Air Canada

Kathleen Murphy - Investor Relations Calin Rovinescu - President and Chief Executive Officer Mike Rousseau - Chief Financial Officer Benjamin Smith - President, Passenger Airlines

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

Thank you 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 Benjamin Smith, President, Passenger Airlines.

On today’s call, Calin will begin by highlighting our third quarter 2015 financial performance and our successful progress in sustaining a profitable growth. 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, costs, financial targets, and strategic plans, are forward-looking within the meaning of applicable securities laws.

This call also includes references to non-GAAP measures. Please refer to our third quarter press release and MD&A for important 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. Good morning, everyone and thank you for joining us on our call today.

This morning, I am extremely pleased to report record operating results for the third quarter, which were driven by strong revenue growth and reduced unit costs. EBITDAR of $1.076 billion increased to $327 million, or 44% year-over-year and our EBITDAR margin expanded by 700 basis points to 26.7%, our sixth consecutive record-breaking quarter for EBITDAR, and a full 10% above consensus estimates.

We achieved record adjusted net income of $734 million, an increase of $277 million or 61% from the same quarter in 2014. On a GAAP basis, we reported record third quarter operating income of $815 million, an improvement of $289 million or 55%.

The airline’s operating margin of 20.3% improved 650 basis points from last year. At September 30, our returned on invested capital was 18%, and our unrestricted liquidity stood at $3.4 billion.

We continue to direct the majority of our operating cash flow to finance the renewal of our fleet with more fuel-efficient aircraft and to reduce net debt levels, 2 drivers, which we firmly believe, will help increase long-term shareholder value. These record financial results were not achieved simply because of the lower fuel prices.

They are instead a result of the continued and successful execution of the strategic plan and the new business model that we have developed over the last several years. The transformative changes we’ve made in recent years provide us with the cost structure, fleet and flexibility to respond not only to competitive market conditions, but also to fluctuations in the Canadian dollar and economic downturns.

Moreover, our plan is not based on fuel prices staying at current levels. Our capacity addition for the year largely in international markets remain consistent with our plan that have been established in a higher fuel price environment and continue to be important contributors to our increased profits.

Before passing it on to Mike, I would like to thank all 28,000 employees for their collective efforts in delivering these strong financial results in our busiest travel season, for continuing to improve our customer service and consistently reaching higher levels of excellence. I will now turn over the call to Mike for a discussion of our solid financial performance in the quarter.

Thank you, Calin, and good morning to everyone. Thank you for joining us on our third quarter conference call.

We generated record passenger revenues in the quarter reflecting solid demand in all of our 5 geographical markets. Consistent with our objective of expanding internationally, the vast majority of this growth was generated through the international segments of our network.

On capacity growth of 10.5%, passenger revenues of $3.7 billion increased $240 million or 6.9%. PRASM declined 4% in line with our expectations, primarily as a result of the 3.8% lower yield.

As discussed on prior calls and we cannot emphasize this enough, bottom-line sustainable profitability and margin expansion have been and will continue to be our focus as execute on our value-enhancing strategies. There is a naturally anticipated yield impact stemming from the implementation of our strategic plan whereby, 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.

In the third quarter, the stage length impact accounted for more than 50% of our yield decline. On a stage length adjusted basis, system yield declined 1.7% year-over-year.

The quarter also saw a projected reduction in carrier surcharges relating to lower fuel prices primarily in some of the jurisdictions where carrier surcharges are regulated as well as adjustments for travel to and from several other European countries. Our third quarter passenger revenues also included $119 million favorable currency impact.

With respect to the domestic market, the revenue environment remained challenging as evidenced by a PRASM decline of 6% versus the third quarter last year. This result was not unexpected given the significant capacity additions by our main domestic competitors.

We also experienced a higher proportional growth of lower yielded international and U.S. passenger flows connecting over the domestic market in support of our international expansion strategy.

We also continue to observe declines in oil-related market travel impacted mostly our Maritimes and intra-west route groups. We continue to monitor capacity and pricing very closely in all our markets, and are focused on profitability, recognizing that we will, of course, compete in the key strategic domestic markets.

I’d like to iterate that our incremental capacity is a much lower unit cost resulting in improved margins and profitability. Turning to ancillary revenues, we experienced a significant increase in ancillary revenue per passenger in the quarter, up 23% year-over-year, with the majority of the growth attributable to baggage fees, preferred seating and seat selection.

As you know, we transitioned to our new revenue management system and optimization system in June, and have begun observing some of the positive anticipated outcomes. Additional planned enhancements remain on schedule, and we continue to expect incremental annual revenues in excess of $100 million on a run-rate basis as a result of this initiative.

Now, turning to capacity, we expect to – we continue to project full year 2015 system ASM capacity growth of 9% to 10%, with the majority of the forecasted capacity increase focused on international expansion opportunities. For the fourth quarter, we plan to increase system ASM capacity by 7.5% to 8.5%, when compared to the same quarter in 2014.

We will look to provide our capacity plans for 2016 when we release our year-end results as we continue to fine tune our business plan. Operating expenses increased $64 million or 2% from the third quarter 2014, driven by a lower base fuel price environment, which reduced operating expenses by $477 million.

This was largely offset by operating costs associated with our capacity growth and an unfavorable currency impact of $215 million. Adjusted CASM decreased 0.5% from the same quarter in 2014, in line with the decline projected in our August 12 news release.

Had the U.S. Canadian dollar exchange rate remained at 2014 levels, adjusted CASM would have reflected a decreased of 4.6%.

Air Canada assumes the Canadian dollar will trade on average $1.32 per U.S. dollar in the fourth quarter and $1.28 per U.S.

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

dollar fuel projections, our current forecast assumes an average jet fuel price per liter of $0.60 for the fourth quarter and $0.63 per liter for the full year 2014. Air Canada also continues to assume relatively low Canadian GDP growth for 2015.

