Air Canada

Kathleen Murphy - IR Calin Rovinescu - CEO Mike Rousseau - CFO Ben Smith - President, Passenger Airlines

Konark Gupta - Macquarie Capital Cameron Doerksen - National Bank Financial Fadi Chamoun - BMO Capital Markets Kevin Chiang - CIBC Walter Spracklin - RBC Tim James - TD Securities Chris Murray - AltaCorp Capital David Tyerman - Canaccord Genuity

Thank you, Elena, 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 first quarter 2015 financial performance and the progress made on our strategic initiatives. Mike, will then address our 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. 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 first 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.

Thank you Kathy, good morning everyone and thank you for joining us on our call today. This morning I'm delighted to report the best first quarter financial performance in Air Canada's history.

Record results in adjusted net income, operating income, operating margin, EBITDAR, passenger revenues and passenger load factor for the quarter all underscore our leadership team's success in executing on our value enhancing strategy. We've continued to see a strong demand environment, in the first quarter our margins expanded dramatically bolstered by strong cost control with adjusted CASM declining 1.8% despite the weaker Canadian dollar and solid traffic growth particularly on leisure sun routes.

Adjusted net income of a $122 million represented an improvement of $254 million from the same quarter in 2014. EBITDAR tripled over last year to $442 million, while operating income of 200 million improved $262 million.

We expanded our first quarter operating margin by 820 basis points to 6.2% and over the last 12 months generated a return on invested capital of 15.2%. The continued implementation of our fleet initiative and capital programs is on target and we're making progress on delivering on a permanently lower cost structure while profitably growing our business especially our international routes.

Before turning the call to Mike I would like to thank Air Canada's 27,000 employees for their hard work, earning the loyalty of our customers as we continue to implement our commercial strategy focused on international growth with a renewed fleet and onboard product. I'll now turn the call over the Mike for a discussion of our financial performance.

Thank you Calin and good morning to everyone. We generated record revenues for first quarter of 3.2 billion, an increase of 6% versus last year, driven by strong demand, the leveraging of our comparative product and services and by an increase in connecting traffic as we continue to expand our international network.

On 9.3% higher capacity passenger revenues increased a $178 million or 6.9% on traffic growth of 10.9% partly offset by a 2.4% [lower] yield. On a stage length adjusted basis system yield declined 2.6% year-over-year.

PRASM decreased 2.7%, as a 1.2% point improvement in passenger load factor was partly offset by the lower yield. All these metrics were at or close to expected internal levels.

As discussed in prior calls modest yield declines are anticipated in natural consequence of the successful implementation of Air Canada's business strategy to profitably increase long haul international and leisure flying. Although yields are largely impacted by a longer average stage length and increase in number of leisure travelers, the incremental capacity is at a much lower unit cost resulting in improved margins and profitability.

Overall the demand environment remains stable, despite the lower value of the Canadian dollar, although the Canadian dollar weakened against the U.S. dollar in the first quarter.

The Canadian dollar has remained relatively stable against other foreign currencies thus we continue to see opportunities to increase international point of sale revenues particularly from China, Hong Kong, and the UK. In addition the stronger U.S.

dollar is generating addition demand from U.S. point of sale.

We continue to make meaningful progress in growing international to international traffic flows through our major Canadian hubs with a 25% increase in [indiscernible] traffic in the first quarter of 2015 when compared to 2014. On the ancillary revenue front we continue to significantly increase this revenue source as ancillary revenue per passenger increased 15% over last year.

Leading the way were higher revenues from bag fees, change and cancellation fees, seat selection and preferred seating as well as paid upgrades. Turing to capacity while we're benefiting from significantly lower fuel prices although partially offset by a weaker Canadian dollar.

We're not planning on making any major adjustments to our 2015 capacity plans. We continue to focus on profitable international expansion and remained very disciplined in our approach to capacity management.

We actively monitor the demand environment need to the markets we serve and we continue to maintain a flexibility to adjust and replay capacity very quickly to react to market changes. While we're seeing lower oil prices impacting demand and yield on certain oil and gas related markets, we have identified other sources of demand to compensate for this decline.

We've also made some adjustments to capacity to better match the demand environment in that sector and we will further redeploy capacity if warranted. For the second quarter, we plan to increase system ASM capacity by 8.75% to 9.75% when compared to the same quarter in 2014 and we continue to expect full year 2015 system ASM capacity to increase by 9% to 10%, primarily driven by the continued lower cost growth of [rouge] and by profitably expanding international services to the introduction of additional Boeing 787 aircraft at mainline.

