Continuity Podcast - Aviation In Canada: Heading For Blue Skies And Tailwinds

Yula:

Hi, I'm Yula Economopoulos.

Jordan:

And I'm Jordan Virtue, and this is the Continuity podcast.

Yula:

Jordan, did you know that the aviation industry is reinventing itself because of COVID?

Jordan:

No, I hadn't heard.

Yula:

Well, they're finding creative ways to do business and even provide support during the pandemic, like using drones to deliver critical medical supplies to remote communities.

Jordan:

Interesting. I'm just thankful pilots didn't move to a fully virtual environment. I think I like them on the actual plane.

Yula:

Right. Well, speaking about pilots, we have one here with us today, Auriol Marasco, who is joined by Jason MacIntyre. Both are Partners in the Aviation group and will be navigating us through some of the latest trends in the Canadian aviation industry.

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Jordan:

Auriol, aviation was obviously one of the hardest hit sectors due to COVID. Were there any segments of the market that escaped the downturn?

Auriol:

Yes, it is true that the aviation and the tourism industries really did take a massive hit because of COVID. However, even in these dark times, there has still been a little bit of light that has crept in. This is especially true in the drone space.

So, you had this combination of restricted commercial flights paired with a massive increase in demand for cargo during COVID, and that really did provide an accelerator for the use of drones in the commercial space. So, we saw companies like Drone Delivery Canada really make a push for the use of drones in the commercial cargo space by delivering COVID-19-related deliveries and other pharmaceutical needs to the remote northern communities.

Ventures such as this really did provide ample evidence that drones can be used safely and efficiently for cargo deliveries. I think we can expect that the use of drones is only really going to continue to grow.

Jordan:

How is traditional aviation impacted by the pandemic?

Auriol:

We also saw a shift in practice here as well. On one hand you had all these corporations, which had their corporate fleet, who are now seeing that, hey, we don't need to travel for everything, we can use virtual meetings instead. For those companies, they were selling off their aircraft fleet.

But at the same time, you had some other corporations and some high-net individuals who said they didn't want to take the risk of the unknown of travelling through commercial airports or just didn't have access to the routes that they needed. So, you had a huge influx of new passengers on the private aircraft market, and so, there was a corresponding increase in the amount of sales that we saw in the secondary market as the passenger base was shifting for private aircraft in Canada.

Jordan:

Jason, it's my understanding that airlines received government aid well into the pandemic. How did they cope with this?

Jason:

Once the lockdowns took effect and there was an understanding that this was going to be a long-term situation, we saw the Canadian carriers take a variety of steps. They really scrambled to cut routes and to lay off employees in an attempt to save on expenses.

Certainly, throughout the pandemic, both Air Canada and WestJet operated on significantly reduced schedules unlike other carriers like Sunwing, Transat and Porter, who ceased operations altogether for a period of time. Although the aid that was given by the federal government wasn't specific to airlines, those aid packages that they gave to large employers were a real relief to a number of the Canadian carriers and, of course, the employees that were able to access those relief packages.

Overall, we really saw that the Canadian airlines first exhausted their options in the private market before turning to the federal government for specific relief. We worked on a number of transactions where the airlines accessed the capital markets to raise funds and to refinance their existing debt facilities.

Jordan:

What can you tell us about the aircraft financing side?

Jason:

We saw that some of the carriers, both Air Canada and WestJet, for example, they entered into sale leaseback transactions with some of the aircraft that they owned in their fleet. That provided them with immediate cash injections as each aircraft was sold.

Also, many of the Canadian carriers sought relief from their existing aircraft financiers and lessors, whether that meant a refinancing, a restructuring or even other alternative commercial arrangements.
We have also seen many of the Canadian carriers reconsider their fleet plans for the long term. Some carriers have taken steps to retire older aircraft types within their fleet, in large part, likely to reflect their expectations of passenger demand coming out of the pandemic.

We also saw some of the Canadian carriers commit to purchase or lease new next-generation aircraft in order to take advantage of the latest technology that the aircraft manufacturers have been producing. The most notable aid package was for Air Canada, who has already announced, just a few weeks ago, that it no longer plans to avail itself of the almost C$6-billon aid package that was only finalized in April earlier this year.

