Air Canada (OTCQX:ACDVF) Q2 2020 Earnings Conference Call July 31, 2020 8:30 AM ET

Company Participants

Kathleen Murphy – Director-Investor Relations and Corporate Reporting

Calin Rovinescu – President and Chief Executive Officer

Mike Rousseau – Deputy Chief Executive Officer and Chief Financial Officer

Lucie Guillemette – Executive Vice President and Chief Commercial Officer

Conference Call Participants

Walter Spracklin – RBC Capital Markets

Hunter Keay – Wolfe Research

Andrew Didora – Bank of America

Savi Syth – Raymond James

Kevin Chiang – CIBC

Chris Murray – ATB Capital Markets

Helane Becker – Cowen

Cameron Doerksen – National Bank Financial

Jamie Baker – JPMorgan

Tim James – TD Securities

Konark Gupta – Scotiabank

Operator

Good morning, ladies and gentlemen. Welcome to the Air Canada’s Second Quarter 2020 Conference Call. I would now like to turn the meeting over to Kathleen Murphy. Please go ahead, Ms. Murphy.

Kathleen Murphy

Thank you, Melanie. And good morning, everyone. And thank you for joining us on our second quarter call. With me this morning are Calin Rovinescu, our President and Chief Executive Officer; Mike Rousseau, our Deputy Chief Executive Officer and Chief Financial Officer; Lucie Guillemette, our Executive Vice President and Chief Commercial Officer; and Craig Landry, our Executive Vice President of Operations.

On today’s call, Calin will begin by giving you an overview of the impact of the COVID-19 pandemic and related government travel restrictions on Air Canada, what we have been doing in response and how we view the future. Lucie will touch on travel demand, cargo and loyalty, and Mike will provide you with the visibility on current plans regarding burn rate, liquidity and fleet before turning it back to Calin.

We will then open it up to questions from equity analysts, followed by questions from fixed income analysts. Before we get started, please note that certain statements made on this call are forward-looking within the meaning of applicable securities laws. This call also includes references to non-GAAP measures. Please refer to our second quarter press release and MD&A for cautionary statements relating to forward-looking information and for reconciliations of non-GAAP measures to GAAP results. I will now turn the call over to Calin.

Calin Rovinescu

Thank you, Kathy. Good morning, everyone, and thank you for joining us for our second quarter call this morning. As with most other major airlines worldwide, Air Canada’s second quarter results confirm the devastating and unprecedented effects of COVID-19 and related government travel restrictions on our industry and Air Canada.

We recorded second quarter negative EBITDA of $832 million and an operating loss of $1.555 billion. Operating revenue declined 89% over the second quarter for 2019, with strong growth in cargo revenues following an exceptional quarter by the cargo team helping to somewhat soften the blow. With Canada’s federal and interprovincial restrictions, we have been amongst – which have been amongst the most severe in the world, we carried less than 4% of the customers carried during last year’s second quarter. Revenue passengers carry declined more than 96% compared to a year ago.

As these numbers indicate, most commercial aviation in our country has been effectively shut down. That said, Air Canada has taken and continues to take decisive measures, both to ensure business continuity and to provide our customers the greatest possible assurance of their health and safety as they begin traveling with us again.

We are confident that these measures will successfully manage through the pandemic and rebuild our airline, especially now that it appears we passed one hurdle in the second quarter and that travel is resuming, primarily in the domestic market, albeit very slowly at a markedly reduced level.

Our company is fundamentally very solid. Since mid-March, we have raised $5.5 billion in new equity, debt and aircraft financings in the capital markets, providing us with over $9 billion in liquidity as of June 30. The speed and magnitude of this capital raising is also unprecedented. And it is a testament to the confidence capital markets have in our airline and in what we have achieved over the decade.

I commend our finance and legal teams for their relentless innovative efforts to raise liquidity during such a challenging period. I’m also reassured by the knowledge they stand ready to do more as we continue to assess additional financing needs. In addition to building liquidity, we have taken decisive action to cut spending and preserve cash, including a major management and frontline workforce reduction, a $1.3 billion reduction of our fixed costs and capital investments, the permanent retirement of 79 aircraft, the indefinite suspension of certain domestic routes and station closures and a reduction in our network seat capacity of 92% in the quarter.

These were some of the painful but necessary steps we have taken to stabilize our airline and preserve cash in these uncertain times. And without government industry support and as travel restrictions are extended, we will look at other opportunities to further reduce costs and capital, including further route suspensions and possible cancellations of Boeing and Airbus aircraft on order, including the Airbus A220, the former Bombardier C Series manufactured at Mirabel, Québec. We are positioning ourselves to emerge even more competitive and nimble as the pandemic recedes or more reasonable science-based measures are introduced to replace the blanket quarantine and other travel restrictions. To promote customer safety and confidence, we introduced Air Canada CleanCare+ a comprehensive, multilayered approach to bio safety at all phases of the journey, and we continue to look for ways to add additional layers without waiting to be regulated before doing so.

As well, we have slowly begun to rebuild our network. We’re calling a small number of employees and selectively restoring some of the award-winning services that have placed Air Canada among the world’s great airlines. We are prepared and look forward to greeting returning travelers and ensuring they are as safe as possible in the circumstances. I offer a most heartfelt thank you to our employees for their unwavering commitment to our customers and to our company during these stressful times that our airline has adapted so quickly to the greatest cataclysm in commercial aviation.

It’s proof of both our company’s strong culture and our employees’ dedication and remarkable abilities. And with that, I’ll turn the call over to Lucie.

Lucie Guillemette

Thank you, Calin. And good morning, everyone. To start, I would also like to thank our passionate and hard-working teams for continuing to represent the best of Air Canada during the pandemic, which has impacted so many people around the world and has resulted in the most challenging time our industry has ever seen. I’m incredibly proud of the effort, commitment and innovation displayed daily by our teams despite the circumstances.

In the second quarter, we felt the full impact of the pandemic and travel restrictions imposed globally, resulting in a passenger revenue decrease of 95% while operating 8% of our capacity compared to the second quarter and 2019.

As discussed on the last quarter’s call, we significantly scaled back our network, which had grown to 220 airports at the beginning of 2020. We completely suspended our service to the United States through most of May, limited our international network to five vital air bridges to retain key global connectivity for Canada, and reduced our domestic network to 40 airports from 62, while still continuing to serve all Canadian provinces throughout the pandemic.

Although we are in unchartered territory, our teams continue to refine our predictive demand recovery models that are informing critical decisions for our network, fleet and operations. The team is acutely monitoring the status of travel restrictions and border openings worldwide, customer confidence in air travel and a multitude of factors that will contribute to understanding demand recovery across all market segments. Supported by these predictive models, we will progressively and prudently build back our operations as demand begins to recover. And this summer, we are planning to serve 91 destinations, close to double the number of destinations we operated in May.

But still less than half of last year. Despite the increase in destinations, our third quarter system capacity is expected to be approximately 80% less than what we operated in the third quarter of 2019. We will continue to dynamically address capacity while considering passenger demand, quarantine, health warnings, travel restrictions and border closures.

As difficult as it was to see our network diminish to a shell of what it had been, we look forward to building back the foundational elements, beginning with our domestic operations, where we have started to see some signs of recovery, specifically with our transcontinental services and in Western Canada.

We do anticipate domestic recovery will be uneven as the maritimes continue to be impaired by interprovincial travel restrictions while Ontario and Québec lagged behind the western provinces in terms of reopening our economy. Looking to our transborder network, we resumed service in selected cities in the United States at the end of May, and we’ll continue to strategically and selectively build back our network through the third quarter. Given the number of new daily COVID cases in some states as well as ongoing travel – transborder travel restrictions and advisory, there remains significant uncertainty on time lines for recovery for the U.S. market.