Our projected domestic capacity growth of 3.5% to 4.5% in 2015 is mainly driven by our 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 ensuring that we have a necessary capacity to match the much stronger demand during the peaks summer months. We now have eight Boeing 787 aircrafts in our mainline fleet and the performance of this aircraft from an operational, customer experience and unit cost perspective is fully meeting our expectations.

On the cost side, for the first quarter on the capacity increase of 9.3%, operating expenses decreased 78 million or 2% in the first quarter of 2014. This decline in operating expenses reflected the impact of lower jet fuel prices largely offset by the impact of the weaker Canadian dollar and capacity related cost increases.

The weaker Canadian dollar on U.S. denominated increased operating expenses by $135 million in the quarter.

This current impact was partly offset by a favorable current impact of 38 million on passenger revenues and realized currency derivative gains of $51 million. In the first quarter adjusted CASM decreased 1.8% than the same quarter in '14, better than the 0.5% to 1.5% increase projected in our February 11th news release and this was largely due to; one, lower than anticipated aircraft maintenance expense which was largely driven by the acceleration of aircraft lease extensions in certain favorable lease return condition provision adjustments.

This reduced maintenance expenses by 22 million in the first quarter of 2015. Two, The impact of the new Jazz CPA, effective January 1, 2015, whereby certain costs, such as ground handling services performed by Air Canada, are no longer recovered from Jazz and passed through to Air Canada under the Jazz CPA, this reduces both other revenues and capacity purchase fees although this change does favorably impact to adjusted CASM and guidance, it does not affect operating income or net income.

And third, lower than expected employee benefits expense due to lower benefit payments and improved plan experience. Turning to fuel hedging, our fuel hedging strategy remains consistent in its usage of call options which is a from insurance that should protected us against short-term prices spikes but allows us to benefit 100% from a declining fuel price.

Our target hedge ratio was approximately 40% of our planned fuel consumption typically 3 to 9 months in advance of any given quarter. As of March 31, 2015, approximately 28% is [indiscernible] purchased of jet fuel for the remainder of 2015 are hedged at an average WTI equivalent capped price of $72 per barrel; however, given the structure we have in placed should energy prices rise above $94 per barrel, the effective WTI equivalent capped price would increase to an average of $83 per barrel.

Our current forecast assumes an average jet fuel price per liter of C$0.69 for the second quarter and C$0.70 per liter for the full-year 2015. With respect to foreign exchange risk management, we have recently increased our target coverage from 60% to 65%.

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

dollar cash reserves of U.S. 2.2 billion and U.S.

711 million receptively. Currency derivatives enable us to purchase US dollars at a weighted average price of C$1.1784.

Now turning to our cost guidance, we expect adjusted CASM to increase by 0.25% to 1.25% in the second quarter of 2015, and to decrease by 1.5% to 2.5% in the full year 2015 when compared to the same periods in '14. Our adjusted CASM projections assume the Canadian dollar will trade on average, at C$1.22 per U.S.

dollar for the second quarter and for the full year 2015. If the value of the Canadian dollar were at 2014 levels, projected adjusted CASM for the second quarter and the full year would reflect decreases of 1.5% to 2.5% and of 4% to 5% respectively when compared to the same periods in 2014.

Now moving on to the balance sheet, we entered the quarter with unrestricted liquidity of 3.1 billion well above our target minimum liquidity level of 1.7 billion. We generated free cash flow of 383 million, $349 million higher than the first quarter [2014].

The stronger cash flows from operating activities more than offsetting the impact of our investment in two Boeing 787 aircraft delivered in the quarter. At March 31, 2015 adjusted net debt was 5.2 billion, an increase of 58 million from December 31, 2014.

As higher long term debt and finance lease balances were largely offset by higher cash and short term investments. At March 31, 2015 our adjusted net debt to 12 month trailing EBITDAR ratio improved to 2.6, well within our objective of maintaining the ratio of below 3.5.

Decline in fuel prices are providing us with opportunities to further strengthen our [indiscernible]. For the 12 month ended March 31, 2015 we generated a return on invested capital of 15.2%.

This was 430 basis points higher than at the same time last year and 420 basis points above our weighted average cost to capital. With respect to the fleet we recently signed an agreement with Boeing which substitutes seven Boeing 787 8-series with seven 9-series as this model better suits Air Canada's long term international expansion plans.

This change has been reflected in our capital expenditure table which can be found in our first quarter MD&A. And with that I'll turn it now back to Calin.

Thank you, Mike. The lower average fuel prices in the quarter contributed significantly to the results.

Our strategy is not based on an assumption of permanent low fuel prices. Low fuel prices are a welcome tailwind but history has shown how fickle oil pricing can be, so we remain intently focused on the execution of the strategy that has brought us this far.

