Air Canada

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

Konark Gupta – Macquarie Capital Fadi Chamoun – BMO Cameron Doerksen – National Bank Financial Julie Yates – Credit Suisse Helane Becker – Cowen and Company Chris Murray – AltaCorp Capital Turan Quettawala – Scotiabank Walter Spracklin – RBC Tim James – TD Securities Doug Taylor – Canaccord Genuity David Tyerman – Cormark Securities Kevin Chiang – CIBC

Thank you, Valerie 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 third quarter 2016 financial performance and the progress we made on our strategic initiatives. Ben and Mike will then address our third quarter financial performance and turn it back to Calin before taking questions from the analyst community.

As usual, I would like to point out that certain statements made on this call, such as those relating to our forecasted 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. Before turning it over to Calin Rovinescu, Air Canada's President and CEO may I just mention that on behalf of all 30,000 Air Canada employees who are very proud of your recent and deserving award as Canada’s outstanding CEO of the year.

Good morning, everyone and thank you for joining us on our call this morning. Thank you as well Kathy for the mention.

Of course the recognition like this is really a recognition for our entire company. A testimony to the extraordinary capability and talent of the team that I’ve been honored to lead for the past seven years.

And to each and everyone of our 30,000 employees that have worked so hard to become more flexible, entrepreneurial, and proud and who’ve executed on our complex transformation. This morning I am very pleased to report record adjusted net income of $821 million or $2.93 per diluted share for the third quarter an increase of $87 million or $0.43 per diluted share from third quarter of 2015.

Record EBITDAR of $1.248 billion, improved $172 million from last year’s record. We’re also pleased with these results, as are significantly above consensus estimates.

The fact we attribute to the consistent application of our international growth and other strategic initiatives, a strong customer focus led by a great workforce and disciplined cost control. On a GAAP basis Air Canada generated record operating income of $896 million, an increase of $81 million compared to last year, which is also a record.

For the third quarter we reported net income of $768 million or $2.74 per diluted share. These record results have been achieved despite the fact that the global economy continues to be challenged and we are still in a low economic growth environment.

Despite this environment, we have been able to exceed last years record EBITDA performance by 16% while continuing to expand EBITDAR margin, which we believe is clear testimony to the success of our fleet investment strategy and the profitable expansion of our international network. These strong results reflect a strong execution of our strategic plan and the tremendous efforts by the entire Air Canada workforce I personally want to acknowledge.

In the quarter, traffic grew by almost 19% compared to 2015’s third quarter, including nearly 28% growth in international-to-international passengers connecting via Canada to international destinations. The transformation we have undertaken in recent years has provided us with the cost structure and flexibility to respond to many competitive market conditions.

And these changes have meant to improve profitability, as realized this summer with the launch of more than 20 international and U.S. trans-border routes, all of which have met our financial expectations to-date.

Our current investment priority continues to be directing the majority of operating cash flow to finance the renewal of our fleet with more efficient aircraft from a fuel and maintenance point of view and to reducing net debt levels including through the recent completion of a highly successful $1.25 billion refinancing transaction. Without removing our foot from the pedal regarding our strategic priorities, we remain on track for delivering the key financial targets established at our 2015 Investor Day.

On a 12-month trailing basis, we achieved an EBITDAR margin of 19% against the target of 15 to 18%, and the return on invested capital of 15.5% against the target of 13% to 16%. We are also on track to achieve the targeted leverage ratio of 2.2 times by 2018 and to realize unit cost savings of 21%, not counting the impact of foreign exchange and fuel prices by the end of 2018 when compared to 2012.

In addition we continue to focus on investments and training for our employees, which we have seen has contributed to higher engagement levels and improved customer service experience and scores. In fact just today The Globe and Mail announced that for the fourth consecutive year Air Canada is one of Canada’s top one hundred work places.

Air Canada’s brand value has been evaluated as one of the fastest growing amongst large companies in Canada. And we are the only Airline to rank among the country’s top brands according to the UK’s Brand Finance; one of the world’s leading brand valuation consultancies.

Before passing the call to Ben I would like to touch on the preliminary announcement made by Minister Garneau last Thursday regarding airlines and airport efficiency. We are studying the measures announced by the Minister and can comment further as more information is known.

We can however say that the number one issue faced by the Canadian Aviation Industry continues to be the uncompetitive level of government and infrastructure, rates, charges and taxes, including airport rent and related charges, security, surcharges, fuel taxes and others. Canada ranks 136th out of a 140 countries when it comes to ticket taxes and airport charges.

These need to be properly addressed to create a truly competitive industry and reduce airfares meaningfully and sustainably. I will now turn the call over to Ben for a discussion of our revenue performance for the third quarter before commenting again at the end.

Thank you Calin and good morning. I am pleased to report that our system passenger revenues increased $390 million or 10.5% to a record $4.1 billion in the third quarter.

Our transformative business plan was in full deployment, which had two core attributes, unit cost reduction and international revenue growth, targeting a larger share of the Canada, to and from international markets and sixth freedom markets to and from the Americas. On a system basis Q3 traffic increased 18.9% versus last year.

As expected yield declined 7.0% due primarily to three things, longer stage length. The increased size of Air Canada Rouge and the further identification of The Air Canada mainline fleet economy cabins.

These are fundamental parts of our plan to drive improved margins through cost reduction. As expected our transition to more international long haul routes resulted in a 7.2% increase in average stage length which impacted system yield by 4 percentage points in the third quarter.

On his stage length adjusted basis yield decreased 3.0% versus the previous year’s quarter, reflecting a customer mix waited towards leisure traffic in the summer months as well as the strong competition we had from seasonal low cost carriers. Q3 2016 for Air Canada included the simultaneous full deployment of numerous strategies that have been years in the making.

Two new Boeing 777’s were delivered in the second quarter, which brought our flee to 25 of the latest generation model of this aircraft making Air Canada the largest operator of this fleet type in North America. The full benefit of these new aircraft coupled with the full impact of a reconfigured international fleet with a denser economy class cabin and the same number of premium seats which correspondingly have the direct and meaningful impact on RASM and CASM are key strategic initiatives.