Yula:

Auriol, I think it's safe to say that the future is green. How is the Canadian aviation industry reacting to the rise in ESG-focused financing?

Auriol:

There is definitely a green hue on the horizon. I mean, with fuel costs representing a major cost for the aviation industry, reducing emissions has always been in the interests of airlines. Whether that's through optimal-routing structuring or finding just more efficient aircraft to add to their fleet, ESG is not really a new concept for the aviation industry.
We have industry standards like the LMA green loan principles and sustainability-linked loan principles, and with those industry standards, the focus really is on projects that have an environmental benefit that can be assessed and reported on, and transportation lends itself quite easily to this type of project.

We've seen this already in the shipping industry where they're using green loans and green bonds to purchase more efficient vessels, which produce lower levels of emissions. The analogy is there for the aviation industry as well with the purchase of next-gen aircraft or new technology aircraft, which will help reduce emissions going forward.

Yula:

What are some steps airlines are taking to reduce emissions?

Auriol:

So, there are companies like WestJet who have partnered with Carbon Zero and Air Canada, which has announced a program called Leave Less, and these are both dedicated to reducing their emissions through either carbon offsets or the use of sustainable aviation fuels.
There are even smaller outfits in Canada, like Harbour Air, that are finding their own ways to think green. In 2019, Harbour Air did the world's first all-electric commercial aircraft flight, and that was in an electric Beaver, which doesn't get much more Canadian than that.
You also have international bodies like ICAO, which are setting standards which are then trickling down to the member nations. With ICAO, there is Corsia, which is the carbon-offsetting and reduction scheme for international aviation, and that's a global market-based scheme aimed at stabilizing the carbon dioxide emissions of international aviation. So, we saw that come into play in Canada back in 2018. The federal government amended the Canadian aviation regulations to allow for the precursor to the implementation of the actual offsets, and at that time, it was all about putting in place processes to allow for the monitoring, the reporting and the verification of the emissions.

So, I have no doubt that the Canadian aviation industry is going to take full advantage of green financing products.

Yula:

Jason, back in 2018, the federal government loosened foreign ownership rules for Canadian airlines. What impact has this had on the market, if any?

Jason:

The 2018 amendments enacted by the federal government loosened the restrictions on foreign ownership and control of the Canadian air carriers. Of course, you know, the devil is certainly in the details here, but broadly speaking, those amendments effectively increased the foreign ownership limit on the Canadian carriers from 25 per cent to 49 per cent of the voting interest in the airline equity, with a sublimit that no individual foreign owner could hold more than 25 per cent of the voting interest.

As a result of these amendments, the existing Canadian air carriers were able to expand their potential investor base. They could do so, you know, in two ways, either by allowing existing foreign investors to increase their existing investment or, secondly, by allowing new foreign investors to invest. It provided the existing Canadian carriers with the potential pool of new investment funds.
Over the course of the last year or so, we have seen a number of new entrants or, probably more aptly named, re-entrants, into the Canadian market.

Yula:

Can you give us examples of airlines that have entered or re-entered the Canadian aviation space?

Jason:

Enerjet has just recently rebranded itself as Lynx Air and announced it plans to start services in early 2022, and Canada Jetlines has also made a similar announcement that it plans to start operations from Toronto starting in 2022.
All of these new entrants into the Canadian space would, of course, have benefited from the increased allowance for foreign investment, which would have expanded their potential pool of investors from the get-go. It is safe to assume that the increased availability of investment for these new entrants has been a driver in the number of start-ups looking at the Canadian space.
And to circle back to what Auriol had mentioned earlier about the use of drones in Canada, it is important to note that drone operators that are providing a commercial air service in Canada are also subject to these foreign ownership restrictions.

Yula:

Auriol and Jason, thank you for joining us today and sharing some positive views about the aviation industry. Now, if only COVID could hop on the next flight to oblivion.

Jordan:

I couldn't agree more. Listeners, for more information on our Aviation group, please visit blakes.com. Until next time, we wish you a safe and healthy holiday season.

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