We were pleased to see the European Commission include Canada on the list of countries they deem low risk. Along with this inclusion, with the recommendation for their European Union member countries to open their borders to Canadians based on an objective science-based situational analysis of COVID-19 in Canada.

Since then, we have seen a number of countries, including Germany, France, Spain and Greece and Italy, among others, heed this advice and adopt a rational science-based approach and reopen their borders to Canada. To coincide with the easing of border controls in Europe, we have resumed service to several destinations over the Atlantic. While adding back Transatlantic routes, we are maintaining a focus on our hub-to-hub markets, supported by our partnership with the Lufthansa group, as well as leisure-focused European destinations, such as Athens and Rome, where we added back to our route network from Montreal and Toronto earlier this month. We do anticipate recovery will continue to be slow and uneven over the Atlantic, with varying levels of travel restrictions imposed and with Canada’s border closure still in place for Europeans.

Looking to the Pacific, recovery is highly dependent on the status of border control and travel restrictions in place throughout Asia and reciprocally by Canada. Given the large leisure market over the Pacific, we anticipate that once travel restrictions begin to ease, we will see a relatively strong return of passenger demand.

As we rebuild our global network, partnerships will be key to our recovery and a significant competitive advantage fully maximizing the value of our Transatlantic joint venture partnership with the Lufthansa Group and United Airlines will de-risk our ramp up and enhance our global customer offering. We are also evaluating increasing our global partnership portfolio with a focus on traffic diversification once passenger demand begins to recover.

In the second quarter, we received our seventh Airbus A220. The size and range of these aircraft helps mitigate the current challenges of a low passenger demand environment, and its unique capabilities are going to be a cornerstone of our longer-term recovery. Customer feedback on the Airbus 220 has been very positive, exceeding our already high expectations.

Over the course of the pandemic and through the second quarter, we’ve continued our focus on airfreight to meet the immediate and exceptional demand for medical equipment, critical goods and the regular movement of our time-sensitive air cargo.

Since mid-March, we have operated over all 2,000 all cargo international flights. To facilitate this program, we were the first airline globally to remove seats from aircraft to enable cargo capacity in the passenger cabin, converting four Boeing 777s and three Airbus 330 aircraft. This rapid transformation of our aircraft to meet cargo demand reflects our ability to quickly pivot and adapt to the changing dynamics of the industry, while maximizing the use of our fleet. For the first time ever, our cargo revenues exceeded passenger revenues in the quarter.

Looking to Aeroplan, despite the strong headwinds, we continue to be pleased with our results and excitement is building within our company and amongst our customers for the re-launch of our loyalty program later this year.

Our co-brand credit card portfolio has rebounded quickly off the lows seen in March within most categories outside of travel, returning to 2019 levels. Furthermore, we are seeing very little impact on attrition as credit card retention rates are in line with historical norms. Our innovative Travel at Home campaign, which aimed to keep Aeroplan membership engaged during a period when they were quarantined at home was very successful. This effort included our first ever buy miles campaign, and it exceeded our expectations, generating a record number of miles sold through our platform partnership.

On top of great takeoff from our members, we received hundreds of notable mentions and acclaims from media and loyalty bloggers, recognizing the creative and thoughtfulness of our promotions and policy changes. These actions have earned us momentum of goodwill, trust and anticipation for the re-launch of Aeroplan, which remains on track for the fourth quarter of this year. We look forward to providing more information in the coming weeks, demonstrating what we feel our new program will be the best in the industry.

The safety of our customers and of our employees is and has always been paramount at our airline. Which is why, as Calin mentioned, we introduced CleanCare+, our comprehensive and industry-leading end-to-end approach to bio safety throughout the customer journey.

At the airport, we have expanded our touchless services and introduced virtual queuing to reduce wait times at selected counters. Additionally, we implemented preboarding health screening measures, including a mandatory temperature check and updated our boarding procedures to reduce the amount of time in line while boarding. We have also made protective face coverings mandatory for our staff and customers throughout the travel journey, including at our check-in counters, boarding gates and onboard our aircraft.

We recently announced the gradual reopening of our Maple Leaf Lounges, featuring new bio safety protocols, including enhanced cleaning procedures and new touchless processes such as ordering prepackaged food from a mobile device. The domestic Maple Leaf Lounges at Toronto Pearson has opened to eligible customers and the domestic Maple Leaf Lounges in Montreal and Vancouver are set to reopen in the coming weeks. We will continue to open other lounges in our network through the fall based on passenger demand.

Onboard customer care kits, which includes PPE and hand sanitizers, are distributed to all passengers. We have also thoughtfully redesigned our product offering and introduced prepackaged meals where complementary meals are offered leveraging our culinary panel. Building on our award-winning cabin cleanliness we enhanced our cleaning and sanitation protocols and use of electrostatic sprayers throughout the cabin.

After ending a policy guaranteeing empty adjacent seats, we introduced new flexible rebooking options for customers in economy class when their flight is booked close to capacity. In any event, most flights are currently operating with lesser load factors. As we continue to refine and improve our CleanCare+ product and further develop biosafety measures across our operation, we have partnered with Cleveland Clinic, a global health care leader to provide medical advisory services. And in addition to our current CleanCare+ efforts, we’ve also engaged Spartan Bioscience, an Ottawa-based biotechnology leader in portable DNA testing technology to assess how best to deploy Spartan’s portable rapid COVID-19 testing technology in the aviation sector.

Our entire leadership team, our people on the front line and those behind the scenes remain laser focused on implementing measures that will instill customer confidence in air travel. We are proud of the bio safety measures we’ve implemented to date and we look forward to continuing to welcome our customers on board to experience them first hand.

With that, I will pass it off to Mike.

Mike Rousseau

Thank you, Lucy, and good morning to everyone.

I would also like to thank our incredible employees for their dedication during these very demanding and challenging times. On our last call, we discussed the measures required to stabilize operations and begin the recovery process. One of the critical measures is raising liquidity to provide us with more flexibility to meet future challenges and potentially take advantage of opportunities to improve the franchise. As Calin mentioned earlier, since this pandemic began, we have raised $5.5 billion in liquidity. This was achieved through several transactions, including secured financings and equity convertible note offerings. At the end of the quarter, unrestricted liquidity amounted to $9.1 billion, and excess cash totaled $6.8 billion. As discussed in our Q1 earnings call, given the various covenants we have, I would be comfortable with a minimum cash balance of $2.4 billion on our balance sheet.

We have an unencumbered asset pool, excluding the value of Aeroplan and Air Canada Vacations of approximately $2.5 billion. We are confident that we can utilize this collateral package and other assets we have to access additional financing facilities. We have also made progress on reducing our costs in the quarter, including through workforce and fleet reductions, and have continued to lower and defer capital spend. As discussed in our last earnings call, we initiated a company-wide fixed cost reduction and capital reduction and deferral program as a result of COVID-19. This has now reached $1.3 billion. We have a team dedicated to pursuing additional cost reduction initiatives for cash preservation.

In addition to labor and fleet rightsizing, areas of focus are maintenance, real estate, IT and other fixed cost areas. Continuing to improve productivity and processes are also key in achieving our objective of being as lean as possible as we come out of this crisis. We do expect that our breakeven point with meaningful decline, the result of significant work we’re undertaking to permanently reduce our fixed cost structure, our investments in more efficient aircraft, our decisions to aggressively retire older, less-efficient aircraft and our investments in key customer-facing technologies such as Aeroplan and our passenger sales booking systems and further streamlining and enhancing airport operations. Excluding depreciation, amortization and special items, operating expenses decreased almost $2.5 billion or 64% in the second quarter from the same quarter in 2019.

