When the Canadian government grounded the Boeing 737 Max 8 aircraft this past March, the decision threatened to unleash operational chaos at Air Canada. The company had 24 Max airplanes, making up 20% of its narrow-body fleet, and another dozen slated for delivery later in the year. Guiding the airline’s response was one major question: How long could this go on? The question was particularly burning for Mark Galardo, Air Canada’s vice-president of network planning, who was charged with overhauling its schedule in real time to maintain order and minimize loss of revenue.
Some of Galardo’s colleagues speculated the Max would be back in the air within a couple of months. Calin Rovinescu, Air Canada’s CEO, told him something different. “Mark, categorically, I think this is going to go right through the third quarter,” Galardo recalls Rovinescu saying. Those summer months mark Air Canada’s busiest and most lucrative season. Galardo had to prepare for the worst. “Those were words very few people wanted to hear, but he said them because his instincts and foresight are second to none,” Galardo says.
Rovinescu, it turns out, was correct. The Max is still parked, ever since two deadly crashes led aviation authorities worldwide to ban it from the skies. Air Canada has removed the plane from its schedule until February 2020. The grounding is the kind of unexpected cataclysm that could bring an airline down. Rovinescu says it has been more disruptive to the company than the terrorist attacks of Sept. 11, 2001. “9/11 was catastrophic for the industry. It was sudden, it was overnight,” he says. “But what we faced with the grounding of the Max was actually much, much more significant and much more complicated for us to deal with.”
So far, though, Air Canada has remained relatively unscathed. In the pivotal third quarter, the company managed to complete 95% of its planned flying and earn $636 million. Profit-wise, Air Canada is further ahead than it was at this time last year. The performance is a testament to the strategy Rovinescu set when he joined as CEO more than a decade ago, as the company teetered near bankruptcy for the second time. He has put existential threats far behind Air Canada. Rovinescu’s favoured word to describe the company these days is “sustainable.”
“We are capable of performing and continuing to thrive in good times and in bad times,” he says during an interview at Air Canada’s headquarters in Montreal. With his tanned complexion and crisp white shirt open at the collar, Rovinescu has the air of an executive who is very much indulging in a victory lap, fully confident in deploying a word like “sustainable” to describe an airline that has been through bankruptcy before, in a sector where companies regularly go belly up.
Rovinescu, dedicated readers might recall, was named CEO of the Year by this publication in 2013. You may be asking, “This guy? Again?” Some additional questions might come to mind: The guy who enjoys the benefits of a federally protected industry while using all of Air Canada’s might to bludgeon new entrants seeking to bring down fares? Whose purchase of a rival sparked competitiveness concerns? Whose strategic manoeuvring hobbled a long-time partner? Whose company has, according to an observer, a “scorched earth” approach to his competitors?
Yes. That guy.
Air Canada might not be the most beloved airline in the world (though representatives will helpfully note that Skytrax rates it the best in North America), and Rovinescu’s take-no-prisoners approach rankles the competition, but his results are hard to dispute. Air Canada has $1.98 billion in cash on its balance sheet, a pension surplus, stable labour relations and a global strategy that has rewarded shareholders.
And it might emerge even stronger this year. Rovinescu clinched a $720-million deal for Transat A.T. Inc., the parent company of Air Transat, bolstering the carrier’s presence in the vacation market. (The deal still needs approval from the Competition Bureau.) In January, the airline acquired the Aeroplan loyalty program, with a revamped offering set to be unveiled next year. Air Canada’s share price has continued to soar through it all, up approximately 80% this year. Over Rovinescu’s decade-long tenure, the stock has returned more than 5,900%. Even some of his critics begrudgingly admit it’s an impressive act—though not, of course, on the record.
When Rovinescu joined Air Canada in 2000, he was a lifetime lawyer and a partner at Stikeman Elliott LLP, where Air Canada was a client. He forged a deep relationship with the company, serving as lead external counsel on the 1988 privatization, and made himself indispensable when Onex Corp. mounted a hostile takeover bid for the airline in 1999. Rovinescu helped to torpedo the bid and bonded with Robert Milton, then Air Canada’s CEO.
Milton was so impressed with Rovinescu he recruited the lawyer as his executive vice-president of corporate development and strategy in 2000. Milton has said he was drawn to Rovinescu’s “aggressiveness” and determination, qualities he recognized in himself. Rovinescu coyly dismissed the notion back then, saying both he and Milton were “lambs.”
