Air Canada

Kathleen Murphy - Director, Investor Relations and Corporate Reporting Calin Rovinescu - President and Chief Executive Officer Mike Rousseau - Chief Financial Officer Ben Smith - President, Passenger Airlines

Walter Spracklin - RBC Konark Gupta - Macquarie Capital David Newman - Cormark Securities Cameron Doerksen - National Bank Financial Kevin Chiang - CIBC Turan Quettawala - Scotiabank Chris Murray - AltaCorp Tim James - TD Securities David Tyerman - Canaccord Genuity

Thank you, Melanie and good morning ladies and gentlemen and thank you for joining us on Air Canada’s third quarter conference call. With me this morning are Calin Rovinescu, our President and Chief Executive Officer; Mike Rousseau, our Chief Financial Officer; and Ben Smith, President, Passenger Airlines.

On today’s call, Calin will review our third quarter 2014 financial and operating performance and provide a status on the progress of our strategic initiatives. Mike will then review our third quarter financial performance in more detail and turn it back to Calin before taking questions from the analyst community.

We will start by taking questions from equity analysts followed by questions from fixed income analysts and lenders. As usual, I would like to point out that certain statements made on this call, such as those relating to our outlook on capacity, cost and strategic plans, are forward-looking within the meaning of applicable securities laws.

This call also includes references to non-GAAP measures. Please refer to our third quarter press release and MD&A for important cautionary statements relating to forward-looking information and for reconciliations of non-GAAP measures to GAAP results.

I am now going to turn over the call to Calin Rovinescu, Air Canada’s President and CEO. Calin?

Thank you, Kathy. Good morning, everyone and thank you for joining us on our third quarter earnings call.

Today, we reported Air Canada’s best performance at any quarter in the company’s 77-year history surpassing previous records for adjusted net income, operating income and EBITDAR. Adjusted net income of $457 million was $92 million or 25.2% above last year, while EBITDAR of $749 million increased $123 million.

Operating income of $526 million increased $110 million or 26.4% year-over-year. So, as you might imagine, I am extremely pleased with these results, which clearly demonstrate the considerable positive momentum in our business model and the transformative steps that we have taken.

We generated record revenues of $3.8 billion in the quarter, an increase of 9% from the same quarter last year. On the cost side, adjusted CASM decreased 2.9% from the third quarter of 2013.

Given that margin expansion is our key focus, we were pleased to report an operating margin of 13.8% in the quarter, an improvement of 1.8 percentage points over the previous year’s quarter underscoring the effectiveness of our cost transformation strategies. While the recent tailwind provided by a reduction in fuel prices is a welcome development, it has been offset somewhat by a weaker Canadian dollar and we remain focused on further cost reductions to achieve sustainable profitability in this highly competitive industry.

While foreign exchange rates and fuel prices have fluctuated since 2012, we remain on track to achieve the strategic initiatives and related savings that we announced at our June 2013 Investors’ Day, which would have driven a 15% CASM reduction over our 2012 baseline costs. These initiatives include the introduction of five higher density Boeing 777, all of which are now in the operating fleet; the introduction of 37 Dreamliners, 5 of which have now been introduced into our operating fleet; the full rollout of Air Canada Rouge to 50 aircraft, and we are currently at 27 aircraft in Rouge, as well as certain other cost reduction initiatives.

Our return on invested capital continues to show solid improvement. At September 30, our return on invested capital was 11.4%, a return on investment, which is 220 basis points above our cost of capital and consistent with the last several quarters within our goal of achieving sustainable ROIC of 10% to 13% by 2015.

Cash levels also remained strong. At the end of September, after having taken delivery of our initial 787 aircraft, our unrestricted liquidity was at $2.8 billion, well above our target minimum liquidity level of $1.7 billion.

So, as you can see, we remained squarely on track to deliver on the objectives we set out at our June 2013 Investors’ Day. Following on what was a very good quarter, we were very pleased to announce last week a groundbreaking 10-year agreement with our pilots, which provides a strong foundation for profitable growth.

The new agreement provides greater stability and long-term certainty as well as the framework for strong partnership with our pilots. It is the most tangible indication of the shifting culture underway at Air Canada.

And I want to commend the teams representing both ACPA and management for their insight, commitment and determination in reaching this agreement. With this additional stability, I am especially pleased to announce today an accelerated implementation of our fleet initiatives and capital programs with the acquisition of an additional two Boeing 777-300ER aircraft in 2016 in a higher density configuration.

This will bring our Boeing 777 fleet to a total of 25 aircraft, all of which will be reconfigured to our new international cabin product standard now featured on the 787 Dreamliner, entering our international fleet. Before turning the call to Mike, I would like to thank our employees for their dedication and professionalism in taking care of our customers and in helping us deliver these record results.

I will now turn the call over to Mike for a more detailed discussion of our performance in the quarter.

Thank you, Calin and good morning to everyone. We generated record revenues in the quarter reflecting solid demand in each of our five markets.

Consistent with our goal of increasing global international-to-international transit traffic via Canada, we experienced a 31% increase in international and U.S. originating customers choosing Air Canada for their global travel plans in the quarter as we continue to leverage our competitor products and services and expand our international network.

On capacity growth of 9.8%, passenger revenues increased $299 million or 9.4%. Traffic grew 11%, while on an overall basis, yield declined only 1.3%.

Consistent with the second quarter, the third quarter saw higher proportion of seats going into long-haul leisure markets. Average stage length increased 2.6% year-over-year and have the effect of reducing system yield by 1.5 percentage points.

Passenger revenues benefit from the weaker Canadian dollar, which positively impacted revenues by approximately $67 million. Third quarter PRASM declined only 0.2% as the passenger load factor improvement of 1 percentage point almost fully offset the yield decline.

We saw very strong results from our business cabin in the quarter with a revenue increase of $31 million or 5.3%, all yield related. Business CASM and PRASM improvements were recorded in each of our markets.

Moving on to our domestic market, in the third quarter on capacity growth of 5.3%, revenues rose $76 million or 6.5%. The revenue increase was due to traffic growth of 6.9%.

A yield decline of 0.7% reflected higher proportionate growth of lower yielding international and U.S. transported passenger flows as well as yield declines on certain regional routes.

These yield decreases were partly offset by a solid yield performance on our transcontinental services. Overall, domestic yield excluding connecting traffic to the U.S.

and international destinations improved on a year-over-year basis. PRASM increased 0.8% year-over-year with improvements recorded on most major domestic services.

