Air Canada

Kathleen Murphy - Director, IR & Corporate Reporting Calin Rovinescu - President & CEO Mike Rousseau - CFO Ben Smith - President, Passenger Airlines Chris Isford - VP & Controller

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

Thank you, Melanie, and good morning, ladies and gentlemen, and thank you for joining us on our call today. 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 begin by highlighting our 2014 financial performance and the progress made on our strategic initiatives. Mike, will then address the financial performance, 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. 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 fourth quarter press release and MD&A for important assumptions and cautionary statements related to forward-looking information and for reconciliations of non-GAAP measures to GAAP results.

I am now going to turn it over to Calin Rovinescu, Air Canada's President and CEO. Calin?

Thank you, Kathy, and good morning, everyone, and thank you for joining us. 2014 was a break-out year for Air Canada, where the corporation showed what we are truly capable of.

Record sales, record EBITDAR, record adjusted net profit, record number of passengers carried, record load factor, best airline in North America for the fifth year in a row. In 2014, we achieved the best financial performance in our history.

Adjusted net income of $531 million surpassed last year's record by $191 million or 56.2%. EBITDAR of $1.671 billion increased $238 million or 16.6%, while operating income of $815 million improved a $196 million or 31.7% year-over-year.

This excludes the impact of an operating expense reduction of $82 million related to benefit plan amendments in 2013. We generated record 2014 revenues of $13.3 billion, an increase of 7% from 2013.

On the cost side, adjusted CASM decreased 2.6% from the 2013 despite an unfavorable currency impact. We recorded an operating margin of 6.1% in 2014, up 1.8 percentage points from the previous year's operating margin, excluding benefit by an amendment.

This reaffirmed that we are executing on our margin enhancement strategies. We also had strong operational results with very positive customer feedback and we established a new record load factor of 83.4% in 2014.

As a result of collaborative efforts across the organization, Air Canada continued to improve its on-time performance, ranking among the top five North American airlines according to FlightStats 2014 Airline On-Time Performance Service Awards. We got exceptional results that continue to underscore the effectiveness of our business strategy.

As previously we remain focused on executing on our core priorities and continue to deliver sustained profitable growth. The key priority, as you know, is focused on international expansion, and our new and more efficient aircraft are helping us drive tangible profitable growth.

We have announced new international destinations for both Air Canada mainline and Air Canada Rouge, including from Toronto to Rio de Janeiro, Amsterdam, Panama City, Dubai, and Delhi; from Vancouver, seasonal service to Osaka, and from Montreal to Venice. During the year, we took delivery of the first six of our Boeing 787 which are already contributing to our improved bottom-line with better fuel and operating efficiencies.

This strategy also focuses on global or sixth freedom traffic connecting over our Toronto, Montreal, Vancouver and Calgary hub. In 2014, this traffic increased 23% over the previous year, with a significant portion originating from the U.S.

We expect that once implemented our revenue sharing joint venture with Air China, announced last November, will stimulate traffic growth between the two countries and further strengthen our presence in Asia. The second core priority continues to be cost reduction and revenue generation.

Revenue generation initiative such as preferred seating, first check bag fees, and premium economy privileges are paying off. In fact to meet demand we are refurbishing our entire Boeing 777 fleet to the new 787 standards and introducing a premium economy cabin to both the 777 and the Airbus 330-300 fleet.

This investment allows us to fulfill the needs of new and existing customers, passengers that don't want to pay for the full business class product, but are willing to pay more for a larger seating area and expanded services. Thirdly, investing in our product is also key to engaging our customers, another priority.

Our new Maple Leaf Lounge in Heathrow, and the introduction of Wi-Fi connectivity across our North American fleet are other examples of improvements that are welcomed by our business travelers and that's important in continuing to secure our position now five years running as best airline in North America. In addition 83% of business travelers in Canada preferred our airline to the competition, according to a national survey by Ipsos Reid, a 14 percentage point improvement in our ratings over the past six years.

Finally, we continue to make progress on our fourth priority, culture change. Employee surveys conducted in 2010, and again in 2014, demonstrated dramatic improvement in employee engagement over that period.

Employees observed signs of increased and improved culture change taking place in the workplace and revealed their pride in working at Air Canada. For me, however, one of the most tangible signs of our employees understanding of our growth plans, and that a positive shift in culture is occurring at Air Canada, the landmark 10-year agreement reached with our pilots last October.

This provides us with a stability we need to confidently invest further in aircraft, technology, product, and new destinations. We remain focused on prudent capacity management and a pricing strategy based on market demand, which overall has continued to remain strong into 2015.

While fuel prices of course remain volatile, the recent decrease is expected to drive significant cost savings in 2015, and provides us with an opportunity to increase adjusted net income, reduce adjusted net debt, and further strengthen our balance sheet. We've also made great progress on the pension front, which Mike will elaborate on.

Before turning the call to Mike, I'd like to thank our 27,000 employees for their part in these accomplishments, and for their continued focus on taking care of our customers as we work towards sustainable profitability in this highly competitive industry environment. Turn the call over to Mike for a discussion of our financial performance.

Thank you, Calin, and good morning to everyone. Fourth quarter adjusted net income of $67 million was also a record for Air Canada surpassing last year by $64 million.

On capacity growth of 8.5% in the quarter we recorded a $195 million or 7.6% increase in passenger revenue. On traffic growth of 9.4%, partly offset by yield decline of 1.9%.