This quarter also represented a very big step for Air Canada, as we grew our capacity on a system basis by 20.9%. We continue to diversify our network with close to 92% of the capacity increase in international markets with a particular focus in the North Atlantic and the Asia Pacific markets.

As mentioned this growth was primarily driven by additional Boeing 787 aircraft in the mainline fleet, the growth of Air Canada Rouge and additional seats on our Boeing 777 aircraft. Many issues affected the market in the third quarter including a lower Canadian dollar a slower Alberta economy, new lower cost competition across the Atlantic from Westjet and Icelandic carriers, the fallout from the Brexit vote and the effects from the terrorist attacks in France and Turkey.

Despite all these factors we delivered record earnings and EBTIDAR margin in the third quarter. In Q3 our sixth freedom international-to-international connecting traffic showed growth of almost 28% when compared to last year, as we continue to leverage the geography of our Canadian hubs, our industry leading products and services, our extensive network and our other competitive advantages.

We increased both inbound and outbound traffic between Canada and international markets. We saw a major growth in the U.S.

aided by our comparatively weaker currency and we were able to further capitalize on some unique routes thanks to our efficient configurations on our 777 and 787 aircraft. Our 787’s are configured to allow us to profitably operate routes like Delhi, Dubai, and Brisbane and Air Canada Rouge has been the catalyst for a successful expansion into market like Northern Africa and Eastern Europe.

We’re also very pleased with the results of our first summer utilizing our new revenue management pricing system which has helped ensure this expansion as both optimized and sustainable. We see more opportunity to be gained from this initiative.

Thanks to the flexibility provided by our landmark and unprecedented agreement with our pilots which remains unique in our industry we were able quickly move capacity from the comparatively weaker Atlantic to the stronger specific markets to take advantage of more lucrative opportunities. Each would have presented themselves differently had we not had the strong relationship and flexibility with this group.

11:11):

11:24): Thanks to our early mover advantage, we are enjoying a head start and the results so far have been very positive. Focusing on a couple of our key markets, in the domestic market, after several challenging quarters we saw a significant improvement in our performance in the third quarter.

This was consistent with our expectations for unit revenue to stabilize once supply and demand were in better alignment.

12:26): We also experienced tremendous growth in U.S. outbound traffic to Canada due to a greater desire of Americans to come to a comparatively more affordable Canada and this revenue is mostly denominated in U.S.

dollars, which resulted in a favorable currency impact given the lower Canadian dollar. Revenues on the Atlantic increased $109 million or 10.7% year-over-year on traffic growth of 21.8%, our routes to Delhi and Dubai were very successful and Italy, Greece, Spain and Portugal performed solidly.

However, as highlighted by our U.S. international competitors, the yield environment remain challenging, reflecting increased industry capacity and competitive pricing to and from North America.

Despite the challenges, all new Atlantic routes were profitable and met overall expectations. Our internal analysis shows we gained significant market share from various competitors, which bodes well for our long-term market position especially in our key hubs of Toronto, Montreal and Vancouver.

Turning to the Pacific, revenues increased $108 million or 19.2% on traffic growth of 29%. Yields were under some pressure with increased industry capacity on most major Pacific Services however Pacific margins fully met expectations in the quarter.

Japan performed extremely well as we experienced a shift in outbound Japanese traffic to Canada from Europe. The traffic growth reflected in large part the launch in June of a non-stop 787 service to Seoul from Toronto and Canada’s only non-stop flight to Brisbane from Vancouver both operated with 787’s.

We introduced new 787 service between New York Newark and Vancouver scheduled to well service the local market in addition to providing a seamless offering between Australia and the metropolitan New York area. We also recently launched our seasonal 787 non-stop service between Vancouver and Delhi complementing our daily year round 787 service between Toronto and Delhi the only non-stop flight from Canada to India.

Looking ahead for the fourth quarter due to the change in timing of winter school breaks, we do anticipate a portion of Christmas peak demand to shift from Q4 2016 to Q1 2017. As I mentioned we have also recently made a number of exciting new route announcements for 2017 including the launch of a new year round 787 service between Toronto and Mumbai, Montreal to Shanghai and Vancouver to Taipei, seasonal Rouge routes from Montreal to Algiers, Montreal to Marseille, Vancouver to Nagoya and Toronto to Berlin.

Q3 2016 show cased the full potential of an optimized Air Canada with the right fleet and right products and services and demonstrated that with a well diversified revenue base our airline can produce superior bottom line result even in a somewhat challenging environment. We are very active and focused on further commercial opportunities in the areas of ancillary revenues branded fares and customer engagement.

As we progress into next year, we will re-double our focus in investment in customer service, cost reduction and increasing market position strength as we look towards continuing our transformation into becoming a true global champion airline in all respects. I will now turn the call over to Mike for a discussion on our cost performance and balance sheet metrics.

Thank you, Ben and good morning to everyone. Record EBITDAR for the quarter was driven by both the increase in revenue and traffic as well as the transformational changes we’ve made in recent years on the cost side.

We reported a CASM decline of 8.3% from the third quarter of 2015, on an adjusted basis CASM decreased 5.9% year-over-year. With unit costs improvements reflected in all major line categories with the exception of ownership costs comprised of depreciation and air craft rent.

As we continue to invest in fleet renewal and optimization. An increase in average aircraft utilization of 3.3% when compared to last year also contributed to our improved unit cost performance.

Turning to fuel expense we absorbed the net increase of $12 million or 2% from last year mainly on a higher volume at fuel liters consumed given our capacity growth in the quarter mostly offset by the impact of lower base jet fuel prices year-over-year. Our assumption is that the price of jet fuel will average CAD0.60 per liter in the fourth quarter and CAD0.54 per liter for the full-year.

We continue to hedge fuel with call options protecting us against short term price spikes but allowing us to benefit 100% from a declining fuel price. As of September 30 we had hedged approximately 40% of our anticipated purchases of Jet fuel for the fourth quarter of 2016 at an average West Texas Intermediate WTI equivalent cap price of U.S $56 per barrel.

