Air Canada

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

Cameron Doerksen - National Bank Financial Helane Becker - Cowen and Company Walter Spracklin - RBC Konark Gupta - Macquarie Chris Murray - AltaCorp Capital Kevin Chiang - CIBC David Tyerman - Canaccord Genuity

Thank you, Elena, 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 second 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 EBITDAR margin, 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 second quarter press release and MD&A for important assumptions and cautionary statements relating 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, and good morning everyone and thank you for joining us on our call today. This morning I'm extremely pleased to report the best second quarter financial performance in Air Canada's history from an EBITDAR, operating income, and adjusted net income perspective.

This is our fifth consecutive record breaking quarter for EBITDAR. A strong quarter is not the result of only lower fuel prices.

These results were achieved due to a focused execution of the business plan we outlined to the investor community in detail at our June 2015 Investor Day. With our growth in the quarter, we successfully increased passenger revenue by 3.9%, expanded margins, significantly increased adjusted net income and EBITDAR, and continued to improve our return on invested capital.

We generated record second quarter adjusted net income of $250 million or $0.85 per diluted share in the quarter. This compares to adjusted net income of $139 million or $0.47 per diluted share in the second quarter of 2014, an improvement of $111 million or approximately 80%.

EBITDAR amounted to $591 million, compared to EBITDAR of $456 million in the same quarter last year, an increase of $135 million or approximately 30% year-over-year. The airline recorded an EBITDAR margin of 17.3%, an improvement of 3.5 percentage points versus last year.

On a GAAP basis, we reported record second quarter operating income of $323 million, an improvement of $78 million or approximately 32% from the second quarter of 2014. An operating margin of 9.5% reflected an improvement of 2.1 percentage points from the same quarter in 2014.

We again expect to deliver record results in the third quarter, with EBITDAR margin expansion versus prior year higher than the 350 basis point expansion recorded in the second quarter. Demand continues to be robust moving into traditionally our most important quarter, given the travel demands and patterns of our North American customers.

Our capacity additions for the year, which are largely in our international markets, are important contributors to our increased profits and remain consistent with our plan which was established in a higher fuel price environment. Our plan is not dependant or conditional on fuel prices staying at the current levels; and the transformative changes we've made over the last several years provide us with the cost structure, fleet, and flexibility, to respond not only to increased competition in any of our key markets, but also to weaknesses in the Canadian dollar or a downturn in the economy.

Given the shift to international growth, we are better able to manage specific events such as the weakening of the Alberta market, if we see demand weakening, we can adjust quickly. We're building an airline for the long-term, a sustainably profitable and resilient company and a global industry leader.

Before passing it on to Mike, I'd like to thank and acknowledge the efforts of our 28,000 employees who work together to deliver an outstanding operational and financial performance this quarter. I'll now turn the call over to Mike for a discussion of our financial performance.

Thank you, Calin, and good morning to everyone. We generated operating revenues of $3.4 billion in the quarter, $109 million or 3% above last year.

On 9.3% higher capacity passenger revenues of almost $3.1 billion increased $117 million or 3.9%. Traffic growth of 8.7% in the quarter reflected traffic increases in all of Air Canada's five geographical markets.

PRASM declined 5.5% primarily on a 5% lower yield. This is consistent with the anticipated yield impact stemming from the implementation of our strategic plan.

As discussed several times in prior calls, most of our capacity growth is aimed at long haul international and leisure flying, which leads to increased average stage lengths, and a greater mix of leisure revenues versus business revenues. The incremental traffic is being flown on significant lower cost aircraft resulting in expanding financial margins.

The quarter also saw an anticipated reduction in carrier surcharges related to lower fuel prices primarily where carrier surcharges are regulated such as Japan, Hong Kong, Korea, and Brazil. The yield decline was probably offset by a positive currency impact of $61 million, and additionally, to ensure clarity, bag fees are not included in our yield and PRASM results.

Our key financial objective continues to be the expansion of our operating margins, and as Calin stated earlier, we expect our third quarter EBITDAR margin to increase by even more than the 350 basis point improvement we experienced in the second quarter. Before moving on to the operating costs, I'd like to touch on the domestic markets.

While our passenger demand was robust in the quarter including an increase in international flow traffic, we did face increased industry capacity in the domestic market which contributed somewhat to a yield decline, despite the fact that Air Canada's capacity increased only 2.6% in the quarter. Looking at the third quarter and noting that our main domestic competitor has got it to increased domestic capacity which may be temporary; we expect yields to continue to be under some pressure, although demand remains very strong.

Looking forward, we anticipate domestic capacity growth of 3% to 4% in the full-year 2015 which is a slight reduction from our previous guidance. July marked the second anniversary of Air Canada Rouge and we continue to be extremely pleased with the financial and operating performance and expect to have a strong summer season.

From a financial perspective for the first six months of 2015, Rouge margins have exceeded both plan and last year's levels. In late May, we announced a number of product upgrades to benefit Rouge customers.

The premium cabins in the Rouge Airbus 319, a fleet of 20 aircrafts have been converted from a 3x3 seating configuration with a blocked middle seat to two side by side business class seats in a 2x2 configuration, providing premium leisure customers with more space and comfort. Air Canada Rouge is also in the midst of increasing its carry-on space throughout its Airbus 319 fleet by 30% with the installation of new overhead bin doors dubbed pillow doors because of their curved shape which allow carry-on items to be stowed much more effectively.