We had a number of important achievements in the quarter that further our goals, on the cost side we concluded and amended an extended capacity purchase agreement with Chorus Aviation which we expect will result in approximately $550 million in financial value over the next six years as compares to the previous CPA with Jazz. We closed a private offering of over U.S.

$1 billion in enhanced equipment [fund] certificates and three transfers of certificates with a combined weighted interest rate of 3.8% mainly to finance nine new Boeing 787-900 aircraft. On the customer engagement front we remain the leading airline in customer loyalty according Brand Key's Customer Loyalty Index.

For the 2015 index New York based Brand Key surveyed more than 36,000 US and Canadian consumers in 64 categories to measure the degree of loyalty that consumers exhibit towards their favorite brands. In April we concluded a new collective agreement with Teamsters representing our US based [indiscernible] to be in effect until 2019.

This follows the conclusion of a new agreement with Unite representing our UK based employees also in effect until 2019. The pace and implementation of our new revenue management system is progressing as planned.

Given the number of connecting passengers Air Canada serves, our growth and our pursuit of new markets, this system which optimizes on the basis of a passenger's full trip itinerary and point of sale rather than on an individual flight leg will allow us to better optimize passenger flows across the network. We continue to estimate that the new system to be fully implemented by the end of the second quarter will deliver annual incremental revenues in excess of $100 million.

Competition is aggressive in all markets and in particular while we expect our main domestic competitor we’ll continue to emulate what we do well. Air Canada was the preferred airline of 83% of Canadian frequent business travelers surveyed for 2014 and this percentage has continued increasing materially over the last several years.

We will work hard to make sure that this remains the case and even improve that advantage. As we have often said we see our best revenue opportunities in the international market and so global expansion is our prime focus with 90% of our capacity growth in 2015 in international markets.

Earlier in May we launched our new seasonal Air Canada Rouge service between Vancouver and Osaka, the only non-stop service between Canada and Japan's second largest city. Next month we're starting year around mainline service to Amsterdam and Air Canada Rouge service from Montreal to Venice and Mexico City.

This fall Dubai and Delhi will be added to our mainline network from Toronto. As of this summer we'll have increased our system wide international capacity measured by seats by almost 50% since 2009.

Among the new international destinations we've added to our mainline in Air Canada Rouge networks over that time, our Edinburg, Manchester, Copenhagen, Brussels, Lisbon, Madrid Barcelona, Geneva, Venice, Milan, Athens, Istanbul, Rio de Janeiro, Panama City and Tokyo Haneda. We've been transforming our business through Rouge, through our high density 777, through our 787 so that we can profitably expand our business even in the traditionally most challenging quarters.

And with this growth expanded margins, adjusted net income and return on invested capital became our key focus rather than RASM. Looking forward to the balance of the year while fuel prices remain volatile, in 2015 we expect to continue to expand margins, continue to increase adjusted net income, strengthen our balance sheet and create value for shareholders.

We also expect to set a new record for second quarter operating income this year however year-over-year improvements will likely be modest when compared to the first quarter improvement we’ve just reported. This is due to a particularly strong revenue performance in the second quarter of last year and higher projected maintenance expense.

The absence of favorable tax related provisions adjustments of 41 million recorded in the second quarter of 2014 as well as higher relative fuel prices in the second quarter versus the first quarter of 2015. As I said earlier, reliance on low fuel to drive profitability is not part of our plan; our plan is based on delivering on a permanently lower cost structure while growing our profitable businesses to enhance shareholder value.

We're pleased with what we've achieved in the first quarter and look forward to continuing that progress through 2015. And with that I'd like to thank you all joining us on this call and now open it up for questions.

Just on the Jazz CPA changes, as you've stated in the MD&A that certain activities performed by you guys will be taken out of both costs and other revenues, so can you please quantify the impact on other revenue in the first quarter and possibly for the full year?

Sure, it's Mike. For the first quarter it was approximately a $20 million change and for the year it going to be approximately $60 million to $80 million.

60 to 80 okay thank you. And then what's your view on the margin outlook, you said obviously -- Calin mentioned that you're not relying on the fuel tailwind to kind of improve the margin, so what are the incremental tools that you're considering to offset potential headwind because fuel curve looks like it's shifting up recently and it could be a headwind potentially next year?

So exactly, when we talk about cost structure permanently improving it's all of the driver that we've talked about so much over the last several years and it starts with the lower seat cost from the incremental seats we've added on our Rouge product, the high density 777, on the high density 777 we've basically increased the number of seats by about 100 on these airplanes. And so when you look at -- a lot of that expectation comes from the additional seats that have been added then of course the 787 itself is a much more efficient aircraft, so sure some of the missions that we've preciously served with the older aircraft, we do get that benefit from the 787.