On a stage length adjusted basis, system yield declined 0.7% year-over-year. EBITDAR for Q4 was $349 million, if you exclude the one-time $30 million payment to the ACPA members.

The EBITDAR margin as a result increased 160 basis points in Q4 to 11.2% versus last year. For the full-year 2014, on a capacity growth of 7.8% we reported passenger revenue increase of $783 million or 7.1% on 8.5% higher traffic.

Yield decline 1.3% was flat to last year on a stage length adjusted basis. As we discussed many times in prior calls, modest yield declines are an anticipated and natural consequence of the successful implementation of Air Canada's business strategy to probably increase long-haul international and leisure flying.

Although, yields are largely impacted by a longer average stage length and the increase in number of leisure travelers, the incremental capacity is at a much lower unit cost, resulting in improved margins and profitability. We continue to make meaningful progress in growing our international-to-international traffic flows through our major Canadian hubs, by leveraging our competitive products and services and expanding our international network.

And the stronger U.S. dollar is generating additional demand from a U.S.

point of sale. In 2014, sixth freedom traffic connecting to our major Canadian hubs increased 23%, when compared to 2013.

On the topic of yield management, we are in the middle of implementing a new passenger revenue management system, which is aimed at better optimizing passenger flows across the network. We expect to have this system fully implemented in the second quarter of 2015 and have estimated incremental annual revenues in excess of $100 million from this initiative.

On the regional front, the new extended capacity purchase agreement we recently concluded with Jazz is another important step towards sustainable profitable growth. The agreement provides both parties the greater stability and significant cost reductions through a better alignment of interest, which is what we are aiming for.

The agreement significantly increases our competitiveness in regional markets through lower unit cost and an improved product offering. The resulting stronger network will support our commercial strategy of expanding internationally, and increasing connecting traffic to our hubs.

We estimate that this new agreement will result in a financial value of approximately $550 million over the next six years, as compared to the previous CPA, including an increase in operating income of approximately $50 million in 2015. We are also taking every opportunity to grow ancillary revenues through multiple channels.

In the fourth quarter, we successfully increased ancillary revenue per passenger by 18% when compared to the same quarter 2013. This increase was largely driven by the adjustment to our first checked bag policy in November of 2014.

And for the year, we increased these revenues by 10% when compared to 2013. Looking ahead, Air Canada's first quarter system ASM capacity is expected to increase 8.5% to 9.5% when compared to the same quarter in 2014.

We continue to expect our full-year 2015 system ASM capacity to increase by 9% to 10%. Given that 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 today's news release.

As discussed on our last call, approximately 55% of the forecasted increase in system capacity for 2015 is through the continued lower cost growth of Air Canada Rouge, while 38% will be directed to international markets with the introduction of our additional 787 aircraft at mainline. A projected growth in domestic capacity of 3.5% to 4.5% in 2015 is largely focused on transcontinental services, and primarily driven by the positioning of certain Boeing 777 and 787 aircraft for their international departures at our major hubs in Toronto and Vancouver, and by an overlap of the interim lift related to our Embraer 190 replacement program, which is aimed at better matching capacity with demand during the peak summer months.

While we are benefiting from much lower fuel prices, although partly offset by weaker Canadian dollar, we are not planning at this time on making any major adjustments to our 2015 capacity plans, and they remain consistent with what we've previously disclosed. We continue to focus on probable international expansion and remain very disciplined in our approach to capacity management.

While overall demand remains robust we do expect that certain energy markets will come under some pressure and we have redeployed and will continue to redeploy capacity to reflect the forecasted changes in the demand environment, on certain services such as Alberta, Saskatchewan, and selective regional markets in the BC. We actively monitor the demand environment in each of the markets we serve and have flexibility to redeploy capacity to changing market conditions very, very quickly.

Turning to our cost performance, for the fourth quarter on capacity increase of 8.5%, operating expenses increased $239 million or 9% from the fourth quarter of 2013. The weaker Canadian dollar on U.S.

denominated expenses increased operating expenses by $89 million in the quarter. In the fourth quarter of 2014, one-time payments totaling $30 million were made to ACPA members under our collective agreement concluded in October 14.

While in the fourth quarter of 2013, Air Canada recorded an operating expense reduction of $82 million relating to amendments to defined pension plan. Adjusted CASM was unchanged from the same quarter 2013.

We have projected a fourth quarter decrease of 1% to 2% in our news release dated November 6, 2014. This difference was primarily due to revised actual valuations and other issues related to pension in post retirement -- post employment benefits while which resulted in higher than projected employee benefit expense.

An increase in accruals related to employee profit sharing program, as a result of the stronger results than we had originally forecasted, and to having moved certain maintenance events scheduled for the first quarter of 2015 into the fourth quarter of 2014. The Canadian dollar was also a little weaker than what we have previously anticipated.

For the year, operating expenses increased $694 million or 6% from 2013 on capacity growth of 7.8%. The weaker Canadian dollar on U.S.

denominated expenses increased operating expenses by $397 million, while lower jet fuel prices decreased operating expenses by $200 million when compared to 2013. Adjusted CASM decreased 2.6% in 2013 in line with the guidance provided in our November news release.

Turning to fuel hedging, we are certainly monitoring the drop in volatility in oil prices very closely. And although at this point in time we have not made any changes to our hedging program, we are reviewing different scenarios and opportunities internally.

