Air Canada's (ACDVF) CEO Calin Rovinescu on Q1 2020 Results - Earnings Call Transcript
Air Canada (OTCQX:ACDVF) Q1 2020 Earnings Conference Call May 4, 2020 8:30 AM ET
Company Participants
Kathleen Murphy - IR and Corporate Reporting
Calin Rovinescu - President and CEO
Mike Rousseau - Deputy CEO and CFO
Lucie Guillemette - EVP and CCO
Craig Landry - EVP, Operations
Conference Call Participants
Tim James - TD Securities
Kevin Chiang - CIBC
Walter Spracklin - RBC Capital Markets
Konark Gupta - Macquarie
Hunter Keay - Wolfe Research
Doug Taylor - Canaccord Genuity
Chris Murray - AltaCorp Capital
Andrew Didora - Bank of America
Helane Becker - Cowen
Operator
Good morning, ladies and gentlemen. Welcome to Air Canada's First 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, Elaina. And good morning everyone and thank you for joining us on our first 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 impact of the COVID-19 pandemic 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 visibility on current plans regarding burn rate, liquidity, and fleet before turning it back to Calin. Calin will then open it up to questions from every analyst.
Before we get started, please note that certain statements made on this call are forward looking within the meeting of applicable securities laws. This call also includes references to non-GAAP measure. Please refer to our first quarter press release and MD&A precautionary statements relating to forward looking information and from reconciliations of non-GAAP measures to GAAP results.
I will now turn it over to Calin.
Calin Rovinescu
Thank you, Kathy. Good morning everyone. And thank you for joining us on our first quarter earnings call. Shocking as today's results would have been just three months ago when we reported strong 2019 earnings, which followed on several years of record results, to now further affirmation of the severity and abruptness of COVID-19's impact upon Air Canada and the global airline industry. No adjectives can adequately describe the pandemic's cataclysmic effect upon our industry nor can numbers fully quantify the extent of the financial devastation the global airline industry is experiencing and will continue to experience for some time.
For Air Canada, the pandemic and government-imposed lockdowns and travel restrictions the world over have ended a run of 27 consecutive quarters of year-over-year revenue growth. Our solid January and February results despite weakness in China and other Asian markets gave us every encouragement that this performance would continue until the sudden and catastrophic onset of COVID-19 in Europe and North America in early March.
We're now living through the darkest period ever in the history of commercial aviation, significantly worse than the aftermath of 9/11, SARS, or the 2008 global financial crisis. Our EBITDA fell in the quarter by more than $0.5 billion to $71 million, dropped $583 million a year ago albeit last year we had the Boeing 737 MAX operating for most of Q1. On a GAAP basis, we reported an operating loss of $432 million.
And there is little doubt that we are not yet out of the trough. IATA is now forecasting that the industry will lose CAD450 billion or US$314 billion in passenger revenue in 2020, a 55% decline from 2019. The global airline industry was virtually shut down as we entered Q2 with more than 100 carriers from around the world having suspended service altogether and most others operating at less than 5% compared to last year.
Despite the financial carnage, our first priority has been and remains the health and safety of our customers, our employees, and the communities where we live and work. Our foremost concern from the outset has been to apply best practices and recommendations on preventive measures and to contribute in any way we can to assisting with public health initiatives often acting more quickly than required by governments. We pulled out of China on January 29, well ahead of other international carriers and ahead of any government-imposed restrictions. We did likewise with respect to certain European markets in February. We introduced personal protective equipment for our staff in March and facial coverings for our passengers in early April, ahead of other airlines or any requirements to do so.
We fully understand that once government restrictions are eased a key factor in the return of travel demand will be customers having confidence to travel, especially until a vaccine is broadly available. Therefore, we are today launching Air Canada CleanCare+, a new program for safety, cleanliness, and hygiene throughout the passengers' flight journey. We're actively rethinking all aspects of the travel experience. Airport check-in, security queue, the Maple Leaf Lounges, airport gate, the boarding process, and personal space onboard our aircraft.
We intend to continue enhancing Air Canada CleanCare+ where we can with best practices from around the world, including increased use of screening tools as they become available. We'll be rolling out various video and other communications to explain this new program.
Secondly, we made a priority of preserving liquidity just as we exercise much discipline with respect to our balance sheet over the last decade. Mike will provide more details in a few minutes. However, at this point, I'd like to commend Mike and the finance and treasury team for their foresight during prosperous times that we have the discipline and were able to accumulate liquidity of nearly $7.4 billion as we started this year. This harvesting during the good years positions us well for the extraordinary challenges in the lean years.
Finally, we focused on stabilizing our airline and preserving cash effectively putting it in a state of hibernation. Among other things, we have reduced our capacity and our schedule by 85% to 90% unwinding a decade of successful international growth, and we have parked the majority of our fleet for the time being. Perhaps, most of all, we were forced to take the extremely painful step of furloughing more than half of our 38,000 employees and the number of employees on inactive status is now around 20,000.
In addition, we introduced various other workforce mitigation programs including management wage reductions for continuing employee. Implementing furloughs was agonizing given the tremendous dedication of our employees to Air Canada's transformation over the decade. At no time has their commitments been as evident as in their response to COVID-19. They're concerned for the well-being of our customers and each other, they tried of bringing stranded Canadians home from abroad and their continued hard work transporting customers and emergency supplies and other essential goods is truly inspiring.
Realistically, we expect it to take at least three years for Air Canada to get back to 2019 levels of revenue and capacity. And despite the difficulty of the present situation and the uncertainty of its timeline, we are already working on a restart plan. This requires that we anticipate what our industry will look like, what the state of the global economy is likely to be, what governments may require, what customers may require. While there are many unanswered questions, we do not intend to wait until they can all be answered to take concrete action and that is what we are doing. You'll hear more about this from Lucie and Mike.
I thank our employees for their dedication and professionalism. My commitment and the commitment of our leadership team to our employees, our customers, and our shareholders is to do everything we can to safely rebuild as quickly as possible in this new reality and ensure Air Canada retains or better yet given our foundation improves upon its industry leading position coming out of this.
And with that, I'll turn the call over to Lucie.