We’ve also hedged about 8% of our planned fuel consumption for 2017 at an average WTI equivalent cap price of U.S $57 per barrel. Additional information of our operating costs is included in our third quarter MD&A.

Moving on to our adjusted CASM guidance, based on our latest cost forecast we expect adjusted CASM to decrease between 5% to 6% in the fourth quarter when compared to the same quarter of 2015. Foreign Exchange is not expected to have a significant impact on operating costs in the fourth quarter relative to last year’s fourth quarter.

For the full-year 2016, we continue to expect adjusted CASM to decrease between 2.75% to 3.75% from the full-year 2015. If the value of the Canadian dollar remained at 2015 levels, adjusted CASM for the full-year 2016 versus the full-year 2015 would be projected to decrease 3.75% to 4.75%.

With the third quarter now behind us we are able to narrow our range, now expect EBITDAR for the full-year 2016 to increase 6% to 8% when compared to the full-year 2015. This compares to our previous guidance of EBITDAR growth of 4% to 8%.

I know all of you have already done the math on our Q4 EBITDAR estimate which is now expected to be at or slightly below last year’s Q4 level of $425 million. But you should also realize that our estimate for Q4 remains significantly above both 2013 and 2014 Q4 EBITDAR results.

We have made certain assumptions as part of our forecast which are discussed in the news release we issued this morning. Moving on to the balance sheet and liquidity, we ended the quarter with $3.7 billion in unrestricted liquidity.

Free cash flow of $315 million improved $429 million from the third quarter of 2015. Adjusted net debt of $6.819 billion (sic) at the end of September increased $528 million from December 31 2015.

New borrowings for the year-to-date period of $1.3 billion which were all related to aircraft financings were partly offset by debt repayments of $461 million and a favorable currency impact of $259 million. September 30, 2016 our adjusted net debt to 12-month trailing EBITDAR ratio was 2.5 unchanged from December 31, 2015.

Our return on invested capital at the end of the quarter was 15.5%, 620 basis points above our weighted average cost of capital of 9.3%. We recently made great progress in improving our balance sheet with our successful $1.25 billion refinancing transaction completed in early October.

We expect to realize annual interest expense savings of approximately $60 million and have freed up collateral with a value of approximately $650 million. This brings the total estimated value of Air Canada’s unencumbered assets to approximately $2 billion.

In conjunction with this refinancing transaction we paid $61 million in premium costs and wrote–off transaction costs and discounted $21 million. These costs will be reported as a special interest charge in the fourth quarter of 2016 and will be excluded from adjusted net income.

This very successful transaction, which was well received by the market is a reflection of the execution of our strategic plan over last several years. This transaction provides us with even greater flexibility to continue to execute on our strategic initiatives and to create additional value for shareholders.

Since mid-2013 we’ve reduced weighted average cost of our overall debt by approximately 150 basis points to 4.49%. Additional detail on our results for the third quarter can be found in our financial statements and MD&A, which we posted on our website and filed on SEDAR this morning.

We expect to release our 2017 annual guidance in early 2017. With that, I’ll turn it back to back to Calin.

Thanks Mike. As we mentioned, we’re reporting a 16% higher EBITDAR level this quarter, despite what is commonly viewed as a low growth global economic environment not unlike the previous quarter.

We’re delivering record results by sticking to our strategic plan developed several years ago, which has evolved over time, but has respected the same general principles along with some deliberate cost control measures. We remain confident that we will deliver the 2016 EBITDAR growth targeted in our guidance with our ultimate objective of coming in at the high end of the range.

It is worth repeating that our [indiscernible] refinancing is an important transaction for us, not only will it save $60 million in annual interest cost as Mike indicated, with an all in rate of approximately 3.8% as at the end of last week. But it was also was enthusiastically over subscribed and demonstrated that capital markets are generally very supportive of Air Canada’s plan.

Overall, Q3 was the best evidence yet, supporting our strategy of growth at a lower cost. Yes, we did add significant capacity with reduced RASM but delivered strong EBITDAR and adjusted net income with improved margins.

Integral to our strategy is a flexible model to move capacity to different markets, to capitalize on flow and demand. When some markets are stronger, others may be weaker.

So this opportunistic operational style allows us to maximize our assets and renders us much less dependent on domestic travel within Canada. Flexibility expands to our ability to deal with different economic environments by having more so called swing capacity, essentially our unencumbered aircraft.

Our performance demonstrates that we are able to compete with the best and strongest global carriers in the world by challenging them for global traffic flows. While we are pleased with seven consecutive quarters of record financial results, we are investing in the long term with our fleet, CapEx and international route decisions.

It is indeed possible to accomplish both successfully and maintaining this multi-pronged focus remains our objective in the months ahead. While we’ve made significant progress over the last several years we continue to raise the bar for customer experience and have more important initiatives underway across the system.

Thank you for attention. We’ll now open it up for questions.

Thanks and good morning gentleman. Just a house keeping to begin with, the FX impact was $49 million on passenger revenue in the quarter, but what was the impact on operating costs?

It’s Mike, good morning. It was 20 million on operating cost, 13 I believe to fuel and 7 to non- fuel.

Okay. Thanks Mike for that.

So a couple questions here first on yield. This 7% yield decline I guess the stage length had a negative impact of 4 points and then there was a positive 1 point impact from FX.

So can you please quantify some of the remaining factors Mike?

Well again, this is a reflection of our overall strategy, most of our growth, the vast majority of our growth is with the economy or leisure customer because we’re not really adding a lot to the business class portion of our planes. And so the mix of customers are skewing more towards leisure, especially in Q3 and that was a major impact to the yield in the quarter.

Now again as part of the strategy we are moving those customers at a lot lower cost and therefore as a result our margins continue to expand.

Okay. And the Pacific market seems to have declined materially since the last two or three quarters, so there was obviously – one of the factors was the fuel surcharge was regulated, but if the fuel price sort of re-bounce here, then the fuel surcharge will probably rebound with that.