We continue to hedge fuel using call options that provides protection against short-term price spikes, but allows us to benefit 100% from a declining fuel price. As of September 30, 2015, 40% of our anticipated purchases of jet fuel for the fourth quarter 2015 is – are hedged at an average WTI equivalent cap price of $65 per barrel.

We’ve also now hedged approximately 9% of our anticipated jet fuel requirements for 2016 at an average WTI equivalent cap price of $53 per barrel. Moving on to foreign exchange risk management, our target coverage is to hedge 70% of our net U.S.

dollar cash flows on a rolling 18-month basis. On September 30, U.S.

dollar cash and investment reserves, combined with derivative coverage resulted in a coverage of 69%. We had U.S.

dollar currency derivatives and U.S. dollar cash reserves of $2.2 billion and $563 million, respectively.

The currency derivatives enable us to purchase U.S. dollars at a weighted average price of $123.59.

In the first nine months of 2015, we have realized gains of $87 million related to settled foreign exchange contracts and recorded unrealized gains of $112 million related to the change in the Canadian equivalent value of our U.S. cash investments.

In addition, assuming our outstanding foreign exchange derivative contracts were held to maturity and exchange rate remains consistent, at September 30, these contracts would have an estimated benefit of $159 million. Under the all the assumptions I just discussed, the total gain would amount to $358 million, with the majority of the benefit recorded in 2015.

This would represent a significant cash offset to our net U.S. dollar operating expenses and to our capital expansion programs, which are primarily denominated in U.S.

dollars. Now turning over to cost guidance, based on our current forecast, we expect adjusted CASM to increase by up to 1% in the fourth quarter of 2015.

On a full year basis, we now project adjusted CASM to decrease by up to 1% from the full year 2014, as opposed to the decrease of 1% to 2% projected on August 12, 2015. This is a result of additional investments to further improve the customer experience, slight increases in depreciation, employee benefits and aircraft maintenance expenses as well as the impact of a weaker Canadian dollar.

If the value of the Canadian dollar were at 2014 levels, the projected adjusted CASM would reflect decreases of 3% to 4% for both the fourth quarter and the full year 2015 when compared to same periods in ‘14. Now moving on the balance sheet and cash flow, we ended the quarter with $3.4 billion in unrestricted liquidity.

Free cash flow improved $102 million from the third quarter of 2014, reflecting the impact of higher operating income, partly offset by higher capital expenditures when compared to the third quarter of ‘14. We continue to make investments in new aircraft with the addition of two Boeing 787 aircraft to our operating fleet in the quarter.

These aircraft have a significant unit cost advantage to the Boeing 767s they are replacing. At the end of [ph] September, adjusted net debt was $5.4 billion, an increase of $291 million from December 31, 2014, on higher long-term debt and finance lease balances, partly offset by higher cash balances.

Our adjusted net debt to 12-month trailing EBITDAR ratio was 2.2. To reiterate what Calin said earlier, we continue to invest in the renewal of our fleet with a more efficient aircraft and are allocating operating cash flow to fund those investments and to reducing net debt levels.

Trailing 12-month ROIC at September 30 was 18%, 660 basis points higher than last year and 880 basis points above our weighted average cost of capital. As stated in our June 2015 Investor Day, we are targeting ROIC of 13% to 16% during the 2015 to 2018 period.

In closing, we are extremely pleased with our third quarter performance. We look forward to continuing to deliver on our long-term business plan, independent of the price of fuel and remain fully committed to building a durable and sustainable, profitable airline that will continue to create value for all stakeholders.

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

Thank you, Mike. Our third quarter was productive on other fronts as well, including employee relations.

As announced on October 20, ongoing negotiations during the quarter with CUPE, the union representing our flight attendants, resulted in a tentative agreement on collective agreement terms for 10 years. This is a win-win agreement that if ratified will provide added stability and flexibility, while acknowledging the important contribution of our flight attendants towards Air Canada’s future and the great assets that they represent.

As the fifth collective agreement reached with our unions, who represented our employees over the past year and if this one is ratified, it will be the second on terms for 10 years. This is a further indication of this collaborative partnership we are actively building with our employees.

Our fleet renewal is ongoing and in the quarter we took delivery of our first Boeing 787-900. It’s the larger version of the Dreamliner 787-800 series already in our fleet and that has proven extremely popular with customers and comes with Air Canada’s new international product standard.

The Dreamliner and in particular, the 787-9 is key to the expansion of our international network. In the quarter, we announced new nonstop flights from Vancouver to Brisbane, Australia.

As we renew and grow our international fleet to include 21 Boeing 787 aircraft by the end of 2016 of the 37 on order, we are ramping up conversion of existing routes to Dreamliner service from Toronto to Asia, Europe and South America. In addition to the new Toronto-Delhi and Toronto-Dubai routes that are being operated with 787-900 aircraft and that began just a few days ago, Toronto-Istanbul will be converted to Boeing Dreamliner service effective May 2016, joining Toronto-Copenhagen, Zurich, Tel Aviv, Tokyo Narita in the summer and select Toronto and Vancouver flights to London Heathrow as well as Vancouver, Tokyo Narita, Seoul and Brisbane.

We will also begin operating our international flights from Calgary to Tokyo Narita, London Heathrow and Frankfurt with Boeing 787 aircraft beginning in 2016. We also announced the expansion of our global reach to span six continents with the launch of Air Canada Rouge Service to Casablanca in the summer of 2016, our first destination to Africa.

Our intention to operate new nonstop Air Canada Rouge leisure routes next summer to Budapest, Prague, Warsaw and Glasgow from Toronto Pearson are equally important as we continue to build out our network from our global gateway hub with more international destinations. Our growth strategy makes full use of our legacy advantages such as our full-service network reach and global partnerships.

And the capacity we are adding is increasingly at lower cost. The Boeing 787 being introduced into our fleet offers a 31% unit cost saving in maintenance and fuel over the older and less efficient Boeing 767 aircraft they are replacing.

In turn, some of the newer 767s are being transitioned to Rouge, delivering lifts at a unit cost of up to 30% lower than similar aircraft operated at mainline. Rouge is delivering on all our expectations as a tool to compete against leisure and lower-cost carriers in some European holiday and other leisure markets.