Lucie Guillemette
Thank you, Calin. And good morning everyone. I'd like to start by wholeheartedly thanking our incredible teams on the frontlines and behind the scenes for their resolve during this tragic situation that is impacting so many around the world. And to our customers, we hope you are all staying safe and look forward to see you again soon. We'll be ready when you are.
There's no question the situation is unlike any our industry has ever faced, which has so rapidly disseminated air traffic demand around the world in a matter of weeks. The impact of the pandemic and travel restrictions imposed began to be significantly felt in early March and resulted in passenger revenue decrease of $604 million or 16.9% for the quarter when compared to the first quarter in 2019. There is limited visibility on travel demand for the remainder of 2020 and the duration and extent of the impact remains unknown.
Since March 16, we have reduced our schedule by more than 90% and grounded over 200 of our aircraft, a network that we built up over the last 10 years that were serving 220 airports globally, has been reduced to five international destinations and 40 domestic airports.
With respect to the U.S., we have now suspended our entire 53-city comprehensive transborder network until at least May 22 subject to government restrictions beyond that date.
As Canada's flag carrier in recognizing ongoing travel and trade needs we're proud to be operating vital international outreaches for the country as well as to continue to serve all Canadian province, Yellowknife, Northwest Territories and Whitehorse in the Yukon.
We continue to provide a lifeline to the country by transporting vital goods and supplies to areas that are in the most need. We anticipate flying our revised schedule into the remainder of most of the second quarter. We accordingly expect to reduce Q2 capacity by 85% to 90% compared to the second quarter of 2019. And Q3 capacity is expected to be about 75%, less than the comparable quarter last year. Of course, we will proactively and dynamically adjust capacity based on demand.
Although recovery will likely be slow we are closely monitoring domestic and international demand in markets around the world, as well as global travel restrictions. Using a multitude of factors, we've developed new models to assess demand that are informing our network plan, fleet plans, as well as our operational requirements. Ultimately, the most important factor to travel demand returning once restrictions are eased will be instilling confidence in our customers that air travel is safe.
We realize that the experience at the airport and onboard will be important in emphasizing safety and building confidence and we are actively rethinking our products and services throughout the customer journey while considering these new realities and staying true to the foundational elements and competitive advantages we've built over the years.
Physical distancing will be an important factor at airport check-in, security cues, our lounge network, airports gates, in the boarding process, and onboard aircraft. Technology is going to play a critical role at self-service, and automation is integrated throughout our customers' journey.
To underscore our commitment to customers and employee safety, today we are announcing Air Canada CleanCare+, which steps out all the health and safety measures we are implementing at every touch point of the flight experience. Prior to boarding an Air Canada flight, customers will be subject to an infrared temperature check. To promote physical distancing and provide more personal space onboard and our aircraft, we will block the sale of adjacent seats in economy class on our all flights and cap the total number of seats sold for each flight operating until at least June 30.
We will also be distributing care kits to every customer containing hand sanitizer and sanitization wipe to promote onboard hygiene. This includes the new operating protocol our teams have developed and adopted for hospital grade sanitization and cleaning of our lounges and our aircraft building on our award-winning cabin cleaning standards.
Another element of Air Canada CleanCare+ is that we will be further raising our aircraft grooming standards by introducing the use of electrostatic sprayer to complement our existing disinfection protocol. We are also modifying our onboard products and service delivery to ensure the safety of our in-flight teams and passengers.
We have already been recommending facemasks since early April for both our customers and crews before this became mandatory later April following a Transport Canada directive and we will continue utilizing appropriate personal protective equipment for both crews and passengers moving forward.
We have also modified our current onboard products including providing prepackaged food and bottled water in all cabins instead of our usual food and beverage service. We know that human connections are going to be more important than ever. And although, the way we deliver our service may be different in the future, we are steadfast in our commitment to continue to create memorable experiences for our customers with simple but meaningful interaction.
In our efforts to support our country's health care workers as they continue to combat the virus, we have enhanced our focus on airfreight. We're very proud of the role we have played in bringing critical medical and other vital supplies to Canada and helping distribute them throughout the country. We have reconfigured the cabins of four of our Boeing 777-300ER, our largest wide-body aircraft removing passenger seats to give them additional cargo capacity. We are doing the same thing with some of our Airbus 330. The rapid transformation of some of our aircraft to meet cargo demand reflects our ability to pivot quickly and maximize our fleet assets when these aircraft would otherwise be parked.
Our engineering team has worked around the clock to oversee the conversion work and with Transport Canada to ensure all work was certified as tasks were completed. We've operated more than 500 all-cargo flights since March 22 and plan to operate at least 150 all-cargo flights per week from point of Asia Pacific, Europe, the United States, Latin America using a combination of the four newly converted Boeing 777, four converted Airbus 330, as well as Boeing 787 in addition to the current regularly scheduled flights to London, Paris, Frankfurt, and Hong Kong.
We also recently announced that working with our regional carrier Jazz Aviation, we will begin operating 13 converted Dash 8-400 aircraft branded as the Simplified Package Freighter developed by De Havilland Canada to short and medium home markets under the Air Canada Express banner. The converted cabin is suited well to loose cargo like medical supplies, PPE, and other goods needed to support the ongoing fight against COVID-19.
To-date, we've moved over 5,000 cubic meters of mostly PPE from China, which would be the equivalent of 110 million mask. This is truly an all hands-on deck effort to facilitate the cargo on all of our flights we have created five segment-specific sales teams including repurposing several passenger sales groups to continue exploring additional cargo opportunities and the unique needs of customers at different levels in supply chain around the world.
We recognize our loyal customers and demonstrate our commitment to them during these tough times. We were happy to extend the status to our Altitude members until the end of 2021. In addition, for those Altitude members who achieved their status in 2020, since their status is already secured to the next year they can share the status with a loved one.
Lastly, we designed a program that allowed our customers to earn miles and status from home while donating masks to a charity engagement fighting the COVID-19 crisis.
To close, I have had the privilege of experiencing the tremendous growth story of Air Canada over the last 10 years. We have built a world class airline and we have been rewarded with extremely loyal customers and consistent revenue growth. As our teams come together to plan for recovery, there's a great sense of optimism and confidence that our people will build our airline back up and return to our flight back with global success.
With that, I will pass it off to Mike.