I will now touch briefly on the special items we reported in the quarter. We recorded a non-cash impairment charge of $330 million of which $295 million was related to the write-down of right-of-use assets for leased aircraft and a reduction of carrying values of owned aircraft. To provide more color in response to the capacity reductions related to COVID-19, we are permanently retiring 79 older aircraft from our fleet, consisting of Boeing 767s, Airbus 319s, and Embraer 190 aircraft. We retired 50 of these aircraft in the quarter, including the entire 767 and E190 fleets. The retirement will simplify our overall fleet, reduce our cost structure and certainly lower our carbon footprint.

We also undertook a workforce reduction of approximately 20,000 employees or 50% of our staff. This was achieved through layoffs, terminations, voluntary separations, early retirements and special lease. We recorded a provision of $112 million related to these arrangements. In April, in response to challenges posed by COVID-19, the government of Canada introduced the Canada Emergency Wage Subsidy or CEWS available to qualifying Canadian companies across all industrial sectors that has suffered significant revenue losses. In the second quarter, we received or accrued net payments of $202 million to cover a portion of our employee wages. In mid-July, the government of Canada announced that the program would be redesigned and extended to December 2020. We intend to continue to participate in this program, subject to meeting the eligibility requirements. The minor benefit of the program is included in our definition of net cash burn.

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Before getting started with the critical measure of net cash burn, I would like to reiterate our definition. Air Canada defines net cash burn as net cash flows from operating, financing and investing activities, but excludes proceeds from new financings. A lump sum debt maturity was made in March 2020 and any future lump sum debt maturities, which we have refinanced or replaced the amount. Net cash burn also excludes movements between cash and short-term and long-term investments. Net cash burn in the second quarter of 2020 was $1.7 billion or approximately $19 million per day. This was in line with our expectations. Through the stabilization of working capital and through significant measures I addressed earlier, to reduce cash burn, the daily net cash burn improved as we progressed through the quarter.

Looking ahead at the third quarter, despite higher capital expenditures primarily related to new aircraft acquisitions, which will have been financed, we estimate net cash burn to be $15 million to $17 million per day. This net cash projection includes $4 million per day in capital expenditures, which is approximately double the Q2 actual and $5 million per day in lease and debt service costs, approximately the same level as Q2. The Q3 guidance assumes a moderate improvement in travel demand as we move through the quarter, as well as the lifting of certain government-mandated restrictions and the opening of certain international borders. We will not be providing guidance on Q4 cash burn at this time given the uncertainty regarding border closures and the 14-day quarantine.

And before turning it back to Calin, I want to provide a brief update on income tax accounting. The accounting rules create a very high hurdle for the recognition of deferred tax assets. And as a result of COVID-19, there is considerable negative accounting evidence relating to losses incurred in 2020. As such, and in keeping with our historically conservative approach, it was decided that the net deferred tax asset would not be recognized commencing in the second quarter. The future income tax deductions underlying the unrecognized deferred income tax assets remain available for use in the future to reduce taxable income. To further complicate matters, despite having significant operating losses, the net tax asset derecognition resulted in an accounting income tax expense of $271 million in the quarter, which is not reflective of any underlying net tax loss.

To conclude, I’m very confident that our strong management team and the support of our talented and dedicated employees and other stakeholders, we can successfully manage through these tremendously challenging times.

And with that, I’ll turn it back to Calin.

Calin Rovinescu

Thank you, Mike.

With passenger revenue and passengers carried down more than 95%, today’s results underscore the tremendous urgency for governments in Canada to take reasonable steps to begin to safely reopen our country and revive aviation much in the way other countries have been able to. At present, there exists no fewer than four overlapping barriers to travel and economic recovery, imposed by governments in Canada. These include a blanket restriction on all foreign travelers, including the complete closure of the Canada-U.S. border, blanket quarantine rules, including for Canadians, regardless of the infection rate in the country of travel, interprovincial travel barriers inconsistent with Canada’s Charter of Rights and Canadian government global travel advisories to avoid all non-essential travel, which prevent travelers from securing travel insurance. Together, these measures constitute one of the most severe aviation lockdown regimes in the world.

While needed and appropriate, at the outset in March, these constraints still remain in place. Unadjusted, despite the availability of more targeted measures that can achieve the legitimate public health objectives and their combined effect has been to decimate the airline business and prevent the possibility of any real recovery at a time of otherwise fragile demand. An Ipsos survey conducted in July, found that quarantines, both at destination and upon returning home, represent the biggest barrier to travel right now along with the government’s active discouragement of non-essential travel. As we have largely flattened the curve in Canada and in many countries, increasingly, these blanket prohibitions are less effectively combating COVID and more inhibiting an economic recovery, especially in a country with more than 12% unemployment.

Scientific research has shown there is little risk of any communicable disease being transmitted on board modern aircraft as the quality of aircraft cabin air is carefully controlled. This is according to IATA, the WHO and many other experts. Canada needs to find a responsible way to coexist with COVID-19 until there is a vaccine. That is why we have worked so diligently at establishing the new bio health and consistent safety guidelines that Lucie spoke of. We’re really at the forefront of biosafety globally, not waiting for regulators. That is why we have entered into partnerships with private testing firms and have made specific science-based proposals to government to ease some of these restrictions.

Air Canada alone generates about $50 billion in total economic output in Canada, which represents around 2% of GDP. Prior to COVID-19, we directly employed 38,000 people plus 6,000 at our regional airlines. We supported around 34,000 retirees and their families who count on us for their pensions. And we indirectly support 190,000 other jobs in spin-off industries such as tourism, ground transport companies, airports, manufacturing, aerospace, food and beverage and countless other suppliers. This economic activity is critical to Canada, and millions of Canadians as well as many communities depend on our company and on this economic activity. Virtually all of the top 20 airlines in the world, our competitors have received tens of billions of dollars through sector-specific support programs from their governments, while no such programs have been made available thus far in Canada.

Canada uniquely combines no such support with the most severe measures that impede recovery. To contend with the challenges, we thus far managed to raise adequate liquidity to go it alone, despite having been virtually shut down. But now we need to be permitted to prudently and cautiously do some business in the way other airlines and other countries are and in a way that respects legitimate public health objectives, so we will continue to push in that direction. Last week, even the WHO said that economies have to reopen and trade has to resume. Other G20 countries with infection rates under control, including all of the European Union have managed to use science-based approaches in a gradual and coordinated manner, we need to as well.

Turning to our proposed acquisition of Transat. As you know, we have made our filings with the Canadian and European regulators. The European Commission is in its Phase 2 review and has suspended the time line while awaiting certain information from the parties. The Minister of Transport of Canada has received the reports from the commissioner of competition and from officials – and officials from Transport Canada and the regulatory process is following its course. Transport has provided two notices. Transat, I should say, has provided two notices of extension of the closing date, which ultimately cannot extend beyond December 27, 2020. We intend at this point to reserve further comment on this transaction.

To conclude, as we have said previously, we expect the recovery to take at least three years. And we are doing everything, absolutely everything in our power to ensure that this airline that we have built with hard work, collaboration and energy over the last decade into one of the world’s leaders and into a global champion will continue to not only survive, but to thrive. Although we will emerge smaller with fewer aircraft, fewer people, fewer cities served and slimmed down overall operations, we will be nimbler and more competitive. I have no doubt that the vision, an entrepreneurial culture that guided us through a decade of incredible success, building a global network carrier anchored by three strong hubs to capture global traffic still holds. And while the recovery will take time, I’ve every faith that our skilled management team and dedicated employees have the fortitude and resourcefulness to rebuild with dedication, energy and passion.