The new revenue management system as we estimated that is an incremental $100 million per annum and there are series of very specific cost drives initiatives that have been undertaken in the operations branches that also have the objective of reducing our CASM X fuel. So I'd say these four drivers tend to be the main things, we've also concluded some favorable agreements with respect to adding capacity in Toronto with the GTAA as you know that also provides some additional lift.

So the series of initiatives these are same initiatives we've been talking about except what you've seen in this first quarter is that we hit -- we started hitting our stride with respect to being able to achieve on some of these initiatives of course other than fuel.

So just on that, I understand obviously you've been talking about these drivers for some time and these are obviously playing out very well, but my real question is like if fuel becomes a big headwind going forward, is there anything incremental that you see that you anticipate you could do kind of to offset that headwind? I don't know perhaps on the fuel surcharge side or through other measures maybe ancillary revenue, the [WiFi] and all those things -- are you considering all those options?

So first of all, all of those drivers that you just mentioned are things that are part of our business plan going forward with our without fuel headwind, I mean there is no question that we've already indicated that on the baggage fee on somebody's ancillary charges that we think that these are important drivers of the business model and they have been accepted broadly in the U.S. and in the other parts of the world as well and so we certainly expect ancillary revenues to continue to be a key part of our business strategy, as far as fuel surcharges and the lack of ever fuel to change and we've always been careful at ensuring that the fuel surcharges are inserted in a timely basis to help us recover any major shift.

However what has been achieved here and this is the part that gives us enormous flexibility is that we now have the flexibility of deploying aircraft that have a materially lower cost structure depending on what has happened in the marketplace. So if we have an opportunity to deploy more to leisure markets, if there's been a slowdown in business for whatever reason we can now do that where we were not able to do that before, we had Rouge, if we feel that there's a market that has a high component of what may referred to as visiting friends and relatives market, well we now how high density product in mainline that could be deployed.

So with these drivers it gives us what we call flex capacity that can be deployed as needed and when needed, so we’re much more confident that the transformation that we’ve made positions us well for a great fuel environment or for a poor fuel environment.

Okay that's very good color Calin, thanks. And then Mike, just a final one on pension, when do you anticipate forming a decision on opting out?

Like if we assume you opt out this summer, will it reduce cash contribution by $110 million in 2015 or will that be in 2016 and would you put that cash toward deleveraging or consider potentially buyback or dividends.

We need to make a decision before the end of June, so in about a month and a half, to take advantage of about a $110 million cash benefit for 2015. So if we opt out as is commonly referred to by the end of June this year it is retroactive to the start of the year and so our payment for the solvency payments for the pension plans would be $91 million and roughly $90 million in 2015 versus the $200 million that we had committed to under the agreement with the Federal Government, so saving of a $110 million.

And to the second part of your question you know as we make the, as we go through the analysis of making that decisions on the opt out, certainly our first priority is deleveraging the balance sheet but we will explore other opportunities as well.

Okay, thank you Mike, thanks, very good quarter guys, thank you.

Just had a couple of questions on some specific markets, I guess maybe firstly on the Pacific market, you know the RASM there was down 7 plus percent, obviously a competitive market. Could you maybe just describe a little bit more what's going on there and what you see as we head into the busy summer season?

Sure, hi it's Ben. Most of the fuel surcharges in the markets that we serve on the Pacific are governed by the specific jurisdiction government that's in charge, so we don't have as much flexibility as we do say to Europe or elsewhere, so with the fuel decrease the price of fuel decrease a lot of these jurisdictions put in lower surcharges -- fuel surcharge levels, so that's where you see the bulk of the yield pressure.

Business cabins were as expected in terms of demand and yield where we saw most of the pressure was on the economy cabin. Demand was okay, there is significantly more capacity in the market but we're seeing some of that start to balance out through the end of the second half of this year.

Okay.

We had the added benefit on the Atlantic, being able to hold prices higher for longer than we did in the Pacific.

Okay, and maybe just second question on the trans-border market, I think we've seen some, the U.S. player there may be pulling some capacity I think your partner United actually announced they're going to pull back their trans-border capacity.

I'm just wondering what impact that has on Air Canada? I mean if United's pulling back capacity that means you -- maybe you have an opportunity to have more passengers on your aircraft and does that make a difference for you economically?

If you were seeing reductions from all the U.S. carriers that serve Canada, you know with the Canadian dollar being relatively weaker to the US currency the Canadian market is not as attractive to U.S.

carriers. The opposite is actually in place for us where point of sale U.S.

revenue is now more attractive so we have a double benefit under this scenario.

Okay but does it necessarily lead to maybe more traffic coming on to your aircraft especially in the case of United bringing down its capacity?