Moving on to ancillary revenues, we continue to increase this important source of revenue in the quarter, with ancillary revenue per passenger up 18% year-over-year. This has primarily tripled to growth in bag fees and an increase in fees associated with preferred seating and seat selection.

Now, turning to capacity, we continue to be confident with our full-year 2015 projected system ASM capacity increase of 9% to 10% in line with our previous guidance as appropriate. Majority forecasted capacity increase continues to be focused on international expansion opportunities and is primarily driven by the lower cost growth of Rouge and the introduction of additional Boeing 787 aircraft in the mainline fleet in replacement of the less efficient Boeing 767 aircraft.

For the third quarter, we plan to increase system ASM capacity by 9.5% to 10.5% when compared to the same quarter in 2014. We continue to closely monitor the demand environment, and as Calin mentioned earlier, we have a flexibility to adjust and/or redeploy capacity very quickly.

In terms of our new revenue management system, we successfully completed the implementation of the new system in June, as planned, and I'm pleased to report that transition went very smoothly. Although we did anticipate issues of service fall in certain of our large projects, both technically and commercially, we're pleased with the progress to-date.

We have worked through the issues and at this point in time the critical items have been addressed. We plan to bring enhancements over the course of the following months and at present we do not foresee any major roadblocks.

We continue to expect incremental annual revenues in excess of $100 million on a run rate basis as a result of this initiative. On the cost side, operating expenses increased $31 million or 1% from the second quarter of 2014.

This increase was mainly due to one, operating cost associated with our capacity growth such as volume -- the volume of [indiscernible] fuel expense, airport and navigation fees, and sales and distribution cost; two, the unfavorable impact of a weaker Canadian dollar on foreign currencies denominated operating expenses, which increased our operating expenses by approximately $134 million in the quarter; three, impairment charges of $14 million related to the planned disposal of two Airbus A340-300 aircraft versus nothing last year in second quarter of 2014; and four, a favorable tax related provision of $23 million in the quarter versus favorable tax related provision of $41 million in the second quarter of last year. These increases were largely offset by the impact of lower fuel prices, which decreased operating expenses by $351 million in the quarter.

Please note that the impairment charges and tax related provision adjustments are excluded from adjusted net income and adjusted CASM results. Adjusted CASM increased 0.7% from same quarter 2014 in line with increased projected in our May 12, news release.

Had the U.S. and Canadian dollar exchange rates remained at 2014 levels, adjusted CASM would have decreased 1.8% year-over-year.

This percentage is more reflective of our efforts to reduce our unit cost, excluding fuel. As a large contributor to the weakening Canadian dollar has been the significant decline in the price of fuel, which is otherwise reflected in our significant CASM decrease of 7.6%.

Air Canada assumes that Canadian dollar will trade on average, the CAD1.30 per U.S. dollar in the third quarter and CAD1.27 per U.S.

dollar for the full-year. Taking together with our U.S.

dollar fuel projections, our current forecast assumes an average jet fuel price per liter of CAD0.62 for the third quarter and CAD0.64 per liter for the full-year 2015. Air Canada also assumes relatively low Canadian GDP growth for 2015.

Quickly touching on fuel hedging. We continue to hedge fuel using call options, which provide protection against short-term price spikes that allows us to benefit 100% from a declining fuel price.

Our target hedge ratio is approximately 40% of our planned fuel consumption. As of June 30, 2015, approximately 40% of our anticipated purchases of the jet fuel for the remainder of 2015 are hedged at an average WTI equivalent cap price of US$66 per barrel.

Given the structures we have in place, should energy prices rise significantly, the effective WTI equivalent cap price would increase to an average of US$77 per barrel. With respect to Foreign Exchange Risk Management, we've increased our target coverage from 65% to 70%.

At June 30, we had U.S. dollar currency derivates and U.S.

dollar cash reserves of US$2.1 billion and US$737 million respectively. The currency derivatives enable us to purchase U.S.

dollars at a weighted average price of CAD1.1980. From a sensitivity perspective, given the significant decrease in the price of jet fuel, Air Canada's net exposure to the U.S.

dollar has declined. Consequently the annual pre-tax income of a one cent change in the Canadian dollar versus the U.S.

dollar has decreased from $45 million to $34 million. Now, I'll turn it over to cost of guidance.

Based on our latest cost forecast, we expect adjusted CASM to decrease by 0.5% to 1.5% in the third quarter of 2015 and to decrease by 1% to 2% in the full-year 2015 when compared to the same period last year. The value of the Canadian dollar were at 2014 levels if adjusted for adjusted CASM for third quarter and the full-year would reflect decreases of 4.5% to 5.5% and 3.75% to 4.75%, respectively when compared to the same periods in 2014.

On to the balance sheet and cash flow, we ended the quarter with unrestricted liquidity of close to $3.3 billion. Free cash flow of $299 million improved $335 million versus 2014 on higher cash flows from operating activities and lower capital expenditures.