Mike Rousseau
Thank you, Lucie. And good morning to everyone. The events of the last few months have been incredibly challenging and our hearts go out to all those who have been affected by this pandemic. I would like to extend my sincere thanks to our employees for the dedication during these exceptionally difficult times.
To navigate through this crisis, we have taken and continue to take numerous substantial measures. This includes significantly reducing cost and capital spend adding liquidity and resizing the airline through workforce and fleet reductions, reducing the burn rate, that is -- as is commonly referred to, as well as adding liquidity sources with additional layers of insurance are two critical objectives for all airlines. The burn rate for Air Canada is a combination of our remaining fixed cost structure. Rent, debt, and interest costs are now reduced capital expenditure program, and changes in working capital and other items, most notably advanced ticket liabilities offset by a variable margin of flying and other revenues. We do not include proceeds from any financings in our definition of burn rate.
Overall, we are working on all these key levers to reduce cash burn and excellent progress has already been made over the last seven or so weeks and more will be implemented in near future.
Seeing a rapidly deteriorating demand and revenue environment, we very quickly and aggressively reduced our volume related costs and started a -- undertook a company-wide fixed costs and capital reduction program including a project deferral program, which had an initial target of $500 million. We have surpassed this target with $1.05 billion achieved so far and we continue to look at more opportunities to preserve cash.
To give you a little bit of color, about 65% of the now $1.05 billion program is 2020 capital expenditure plan reductions or deferments and the remaining portion is a reduction of 2020 fixed operating costs. We took advantage of the emergency wage subsidy or CEWS for most of our workforce, which allows for the returning of previously furloughed Canadian-based employees to payroll for the March 15 to June 6 period.
This program helps with cash burn as an addition to covering inactive employees that compensate us in part for salaries paid to active employees up to June 6. And this is in addition to the $105 billion program I just spoke about.
Furthermore, a few weeks ago we made available a company-wide voluntary separation program for management as we begin to resize the entire company to align it with our view of revenue levels over the next three years.
Monthly fixed operating costs before mitigation were approximately $425 million, monthly debt, rent, and interest costs are about $130 million per month. And capital expenditures are about $150 million per month for the rest of 2020 before financing for aircraft capital. There are no lump-sum debt maturities for the remainder of 2020.
Advanced ticket sale liability includes white credits to be converted into future travel and also reflects to refund polices and rules by contrary. The sales liability moving forward will be also be a function of how quickly borders open and bookings improve. In Europe, as Lucie walked you through, we are maximizing the cargo opportunity to cover some portion of our fixed overhead. We certainly believe as the year progresses the daily burn rate will improve and that Q2 will represent the lowest point after the month of March.
Moving on to liquidity. As all of you know, we started the year with $6.4 billion of cash on our balance sheet, one of the highest cash positions in the industry on a relative basis. As revenue level and advance sales change going forward given the numerous covenants we have, I would be very comfortable with a minimum cash balance of $2.4 billion on our balance sheet, resulting in having $4 billion to cover future cash burn.
At the end of March, we had $6.5 billion in total cash. This included the impact of drawing down our two revolving lines of credit, which provided us with net proceeds of approximately $1 billion. This means we utilize approximately $900 million in cash all in the month of March. This amount included a lump-sum debt maturity of $225 million resulting in a net operating burn of $675 million in March. We expect our daily cash burn will improve modestly in the second quarter versus the net $22 million per day burn experienced in March on a reduction in net refund activity and a lower overall cash expenses and other obligations offset in part by much lower revenue levels.
In April, we continue to add layers of insurance to our very strong starting liquidity position as we conclude the short-term loan in the amount of US$600 million secured by 35 aircraft and five spare engines for net proceeds of $829 million.
We believe we will be able to utilize the collateral package to access a replacement longer-term facility before this 364 days the facility expires. Taking this facility into account and considering certain estimated declines in asset values as a result of COVID-19, our unencumbered assets pool probably assisted approximately $2.6 billion. Aircraft values are based on recent valuations and have declined since the 2019 year-end value.
Turning to our capital expenditures. For the remainder of the year, CapEx is projected to be approximately $1.5 billion. This amount includes purchase commitments for Airbus A220 aircraft, which have been financed initially with a brief financing of $788 million, which concluded in late April. This facility is expected to be replaced with longer-term secured financing arrangements later on in 2020. We have raised approximately $2.6 billion liquidity in the past six weeks from refinancing I just spoke about. And with the $4 billion of additional cash we had a year-end results on a pro forma basis and total cash sources of $6 billion at the beginning of 2020. We continue to plan for an expected close future debt financings to add further layers of insurance.
Moving on to our fleet, we have also decided to retire 39 older, less efficient aircraft from our fleet as soon as possible, comprising of Boeing 767s, Airbus 319s, and Embraer 190s. The Embraer aircraft exiting the fleet immediately. We own 27 of the combined Boeing 767 and Airbus 319 fleet and the majority of the remaining aircraft have lease expiries within two years.
Our objective is to quickly right-size the fleet to the level of revenue we expect, reduce complexity and costs, provide more flexibility as the market improves, and lower our carbon footprint. Despite the changes we're making to our fleet, our fleet plan continues to be very flexible with lease returns and options enabling us to deal with virtually any scenario. I'd like to disclose that despite the lower equity markets and interest rates a perfect storm for any defined benefit pension fund program, our estimated pension solvency surplus at April 1, 2020 was $2.7 billion, slightly higher than where it was on December 31, 2019. Our immunization and diversification strategy and the excellent team we have managing it have all been instrumental in mitigating this risk.
To conclude, after a decade of transformation which allowed us to enter this crisis with a very strong balance sheet and a much lower risk profile, I'm confident that with our experienced management team and necessary and difficult steps we're taking we can successfully manage through these tremendously challenging times.
And with that, I'll turn it back to Calin.
Calin Rovinescu
Thanks, Mike. We've already discussed our focus on safeguarding people's health and safety, preserving liquidity, and stabilizing our airline through the pandemic. In addition to these immediate priorities, we have four but no less pressing concern preparing to emerge from COVID-19 and adapting our airline for a post pandemic world. Over the last decade as most of you know, we've infused entrepreneurial spirit, resilience, innovation, and discipline into AIR Canada's DNA. These attributes will serve us well as we navigate through the crisis and beyond.