With all of them so, yes United and also the other carriers, some of the carriers have actually exited markets so we now may be the only choice, or the better choice and on parallel routes where we were flying against United or with United when they were flying in partnership with us does up additional revenue streams that weren't available to us in the past.

Okay, very good. Thanks very much.

Good morning, I want to say first congratulation on a very strong start this year, you know Calin, you've been reporting strong results and doing what you said you will go for which is to expand margin over the past few quarters for that matter but valuation hasn't really been responding as much specially more recently and we sense certain inventors or concern that maybe the competitive landscape is changing for the worse here with so much capacity coming to the market both from you and your competitor in Canada, and the demand valuables are a little bit less certain I guess and maybe there are concerns of the lower fuel cost encouraged the industry to lose some price discipline. I know you've touched base a little bit before on what your priorities are, but how do you think about the competitive landscape now say versus couple of years ago before we saw the fuel decline and this capacity come on board?

So this what I think you make a couple of good points there Fadi, first of all thank you for your good remarks on our margin expansion, that as you know indeed one of your key drivers and very pleased to have seen the progress we've made in that area. When I look at what our valuation metric ought to be, I guess first of all I take some comfort and pleasure in having seen shareholders do well over the last two years as you know 2013 we were the top stock on the TSX Index and then last year 60% increment on top of that, so I think probably over two years it’s probably something like 400% or 500% up, so the idea [indiscernible] and then since 2009, 800% up.

So while we would like to have valuations that are closer to our U.S. comparables, I am pleased that seeing the massive progress and the share price over the last several years that recognizes the transformation that is occurring.

Is there or is there not some level of valuation differentials between Canada and United, States obviously it's up to the market to determine that. We have had a tremendous amount of U.S.

interest in our stock over the last while and I think we'll continue to have that. I don't ascribe as a valuation differential if there is one to the capacity strategies and indeed as I've said and this is something that I've learned a long time ago, you run your business and transform your business in the way that make sense for your business and if it's appropriate valuation modifiers that are important will come to influence the stock price overtime.

So we managed to ROIC, we manage to improve margins, we manage to adjusted net income and we will continue to do that in that fashion and that part of that does mean that we will growth into our cost structure. Someone used that expression.

We're growing into a much more powerful company that has international breadth. Our domestic capacity increase has been de minimis in relation to our domestic competitor and we expect that to continue to be the case.

Okay in this first quarter you've improved margin even on the ex-fuel basis, do you sort of expect this sort of to be the case for this year as well, based on where the fuel is right now and the demand environment that you see?

That is certain without making any forecast because as you know we don't forecast earnings, certainly that is our expectation and that is our business plan.

Okay thanks for that but maybe one last question, Mike, if there is an opportunity to repay debt with the cash that you on hand?

Yes, we do Fadi and we're looking at that opportunity as we speak.

You've laid out a lot of parts of your strategic goal plans over the past few years and you're executing on them well, when you look at your loyalty plan through this process, how do you see that evolving and maybe specifically how you relationship with EMEA evolves or how you like it to evolve over the next call with 4 to 5 years here to the end of contract?

So our relationship with EMEA and Aeroplan is very strong, it's very-very good relationship that has created lots of opportunity for them and given us specially in some more challenging times knowledge that we have a large shape partners that is acquiring certain amount of capacity on our Aeroplan, so it's a very good relationship and one that we value very much. Obviously as the universe continues to unfold, we represent the Air Canada shareholders and we'll continue to take what is the appropriate course of action, but right now there is nothing underway that I could report on.

My expectation is that we will continue to improve on the program as we did last year. There were enhancements to the program that contributed to benefit us and them at the same time really true win-win and so we'll continue to look for those sorts of opportunities, but as of right now we have no -- nothing we can share with you beyond what I've just said.

Okay that's helpful and moving to the couple of housekeeping questions here, just it looks like the revised Jazz CPA is providing a little bit of boost to your adjusted CASM guidance and if I recall correctly I think you had this agreement in place when you issued your 2015 guidance back in February, just wondering, were there any changes over the past months as you looked at those contract more closely, or is it just an accrual of some of the savings you would anticipate earlier in the year, I'm just trying to get of sense of if you're viewing this contract differently than you may have back in February.

Kevin, its Mike. Good question, you're absolutely right, we had the economic terms solidified at [Jan 1], but the second component was how to account for it and so our accounting leadership or finance leadership looked at other ways of accounting for the activity between two companies and we decided to align ourselves more with U.S.

Airlines, so that accounting change basically drove a little bit of benefit from an adjusted CASM perspective for the quarter and for the year but again as we reiterate it does not affect the operating income line.

Thank you and then just last one from me. Good color on the impact of the stage length on your yield decline.

Are you able to provide any granularity on the impact of mix on your yields in the first quarter?