Adjusted net debt was $4.9 billion at end of the June, a decrease of $236 million from December 31, 2014, as higher cash and short-term investment balances more than offset an increase in our long-term debt and finance lease balances. On June 30, our adjusted net debt to 12-month trailing EBITDAR ratio was 2.3 and our objective is to detain a ratio of 2.2 by 2018.

Trailing 12-month ROIC at June 30, was 16.2%, 520 basis points higher than last year and 540 basis points above our weighted average cost of capital. We are targeting ROIC of 13% to 16% during the 2015 to 2018 period.

In closing, I'm very pleased with our record second quarter performance and look forward to an even better third quarter, as we continue to successfully execute on our strategic plan. And with that, I'll turn it back to Calin.

Thank you, Mike. Our second quarter was not only financially profitable; it was also productive on other fronts.

We continue to make progress on the labor front. We successfully finalized two agreements in the quarter.

In April, we concluded an agreement, collective agreement with the International Brotherhood of Teamsters representing the airline U.S.-based unionized work force. And in June, we concluded a collective agreement with Unifor, the union representing the airline's approximately 4,000 customer service and sales agents.

Following our previous agreements reached with ACPA representing our pilots, and United representing our UK based employees, we're now well on our way towards achieving the labor stability and flexibility needed to realize the full potential of our business plan. With the ratification of these agreements, our employees are telling us that they want to work with us to achieve the same profitability.

Negotiations with QP, the union representing our flight attendants are ongoing. We also continue to expand our international reach with the launch of Rouge seasonal service between Montreal and Venice and Vancouver-Osaka and yesterday Air Canada -- and Air Canada year round service from Montreal to Mexico City and Toronto to Amsterdam.

In the quarter, we announced a code share agreement with Air China on Montreal-Beijing and subject to requisite regulatory approvals, we're planning to finalize and implement a comprehensive revenue sharing joint venture with Air China in respect of all flights between China and Canada strengthening our presence in China and Asia, one of the fastest growing air transport markets in the world. And more recently we also announced the introduction of non-stop services to Leon, France, and London Gatwick Airport, as well as Vancouver-Brisbane beginning in summer of 2016.

This international network activity was complemented by the loss of a number of North American services to Austin, Texas, and Canadian destinations including Halifax, Terrace, Nanaimo, and Comox B.C. In late July, we were very excited to take delivery of our first Boeing 787-900 series.

This new Dreamliner version will seat 298 passengers and has a range of 15,372 kilometers compared to the Boeing 787-800 series which is configured to carry 251 passengers with a range of 14,500 kilometers. The larger capacity and greater range of this aircraft will accelerate our international expansion strategy and allow us to offer more non-stop services to new international destinations.

First designated routes for the Boeing 787-9 are non-stop services from Toronto to Delhi and Toronto to Dubai later in November. In the interim, customers will have the opportunity to preview the new aircraft on select flights between Toronto and Vancouver during August and between Toronto and the cities of Munich and Milan during September and October.

We took delivery of our first Dreamliner in May 2014, and will receive a total of 29 new 787-9 Dreamliner aircraft by 2019, in addition to eight 787-8 aircraft already in service. Future deployments of the 787-9 Dreamliner will be now announced as new aircrafts enter service.

Markets seem to be punishing the North American airline industry recently. So I think it bears repeating both the rationale and the confidence we have in the business plan we outlined to many of you at our Investor Day event in June.

Nothing has changed since that time to cause us to change our strategy. Indeed, based on our margin expansion, record results, and record number of passengers carried, we remain confident we have the right plan in place for Air Canada, a resilient plan that has continued to hold dollars regardless of macroeconomic event, currency and market fluctuation, the price of oil, or the strategy adopted by other carriers.

The first phase of our transformation has more than delivered on what we set out to do. At our previous Investor Day in June 2013, we had set out achieve some very specific targets relating to CASM, ROIC, net debt, and cash flows.

Two years later at our Investor Day events held this June, we shared that we're not only on track to achieve these targets but we're well on our way to comfortably exceeding them. Taking all initiatives into account, we estimated that we should realize CASM savings excluding the impact of foreign exchange and fuel prices of 21% compared to a target of 15% by the end of 2018 when compared to 2012.

Recent fuel price drops have not factored into our CASM calculations for this purpose and we continue to run our business on the assumption that higher fuel prices will someday come back. In addition, as at the end of the second quarter of 2015, to highlight our substantial progress, unrestricted liquidity was at $3.3 billion compared to a minimum target of $1.7 billion.

ROIC was at 16.2% compared to our most recent previous target of 10% to 13%, and adjusted net debt to 12 months trailing EBITDAR was at 2.3 times compared to our most recent previous ceiling target of 3.5 times. The implementation of our fleet initiatives, capital program, liquidity target, and debt levels, remain on target and we're delivering on a permanently lower cost structure while profitably growing our business especially on international routes.

In light of this progress at our Investor Day events in June we set new, more ambitious financial target, an expanded EBITDAR annual margin of 15% to 18%, ROIC of 13% to 16% during the 2015 to 2018 period, a leverage ratio of 2.2 times measured by adjusted net debt over EBITDAR by 2018. We issued these targets with a confidence of a strategy that since the end of the first quarter in 2009 has increased the value of our shares by almost 15 times or 1,400%.

