U.S. dollar requirement but the impact in Canadian dollars is
mitigated by a correlation between the Canadian dollar and the price of crude oil
– Impact of hedging benefits cash flow but hedging results reported in non-operating income
10
Lower Leverage and Cost of Debt
11
6,393
7,090
6,291
5,132
4,3514,137
4,576
4,874
5,628
2.4
2.62.5
3.13.03.1
3.73.5
8.3
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
2012 2015 2011 2010 2009 2014 2013
$ Millions
2016 June-17
Adjusted net debt
Leverage ratio
• Significantly lowered cost of debt
− 4.5% at June 30, 2017 vs 6.6% in 2012
− Accessed lower-cost capital – EETC/JOLCO
− $1.25 billion dollar refinancing transaction
• Increased pool of unencumbered assets
− Total current value of US$1.7 billion
• Conscious effort to increase credit ratings
− Standard & Poor’s
BB- with stable outlook in 2017 (from CCC+ in 2010)
− Moody’s
Ba3 with stable outlook (from B3 in 2010)
12
Air Canada’s evolving risk profile:
ERM provides a balanced
approach to Risk and Performance
Preserve Value
Create Value
2008- 09
Survival
2010-13
Sustainability
2014-15
Profitability
2016+
Sustained Profitability
Enterprise Risk Management at Air Canada
The ERM Process
Risks to Air Canada’s Strategic Plan and
Operations
Air Canada’s Executive and Sr Management Team participate in the identification and rating of
enterprise-level risks to Air Canada
ERM Risk Register
Key Risk Indicators are identified for each of the top ERM risks and monitored on a quarterly basis. Emerging risks are continuously
being evaluated.
Summary
13
Stabilization of business 2009-2012
– Major risks mitigated
– Difficult decisions around capital investment
– Set foundation for growth
Establishment of strategic growth plan
– Repaired balance sheet and pension which allowed for funding
of growth opportunities
– Significant work with union groups to align vision
– Resulting in significant improvement in earnings and share price
Continued execution of Global Champion strategic vision