Additionally, we expect that both the overall industry and the airline will be considerably smaller for some time. This will unfortunately result in significant longer-term reductions in both fleet, as Mike mentioned, and employee levels.
While it's not possible to predict the course of the pandemic and its fallout globally or indeed the changes that would be required of the airline industry, our determination is to ensure that our company is positioned to emerge as strong as possible. We want to be ready to capitalize on any opportunities that will inevitably arise. That Air Canada should be strong coming out of this crisis is in the interest of all Canadians and all of our stakeholders. Apart from making it easy for Canadians to travel across our country, to the United States and around the world, the connectivity our Canada provides for people and goods is essential to the economy. In 2019 our airline employed 38,000 people directly. And studies show it supported another 190,000 jobs in multiple industries and made at least $47 billion contribution to Canada's economic output.
Air Canada and indeed the entire airline industry are key strategic drivers and economic catalysts for the country's overall economic recovery. We should be viewed as essential components of any post pandemic planning and we support the National Airlines Council of Canada and IATA in their representations to governments.
Let me conclude by saying that Air Canada has not been sitting idly by hoping for demand to rebound. Along with all the cash preservation, financings, and cost saving measures we've taken to manage through this crisis and to plan for the restart of the industry, we're also counting on certain of the key transformative projects that were underway before COVID-19. This includes the ongoing development albeit at a slower pace of our new loyalty program.
A recent decision to extend Altitude member status to the end of 2021 ahead of most other loyalty programs is one example of the innovative customer centric thinking shaping the new Aeroplan.
And other major initiative, the implementation of our new reservation system has also continued this year with the migration of airport services to the Altéa platform in the middle of the COVID-19 environment.
And with respect to our proposed acquisition of Transat, we have now received the comments and concerns of the Commissioner of Competition of Canada, which have been shared with the Ministry of Transport. The filing has also been completed before the European Commission and we're awaiting the commissioner's -- of the commission's Phase I response. We intend at this point to reserve further comment on this transaction.
The introduction of cargo-only flights is helping us diversify our revenue streams. And the rapid modification of passenger cabins on some aircraft to increase their cargo capability are prime examples of nimble entrepreneurship. In fact, we believe cargo represents a tremendous opportunity. This is due to the need for urgent cargo transport during the COVID-19 lockdown and expectations that the pandemic will permanently alter future behavior in terms of online commerce.
Like a once in a century storm, COVID-19 is washing away all that came before it except those things engineered to withstand such events. We're confident that Air Canada is well-engineered to withstand this crisis. When we first undertook to transform Air Canada we were always mindful of the wildly varying fortunes of our industry. Our overarching objective is to create a strong airline that would be sustainable and nimble over the long-term designed to withstand all shocks. Today that design is being put to the test and I have every confidence that the Air Canada we have built over the last decade will endure this.
And now we'd be pleased to take some questions, Elaina.
Question-and-Answer Session
Operator
[Operator Instructions]. The first question is from Tim James with TD Securities. Please go ahead.
Tim James
Thank you. Good morning everyone. First question, if I could. I'm sorry if you could talk about what you anticipate your cash balance will look like at the end of the second quarter?
Mike Rousseau
Good morning, Tim. It's Mike. Let me answer it this way. We ended Q1 at $6.5 billion very healthy cash balance. We've already announced two financings in April for $1.6 billion. If you assume the burn rate for argument's sake at $20 million a day, we will be -- you would burn roughly $1 billion, so we'd end up at $6.3 billion liquidity. Now the breakeven burn rate would be roughly $18 million a day to get us to the same level as we were in Q1 before any debt financing. We are currently working on some debt financings and we hopefully will close them before the end of the quarter. So our anticipation is that our cash balance will be higher at the end of Q2 than it was at the end Q1.
Tim James
Okay. Great. Thank you. My second question, I'm just wondering if you could talk through how you were doing capacity planning at this point? Obviously, historical models don't help much. But are you trying to air on the side of caution with the ability to add more if necessary or are you planning load factors that will provide plenty of room to deal with the more rapid recovery than expected?
Calin Rovinescu
Tim, it's Calin here. It's an excellent question. And I would say that all of the conventional revenue, management revenue planning models have been flushed down the proverbial toilet. This is an environment where we have to assess how much capacity we're going to put into the market based on some combination of when we think governments are going to lift the restrictions on international travel, on transborder travel, on quarantine requirements, on people being able to get into restaurants or other such events. So I'd like Lucie to comment in a minute. But basically what we're doing here is we are estimating our best guess at this stage, as to how the rest of 2020 breaks out and you heard what we've said about Q2 and Q3 capacity. But it really is at this stage largely interdependent on some factors that are well beyond the control of an airline and well outside the realm of conventional revenue finding models.
We are, however, because of the fact that we've been so advanced in our artificial intelligence, the drivers, we are building a capability to take information from non-conventional revenue management sources. And I'll just advise Lucie to comment a little bit. I think it's -- I would characterize it as being probably one of the industry leading drivers at this stage at understanding the back to business, the return to service that Lucie and our revenue management team are working on, Tim.
So Lucie, why don't you go ahead?
Lucie Guillemette
Sure. Hello, Tim. Well, for sure the traditional information that we would normally use to guide us in terms of developing demand curves and capacity profiles are of no value to us today. So what we have done is we've worked using all kinds of external policies and data points. We've worked at recreating a demand curve by geography. So, for example, key markets in Canada, transborder markets, trans-Atlantic. So for the regions we serve, in order to, first of all, inform us in terms of what the demand could look like using these factors and also informing our capacity planning team to see where we could potentially take some risk and reintroduced some capacity.
Now, needless to say, in normal times, our systems are built to be able to recognize demand coming from different market segments different points of sales, but today, we are recreating that based on factors that we deem will be important to influence hereafter. For example, what diversity government regulations are, which countries are close to which market segments, which points of sale are close because the multitude of factors that we have used to recreate demand curves. And obviously it's something that is going to adjust on a dynamic basis. So as soon as new information becomes available or as soon as we start to see demand in some areas that informed us to we'll revalidate this demand curve. So certainly not easy.