On capacity growth of 12.7%, the U.S. transborder revenues increased $60 million or 11.2% and reflect a strong demand across all major U.S.

transborder services. Yield declined 3.7%, of which 2.2 percentage points was due to a 3.8% increase in average stage length.

We also experienced a significant higher proportion of lower yielding incremental international-to-international flows in support of our international expansion strategy. PRASM decreased 0.7% as the yield decline was largely offset by a 2.5 percentage point improvement in our load factor.

Revenues on the Atlantic routes increased $122 million or 14.9% on capacity growth of 20.2%. We experienced again strong demand across all major Atlantic services despite a very competitive environment.

Our PRASM decline of 4.4% was mainly due to a 3.5% decrease in yield, which reflected again a higher proportion of seats going to long-haul leisure markets. Additional, Atlantic services being served with our lower cost Boeing 777 high-density aircraft, which have a larger economy cabin as well as new and increased lower cost leisure flying by Air Canada rouge, which offers a premium rouge product, but has no international business class cabin.

A favorable currency impact of $30 million and a strong performance in the business in premium economy cabins partly offset the PRASM decline on the Atlantic services. On the Pacific services, revenues increased $40 million or 8.3%, PRASM improved 7% on a 4.9% higher yield and a 1.7 percentage point increase in load factor.

PRASM improvements were recorded in all major Pacific services with the exception of Hong Kong where Air Canada operates a lower cost, higher-density Boeing 777 aircraft which has a larger economy cabin. The use of this lower cost aircraft is allowing Air Canada to access traditionally lower yielding traffic, while improving our profitability.

On routes to the Caribbean, Mexico and South America, which we collectively call the other markets revenue increased $1 million. Overall PRASM declined 1.1%, mainly a result of our suspension of service to Venezuela.

Routes to Mexico and to the traditional sun destinations recorded PRASM improvements in the quarter. We continue to be extremely pleased with rouge’s performance which is exceeding our expectations from a profitability standpoint.

And by the way, Air Canada rouge served more than 1 million customers in the third quarter, contributing to a record system-wide load factor for the second consecutive quarter. On the cost side, the Air Canada rouge Airbus 319 aircraft is delivering a 23% lower CASM than the Airbus 319 aircraft in mainline.

While the Boeing 767 aircraft is delivering a 30% CASM reduction versus the same aircraft at mainline. Our higher density Boeing 777 aircraft which are allowing us to compete more effectively on high volume leisure-oriented routes is also improving our bottom line.

From a CASM perspective, this 458 seat aircraft is delivering a 20% lower CASM than the 349 seat Boeing 777 aircraft in the mainline fleet. And now turning to our capacity guidance, for the fourth quarter of 2014, we expect system ASM capacity to increase 7.75% to 8.75% when compared to the fourth quarter of 2013.

We continue to expect full year 2014 system ASM capacity to increase by 7% to 8% and full year domestic ASM capacity to increase in the range of 4% to 5% when compared to 2013. Given that our ASM capacity growth is largely driven by increased seat density and longer average stage length, we provided some projections on these measures in the outlook section of our Q3 news release.

For 2015, we are planning for system ASM capacity growth of 9% to 10% when compared to 2014, with approximately 55% of this forecasted increase related to the continued lower cost growth of Air Canada rouge and 38% directed at international market with the introduction of additional Boeing 787 Dreamliners at mainline. We expect full year 2015 domestic ASM capacity to increase 4% to 5% with the large part of the growth focused on transcontinental services.

And this growth in the domestic market is driven by two factors. The first one being the positioning of certain Boeing 777 and 787 aircraft for their international departures at our major hubs in Toronto and Vancouver.

And second, an overlap of the interim lift related to our Embraer 190 replacement. More specifically, we plan to replace 8 of our Embraer 190 aircraft with 3 Airbus 321s and 2 Airbus 320 aircrafts in 2015.

In order to better match capacity with demand for the 2015 summer season, we plan to take globally of these five replacement aircrafts prior to the start of tue summer season, while the 8 Embraer 190 aircrafts are only expected to exit fleet in the latter part of 2015. This overlap of the interim lift is forecasted to account for approximately 30% of the projected domestic capacity growth in 2014.

This is clearly a benefit that we plan on taking full advantage of, given the importance of our summer season to our financial results. Again, a large part of the capacity growth in 2015 is driven by increased seat density and longer-haul flying.

And again, additional information has been provided for you in our Q3 release. As you may recall, as part of the Boeing 737 MAX order, Boeing will be purchasing 20 Embraer aircraft from Air Canada.

Besides the 8 that are actually in the fleet in 2015, 12 Embraer 190 aircraft will leave the fleet in the first half of 2016. These 20 aircrafts will be replaced with 5 Airbus narrow-bodies which we have sourced from third parties, as well as 5 Boeing 767 aircrafts which will remain in the fleet rather than being returned to lessors as originally planned.

This 10-for-20 replacement program is expected to drive a CASM reduction of 10% versus our current unit cost. Moving to cargo, third quarter revenues increased $8 million or 6.5% on traffic growth of 6.9%, reflecting increased cargo capacity, market share gains and strong demand from North America to Europe.

Excess capacity in the industry remains an issue in the quarter, putting downward pressure on yields. While we saw a significant yield decline in domestic market, we did record positive revenue growth and higher volumes in the quarter.

The use of larger aircraft versus last year on transcontinental routes allowed the airline to carry additional cargo. However – while the rate per kilo declined slightly versus last year, domestic yield per revenue ton mile decreased 24.7% on the significant growth in capacity.

Third quarter total revenue per passenger grew 6% year-over-year. Consistent with our priority of optimizing revenues, we are in the process of implementing a new revenue management system which is aimed at improving yield management beginning at 2015.

We expect incremental annual revenues of over $100 million as a result of this change. We also recently announced the first bag fee in domestic flights within Canada and two from Caribbean and Mexico with certain exclusions.

Now, turning to the expense side of the income statement, on a capacity increase of 9.8%, operating expenses increased $209 million or 7% from the third quarter of 2013. The weaker Canadian dollar on U.S.

denominated expenses increased our operating expenses by $68 million in the quarter. Adjusted CASM decreased 2.9% versus the same quarter in ’13 with unit cost improvements recorded in most expense line categories.