But what else are you seeing in the Pacific market that kind of led to the big decline like that? Is it more because the capacity was there so that fares were sort of compressed at this point initially and then it will improve down the road?

And then if Air Canada – sorry, Air China JV comes to fruition, would you expect any improvement in PRASM as well?

Yes. Hi, it's Ben.

We actually – were quite pleased with our Pacific performance. It hast to be very competitive as it always is, that market lot of players both into Canada and U.S.

Fuel is relatively low. And market fare is usually, as well as fuel surcharges usually react to that.

But we're very pleased with our margin performance on the Pacific.

Okay, Ben. And on the competition side Ben, is there anything that is driving those pressure on the fare side especially in the Pacific market in third quarter?

Not, anything new that we haven’t experience over the last decade.

Okay, thanks. And finally, second question Mike on the leverage, you continue to target 2.2 times by 2018.

So I was just wondering if fuel price sort of rebounds here, the EBITDAR might come under pressure little bit. So what would you expect to be the biggest drivers of leverage ratio to that 2.2 times level?

Will that be sort of a financial decision to kind of a push out some CapEx and sale-leaseback some aircraft or would you expect the EBITDAR as well to grow?

We expect – first of all, we expect EBITDAR to grow. And but also there is flexibility, certainly we're – we will be generating more free cash flow as we get through our highest CapEx year ever for the Air Canada, CapEx drops next year and drops the following year.

And so we will be producing higher levels of free cash flow, which we will be utilizing to pay down debt to reach that target of 2.2.

And any sense on the timing of the sale-leaseback Mike for the 787’s that you indicated before?

Yes. We're putting our plans together right now for 2017 financings.

We will be doing up to four sale-leasebacks in 2017. That’s two more than we did in 2016.

We're finding very, very competitive rates in the sale-leaseback market for 787’s. And so we're taking advantage of that opportunity and are working with two parties right now to put together four sale-leasebacks for the first half of 2017.

And did you expect similar competitive rates on other aircraft types as well or is it just specific to 787’s right now?

Right now 787 programs really are our priority to finance. And we're really not looking to the sale-leasebacks on any other planes other than potentially 787’s.

We will still own the majority of our 787’s. But as we said all along even years ago, we would put together our financing plans for 787 program.

We expect that some of those will be done on sale-leaseback arrangements. And we will again – we did two this year and we hope to do up to four next year.

Okay, thanks for the great color, Mike. Thank you.

Yes, good morning. First question, if you can talk to some degree on your capacity plans for next year, your fleet is looking nine 787’s.

You've got two max coming I guess toward the end of the year. And then I guess through we should not significantly similar [Audio Dip] can you give us some idea of the percentage of that [Audio Dip] developing going into next year [Audio Dip] possibly talk about what will be going in domestic market as well?

Okay. Fadi, it's Calin here.

So we're having a little trouble hearing you, but capacity for next year, we're not putting out capacity guidance for 2017 at this stage or frankly at all. Other than what we've been saying in terms of the aircraft coming into the fleets and so you can make some correlations from that.

We have seen – you've seen notionally that we've been talking about 90% of our growth coming from international markets and there you saw we exceeded that slightly in the third quarter, we had more than 90% of the growth coming from international markets. As you have a sense to how we're deploying the capacity.

So whenever there is any discussions about there being too much domestic capacity. I think that focuses me to focus on where it is, that this capacity is actually being deployed which is in these international markets.

So as these new airplanes come in, you've heard about some of the new routes that Ben mentioned that we have already announced for 2017. And we're confident that we'll continue to be able to tackle those routes profitably just as we did the 2016 new routes.

This involves a combination of the so called six freedom traffic. So we know that that requires some connecting traffic and our investment in the narrow body and in the regional aircraft is with a view to contributing to the growth in international markets.

So that continues to be the strategy but we're not putting out at this point capacity guidance for 2017.

Okay, appreciate the color. The other question I have is on CASM, so I mean you are going to be 375 to 475 this year, I guess on a currency neutral basis.

And is there – Mike can you give us sort of an idea about some of the big pieces through the cost structure going into 2017, what we should be sort of thinking about I guess the fleet expansion is not very dissimilar to what we've seen this year, anything else we should be thinking about as we sort of hone the cost structure going into next year.

Good morning, Fadi, it's Mike. I think it's consistent that you can’t be consistent execution of our strategy bringing in very, very productive 787s to replace 767s and then moving some 767’s down to Rouge, and expanding Rouge, those two programs still have a lot offer and they will be the key drivers to our CASM ex-fuel and CASM reduction next year.

And Fadi also just when you do your calculations, you probably can see this from the MD&A and so on, but there will be four 767s coming out of the fleet next year. So it's not all incremental, as Mike just said there is replacement of some 767 flying.

So make sure that you aren’t double counting.

So those two initiatives will be little the key contributors to the CASM decline next year. Additionally we're going to be one year more mature with our new Jazz contract, which is delivering the value that we thought it would to us.

The 737s as you mentioned don’t come in until late in the year. So they will not have much of an impact next year, but they will have a much bigger impact in 2018 as we drive the 10% CASM improvement from that fleet replacing program.

Okay. So would it be probably fare then to think on a currency neutral basis, the magnitude decline we saw this year, we should be seeing something around that same range next year as…

Yes. Again, Fadi, I don’t want to provide guidance this point in time.

We're still going through our business plan and we will be providing full guidance to the market in early 2017 on all of the metrics that we think are important.

Okay, thank you.

Thanks, Fadi.

Thanks, good morning. I guess you talked about launching 20 new international and U.S.

trans-border routes this summer, so it's an awful lot of new routes. I'm just wondering if you can talk about how those routes are maturing?

Is it a typical sort of curve that you're seeing? Are they maturing maybe more rapidly than you normally see?

I guess what I'm trying to get a sense of is, as we look ahead to next summer, how much better will these routes be performing relative to what you've seen this past summer?

Sure. I'll ask Ben to comment more specially Cameron, but – you know what – the thing that has gone over the last several years is as we have made our three main hubs much stronger.