Thank you. And I’ll be pleased to take some questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] The first question is from Walter Spracklin of RBC Capital Markets. Please go ahead.

Walter Spracklin

Yes. Thanks very much. Good morning everyone.

Calin Rovinescu

Hi, Walter.

Walter Spracklin

So I’d like to start with you, Calin. And I think in the last call, you had looked out over the next few years and pegged a three-year time frame for your view on the recovery of your sector. I didn’t hear any update there. I have heard that being extended by a number of industry associations and so on. And then I listened to your use of the word permanent in your fleet recovery and on certain routes on that basis, what is your view longer term? And has it changed with regards to how quickly and how long it will take for the airline industry to recover?

Calin Rovinescu

Right. Yes, it’s extremely an important question, Walter. And I’d say that this, of course, is – it continues to be somewhat of a moving target. So what we said at the last quarter, which was, of course, very shortly, relatively shortly after the pandemic was declared, we said we expect it to be at least three years. And I think we were one of the first that came out and had that type of a time frame and sadly, that has been proven to be correct. I think lots of other carriers have now said the same thing at least three years. Then IATA, the Airline Association, as you know, that has about 220, 230 carriers in the world. IATA came out a couple of days ago and said that they consider it to be four years.

And so we’ve always been saying minimum three years, but it could well be longer than three years. We think that when we talk about some of these permanent changes that we’re making, we’ve taken out these 79 aircraft from the fleet permanently. But of course, we do have aircraft on order, and we will have optionality as to the speed with which we start rebuilding our fleet. And that we expect to be smaller coming out of this. In other words, if you look at the next – over the next three years, we will be smaller than we were over the last three years. But that doesn’t mean that at the end of that three-year period, if there’s a vaccine and if travel has returned to some semblance of normal that we can start coming within the sort of environment that we had in 2019. But we’re not calling this as a definitive three-year time frame. We’re continuing to stick with the minimum three years. And right now, IATA is out there at four years. So that’s sort of what the – I would say, is the best summary of the industry I can give you at this stage.

Walter Spracklin

Makes sense. I appreciate those comments, Calin. Second question here is on booking trends. It seems on – I don’t know if you can give us indication on the most recent here into the third quarter. I know some talk among your peers is that it has stalled here a little bit. But my key question with regards to booking trends is, is there any factors that you have seen in your booking trends that will give you insight as to the new mix of leisure versus business? And in particular, are you seeing leisure routes coming back faster than what you would consider to be your typical business routes?

Calin Rovinescu

Okay. No, again, good question, Walter. I’ll start, and then I’ll turn it over to Lucie. So remember, we said last time also that we expected the recovery to go in this order. We said domestic first, leisure second, business third, international fourth. And that is still largely the way we are seeing things. Of course, the speed with which this is occurring is slower than we would otherwise have hoped, of course. But we are seeing it in that order.

Maybe I’ll turn it over to Lucie, who can provide a bit more color.

Lucie Guillemette

Yes. Hi, Walter, it’s Lucie. So for sure, in looking at booking trends for the future, the domestic network continues to be the one that is performing best. But what we do see in the domestic sector is mostly leisure traffic. We are seeing some sectors performing a little bit better out west from a corporate point of view, some few industries. But by and large, the vast majority of the content is, in fact, leisure traffic and VFR as well. On the international markets, the markets that we have introduced, we did launch those because we felt that there was more VFR potential, particularly on the Transatlantic market. When you refer to the term stall, bookings may have stalled; I think most airlines actually reported similar. Near the end of June, we did see a two- or three-week period where the booking velocity was rather flat. But as we look to the future, again, on the domestic network, we’re seeing a little bit of rebound.

Calin Rovinescu

The other thing I’d add, Walter, of course, is the return of corporate travel, of course, is also influenced somewhat by the practices and policies of when banks and other organizations are returning to work. And as you see, some organizations are now planning to not return to work until early in 2021. And so that also has a bit of a moving target in terms of the return of corporate travel.

Walter Spracklin

Appreciate that. Squeezing one last question here on the cash burn. It seems to be, when I look at your peers, the cash burn levels on a relative basis are improving faster. My question is whether this is due to demand and reopening quicker in those jurisdictions? Or is there some structural expense consideration with your company that would prevent a quicker cash burn?

Mike Rousseau

Good morning, Walter its Mike. I mean, that’s a difficult question because every airline has a specific different characteristics around refund policy, around opening up markets, around mix of international versus domestic business. As you know, we were very quick in reducing the footprint of the company, both from a labor and from a fleet perspective. The U.S. airlines, obviously, with the CARES program have not done so other than on the fleet side, and so it’s very, very difficult to benchmark. I mean, we’re making strong progress on our fixed cost structure. And our fixed cost structure as a percent of our overall cost structure is very similar to where the U.S. airlines are. And again, we’re – we’ve already taken out roughly 20% of our fixed costs. That’s one of our key levers in lowering the cash burn, and we’ll continue to see some improvement over the next little while. And as such, that’s driving the lower cash burn Q3 versus Q2.

Walter Spracklin

Okay. Appreciate the time as always. Stay healthy.

Calin Rovinescu

Thanks, Walter.

Operator

Thank you. The following question is from Hunter Keay of Wolfe Research. Please go ahead.

Hunter Keay

Good morning, everybody. Thank you.

Calin Rovinescu

Hi, Hunter.

Hunter Keay

Calin, how are your frustrations with these travel restrictions complicating federally discussion? And what sort of conditions would be sufficient for you to turn off the idea of taking aid? Because I’m just wondering, if there’s a scenario here where this aid comes, but it prolongs the government’s sort of entitlement, that’s a bad word to use, but it prolongs the government’s desire to keep things closed. How do these two work together?

Calin Rovinescu

Well, look, they work together very, very much hand-in-hand, Hunter. Our perspective here is that we look at what’s going on elsewhere in the world. These are airlines that we compete with, of course, the U.S. carriers and all the European carriers and all of the Asian carriers. And as we’ve been building our international footprint, those are all competitors, and so they either have been support programs, industry-specific support programs, all the CARES program in other markets. And of course, we know Lufthansa, Air France, KLM, et cetera, et cetera, have benefited from a very, very similar program, Singapore airline.

So this goes on and on and on and on in other parts of the world. And the other parts of the world have also had a more rational, I would say, science-based approach to opening markets. And that means – that doesn’t mean free for all, and we know that the U.K. faced a very a contentious discussion around the imposition of their quarantine. But our perspective is that it should be one or both but it cannot be neither, and I think this is what we continue to be advocating for. We really are amongst the only – I think we’re the only carrier that has – amongst the top 20 in the world, other than the state-owned airlines that are in there.

I think we’re the only carrier amongst the top 20 that has received no financial support package, like an industry package. And probably when we look at the restrictions that exist, the travel restrictions, the border restrictions that exist in the country that those large 20 carriers are in, I suspect that they all have more science-based measures that allow for some level of travel. So we are actually talking in discussions. And I would say that there are active discussions going on. But of course, this is influenced by policy and by various other geopolitical drivers that are unique, I would say to Canada and the minority government.

Hunter Keay

Thank you. And Lucie, you mentioned you’re going to focus on traffic diversification through partnerships. Can you please elaborate on that? And then a separate but related question how does a plus-plus factor in to your long-term transatlantic vision after COVID? Thank you very much.

Lucie Guillemette

Hi. A very good question. So first, you touched about – we touched on the joint venture that we have. Now more than ever, our partnership with Lufthansa and United over the Atlantic is more solid than ever. And in fact, in the development of our network, that’s key to our strategy is really to focus on hub-to-hub markets, where we can actually get feed from our partners, the Lufthansa family. When we speak about traffic diversification, we’re also looking in great detail in terms of where Canada can access. So when Calin was referring to some borders being opened, although Canadian – foreigners cannot come to Canada, Canadians do have the ability to visit some countries in Europe. And because we don’t fly those markets non-stop, we still have the ability through interline partnerships to be able to go and capture those markets.