The sensitivity toward being labelled a corporate Machiavelli is perhaps understandable, given Air Canada has long fended off accusations that it abused its market position to crush rivals. Still, he’s not above taking shots at competitors. When now-defunct CanJet lobbed a competition complaint against Air Canada in 2000, warning it was in danger of going under, Rovinescu retorted that any problems were “more as a direct result of their business plan.”
Air Canada had plenty of problems of its own back then. Sunk by the combination of the bursting tech bubble, 9/11, the SARS outbreak and a debt-laden merger with Canadian Airlines, the company plunged into bankruptcy protection in 2003. Rovinescu took the lead as chief restructuring officer, mapping out a strategy to emerge on the other end, but resigned in 2004 when a potential investment deal collapsed. He went on to co-found Genuity Capital Markets, but it wasn’t long before he was called back to Air Canada.
In 2009, the airline was again on the brink. The global recession laid waste to the market for air travel, and the firm was struggling with too much debt and a massive pension deficit that would balloon to $4.2 billion. Rovinescu started as CEO on April 1 of that year. It took time to stabilize the company, but he’s so accustomed to telling the tale that he can easily rattle off the highlights: securing financing, hammering out long-term labour agreements to reduce liabilities, and plugging the giant hole in the pension plan, which required relief from the federal government on payment terms.
Rovinescu then began expanding Air Canada’s international reach—which included a $12-billion capital investment program; building global hubs in Toronto, Montreal and Vancouver; and targeting passengers from the U.S. connecting through Canadian cities. (Half of Air Canada’s revenue comes from outside North America, compared to 43% in 2012.) Air Canada, he contends, is now among the world’s global champions. “If you consider Google, Apple or Samsung global champions, you can look at some common characteristics,” he says. Those include investing in assets and people, instilling an entrepreneurial culture and having an international outlook.
Putting Air Canada in the same sentence as Google and Apple is a very Calin Rovinescu thing to do; confidence is one of his defining traits. But when it comes to his leadership style, consistency is just as important. “He is an incredibly disciplined guy around strategy,” says Duncan Bureau, who previously headed Air Canada subsidiary Rouge before leaving earlier this year for personal reasons. “Airline executives around the world get distracted by shiny objects. Calin does not get distracted.” When Rovinescu arrived at Air Canada, he identified four broad strategic goals: improving finances, growing internationally, and strengthening customer engagement and corporate culture. Those goals haven’t changed.
The financials certainly have, though. The company pulled in more than $18 billion in revenue last year and announced in the last quarter it had slashed its leverage ratio in half from the end of 2018, putting it one level below investment grade. The company’s cost per available seat mile (an important metric in the industry that measures the cost efficiency of an airline) is down 8% in the past five years, as Air Canada has spent billions on bigger, more efficient planes, increasing the fleet size from 362 to 404.
Rovinescu’s recent moves are really a continuation of the strategy he set out years ago. In January, Air Canada finalized its acquisition of the Aeroplan loyalty program in an episode some say represents Rovinescu’s shrewd approach to business. In May 2017, Air Canada announced its intention to break with Aeroplan, which was owned and operated by Aimia Inc., and launch its own loyalty program in 2020. The news sparked confusion and panic among Aeroplan members worried about being able to redeem their points, and turmoil for Aimia, which was about to lose its biggest partner. Aimia’s stock price fell by more than half and never recovered. In July 2018, with Aimia struggling, Air Canada teamed with TD, CIBC and Visa to bid for the Aeroplan program with a lowball offer, later upping the price to $450 million in cash, plus assumed debt.
Rovinescu rejects the idea that this was a diabolical strategy to bring Aimia to its knees, gamed out years in advance. “This was simply doing the right thing for our business and for our stakeholders,” he says. “We’re not running a popularity contest.” Owning the program provides Air Canada with a number of benefits, mainly that it no longer has to negotiate with or sacrifice profit margin to a go-between.
The irony, of course, is that Rovinescu began to spin off the loyalty program during his first stint at Air Canada, saying it would unlock Aeroplan’s “full potential for profit” and “further enhance shareholder value.” (The unit started trading as a public company in 2005.) Back then, the airline also desperately needed cash. “The sale of Aeroplan was a good idea at the time,” he says. Only Rovinescu can make selling an asset and buying it back later look like a genius move both times.
The Aeroplan purchase has really just brought Air Canada in line with its competitors; no other major North American carrier has spun out its loyalty program, says Helane Becker, a managing director at Cowen Inc. “It’s proprietary information, and it’s a meaningful contributor to earnings,” she says.