I think we're thankful that we had introduced our OD system few years ago because despite the fact that the historical data is not good certainly the fundamentals and the base that we have in the RM team and it's been supported by network planning and sales and the rest of the commercial organization. We feel confident that at least we're going to be able to recreate some of these models to help us inform the capacity.
Mike Rousseau
And Tim, I think you also asked the question as to whether we're going to have flexibility to adjust up if demand recovers more quickly? The answer is absolutely, yes. We hope we're keeping back a lot of dry powder both in terms of aircraft that are available as well as crews to fly them. And so the fact is that we are -- I characterize this as planning for the worst and hoping for the best and using our new revenue driven model to help guide that. And if we see demand returning more quickly we'll be able to ramp it up fairly quickly as well.
Operator
Thank you. The next question is from Kevin Chiang with CIBC. Please go ahead.
Kevin Chiang
Hi. Good morning. And thanks for taking my question here. And maybe just turning to your fleet retirement announcement of the 79 Boulder, 767s, 319s, and the E190s, it looks that about 35 of them are in your mainline, which I guess suggests remainders are coming out of rouge. That looks like a pretty significant decline in the Rouge fleet. So one -- it might not correct there. And then maybe, secondly, how do you view the Rouge brand are coming out of this downturn, especially maybe with a greater focus on a less dense aircraft?
Calin Rovinescu
Okay. Hi, Kevin. It's Calin. Yes. Basically we are looking to Rouge, some [indiscernible] they're not coming out necessarily overnight, the one that we said are going to come in immediately are the Embraer. And then we will pick and choose the timing of the exit of the 767. It could be accelerated. We'll find optimal timing to do that. But Rouge, it's going to continue to be an integral part of Air Canada albeit primarily a narrow body operator into leisure markets. It's been extremely successful with both the narrow body and wide body, and so now we would like to have a greater concentration on narrow body flying as we build the recovery post this COVID-19 environment.
Mike Rousseau
And, Kevin, the only thing I'd want to add that is that we do plan to cover some key international leisure destinations with mainline. We have very cost efficient fleet, the 330s, the high-density 777s, and we've identified those key leisure markets principally in Europe that we want to maintain service to and we can do that effectively with the mainline product.
Kevin Chiang
That's helpful. And then just last one for me here. The cash burn detail you provided was very helpful around $20 million a day. In the event that demand takes longer to return, can you talk just some of the additional variables you can pull to drive that lower? And if you're able to maybe quantify how much lower you can get that $20 million burn rate to if demand takes longer to recover?
Mike Rousseau
Well, let me -- and Kevin, that was a great question. Let me first of all say that that number is going from our perspective it'll be a low point. We virtually have no revenue coming in other than cargo in Q2, and so we're not getting much benefit from the revenue side of the business either than cargo.
So going forward on that cash burn number, I mean that the big buckets are salary and benefits, technology infrastructure, building rent, maintenance contracts, and our CPA, fixed costs. So those are kind of five buckets that we continue to work on. Also you salary benefits will be a function of how we resize the company. So there will be opportunities in that bucket and that by far is largest of the buckets. We're working very closely with Jazz and Sky to take out their some of their fixed cost structure so that will continue to improve over time as well.
And the other buckets maintenance, IP, and building rents are less material, but we continue to work with our suppliers and our vendors and our partners to try and renegotiate contracts to lower those cash burn muscle there is. As I said in my comments, there is opportunity to reduce that cash burn. Some of these take a little bit longer than some of the stuff that is done already.
Operator
Thank you. The next question is from Walter Spracklin with RBC Capital Markets. Please go ahead.
Walter Spracklin
Thanks very much. Good morning everyone. I was wondering if you could go back to your three-year recovery indication there, Calin? And just curious how you're segmenting your expectation of the rebound in leisure travel versus business travel? And particularly, could you give us some comfort as to where a lot of investors and folks I speak to seem to be more pessimistic on business travel in particular? And even if you could segment that versus domestic, international to whatever extent you can, it'll be appreciated.
Calin Rovinescu
Okay. So our sense is that the first dynamic that recovers is the domestic network. This has been proven to be the case in looking at the countries that were ahead of us in this COVID-19 dynamic, like China and Korea and others. We believe that domestic recovers first. Visiting friends and family is going to be a big driver of that recovery. Now, we think that in our universe the transborder, as soon as we get that comfortable that the U.S. situation is relatively speaking under control, I think the U.S. fits well within the dynamic of North America recovery, people visiting friends and relatives, visiting their vacation homes and so on and so forth.
The international becomes -- obviously, based largely on, as we said earlier, on how the restrictions are lifted and how well other countries are doing in controlling the pandemic and in dealing with, this is all in this pre-vaccine university like. And so I sense that international travel does return, but of course we would have to plan that very, very carefully. Business travel both North American business travel and international business travel does return, but we know that people are getting comfortable with alternative facilities such as these video conferences, the Zooms of this world and so on and so forth. We know that and we are dealing with that in reality. And that's why we are planning the return of our capacity in a measured way.
We don't believe that you flick on a switch by the third quarter and all of a sudden we're back to 2019 third quarter, we really don't believe that. So we've been very transparent with the market. We think that this is a build-up of a progressive domestic market first, domestic transborder, visiting friends and relatives, leisure, business, international and that's sort of the trajectory as we're seeing it play out and that's why we've estimated a three-year or what we've said is a minimum of a three-year recovery time frame. You know that some of the manufacturers have come out and an estimated three to five years. Boeing and Airbus, I think both have estimates in that range. They of course are bit longer out than airlines or then we would be on the basis that they need to see that there's some recovery in the airline industry before they can start ramping up production at scale.
So I think that when we've looked at it -- and this is a little bit of crystal ball gazing, so this is not sort of within the conventions of a traditional perspective or notebook, this is how do we feel the market returns, how do we feel the industry rebounds and how do we feel demand returns. This is a little bit of crystal ball gazing but that's our best estimate at this stage and that's how we sort of built up this recovery time frame to get to three years from now.