At December 31, we have hedged 22% of our planned fuel requirements for 2015 and an average WTI equivalent capped price of U.S.$97 per barrel. Given that we hedge only recall options we are protected against short-term spikes and fuel prices and benefit 100% from a declining U.S.

denominated fuel price. This is of course partially offset by a negative correlation of the Canadian dollar.

Our current forecast assumes an average jet fuel price per liter of $0.66 Canadian for the first quarter and $0.67 Canadian for the full-year 2015. We are also watching the Canadian dollar very closely and although we do not anticipate making any significant changes to our foreign exchange risk management policy in the near-term.

At December 31, we had U.S. dollar currency derivatives, and U.S.

dollar cash reserves, of U.S.$2.3 billion and U.S.$620 million respectively. The currency derivatives of U.S.$2.3 billion enable us to purchase U.S.

dollars at a weighted average price of Canadian $108.84. We've included estimated impacts on our results of changes in fuel prices and foreign exchange in our 2014 MD&A under sensitivity of results.

Turning to cost guidance. We expect adjusted CASM to increase by 0.5% to 1.5% in the first quarter of 2015; it's a decrease by 75 bps to 1.75% in the full-year 2015 when compared to the same period in 2014.

Our adjusted CASM projections assume the Canadian dollar will trade on average at Canadian $1.25 per U.S. dollar for the first quarter and for the full-year 2015.

If the value of the Canadian dollar were at 2014 levels, the projected adjusted CASM for the first quarter and full-year would reflect decreases of 2% to 3% and 3.75% to 4.57% respectively when compared to the same period in 2014. And while adjusted CASM is negatively impacted by the weak Canadian dollar, foreign denominated revenues essentially active and natural hedge against U.S.

dollar denominated non-fuel operating expenses. As such, net U.S.

dollar operating expenses are largely attributable to the airline fuel purchases, which are currently at a much lower cost in Canadian dollars, despite the impact of the weaker Canadian dollar. Moving to our balance sheet and liquidity, we ended the year with unrestricted liquidity of $2.7 billion, well above our target level of $1.7 billion.

Free cash flow was lower by $90 million in the fourth quarter and $329 million for the full-year 2014, in the same periods of 2013 and was impacted by addition of one Boeing 777-300 and six Boeing 787-8 aircraft in 2014. The decline in free cash flow in the fourth quarter of 2014 was driven by the addition of two Boeing 787-8 aircrafts, as well as changes in non-cash working capital, particularly the timing of fuel payments when compared to the same quarter in 2013.

At year-end, adjusted net debt was $5.1 billion, an increase of $781 million from December 31, 2013, largely due to the financing of aircraft purchases in the year. In addition, as majority of our debt is U.S.

denominated, the mark-to-market increased long-term debt and financed lease balances by $365 million. As of December 31, 2014, our adjusted net debt to 12-month trailing EBITDAR ratio is 3.1 and well within our objective of maintaining the ratio below 3.5.

In 2014, we also made significant progress towards our stated target return on invested capital, a key metric driving shareholder value. We generated return on invested capital of 12.1%, 200 basis points above our weighted cost of capital, and consistent with our stated goal of achieving a sustainable ROIC in the 10% to 13% range.

Again, additional details on our results for the fourth quarter and full-year can be found in our financial statements, in MD&A, which were posted on our website this morning and in SEDAR as well. Now, turning to pension.

Based on our preliminary estimates, including actuarial assumptions, as of January 1, 2015, the aggregate solvency surplus in Air Canada's domestic registered pension plans is now projected to be $780 million. Under our 2014 pension deficit regulations, Air Canada is required to make average annual payments of $200 million, to contribute an aggregate minimum of $1.4 billion in solvency payments over seven-year period which began last year January 1, 2014.

We are of course are committed to opt out of these regulations and have past service payments determined in accordance with normal funding rules. As we said many times, we will consider opting out when the annual solvency deficit payments under normal funding rules, which are determined using deficit levels over the past three years, which will be less than $200 million.

And when there would be a strong basis for confidence at the airline's derisking strategy would make a future significant deficit, unlikely to reoccur. In order to mitigate the discount rate risk at December 31, 2014, we had matched approximately 72.5% of our pension liabilities with fixed income products.

Should we decide to opt out based on normal funding rules, and subject to the finalization of preliminary estimate of our pension solvency surplus, at January 1, 2015, Air Canada's past service payments to its Domestic Registered Plans would be approximately $90 million in 2015. We expect to make a decision on whether to opt out this year by the end of June.

And with that, I'll turn it back to Calin.

Thank you, Mike. Looking forward, the state of the economy, market demand, our ability to adjust capacity accordingly, and fuel prices, are all top of mind for all of us.

Although, I am not an economist, the January statistics Canada job numbers, and Air Canada's record January traffic results, belie the economic bloom forecast by some. We carried an unprecedented volume of passengers on record capacity levels for January.

And we do have a three to five months deal of demand and it remains strong in most markets. As Mike mentioned, we do expect that certain domestic routes may come under pressure as a result of cutbacks in the oil and gas sector, but the impact of a further drop in demand in this sector of the market would not be significant for Air Canada.