Regarding fuel expense, our economic fuel price per liter came in at $0.90, up 0.4% from the same quarter last year. Fuel expense increased $74 million or 7%, $80 million of which was volume-driven on a 9.8% growth in capacity and $36 million of which was due to the weaker Canadian dollar.

A 4% decrease in the price of jet fuel mitigated the fuel expense increase by $42 million in the quarter. We are currently pleased with the recent decline in jet fuel prices which was more than offset somewhat by the weaker Canadian dollar.

However, given the high volatility of fuel prices, we are not expecting to make any changes to our hedging strategy which is a form of insurance, as it protects us against spikes and fuel prices but at the same time, allows us participate 100% from a declining fuel price. September 30, we had hedged 40% of our planned fuel requirements for the fourth quarter of ‘14 and average WTI equivalent cap price of $108 per barrel and 10% of our anticipated jet fuel purchases for 2015 at a WTI equivalent cap price of $101 per barrel.

Additional detail in the operating results for the third quarter can found in our financial statements and MD&A which were posted on our website and filed on SEDAR this morning. Turning to our cost guidance, we expect adjusted CASM to decrease by 1% to 2% in the fourth quarter and to decrease by 2.5% to 3.5% for the full year ‘14 when compared to the same periods in ‘13.

Our ASM and CASM projections reflect Air Canada’s assumptions like Canadian GDP will grow 2% to 2.5% in ‘14 and ‘15. Air Canada also assumes that the Canadian dollar will trade on average at $1.12 per U.S.

dollar for the fourth quarter and $1.10 per U.S. dollar for the full year 2014.

And that the price for jet fuel will average $0.82 per liter for the fourth quarter and $0.90 per liter for the full year 2014. For 2015, Air Canada is assuming that the Canadian dollar will trade on average at $1.11 per U.S.

dollar and the price of jet fuel will average $0.88. Moving on to our balance sheet and liquidity, as Calin mentioned, we ended the quarter with unrestricted liquidity of $2.8 billion.

Negative free cash flow improved $57 million from the same quarter last year on higher operating cash flows of $200 million, partly offset by additional capital expenditures of $143 million, which mainly reflected the acquisition of the two Boeing 787 aircrafts in the quarter. At quarter end, adjusted net debt was $4.6 billion, an increase of $272 million from December 31 on higher long-term debt and finance lease balances, partly offset by higher cash balances.

As the majority of our debt is U.S. denominated, the mark to market increased long-term debt and finance lease balances by $213 million.

At September 30, our adjusted net debt to 12 months trailing EBITDA ratio was 2.8 and within our objective of maintaining the ratio below 3.5. Moving on to our fleet, as Calin mentioned earlier, we expect to add two additional Boeing 777 aircraft to our fleet in the second quarter of 2016.

This aircraft will be high density with a three-cabin configuration. We will look at financing options close to the delivery dates of these aircrafts.

These new 777s will offer Air Canada’s new international product standard as introduced on the airlines Boeing 787 aircraft. We are also planning of harmonizing the business class cabin on our existing five higher density Boeing 777 aircraft to Boeing 787 standards.

The capital cost associated with the Boeing 777 purchase and the reconfiguration of the existing five high-density aircraft have been included in our projected capital commitment table as provided in our Q3 MD&A. Additional information on our fleet plans have been included in our Q3 MD&A as well.

And with that, I will turn it back to Calin.

Thank you, Mike. Along with the strong brand and award-winning products and services, we view the expansion of our international and leisure businesses as building blocks for making Air Canada sustainably profitable.

Other carriers may be pursuing different strategies, such as constraining growth or focusing on regional growth, but we believe our focus on global expansion along with the strengthening of our hubs and gateways to be the right strategy for Air Canada. We believe our record performance in the quarter to be a positive reinforcement of our international growth strategy and the strategic deployment of Air Canada rouge to compete more effectively in leisure markets.

Together with the 9.8% growth in capacity, we reported a record 87.2% load factor for the third quarter. This reflected strong demand across our network as well as a great performance by our revenue management network planning teams to fill the additional capacity in the quarter.

We are demonstrating that there is indeed substantial operating leverage available to us if we execute well. Our 9% revenue improvement this quarter has translated into a 26% improvement in operating income.

Additionally, consistent with our objective of increasing global international-to-international connecting traffic through our major Canadian hubs, we experienced higher proportional growth of international-to-international passenger flows relative to the third quarter of 2013. This sixth freedom traffic was up 31% from the same quarter in 2013 and with a significant portion coming from the United States.

I continue to be highly pleased with Air Canada rouge’s financial and operating performance, with a load factor of 87.2% and a 30% CASM reduction on the 767 versus the same aircraft at mainline, Rouge’s European seasonal leisure routes exceeded our performance expectations. The conversion to Air Canada rouge of flights previously operated by Air Canada allows us to compete more effectively as these markets have both high leisure demand and low cost competition.

While we recognize that we must manage the expectation of Air Canada’s premium customers on these transfer groups, the financial performance of these routes since the transfer categorically validate this decision. The landmark agreement we have reached with our pilot last week confirms that we are in a solid position to make the substantial capital investments required in fleet to increase our competitiveness over the long-term significantly lowering costs and taking advantage of opportunities to grow the airline and improve margins.

In addition to labor stability and long-term cost certainty, the agreement also provides for increased flexibility with respect to regional airline capacity purchase agreements, facilitates the evolution of Air Canada rouge into a stronger leisure carrier with improved fleet renewal flexibility in terms and provides additional code share and joint venture flexibility and scope. Together with the ongoing renewal of the mainline fleet, we continue to build Toronto Pearson into a truly global hub with the successful launch in the quarter of new Tokyo-Haneda service to be followed with the introduction of new year-round service to Rio de Janeiro and Panama City in December, Amsterdam beginning June 2015 as well as Vancouver-Osaka and Montreal-Venice seasonal services to be operated by Air Canada rouge.

And we continue to invest in our premium products to ensure our competitiveness on the global stage. As we announced earlier today, we are introducing our new international business class and premium economy seating to include all Boeing 777-300ER aircraft, seven more than previously announced.

Our new three-cabin international product and seating standard will be extended to all 25 of our Boeing 777-300ER and 200LR fleet consistent with our new Boeing 787 Dreamliner aircraft. We will also reconfigure our fleet of eight Airbus A330 aircraft to offer customers the option of our new premium economy cabin across our entire wide-body international fleet.