The acquisition of Transat has been as skilful. The launch of Rouge, Air Canada’s low-cost subsidiary, in 2013 meant intense rivalry for the Montreal-based Transat, which specializes in leisure travel. After a few years of grinding down the competition, Air Canada opted to buy it. Through Transat, Air Canada can increase its share of leisure travel and its packaged vacations business. “These are not areas that were main areas for us,” Rovinescu says, “so that side of the business is an interesting adjunct.” Combined, the airlines will also be able to fly some seasonal routes year-round.
The Competition Bureau is currently reviewing the deal, and there are concerns Air Canada could consolidate routes, hike fares and boost its margins. Rovinescu has heard this argument countless times. Air travel is a global business with ample competition, he says. If an airline tries to increase prices more than the market will bear, someone will undercut it. Consumers will always hunt for the cheapest fare, even if it involves a more complicated route. “People need to have a much deeper understanding of the pricing environment than a fairly simplistic point-to-point analysis,” he says.
Air Canada’s main domestic competitor, meanwhile, is further encroaching on its turf. WestJet Airlines took delivery of its first Boeing 787 Dreamliner aircraft this year, allowing it to fly longer transatlantic routes and provide a premium offering to its customers, a direct challenge to Air Canada’s hold on business-class seats. While WestJet isn’t know for high-end travel, its global ambitions nevertheless represent a challenge.
“We wish them well,” Rovinescu says with a puckish smile that seems to belie the sentiment. “This is a highly, highly, highly—three times—competitive business.” He rattles off a number of carriers Air Canada already competes with and says it comes down to price, the quality of the product offering and the breadth of an airline’s network. The message seems to be that WestJet is just one more airline—and that it had better know what it’s up against.
On a private call with Air Canada management one Sunday night earlier this year, Mark Galardo weighed the implications of the grounding of the Max 8, which looked nearly definite. The company had two dozen of the planes, flying up to 12,000 passengers every day, and another 12 aircraft on the way. How could they replace all of that capacity? On the call, Galardo blurted out, “There’s no way we can get through this.”
But the company didn’t have a choice. It had begun sketching out a plan before Transport Canada officially grounded the planes. Every day for a month, Galardo co-ordinated a daily call with departments across the company and met frequently with senior executives, including Rovinescu. In the end, Air Canada had to cancel some flights while consolidating others onto larger aircraft. The company paid other airlines to fly its passengers, extended leases for some aircraft that were scheduled to leave its fleet, picked up some more from bankrupt Icelandic carrier Wow Air, and leaned on its regional partners to fly extra routes—all of which helped to prevent a logistical meltdown.
“Had this occurred seven or eight years ago, when Air Canada was more fragile, it could have had devastating consequences,” Galardo says. “We’re a much more formidable company, much more nimble, and the culture change Calin challenged the company to undertake, you can see the results of it through the Max grounding.”
There are more challenges ahead, though. The renewed Air Canada has yet to be put to the test through a recession or spike in fuel costs, for example; oil prices are well below 2014 levels, which has eased the financial impact of the company’s expansion. Analysts, most of whom have the equivalent of an outperform rating on the stock, say Air Canada is in a much stronger position to endure such shocks this time around. “The balance sheet is the strongest it’s ever been,” says Chris Murray, a managing director at AltaCorp Capital. “And they’ve got a very flexible fleet.” The company owns more of its aircraft outright these days, so in the event of a reduction in travel, it won’t be paying leases on planes that have to be parked.
Air Canada’s collective agreements with pilots and flight attendants are up for renewal in a few years, and given the airline’s improved financial health, the unions could be looking for more this time. Rovinescu says it’s too early to speculate on that and offers a clipped “good” when asked about relations with the unions today. Union representatives declined to comment.
Not everyone has been blown away by Rovinescu’s performance. Long-time aviation analyst Ben Cherniavsky, a managing director at Raymond James, has noted Air Canada’s increase in capacity came at a cost to its pricing power and operating margins, which are among the lowest of all North American airlines. Pre-tax profits have barely budged compared to three years ago. “They’ve been pumping more capital into the business to basically generate the same amount of profit,” Cherniavsky says. “These arguments that Air Canada deserves a premium valuation make no sense to me.”
Rovinescu barely acknowledges the critique. “What do you think the take is of our shareholders? That’d be my answer,” he says. “How many companies, Raymond James or other companies, have delivered 6,000-plus shareholder return?”
From his perspective, more routes, more planes and more seats are the best way forward. Legacy airlines need scale in a turbulent industry. “Airlines will grow to sustain,” Rovinescu says.
And that’s what he’ll do, whether anyone likes it or not.