Our extensive network and fleet mix ranging from our largest Boeing 777 and 458 seat high density configuration to that of one of our Air Canada Express partner's 18 seats Beechcraft Aircraft, gives us the flexibility to adjust and redeploy capacity to changing demand or market conditions very quickly and were never reluctant to do so when warranted. Air Canada Rouge also provides us with swing capacity and much needed flexibility between seasons, compared to what we had before.

Moreover our amended CPA with Chorus concluded last week, which allows for the simplification and modernization of the Jazz fleet, will give us even greater network flexibility at a lower cost. At Jet fuel, it represents our largest and most unpredictable cost, as you all know.

Jet fuel has averaged over $100 of barrel for more than four years. For just four months now, fuel prices have been lower and not unexpectedly remain volatile.

The recent reduction in fuel cost absolutely benefits Air Canada in the short-term and subject to ongoing volatility, we expect to take full advantage to improve our balance sheet, by reducing adjusted net debt and investing in our product. But it's too early at this stage to predict where fuel prices will be in the long-term.

At the same time, we are closely monitoring the Canadian dollar, devaluation of which erodes some of our gains from lower fuel prices. This is a highly competitive business with thin margins.

And we fully intend to continue to be price competitive on fares, while also maintaining our focus on sustaining profitability. Reliance on low fuel cost to drive profitability is not part of our plan.

Indeed such a plan would not be sustainable. Our plan is based on delivering on a permanently lower cost structure, while growing our profitable businesses.

So in 2015, we will remain focused on the execution of our business plan in delivering on our four priorities. We'll continue to strive for operational and customer services excellence, in implementing our international growth plans, we'll continue to develop our sixth freedom traffic, particularly focusing on the Toronto hub, and we will be nimble and flexible playing to our strengths and always ready to change course, if necessary.

We're pleased with the record that we achieved in 2014, and look forward to continuing that progress into 2015. So with that I'd like to thank all of you for joining us on the call and open it now up for questions.

Just on your -- on the housekeeping one first of all your $349 million in EBITDAR, Mike, does that translate into about $0.33 on earnings per share, because there is a lot of movement between CASM I feel in your hedges et cetera. So really the focus I think is now that you're generating earnings per share should be earnings per share, so is it around $0.33 that you generated in the quarter?

I believe that -- I think that's the way the math works, David.

Okay, very good. What, if you look at the cost factors, what really caught you by surprise I guess in the quarter, and how is that reflected through in your view of 2015.

I mean obviously you see the change of FX was a big one on the maintenance and timing thereof, I certainly know that's under your control, but what actually transpired and how does that reflect through?

Right, good question, David; it's Mike again. So, I don't think, I think the only one thing that surprised a bit was the drop in the discount rates which affected our benefit expense a bit.

But we made a conscious decision to move a series of maintenance events from Q1 of 2015 back into Q4, because we have got a very, very busy year from a fleet perspective in 2015, and we have the opportunity to not cost us about $15 million to $20 million. And so that was simply a move from Q1 and back into Q4, which I think was a right decision from our perspective.

And the rest of it is again some higher profit sharing that we initially anticipated and to some degree slightly weaker Canadian dollar. So again, as we've shown you on the guidance, our benefit expense we've projected that for next year, built into our adjusted CASM numbers, and so again I would most of the decisions were conscious decisions and good business issues from our perspective.

Okay. And similarly going to this year you got a Q1 rising a bit but the full-year coming down what's a play in Q1 versus --?

The major reason for that is the majority of the increase in maintenance budget this year in 2015 is front-end loaded, Q1 and Q2.

Okay. Very good.

And second question just on the demand environment probably for Calin, obviously you talked about being mitigated on your Alberta exposure, but are you seeing anything to the booking curve in terms of outbound probably with the C dollar where it is? And secondly, on international, you have that great deal JV now within China, but as look out into the Asian trades, certainly are you seeing sort of a backdoor pick-up through your sixth freedom traffic given where the U.S.

dollar is today.

I might ask, Ben, just to provide a bit more color, but generally we're not seeing any particular weakness of any significance at this stage based on the economy and based on the situation in the oil and gas sector, which is obviously very small part of our business, overall. In terms of Asia, for sure Asia is a big part of our strategy, and the Air China joint venture which has yet to -- yet to be implemented and we need the regulatory approvals et cetera to get that done.

We're -- we apply expectations for that partnership. I think everyone is seeing the benefits that we achieved through the A++ partnership over the Atlantic.

And so we have a very good model for what can be achieved with respect to Asia. So that is exciting.

But at this stage we're not yet seeing any of the benefits from that. And as far as sixth freedom traffic, definitely we had a 23% increase in sixth freedom traffic in 2014.

We expect that to continue growing and a lot of that traffic will be exactly, as you say, people connecting from Asia to other parts of our network or people connecting from the United States to parts of our network, including Asia. But, Ben, do you want to provide a little glimpse on the -- without going too far a feel on the question of demand.

Sure. I guess, overall, we're quite pleased with the demand environment.

The way we've been working towards building up our network and ensuring the capacity in the aircraft deployed in an optimal way. The demand is coming in as predicted and with the weakness of the Canadian dollar it just makes the -- our focus on U.S.

point of sale that much more attractive. So as far as we're concerned in terms of demand, right now there is coming in either on plan or slightly ahead of plan.

Okay. Very good and last one for me just on the pension great to see but just more on the fuel, Mike, if you're looking at your hedging and so it was a little bit lighter than I thought you would have might have taken advantage of, is that just taking a view on the fuel or is that just that the hedging is just a bit too costly at this juncture?