It may not be the right strategy for other carriers or the strategy preferred by some contrary thinking outlier analyst. But for Air Canada it is the right strategy and consistent with our four priorities which has driven our transformation and success to-date and has continued to be the pillar underpinning our business plan: mainly international expansion, a concerted effort to reduce cost while growing revenues, tightening customer engagement, and changing our culture to promote a more entrepreneurial spirit.

These four priorities converge toward our goal of sustained profitability and we are now well on our way to realizing this goal having reported record results for the past five quarters, the past two fiscal years. Our best ever first quarter results in our 78 year history and now the record second quarter we reported today.

Our Q2 results show that with our growth we are successfully expanding margins, increasing adjusted net income, and improving our return on invested capital, thereby creating substantial value for shareholders. We are continuing to strengthen our balance sheet with increased liquidity level, improved net cash flows, and reduced adjusted net debt, and we expect further benefits from our recent credit rating upgrade.

Most significantly, we've achieved all of our objectives restructuring our pension plans. We cannot overstate that at the execution of our strategy as we have repeatedly told you we are focused on bottom-line sustained profitability and margin expansion.

Our improving profitability is driven primarily by two priorities that I'd like to expand. Our strategy of international growth and focus on reducing costs while increasing revenues.

In doing so, I'll address the elephants in the room, our capacity growth. Air Canada's capacity growth is largely international not domestic and we continue to drive down the cost of our international capacity through various strategies.

We are nearly one-third larger internationally today than we were in 2009 and our international network has been the main driver of our profitability. As an established carrier with legacy costs, and a great global brand, to compete we need to grow internationally, offering more direct service from our Canadian hub to numerous international points, making our hub especially our global hub in Toronto a world-class hub.

We've been very clear in our approach and a key stipulation for our network planner is that each new route must contribute to profitability. That is our focus, not market share or gain.

Now, with this international growth, expanded margins, increased adjusted net income, and improved return on invested capital become our key focuses rather than RASM or chasing theoretical low factor statistics. And we fully anticipate and have planned for decreases in yield, RASM, and load factor, and increases in stage length as natural consequences of our long range plan.

We are growing into international power house capabilities and making full use of our legacy advantages. And the capacity we are adding internationally is increasingly at lower cost.

The Boeing 787 being introduced into our fleet offers a 31% unit cost savings and maintenance and fuel over the older and less efficient 767 aircraft they're replacing. These aircraft are in turn being transitioned to Rouge, which is delivering less at a unit cost of up to 30% lower than similar aircraft operated by mainline.

Investments in new aircraft is a sound investment overall. It enhances the product for our customers, saves on fuel burn, and associated emissions.

In Air Canada's fourth corporate sustainability report, tabled and approved by the Board yesterday, shows that between 1999 and 2014, Air Canada improved fleet fuel efficiency by 37% and in 2014 alone our fuel efficiency initiatives are estimated to have saved more than 11,000 tons of fuel or 35,229 tons of CO2. Rouge is proving to be a powerful tool which enables us to compete profitably against traditional leisure carriers in the Sun, European holiday, and other leisure markets.

767 aircraft we're transitioning to Rouge are operated by Rouge at a unit cost of up to 30% lower and similar aircraft operated by mainline. Rouge gives us rarely available twin capacity and flexibility between markets, between seasons, between periods of economic strength and weakness.

Our regional airlines diversification strategy is helping us maintain that lower cost discipline with carriers like Sky Regional, Air Georgian, Avis Air, continue to be lower cost operators for the category of regional aircraft they fly part of our network. But we have not realized the benefits in Q2 an additional $550 million financial value over the next five years is expected through the amended and extended capacity purchase agreement with Jazz Aviation and we're impressed with how well Jazz and its employees have embraced this new market imperative.

Cost transformation remains a focus in all areas of the company and this includes showing greater flexibility and efficiencies in our new labor contract. Our flexible fleet provides us with twin capacity to readily adjust the seasonal demand and economic impacts and new aircraft deliveries, including the 7879 aircraft coming into service which allows us to tap into new markets to further build on our Toronto Pearson global hub and strengthen our Montreal, Vancouver, Calgary hub.

One particular area of emphasis is capturing lucrative international connecting traffic. This international to international connecting traffic is driving profitability on a number of seasonal routes and will continue to be an important focus for our commercial teams.

In fact, we recently restructured and expanded our U.S. sales team to ensure we are capturing our share of that traffic as well as maximizing the benefits of our A++ joint venture with Star Partners, United, and Lufthansa.

In order to successfully participate in this international market, we've invested significantly in developing a premium product, one that has made us the only four star network carrier in North America. Product is further enhanced by the 787 fleet and we're introducing our next generation international business class and a new premium economy cabin across the Air Canada wide body fleet beginning in 2015 and reconfiguring our Boeing 777 cabin interiors.

We are making a massive commitment to having over the medium to longer-term, the right fleet, with the right fleet economics, fuel burn, configuration, range, capabilities, and customer amenities consistent with our commercial and network objectives. And despite the $9 billion of capital commitments over this exercise, in June 2015, we confidently settled leverage ratio of 2.2 times by 2018 as one of our key targets with financial community.