Walter Spracklin
And that makes sense. And I totally understand that this is obviously a difficult time to do any forecasting at all. Second question here. You've obviously been following the financings that have been done south of the border, equity, and debt. What's your view on the notion of an equity financing? Obviously, you're in a better position than many of those that have done that. But the markets are open it seems for that type of financing. So Calin, I'd love to hear your thoughts. And does it tie in to government support? And what strings might be attached to that government support to helping you decide how you emerge? And really the question is if you don't need an equity financing or don't go that route, how leverage do you feel comfortable with when you would exit this? I'd love to hear your thoughts on that.
Calin Rovinescu
I'll say to you is I'll pass on to Mike. And Mike has been obviously considering all of our various financing alternatives here, and did an amazing job. I know that most of you think he's at home making cat videos or something, but he is actively busy looking at all kinds of financing. So look, we're not -- we entered this with one of the best balance sheets in the global airline industry relative to our size. And we -- as you know we have not done an equity issue since 2009. And so we know all of the alternatives are available to us, but Mike and the treasury team are doing a fantastic job at isolating and identifying the alternatives that makes the most sense relative to our current dynamic.
We look at -- we are very proud of our leverage ratio. We are getting to investment grade as you know, that was a big target of ours and we were kind of within shooting distance of it. I'd say arguably we were there already. And so we've been guarding that leverage ratio very carefully, but there are lots of alternatives open to us. And so we're not necessarily jumping at the first thing the company waives in front of our eyes. But Mike, I'd like you to add anything on to that.
Mike Rousseau
Sure. Thanks, Calin. And good morning. So interesting question. All these starts with what our view of the recovery is and what the burn will be over that period of time. And we've got a fairly good sense of that. Then all of the equity is one of the options, I would say. I would not say it's a key option, but it certainly has been one of the options open for us. But that really depends on what our view of the burn is and what our capacity is from a debt perspective.
We do have the balance leverage. But as we recover leverage we'll get back into a more reasonable range as our EBITDA improves over the next couple of years. And so we put that into a plan and right now we're executing on debt financings that we feel are appropriate, that are using supply we already have in place and certainly that market is open for us at this point in time. So we'll continue to focus on debt equities as we've always talked about in the past is always an option for us, but it really depends on the recovery teams over the next little while.
Operator
The next question is from Konark Gupta with Scotiabank. Please go ahead.
Q – Konark Gupta
Thanks. And good morning everyone. So just wanted to ask you a follow-up on cash burn. Thanks for providing that color. So just confirming if the $22 million per day in March, was that before government waived subsidy cost and CapEx reduction and the A220 financing? And if that's the case then what would you think that cash burn would look like net of those offsets?
Mike Rousseau
Sorry, Konark. And you were breaking up there for a second. So cash burn in for the month of March was $22 million a day. And so that is before any financing and that is before any subsidy because we had not yet applied nor received the subsidy from the government.
Calin Rovinescu
We still haven't.
Mike Rousseau
And we still haven't. That subsidy will go against the April -- the March component of the subsidy will go against April for the most part.
Q – Konark Gupta
Right. So yes, sorry for breaking out there. I'm just curious if net of those subsidies and the cost and CapEx reduction or what would be cash burn would look like?
Calin Rovinescu
In the month of March?
Q – Konark Gupta
March or April or today, yes.
Mike Rousseau
I haven't worked those numbers out. Again, I think the way you can look at it is the subsidy is probably because again the subsidy is beneficial to us only for active employees. We brought all the employees back off furlough, and we're paying the same amount, the government's paying us, so the flow through for inactive employees. For active employees, you do the math, its $847 per week, $3,300 per month for roughly 10,000, 12,000 active employees. So $30 million to $40 million a month in benefit to us until June 6.
And again, we put together the program, the $1.05 billion program. I don't want to split on capital, capital is roughly $700 million of that, fixed cost is $350 million, so another $30 million, $40 million a month in fixed costs reduction as well. So right there for the month of April, we have roughly $80 million to $90 million of reduction in cost plus the capital reduction that I don't have at tip of my fingers as to what, how that influenced April.
Q – Konark Gupta
Okay, and thanks for that. And then on advanced sales, Mike, so I saw the numbers dropped by $325 million during the quarter. How much was that related to the drop in bookings versus increase in refunds? And can you provide some color on those trends in April versus March?
Mike Rousseau
So both of those components contributed to that $300 million decline in advance tickets. As you know, Konark, advance ticket sales would increase this time of year as we go towards the summer. Very unusual for advance ticket sales decline. It's going to be interesting to see what happens as the market comes back hopefully towards the end of the year, where advance ticket sales historically may have declined, and they may increase, so we may get a complete change in seasonality of the growth or decline of event ticket sales, depending on the recovery cadence. So again refunds were higher than last year.
And obviously, advance sales are much lower than last year. And so both of those factors contributed to the $300 million. I don't have to flip this point in time. But again, both factors contributed.
Calin Rovinescu
Our expectation is that as soon as the governments released the travel restrictions, that will start resulting in fairly important improvement in advance ticket sales. So obviously, we're waiting for that, especially as it relates to international markets for the third quarter.
Q – Konark Gupta
Thanks. And just last one for me before I turn it over. So on the unencumbered valuation, you said $2.6 billion. I think we're just kind of down from the prior disclosure of about $5 billion. Is it fair to assume that the $600 million U.S. term loan that you raised as well as the $1 billion revolver drawdown reduced the unencumbered asset pool by $1.9 billion and the remaining $500 million reduction relates to the lower asset valuation net of FX tailwind?
Mike Rousseau
Yes, the remaining $500,000 reduction you're right, so we went from $5 billion sorry, you're right, down about $1.8 billion, $1.9 billion for the quarter we've posted both to the 364 day facility and to the $200 million revolver and the remaining component is the revaluation of the planes that were part of the collateral package.
Operator
Thank you. The next question is from Hunter Keay with Wolfe Research. Please go ahead.
Hunter Keay
Calin, in your prepared remarks you talked about capitalizing on any opportunities that may arise. Is that a comment that you are -- are you referring to organic growth opportunities? Are you contemplating some scenarios where you guys make some strategic acquisitions of assets or the like at some point here in the event that you're ready to do something like that?