So therefore it's not just launching a new route with the expectation that you are picking up passengers only from the local city. So these routes are capable of being brought to maturity much more quickly than we would have been able to five or six or seven years ago.

And so we're quite pleased to see it and in many respects it has attracted better than our initial forecast or expectations were. So remember, this is – it’s a three pronged strategy, one is you get the right fleet in, two is you build up the hub and three is you'll go to all these new destinations.

I'll ask Ben to perhaps comment a bit more specifically.

Sure. The – with the introduction of Rouge into our fleet and into our product offering, many of these routes we were in couple of decades, we know them quite well, we just never had the right aircraft to properly serve, the markets profitably.

So with all of the advantages that we have in terms of fleet and our joint venture with Lufthansa and United in many of the markets where we deploy Rouge. We're seeing a pickup in the level of efficiency in terms of margin, it’s a much faster than what we see on a typical mainline new route introduction.

So the Rouge routes are performing extremely well right off the bat. The mainline routes are doing at plan but not as strong to begin with and we expect improvement until they reach full maturity over the next year or two.

And on the six freedom I mean you talked about the international to international connecting traffic up almost 28%. Is there anything that’s surprising you on the traffic flows with that traffic route?

Well. We've got as we've mentioned in previous calls a new revenue management origin destination system that we're into our first year of deployment.

And it's helping us in a big way. So we're not really going for volume, we're going for quality of customer.

I think with our geography and a product offering that we have, we can be selective in the types of flows that we go after. So in particular the U.S.

Northeast to Asia is a prime objective of ours to gain more share there. We think we have the best offering especially from cities that don’t have non-stop service to Asia.

And then as well we're finding that our Australia service is also very unique in particular because of the ease of transiting Vancouver. So there are many, many markets that we can continue to grow from – U.S.

as you know its largest air market in the world. But we're being very particular as to what type and how – what the kind of quality that revenue is to ensure we maximize on the opportunity.

Okay, very good. Thanks very much.

Good morning. Thanks for taking my question.

Ben can you quantify the impacts on the calendar shift in Q4 and then do you expect to recapture all of those revenues in Q1 or will the compressed holiday period result in some lost revenues.

We expect some of that will shift but overall it should be the same or superior to last year.

And then in terms of magnitude of the headwinds on fourth quarter or is it similar to what the U.S. carriers have said, around a point?

I think it is about right. I think we're slightly different, because we're more skewed international than the U.S.

carriers, but overall it should be immaterial should look the same.

Okay, got it. And then Michael you mentioned increased aircraft utilization helping unit cost performance, how much more room do you have on aircraft on improving aircraft utilization and what are the primary drivers enabling that?

We've got an incredible team here. And they always look at opportunities to improve aircraft utilization or all the key drivers to keep our cost down.

Certainly there is more room, I think Q3 showed a very, very high utilization, especially to meet the demands of the Canadian public, lots of travel during Q2 and Q3. Yes, the key drivers there are obviously our maintenance, on time performance, a number of the metrics that we continue to focus our operations staff on.

And so we do believe there is still opportunity for us to improve utilization throughout the year.

I could add to that Julie. We – in the summer, I think you can see if you actually go into detail of the international fleet aircraft utilization.

I mean we probably have the best in North America. With the location of Toronto and the times zone we can cross utilize Trans-Pacific fleets with our Trans-Atlantic Fleet and that allows us to use basically a one aircraft rotation on Trans-Pacific coupled with the shorter one aircraft rotation on the Trans-Atlantic and that drives utilization really high.

We're looking to expand those types of things into Q4, Q1, Q2, demand is obviously not a strong in Canada during those periods. But we're incrementally throughout our medium term and long range plan is to get our utilization rates closer to a more flat line year around, I think we'll ever get fully with the same levels of Q3 but the objective is to get closer and we’re hoping to make improvements on that each and every year.

Okay. That’s helpful color.

And then one last one, just on the stage length impact on the third quarter was about 4 points, I think last quarter it was about 2.4, so looking into the next couple of quarters based on the growth that you are planning and how we should start to see some anniversarying of the longer stage length flying. How should we think about the right run rate for a stage length impact on yield?

I think at this point we are going to continue to see stage length increase depending on the competitive environment, North America to put out an estimate of what the run rate is going to be over next few years. I think I would be able to guess at this point.

We're going to continue to evaluate how Q4, Q1 go and then will solidify our further plan. But it definitely will continue to increase at what level.

I don’t think we’re ready to give a number yet.

Julie, it's Mike. We can give you some short-term numbers, for Q4, we expect something like 6% stage length, so not quite as high as Q3, but certainly higher than what we experienced in Q1 and Q2.

Okay. That’s the actual increase in stage length but not the impact of the yield.

That’s right. That’s the increase of stage length.

Got it. Okay, great.

Thanks so much.

Thanks, Julie.

Thanks, operator. Hi everybody, thank you very much for the time.

Just a couple of questions, one, so I know the goal at the last Investor Day was to increase your share of six freedom traffic to kind of low-single digits. Can you say what – where that number stands right now?

We haven't done the – we haven't got the exact number yet, we haven't seen all the reports of our competitors. We should have that in a couple of weeks and we can get back to you.

Okay. Just a kind of curious the 27% or so percent increase is significant in must be adding to your share, so kind of wondering how that’s going?

I could tell you this Helane, we're still far short of the term that many essentially use fair share of U.S. six freedom.

So we are still well below.

Okay.

But we’re definitely are getting closer to where we like to be.

Okay. And then related to that, are you seeing any impact from the Icelandic in your prepared remarks you mentioned, the Icelandic carriers but are you seeing a shift in connecting traffic kind of away from Toronto or Montreal and into Reykjavik?

Look – it's Calin. We have low cost carrier competition, in so many of our markets and obviously we have had the entry of these Icelandic carriers this summer.

But there has not been anything as significant in terms of loss of connecting traffic. Part of the investment we've made over last number of years as this I said earlier building up those hubs and that gives us a competitive product and a competitive connection product.

So we're still very pleased with our connecting traffic level.

Okay.