To increase its appeal to premium customers, we have made improvements in the Rouge premium cabin on the narrow-body Airbus A319s to provide the same standards of comfort offered in Air Canada’s business-class cabin. Rouge is simply knocking it out of the park for us on all fronts.

And despite some of our competitors’ wishful thinking, we have no plans to abandon the deployment of this strategic and powerful tool anytime soon. While the market may have concerns about the additional capacity of these new aircraft and routes represent, it bears repeating that we remain fully confident in our plans, which we also outlined at our investor event in June.

Nothing has changed over the past four months to cause us to change any part of our strategy. We believe the record EBITDAR and perhaps more importantly, record EBITDAR margin, record adjusted net income and record operating income we reported this quarter validates the plan that is – that’s the plan in place is right one for Air Canada.

It’s a resilient plan that provides us with flexibility to manage macroeconomic events, currency and market fluctuations, the price of oil and changing competition dynamics. As I have said repeatedly, we continue to run our business on the assumption that higher fuel prices will someday come back and we continue to maintain flexibility in our fleet and network plans to adjust the market conditions as required.

Having significantly exceeded our CASM, ROIC, leverage ratio and cash level targets from our 2013 Investor Day, we continue to pursue the new elevated targets established at our last Investor Day in June. These include an annual EBITDAR margin of 15% to 18%, ROIC of 13% to 16% during the 2015-2018 period and a leverage ratio of 2.2 times by 2018.

To highlight our substantial progress, at the end of the third quarter of 2015, rolling 12-month EBITDAR margin was 17.6%. As Mike said, ROIC was 18% and adjusted net debt to 12-months trailing EBITDAR was at 2.2 times.

Investments we have made are about to render and are about to render over the next several years are fundamental to our business strategy of reducing costs, expanding internationally, deploying the correct aircraft on the correct route and realizing revenue enhancements, which will further improve margins in subsequent years. The implementation of our fleet initiatives, capital program, liquidity targets and debt levels remain on target and we are delivering on a permanently lower cost structure, while profitably growing our business, especially on international routes.

Our Q3 results show that with our growth, we are steadily and progressively expanding margins, increasing adjusted net income and improving our return on invested capital, thereby creating substantial value for shareholders. Indeed in 2014 and in the first nine months of 2015, we outperformed our main domestic competitor from a total shareholder return perspective and on year-over-year traffic, load factor and operating margin improvements.

And with international growth, expanded margins, increased adjusted net income and improved return on invested capital have become our key focus rather than RASM or load factor. That said, we posted a very strong load factor of almost 87% for the quarter and we achieved single-day records for over 150,000 customers carried during August.

It also bears repeating and as clearly as I possibly can that we are anticipating decreases in yield and increases in stage length as entirely natural outcomes of our long-range plan and business model. Excelling levels of customer satisfaction is a shared focus for the entire executive team, and to this end we’ve increased investments in training and support for our employers, which is contributing to higher employee engagement levels and improved customer service scores.

We remain Canada’s favorite airline for business travel by far with an ever increasing margin according to the Ipsos Reid Annual Business Traveler Survey released in the past quarter. Air Canada was preferred by 86% of Canadian frequent business travelers surveyed for 2015, an improvement of 17 percentage points in our ratings in the national survey over the past 7 years.

So, in summary, we are on track in the execution of the business plan, which makes us a more resilient, flexible and profitable carrier than we ever were. We have an increasingly engaged workforce with a number of long-term labor contracts achieved that provide us with stability and has flexibility at competitive terms.

We have a premium product that continues to attract higher yield customers on both North America and international routes. We have a lower cost structure that we are driving down even further.

We have a more flexible fleet, which provides us with seasonal swing capacity that allows us to adjust quickly to changes in market demand. In addition, our fleet mix allows us to return older and less efficient aircraft at no material cost as softening market dictate this.

In short, we’re now in a stronger position to be able to withstand whatever headwinds could buffet the industry without losing altitude, but it’s important to note, in any event, we’re not seeing any softening of the market that could cause us to change any course of our action other than some relatively isolated pockets where we have already adjusted capacity based on demand. In conclusion, we continue to be very confident that we have the right plan in place to continue delivering on our goal to make Air Canada a sustainably profitable global industry for the long-term.

And with that, thank you for your attention today. We will be happy to take some questions.

Thank you and good morning, everyone and great results again.

Thank you very much.

So, my first question is on the fourth quarter adjusted CASM, so what is causing that adjusted CASM to increase other than obviously FX, is there anything else that we should be mindful of?

It’s Mike Rousseau speaking. No, it’s just couple of areas, FX being the largest impact.

It’s a fairly – relatively smaller change from our previous guidance. Foreign currency is one issue and probably the primary issue.

And as I said, we’ve made some investments in customer staffing levels at – in our airports to provide a higher level of service for our customers. We also have a slightly higher benefit expense, and so a combination of several different items resulted in us minimally changing the guidance.

But far and away, the big driver there is FX.

I see, okay. And one of the most obviously common concerns in the investment community, I guess, is sustainability of strong demand that we are seeing in traffic numbers in this weak certain macro environment.

And I think you kind of alluded to that Calin in your initial comments. So can you please comment on what sort of gives you great comfort that you are not adding way too much capacity at this point?

And perhaps tie in your comments with geographic trends that you are seeing because Koreans seem to be traveling less to certain pockets like the U.S. because of the dollar?

Right. So again, it’s a question that we are very mindful of.

We appreciate that what we have been doing has – some people are surprised that we were able to do as well as we are doing with the amount of capacity we are putting in the market. So we – number one, we look at this past quarter and frankly, the past two quarters, three quarters, if you like in Canada, the Bank of Canada had predicted in fact, indeed stated that we were in a recessionary environment; extremely low growth and then negative growth.

And then for the year, as you know, the GDP estimate is 1%, 1.5%. So despite that, we have seen other than in intra-west markets and these intra-west markets we’ve, in some cases, already pared down capacity.