Again we will continue to employ our existing hedging strategy and so having 22% hedged at this point of time is normal. But as I said in my comments, we are looking at different opportunities, but the fact future hedging is very expensive right now because of volatility in the marketplace.

Very good. Thanks guys and keep up the good work.

Thank you very much.

I guess may be my first question is on the capacity side. So it seems like that you've put a lot more wide bodies on the domestic and the transborder routes right now.

I think we've noticed the 767 to the Rouge on Vegas and even on LAX. Just want to get a sense of whether that's seasonal, Ben, and may be you can talk a little bit about the reasons behind that, are you seeing some weakness on Atlantic or also may be are those plans likely to go back to transatlantic in the summer?

No, Turan, this is -- this was always part of our plan. Historically, we've always had wide bodies on our strongest routes.

We had a period of five to seven years where we had a big shortage of wide bodies, which would be delay of the 787 made it even worse. So this is part of the plan to run on Vancouver depending on the season it's usually our busiest route in the country.

We can go up to 20 frequencies a day; the route can certainly sustain that aircraft type it does very well for us. We do have international networks on either side.

So for maintenance and flow purposes it also make sense, crew basis are also in both locations. So the aircraft does work on those route, obviously we don't buy specifically for that route, but we can get additional hours out of the airplane when flowed correctly to Los Angeles.

We also have a 767 on San Francisco and in some months on Calgary, if we have downtime in between missions, we have aircraft that arrived in Toronto early in the morning from South America and don't go out to late at night. So sometimes we put in a daytime turn out to the West Coast fits in perfectly, and those are heavy business routes, customer base does appreciate the premium cabin.

We see in the United States on JFK to California most of the carriers now do have an international product. We do charge appropriately for that.

So we're pleased with the bottom-line result. And where we have heavy leisure demand, the rouge model, allowed us to ship capacity from transatlantic to sun type destinations in the winter and the 767 Rouge perfect for that and, so Las Vegas, Cancun, a lot of the Caribbean markets we are operating the 282 seat Rouge 767 very effectively.

And we find that aircraft much more appropriate than what some of our competitors use and that airplane can then be deployed to seasonal Atlantic routes in the summer. So it's all in the plan and you'll see more of that going forward.

Great, thank you very much for the color. And then, I guess the next one just also on that, so the Embraer's Mike, I think you said they're going to come out of the fleet by the end of the year.

Should we expect sort of the middle of the year, I guess, with the summer being more higher on the capacity side from a seasonal perspective in the quarters?

I think that's fair. We have outlined our plans to replace those aircrafts so we're bringing in five narrow-bodies, 321, 320 pre-summer, and the roughly 12 Embraer 190s leave the fleet post-summer, between post-summer and the year-end, and the rest of them will leave in the first half of next year.

Perfect. Thank you.

And then just may be one last one, I know you guys said that you haven't seen any impact on demand yet, but I guess just based on the history would you expect to see any problems on the demand side just with the dollar being where it is and may be if there is any expectation of weakness where would you see it?

No, look I mean I think that we're living right now in a unique environment with what we're seeing in the fuel and the level of volatility in the fuel and the speed at which the Canadian dollar has come down. So obviously -- we have no crystal ball here to predict as to how the economy will map out.

We do speak to economist on a regular basis to get their perspectives on what folks think, back at Canada might do, interest rates might come down again et cetera, et cetera. These are all drivers that will obviously have some impact on it but as I say so far, so good.

Great. Thank you very much.

Good morning, congratulations for record numbers.

Thank you very much, Konark.

And my questions are basically around the cost side first to begin with. So it looks like your adjusted CASM would have been down about 2.5% in fourth quarter without the $20 million maintenance impact and $30 million payment to pilots, is the math right on that?

Off the top of my head that sounds about right. But certainly if we can -- yes that sounds about right.

Okay, that's great, thanks. And so unit costs looks like they are declining at a faster pace in 2015 just looking at your guidance without Canadian dollars impact.

So I know Rouge high density 777s and 787s are likely the key drivers. But can you just give us some sense on various moving parts this year and next, I guess moving some maintenance events to fourth quarter also helps in 2015?

A little bit on the maintenance side. But again the key drivers remain the expansion of Rouge; we're adding at least four more wide bodies to Rouge in 2015, the continued introduction of 787s.

For the most part the 777 high densities are behind us because we had them for the -- almost the full-year in 2014. And so Rouge, 787s, and a number of other initiatives that we're putting in place to reduce cost, which is ongoing part of our D&A are all driving negative or improvements in adjusted CASM.

Okay. So is there a way to find out or can you comment on, like what sort of kind of major weight is that Rouge 787 combined or is it your other cost initiatives that --?

I think those first two buckets the fact and the fact that we are increasing density in some of our fleets as well. Those three factors would provide majority of the overall improvement in adjusted CASM.

I see. Okay, thanks.

And can you also please comment on your 15% CASM reduction goal, like has it changed due to the rapid decline in fuel prices, I understand I think it was for five years from 2012, so 2017. So now do you think achieving that goal in 2016 or may be before that?

No, we are still on track to achieve that goal. Remember the 15% CASM use 2012 as a benchmark year.

So you benchmark against the foreign currency in fuel in 2012. And so we continue to monitor that and we are on track to achieving 15%.