So in summary, the execution of this plan makes us a more resilient and flexible carrier than we were in the past. We have a premium product that continues to attract higher yield customers on both North American and international route.

We have a lower cost structure that we are driving down further. We have a flexible fleet, which provides us seasonal twin capacity and allows us to adjust quickly to changes in market demand.

In addition, our fleet mix allows us to return older aircraft at no material cost, the softening market dictate this. We've eliminated our pension deficit and significantly strengthened our balance sheet.

We have an engaged work force with a number of long-term labor contracts now achieved that provide us the stability, enhanced flexibility in competitive terms. In short, we're now in a stronger position to withstand whatever headwinds could buffet the industry without losing altitude.

So it's important to note that in any event at this time, demand remains strong and we're not sensing any softening of the market that would be a cause for concern or a reason to change for. In conclusion, we continue to be very confident that we have the right plan in place to continue delivering on our goals to make Air Canada the sustainably profitable global industry leader for the long-term.

With that, I'd like to thank all of you for joining us on the call today and we'll now take your questions.

I guess I just wanted to get some little more detail on the sixth freedom traffic growth in Q2, it's obviously your key of your strategy, and I apologize if it was in the MD&A or it was mentioned, but I didn't hear the number. But can you just comment on what the growth was in Q2?

And I wonder if you can also sort of parse for us how much of that growth you think is leisure versus business traffic.

Okay. Hi, Cameron, this is Calin.

I'll ask Ben to talk a little bit about it and so you put that number specifically in our MD&A. Yes, so we don't actually -- we can give you a sense of it, but we haven't been breaking out that number in our disclosure.

So I'll let Ben comment generally on the trends we're seeing.

Sure. We're actually quite pleased with our international-to-international growth, traffic, all front in particular point of sale of the United States.

Our main focus is on the premium end of that traffic, so the passenger numbers are when you look at other big global carriers may not be that exciting, but the revenue that we're generating is about what we'll expect in this quarter and looks like trend going forward are following on the same path.

And maybe I just can ask another question on, I guess on traffic trends. I mean one of the things seem to be is a very weak Canadian dollar here.

I'm wondering if you're seeing any impact on Canadians driving across the border to go to a U.S. border airport.

Are you seeing any of that traffic start to come back to Canada and to Air Canada specifically, I know it might be something that's kind of difficult to gauge?

Early numbers on that are actually positive for us. Definitely with the strength of the U.S.

dollar, those airports are not as attractive, and with the interest in our Rouge product and the aggressive pricing in the Canadian market making those very, very price sensitive customers look to Canada for flights they may looked to go over the border in past.

Thanks very much operator. I was just wondering if you could may be give us some more just direction sequentially.

How the moving parts are in terms of the domestic market, the international market? Is there any way to tell what July looks like versus June or looked like August versus July and so on?

Yes. I mean -- I think generally again, we're not of course putting a specific monthly forecast as you know, Helane.

But as I said at the outset, the trend continues to be very strong. We are well aware of the fact that in some partners the bank of Canada has put up some numbers that have secured some industries.

In our business at this stage we are not seeing weakening of demand and that is fairly encouraging statement I think not only for us, but for other industries that are as dependent on transportation. We tend to be somewhat of a bell weather indicator for economic trend.

So I think it's quite encouraging. We are not seeing a weakening in demand at this stage at all.

Okay. And then just from a balance sheet, do you have target in line for your cash position?

And how you think about capital allocation?

I'll ask Mike to add a couple of thoughts on this. But we have indicated in the past that as we now have been released from our incremental pension funding obligations that we are going to be generating incremental cash and we look to a lot of that cash to be available to reduce debt and to approve the balance sheet over time.

So we will look for those opportunities. We are sitting at this stage on strong liquidity position, which we're pleased with, but we are expecting that liquidity position to increase and then to be able to use some of those proceeds to reduce debt in this level, especially to brining in our new aircraft.

Good morning. This is Mike.

So just to further Calin's comments, our priority remains in deleveraging the balance sheet given the target ratio of 2.2, leverage ratio by 2018. But we also as you know instituted a share buyback program couple of months ago, and so we expect to execute that over next year as well.

Okay. And then just one last question on your PRASM growth you've seen at over the last couple of years we've seen PRASM accelerate about 5% from 2Q to 3Q, right.

So you have a positive trend. Do you think that trend continues into for this year as well?

I mean I know you're not going to comment on or give guidance, I'm not asking for that. I'm just thinking about the trend.

I know the last couple of years and whether that could continue into this year.

Hi, Helane. This is Ben.

Hi, Ben.

Yes, you're right, we don't give forward RASM numbers, but we released our July load factor numbers, which if you read. And so it was extremely strong across all factors.

We are very pleased with those. And we've indicated that we demand a holding.

We expect to see equal strength for the rest of the quarter and that's -- it's very encouraging for us. The plan, as Calin mentioned, is working as benign and is weathering all the changes in the marketplace.

The change in Canadian dollar, fuel, and the different strategies of our competitors, planned extremely resilient and we're very, very pleased with how it's executing.

And just to further Ben's comments this is Mike. RASM, load factor, good control over cost, lower fuel cost all give us -- all these levers, all these drivers gives us a confidence to say to the market that our Q3 margins will expand by more than 350 basis points.