Calin Rovinescu
No, look, I think that, first of all, we need to get through this before we capitalize on any opportunities. So that's the number one objective is to get through this environment and this environment presents a lot of risk as you're hearing here. But on the assumption that Air Canada is going to be a strong player coming out of this, it will go to our growth primarily. There's no particular company that we're looking at or anything else like that at this stage and it would be foolish for us to do that given the current environment.
So I just want us to be positioned strong coming out of this because whenever you have a industry dislocation the way you have here, as you know, and you look back to the history of our industry and many other industries, an industry dislocation like this will result in many, many opportunities.
We're well aware of that and we want to position Air Canada best to be ready to look at those sorts of situations as we come out of this post-COVID environment.
Mike Rousseau
And Hunter, it's Mike. To that end, that's why we made a conscious decision to continue to invest in our reservation system and in our loyalty systems. Those are going to be two key drivers to customer experience, to customer satisfaction, to organic growth and any other type of growth we want to consider. And so again, those are two conscious decisions that we wanted to make and continue to invest in and ensure that we position ourselves to take advantage of whatever opportunity presents itself as we move through this situation.
Hunter Keay
Yes, thanks, Mike. And that's actually a good segway to my second question, which is I guess it's a two-parter. How do you feel about the underlying assumptions for Aeroplan that drove the $2.5 billion NPV estimate right now? And how do you feel about the build to 7 million members at some point over the next couple years, relative to pre-COVID for both those metrics? Thanks a lot.
Mike Rousseau
Thanks, Hunter. So a little more color on Aeroplan. Aeroplan is still obviously cash flow positive to us for different reasons than in the past. Our credit card spend is down based on market trends, but still lot of cash coming in from our partners. And then also redemptions are way down. So the cash costs associated with that business units are also down. So net cash is still positive from our perspective. So probably not as positive as it could have been, but still positive. And so still very, very comfortable with the business model.
Certainly, going forward, we push launch into later this year because we believe it'll be a better business market at that point in time to launch the Aeroplan, new Aeroplan product. We're not -- we'll see on 7 million customer base, going from 5 million to 7 million. We still think that's doable, and maybe push it a bit for the most part, but we still think that's a very doable objective. And the more we design this new program, the more we like it and the more comfortable we are that we can achieve those objectives in due course.
Operator
Thank you. The next question is from Doug Taylor with Canaccord Genuity. Please go ahead.
Doug Taylor
Yes, thank you, good morning. I want to follow-up on an earlier question about government support. I understand it's a sensitive issue right now, but can you share your thoughts on the range of outcomes in terms of the form that might take, the timing especially given that our neighbors to the south have all completed industry-specific bailout packages now?
Mike Rousseau
Yes, look, I mean we are of course following what is going on in other parts of the world. And I think as you appropriately pointed out, the U.S. industry has seen a US$50 billion program, half of which is in respect of an employee wage program until September 30. And then the other half of which is, it's a loan program and virtually all of the major U.S. carriers have stepped up and benefited from both programs. And they've typically been in the circa between the two programs circa US$10 billion when you put the two programs together per carrier. So that's Delta America and United Southwest, et cetera.
Similarly in, in Europe, we look at markets like France and the Netherlands where the combination of France and the Netherlands resulted in something that is call it circa €10 billion or €11 billion to Air France KLM from the combination of the two governments. In respect to Lufthansa, we look at Germany, Austria, Switzerland and Belgium, which is also circa $11 billion.
So those are I would say that those are all models that are out there for larger carriers that we would consider to be potential competitors. Again as I said, we came into this with a very strong balance sheet. So for us, it was not a tomorrow morning sort of an issue the way it was perhaps for some of the other carriers, including some of the ones I've mentioned.
This being said, I know that our government is looking at studying the models that have taken place elsewhere. I can also talk about Asia, by the way, Singapore Airlines, combination of equity and debt for about US$11 billion. They're privately-owned by the Singapore sovereign wealth fund. Likewise in Korea, similar program for Korean Airlines. So I know our government is looking at and considering various models from around the world.
I'm not able to comment here on the various outcomes, possible structures and so on and so forth, other than to say that we are all watching and paying attention and our industry associations have been making representations to governments as to the merits of supporting airline industries.
Doug Taylor
Okay, thank you. I just want to dig in on the 79 aircrafts that are being retired from the fleet, presumably over the next couple of years, some of these were aircraft that are being replaced by newer aircraft anyway. So I guess I want to ask to what degree that represents a permanent reduction in your capacity versus just an upgrade of technology? And are any of the decisions regarding that fleet and the removal of certain aircraft from that fleet contingent on the closing of the Transat acquisition? Thank you.
Mike Rousseau
Good morning, Doug, it's Mike. So let me take those two questions. On the second one, the quick and simple answer is no. Our fleet decisions are independent of Transat. On the first question which is a little more complicated, you're actually right, the E190s is being replaced by the 220s which we liked and which we will continue to be delivered to us. The 319s, some of them were being replaced by the MAX, but I think we were more aggressive in our retirement schedule for the 319s. So that's a part in -- a part issue.
And then of course the 767s, I would say the majority of that is accelerated retirements and not being backfill to any great degree other than with some mainline 330s or 777 identities for key international leisure markets, I just spoke about before. So generally, I will say more than half of that 79 are absolute reductions and the rest are more -- were built in as part of the replacement program to the more efficient fleet that we had talked over the last year or so.
Operator
Thank you. The next question is from Chris Murray with AltaCorp Capital. Please go ahead.
Chris Murray
Yes, thanks folks. Just maybe turning back to the cargo business and the conversions, so I guess a couple of quick questions. One, on kind of on cash or operating basis, are those cargo aircraft actually positively contributing? And then the second question or second part of this is, you do have some older aircraft. Any thoughts about taking some of those and repurposing them into cargo aircraft full-time?
Mike Rousseau
Let me take those two questions, Chris. And good morning, it's Mike. There's no doubt, the cargo business is cash positive to us. When we look at the imputed costs of moving cargo in our two different models now, the all cargo 777s and 330s or the normal passenger plane, the current market is very strong, yields are strong, demand obviously very, very strong and those are contributing to reduce the overall burning rate.
The volume is not incredibly high, but it's still contributing to the overall burn rate. And our current team are doing a great job getting business talking to different governments and different partners to move business from all over the world into Canada and vice versa.