Conversion of these aircrafts is expected to be completed in the second half of 2016. So, in closing, we are maintaining the momentum we achieved in 2013.

We are achieving the financial targets established in June of last year. We are investing in fleet and in our product as we execute our commercial strategy focused on international growth and the strategic deployment of Air Canada rouge.

We are making ongoing progress of culture change. This is evidenced by our pilots’ very strong support for the recent 10-year agreement.

A recent survey of our employees conducted by an independent market research firm which founded significant improvement in employee engagement as well as recent awards. Our investment in the well-being of our employees and commitment to provide progressive, best practice programs has been recognized with the recent naming of Air Canada as one of the Canada’s Top 100 Employers for the second year in a row.

In addition, we were also recently awarded top honors by Canadian Occupational Health Safety magazine’s Safest Employers Awards. I would like to thank our employees for their dedication and professionalism and taking care of our customers for taking notice and responding favorably.

Our award-winning product and customer care is recognized by numerous industry surveys of air travelers and this is not only the Skytrax Awards. Once again, Canadians have told us that Air Canada is the preferred airline for frequent business travelers by a continuingly growing margin across the country as confirmed by the Ipsos Reid Survey released in September.

We are not however resting on these record Q3 results nor are we spiking the ball in a victory celebration. Rest assured that our leadership team is committed to executing on all aspects of our strategic priorities to ensure we remain sustainably profitable for the long-term and continue to deliver meaningful shareholder value.

With that, I would like to thank you all for joining us on this call. I would now open it up for questions.

Thanks very much. Good morning, everyone.

I just want to say first up very solid results. Congratulations on those record results.

I guess, I will start here with capacity. I know that you have got a pretty clear plan with your international growth.

Looking at your capacity though going out over the next few years, we had thought that the first year would be kind of a higher capacity and then it would kind of come down or moderate over time. And it looks like given you are guiding 7 to 8 this year, you are accelerating into next year with 9 to 10, can you give us some color about – is that because rouge is coming on like you said, Calin, a lot better than expected.

So, you are moving forward perhaps ahead of that plan. And if you can at all, give us some trajectory, I know you have given kind of medium-term CASM guidance, but can investors know after you get through 2015, how long does it take before we see some moderating of that capacity growth and more in line with kind of a long-term demand growth environment?

So, well, first of all, thank you, Walter for your nice remarks. I would say the following.

Rouge had been more successful than we expected and we have been very pleased with the rollout. And there is no question that from a pure business perspective having lower cost capacity coming into the marketplace makes more sense for us.

And so as we have been looking at the – you still see that we have some room to grow before we get to the cap on the number of airplanes in rouge. And so as we find opportunistic airplanes, we will consider them and that is part of the strategy.

Secondly, I think as Mike mentioned in his remarks, you do see the positioning of some of the high-density 777 that have a lot of seat within Canada for positioning purposes. And so there will always be some impact of that.

And thirdly, leaving aside rouge, the international strategy does require us to continue expanding, because I would say that over the previous decade, we have not grown the way we could have grown in terms of the available opportunities that exist from Canada. So, when you see the sixth freedom traffic number, 31% sixth freedom improvement quarter-over-quarter, you see that we are in fact winning with our strategy of taking traffic over our Canadian hubs, primarily from the United States.

So, you see the size of the U.S. market, you see the international opportunity, you see the kind of aircraft and the fact that we have lower capacity.

So, that is part and parcel of what we are trying to do. We are not providing guidance in terms of capacity beyond next year at this stage.

But obviously, you can model in the addition of the rouge aircraft over the next several years as opportunities come up. Mike or Ben, yes Ben, go ahead.

Yes. Hi, Walter, maybe just to give you a bit more color on why we are confident that we can execute on that large capacity increase for next year.

What we saw this summer, we have the strength of rouge, the high-density 777s the initial introduction of the 787s with how valuable and strong our geographical position, the improved transit facilities at Toronto come into play on a competitive basis against the U.S. and European carriers and access in the U.S.

market, in particular California. So, we actually saw a much stronger originating traffic and destine traffic to that area than we were expecting and that is giving us the confidence to put this type of capacity going forward.

And that’s why you saw the record result in Q3. That was a big I guess portion of what’s contributed to that.

That’s great.

Walter, it’s Mike. I just want to put a different spin on it.

We obviously saw a strong demand in Q3. We saw strong demand in October with the release of our traffic results.

But this company is better positioned now to deal with any type of downturn in the economic markets. We have more swing capacity at this point in time than we had in the past.

And so, our view right now is that the capacity growth projections for next year will be filled by demand, if the macroeconomic environment changes, then we will make adjustments.

Yes. I can maybe just add a bit more to that.

As Mike mentioned, we have never had the luxury of significant swing capacity, so with – by keeping the A330s and the mainline 767s in the fleet longer than originally planned. And to reach those high increases in capacity targets that we put out there, those airplanes are flying at relatively high utilization rates.

So, we have room to either reduce utilization if demand does not come in or even look to remove some of those aircrafts. So we are seeing a lot more flexibility with our fleet than we have had in the past.

So, Ben how quickly could you make that 10 more 2 to 3, is it pretty instantaneous you can do that if it need to be?

Very...

Yes.

We do monthly adjustments to our capacity, and that’s a regular occurrence we have been doing for a couple of decades now.

Perfect. So, my second question here now is on costs, and that’s related, I guess to the capacity question.

First of all as we came in a little bit below guidance and your fourth quarter guidance is a little bit weaker than what we were looking for. Is there anything that happened outside of just kind of that depreciation and maintenance events and employ private sharing that might carry on into or even jeopardize some of your longer term efforts to reduce costs.

And on the flipside of that, if we are bringing on so much capacity at 9% to 10% next year, shouldn’t we see an acceleration of your cost control all else equal given that again, this is low cost capacity you are bringing on, it’s more capacity than you brought on in 2014 and therefore the CASM reduction should be better than it was in 2014, is there some problem with that logic?

Well, let me deal with the two parts of the question. Let me deal with the first part, Walter.

So for this year, for Q3 a small miss on the guidance, we are still very, very happy with our performance. All our initiatives are being executed the way we thought they would be executed.

The miss in Q3 was really because we had to accrue a higher profit sharing which is frankly a good thing from our perspective. And also a change, a more conservative view on depreciation policy on certain engine events, that is really focused just on Q3, because you can see in Q4 our depreciation expense, we are expecting to drop by roughly $6 million year-over-year, so we really isolated the Q3.