And Helane, one thing to note is we’ve been dealing with a very competitive carrier across the Atlantic since the mid 1980s, and that’s Air Transat. And now that we have Rouge, we have much stronger tool to compete against that.

The advantages the Icelandic carriers bring in terms of lower cost versus Air Transat are almost negligible.

Okay. Great.

Thank you. And then I think, Mike, you just said that four 767s were going to be retired.

So at the end of 2017, how many will be left in the network?

Okay. Sorry, let me correct – we’re going to move five 767s from mainline to Rouge.

Okay.

And there will be five left, which we will hang onto for a couple more years in mainline.

Okay. All right.

Perfect. Thank you.

And then just one other comment, Calin, congratulations on your award. It’s well received.

Thanks very much Helane.

Yes. Thanks, guys.

Good morning. Just very quickly, Mike, as you alluded to, yes, we’ve done the number on the guidance, and so it puts you at the top front of the range, pretty much in line with EBITDAR from Q4 of last year.

Just thinking about the capacity expansion, the CASM impact further implies a fairly negative RASM number, or is there something else that I’m missing kind of one-off there that’s going to put some pressure on your EBITDAR in Q4?

No, I don’t think you are missing anything, Chris. Our sense is Q4 will show the same trends as Q3.

We’re employing, executing the same strategy that we played in Q3, so the resulting impact on those key metrics will be roughly the same.

Look, it’s also the speed with which you would see any short-term spikes from fuel. That obviously does have an impact in terms of any quarter, so we did see some spike and of course settle back down.

But as fuel bounces around – fuel is of course a big variable that is going to affect that performance in the fourth quarter.

Okay. So is it just a matter of fuels moving faster than you can adjust fares for?

There’s always a timing impact as you know, Chris. We pre-book two or three months in advance, and so it does take some time for any type of price increase in fuel to be filtered through to the consumer side.

Okay. Just kind of returning – just looking at cash flows – good free cash flow generation this quarter.

Certainly, you talked about maybe some additional 787 leaseback. As we move into 2017 and start thinking about kind of a step back on CapEx, is your expectation that we should continue to generate free cash flow maybe on an annualized basis?

I’m assuming there’s always going to be the quarterly shift, but are we really seeing the trend, or do you guys believe that we are in that trend but we’re going to be positive free cash flow over the next few years?

Chris, it’s Mike. So, that will be something we will consider to provide as guidance in early 2017.

Certainly, with the step down in CapEx of roughly $500 million plus the fact, if we can complete these four sale-leasebacks, there is certainly an opportunity – well, certainly, free cash flow will be much more positive in 2017 than it was in 2016. And we’re still working through our business plans right now, and our expectation and our objective is to provide positive free cash flow for next year.

Okay, great. And then just but one last one, if I may.

Just Minister Garneau’s announcement about changing foreign ownership rules, I know, Calin, you made some comment about costs and I’m sure that’s not a surprise to anyone. Just a few things.

One of the things that results as a part of that was the support for a couple of new participants in the industry to seek foreign funding. Any comments around that?

And then the other issue or the other comment is just some reports in the media that the government is considering perhaps privatizing some of the airports. Any thoughts around that would be appreciated.

Okay. Chris, thanks.

So, first of all, on the competition, as I said earlier, we face the low-cost competition in many, many markets and have faced low-cost competition in Canada. We’ve had a pretty good low-cost competitor in Western Canada, and we’ve had a pretty good low-cost competitor across the Atlantic right here in our – Montreal.

So, we’re familiar with low-cost competition and whether people put the letter U in front of it or not, we expect to be able to compete properly. Having built Rouge, we now have a tool that is much more cost competitive and we feel that, especially in some of the longer haul missions, including inside Canada, Rouge could well be deployed at the right time to be competitive, as needed.

So, we’re in an environment where we’ll do what is necessary to compete, and we’re not concerned about competition. We don’t necessarily like where the playing field is not level in terms of the speed with which exemptions or other decisions are made.

If there is a process to change laws, to change restrictions, then we look forward to everybody having the opportunity to benefit within the same time frame. And our highest expectation, however, is, if somebody wants to tackle with high rates and charges infrastructure in Canada, one has to tackle the system of taxation.

We know that aviation has continued to be a cash cow for many years. And as I said in my introductory remarks, Canada, under the OECD, the world economic forum, is ranked 196 or something out of 200, or 136 out of 140 countries.

So, this rates and charges methodology is something that really needs to be tackled as a more significant priority, in our view. As far as the airport privatizations are concerned, we’re studying the impact of that internally.

We’ve seen some of the submissions of some of the airport authorities who have very strong views on the topic. Again, our expectation in terms of any analysis of this is that the cost of aviation cannot go up.

So, to the extent that airport privatizations would result in a lower cost to us and therefore a lower cost that we could in turn pass on, that would be a good thing which we would support. If we cannot come to that conclusion and we think that the privatization process with the expected return expectations of an infrastructure player would actually increase the cost of aviation, then we will not be supporting that and we will be making our views known in due course.

So we’re analyzing that and we’ll some stage in the coming weeks, we’ll have an official position on that. And look, as far as the rest, we are much more competitive than ever.

So, as there are changes in the regulatory environment, we expect to be able to compete better than we ever have in the past.

All right. Thank you.

That’s correct, Turan.

Okay. Perfect.

Thank you. And then just one question for me here, most have been asked and answered.

In terms of the Rouge fleet, you will obviously be hitting about 50 aircraft by the end of next year. I’m just wondering.

It seems to be doing quite well and I guess maybe there’s a bit more competition coming in, and the Max coming in maybe opens up some Airbus fleet there as well. I’m just wondering if you’re going to work with the unions to maybe make that larger?

Well, that’s always an opportunity to discuss with the union group, Turan. At this stage, it’s too early to say where the discussions will end up because we will have some opportunities for discussion over the coming years, and there’s no question that Rouge has been proven to be a good model, so we’ll see where that goes in due course.

Okay. Perfect.

Thank you very much.

Hey, thanks very much. Good morning, everyone.