We’ve seen very strong demand in virtually all of our markets from Canada. So what this – what it tells is that even if we were in what the Bank of Canada characterized as a recessionary environment, people were still traveling.

Businesses were still functioning other than the pockets in intra-west in the Western part of Canada, which obviously are much more dependent on the oil and gas business. Secondly, our business plan has involved a large measure of what we’ve been referring to as sixth freedom flying, being traffic that we take from other countries, primarily, the United States over our Canadian hubs, primarily, Toronto.

And as you – as I am sure, you know, the U.S. has had a very strong economic environment.

And so the growth and breadth of our U.S. business has permitted us to be able to connect U.S.

connecting traffic over our Canadian hub, and that has obviously contributed to the positive results. And then, the bulk of the capacity that we’ve been putting on has – as we’ve said several times, has been at a lower cost, which means that we’re stimulating, in some cases, that demand, and so we’re seeing that certainly with rouge as well as with some of these other international markets.

And with that, maybe I’ll ask Ben to say a word or two specifically about some of the decisions on international capacity because that has been a great source of our profitability. And what a lot of people in other businesses are struggling with is that even if they can deliver record results or profitable results, they’re not growing the top line.

In our case, what we’re very comfortable with is that what we’ve been doing here is actually growing the top line in addition to expanding our margins. So we’re quite bullish that the way we’ve structured our vision over the last several years is sustainable.

Ben?

So I’ll just expand on Calin’s third point, which is the transformation we’ve been making to our network and in particular, the cost of putting out seats in all the various markets that we operate in, has given us the ability to access all kinds of demand pockets that we couldn’t in the past in a profitable way. So that’s what’s giving all of us the comfort that this plan is robust.

And we continue to see it in all the markets that we’re deploying this incremental capacity, whether it be additional capacity or into new markets that the tools that we now have in our disposal, be it lower cost 787, 777s for the new configuration in rouge, give us all kinds of opportunities that were never available to us at an improved margin.

Okay. So can you remind us what has been the trend in sixth freedom traffic this year?

Sixth freedom.

Sixth freedom is – we are started from a very low base, and so we’re very actually quite pleased with the way it’s been progressing over the last several years. The improvements that have been made in the airport traffic facilities in all three of our main hubs, Toronto, Vancouver and Montréal, are providing the fantastic experience for U.S.

destined and originating customers going to and from Asia and Europe. And we are – as you know, from coming to our Investor Day, we are looking for increase from 0.8% of that traffic to just under 2% that’s within our plan and we are well ahead of that objective.

And you can envision that these are – we don’t break out those numbers separately, but you can envision them as being solid double-digit growth in that sixth freedom traffic.

And then maybe one other point, it’s clear we are not necessarily always going for big volume in these markets. We’re really going for quality of revenue so the focus is on premium to markets in the U.S.

that do not enjoy nonstop service to Europe and to Asia. And of course, we serve 50 destinations in the U.S.

and the bulk of those do not enjoy service to those markets, so it gives a quick opportunity with the natural geographical advantage of Canada.

Okay. And my final question is on the balance sheet, Mike.

So your cash position I think is probably the strongest it has ever been. And I understand that CapEx will increase into 2016 and ‘17 so you might want to keep some flexibility.

But I’m curious about your thoughts on converting some of that CapEx into operating leases to free up some liquidity burden. And if oil doesn’t rebound significantly, perhaps, you could use that to buy back shares more aggressively, given earnings deal is over 30% or even call some of the high-interest debt?

Again, we continue to look at the opportunities for our cash, but we have been fairly consistent in saying that they are going to finance aircraft and pay down debt. We are comfortable with our current cash position, given our capital expenditure program as you noted, over the next couple of years.

Access to financing markets for Air Canada right now are much, much more favorable than they were in the past and the inherent interest rates that we can borrow money at are very low compared to what the implicit rate would be in an operating lease. So economically, it makes sense for us to finance these through debt at this point in time, but that being said, we will not finance all our 787s with debt.

In fact, in 2016, two of the planes will be under operating leases and we will continue to look at some mix of operating leases versus debt financed over the last couple of years.

And any plans to increase or potentially renew the NCIB?

I am sorry?

Any plans to increase or renew the normal course issuer bid?

It’s early yet. I don’t – I think that expires next May, so we are six months away from that.

And we will take that decision as we get closer to May.

Okay, thanks a lot guys. Great quarter.

Thank you very much.

Yes. Thanks very much, great quarter here guys.

So my first question I guess, I know you are not giving guidance on capacity, but when we look out to 2016, just looking at your fleet delivery schedule and making some assumptions on stage length and I guess, those assumptions can get things fairly variable, but directionally are we not forecast or seeing a meaningful step-down in your capacity without providing guidance, just kind of point of direction here or is there something that we should look at in terms of stage length that would suggest that it might remain at elevated levels?

I mean we are not – first of all, thank you for the comments on the quarter. And I think you have understood the vision here, as you have expressed it in many of your reports.

Obviously, we are pleased that we are delivering consistent with some of the things you have been saying. But – we are not providing guidance, but maybe I can allow Ben, without wading beyond what it is, we are not providing at this stage to give you a little mini indicator without going into a forecast.

I will take a mini indicator, that will be great, yes.

And I think Walter, what you have been seeing over the last several quarters is we are only interested in adding capacity where we have margin expansion opportunity and that’s going to continue. And with the 787s continuing to be delivered over the coming years, we gain additional flexible capacity in the form of the A330 that we are planning on keeping as well as the 767s at mainline.

And that gives us a buffer to manage capacity depending on how demand varies going forward. So we still have a lot of flexibility in the amount of capacity we are going to put out over the next few years.

But you can be assured that our plan calls for stringent capacity allocation and only putting it out where we see margin expansion opportunities.