For the year, and for Q4, sorry, for Q4 the reduction of 1% to 2% is not surprising to us because if you – and I think we have provided some visibility to the marketplace, the law of our maintenance increase year-over-year was back-end loaded to Q3 and Q4. In fact, three quarters of our maintenance increase year-over-year was in the back half of the year.

Foreign currency is a little bit weaker in Q4 than what we had anticipated. And there are some other minor events.

For one thing, our new agreement with the GTAA, although very, very positive to us is now a flat lined over the year rather than volume related. And so those small changes do have an influence of taking CASM down less than we otherwise might thought in Q4.

But again, we are very satisfied with the overall CASM reduction in the year. And we all, I think, understand that foreign currency has mitigated the CASM reduction by a roughly 200 basis points on a year-over-year basis.

So that has caused our CASM to not decrease as much as we otherwise thought. Going forward, again we don’t provide – we are not providing CASM guidance for 2015 at this point in time.

But certainly with the increase in ASM capacity we will see a reduction in CASM, adjusted CASM next year. We are still working those numbers out.

We do have some increases in depreciation next year because of 787 deliveries and in our maintenance expense due to some extra events. But we believe certainly that CASM, our adjusted CASM will be reduced next year and we will provide that guidance with our year-end results.

And, Walter, Calin here. Let me just add a couple of things because I did see your earlier question on CASM.

I view that as a good news story because the fact that we can pay out greater amounts onto the profit sharing as a result of having made more money which as a result has some impact on CASM is a circular way of saying – in my view, it’s a good news item. I think that we mitigated the foreign exchange story extremely strongly in the quarter.

And the fact that we are going to be paying out more to employees under profit-sharing program, now we can provide adjusted numbers that take out the profit sharing number, but that’s sort of a meaningless exercise. The point is that with the – this is we are into the long-term game here, right.

We are avoiding short-termism as many other airlines and some analysts would have us do. So, we are avoiding short-termism.

We are talking about a 15% CASM reduction against that 2012 benchmark. And what we are saying this quarter is despite foreign exchange and even though we are going to be paying a larger amount of profit sharing, we are absolutely on target as I said on my opening remarks against that 15% 2012 benchmark.

And as we are building this transformation, that is the much more meaningful CASM target. Quite frankly, whether it’s 1% this way or 1% the other way as a result of profit sharing is with due respect, largely irrelevant.

Great, okay. Thank you very much.

That’s very helpful.

Good morning, a very good quarter. Just my first question is what’s your strategy on fuel surcharge and domestic fares given fuel prices are kind of lower here, right and competition may reduce surcharge or perhaps fares to attract more traffic, so what’s your view on that?

Hi, it’s Ben. Well, my opinion accord accounts I mean we have in my view the strongest revenue management and network planning teams in the business.

We have always been a rational competitor. Over the last three decades, we faced many rational and irrational domestic competitors, but we are strongly focused on margin expansion and adding to shareholder value.

So, you will continue to see us basically manage towards that. So, we are remaining with our existing strategies and don’t expect any change to happen from that front.

Okay. So, basically, no change in the fuel surcharge policy you have right now?

We don’t have a fuel surcharge in the domestic market right now.

No, but you have an international, right, like I am asking if there is any change to that?

Look, we go with what – I mean, I can say we are maximizing margin and shareholder value where we can take increases, we will take increases and we will be competitive where we need to be without being irrational.

Okay, great. Thanks.

And so how should we think about yield and RASM next year as capacity growth remains quite strong and but of course you get the benefit of lower Canadian dollar?

Well, I mean look as I said, we are very excited about the tools that we have got at our disposal that we haven’t had in the past. So rouge, 787s and high density 777s and eventually the existing 18 777s we will get a lower cost jet configuration as well.

So that gives us a lot more flexibility in fighting in the marketplace. So, there again we are focused on margin expansion.

So, we are going to try to get cabin done as low as possible, RASM up as high as we can within whatever the marketplace opportunities that present themselves gives us.

Okay. So, as you said last quarter right so you would still expect the yield to be sort of negative next year, right, along with obviously CASM decline is much more than yield?

It’s Mike. We are not providing guidance on 2015 yields or cost at this point in time.

We did provide some information in our Q3 press release on seats dispatched and stage length increases next year. And at this point in time, that’s as far as we are going to go talking about 2015 yields.

Okay, alright. Just quickly jumping on the competition, it looks like some recent increase in competition in Atlantic and Pacific specifically if you look at some major international competitors they have announced new non-stop flights to Canada at both sides of the continent.

And Cathay is talking about new non-stop flight between Hong Kong and Calgary. So, do you see kind of that as major sort of threat for you guys, like you kind of have to strategize differently with your 787s and 777s to better compete with these guys?

So, the first part of your question, do we see the additional frequencies and capacity that’s been recently announced as a threat? Well, yes, we do, but it’s not any more than we have seen in the last 10, 20 years.

We have competition – a lot of competition both across the Atlantic and the Pacific from many, many carriers. So, this is nothing new.

With the tools that we have, I think we are much better positioned to compete with any of the carriers on the Pacific or the Atlantic. So, we are actually – we are still keeping to our existing plan for next year.

No change due to the recent announcements.

And I would add – it’s Calin here, I would add one other thing. When you see – when Ben references these additional tools that we have, I think as we have said on some of the prior calls, when we introduced our higher density 777 aircraft on the routes like Montreal-Paris or a route like Vancouver-Hong Kong, the dramatic effect that, that had to the profitability of the route was extremely important.

And I think that as we have discovered now as additional competition coming in to any of these markets, we feel that these tools put us in a much, much better position to compete. And as I have said many, many times, competition makes us stronger and we will continue to expect to improve what it is that we are doing to face that kind of competition.

So, we are not overly concerned at this stage.

Okay, that’s great. Thanks, guys.

That’s all of my questions.

Good morning, folks.

Hi, David.

Great results. Just I see your stock price is up around 5% here and I think the one niggling concern might go back to Walter’s question on the CASM ex-fuel guidance.

But if I look at this, I mean, is the way to think about this obviously now as we go forward that some of your line items are affected by FX, but you cover it below the line with your hedges and you of course are going to enjoy the downside on the fuel. So, maybe it’s more of a total CASM and EPS going forward.