On the second question, regarding permanent cargo retrofits, that's not our intention. At this point in time, we -- it's not really our business, it's not really our, we used to be freighters 10 or 12 years ago, it really didn't make money for us. And so we exited that business. And we really see no reason to re-enter that business.
Chris Murray
Okay, fair enough. And then this one, it's a bit of a delicate question, but one I've been getting a lot from investors. Just the Transat transaction, I appreciate that it's before regulators right now, so there's maybe only so much you can say. I guess the intent or the thought process around entering the transaction, I guess a couple of parts of this, a, you don't -- has it changed your rationale for why to approach Transat and how it builds out the leisure business? And then second, are there any opportunities to revisit some of the terms of the transaction at this particular point?
Mike Rousseau
Look, Chris, we really at this stage until we get regulatory approval, there's really no further update that we can provide. I think that we've been very, very clear and the document is -- the agreement is of course available for everyone to review is posted on SEDAR and so on. This is well publicized transaction. We're not going to speculate beyond simply saying that until such time as we get regulatory approval, we won't provide an update.
Operator
Thank you. The next question is from Andrew Didora with Bank of America. Please go ahead.
Andrew Didora
Hi, good morning, everyone. Most of my questions have been addressed, but just one for Calin. You speak about emerging from this crisis as a smaller airline, you have a three-year recovery period. How should we think about your cost structure as you shrink the airline particularly around now the salaries and wages line? Now, if you're saying cutting capacity by say 20% relative to 2019, 10-year salaries expense fall 20% or reform we're not thinking about this right and extremely forward? And is the relationship linear or not? Thanks.
Calin Rovinescu
Great. So I mean look that is of course the challenge to our operating team here and the discussions we have with our various labor groups and how do we get productivity at the highest levels we can. And so, in a way, it is very similar to the exercise that we embarked on many years ago, when we did our initial CTP program to try to sort of right size our cost structure in relation to our operation. And so, obviously, that doesn't mean that you get the cost out overnight, but if we're looking at a three-year, three-year plus timeframe, that is certainly our expectation that we take down our cost structure to a level that is consistent with a smaller operation. It would not make any sense for us to carry drive along a cost structure that was consistent with a $20 billion revenue operation, if we're not able to generate $20 billion of revenue.
So we're very, very aware of that. We're not going to give you a CASM guidance right now, it's way too early for that, but we can certainly tell you that what you've described is exactly what is the operating assumption here, that we can get our cost structure, especially our wage and salary and benefits line to be consistent with a reduced operation.
Mike Rousseau
And Andrew it's Mike. Just to add a few, little more color. I mean we've doubled our size over the last 10 years. So we've been profitable at different levels of revenue. And that was before we had Aeroplan for the most part. So if you go back into a couple of years ago, we might have been several billion dollars lower in annual volume but our margins were still very strong. And again, that was before Aeroplan, and some of the technology investments we made. So we're very comfortable that we can right size the company because we had practice and doing it and we have experience of doing it as this recovery keys [indiscernible]
Operator
Thank you. The next question is from Helane Becker with Cowen and Company. Please go ahead.
Helane Becker
Thanks very much, operator. Hi, everybody, and thank you very much for taking the time and squeezing me in here. I just had two questions. One is right now the fifth -- sixth freedom traffic is non-existent. And I was just wondering how you're thinking about that business as you think about recovery in say mid-2021?
Calin Rovinescu
Right, I mean, I'd like Lucie to comment as well, Helane, but that is one of the reasons that we are building it in a progressive fashion. We're well aware of that. And that's why we've said what we've said today for the summer for example that we expect to be 75% down, a lot of that sixth freedom traffic will be challenged for sure this coming summer. And as we get into next year, we're not at this stage putting out a forecast for next summer. But our expectation is that we start getting some of it back and with the strength of our Star Alliance partnerships and with our European gateways, we think that we will be able between the Canadian gateways that we built and the European gateways, we'll be able to reintroduce some of that traffic over time. But, Lucie, do you want to add anything to that?
Lucie Guillemette
Sure. For sure, in the immediate term, most important question is when will some of the government restrictions be lifted. So at that point of time, it will give us an idea of how much transborder flying we should actually be introducing in order to feed our international network. But as we said earlier, we anticipated we will not recover quickly. But there's no doubt that, by the time we reach 2021 timeframe, transborder is extremely important to us. As Calin mentioned, we have a very strong partnership with United Airlines, a strong partnership as well on the transatlantic network.
So our goal would be to reintroduce all the core transborder markets in order to feed the transatlantic and some of our Asian flying. So we will be monitoring it very, very quickly, but it's definitely a very key market for us considering currency, for example.
Helane Becker
Great, great. Got you. And then the other question I had was you have a lot of Canadians who have vacation homes in like Arizona, South Florida and Nevada and I know you were talking about in the recovery seeing some of that return. I imagine a lot of them are quarantining themselves down there for given the weather in Canada in maybe March and April. So is it more that you're thinking about them coming back next year? I imagine many of them would have driven this time around right, so you're thinking more next year they come back as opposed to 2020?
Lucie Guillemette
No, no, we think that there is desire for this year as well as some of those markets, especially the so called vacationers, sun birds, most of them have come back. That was one of the reasons why we maintained our transborder flying after the Canada, U.S. restrictions were put in to allow some of these people to come back to Canada.
So it's that's not, that is I'd say typically one directional and it's sort of targeted relatively small market. We just believe that as people start getting more comfortable -- and that was one of the reasons we launched CleanCare initiative to make sure that people are aware of the additional steps taken onboard, people will want to go back to their vacation homes again, they made a big investment to their vacation homes, they want to go back and visit their families again and visit their friends over there again.
And I think that that is the assumption that we're making is that as I said domestic first, transborder, leisure and then business and then international. I think that's sort of the cadence that we see. But we certainly expect to see leisure travel return to sub-levels this year, although you obviously see what we expect in terms of demand for the third quarter.
Operator
Thank you. This will conclude the question-and-answer session. I would now like to turn the meeting over to Ms. Murphy.
Kathleen Murphy
Okay. Thank you, Elaina, and thank you everyone for joining us on the call today. Thank you very much.
Operator
Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you all for your participation.
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