And so lot of those levers are certainly moving in right direction. Now, I'm sure the market wants to know how much more than 350 basis points, while we also aren't going to give that indication at this point in time, but those levers appear to be all moving in the right direction.

So if I could come back to your RASM, you gave us good guidance that there was a lot of moving parts, that are reflective of your strategy that have affected your yield. You indicated that 190 basis points was due to stage length, but then you mentioned a number of other factors that relate to product mix and fuel surcharge.

If we were to quantify if we could, those other factors in one bucket, or adding them altogether, do we have a sense, what level in combination those have been a drag on yield in the quarter?

It's a good question. Walter, its Mike.

We just don't have that visibility that sitting here this morning. But we'll take that back as to see whether -- it's very difficult on the mix of leisure versus business customers to determine what the impact is to our RASM.

The fuel surcharges coming off certainly in the regulated markets like Japan, Brazil, Hong Kong, we could probably determine what that number is and give you some visibility or give the market some visibility next time around.

Okay. And I guess, where I'm going, is looking for a little bit more pure same-store sales growth kind of number, which would be helpful.

Okay. Second question here is on your competitive pricing.

You mentioned domestic was a little bit competitive, given some of the weakness in the economy, and some of the temporary added capacity by West Jet. Is there any other areas where you're seeing particularly weak, a weak or highly competitive pricing dynamic, or was that the only one you're seeing in the quarter?

Hi, Walter, it's, Ben. We're seeing strong, strong competition across the Pacific, but that's not new, that's holding.

But we are seeing better strength than planned point of sale United States and some markets in Europe. Our Atlantic business is very strong, California to Canada very strong.

So I think we are seeing more, greater offsets to combat some of those weaker areas. Although it is not the largest or not our main base like our competitor, so we're not affected.

Right, okay. And then, just a follow-up on Cameron's question regarding the Canadian dollar.

Obviously, the weaker Canadian dollar is making travel a little bit more expensive at the end destination. And so we've asked, I guess, this question before, and it's hard to look back historically to see any sensitivity to change in Canadian travel patterns with the weakening Canadian dollar.

But based on what you've seen, and given how significant the Canadian dollar weakening has been are you sensing any travel, or disruption in demand or travel patterns by Canadians flying overseas, or internationally as a result of the weaker Canadian dollar?

Excellent question. And I think this goes back to the resilience of our plan.

As we diversify the network and the customer base with the new advantage that we have with Rouge and a lower cost base that is not a big of a concern that would have been in the past. So we are seeing the ability to tap into many different price points that were not promptly available to us in the past and that's working up great.

So yet we are seeing some shift, but then we're seeing some great offset, great opportunities that weren't there, that weren't available to us in previous years.

And just to further -- Walter, this is Mike. Just to further on Ben's comments.

Again, the fact that we're so well diversified against other currencies and Canadian dollar has not done badly against the Euro for example or given some Asian currencies. Certainly, the headline is versus the U.S., like in these well diversified results in a lesser impact to us than otherwise might be the case.

Yes, and Calin, you mentioned there was some retrenchment of U.S. competitor flying into Canada.

Did that continue into the second quarter here?

Yes. May be there you do see -- we've seen some retrenchment, it's one of those situations that we're not counting on it.

And obviously, it's up to our competitors to decide what's appropriate for them. But it's one of those situations that we have the flexibility now to use the weaker currency to our advantage when it suits us.

If the currency goes up that will be obviously helpful to us in terms of our cost side of the equation. So this is -- what you're touching on is the key factor.

And when we talk about flexibility and resilience, it's exactly that. So we're not -- we prefer a stronger Canadian dollar to be very blunt.

But we have a weaker Canadian dollar, we're going to find our opportunities either on the transborder side, be there in terms of getting some passengers who previously were going across the border, be it in terms of having the Rouge operating as a --. So we're not counting on anyone pulling out, we're not counting on anything like that.

But we're quite confident that the changes we made make us more competitive.

So Mike, I just wanted to clarify on the EBITDAR margin side. So when you exclude tax provision from both quarters, your EBITDAR margin was up, I think 400 basis points.

So on an adjusted basis; are you expecting something better than 400 basis points in the third quarter?

I think our statement stands that we'll -- that we expect some better than 350.

Okay. That's good, thanks.

And just looking on the yield side, obviously like there have been some negatives in terms of fuel surcharge pressures in Asia and Brazil. And but if you look at U.S.

transborder, the yield trend actually looks very good in the second quarter. So what's going on there, because the yields appear to have improved sequentially?

I mean what's going on in transborder from an overall market perspective is that it's probably been the strongest demand environment we've seen in many, many years and that's having repercussions across all fronts. And the previous question that was asked, we have the added benefit that we weren't expecting a reduction in U.S.

carrier activity cost across the border. So all that is producing all kinds of positive outcomes for us.

Is also the U.S. dollar strength, is obviously hurting a lot of U.S.

airlines. Is that also helping you guys winning some market share versus them, and like between the U.S.

Canada or U.S. Atlantic?

Well, I think that, as you know, part of our one of the main pillars of our expansion plan is to leverage the geography of Canada for international flow traffic. So yes, by design we are competing in a much bigger way for U.S.

originating and destined traffic. And as we've shown on our Investor Day; we're not looking of majority of that share, we're looking for 1 to 2 percentage point in that market and it's delivering.