Is that maybe the way you think about it as we head into ‘15 and hopefully the fuel prices kind of stay where they are?

David, it’s Mike. Certainly, when you look at that way, I mean our focus has always been enhancing or increasing our operating margin.

Right.

And we have been very clear, the market about that. And as Calin said, I would not place any concern about a small myth in CASM guidance in Q3, because again it was for the right reasons, our profitability has exceeded our expectations as we had to accrue a slightly higher profit share for our employees, which we are happy to pay our employees, because they are part of the success as well.

Right. So, it sounds like you agree that maybe it’s more total CASM, because you have to factor in that energy price obviously where it is, right?

Right.

And David, basically as I said to you while discussion, I honestly I am extremely pleased with the CASM performance here and it is pleasing for me to see us pay increased profit sharing above what it is that we would have estimated, because we have greater profitability. That’s a good new story.

But in terms of the opportunities that remain available to us leaving aside fuel and potentially some improvement in FX, but of course, we will take those if we can get them, but for sure we expect to extract additional cost out as we are adding capacity absolutely. And we will find opportunities.

We have disclosed the 1 for 50 in terms of the flight attendant ratios, which we are not seeing the full benefit of yet, which next year you will have a full benefit of that. So, there are lot of initiatives that we will continue looking to extract, but as of right now, for sure, fuel will provide some benefit, but beyond that our expectation is that we have lots more opportunity as we add capacity.

Okay. And then now more of a macro question, maybe more travel intensions or maybe showing up in your actual bookings, but obviously, Europe perhaps slipping into recession here and Germany a little bit softer and then of course China decelerating.

Are you seeing anything at all as far as weakness in your bookings at all? I mean, obviously, you had great quarter here showing good strength, but I mean, if you look out just in terms of travel intensions, any softness that you see at all or any certain continents or geographies that you are seeing anything?

No. We have not seen, David, in our markets any weakness.

Of course, we have a fairly diversified offering with our operations over the Pacific, the Atlantic, Latin America and obviously North America. So, we have not seen at this stage weakness.

Booking trends continue to remain adequate. And I mean, Ben wants to comment on it.

Sure. And I think a key point also is prior to the introduction of these new tools into our arsenal, we were underperforming especially on the Atlantic in terms of our market position and capacity, because we just couldn’t carry that traffic properly.

Now that we have got these tools, we are carrying a more reasonable amount of share and that is why we are in a much better position than a lot of our competitors who in some cases were actually over-carrying what they actually should have been carrying. And with these new lower cost tools, we are very well positioned to maintain that.

So, even if there is decrease in demand in some of these markets, we are better positioned to even increase our position during those times.

Okay. And then last one from me, just on the domestic and transporter, obviously, WestJet is lowering some of their fares and it looks like they are trying to take care of a couple of up starter trying to get going by reasserting sort of lower fare buckets again, but I am more looking at the competitiveness as you in the southbound occasions market, this winter obviously at CanJet firing up you guys, they are going to have a full suite of rouge or almost full suite of rouge and of course WestJet is not going to give up any in transit.

I mean, what does it look like for the southbound of occasions winter – this winter, especially with the OpEx, where it is?

Well, we won’t comment on our competitor’s pricing strategies or anything else like that. We won’t touch that with a 10-foot pole.

Yes, I know, for sure.

But what I will say is that what rouge has demonstrated categorically, I would say, is that our product is very well received in the leisure marketplace. And therefore when we go up against any competitor, which obviously will take into account pricing strategies that are available to us, but we will market our product properly.

And in many cases, for numerous reasons, the rouge leisure product is more appealing than others to the extent that there is any kind of a shortage of demand, but our sense is that as we come into the winter, we are not seeing any weakness in demand at this stage.

Very good guys. Great results.

Thanks very much, David.

Yes, thanks. Good morning.

I guess I just wanted to have a couple of questions on labor. You have got the new long-term pilots agreement here.

I know you don’t want to divulge specific details, but you have mentioned some flexibility on regional aircraft or regional capacity and also on rouge. I am just wondering if you can just sort of describe in more detail what that means?

I mean, are you getting I guess more scope relief on the regionals and is there going to be a potential for a change in the mix of aircraft within rouge. It doesn’t sound like the cap has changed.

Cameron, thank you. And Ben Smith, who led that initiative, obviously knows a tremendous amount about the details there, but some of them are not in the public domain.

But I can say the following and then I will ask Ben to provide a bit more color. What we saw through that deal is flexibility.

Flexibility with respect to the aircraft we can put into rouge. Flexibility with respect to the capacity purchase agreements we can have with our regional carriers below 75 seats and 75 seat aircraft and both of those will give us significant flexibility, which would help us reduce our costs.

And that would both create a competitive dynamic for our regional carriers, because as we have said in the past, the regional diversification is a cornerstone of our future. And so we definitely want to create a competitive dynamic for regional carriers and therefore having the capacity to have more 75 seats flying is an advantage.

It’s an advantage to our regional partners provided they get their costs in line. In terms rouge, the ability to have somewhat larger narrowed-body aircraft in rouge is an advantage.

So I will ask Ben to maybe highlight two or three things without going beyond what is already in the public domain.

Okay. Thanks Calin.

Yes, we are obviously very excited and thankful that our pilots have ratified this deal and they are investing I think in this company and their careers. Two of the points which you brought up which are really important for our go-forward strategy, one, was we had a very old and archaic formula for determining how much regional capacity we could fly under the old contract, it was based on North America flying, that has now evolved into something that will help promote international flying.

So, it’s a complicated formula, but it works for us, it works for the pilots. And we are very pleased with that.

So, that was something we really needed to get done. And on the rouge front, the maximum of aircraft is still 50.

But within that, we can have the flexibility to increase the wide-bodies' count from 20 to 25 which we are looking to do. And then on the Pacific narrow-body aircraft type, we have flexibility there, plus we have flexibility on the renewal of both the narrow-body and wide-body fleet types would be past certain thresholds.

So, a lot of flexibility there, which will go to on margin improvements, increased flying and greater profitability.

Okay. And secondly on labor as well, this is – obviously creates a lot of stability with this pilots’ agreement.

Are you looking to do something similar with some of your other labor groups?

It's premature at this stage, Cameron. I think that each of the labor groups have their own issues, their own dynamics, their own concerns and so I think that there could well be different approaches with each of the groups, but it’s premature to say at this stage.

Okay. That’s all for me.