So when we talk about traffic diversification, we have opportunity as well to bolster some of the interline agreements that we currently have and also develop new ones as the COVID environment continues. Because as we said earlier, we don’t anticipate that we will be returning to all these international markets for several years, but those markets are still available to us, just connecting over another transatlantic gateway. So from that perspective, we are pursuing opportunities with other interlines that can give us feed on some of the markets that we operate. And the same holds true for Asia. There’s opportunities for us, for example, in Japan, to expand some of our interline agreements. And of course, for the transborder network, very similar strategy where we worked very closely with United, and again, our transborder network as it stands today is hub-to-hub. So we do feed into United hub as they feed into ours.

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Hunter Keay

Thank you, both.

Calin Rovinescu

Thank you, Hunter.

Operator

Thank you. The following question is from Andrew Didora of Bank of America. Please go ahead.

Andrew Didora

Hi. Good morning, everyone. Mike, I think one of the differences in your cash burn relative to U.S. carriers is the fact that you do not include the aircraft CapEx that is already financed. So if I wanted to put your cash burn on par with your U.S. peers, can you tell us what of the $4 million per day CapEx in your cash burn numbers for 3Q, how much of that is already financed?

Mike Rousseau

You’re right, Andrew. We’ve taken a more conservative definition for cash burn, more of a gross level rather than net financing level. I don’t have that number off the top of my head. We can get that number to you post this call. There will be some improvement in cash burn, if we include the aircraft financing amount for Q3.

Andrew Didora

And do you have a sense of what’s coming in and Q3 has already been a part of that bridge financing?

Mike Rousseau

And that’s part of the complexity. Some of those aircraft may be covered with the bridge financing and some of them may not be, and we just need to go back and separate those numbers. But I don’t think the impact will be large to the net cash burn for Q3.

Andrew Didora

Okay. I can follow-up with Kathy, offline. And then my second question for Calin. You’re right in being one of the first to speak of the multiyear recovery period for the airline industry. Just interested as we were four, five months into the pandemic, would like to hear your thoughts on how you think this is all going to structurally change the airline industry over time and/or if at all? Thank you.

Calin Rovinescu

Right. I think that there will be some structural changes for some period of time. I think that the entire industry will be smaller overall. So that is all markets. I think that the industry – when we look at the total number of ASMs that are going to be put out there, my sense is it will be smaller for some period of time. When we look at the real discretionary travel that occurred, that we had some – the influx of so many low-cost carriers that came into the market that stimulated demand. And that led to competitive products like our Rouge product that came out there. That created, for example, in our case so many more markets in Europe that had direct access.

Now some of that traffic will be served with connections over the hubs. So, what that does is that takes a couple of steps backwards because, of course we were building these great hubs over the last while. And I think the same phenomenon will occur in many other countries of the world. When we look at the – when we look at the Gulf carriers, massive expansion, Emirates, Etihad and the Qatar, you wonder whether – without having a domestic market, in their case, it was all connecting traffic whether that connecting traffic model continues to exist at that same pace. Singapore Airlines, similar thing. So when you look at it on a global basis, I think that one can conclude that the industry will be smaller for some period of time.

You look at Latin America, LATAM, of course, going through a restructuring. Now they’re likely to come a smaller carrier. So all that to say – that’s why when I say that we will be smaller, but we expect the industry to be smaller. And therefore, as Air Canada comes out of this, we can be a nimble, competitive carrier that is going to be with a younger fleet, having taken out the 79 older aircraft. So we’ll have a very, very competitive airline in a smaller environment, but it’s my expectation that the industry will be smaller. And some of this – and I think you’ll continue to see a return to a real focus on the hubs because the hub traffic for the larger carriers will be that much more valuable.

Andrew Didora

Thank you.

Operator

Thank you. The following question is from Savi Syth of Raymond James. Please go ahead.

Savi Syth

Hey, good morning. First question on, you mentioned that 25% of fixed costs have been removed. Is it a fair assumption to say that then if you kind of get to 75% of where you were in kind of 2019, 2018 that your unit cost would be similar to better to what you saw back then?

Calin Rovinescu

First of all, welcome to your first quarterly call. It’s nice to have you. Again, I made a comment in my prepared remarks that we do think as we go forward and as the market recovers and we continue to improve that our cost structure will be more competitive for a whole number of reasons. And one of those reasons is the point you make is that we’ve taken a lot of fixed costs out of the company, a lot of hard work. And we don’t plan to put those fixed costs back into our structure. And so I can’t compare back to 2018, 2019 on a CASM basis, but certainly, we believe we’ll have a better CASM as we go forward on a relative basis as revenue comes back.

Savi Syth

Is there a certain level where it needs to kind of come back to kind of get to that ideal?

Calin Rovinescu

Yes. Well – I mean, we have to work out what that breakeven point is. I don’t have that again off the top of my head. But certainly, as the recovery matures, we’ll hit that point, hopefully, in the next two years.

Savi Syth

Got it. And I appreciate the commentary about like what you’re seeing in demand. I’m just kind of curious what you’re seeing from a competitor standpoint, if you’re seeing discipline from your competitors; and generally, what the – within Canada, what the competitive landscape looks currently?

Calin Rovinescu

Well, I think that the competitive environment here is influenced a little bit by the fact that one of the domestic competitors here, Porter Airlines, had chosen not to operate over the last number of months. And so they took out their capacity from the market entirely. But I would say other main – and Transat, which has some domestic activity too basically to position flights and to get ready for some of their international operations, they also had ceased operations. So it was really largely domestically WestJet and ourselves. And I would say that when we look at the share of capacity, it has not materially changed from what it was prior to this. So I would say that it has not – neither carrier has sought to use the pandemic as a way of gaining market share.

Savi Syth

Okay. Appreciate the color. Thank you.

Operator

Thank you. The following question is from Kevin Chiang of CIBC. Please go ahead.

Kevin Chiang

Hi. Good morning and thanks for taking my question. Maybe, Lucie, you talked about the rollout of the loyalty program. I’m just wondering maybe how your thoughts have changed about Aeroplan as you roll that out later this year, if you think business travel either lags in recovery or maybe is impaired overall. And has that changed how you think about Aeroplan longer term?

Calin Rovinescu

Kevin, maybe I’ll start and then – and turn it to Lucie. So Aeroplan for us is a long-term investment here. So it is not going to be influenced at all by what we’re seeing in terms of short-term corporate travel demand at all, at all, at all. We’ve been building Aeroplan since our acquisition into – and we’re going to be releasing the details, some of the details of that in mid-August. But we’ve been building it with a vision to be extremely compelling. And even in the height of the pandemic, we had some of our loyal Aeroplan members purchasing points on a discounted basis for future travel and so on and so forth. So we know there’s a lot of excitement about it. So we are not changing any of our thinking whatsoever in terms of the short-term impact of this. And we’ll still roll out with these features that we are planning to do. We’ve not made any changes at all. But in terms of how the demand, the relative demand will be influenced by Aeroplan, I don’t know, Lucie, do you have anything to add?

Lucie Guillemette

No. Certainly, there will be a much greater opportunity for us, first of all on market segmentation. We’ll be able to do a much better job in terms of providing the right offer to right customers with the information that will be available to us through the Aeroplan program. And also, we’ll also have the ability to have many, many compelling redemption offers as well for customers. From a commercial point of view, there’s huge benefits for us as well.

