From Good to GreatIn my December 4th post
The Race for Efficiency, we learned that:
- Transportation assets are becoming smarter, greener, and larger at an ever-faster rate.
- Companies need to invest constantly in new-generation assets to remain competitive, while retaining capital discipline.
- There is a strong inverse relationship between economic profit and the average age of an airline.
- Asset size (aircraft) has roughly doubled every ten years, reducing unit costs by 16 percent, respectively, for new-generation aviation assets.
- Over the past 30 years, marginal capacity cost in a number of the eight transportation and logistics industries has amounted to as much as 25 to 50 percent.
- Scale and technological progress have driven up the operating efficiency of new assets.
- New-generation assets are 10 to 30 percent more efficient than previous generation assets and have correspondingly lower unit operating costs.
- New assets often set lower market prices, causing older, less efficient assets to deliver lower than expected return on investment.
- New-generation assets devalue older assets as second-hand prices tumble.
Since 2013, Air Canada has pursued international growth, becoming less reliant on the Canadian economy, instead growing a more diversified revenue stream. Since then, the Airline’s domestic revenue as a percentage to total revenue has decreased from 37% to just over 30%. New fuel efficient B777s were delivered with greater seat density while existing B777s were reconfigured to a new standard. However, the real game changer for Air Canada was the introduction of the B787. This new generation aircraft will serve the backbone of Air Canada’s wide body fleet for many years to come. The B787 is ideal for long, thin routes. Given Canada’s smaller population base, there were routes that the Company could not operate profitably. The B777 was too large for the route, or the older 767s did not have the range or the operating economics. The B787 was the answer to this problem.
With the Mainline wide-body fleet renewal program now complete, expect to see more improvements productivity and cost reductions in the coming years as Air Canada replaces its mainline narrow-body fleet with newer more fuel-efficient aircraft in higher seating configurations. The best is yet to come!
Have a look at the tables below, and it is clear how the thinking outlined in
The Race for Efficiency has enabled Air Canada to achieve major productivity improvements, cost reductions, while growing a solid capital base, a diversified revenue stream, and healthier ROICs - think Economic Profits.
The improvements are compelling!
Note: The three US legacy carriers are included for comparison purposes. Their strategy has been to focus on their home markets, in part because of their strong dollar, which makes them less competitive internationally. Accordingly, domestic revenue as a percentage of total revenue varies from 62% and 68% among the three carriers. All three have formed international alliances and partnerships, and in the case of Delta, partial ownership in foreign carriers. Delta pilots are beginning to challenge management, as they see partial ownership, as a way to achieve lower costs at their expense. See the following link for more information on this issue:
https://skift.com/2019/08/23/delta-pilots-upset-that-primo-routes-to-europe-are-going-to-foreign-partners/ Only American Airlines data since 2015 was included, the first full year as a merged airline. The source of data for the US carriers is
https://web.mit.edu/airlinedata/www/default.html. Air Canada’s data is the MD&A.
Doing More, Over the 6-year period, Air Canada’s
total capacity measured in Available Seat Miles (ASMs) increased 61.7% significantly more than its US counterparts. Average stage length increased 18.7% while the US carriers remained the same.
Available Seat Miles (thousands of miles) Year AAL UAL DAL AC 2013 212,977 204,210 68,572
2015 239, 368
2018 248,574 244,771 238,588 110,886
Change 3.75% 15% 16.8%
61.7%
Average Stage Length (miles, the longer stage length the better) Year AAL UAL DAL AC 2013 1702 1196 1464
2015 1226
2018 1236 1582 1149 1738
Change 0.008% 0.07% -0.04%
18.7%
Productivity Measures Flying larger aircraft longer distances also yields improvements in productivity. Over this period, Air Canada saw significant improvements in employee productivity compared to US carriers, and in revenue generation per employee.
Available Seat Miles (ASMs) per Employee - Thousands.
Year AAL UAL DAL AC 2013 2,437 2,690 2,798
2015 2,421
2018 2,415 2,825 2,704 3,708
Change 0.002% 15.9% 0.005%
32.5%
Passenger Revenue per Employee (000), U.S carriers in US Dollars
Year AAL UAL DAL AC 2013 295.8 339.8 505.0
2015 293.5
2018 297.7 331.9 350.0 604.0
Change 1.43% 12.2% 0.3%
19.6%
At a Much Lower Cost I spoke with an Airbus engineer nine years ago, and he told me that Airbus had already developed the next generation airframe but both Airbus (and Boeing) were waiting for the engine manufacturers to develop an engine that would achieve a 15% decrease in fuel consumption. Airbus and Boeing needed to get this kind of improvement to be able to entice airlines to replace older fleets. One demand airlines put on Boeing and Airbus was that new aircraft would need to operate profitably at oil prices seen in 2008, when oil reached $140/barrel.
With most of the narrow-body aircraft arriving between now and end-2021, expect to see additional fuel savings.
Have a look at these impressive numbers.
The magnitude of these improvements results from a significant decrease in fuel consumption rates and increased seating density. This will give Air Canada a cost advantage over competitors, and as stated in ‘The Race for Efficiency’ be a major contributor to increased economic profits, as well as better insulate the Airline from fuel spikes or sustained increases in fuel prices.
The values in the following tables are adjusted to reflect Air Canada seating configuration. Air Canada’s seat count on each aircraft is provided in its MD&A. The source for fuel information is:
https://en.wikipedia.org/wiki/Fuel_economy_in_aircraft Actual values for Air Canada may vary but only slightly due to small variations in aircraft weight. FC/Seat is Fuel Consumption per Seat. (A lower number is better.)
Type Sector Length (km) FC/Seat (L/100km) Embraer E190 1,124 3.62
Airbus A220-300 930 2.62
Airbus A220-300 1,900 2.60
Replacing the E190 with the A220-300 will result in a 28% reduction in fuel consumption per seat.
Type Sector Length (km) FC/Seat (L/100km) Airbus A319 1900 3.04
Airbus A320 1900 2.68
Boeing 737 Max 8 1900 1.95
Replacing the A319 fleet with the Boeing 737 Max 8 will result in a 36% reduction in fuel consumption per seat. Replacing the A320 fleet with the Boeing 737 Max 8 will result in a 27% reduction in fuel consumption per seat.
Is that everything? It seemed like he said quite of bit more than that. Bob Harris (Bill Murray), Lost In Translation