We don't think so Kevin, it's difficult for us to within a certain factor error determine how much our leisure, what growth was leisure, and we have said majority of our growth is leisure, our business traffic remains strong, but certainly I think our [indiscernible] account was up over 9% in the quarter, the majority of that was in leisure, dominated.

Again congrats on a very good first quarter.

Thank you, Kevin.

I guess my first question is on fares and how the competitive pressures evolved by geographic segment, perhaps Ben is the best one for this, but [WestJet] indicated on their call that you'd attempted a fare increase in the quarter which they did not respond with and as a result the fare increase didn't go through domestically and I'm just curious what are you seeing more, is that the same kind of pressure internationally and certainly WestJet indicated that pressure was being felt industry wide and that is North American industry wide. Are you feeling that same type of pressure -- to a reason why it would be different?

I mean it hasn't really changed for us, we view pricing and we always have as a function of supply and demand, you know we've been in business a very long time, we have an amazing revenue management team, we been through high fuel price, low fuel price, good economic times, bad economic times, all different markets, we haven’t changed our strategies as Calin said we are totally focused on margin expansion and improved ROIC. Different markets, different times, we have different demand reaction.

We are, as you've seen over the last few years transforming our product and our model to ensure that we have the best value proposition to as many market segments where we can be profitable as possible. So you'll see we're renovating our business cabins on all our 777s to match the 787.

We've introduced international [indiscernible] our key trans-continental market. We have a preferred seat brand product now in place on all of our aircraft, we're improving the narrow body Rouge business class product to better match what customers are expecting, so we don't view our product offering exactly the same as all of our competitors, we have it specifically designed to maximize margin, but back to my first statement you know, we've always viewed pricing basically as a function of supply and demand and we try to set our products out to get the possible value out of the market.

And setting a product to achieve that value through better pricing is it, just asking a little differently, is it easier to achieve that rate increase in the international markets than the domestic markets for you?

No, I think look, in the domestic markets we have a very powerful product, we have the best network, the highest number of flights, we have premium products that nobody else has, we have a great frequent flyer program, we’ve got great corporate contracts, and we continue to see very strong consumer acceptance of what we have on offer. We've always had tough competition; we don't expect that to change.

I guess where I'm going is that, I don't question the product I'm just worried about how much people are willing to pay for it if your competitors are keeping rates down and keeping fares down, regardless of your product you have a better product but if you can't capture the benefit from it through rate increases than you're not getting the benefit of that superior product I guess.

Look I mean there's many-many different types of consumers in Canada and the U.S. and international markets and we're trying to transform our business that we can profitably carry the right mix for our model to reach our objective.

So by having the right balance of business customers, leisure customers [indiscernible] on the bottom line increased, that's really what we're focused on. And when you look at what we have on offer, I mean all the different markets that we serve, it's hard to find exact comparable.

One stat, one stat that I think you can look at is, you back to last decade and through thick or thin we've managed to achieve the highest PRASM of any carrier in North America.

Okay on the demand side as you mentioned the yield is a function of the demand and supply, I found it interesting that you've noted perhaps you can talk a little bit to your forward curve but so your forward booking, but you noted particular strength in Caribbean which is exactly where WestJet was saying that there is weakness and I just wondering if you could explain why the difference there on that, you went out your way to highlight that on this particular strength and that was interesting, so perhaps in general if you could talk about your forward bookings and in particular about the Caribbean market where it sounds like your competitors are seeing a little bit less of demand or overcapacity perhaps?

I think what I hope the markets start to notice is as we transform the business; there are areas in the marketplace that we’re attractive or we weren't able to make money in the past. With our revised and enhanced model, with Rouge, with our different cost structures now at regional and at mainline, we can access pockets of demand all over the place in particular the leisure markets that were not attracted to us in the past.

So that obviously affects all of our competitors that may not have had to deal with us in those areas in the past.

So that makes sense. And you're indicating steady capacity growth with your full year guidance and when you take that demand environment Ben that you just mentioned, I look back and you've been bringing on good capacity and actually matching capacity with demand in fact traffic coming in a bit above capacity, is there a period now as you lap those traffic increases but you continue the fairly high single digit capacity increases that while still enhancing merger your load factors do start to come down at its more difficult to match that traffic with your capacity or is it now looking at your forward curve, do you still see the ability here to match traffic with your capacity?

We don't -- load factor is obviously not our number one concern, we like to optimize it that not at the expense or margin expansion, so if we can exceed it's, great, I don't lose sleep if we are one or two points down as longer as hitting the rest of our metric, but with our airline that is now well on our way to a major transformation, we see all kinds of opportunities that weren't available to us in the past and as Calin mentioned in particular international, as also in the Caribbean, these are big-big markets that Canadian want to fly too and foreigners want to come into Canada internationally that we were not best equipped from a cost perspective or a product perspective to participate in, in a profitable way. So we get very excited when we look at all of the opportunity ahead of us and we see very strong demand that we could capture a fair share at a profitable level.