Okay. And with the Chinese currency sort of devaluing here versus U.S.

dollar, is that something that you expect to drive further traffic between U.S. and Asia via Toronto?

I think it's early to tell right now and we're obviously monitoring that situation. But it's way too early to tell given it's only been two days since they made their announcement on the devaluation.

But that is part of our target market and we do have a lot of U.S. originating passengers who travel to China and we'll continue to chase that market.

We've announced as you heard our MOU with China in terms of forming up integrated joint ventures that will help us as well. So we think it could be beneficial long-term, but it's too early to provide any guidance on that.

And finally on the leverage side, I heard you guy saying you wanted to redeploy some of those cash, excess cash toward deleveraging. So just wondering obviously, U.S.

dollar debt on your balance sheet is pretty high compared to the entire debt. So are you looking at deleveraging that U.S.

dollar debt with the cash that you have on hand? Perhaps some of the callable bonds that you have coming up over the next couple of years, so you want to kind of refinance those or repay those debt?

A very good question and something we've been looking at very carefully over the last few months. We do have the high yield, which is callable in October of next year, and so that's something we're focusing on at this point in time.

Kind of just thinking about the sixth freedom traffic into Asia. I know you've talked about the joint venture, but just thinking about how this evolves over the next little while.

I guess, in terms of number of pieces of this. One, how much of the joint venture is going to be required, in order to drive the traffic?

And then, how much of it's going to be introduction of the 787 in order to tie in all the key points? And I guess, the other piece of this is, similar to what did you with the Atlantic joint venture, you had some other partners out of the U.S.

Do you think you can see a reason to have to add more partners to that joint venture, either out of the U.S. or into other Asian destinations?

Okay. These are all good questions.

So very quickly, and I'll ask Ben to add a little bit of color on this. We have a very successful business already into China as you may know.

So we have two frequencies to Mainland China proper from Vancouver to from Toronto. And then we have Hong Kong in addition to that daily.

So if you include Hong Kong part of China we had six daily flights there to begin with. We would take -- we would fly incremental frequencies if we had the right landing slots available in Beijing.

So that is a business that is already very strong for us to begin with. So we are not relying or need the joint venture to have a decent business, but we're looking at the joint venture potentially helping us do as accelerated to next level and benefit from the Air China network.

And of course, as we've seen in other markets when you do have two strong players partnering on a given root that actually creates enormous efficiencies and benefit for the consumers as well. And so we're quite confident that we'll be able to stimulating incremental traffic as result of this partnership.

787 will certainly be the right aircraft for some of the missions, but we're flying the 777 there now and that's the best and a great airplane for us, no trouble filling it. It's also a very good cargo market.

And on your question on A++, the similarity -- the difference would be Asian market is that where if we do a partnership with a Chinese carrier as we're contemplating here, that wouldn't necessarily help us enormously in further parts of Asia. So we would consider integrated partnerships for other parts of Asia, but not necessarily intertwined in the same partnership is that with Air China.

And with that, maybe I'll ask Ben to, if you want to comment? Add anything else to that?

Yes. I think Calin covered most of it.

I think just reemphasize a part about how our international strategy are not dependent on a joint venture across the Pacific. We definitely enhance our position.

China itself is a fantastic market. I think the biggest benefit yet we're successful in getting this joint venture completed would be our ability to do star extensive services in the secondary cities plus additional surface into Beijing.

But our recent addition of Haneda into our network, Osaka, our new announcement to Brisbane that all fits into the strategy we've been class mapping up for the last few years. And that would not dependent on the joint venture.

Okay. And then, along the same lines thinking about the Pacific, I guess, there's been a number of announcements from the government level, I guess they are trying to expand the Canada transit program which allows, I guess, travel without a visa into -- through Canada.

Any thoughts about how you need that to develop, in order to hit some of your numbers? Or any thoughts around if the TPP talks might have some positive benefits for you over time?

Yes. There is no question that the TPP was approved that that would be positive for us long-term.

We are not counting on transit without visa as a precursor to our business plan. Clearly, it is the right direction and we have been lobbying all the various parties, because as we want to build the global hub, there is no question in having simplified visa process and one that is sort of consistent with what exists in another parts of the world where you have very competitive hubs.

That's what's needed in Canada if you want to build a global hub here. So we certainly like to see that.

But as we've evolved, for example, our three-year plan, it's not counting on any major regulatory changes at this stage.

And then, Mike, just one last question for you. When we go back to the Investor Day, and really good leverage metrics at this particular point.

But the comment I remember, if we go back to Investor Day, was the thinking that just the pacing of where CapEx spend is going to be over the next say, year. As even though, we are heading to a long-term goal of 2.2, is it still fair to think that we might see leverage levels increase through early 2016, as you just bring in more equipment?

Or is there something that sort of changed in your thought process around that?

Hi Chris, it's Mike. You're asking me correct.

We do have a fairly aggressive year next year for capital expenditures. And so you may see some increase in leverage ratio, but certainly much, much lower than we have been historically.

And we did indicate the market that it may move up and down slightly, over the next couple of years. But our key focus is the 2.2 by 2018.