That makes sense. And then when we look at yield as that capacity, you guys have done a very good job at communicating that negative yield as a function of other things, more important things as opposed to fares, but 210 basis-point drag now, presumably that will start to decline and do we have ever any sense into 2016, the magnitude just as we start lapping some of these things of the lag effect – or sorry the mix effect of the longer stage length from the 210 down to some lower level or do we have any sense in that regard?

Yes. I think Walter, it depends on what final decisions we make on where to allocate these airplanes.

Obviously, the longer the stage length, the greater the yield lag is going to be. As Calin mentioned, we are not solely focused on load factor and yield, it’s really margin.

And with these very low unit cost aircraft and with the type of product that we have, we are seeing very attractive margin opportunities out there and some have lower yielding market environments. But with the tools that we have, it would be more than offset by the cost of vehicle that we are going to use.

Okay. On the bag fee topic, you saw obviously that WestJet has decided to go with a bag fee on international flights.

So I am just curious that – two questions around that, first of all, will that – if they kind of strip that out of their base fare, which could be about 10% of their base fare and layer it on obviously, on to the bag, when you do an Expedia search, won’t you be disadvantaged then if they have taken that de-bundling kind of approach and at least optically suggest that you will be a higher price point, even though functionally you won’t be. And as a result and this is my second question, would you consider adding a bag fee to international flights or is it too difficult given your partnership and your Alliance membership to affect that type of fee?

We are still studying what they have put – what they announced yesterday or the day before with bag fees. They – we compete with 60 international competitors across the Atlantic and the Pacific.

And I believe 55 of them are going to be larger than WestJet’s initial foray across the Atlantic with their 767s. So we have a lot of other competitors we have to deal with in terms of fares, fuel surcharges, bag fees, that type of thing.

So this is just one additional one we are going to have to deal with and we will figure it out. We compete ferociously across both oceans and we will definitely do that with this new competitor that’s coming online with the 767s.

So it’s not impossible for you to implement that?

Pardon me?

It’s not unduly difficult for you to implement a fee of that type if you wanted to?

We have some exceptions. If you look in our various markets where there is some unique bag situations like I think the market has excess luggage.

We are not the dominant player. We have got to go with what the market is looking for.

We have that already in place in many markets, so we have exceptions. But as I said, this is a small by comparison, amount of capacity that’s going in.

I don’t think we are going to alter our entire international strategy for one player when we have so many that are out there.

The main takeaway here, Walter is that we are not going to take our eye off the ball. We have got many, many markets as Ben said many competitors that we are monitoring and watching.

We have the Alliance relationship. So with due respect, do not take anything away because we always like to see a new competitor in the market because it makes us more competitive.

We are not going to turn ourselves upside down because of what our domestic competitor here WestJet is doing or not doing. And I think that’s the way we will plan on approaching this initial foray into the international market.

Okay, fair enough. And last question here, I guess for Mike, with the foreign exchange impacting CASM by a fairly significant amount as you alluded to, again in the fourth quarter, we started to lap that now into 2016.

Obviously, ForEx will be less of an impact just assuming your current forecast – or current spot levels, is there anything else we should look at in terms of 2016 that might be a headwind that we haven’t – that you would flag here or stripping out ForEx, we should get back down into some nice negative territory in terms of that adjusted CASM for 2016?

I think that’s a fair statement, Walter. Again, we are still working our business plans and we will provide that guidance along with the ASM guidance when we release our year end results.

Okay, understood. Thank you very much.

Thanks Walter.

Yes. Good morning.

Good results guys. I guess my first question is just, Ben I heard your comments about entering new markets with the 787 as well as I guess the Rouge 767s, can you give some color on how many new markets you will be adding in 2016?

Hi, Turan not yet, we are still weighing what are the best opportunities for these airplane, be it either incremental frequencies on existing routes or adding new lengths to existing destinations or outright new destinations. So once finalized – and the ones that are not announced as of yet, have yet to be finalized.

So can’t give you a clear 100% answer at this point because we are still evaluating based on ever changing market.

Got it. Okay.

Thank you. And I guess, some color on the Sun markets here with the start of the winter, I know Transat has been adding a bunch of capacity this year as well and I think you guys have added some capacity as well there.

Any color there on how that’s going?

That’s going better than expected. We are very pleased with how Rouge is performing in the U.S.

Sun markets of Florida, Arizona, Hawaii, California as well as Mexico, the beach markets and Caribbean. We are finding now after we tweaked the Rouge product on several fronts with the premium product as Calin mentioned as well as the accumulation of redemption on our frequent flyer side as well as some of the schedules.

We do have – we are shifting the bulk of our 767 Rouge fleet from the Atlantic into the South for the winter. And so far, advanced bookings look very strong.

We are very pleased with it and it’s working very well with our Air Canada vacation product as well.

Perfect. Thank you.

And I guess last question from me here. It seems I guess with the change in government that it’s going to be more unlikely that jets will be allowed at the island airport here.

Do you think that could open up some more slots for you at the airport? And if they are open, would you be interested in them?

So, let me start again. Yes, thanks, Turan.

Thank you for your comments as well on the quarter. We certainly appreciate when we hear good comments, especially from people who may have doubts as to our ability to perform here.

On the island, I can say the following. Look, we have said repeatedly that access is not adequate for us.

Our customers have asked us repeatedly and we would be providing service to Ottawa and to New York markets. We have the demand for that.

We haven’t been able to get the adequate slots. It’s been under that controlled monopoly and modified monopoly over the last number of years.

So, we have said also repeatedly that we are not in favor of jets. I think jets is a bad idea for the island.

We think it’s a bad idea based on the fact that it contravenes the tripartite agreement that was negotiated years ago. We think it’s a bad idea for all of the environmental reasons that the folks around the Toronto waterfront have been saying.

We just – we think it’s a bad idea based on the capabilities of jet airplanes flying into the center of Toronto. And so we think that it is a good growth commuter market with turboprop airplanes and we would be happy to take additional slots if that was made available to us and we will continue to push for access.

Great, thank you for your comments, Calin and good to know that you are paying attention. Thank you.

Thank you.