Calin Rovinescu

Right. And Kevin, just to bring it to a conclusion. I mean when Mark outlined the new Aeroplan program back at Investor Day 1.5 years ago, one of the key ingredients, the key objectives was to broaden the program beyond the business market. And you will see with the benefits and features that we’re going to be announcing in the next couple of weeks that this program will have much wider acceptance across all market segments, as Lucie was referring to. And obviously, it’s going to still be an incredible program for the business traveler and for the high-frequency traveler, but we’re also going to try and expand the market to a broader audience.

Kevin Chiang

That’s great color there. Thank you all for the answer. Maybe my second question here, just turning to your fleet. You’ve taken steps here to reduce the mainline and Rouge fleet quite significantly. But when I look at your MD&A, it looks like you’ve taken nine aircraft out of Air Canada Express. So just wondering how you’re thinking about your – that banner, your regional fleet. Do you feel that the number you exited Q2 with is the right size and the right makeup? Or do you think the portfolio and the size of that that Air Canada Express fleet continues to need to shrink here similar to your mainline and Rouge fleet?

Calin Rovinescu

Yes. Sorry, I’ll just start. Look, Kevin, it’s 14 not nine because there were also the Beech Aircraft that came out in addition to the nine – in addition to the nine Dash A300s, we also had the five Beech Aircraft that came out. So it’s 14 that’s related to – there was a 14 reduction that related to the 30 route suspensions.

And Mike will just comment on the fact that we are looking at the rightsizing of the regional network as well.

Mike Rousseau

So yes, we’re spending productive time with primarily Chorus going through the fleet size. We already had a strategy to lower the number of planes but increase – keep the seat count the same. So we were going to exit the – kind of the – to Calin’s point, the Beech Aircraft, the 37 seaters and some of the 50 seaters over time and focus on the E175s and CRJ900s and the Qs, which are in the 70-plus seat range. That was always our strategy, Kevin. And we don’t see a change in that strategy going forward. We will have to, though obviously, focus on the number of aircraft. But certainly, our strategy of going to higher seat count aircraft and a lower number of FINs is still in place.

Kevin Chiang

Thank you very much for the color. Have a great weekend.

Calin Rovinescu

Thanks, Kevin.

Operator

Thank you. The following question is from Chris Murray of ATB Capital Markets. Please go head.

ChrisMurray

Thanks, folks. Just, I guess thinking about what the strategy is longer term for the company. When you think about – I think at one point, Calin, we talked about Canada itself is a fairly small market. And one of the ways to be able to build Air Canada, for lack of a better term, was to use the Sixth Freedom model. And you’ve talked about hubs. And so I’m wondering, as you think about the shrinking of the airline or at least the, call it, the rightsizing of the airline to demand, how do we think about Air Canada’s strategy going forward?

Is it sort of – do you end up retracing back to we’re here to serve Canadians going to the rest of the world? Or do you maintain the idea around Sixth Freedom? And I guess maybe even elaborating on that – and you kind of made the comment about flow into hubs is going to become increasingly more important. But at the same time, we’re seeing you guys reduce connectivity in the regional network. So just maybe help us square what’s kind of short term versus where we think the strategy goes over the next couple of years?

Calin Rovinescu

Right, right. I mean, obviously, we’re not – given the public nature of this call, we’re not going to share all of our commercial strategy, as you’d appreciate, Chris. So I’ll keep the comments fairly general. But I can say the following. Look, first of all, the hub strategy and the global gateway strategy has not changed. And so big picture, the Air Canada is a network carrier, and Air Canada trades in global traffic flows. And that is the, I would say, the continued strategy for the company.

In terms of what we’re doing with any specific markets, the regional routes and all that, that represented a small portion of connections from Canadian markets, of course. So this is something that we’ll look to see – have the right aircraft on the right route with the right size and some of those markets were very, very small for us, and we weren’t the best carrier to serve them. But our vision on our main three Canadian hubs and our international gateway hub partners, that hasn’t changed at all.

And when I talk about the fact that – taking a typical example is that we would have before service from one of the Canadian cities with Rouge to, call it, a secondary European city direct. You’ll see a fewer of those for the next few years. You’ll see fewer of those because the demand will be less. And so for the traffic that wants to go to, call it, a place like, I don’t know, Manchester or places like that, we’ll do it with a connection as opposed to with a direct service. And I think that without getting into any specific routes because, again, that would be commercially sensitive, you can envisage that the focus for the flows will be over hubs. And I think that, that doesn’t mean that we won’t get back to the strategy of – and continuing leisure flights direct, bypassing the hubs. But that’s one of the ways we’re looking at it.

And the transborder, obviously, the transborder is completely shut down right now. Air Canada is the largest carrier into the United States. We were serving 53 cities in the United States. Once we get beyond the Canada-U.S. border closure, we expect to return to that and to reaffirm our strength into the United States and that is a key driver of the Sixth Freedom strategy, and that will absolutely continue.

So it’s a shrinking of the strategy, a paring of some of the hub bypass frequencies that we had. But it’s certainly, by no stretch of the imagination is it an abandonment of that because while we like our domestic business, our domestic business is less than one third of what it is that – for current – that Air Canada did last year. And so we have every ambition to continue establishing the global network carrier that we became.

Chris Murray

Okay, fair enough. And then I don’t know who wants to take this one, but as we think about the restart, and granted Q2 is we’ll call it an anomaly and just leave it at that. But how do we think about the balance that you’re going to be able to strike between capacity and traffic? And I guess what I’m thinking about here is load factors. And I think we’ve had a lot of discussion around do you start de facto with a two thirds load factor on narrow-bodies or something like that. Can you just maybe help us understand, even as you’re going to run maybe 20% of your normalized capacity in Q3, your ability to flex gauge in order to keep loads at least reasonable or at least commercially viable levels?

Calin Rovinescu

Yes, let me put it this way. Chris, you need to throw out every single basis in which you looked at the industry as far as I’m concerned for the foreseeable future as we are living through this pandemic. And I’ll tell you why.

One, load factor here becomes largely irrelevant. We’re going to be making estimates of how much capacity is put into the market right now. Based on a new combination of demand that is based on customer confidence to fly, intertwined with opening of border restrictions and quarantine.

So that is a totally different metric than the sort of historic relationship between how much capacity you put out and how many passengers are actually filling the seats. And I think that we actually are using some artificial intelligence drivers to help us understand how that demand comes back into the marketplace.

But you have to understand that, actually, even though people are booking, in some cases, depending on what a government might do or where you might have a – you’re seeing this recent phenomenon between Spain and the UK where the UK all of a sudden imposes a quarantine on travelers from Spain.

So flexibility here is going to be key. Our objective over the course of the next period of time and, call it, a year, if you wanted to put an estimate of how much time that would be, will be to try to optimize revenue, not optimize load factor. And we’re going to be looking to ensure that we get enough revenue in the door that starts mitigating the cash burn because it’s going to be an unusual and an abnormal environment. And so any of the historic drivers of capacity and load and so on are going to be completely thrown out.

The other thing, so when you talk about flexibility, this is where we get an opportunity to optimize. So you say, one, flexibility is what aircraft you put on. And in some cases, we’ll see if the demand is greater and we see it coming back and we see on a given route, we might upgauge a wide-body aircraft from 330 to a 787, for example. And we’re doing that already now as we’re looking at the marketplace.

We’ll also optimize for cargo demand. Cargo, as you saw in the second quarter, became a key driver for some of these markets. And so some of the – when we look at Hong Kong as a market, we continue to operate to Hong Kong with relatively low passenger demand because cargo demand is strong on that market. So the passenger load factor on a Hong Kong is much, much less relevant than it would be on another market. So you have a series of completely different drivers for establishing what we’re trying to do now.