Okay. Okay and just a housekeeping, what's your assumption for jet fuel per barrel leading to your guidance for fuel cost per liter?

I don't know have that number at the top of my head but we can get it to you.

For sure, thank you. And just finally on the yield, the decline in yield is understandable due to stage length and more economy seats.

But how much of a decline in the fourth quarter was due to pricing softness and how should we think about it moving forward?

We didn't see any pricing softness to speak of in the quarter. I mean this is, as we've said several times, Konark, this is part of the overall expectation and the strategy here is that as we are adding more seats and as we are adding more economy seats and as we are moving into greater percentage of these premium economy and in some cases reducing the number of business class seats that business as expected outcome in one and that we are comfortable with.

Okay. And you would still see strong benefits of first bag fee in 2015, I believe right?

Yes.

Okay. That's all for me.

Thank you.

Just before you leave the line, I do have the answer now on your question regarding the cost per barrel. So at U.S.

level it's -- our guidance translates into $78 per barrel for Q1.

For Q1? And what's for 2015?

The same thing.

The same thing?

Roughly the same thing, yes.

Okay. Thanks a lot, Mike.

Good quarter. Thank you.

Thank you.

Yes, thank you very much, operator, and Calin congrats to you and the team on certainly a better year here for Air Canada is quite something.

Thank you very much, Walter.

Just wanted to sort of follow-up here on yields, I guess, Ben, you had indicated in prior call that about 150 basis points was the drag effect of mix, stage length, rouge seat purchases and so on. You came in a little bit lower than that.

The question I have is with the lower fuel price environment we now know that you can be a lot more flexible to take advantage of opportunistic promotional activity. And I just want to make sure that I separate that effort from any demand related or overcapacity related moves on your part with regard to pricing.

So as we look out to 2015, if we assume 150 basis point drag and you correct me, Ben, if that's no longer the case but 150 basis point drag on mix, would that strategy of being opportunistic, be -- I've got in my model to be about 50 bps additional is that a fair numbers or should we look at it completely differently?

I don't think I've ever put out that number. I mean the way we manage it internally here is margin expansion.

We have a very aggressive target to have consistent improvement quarter after quarter in our entire system around margin expansion. So that's how we manage the network and our revenue management assumes we will deploy the capacity based on when we receive the strongest demand both yield and traffic, where we allocate our fleet in a more sufficient way to drive consistent margin expansion.

If that did result in a 150 basis point reduction or carry through may be, we can check that after to see if that's lines up what we have. But just for a year-end product, how we manage it year-end, that's how I manage it.

Yes, my question was more away from the 150 and more toward just making sure we and investors understand that there is times when you'll be opportunistic now that you have the flexibility of fuel that might lead to a year-over-year negative comp in same store fares, may be because of an extended promotional period a little bit longer than you typically did last year, and just so we understand could -- is that a 25 basis point, is that a 50 basis point, is that a 100 basis point, so we can be aware of it, and expecting in our forward estimates, if that indeed would be your strategy in 2015?

Yes, well that's to bring it back to what I said in the beginning, our strategy continues to be focused on margin expansion if there is an opportunity through low affairs because of lower fuels to continue in a more aggressive way along that plan and that's what we're going to do.

Right.

Calin here. We don't have a target number of basis points that we don't -- we don't operate like that that's not the way.

I mean from your perspective you might obviously create some assumptions from an analytical perspective, but from our perspective its actually what we're trying to do here is drive profitability as we've said many, many times and we'll use whatever tools we have at our disposal to drive profitability, in some cases it is through putting more seats on the airplane, in some cases it will be through higher fares, I think some cases it will be through ancillary fees, and sort of -- and to the extent that the net effect of that is margin expansion and we consider that have been successful.

Fair enough, yes, okay. On the CPA you mentioned 550 six years, first year 50, implying roughly a 100 per year after that probably right may be on a sloping upward fashion, out to 2021 but the new agreement that you have and I know that that's relative to the old agreement but the new agreement include a 21 to 25 which sees almost a 50% reduction in your CPA rate.

So is it fair to say that the $100 million might even spike higher 21 to 25, I know it's for quite a way out but it is a new agreement and it certainly based on what we're hearing from Chorus that seems like the roadmap.

That's exactly right, Walter, because Chorus did disclose the fact that the profit per thin, will drop materially in the extension period. Now our focus was really about how much money and value we create between now and the end of the original CPA.

And then equally important we want to ensure that and for the extension period, the cost structure of Jazz would be competitive and we don't know what the competitive market is going to be at that point in time. But we have estimates and we’re very comfortable that both those objectives had been achieved.

And to your point you're absolutely right we did not forecast beyond the 550 what we thought we would achieve from those additional five years, but for sure it is less we would be paying less than we're paying today, absolutely. And, as Mike said, our expectation is that it will be market competitive at the time but for sure it's less than what we have today.

So we thought we would be conservative and tell the market only what we saw for the next -- for the term to the end of the contract.

Make sense. Last question here is on cost.

I know, Mike, you have reaffirmed your 15% reduction but you've achieved a lot since June of 213 a lot that wasn't in your 15% I know that 15% is actually inclusive of fuel. Is it safe to say that we're not only going still confident in 2015 but could be materially better than that over this 2017 to 2018 timeframe?