Thanks very much operator. Hi, guys.

Thanks for the time. So, I have just two questions.

One is on aircraft maintenance, given that the fleet is getting younger, I was kind of surprised to see the increase in the third quarter. So I was kind of wondering if you could just kind of walk me through what happened there and what I can expect going forward?

Okay, very good question. It’s Mike responding.

So for Q3 alone, it was all about foreign currency. The vast majority for our maintenance expense is in U.S.

dollars. And so virtually, 100% of the increase year-over-year was foreign currency related.

Now that being said, on a longer term basis, we are moving the airline more to power-by-the-hour contracts versus historically, we may have taken the maintenance holiday for the first couple of years of the new aircraft. This, we believe, is the better economic decision for Air Canada.

But you will see, for most part, higher costs in the first couple of years than you otherwise would have seen in the past. But you’ll see lower costs, actually after we get through the so-called maintenance holiday.

So, we have changed our view on maintenance contracts and again going for the most part exclusively with power-by-the-hour contracts on a go-forward basis.

Okay. So bottom line is I can expect to see this type of increase until one year goes by?

Again, two factors – short-term factors of foreign currency, and depending where the Canadian dollar moves in the next year or so, it will influence our maintenance expenses, but certainly, on a longer term basis, we see a more stable maintenance environment as we add contracts to the deviation bucket.

Okay, good. And then my other question is, I’m wondering if you can sort of parse out what percent growth you’re seeing in the rouge markets versus the mainline markets.

And I’m not sure, I’m asking the question as clearly as I should, but I’m kind of wondering if you can just talk about the mainline business traffic that you’re experiencing versus maybe the rouge, because you don’t report them separately.

I’ll make a general comment there. We don’t report it separately so it’s hard for us to selectively give some information here.

Helane, it’s Calin here. But I could say the following.

What you’re noticing in – particularly, in the rouge case, is that we’re entering new markets, new markets for Air Canada or markets at Air Canada has not served in a very long time. And so by definition, that – in terms of buildup and growth, you have much less risk when you’re doing it with a lower cost vehicle like rouge.

And so, when you look at top line revenue growth, if you’re saying what the portion of our top line revenue growth comes from rouge, well you can sort of – I can indicate by saying you’ve seen a tremendous number of new routes that we’ve had there that we just – we are not serving before. And we’ve announced a bunch for next year as well, albeit Central European markets.

So I think a way to think of it is we’re expanding rouge into markets that are categorically leisure markers and that will therefore provide, from that vantage point, 100% of that revenue is incremental because we would not otherwise be serving it or did not serve it before. And in the mainline case, what you’ve seen us do is increase capacity where we thought we would better serve it.

And you’ve seen, for example, we’ve recently announced that we’re serving, for example, Vancouver-Heathrow, really great demand, so we’re adding additional capacity on that with mainline service. So it is a good mix.

Rouge gives us that 31% cost advantage. So you’re seeing exploiting those revenue opportunities.

But at this stage, we are not breaking down what share of that 7% growth came from rouge versus mainline.

Okay, that’s fair. And I did that yesterday, flying home from Hong Kong over Toronto, and I have to tell you it was fine.

It worked well, so there you go.

Thanks, Helane.

No problem. Thanks, guys.

Yes, thanks very much. Good morning.

I guess, maybe my first question is just on China. And I am wondering if you could just maybe update us on the Air China JV?

And also what you are seeing from a traffic point of view to that market?

Well, so I’ll answer the second part first. China is such a big market and a rich market, that even if the GDP growth in China has slowed and we are no longer talking about double-digit growth, it is still a lot of growth.

When you are talking 8% growth, 7% growth, those kind of numbers, 6% growth, even if that’s what it subsequently is. It’s not that they had in the past, but it is a lot of growth.

So from our prospective, we are still in the overall scale of the universe, a relatively small player as far as the China market is concerned. And so we are seeing really good traffic, good growth, good profitability on those markets.

And we would – as we have said many times, assuming we had the appropriate landing slots at Beijing, we would increase capacity to Beijing, and if we had commercially viable slots that made sense for us to connect passengers onward. So none of the malaise or so called malaise that exists in China is something that is affecting us at all at this stage.

And we continue to see great opportunities there. And then, frankly, traffic in both directions with the changes that we’ve made several years ago to the visa status for Chinese tourists here.

As far as the joint venture, well, it’s continuing. We’re still in good dialogue.

Obviously, these are complicated agreements to put in place. So the dialogue is continuing.

We have regulatory filings to make with the competition regulators, etcetera, etcetera. So that is all in the normal course of things.

And it’s ticking along, and we’ll make further announcements as we get closer to finalizing the agreements. Sorry, Ben would like to add one more thing.

And then Cameron I can just give you a little bit more color on some of the tools that we have got. If you go back before we took delivery of the 787s, most of our China flying out of Vancouver was on 767s.

And out of Toronto, we were flying the 777-200 plus the 349-seat 777-300 into Beijing. With the retrofits that are going on as well as the delivery of the 787s, without any incremental slots at Beijing capital or Shanghai Pudong, we’re still able to materially increase our capacity if demand warrants it with the newly configured 777s that are coming online now plus the 787-9.

It gives us a lot of flexibility to manage the market.

Okay, very good. I guess my second question is maybe more for Mike.

I guess, sort of philosophy around the balance sheet and your – the debt on your balance sheet is still fairly skewed towards U.S. dollar based debt and you have got a fair number of aircraft coming in the next few years here that presumably would become as a U.S.

dollar based financing as well. I am just sort of wondering what your philosophy is now?

It looks like the Canadian dollar is going to stay weak for a while here. Is there any sort of desire to try to shift to more of the on-balance sheet debt to Canadian dollars?

Or are you able to do that?

Cameron, good question. We have actually done some of that earlier this year.

We put some of the debt in Canadian dollars. And we will continue to look at going forward.