And the number one objective of what we’re trying to do is minimize cash burn. Once we get beyond cash burn, once we get to some level of new normal where presumably in a post-vaccine environment, then we can start re-optimizing again.

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The other driver, our operational requirements with – by simplifying the fleet, we’ll make some of the operational requirements work because the cost of operating some of these flights is not optimal. We need to have maintenance and flight-offs cost driver that come into an analysis of what aircraft we’re putting on to a given route when you’re dealing with such low loads. We need to keep our pilots certified. And we need to keep the aircraft rotating.

So you are seeing all of these, I’d say, moving targets. That’s why I say I think that anything that – this is what – I try to say this to our people and I’d encourage the more thoughtful analysts to take the same approach is to say any correlation that you previously had between capacity and load factor, I would respectfully suggest needs to be thrown in the bin.

Chris Murray

Okay, fair enough. Just my last question. Mike, can you just give us a bit of an update on advanced ticket sales? And I guess what I’m trying to understand is what proportion of those advanced ticket sales are still in refundable tickets? Like so, I guess, what proportion is still, I guess, subject to refund? And you had in the last call had some thoughts around how the advanced ticket sales and the bookings could flow, maybe thinking that it could maybe improve as bookings improve as we get through the back half of the year. Any additional thoughts around that would be appreciated.

Mike Rousseau

Good morning Chris. So as you saw, our advanced ticket sales are roughly $2.2 billion per our balance sheet. We’re not going to provide any color on what the breakdown of that is at this point in time. It’s obviously a lot lower. We’ve provided over $1 billion in refunds since the pandemic started. And so as a result, our advanced ticket sales are obviously much lower than last year and also given the fact that the sales outlook and our capacity outlook is what it is.

Again, as the market improves and as we add more capacity and more traffic, we’ll see some improvement in advanced ticket sales. I think customers are booking a little bit closer to departure than what we’ve seen in the past. And again, to Calin’s point, the metrics we’ve seen, the characteristics we’ve seen of the airline industry in the past are changing, and we’re modifying our approach to take the advantages we can of that.

Chris Murray

Okay, thanks guys.

Operator

Thank you. The following question is from Helane Becker of Cowen.

Helane Becker

Thanks very much operator. Thanks also team for letting me get my question. And I appreciate your time. Calin, I just was wondering, I think Toronto, in particular, was hit very hard in the SARS epidemic or pandemic. And there are pandemics probably every decade, but this is the first time governments went so far as to close borders and shut down the industry. And I appreciate all the numbers that you cited with respect to how important aviation in Air Canada, in particular, are to the government. When you talk to Transport Canada and the Prime Mister, what do they tell you? I mean why are they refusing to move off this “we’re shutting down and that’s the end of it.”

Calin Rovinescu

Well, Helane, it’s a great question. And I almost encourage you to pose it directly to them. But no, look, I think, that the government moved quickly here and took decisive action to shut travel down in March. You will remember this, Air Canada was amongst the first in the world to sort of raise a red flag with respect to the risk of this pandemic in January when we pulled out of China.

We pulled out of China on January 29, well ahead of any action having been taken in Canada. We encouraged Canada to frankly take action with respect to the other Chinese carriers coming into Canada following that because we felt we were exposing our passengers and our customers under risk. So we stopped flying to China at a big cost and loss of revenue to us.

And then after that, we also moved quickly to stop flying to Italy when the virus has spread to Italy. And then you remember, there was that brief period of time where Iran – travelers to Iran were affected. So we moved very, very quickly, and we advised the government during that time frame. They chose at that stage to not do anything following the advisory of the WHO, which WHO in the early stages have been advising against border closures, as you might recall.

So when Canada shut it down, they shut it down entirely. And that was the right decision. I have to agree with the decision having been taken because that helped to deal with this and flatten the curve more quickly here than in other places, of course, including in the United States. And I think – so that was the right call then.

But the idea that we have stayed in exactly the same position since March is the part that I find unacceptable because, of course, we are now migrating from a health crisis into a fairly severe economic crisis if we don’t start opening the economy in a more meaningful way. And of course, we’ve seen the impact of job losses not only in our company or in our industry but across the sector. We see the impact that a company like Air Canada has on the economy. That’s why we constantly remind them of that. And so what I take issue with is not that it was shut down as tightly as it was shut down in March. I take issue with the fact that it has not been opened up on a much more thoughtful, scientific basis, which would allow for some level of business to be done.

Many, many Canadians write to us and tell us that they want to travel, and the biggest impediment – and we did our own polling of this. The biggest impediment are the quarantine because they – if you have a two-week holiday and then you have to go back to work, you can’t go for a two-week holiday and then have a 14-day quarantine because you can’t take a month. If you have kids that have to go to school, you can’t do that and take a month. If you have to go back to school, you can’t do that and go back to school.

So the quarantine is the biggest impediment to this. And so we’ve been very vocal. We agreed with the government in March. We think now is the time for science-based measures that would have an approach similar to what the EU has done, which is to say, with countries that have had a light replication rate of the virus, those are the countries that should be permitted to operate without quarantine.

Helane Becker

Thank you very much. That’s a very thoughtful answer. And I appreciate seeing overtime to get my question in.

Calin Rovinescu

Thanks Helane.

Mike Rousseau

Thanks Helane.

Operator

The following question is from Cameron Doerksen of National Bank Financial. Please go ahead.

Cameron Doerksen

Thank you. Good morning. Just one question for me. I guess, sort of if I think about one of the competitive advantages that Air Canada has it’s that you have a very good slot positions at either slot restricted airports or more congested airports. I mean if I – you think that this is going to be sort of an extended period where you’re going to be flying a lot less internationally, is there any risk that you could sort of lose that competitive advantage over time?

Calin Rovinescu

Look, there is no risk that we will give up any of our slots in any way, shape or form. We know the value that our slots have. We have very capable people in our network planning team who are watching the various rules and working with IATA and with the various jurisdictions, slot coordinators, et cetera, to ensure that – because there’ve been all kinds of exemptions that have been granted in different markets. We’re all over it, and there’s no risk of that. And we also have partners, in some cases, that have operated slots. In our cases, where – in some cases where we had been unable to, but we have – there’s no risk of that.

Cameron Doerksen

Okay, excellent. That’s all from me. Thanks very much.

Calin Rovinescu

Thanks Cameron.

Operator

Thank you. The following question is from Jamie Baker of JPMorgan. Please go ahead.

Jamie Baker

Hey good morning everybody. A follow-up on travel restrictions being lifted. How quick is the typical leisure response? So if we think about Canada being on the EU safe list at least for Euro citizens, when that happens, was there an immediate surge in bookings? Is it a more tepid uptick? Do you have to advertise or consumers themselves focused? Like I guess I’m really just trying to assess the eagerness and willingness of consumers to travel once the regulatory impediment is removed.

Calin Rovinescu

Yes. Jamie, it’s Calin, I’ll start, and then I’ll ask Lucie to comment a bit more in depth. Look, there’s no question that there is pent-up demand. It’s not massive pent-up demand, but there’s pent-up demand. And we saw it immediately as the Europeans permitted Canadians to travel without quarantine in Europe, we saw that immediately. And our numbers, of course, over the last, call it, three, four weeks, are materially better than our numbers over the previous three, four weeks. And we’re seeing it on a daily basis.

And so the leisure demand can react pretty quickly. We also feel that in some markets, the traditional summer period is actually going to be extended this year. So it’s going to go into September, October, where it may have ended at the end of August. And so assuming that, that happens, we see that occurring. And we’ve also had some good experiences with markets like the Caribbean. So maybe, Lucie, just add one or two thoughts there.