I mean I don't want to make a forecast at this point in time. We may do that at our next Investor Day which will hold later this year.

But certainly, you're absolutely right. We have done an incredible number of things and both in fleet and in non-fleet that gives us confidence.

So certainly, we'll achieve the 15%.

Okay. All right.

That's all my questions. Thanks very much and congrats again on a great year.

Thank you very much, Walter.

My first question is on the -- I guess the transatlantic. The rouge on there was actually quite strong in fourth quarter and you have listed a couple things in your MD&A about why that was the case.

But I'm just wondering, if you can talk about the underlying demand across all the various seat categories in the transatlantic because it looks like it's actually holding up to be quite strong, is that how you're seeing it?

Yes. Hi, Cameron, it's Ben.

We are very pleased with Q4 on the transatlantic. This sector usually peaks for us in Q3.

And historically, we have had trouble maintaining the round capacity Q4/Q1 because of the seasonality in the Canadian marketplace. But with the improved facilities at Toronto Pearson, as well as Montreal, and Vancouver, our new product as well as the joint venture we have with United and most times all the pieces are in place to perform better in the North America, the Europe market, and that's really helping us.

So we are getting incremental traffic in a big way to and from the United States, and that is driving not in huge individual passenger numbers, but in revenue number because a lot of that is skewed to the front cabin and that's what's driving the result that you're seeing.

Okay. Just may be second question, on the sort of sixth freedom you talked about it a little bit already.

But in MD&A you sort of talk about, if you were to get your fair share of that international traffic would be something like $600 million incremental revenue from here. I was just wondering, what more do you have to do to get there?

And what kind of timeframe you think you achieve that kind of number?

Well, the first thing we really need back of the house to manage that properly with an updated revenue management system. Historically, we've managed our revenues with a standard local light base system, revolving to what's called an origin and destination revenue management system, which we've talked about in the past, it's coming into full swing in a couple of months time.

Typical global big transfer sixth freedom carriers have that in place. So that is key to fully optimize and take advantage of this opportunity.

So we need that in place. I also like to ensure that we have capacity at the right time to seed our international flights.

We are very big. Like we are the largest one carrier in the United States, but we are very small in terms of carrying people from the U.S.

or to the U.S. points other than Canada.

So it's been a bit of network and capacity adjustment to better take advantage of that opportunity. We have actually taken on more white body airplanes.

We have a very robust and well thought out plan to add capacity from key U.S. markets to help drive the -- that strategy.

We have a full sales and marketing plan behind it as well, and also leverage our membership in Star Alliance, not just the JV, but also the Loyalty Frequent Flyer Plan.

And they did have a timeframe as these things rollout, are we are talking assume it would be several years, but just any kind of color there would be helpful?

Well, we'd like to get to our fair share I would say by 2017 at the latest. But I think we might be able to get there sooner.

Okay. Good.

And just last question, just a housekeeping item, the U.S. dollar revenue exposure I mean that's certainly the big offset to the cost out there is.

Are you able to provide what the actual dollar number was in 2014 as far as U.S. dollar revenue?

Sure, Cameron. It averages in direct U.S.

revenues $1.5 billion, plus we get an extra $1 billion in non-U.S., non-Canadian revenues, which we translate back to U.S. dollars right away, so roughly $2.5 billion.

Okay. Okay.

Great. That's all my questions.

Thanks very much.

Just a housekeeping one on the sixth freedom. I noticed that 23% increase in 2014, was down modestly from the first nine months of the year at 26% year-over-year increase.

Just wondering, what the blip was, is it a seasonal thing or anything else we should be highlighting here?

It's definitely a seasonal thing. In the summer it's really driven on passenger volume and in the winter we focus much more on front-cabin business traffic.

So depending on how you're measuring, if you're measuring it by revenue or by passenger numbers, the passenger number will always be much stronger for us going forward in Q2, Q3, and the revenue number should stay very healthy year-over-year, but the actual individual traveler number will come down in the slower -- slower months.

Perfect. And just on the pension -- on your pension situation.

Congratulations on obviously turning that around over the past few years here. So they can make a decision sometime middle of this year.

Just trying to get a sense of what will drive that decision -- is the goal to how this plan 100% immunized before opting out or does it have be at a 100% before you decide on opting out?

Kevin, its Mike. No, I don't think we need to be 100%, but we'd like to lower the overall risk profile a little bit more where it is today and we are looking at techniques to doing that.

And should we achieve that and should things remain relatively consistent with where we are today, then certainly -- we point in the direction of making a decision to opt out.

Okay. That's helpful.

And then when you think of -- I guess when you roll into 2016 you'll have an additional, call it $200 million in cash, that will be going into your past service payments. Any thoughts in terms of how you'd prioritize that additional cash inflow or may be the lack of cash outflow would be focused on deleveraging or returning cash to shareholders.

I think it's still a long way away and all of those options remain open. Certainly, as I said before to the markets and our focus is strengthening the balance sheet and so deleveraging is an important objective for us, but we're certainly not closing the door on any return to shareholder options.

Okay. And just last one from me, just on -- just in terms of the winter season here just in terms of the southern markets, just how that's looking the competitive environment and we heard from your competitor that there were some yield pressure on some of these, I was just wondering if you're seeing the same thing given your product mix has changed significantly over the past few years into those markets?

No, there's no problem for us, things are coming in as planned. We're actually seeing very, very healthy demand to this time.