It is – really, it depends on what you believe, where do you believe the Canadian dollar will go, because certainly, locking it in at today’s rate, means that you lock in at, whatever, $1.34. But we continue to look at adding some element of Canadian debt to our balance sheet to mitigate any potential risk going forward.

Okay, that’s great. Thanks very much.

Thanks, Cameron.

Thanks, guys. Good morning.

I guess my first question is just around the recent Quebec decision around the whole ACE PPA agreement and the – I guess, the shutdown of Aveos. Can you maybe comment on that?

And I guess there’s a couple of pieces of this that I’m trying to understand. One, where do we currently stand today?

I guess, the second thing, how could this down the road affect your strategy around how you want to maintain the aircraft? And I guess, third, does this present any issues with your discussions I’m sure you’re in with your mechanics at this point?

Well, so Christopher, obviously, the decision came out just at the end of the day – the day before yesterday. So our legal team is assessing it, reading what it is that the Court of Appeal said in that decision.

So frankly, it’s premature at this stage to really speculate on what our next steps might be following that. Obviously, we have a team of lawyers assessing it as well, working in conjunction with our maintenance folks.

So it really is too early to say and I wouldn’t want to start speculating and making statements that we might not be able to subsequently deal with. So I think the jury is out.

We’ll take it under advisement, study it, and then, react to it in the fullness of time.

Okay. Do you think it produces any undue risk around your maintenance strategy over the next year or two?

Yes, we don’t – you can’t reinvent structures overnight. As you know, these are very technical kinds of maintenance activities that take place, both in terms of infrastructure and folks.

And so I don’t see anything imminent. But again, we have to really do have to study and take it under advisement.

Alright. And then, moving forward, just one of the things that was kind of interesting to me anyway was looking at the regional expenses.

I know that coming down year-over-year, certainly, fuel made a major role, but even the CPA fees were down year-over-year. And I’m looking at your domestic capacity growth, around 5% this year.

How should we start thinking about – and we have talked a little bit about these different moving parts. But I guess a couple of parts to this.

One, how should we thinking about costs longer term in terms of just your CPA program, expecting fairly modest capacity growth over the next couple of years? But you’ve also come out over the quarter, made some additional announcements that you’re going to add some additional fleet into, I think, with Chorus.

So, any thoughts there on how we should be thinking about regional costs may be ex-fuel moving forward?

Okay. I might invite Mike to give you some numbers as to what we can share, but two or three guiding principles here.

One, part of the objective of our regional strategy has been to reduce our overall cost of providing the regional lift to make it a much more market-competitive number. And that, of course, we’ve put out the number following the modification to the Jazz CPA of a number of about $500 million of expected reduction to the end of the current contract, which is 2020.

The previous contract before the amendment was 2020. And so we’re starting to see the benefits of some of that.

And – but that ramp-up takes a little bit of time given that it is based on a series of drivers, one of which is a flow up agreement with respect to pilots and these sort of labor-related things. So you have that as a driver.

You have that number that is out there. And you certainly can model something that kind of a saving coming from the Jazz CPA benefits.

Secondly, we of course, have added Sky Regional and Air Georgian are playing an increasingly important role in our regional strategy. They both have incremental aircraft.

You’ve seen in our numbers in our MD&A that we are taking 5 incremental Embraer aircraft that will be allocated to Sky Regional. Sky Regional operates at a lower cost, and we think a very market-competitive cost as does Air Georgian.

And so that’s lift as it comes in, will be at a lower cost than we are previously providing. And in order to feed our international ambitions and to feed all of this wide-body growth that we’ve been talking about over the last number of years – or a couple of years, it requires feed.

So by definition, when you talk about bringing in a 787 on a new market, we are not counting only on the O&D from the given hub that it serves. We are counting on feed traffic coming in, which needs to be provided by these feed carriers.

That’s why there will be incremental regional aircraft in our – so those are the three main drivers. And then Mike, I don’t know whether there’s anything additional you could add to that in terms of any numbers that we haven’t already discussed that’s in the public domain yet.

Calin summarized it very, very well. We do have the benefits of the new CPA arrangements with Jazz that will accelerate over the next couple of years.

Offsetting is we have the growth in all our 3 primary providers, again, at a very market competitive terms. And then, more in the short term, some of these costs are in U.S.

dollars as well so there is a foreign currency impact as well.

Okay. And then, the additional aircraft you talked about, I think with your agreement with Chorus, will you be placing an order for that or will they?

Well, the first five Q400s, which will come in pre-summer ‘16, we will take care of those. And the other five is – we are looking at different options right now.

Alright. Thanks, guys.

Thank you.

Yes, good morning. First question, just on the various geographic segments, there is discussion of increased competition in Europe on the domestic side.

And then on the transporter, it seems that you have much better yields in RASM. So I was just wondering if you could comment on what you’re seeing in each those three areas?

Sure. Hi, David, it’s Ben.

Domestically, I think everyone is aware, we’re seeing softness in the Alberta region. And we’re adjusting accordingly, both in the form of volume and in some areas, business demand.

But nothing that I don’t think we can manage well. U.S., very strong.

We are seeing U.S. carriers withdraw capacity, because of the lower value of Canadian originating sales.

So that’s definitely helping us out there, and we’re not seeing any material weakness in demand to or from the U.S. And international, both across the Atlantic and the Pacific, despite significant increase in competition, our new model with robust revenue built into it, is proving very resilient.

So we’re actually meeting or exceeding the demand expectation and the overall margin that we’re looking for in both of those markets. So with the exception of a weak Alberta, I would say the rest of the markets we’re operating in are what we would at have expected or slightly better.

Okay, that’s helpful. And then, Mike, on the FX hedges comment, I think you said you had something like more than $300 million benefit of rates stayed up to September level.

How should we think about this? Is this really just a hedge?

So you’re making a big gain on the instruments, but you’ve got costs going up or is there some outright benefit from all of this?

It’s 100% a cash benefit. It doesn’t help our EBITDAR or operating income because we don’t apply hedge accounting to foreign currency.

But I want to call it out because it’s a very sophisticated program that offsets the impact – the cash impact of a weaker Canadian dollar.

