WASHINGTON — The man who got rid of Air Canada’s last freighter as CFO 15 years ago now says as CEO he wants to double cargo revenue — with the help of the airline’s new freighter fleet.
Decades ago Air Canada flew Boeing 727-100, Boeing 747 Combi (passenger and cargo sections on the main deck) and DC-8 cargo jets. All were eventually removed from the fleet in the 1990s, part of an industry trend in which most passenger carriers determined the cost structure and infrastructure required didn’t justify a separate freighter division in a market with regular peaks and valleys.
Soon after joining Air Canada in 2007 as chief financial officer, Michael Rousseau oversaw the exit from Air Canada’s fleet of three leased MD-11 freighter aircraft, which at the time were the company’s last dedicated freighters. The cargo division continued its job using the belly space on passenger aircraft.
But Air Canada (OTCUS: ACDVF) reassessed its strategy during the pandemic. Cargo became such a strong source of revenue when passenger flying mostly stopped and scores of planes — some with seats removed for extra cabin storage — were repurposed as auxiliary freighters, that Air Canada decided to capitalize on market projections for robust e-commerce shipping growth and fewer widebody passenger jets.
This year the airline began fully operating two Boeing 767-300 converted freighters that were retired from Air Canada’s passenger fleet and plans to have a dozen all-cargo jets within two years.
Last week, Rousseau issued a mea culpa of sorts.
“Many years ago we had freighters. We got rid of them. … I’ve come full circle,” he said during a conversation with a moderator at an aerospace summit here organized by the U.S. Chamber of Commerce.
“We think cargo is a great business for Air Canada. It leverages our brand and our international network,” added Air Canada’s top executive.
Air Canada is putting six more 767 planes through the conversion process, including installation of a large cargo door, so they can carry heavy containers on the top deck. They will join the fleet in stages over the next 18 months. Rousseau said the airline should have four or five 767 freighters by the first quarter of 2023. And last month, Air Canada (OTCUS: ACDVF) announced it acquired two factory-built 767 freighters from Boeing, scheduled to enter service in 2023, and ordered two large 777 freighters for delivery in 2024.
“We saw an opportunity to grow and diversify our revenue base,” Rousseau told the audience. “We should have a fleet of 12 freighters in the next couple of years. And we would like to double the business over that period of time.”
Air Canada achieved record cargo revenue of US$1.2 billion last year. Cargo sales were up 119% compared to 2019. Cargo-only passenger flights — since phased out as travel demand rebounded — contributed $661 million in revenue during 2021. Cargo revenue was up 9% year over year in the first six months of 2022 thanks to higher yields.
The two cargo jets are operating from Toronto to Miami and destinations in Latin America, as well as to Halifax, Nova Scotia, and onward to Germany, Spain and Turkey multiple times per week. One of the top exports to Europe is lobsters and inbound flights from South America frequently include cut flowers.
Air Canada’s current CFO, Amos Kazazz, provided further color on the company’s revived interest in freighters at Cowen’s virtual investor conference on transportation earlier this month.
“This is a business in the cargo world where they want year-round service. There are cargo lanes you really can’t offer from a passenger perspective. By splitting that apart you have the ability to get into specific cargo lanes with year-round scheduled service” as opposed to many international passenger routes that are seasonal, he said.
“It’s something the freight forwarders asked for,” added Kazazz.
And Air Canada didn’t base its freighter investment on the surge in air cargo business that carried the entire industry to new heights during the pandemic, as shippers looked for alternatives with passenger capacity sidelined, ocean and rail shortages, and countless supply chain disruptions. It determined that cargo would be strong over the long term.
“We didn’t look at this purely through the lens of high-yield during the pandemic. We knew that that is really not sustainable long term. So we looked at this as yields during normal times. And it still made business sense,” Kazazz said.
Air Canada is making other investments in cargo infrastructure too. This year it spent $16 million to expand its cold chain storage facility at Toronto Pearson International Airport. It opened the export acceptance area on Monday, featuring 30,000 square feet of temperature-controlled storage, an X-ray machine that allows certain pharmaceutical and fresh products to be screened and an area to keep active refrigeration units.
Sustainability strategy
Before Rousseau took the stage Thursday, Air Canada announced it would purchase 30 electric-hybrid aircraft under development by Heart Aerospace of Sweden. The regional aircraft are expected to enter service in 2028. Under the agreement, Air Canada has also acquired a US$5 million equity stake in Heart Aerospace.
Pure electric planes are limited to short-haul and commuter routes because of battery limitations. The ES-30 model ordered by Air Canada will be capable of carrying 30 passengers and have a range of nearly 250 miles because the lithium-ion battery powering the electric motor will be mated with a traditional generator that can use sustainable aviation fuel.
Last year, United Airlines (NASDAQ: UAL) said it would buy 100 19-seat electric aircraft from Heart Aerospace and invest an undisclosed amount in the company. The ES-30 is a new design that replaces the previous 19-seat design.
Air Canada has a large network operated by regional turboprops. The Heart aircraft, which will have lower emissions and be cheaper to operate, are candidates to replace the conventional prop planes going to smaller markets in Canada.
“We’d like to think we can possibly expand into other regional markets with this type of lower emission, zero-cost aircraft,” said Rousseau.
Air Canada’s efforts to achieve net zero emissions by 2050 include forming a consortium to encourage more investments and credits in production of sustainable aviation fuel in Canada and supporting the development of carbon capture technologies.