Just looking to business class cabin and the revenue contribution declined relative to the economy class cabin give its lower revenue growth in the quarter, are there particular regions that are driving that dynamic? And do you see any pick up in the business class cabin growth as the year progresses?

Hi, it's Ben again. As both Calin and Mike mentioned specially in Q1, the growth is disproportionately in the economy cabin, we added more seats in that part of the aircraft.

We did not on proportionate basis added as many business class seats, so buy design that was expected and as we go forward that balance is also in place through the end of the year. So we do expect international business class growth as well as North America business class growth to grow but not at the same rate as what we hope to achieve in the economy cabin.

Okay so I guess I understand by looking forward it should continue to grow below the economy class cabin wondering if just itself rowed to the 1.2% revenue growth in the first quarter, if for seasonal reasons or otherwise that, that growth rate should pick up. I guess what I am trying to get at here is it was pretty spectacular quarter given there wasn't a lot of growth in the higher margin business class cabin.

I can only imagine what happens when that starts or assuming that picks up at some point?

Yes and our [indiscernible] strategy to penetrate U.S. originating in U.S.

destined business driving both to Asia and Europe via Canada, I think that we're starting to -- as you've heard from the numbers that's going up; already went up in Q1, 25%. We have a very-very strong premium focus for that traffic and I think we already have a very good share of Canada originating in destined traffic, and the U.S.

market as you know very-very big, we're looking for a very small portion of that and that should fund the bulk of our growth going forward on the business cabin.

Okay and then second question looking at the return on invested capital, you're operating pretty comfortably now above the targeted return on invested capital, is there anything wrong or should the market takes this to mean that the potential for further improvement at least while you're in this period of high capacity growth that further upside is more limited at this point or can you continue to kind of push meaningful increases in that metric.

Well, as I said, Tim its Calin here. Return on invested capital is one of our key drivers, so we will continue to look for opportunities to push that and what we intend to do is we have this other Investor Day coming up, we'll review our new targets on that day, but certainly return on invested capital, this is not the end of the story just yet.

So just turning to a couple of different questions, in breaking out the regional cost what was sort of the rationale behind that, is it just something that you think that'll evolve over time or that you just wanted to have more disclosure for?

I'm sorry Chris.

Sorry, in breaking the regional cost separately and sort of segmenting it from all the buckets, what was sort of the rationale behind that?

I think alignment with U.S. Airlines, it's best practices, again like I said earlier our senior finance leadership looked at what best practices around the world for disclosing regional expenses and as you know we have several strong partnerships and so we decided to align ourselves with the best practice that we believe came out of the United States and that's why we changed in Q1 and made historical figures comparable.

And you know is it fair to think that we should start seeing kind of year-over-year the impact maybe more dramatic as we move into further years?

We've told the market what we expect in value from the Jazz contract that we briefly negotiated and so I think it'll be easier for the market now to see that, on that one line versus being spread along many lines.

Okay great, you mentioned a little bit on lease renewals but I think you also may have started some renegotiations on our term [loan B], if we're thinking out the next sort of year or so, you mentioned you may have some cash available for debt repayment. What opportunities do you have to refinance either existing debt or leases and you know thoughts on what potential interest savings may be out there?

We're going through that analysis right now and again the average cost for our debt I think is below 6% right now so it's fairly attractive, there are some instruments above 6% and those are the ones that we'll look at first, I think we have, we officially have two objectives here, we want to free up unencumbered assets and so by paying down debt, secured debt and releasing that security it allows us to build our unencumbered asset space. A couple of years ago we had virtually nothing in unencumbered assets and today we have close to a billion dollars.

And that provides a safety net basically from a risk management perspective and then obviously we want to keep our leverage ratio well below 3.5 to 1 and as you can see the primary objective as we go forward is deleveraging.

Okay great, and then this is kind of more of a semantic question but when you think about -- you mentioned the 787s that you've sort of moved to the 900s. I guess just in the delivery schedule I guess with the narrow bodies with the 737 max and so I guess you'll start with the 800s, just based on what I guess Boeing's going to go with, but is any thoughts on kind of what class of the narrow body that you're looking at right now and would you be bringing in a mix of different sizes or would it be basically 800 maybe the 900 if they get it going?