Okay. Okay.

And then, just the last question – or actually, one, two last questions. The CapEx is up.

Is that just straight – in the schedules out to 2018 or whatever it is, is that just FX or is there anything else there?

It’s – no, it’s primarily FX. Almost all of it is foreign currency.

Okay. And then the last question, the 787, why are you leasing a couple?

I thought from your earlier explanation, it would be cheaper to own them. And so since these are such new airplanes, I’m kind of curious why you would actually consider leasing them?

Well, again, it’s only two in 2016 and we are taking 10 in 2016. So it’s a relatively small amount.

And we just want to establish a sense of operating costs associated with the 787. And frankly, we structured a fairly attractive deal from our perspective.

And you should think – David, it’s Calin here. You should think of a balanced portfolio of aircraft the same way that experts like yourselves would think of a balanced portfolio of securities, because in other words for us to do well over time and many of the large carriers who got great financial resources, greater than ours, will have a leased aircraft because that does make sense, both in terms of when you have to give up the aircraft at the end of the term and lots of other advantages.

So we will take a balanced approach. We have been – previously, we were more on the – too much of the lease side.

So as Mike have said many times, we are looking much more now at having ownership, but there will be some element of ongoing leases that we will do as well, sale leasebacks and leases as well.

Okay, very good. That’s helpful.

Thank you.

Hi. Thanks for taking my question and congratulations on some good results here.

Just a couple of quick ones for me, a housekeeping one, I am just thinking about your, I guess your cost cutting targets longer term and maybe past what you guided to at your Investor Day, should we continue to see a structural decline in your CASM, when I think of through that time period and into the next decade given some of the changes you mentioned on the reporting side for maintenance, the step down on the core still in terms of savings and I guess any potential savings from EMEA?

Yes. Kevin, Calin here.

So first of all, thank you very much for your comments on the quarter. The answer is yes to that.

So what we are doing here in terms of our approach, the way we are thinking about our business going forward, similar to what we said at the Investor Day, we have a series of aircraft related cost reductions, which go around density. So they go to the number of seats on the airplane the fact that the Rouge airplanes have more seats than the same ones at mainline 767s and 319s.

The fact that the 777s have greater density, that obviously reduces the seat cost and that provides portion of the CASM reduction. But that’s not where we are stopping.

We have said – we had a program a few years ago, we called it CTP program, which reduced our costs to one level. We have – every year since then we have a series of internal specific cost reduction targets that are not based on stage lengths, not based on the incremental seat density and that will continue.

And we have given you examples of a few. For example, the significant reductions we are expecting on a steady state basis on our regional network, we have talked as well about the impact of the 737 coming in.

When we look at the operating cost of the 737 and the fuel consumption of the 737 in relation to the 320 family that it will replace, that will have a significant cost. The 787 of course, which is not yet fully in the fleet.

787 has a materially lower cost than the – so on an ongoing basis, quite apart from the densification impact on CASM and the stage length impact, you are going to see some fairly significant initiatives to reduce cost on an absolute basis.

That’s helpful. And maybe more of a philosophical question, I think through this reporting season, we have heard some airlines talk about the benefits of using used aircraft or bringing used aircraft versus going after new aircraft, your strategy is obviously focused more on the latter there, I am just wondering, if you presume lower fuel costs over time, does that materially change how you view the returns on the aircraft you are bringing in versus some of your competitors that are preferring the used...?

It’s a very good question. And again, I would answer it a bit like I did the David Tyerman’s question on the – it is a bit of a mixed portfolio.

Our approach on doing the right thing on fleet is having an efficient fleet that is going to deliver a lower cost for what it is we want to do. And as I said repeatedly, we are not – what we are doing now is not as a result of lower fuel prices and it would be easy to abandon our strategy based on low fuel price, we are not doing that because we are building this business for the long-term.

So we are – this not sort of short-term thinking, finding a way to benefit from a cheap aircraft that might be available to market. That said, when you look at our entire fleet including what we are doing at Rouge for example, the 767s that have come into Rouge have all come either from Air Canada Mainline, meaning used airplanes or coming from third parties that we have in-sourced, leased-in airplanes from other parties of used airplanes.

We now have our first new airplane. In fact, we took it yesterday or the day before, 321.

But there is only five of them, the rest of the airplanes in the Rouge fleet, other than these five 321s will all be used airplanes. So virtually the entire fleet with the exception of these five, are used.

And when you look at mainline, we still have for the next number of years, the 320 fleet is a pretty – I would characterize it – I don’t want to say old, I will say senior fleet. And the – so the entire 320 fleet is a senior fleet.

We have 767s that are remaining in mainline, which are relatively senior, but we are refreshing it with the 787s and the 777s that are coming in. So it is – we are not – this is not a mission to spend capital unnecessarily, but we really do think that it will be the right blend of new and used aircraft, lower cost.

And on an ongoing basis, we think we will have built a much stronger and more viable, sustainable company.

Thank you for the color.

Sorry, Ben has one more comment here on that.

Yes. Just to zero-in on one of the points that Calin made, which is one of the what we view big advantages that Air Canada has is, with the large Airbus narrow-body fleet, we have 75 aircraft at mainline and 25 at Rouge.

With our new 737 MAX airplanes, we don’t have to source, if required big numbers of used airplanes from the outside. We do have our own stable of very, very capable airplanes in-house, which a lot of airlines do not have.

And we can either extend the life of those greater than we had originally planned or have the flexibility to lower the utilization and still have them in swing type capacity or exit them as planned. And that’s a big, flexible tool that we have never had in the past and one that again give us more comfort around the types of growth that we are putting in, so that we know we have the necessary buffer to deal with whatever hurdle comes our way.

It’s a great question, Kevin. And I think actually I am glad that you raised it, because it’s very important for the analyst community to understand our strategy on dealing with new airplanes and used airplanes.

That’s very helpful. Thank you very much.

Thank you. And thank you, everyone for joining us on our call today.

Thank you very much.