We're seeing Canadians take particularly to Florida more frequent trips. In February, we take two or three trips per year and now upping that to five, six, seven, trips per year.

We're seeing a lot of success with our flight pass product into this sun, demand even from the leisure customer for the premium cabin. So overall we're quite pleased with the way things are shaping out.

All right. That's it from me.

Thank you.

Mike, you talked a little bit about your fuel hedging strategies and what you're looking at, I guess a couple of pieces on this what are you guys looking at in terms of different options and I know right now you're only using sort of a cap structure, would you go back to looking at using more of a collar structure just because if it offsets some of the costs?

Chris, the quick answer to that question is, no. We will not expose ourselves to collateral risk and so we will probably continue with same products.

We're just looking at whether we should hedge more or hedge longer so -- a number of different scenarios.

Okay. And any other color you can give us on what you might actually be thinking about other than just buying some caps or something like that?

No, it's too early. It's too early.

Okay. And then just making sure I got my numbers right, just looking at your estimated consumption for fuel, and if I think about that in light on your ASM guidance, fair to think that the fuel efficiencies sort of I'm thinking about litres per ASM burn, it looks like it will be down 2% to 2.5% year-over-year.

Does that feel like it's the right mix for you guys with the new aircraft coming on?

I don't have those numbers off the top of my head, Chris. But we can provide some guidance to the market on fuel burn as we go forward.

Okay, great. And then just a couple of other housekeeping questions.

Just looking at the cost in the quarter, in the other bucket there was I guess $15 million variance that at least was described as not being recurring, can you give us some more color on what that is?

Sure, last year in Q4 of 2013 we received a refund on commodity taxes. And this year we didn't repeat that.

Okay, great. And then the -- I guess the last one just for me just another housekeeping, do you have any idea what your net financing expense for employee benefit liabilities would look like in 2015?

I think we do. Again I don't have the number off the top of my head.

I'm going to ask Kathy, or Chris Isford, our VP, Controller, have it. And they're actually going through the documents right now.

It looks like a decrease of $30 million in this year, Chris.

Okay, great. Thanks guys.

First question on the maintenance for this year, it's up $140 million which seems like a pretty big increase. Are there an unusually large number of events and we'll see the step back or can you give us some insight into where the normal is?

Well, David, over half of that increase is foreign currency.

Okay.

And so that's by far the large. I think $80 million of that $140 million is that based on the assumption of $1.25.

And so the rest of it is just normal escalation and some extra events.

Okay. So, should we consider that as sort of a new run rate if the FX stayed where it is or would there be much extra in there for extra events?

Sorry, you're talking about post-2015?

Yes, like I'm just trying to determine is that extra number unusually high -- or is it just --?

We're going through a bit of a bubble in 2014, 2015 and may be even as part of 2016. We're through a bit of a bubble given the age of our aircraft for maintenance expense and but subsequent to that I think you'll see a lower run rate.

Okay. That's helpful, thank you.

And then the same thing on the D&A is up quite a bit, obviously you've got more planes but it's up like 18% versus 2014, is there anything there or again is there some FX in that?

No, we, as you know we have made a commitment to buy more, own more of our planes rather than opt lease and to get our ratio to where it should be and so depreciation is going up because we're buying more of our planes.

Sure, okay fair enough. Then on the revenue management system, you mentioned over $100 million in improvement where would you be in Q4?

Would you've gotten anything out of it or much as anything?

You're telling about last year, this year?

Yes, I guess --

No, but -- there is no impact in Q4 of 2014.

Okay.

The systems being turned on so to speak in Q2 of this year, 2015. So we'll start seeing a ramp up post-Q2 of this year.

So Q4 this year David, you'll have something Q3 and Q4, you'll have something but not -- but nothing in Q4 last year.

Right, okay, great. And then just on the outlook by region, I get the impression on where you're saying is that there is really you're not seeing much in the way of negative developments on the sun destinations or Europe or whatever, but other airlines are seeing it WestJet definitely called it out on the sun destinations, I think American called it out in Europe, I think Asia is being called out by various airlines too.

What would be different for you guys that would make it special that you're not seeing what other people are seeing?

I think the key difference for us is most of our competitors are operating in a similar fashion year-over-year where we have this new tool Rouge that we never had in the past which puts us in a very different position in the marketplace. So we're able to go after pockets of demand that may be one profitable as in the past.

So the opportunity is much larger for us. So may be like-for-like we would probably be saying the same thing but that’s the real key difference.

Okay. Okay.

That's helpful thanks. And then finally on the pension, there is about $2 billion difference between the solvency number for the domestic and the reported number on the balance sheet.

Could you outline what would be the major buckets of difference or -- magnitude?

I would turn that question over to Chris Isford, our Vice President and Controller.

Hi, David.

Hi, Chris.

If you would look at Page 31 and 32 of our financial statements, it gives you the highlights of the variance and this two big buckets one is the supplementary in foreign pension plans which are not part of the domestic registered plan number and that's about $1 billion of additional liability. And the second piece is the solvency basis is based on a, sorry a plan termination where the accounting is based on a going concern.

And those assumptions are different in terms of plan continuation and how that impacts the liability.

Okay.

I explained the other $1 billion difference, David.

Okay, perfect. Thank you.

Thank you, Melanie, and thank you everyone for joining us on our call today. Thank you very much.