So, I wanted to start I guess on some of the fare activity that you noted from some of the discount carriers. Now, as you booked into the next three or four months on your forward-booking curve, have you noted, as we go into the shorter season now, any acceleration, deceleration, in that level of fare activity, or is it consistent with what we saw in the summer?

Yes. Hi, Walter, it’s Ben.

In the domestic market, there has definitely been a reduction in the year-over-year increase in capacity, so we are seeing more stable pricing and a much more rational marketplace. And trans-border, we’re seeing incredible growth, both outbound from Canada to the U.S.

and inbound into Canada. And that’s aided in part by a reduction by two of the three largest U.S.

carriers in their capacity to and from Canada. Across the Atlantic, we are working even closer with our joint venture partner, Lufthansa, to address the ever-changing market environment, and across the Pacific fairly strong, and our new route to Brisbane is doing really well.

Okay. And that was actually my second question.

Can you comment, Ben, a bit on the pickup you’ve seen in Brisbane, Delhi, Dubai, some of those routes, and what the competitive response has been with your new service?

I think what the – I mean it’s not really a surprise that we were waiting for so long with the right aircraft, which is the 787, and it’s outperforming our expectations on all of those routes. I think this wasn’t part of the initial plan.

The one we decided to add later on was an extension of the Brisbane flight into Newark, and that has proven to be quite successful in attracting not just Brisbane traffic but also Sydney traffic, especially with the unique transit process that Vancouver airport has that to do not have in the California airport, so that’s a unique selling feature that we can offer. And when customers try that out along with our superior onboard product, we’re getting good traction there in the marketplace.

Delhi, the volumes are very strong, so here we’ve got to make sure that we manage yield appropriately to get the right mix onboard. And so far, that’s working well, both on our Toronto flight and on our Vancouver flights, so much so, as you’ve seen, that we’re confident now to launch a third route to Mumbai starting next summer.

So you’re gaining share here without much in the way of competitor fare activities. People are picking up and appreciating the direct service, I suppose?

Yes, well, the Canada/Indian market is very, very large and then of course the North America/India market is very, very large. We’ve been there several times before.

We always knew it was holding us back. The profitability on that route was the right unit cost airplane and not only the right unit cost airplane, but configured correctly for the market.

So we have both those and that’s proving out really well on those routes.

Okay. And then you mentioned utilization.

And without asking guidance, but just the cadence, the capacity obviously over 20% in the quarter is a big number. As we go out now, do you expect to expand utilization?

Or in other words, do you see perhaps – I don’t know if Ben or Mike are the best one for this – is this kind of an inter-year quarterly peak on utilization? And do we hold here or maybe we see it come down from this point forward?

I think, Walter, the key thing which we say often and I hope it’s clear with you is we are on a margin expansion strategy, so the amount of capacity and the rate of utilization will be dependent on ensuring we maintain that year-over-year improvement in margins. That’s what’s driving it.

Plus the utilization of aircraft, Walter, it’s Calin here – you have to bear in mind too that we’re not yet at our full 787 complement. And when that happens, I think that will be a major driver of efficiency of the fleet, give us lots of opportunity to continue improving it.

And you’ve seen it– we’ve had more 777s in the fleet as to how much better we can utilize the airplane. So for sure you will see a lot more focus on that in the third quarter when the opportunities are so great, but we expect to have it now throughout the year.

I guess with higher utilization, higher capacity, it’s becoming – it’s there because the demand is there I guess.

Precisely. And I think that we’re now in an environment where we know the 787 from a maintenance perspective better than we have before.

And it still is relatively speaking early innings in the 787. So we have lots more room to become more efficient with it.

And I think Boeing tells us we’re one of the highest utilizations of the 787 anywhere in the world, and we continue to do that with our team here. As Mike said, we’re confident that our team can turn these airplanes and maintain these airplanes as well as anyone in the world can.

That’s great. So my last question here might be a little further out because it goes into as you grow your fleet in the 737 and the C series.

But I always find that the impact and beneficial impact of feeder traffic and operations and new operations that allow for that feed traffic to come in are often difficult to measure. But Ben, do you see any opportunity now as the 737s start to come in?

Will the impact of feeder and the positive impact of feeder do you expect will accelerate here? Will that be an opportunity with either the 737 or the C series?

Both of those airplanes have a dual role serving the local markets as well as feeding our international network. And for sure, because they are best in class in terms of unit costs, we will see an improvement.

But in particular, those airplanes will help strengthen our position domestically. With the A320 versus the 737NG and the 319 versus the 737NG in the mainline configuration, we are at a slight disadvantage, and we’re looking forward to reversing that with our first Max airplane delivering next year.

Okay. That’s great.

Thank you very much.

Thanks, Walter.

Thanks, good morning. Mike, I’m just wondering if you could provide some additional color on why maintenance expense is trending lower than anticipated, and excluding of course the impact from a higher rate of capitalized expenses in both the quarter and I think implied in your outlook for the rest of the year.

Good morning, Tim. The primary difference is just further cost saving initiatives.

We are in the process of renegotiating a number of large maintenance contracts. And when we provided our annual guidance, we didn’t take into consideration significant savings.

And we’re finding, as we negotiate the agreements, we’re finding more savings than we initially thought.

Okay. So there’s no sort of push-out of these expenses.

It’s just kind of new run rates going forward. Okay.

Great.

Yes, absolutely.

Okay. Then, it seems that the premium economy cabin, at least in my observation, the value equation there is very attractive.

And it sounds like, from some of the commentary, it’s doing very well. Does what you are seeing in terms of load factor in that cabin and other factors suggest there may be potential for increasing revenue per seat in that cabin as you look forward over the next couple of years?

Yes, for sure, Tim. You know, obviously, with the new product, we are not what we would view as 100% efficiency within that cabin from a revenue perspective.

So, we will continue to optimize that as we learn more about each individual market and what the booking patterns are and what the elasticity is. And also we’ve designed both the 787 and the 777 where we can easily add or shrink that cabin without moving monuments, so that’s something else we have in terms of flexibility.

Okay. Great.