Thanks very much.

Thank you.

Hi. Thanks for taking my question.

Maybe, first of all, just a bit of a housekeeping question, you are calling out $0.88, it’s on fuel price. You are calling on $0.88 for next year $0.82 in Q4, a pretty big increase sequentially, I am just trying to get a sense of how you got your forecast for next year.

It just seems relatively high to where fuel prices are today.

Kevin, it’s Mike. We would typically look at the forward curve and use that as a benchmark.

And then we would add or subtract our belief of where the market might go but we would certainly be around the forward curve.

Okay. So just taking the forward curve okay, perfect.

And then, just maybe back on some of the comments and questions around capacity. I think in your MD&A call there are a little bit of yield pressure on competition in the Atlantic I think that does echo what some of your competitors have said.

Just wondering you have added a lot of capacity in your 2014 and just wondering if you have made or are making any adjustments to this strategy in 2015, especially with capacity expected to grow system wide next year versus what you put up in 2014?

No, it’s Ben. We still see plenty of opportunity for growth for both rouge and mainline on the Trans-Atlantic, profitable capacity growth.

So unless we see a change in that environment, you can expect our plans to continue and when Calin mentioned we have a well-diversified networks, we have other opportunities around the world if these marketplace environment changes.

And just on the Atlantic, did you see any tailwinds related to the labor issues from Air France or Lufthansa this past summer?

A little bit.

Okay. It sounds like it’s relatively immaterial though.

Right. That’s right.

Perfect. That’s it for me.

Thanks.

Yes, good morning and great quarter, guys. It’s good to see the strategy working here.

Thank you.

First of all, on the – just a clarification question for me as well, on the E-Jets, Mike you said I think you are going from – for 20 E-Jets you are going to go down to around 10 planes, is that right?

That’s right.

And the CASM reduction, Mike I am sorry, I missed that one.

It was 10%.

10%. Thank you.

And I guess my other question was on the 767...

And sorry, Turan and to be clear that 10% is an additional amount to our – was not originally factored in to the original 15% CASM commitment that was made off of the 2012 baseline.

Yes. That’s right.

Thank you very much for clarifying that. Thanks.

Yes. On the 767s, my question was if you were weak, maybe you can talk a little bit about – I would think that with that kind of cost structure, those planes could pretty much go in a lot of other places and make money for you guys.

So, maybe you can talk a little bit about maybe where else those planes could go and to move your fleet planning guys looking at that just in case maybe Europe is not as strong as we all think it might be?

Sure, Turan, it’s Ben. If the airplane is very versatile, as you know we have had 767 in our fleet for a very long time.

So, we are very familiar with the capabilities of this airplane. It works very well for us across the Atlantic.

We fly with Rouge all the way to Athens. We have just recently announced Osaka.

So it works very well across the Pacific. We will maybe flying into Hawaii, it works great to Las Vegas, great to Mexico, great to the Caribbean.

So, we have plenty of places to deploy this very, very powerful tool in our network, so no shortage. We actually – we have to pick into the most lucrative because there are too many options to this particular aircraft.

So, right now, in the current demand environment, the current marketplace, we are very pleased with the rouge 767...

That’s great. And just one more maybe big-picture question for me, in terms of your capacity guidance for next year, I know Mike you are not going to give more color on CASM or RASM, but I guess suffice to say that your expectation here would be for margins to go up again next year and how does that change if maybe fuel prices go back up again or does it not change?

Yes. I mean Turan, it’s Mike.

It’s hard to speculate on an open call about these issues. You have seen our ability to manage through any type of volatility and continue to outperform expectations.

And so there is I don’t think there is any reason why that shouldn’t continue as we go forward.

But the plan would be to raise margins again next year, correct?

Again, certainly we have always indicated the marketplace that we need to continue to increase shareholder value and that’s one way we are going to increase shareholder value.

Okay. It sounds good.

Thank you.

Thank you. Good morning, guys.

Good morning Chris.

Just I guess a couple of quick ones and then just I have got another conceptual question. First, just on interchange fees, I know Mike, we have talked about that a little bit and there was an announcement out this week.

Any thoughts now that you have time to digest that a little bit what the impact might be to Air Canada either how it impacts the royalty program and how it might impact your cost structure?

Yes. And I think this is also a good news story for Air Canada.

We are still going through the announcements and trying to understand them. They are a lot more complicated than we initially thought.

But it appears that we should have upwards of a $15 million benefit starting in April of next year. But we have to look at the transitional rules as to how that’s going to be put in place.

Okay. And at this point, with the folks at Aeroplan have you taken a look or do you expect any impact on the revenue side?

It’s way too early to tell. I don’t expect that.

We haven’t had a conversation with Aeroplan in the last two or three days on this issue as far as I am aware. Aeroplan, I believe, was obviously aware of the situation.

And I assume we will speak to them in the near future, but I don’t expect any material changes.

Okay, great. And then just moving on to some of the fleet changes, with the 787 now, you have had a few months to operate it, I guess a couple of things I am trying to think about and especially as we start seeing more fleet changes, I guess first of all any comments around how you are seeing the aircraft perform versus your initial expectations.

And I am kind of curious about things like fuel burn and just sort of the feedback that you are getting on that. And as well, any thoughts on your specific fuel economy, how that may be changing over the next year or two as you bring more 87s into the fleet, any sort of change the dynamic of the fleet a little bit?

So, first of all Chris, Calin here, so we have had remarkably good induction history here with the 787s so far. We have – from a maintenance perspective, they have performed extremely well, but our maintenance team has done an outstanding job of getting ready for it given what other airlines had experienced before it came in.

And so we were super well prepared and our team did a great job inducting them. Boeing has indicated that we have got probably the best induction record so far of the 787 operators.

On the fuel side, it’s performing certainly at expectations and we are excited about the fuel saving available on that and in terms of looking at the next several years as we get – go from 405 now, 787 to the full 37. We have factored that fuel saving in as part of our 15% CASM reduction target off of the 2012 baseline.

So, I would say this, at this stage, while it’s still, relatively speaking early days, because we are only in the first 6 months of – or even less than 6 months I guess we got our first airplane in May. We are very pleased with the fuel performance and the maintenance performance of the airplanes.

Okay, great. And then my last question, it’s more of a conceptual one, but when I go back to the Investor Day, one of the things you talked about was sixth freedom traffic and you have seen some fairly strong gains as you were saying.

