Dear readers,
Before former Air Canada’s president Ben Smith left for Air France-KLM in 2018, Smith often stressed how Air Canada needed to take a larger slice of sixth freedom traffic between the United States and the rest of the world. Since Smith’s departure, I haven't heard as much about the strategy, though that's probably more a result of Covid than because of any change in the airline's approach.
Most of you know the freedoms of the air, but here’s a quick refresher on this one: sixth freedom traffic starts in one country, transits in another (in this case Canada) and flies to a third nation. Airlines without strong local markets may focus on this niche, as it allows them to grow when their home market is stagnant. These travelers also can balance seasonality, helping an airline during shoulder seasons when local travelers travel less. Air Canada executives said they rely less on sixth freedom travelers in summer, when Canadians fill more airplanes at premium fares.
In the second quarter, with international demand booming, the Air Canada global connections strategy was back in the forefront. On Friday, during the airline’s second quarter earnings call, Mark Galardo, executive vice president of revenue and network planning, said the April-June period "… was the strongest sixth freedom quarter Air Canada has ever seen." Even better: Air Canada, whichhas trumpeted the potential value of sixth freedom traffic to investors since at least 2014, is still in the "early phase of reaching our full potential" for it, Galardo said.1
Smith and his team handled most of the projects to facilitate these connections a decade ago, when Air Canada persuaded Canadian regulators to make it easier to transfer in Montreal, Vancouver and Toronto en route to the United States. Now, Air Canada executives argue, U.S. travelers may find it easier to transfer in Toronto — and clear U.S. immigration there — than New York. More recently, Air Canada has made tweaks that boost its ability to attract sixth freedom revenues in this unusual post-Covid environment.
One part is the network. Since I started covering Air Canada a decade ago, the airline has added a slew of new routes that attract travelers going to and from the United States, with new flights to India, Southeast Asia and Oceania. During Covid, the airline further added to its long-haul network, with routes like Vancouver to Bangkok and Dubai. In a complementary move, the airline has sought to further optimize connections, Galardo said.
"One of the things that we did during the pandemic is completely change the structure of our network in our operation, and our hub airports, to maximize sixth freedom," Galardo said. "We peaked up our hubs a little bit to really facilitate that traffic flow. We are starting to see results in almost every single geography and in many cases almost every single hub ... which is something we didn't necessarily do as well pre-pandemic."
A second piece is a new North America transborder joint venture with United Airlines, announced last summer. While the alliance is for short-haul traffic, it allows Air Canada to add more flights that might not otherwise make sense. Galardo mentioned Toronto to Sacramento as an example. Surely, some passengers on those flights are connecting in Toronto onto long-haul flights.
A third piece is the loyalty program. When Smith was around, Air Canada didn't control Aeroplan, having sold it years before. But Air Canada bought it back from Aimia in 2019 and since then, Aeroplan president Mark Nasr, a former United executive, has sought to make it more relevant in the U.S. market. Now, the United States is the fastest-growing market for the loyalty program, Nasr said.
"Between that and our relationships, principally with JPMorgan, we're also able to introduce the brand and our product and service proposition to Americans more effectively than we were able to previously," Nasr said.
With international-to-international connections humming and a stable business in Canada, Air Canada produced a strong second quarter, with an operating margin of 14.8 percent and net income of $838 million Canadian ($623 million U.S.) Noting a “continued strong demand environment,” the airline slightly raised estimates for full-year adjusted EBITDA to a range of $3.75-$4.0 billion Canadian ($2.79 billion U.S. - $2.98 billion U.S.)
Paid subscribers can read on for news about cargo — does Air Canada really need 12 freighters? — and business travel demand.