Any thoughts on where you might cap out on as you've spend the capital?

Again, it's certainly we're not be anywhere near where we've been before.

Just a couple of points of clarification. Just maybe back on Walter's question, in terms of I guess, transborder traffic into the U.S.

with the weaker Canadian dollar. It sounds like things are holding up well, but when you look specifically at leisure destinations in the U.S., are you still seeing same level of booking curves as you've seen in the past?

Or on specifically those routes, are you seeing degradation?

Hi Kevin, it's Ben. Nothing material at this point.

The California as I said, very strong gross in both directions, Las Vegas very strong, Florida is quieter, as you know in the summer; and with the Arizona and Hawaii. So it's too early to tell how that's going to look in Q4.

Thank you. And then, just on the sun destination.

I know there's a lot of competition there. Just trying to get a sense of how you see that playing out specifically over the winter season, which I know is a bit out there.

But are you seeing any additional pricing pressure or any type of irrational behavior as people prepare for the busy winter season?

I think what I can tell you is as we grow rouge 50 airplane that tool with the added cost, lower cost platform is going to position much better to compete in those markets.

Yes, Kevin, Calin here. I mean that's the way to think about it is that the reason we have built rouge is to give us flexibility exactly in that cadent.

So we don't know. We have no clue, but obviously no visibility, no clue what our competitors are going to do.

But the point is we have a tool here that we know we can match from a cost prospective our competitors that's where the market takes us, that's where the market takes us. And I think right now we are quite confident that you've seen the lows that we've had on rouge which have been very, very strong that’s included in our numbers.

And so we expect that to continue to be the case as we increase the size of the rouge fleet. We've announced several other destinations that rouge is going to serve and takeover from mainline.

So we're very, very confident. Many of those are sun destinations.

So this has given us a swing flexibility that you never had before.

Okay. And may be just last one for me, just any update on Billy Bishop in terms of your thoughts there?

I know you had a comment out, I guess a few quarters ago. Just wondering what your thoughts are there moving forward?

So, look on Billy Bishop, as we said numerous times, Kevin, it's a good facility. We would like to continue to serve it if we have the right cost structure at that facility and we had challenges with that in the past as well as the adequate number of plots.

And currently we don't have an adequate number of plots to serve more than just Montreal. So we'll continue to push for that.

We believe that it is a good commuter, turbo prop facility consistent with the original Tripartite agreement and so we're not in favor of saving expansion of the runway. We don't think it makes sense or is needed.

We don't think that's just appropriate to go in there. So we'll continue to make those points clear to all who we are speaking with.

We haven't made a decision in terms of -- we did say a few quarters ago that we're considering whether or not we remain at the airport. That is still a possibility, but meantime we're continuing to push to have a better access and have certainty that this is going to be an airport that will be consistent with the original Tripartite agreement, which restricts it turbo props.

Yes, good morning. My question is on you noted in the MD&A for each of the regions I think, except for the U.S.

or the transborder, that competitive pressures were a factor, driving down yields. I was wondering if you could talk about, how they progressed through the quarter, whether they're intensifying in light of lower costs, whether it's reasonable to expect further yield pressure from that factor?

Hi, David, it's Ben. I think with the reduction in fuel and some of the weakness regarding the price of fuel and the weakness in Alberta, we saw a lot of moving parts in the early part of the quarter, as some of the competitor reacting to the new environment.

I can tell you that things have definitely smoothed out towards the end, and things are more I would say balance in terms of in fact to how our markets normally react to the type of demand that we see in Q3, end of Q2. So I think there was a lot of noise in May in terms of pricing capacity, reaction, and readjustment to the new environment and that is more leveled out towards the end of the quarter.

Would that apply for the international markets also?

We didn't see as much volatility in the international markets but same, similar trend.

Okay. And then, the second question, on the revenue management system, when should we begin to see benefits from that do you think?

Well immediately. We're -- this a required technological investment in the plan that we've been rolling out.

It was long time coming, a lot of effort went into this. Our revenue management team put an enormous amount of work, due diligence, and effort in executing the introduction -- and it just happened a while ago.

And so far, so good, very pleased with what we're seeing. And we expect a lot of kind of incremental material improvement in our revenue production optimization performance going forward.

So this should show benefit immediately.

Okay. But I thought from Mike's comments, that there were somewhat I guess, would be normal start-up challenges?

Sure. I mean we get more refined as we move on and we get used to it.

Obviously, a lot of the product their going into it is new. But today we will move from many of the manual process we had in place in our revenue management department to something well automated we're definitely seeing much more efficiency right from the beginning.

Okay. And then finally on the Chorus, it sounded like it didn't contribute a lot, the new contract, why was that, and how would that flow in also?

David, its Mike. I think it's indicated it's more backend loaded.

I mean the value is being driven by two primary levers, one, moving pilots up from Jazz to Air Canada and we did hire some pilots in Q2 but of course a very small impact in the overall numbers. And again that will be momentum as we hire more and more pilots from Jazz to fill positions at Air Canada.

And two, fleet renewal, primarily Q400s and we have not yet received new Q400s as of the end of the Q2 those will be coming in Q3 and Q4.

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

Thank you.