Hi, it's Ben. The initial order was for a split between both the 737-8 max and -9 max, we do have substitution rights between the two and as with the 787s we'll evolve that analysis as we are close to delivery date so nothing new to look forward on that, in the case of the 787 the -9 as we studied it more and then analyzed the economics and the payload capacity of that airplane, we've made some adjustments to the order of the first eight of the -8 variant and then aircraft nine will be starting out with -9 and the remainder of the 29 aircraft will come in the -9 format and that has been publicized already.

Okay great, thanks guys.

First question is on the Q1 adjusted CASM, on the aircraft maintenance should we treat that or think of that as a kind of one off benefit?

David, it's Mike, I don't think so, as we transform our fleet, extend leases under Rouge, transfer planes, we're seeing this type of adjustment every couple of quarters and so I think it's more a reflection of our changing fleet plans than our direction.

Okay, so that's kind of a sustainable thing, may not happen every quarter, but basically the maintenance cost should be lower on an ongoing basis?

I think that's a fair statement.

Okay, any suggestion as to the size, like if we took the 22 million and did it twice a year that'd be a ballpark idea?

I think that what Mike is saying is accurate, as we look at our fleet plans, these things are very dynamic conclusions, it’s not as if we enter into a computer exactly the way the fleet will evolve over the next several years and it spits out a maintenance number, so what's going on is that we’ve kept some of the 767 longer for example and that led to a different outcome than we would have estimated a few years ago when we were looking at 767 situation, in some cases we were expecting to spend money of return conditions, now the return conditions have changed or been deferred or been negotiated. So as our plan has led to success that has led to some strict decisions both for our existing airplanes and the new ones we're bringing in and I think as Mike said, it will be reasonable to expect that we'll have, whether it relates to engine maintenance, different decisions with respect to engine maintenance or airframe maintenance.

Thus we're not going to give a forecast as to what we expect the future savings to be but you can from your perspective using numbers along the lines of the first quarter is not a bad property.

Okay very good, and then just on the same thing on the employee benefits, you have benefited, is that one-off of these sustainable things of benefit?

David, its Mike. The majority of that is sustainable.

I would put that in your trend analysis.

Okay perfect and then on the guidance, it sounds like the majority of the improvement on the adjusted CASM guidance is related to the CPA changes and if I interpret what you said correctly that benefit is being offset by revenue hit is that correct?

That is correct.

Okay so we’re really no different than before then, it sounds like on the guidance?

I think there is a small improvement regarding benefits but the majority of it is the Jazz CPA.

That's great, very helpful. And the last question I had, a lot of the U.S.

airlines I guess yesterday I think it was American and I think United also are pulling back on particularly Atlanta, it seem and they're starting to [petition] U.S. dollar, I just wondering if you comment on what you're seeing whether there are differences maybe the U.S.

dollar is one of them, that could explain that's why you might do somewhat differently than they would?

Hi, David, it's Ben. We've always managed the Atlantic quite -- very-very closely and tightly.

We're making some tweaks as we do every year to our Q4 ’15 and Q1 ’16, some of them loaded in the last couple of weeks so we have a few more to come that we expect base on our current forecast to continue with the plan as we're designed. So you will see a couple of frequency changes and maybe some slight tweak, but nothing major.

I think some of the U.S. carriers have experienced and we didn't; was one with the unusual winds this winter airlines flying 757 over the Atlantic had unusually large number [tech stops] on the Westbound which made some of these services unviable, so airlines that didn’t have other aircraft switched, decided to drop some of those services and you also may have noticed in the last couple of weeks a huge number of frequency increase by the three gulf carries in the U.S.

which will definitely put some pressure on the those market.

And also David what you were touching on is accurate. The U.S.

dollar well obviously it's a major negative for us on the cost side. It does create some interesting opportunities for us when you look trans-border opportunities and indeed some international opportunities.

I think that is a factor that perhaps has been somewhat underestimated when you look at the way that universe unfolds. I think U.S.

carriers might be feeling some of that now.

Okay just the clarification on the Gulf carrier situation than please, your view there is that there is a lot of capacity coming into the U.S. that could be a problem that they're just going to think that you're not and then with Canada I guess the situation can't really above that way given they have limited access to market, is that fair?

Yes, we have plenty of competition across the Atlantic. This is just -- this is something we've never seen before.

The number of new routes or increase in frequency is unprecedented. I mean just look at the last month the number of new announcements by those three carriers; we've never seen that before.

Okay but you don't seem to think that would impact you?

We'll get some domino effect coming into account. But it’s nothing compared to what the U.S.

market is going to experience.

Thank you, Elena. As Calin mentioned earlier, we'll be hosting an Inventor Day in Toronto on June 2nd.

Attendance is limited to investors, analytics; however the media and other interested parties are welcome to this event by live audio webcast. And with that, I would like thank you all for joining us on the call today.