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Morningstar | Grounded 737 MAX Aircraft Will Crimp Air Canada's Shift to Growth and Planned Capacity Additions

Air Canada has successfully implemented a transformation program, with its last operating loss in 2012. Improved operating results are partially due to oil prices easing off highs in 2012 and 2013, when oil breached over $100, but Air Canada has taken separate measures to improve the cost profile of its network. Namely, the carrier implemented its first major revenue and cost transformation program back in 2009 and since then has engaged in route optimization, schedule changes, and fleet retooling. What’s more, Air Canada, realizing the limitations of the Canadian market, has embarked on global expansion strategies, ordering widebody aircraft and capitalizing on sixth freedom traffic (flying U.S. passengers internationally from Canadian airports). Other cash flow enhancing initiatives include acquiring its former loyalty program (Aeroplan) and relaunching in 2020.Air Canada’s current network focuses on improving international flying through its traditional mainline operation, regional subsidiary, and low-cost carrier, Rouge. Air Canada’s globalization strategy rests on maximizing the productivity of its wide-body 777s and 787s, but also capitalizing on sixth freedom traffic, expanding into second-tier U.S. cities with Star Alliance co-ordination and no international competition.Rouge was founded to combat the entrant of ultra-low-cost carriers like Jetline, Enerjet, and Newleaf into Canadian domestic markets and transborder travel. While Rouge boasts 25% lower costs per available seat mile against mainline operations and has seen some success, we believe the jury is still out. We are encouraged by the carrier’s ability to operate in the high oil price environment but given that it may not own the lowest fares on some routes, and likely still shares costs with the mainline operation (the demise of previous low-cost operations), we remain skeptical.Air Canada will bolster its transformation and kickstart the launch of its loyalty program, narrowing the operating margin gap with U.S. legacy carriers, by integrating Aeroplan's 5 million member loyalty program and extending partnerships with TD Ameritrade, CIBC, Visa, and American Express Canada.