Lucie Guillemette

Yes, the other comment that I wanted to make is one thing that we are definitely seeing is how close the booking window is. If it’s possible to believe the booking window is shorter now, and we carry only leisure traffic, than it was when we actually had a mix of business traffic. So I think particularly the quarantine, if we were to see something like that be lifted, we assume that demand recovery would be pretty quick.

Jamie Baker

That’s helpful. And second for Mike. You’re one of the very few managements that’s willing to discuss your minimum structural liquidity. I’m not asking the question because we’re concerned about it. I’d just love to know if that figure may have evolved over time given shift in booking patterns, the composition of the ATL, how it might evolve going forward. Or is it solely a function of covenants as you alluded in your prepared remarks?

Mike Rousseau

Good morning, Jamie. No, I think it’s the latter.

Jamie Baker

Okay.

Mike Rousseau

It’s solely the result of the covenants.

Jamie Baker

Okay. And then just a quick follow-up, should we just assume all aircraft CapEx is financed, it’s really just a question of timing?

Mike Rousseau

Yes.

Jamie Baker

Okay.

Mike Rousseau

That’s a fair assumption.

Jamie Baker

Perfect, thanks for squeezing me in. Take care everybody.

Calin Rovinescu

Thank you, Jamie.

Operator

Thank you. The following question is from Tim James of TD Securities. Please go ahead.

Tim James

Thanks. Good morning. Calin, I’d like your comment about throwing our approach to the relationship between capacity and load factor in the bin as you say. My bins are actually already fairly full with other approaches to airline, and so there isn’t much room. But I wanted to ask about the – your view of liquidity, Mike, going forward. And when you look at your base case recovery scenario, whatever that might be, if that continues to play out here over the next year or two years, is your liquidity, where it sits today, is that sufficient for that scenario? Like should we assume we need to have another pullback or a worsening in demand in order for you to feel more liquidity is required? Or could you – even if things play out the way you expect maybe you add more liquidity?

Mike Rousseau

A difficult question but a very fair question, Tim. And good morning. We obviously were very busy in Q2 raising liquidity to levels where you see them at the end of Q2. We can run many different scenarios. And certainly, I would say the $9.1 billion can cover many scenarios. But we are very fluid here. And we continue to update our financial scenarios. And we will step into the market if we see a need to.

The other thing, as you always know, we’ve been very conservative from a balance sheet perspective. And so if I have too much liquidity, I don’t consider that a bad thing because I can use some of that excess liquidity when the market stabilizes to repay debt, if I so choose. And so we’ve given ourselves some flexibility to do that as well. And so having more liquidity on our balance sheet is not a bad thing from our perspective as long as we have the ability to pay down debt and lower the overall leverage ratio.

So again, Tim, it’s a very fluid situation. We were very successful in Q2 raising what we raised, giving us a higher degree of comfort as we go forward. But we’ll continue to monitor the market and make adjustments certainly on a weekly basis.

Calin Rovinescu

And also, Tim, Calin here. The other factor, which again, a lot of – as you say, a lot of paradigms are finding their way into the waste bin these days. But when we look at a scenario like this, where you see an entire industry, not just our company or not just our country, but entire industry and how long will capital markets have an appetite to fund the industry, you look at so many companies like Virgin, Virgin Australia and LATAM and South African Airways and Thai Airways, and so on and so forth. There’s no question that our strong balance sheet has given us an advantage here. And Mike and team took full advantage in the second quarter of being able to use that balance sheet to raise additional liquidity. And that absolutely is the right call, and that’s the thing that’s given us the ability to now look at what are some of the other drivers that give us more flexibility to go forward. And I would say that the higher the liquidity – and we’ll continue to talk to government to see whether there’s opportunity for a sector-specific program, et cetera, et cetera. But liquidity is the number one driver as we go through this very difficult period.

Tim James

Okay. And just one final question, do you think there is any risk of the CTA changing its stance with respect to cash refunds versus travel vouchers or canceled flights?

Calin Rovinescu

Well, look, the CTA spoke clearly on the topic. And at this point, Tim, I’ve got no reason to believe that they’ll change that.

Tim James

Okay, thank you very much.

Operator

Thank you. The following question is from Konark Gupta of Scotiabank. Please go ahead.

Konark Gupta

Thanks. Good morning. And hopefully, you can hear me okay, after the technical difficulties I’ve been facing.

Calin Rovinescu

Yes, we can hear you loud and clear, Konark.

Konark Gupta

Perfect, thanks Calin. So I have a few questions here. Thanks for squeezing me in. So on the average daily cash burn, I can see its $17 million in Q2, excluding the CapEx, and now you’re projecting that to go down to $11 million to $13 million on the same basis. If you can help us understand what was the cash burn exiting June. And do you expect improvement each month to get to your Q3 projection?

Mike Rousseau

Konark, again, it’s a fair question. We’re not going to provide month-by-month because there are so many changes from a working capital perspective. For example, when we receive the [Qs] payment, so it’s not indicative. There’s no doubt that improved on – as bookings improved, as cost reductions came in place, but to provide you the quantum would be misleading from our perspective.

Konark Gupta

No, that’s fair, Mike. I understand. And so if on the Q3 projection, I think, you mentioned, I think, it depends on, obviously, certain markets reopening and all that. I mean how much of the cash burn in Q3 you would say is predicated on the Canada-U.S. border reopening for nonessential travel?

Mike Rousseau

Yes, we’re not assuming the U.S. border opens in Q3.

Konark Gupta

Okay. Yes. I think right now, it’s supposed to be opening at the end of August unless it’s obviously extended.

Mike Rousseau

Yes, I mean it may, probably unlikely, but we’re not assuming that in our financial modeling.

Konark Gupta

Okay, that’s great. And on the CapEx side, so I saw the capital commitments table. It shows $3 billion CapEx in 2021, including uncommitted CapEx. Can you help us break it down into sustaining CapEx and Boeing 737 MAX-related CapEx, please?

Mike Rousseau

Yes, I would say the $3 billion in 2021 is a very, very conservative number. It’s based on very conservative assumptions of how many planes we’re going to take in, though delivery schedule for the 737 is not yet finalized. So we’ve almost assumed almost a worst-case scenario from a delivery perspective. We do believe as we continue discussions with Boeing, that that will be spread over a little longer period of time. And that capital, that $3 billion will drop next year.

Calin Rovinescu

And as I mentioned earlier, I think, this is also one of the things that have to be assessed in relation to the duration of the travel restrictions and the availability or lack of availability of industry-specific programs here because, obviously, that could affect our appetite to take any aircraft after this year.

Konark Gupta

Right. No, I understand. But I was just comparing 2021 to 2022. And I was wondering if there’s any MAX delivery assumptions in 2020?

Calin Rovinescu

No.

Konark Gupta

Okay, thanks. And last one for me. So it looks like you have removed 50 aircraft out of the planned 79 retirements. What is the timing for the remaining 29 aircraft? It looks like they’re all A319s and have you recognized any cash proceeds from the sale of any of the owned aircraft?

Calin Rovinescu

No, we haven’t sold any aircraft yet. On the 319, we’re going to hold those a little bit longer because most of them are owned, as you mentioned. And they give us a little bit of flexibility to gauge up or to add more capacity and they’re very, very low cost from our perspective. And so right now, our focus is returning 67s and returning the Embraer 190s. And we’ll deal with the 319 a little bit later.

Konark Gupta

Okay, thanks for that. Thank you everyone.

Calin Rovinescu

Thank you, Konark.

Operator

Thank you. There are no further questions registered at this time. I’ll turn the meeting back over to Ms. Murphy.

Kathleen Murphy

Thank you, Melanie, and thank you for joining us on our call today. Thank you very much.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.



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