Thank you. And then just my final question, I actually want to return to a topic that was brought up earlier regarding kind of the seasonality in the business.

And I’m wondering if you can speak to the implications on seasonality from the expansion strategy? Does it increase seasonality?

I know you mentioned there are some initiatives underway to kind of reduce seasonality, but I’m just thinking of putting those aside for a minute. The actual kind of growth trajectory, the capacity plans, et cetera, does that increase seasonality naturally?

And if so, does that actually matter? And if it does matter, what can you do to limit the impact?

And I’m just wondering if you can maybe expand on some of those initiatives you mentioned earlier?

Tim, I’ll comment briefly first and invite Mike or Ben to add. Look, basically, as we’ve had this kind of growth, it for sure will exacerbate the fact that the third quarter is a big quarter for us, and obviously we’re pleased with that.

But we have opportunities like we’ve never had to deploy airplanes to different markets in the shoulder seasons. So we look at, for example, the 767s that are serving markets like Barcelona and Athens and so on in the summer, they are now serving the Caribbean.

In the winter, they are serving Florida, and very, very profitably. So, Rouge, again, is not only an opportunity to reduce costs but it’s an opportunity to deploy aircraft very successfully in the other seasons as well.

As far as the other markets are concerned, the mainline markets, we do have the capability now, in part because of the sixth freedom flying, to fill these airplanes other than in the busy summer season. So, this strategy is designed specifically to give us the opportunity to do well in the other quarters besides the third quarter.

So, I don’t know if Ben or Mike want to add anything to that, but that is part of the strategy. We’re quite confident that we can deploy these airplanes properly besides having strong third quarters.

I’ll just add a few more points there. Definitely, with Rouge, we’ve got the ability to move the bulk of our trans-Atlantic capacity to the sun markets, so Florida, Arizona, Hawaii, Caribbean, Mexico.

And that’s been quite successful and we’re going to continue to do that. On the mainline side, with the 787, we are starting to do things we have not done in many, many years and so far so good, and that’s putting capacity in the market at peak in the winter like India, like Australia, like South America, and we’re using mainline for that.

So a combination of both Rouge and mainline. We’re trying to build up profitable opportunities in the winter, which, historically, have been slower months for us, to give a better balance year-round.

Okay. Thank you.

That’s a great overview.

Thanks, Tim.

Good morning. Thanks for squeezing me in.

One topic area for me. You mentioned attractive lease rates on the 787s.

If we step back and look at the overall portfolio of leased aircraft you have and as you move through a period of renewals, and you are opting to renew those leases, are you guys able to roll these leases at significantly lower lease rates than the prior rate given your improving credit quality and the prevailing rates? Can you help us understand how that will impact your lease rates going forward?

Doug, good morning. It’s Mike.

I think that’s a fair assessment. It depends on the fleet, what aircraft.

Some aircraft are in higher demand than others, but certainly we are seeing, in this low interest rate environment, the opportunity, when leases come up, to negotiate lower rates.

Are you able to provide kind of maybe a magnitude of what your overall lease rate or average lease rates are now versus what you’ve been able to do on some of the latest renewals?

I can’t, Doug, off the top of my head. Right now, our fleet is both 50% leased, 50% owned.

We believe will keep that type of ratio or plus or minus 5% let’s say on that ratio. And again, we’ve got some flexibility.

As we see opportunities in the leasing market that are very, very attractive, then we’ll step into them such as the sale-leasebacks we’re doing next year for the 787 program.

Okay. I’ll leave it there.

Nice quarter. Thanks.

Thanks, Doug.

Yes, good morning. Just one question.

Calin, I think you mentioned you could deploy Rouge on long-haul Canadian. Is there any limitation on what you can use Rouge for in Canada?

So, we’re having a little trouble hearing you, David. Can you speak more into the microphone?

I think you said you wanted to know about Rouge and whether it puts the possibility of deploying Rouge domestically?

Yes, that’s correct.

Okay. Look.

We need to be capable of responding to competition as it comes up, so we’ll assess – we haven’t done that other than on two isolated markets so far. And so we’ll look to see if and when it makes sense.

And obviously Rouge has given us an opportunity to do things that we didn’t have in the past. So as the competition comes into the marketplace, by definition, we need to have a tool to, respond and so we will consider that in the fullness of time, but we’re not announcing any new routes or any new markets at this stage.

Right. But are there any limitations to using Rouge within Canada?

No, there are none, and it’s just a question of us optimizing where we can use Rouge most profitably, which is what we think we’ve done so far.

Okay. Very good.

Thank you.

Thanks, David.

Hi. Thanks for taking my questions.

Just a couple of quick ones for me. When I look at your fuel consumption for ASM, so your fuel efficiency down about 6%, 7% through this year, a nice improvement year-over-year.

I’m just wondering. Is that a good trend we should be expecting over the next few years just given the fleet additions through your fleet plan through the remainder of this decade?

Good morning, Kevin. It’s Mike.

Interesting question. We’re adding nine 787s next year, and so roughly the same as this year, so we should keep the same type of benefit next year as our mix of more efficient aircraft becomes higher within our overall fleet.

Okay that is helpful and then just turning to the Pacific again, I know the commentary was – you’re quite satisfied, you’re quite happy with what you saw there. But it was the only region you saw this year, where there was a sequential modest though, but sequential degradation in the load factor.

Just wondering is that just a reflection of some of the additional capacity you moved from the Atlantic into the Pacific and so expectations would be for that to catch up little bit here or there is something else at play?

That was one, what you point is a good observation, because of the what happened with the terrorist attacks in Europe, we saw it prudent to move – or switch gauge on several missions between – from the Trans-Atlantic to the Trans-Pacific and obviously without the full booking curve window available to us, we weren’t going to get the same efficiency. So that was the minor effect but the overall benefit was much better than what would have been the case if we would have left the airplanes on the Atlantic.

And then of course we had two new very long haul routes that we weren’t expecting the same kind of load factor that we have in the more mature routes and that would have been Toronto Seoul and Vancouver to Brisbane.

That is very helpful and congrats on a good quarter thank you.

Thank you very much.

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