July 10, 2020
NAV CANADA today released its financial results for the three and nine months ended May 31, 2020.
In the third quarter of fiscal 2020, the Company’s air traffic growth decreased 59.4% on a year over year basis, as measured in weighted charging units, as a result of the COVID-19 pandemic. As a result, the Company’s revenue for the third quarter of fiscal 2020 was $159 million, compared to $351 million over the same period in fiscal 2019.
The COVID-19 pandemic and the resulting economic contraction has had, and is expected to continue to have, a significant negative impact on global air traffic and on the aviation industry. NAV CANADA has seen the number of air traffic movements decline since March 2020 as a result of travel restrictions imposed by governments, the closing of international borders and the economic impact of the pandemic.
As a result, the Company’s customer service charges revenue has declined significantly as air carriers have reduced their operations, grounded fleets and cancelled flights and routes. The pandemic is expected to continue to have a negative impact on air travel globally and this will likely continue until such time as travel restrictions are eased and consumer demand for air travel returns. Industry participants are indicating it may be some time before they fully return to pre COVID-19 operating levels. We expect until this occurs that reduced air traffic activity will have a significant negative impact on the Company’s operations and revenues.
In response to the impact of the pandemic, NAV CANADA will continue to review, monitor and take actions to reduce capital and operating spending and cash outflows, while at the same time ensuring the continued fulfillment of the Company’s mandate to safely operate and maintain the Canadian air navigation system as an essential service and to protect the safety of its employees.
In March 2020, the Company accessed its available syndicated credit facility to address near-term liquidity requirements and on May 29, 2020, the Company issued $850 million of General Obligation Notes. The net proceeds of these notes will be used for general corporate purposes, including the repayment of borrowings under the syndicated credit facility and will enhance the Company’s liquidity reserves. The Company has also accessed the Canada Emergency Wage Subsidy government relief program.
On May 20, 2020, the Company issued, for consultation, a notice of revised service charges, providing details of proposed service charge revisions. The proposed changes would increase customer service charge base rates by an average of 29.5%, effective September 1, 2020. The service charge proposal includes provisions to ease the cash flow burden of the increase on its customers through payment deferral mechanisms. The consultation period concludes on July 24, 2020.
“To keep the Company on secure financial footing in these extraordinary times, we implemented incisive cost-cutting measures that will reduce spending now and on a go-forward basis, proposed a significant service charge increase and issued General Obligation Notes in the amount of $850 million.” said Neil Wilson, President and CEO. “We will continue to collaborate with government and industry stakeholders and will take all measures necessary to remain focused on safety and on providing value to our stakeholders.”
Operating expenses for the third quarter of fiscal 2020 were $351 million as compared to $367 million over the same period in fiscal 2019, mainly due to cost saving measures as well as Canada Emergency Wage Subsidy receipts partially offsetting compensation costs.
Net other income and expenses for the third quarter of fiscal 2020 was a net expense of $129 million as compared to a net expense of $15 million over the same period in fiscal 2019, primarily due to a reduction in the fair value of the Company’s investment in preferred interests of Aireon LLC to reflect the potential impact of the COVID-19 pandemic on the aviation industry.
The Company had a net loss (before net movement in regulatory deferral accounts including rate stabilization) of $294 million in the third quarter of fiscal 2020 as compared to a net loss of $31 million for the third quarter of fiscal 2019. This is reflective of the decrease in revenue and reduction in the fair value of the Company’s investment in preferred interests of Aireon LLC due to significantly lower air traffic.
The Company ended the quarter with a cash balance of $918 million, largely due to the issuance of General Obligation Notes and borrowings from its syndicated credit facility. Negative free cash flow(1) of $129 million in the third quarter of fiscal 2020 was primarily due to operating cash flows and capital expenditures exceeding receipts from customer service charges.
The Company is subject to legislation that regulates its approach to setting charges. The timing of the recognition of certain revenue and expenses recovered through charges is recorded through movements in regulatory deferral accounts. The net movement in regulatory deferral accounts for the third quarter of fiscal 2020 was income of $280 million as compared to income of $17 million over the same period in fiscal 2019. This change in regulatory deferrals is primarily due to a $158 million net increase to reflect unfavourable variances from planned results due to the decline in air traffic volumes resulting from the COVID-19 pandemic and a $105 million net increase to adjust the accounting recognition of certain transactions to the periods in which they will be considered for rate setting.
During the quarter the International Air Transport Association discontinued, with the consent of Air Canada as intervenor, its application for Judicial Review of the Canadian Transportation Agency’s decision which upheld the Company’s revised service charges implemented September 1, 2019 and January 1, 2020.
NAV CANADA is a private, not-for-profit company, established in 1996, providing air traffic control, airport advisory services, weather briefings and aeronautical information services for more than 18 million square kilometres of Canadian domestic and international airspace. The Company is internationally recognized for its safety record, and technology innovation. Air traffic management systems developed by NAV CANADA are used by air navigation service providers in countries worldwide.
(1) Free cash flow is a non-GAAP financial measure used by the Company to enhance the overall understanding of its financial and operating performance. Non-GAAP financial measures do not have any standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers. The Company defines free cash flow as cash generated from operations, less capital expenditures, investments in Aireon LLC and equity related investments and principal payment of lease liabilities. Management places importance on this indicator as it assists in measuring the impact of its investment program on the Company’s financial resources.
This press release contains certain forward-looking statements that are subject to important risks and uncertainties. Actual results may differ materially from the results indicated in these statements for a number of reasons. NAV CANADA disclaims any intention to update any forward-looking statements.