Air Canada's Ballooning Costs

The revenue picture is strong, but analysts have focused on rising unit costs. Leadership says the increase probably is temporary.

Today’s post is brought to you by:

Discover the ultimate revenue strategy for airlines: transforming passengers into subscribers. A growing number of carriers are embracing Caravelo's Trip Subscriptions to engage customers differently. This model offers a chance to meet evolving preferences and boost revenue beyond ticket sales. Caravelo’s strategy maximizes the customer lifetime value and optimizes personalized retailing, giving early adopters a significant edge. Wondering if a subscription model fits your airline? Learn more in this report. Meet the Caravelo team at Aviation Festival Asia.

Dear readers,

Air Canada produced a nice result in 2023, with net income of $2.28 billion Canadian ($1.69 billion U.S.) and an operating margin of 10.4 percent. The fourth quarter was decent, too; the airline recorded a slim operating margin of 1.5 percent, which sounds weak until you learn it was 2.1 points higher than the previous year, and you remember that late fall and early winter are a tough time to run a Canadian airline.

The revenue outlook is strong, with executives reporting solid demand in many regions, especially on long-haul sectors, where Air Canada can sell lucrative fares to sixth-freedom travelers heading to and from the United States. But on Air Canada’s fourth quarter earnings call Feb. 16, analysts focused on another matter: the airline's cost guidance. Air Canada said its adjusted CASM likely will be 4 to 6 percent higher in 2024, year-over-year — a much bigger increase than the 2.2 percent it jumped from 2022 to 2023.¹

We know an airline's CASM might rise unexpectedly if it grows capacity by less than planned, because unit costs partially are a function of how much an airline flies. It's true that Air Canada's capacity isn't as high as executives once had predicted — last year, the carrier signaled it would match 2019 levels in 2024, but now executives are saying that won’t happen until 2025, when Air Canada takes delivery of more aircraft including the first of 18 Boeing 787-10s.²

Still, Air Canada is growing considerably in 2024, with capacity set to increase 6 to 8 percent year-over-year. That means the cost pressure is real, and not just a function of a mathematical formula that weighs capacity against costs and spits out a number.

So what are these costs?