And it was interesting thinking that you even put it on the Amsterdam right now, but at the time, you sort of thought about your fair share of the U.S. sort of outbound market, which is going to be the 1.5%.

Any thoughts on I guess, two pieces of this? One, is that still the right number to be thinking about?

And two, I mean at some point, we are going to start lapping these fairly heavy comps, do you think you can still have that kind of growth rate through ‘15 and ‘16 or should we start expecting that to slow down at some point?

Well, when we talk about our fair share, so this is the – to be clear for other analysts and others on the call, this is the U.S. to the world connecting traffic.

This does not include the – just the straight transborder part of our business, because we are of course the largest foreign operator in the United States to begin with. And so when our commercial team look at what they defined as our fair share, it is based on what it is as an international carrier we ought to be taking this traffic.

And the fact that we have so much business into United States should give us a leg-up in terms of producing that. So, we still are very confident that, that is the right target for us to have in mind as a fair share amount.

And I think we estimated the – publicly, we estimated the revenue opportunity there at about $400 million. And so we are working our way up to those numbers.

And once it gets to that 1%, 1.5% level, then you might see more of a leveling off, but perhaps, Ben, do you want to add any color to that?

Sure. I think the 1.5% would just be meeting our, what we would call it, the quality service index, QSI, average number.

I think when you look at our geography and the tools that we have are over and above or more efficient than what some of our main competitors have. We could even look at a higher number later on.

But as Calin said, we are still targeting a conservative 1.5% and we have plenty of room to grow just to get to that number. But in 2, 3 years time, depending on the marketplace, certainly would not shy away from a higher number, if there are still profitable opportunities out there.

And you can see many of the European and Asian carriers, Middle Eastern carriers are already performing well above their QSI in the U.S. market.

Okay. So, I mean just maybe even the baseline a little bit, like if you are thinking about the $400 million sort of is that number in terms of revenue, where do you think you would be sort of on a run-rate basis today?

No. We haven’t put that number out there in terms of our – you are asking what our sixth freedom number would be in terms of total revenue?

Yes.

We haven’t put that out.

No.

No. Sorry, Chris, we are not breaking that number out at this stage.

Alright. Thanks, guys.

Thanks.

Thanks. Just one quick question here from me, of the 9% to 10% capacity growth plan for 2015, how much of that if you can give sort of sort of round numbers is due to the capacity overlap of the 190s and the 320s?

Tim, I think we have put that in our press release. It’s about 30% of the domestic increase.

So, the domestic increase is 4% to 5%. So, 30% of that is roughly to 1% to 1.5% of the overall increase.

Okay, great. Thank you very much.

And it’s all in our highest demand Q3.

Right.

Thank you.

Yes, good morning, guys. Quick question on the revenue management system, the $100 million, can you give us a sense of how you see that scaling in 2015, is it all there at the start of the year or does it take time to ramp up through the year?

We have some very conservative estimates on achieving the benefits of that system through next year. So, it was definitely a ramp up period as we better calibrate that system.

So, most of the benefit for next year is more geared to the second half and if we are successful at ramping up sooner then we will realize some extra benefit earlier on.

Okay, that’s helpful. And on the Q3, what kind of impact did the having more, higher proportion of economy seats have on yield?

We saw the results. It exceeded our forecast.

So, we were very pleased with that performance. As you know, in the summer on many of our routes, we have less demand for premium traffic, because many businesses take that time off.

So, it actually played out quite well, but because so much of that capacity was in the form of rouge or high-density 777, we didn’t add a significant amount in premium seats to the marketplace, but we still manage to keep RASM relatively flat. So, yes, we are very, very pleased with that performance.

Okay. But you don’t have an idea of what the actual – like you have made an estimate for the stage length and I think in the previous call you said an idea of what the greater proportion of economy would have?

Yes. It exceeded our expectation and we are expecting a lower yield and obviously lower RASMs.

I think the market has proved very strong. We are very pleased with our load factor, came in a little higher and also very pleased with base fares.

So, overall, the entire combination, the RASM results exceeded our forecast.

Okay. And then just on stage length sensitivity, is there any – it’s been pretty consistent between yield and stage length through the middle two quarters, is there any reason for that to change when we are thinking about Q4 and into 2015?

No. As you see the bulk of our growth is coming in the form of longer range airplanes, so that will naturally increase the stage length as the aircraft get deployed on the routes where they are best positioned to perform.

Okay, fair enough. And then just on – looking forward on the CASM, when we are thinking about – I know you won’t give guidance, but just thinking conceptually, you have got even more growth next year than this year.

That should be I would think similarly beneficial at least, obviously you have got a drag on the FX side. Is there anything else I should be thinking about and it sounds like you have got some maintenance issues or not issues, but just higher numbers next year.

Is there anything else we should be thinking about?

I mentioned earlier, David it’s Mike, but the two cost categories that we are spending a lot of time on right now, because they do show increases year-over-year is deprecation because of the 787 program and the one you mentioned maintenance.

And you should – David, Calin here, you should also factor in obviously your 10 for 20 that Mike referenced.

Right.

That will have obviously an impact as well.

Towards the end of the year.

Right. Okay, that’s great.

Thank you.

I guess just a quick follow-up on pension. I know you have experienced a solvency deficit at the beginning of this year, but just wondering if anything has changed in terms of your view on where the deficit is today versus – or sorry the surplus is today versus $89 million you had, because interest rates have gone down a little bit here?

Thank you for that question. It’s Mike.

We are pleased to report that our surplus actually has increased.

Okay.

Since the start of the year. Returns have been very solid despite reduction in the interest rates, the long-term discount rates.

They have more than offset that reduction. So, our surplus as of quarter end and as of today is higher than it was at the start of the year.

And we continue to look at and examine the opportunity to opt out of the government agreement we have. That decision will be made in the first half of next year.

And if we do opt out, then we will obviously have a benefit to our cash flow in 2015. And so certainly from a pension perspective, everything looks very positive.

And do you intend to grow the immunity from 70% today to 100% pretty soon or?

Yes. We have – thank you for that follow-up question.

So, we are at 70% for some time given where interest rates are. We took the opportunity in fact last week to increase it to 72.5% and we will continue to look at opportunities to increase that immunization rate closer to 100% over the next 6 months to 9 months.

Okay, that’s great. Thanks a lot.

Well, thank you, Melanie and thank you everyone for joining us on our call today.