Air Canada

Kathleen Murphy - Director, IR & Corporate Reporting Calin Rovinescu - President & CEO Mike Rousseau - CFO Benjamin Smith - President, Passenger Airlines

Konark Gupta - Macquarie Capital Markets Doug Taylor - Canaccord Genuity Walter Spracklin - RBC Fadi Chamoun - BMO Helane Becker - Cowen and Company Cameron Doerksen - National Bank Financial David Tyerman - Cormark Securities Chris Murray - AltaCorp Capital Kevin Chiang - CIBC

Thanks, Lourde, 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 financial performance for the full year and the progress we've made on our strategic initiatives. Ben and Mike will then address our fourth quarter financial performance and turn it back to Calin before taking questions from the analyst and vendor 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 fourth quarter press release and MD&A for important assumptions, definitions, and cautionary statements relating to forward-looking information and for reconciliations of non-GAAP measures to GAAP results. And with that, I'm going to turn it over to Calin Rovinescu, Air Canada's President and CEO.

Calin?

Thank you, Kathy, and good morning everyone. Thank you for joining us on our call this morning.

In 2016, we're proud to have achieved outstanding results surpassing the previous records for EBITDAR, total revenues, and liquidity levels underscoring the effectiveness of our business strategy and improved competitive position. Our share price jumped 34% in 2016 more than that of any of our North American airline peers and nearly doubled to 17.5% return of the S&P/TSX composite index.

In fact our top-line year-over-year revenue growth and adjusted CASM improvement outperformed that of all of our North American airline peers. In 2016, our operating revenues reached a record of $14.7 billion, up 6% year-over-year.

Adjusted CASM declined 2.9% versus 2015. So we are clearly pleased with the continuing trend of declining unit costs as we execute on our initiatives geared to long-term cost containment and leveraging efficiencies.

We also continue to drive initiatives to generate additional ancillary revenue which has now become an extremely important contributor to our overall revenue stream. Excluding special items, record EBITDAR of $2.768 billion increased $226 million or 8.9% from the previous year surpassing the 6% to 8% EBITDAR increase projected in our third quarter news release.

These results were also above consensus estimates. We achieved an EBITDAR margin of 18.9%, 60 basis points higher than 2015, and above our target of 15% to 18%.

Adjusted net income amounted to $1.147 billion or $4.06 per diluted share. On a GAAP basis, we reported operating income of $1.345 billion and net income of $876 million or $3.10 per diluted share.

Our current investment priority is to direct the majority of operating cash flow to finance the renewal of our fleet with more efficient aircraft and to reduce net debt levels, followed by shareholder distributions by our share buybacks. We further improved our balance sheet last year with the completion of a highly successful $1.25 billion refinancing transaction.

This transaction achieved several key objectives including lowering our Canada's weighted average cost of debt by approximately 150 basis points since the second quarter of 2013 and reducing annual interest cost by $60 million based on calculations at closing. In 2016, a return on invested capital of 14.7% was in line with our target of 13% to 16%.

A leverage ratio of 2.6 was essentially at last year's level and this in a year where we added almost $3 billion in total capital spend. Looking at 2017, we see a continued strong demand environment and growth in sixth-freedom traffic through our major Canadian hub.

Taking advantage of our broad network and our locations as ideal transit point, we see international and connecting traffic as key to our strategy going forward. We expect to achieve an EBITDAR margin of between 15% to 18% even with our current forecast of rising fuel prices and our return on invested capital is projected to be between 9% and 12%.

Moreover we forecast positive free cash flow in 2017 in the range of $200 million to $500 million. We also remain on track to achieve our 2015 Investor Day targeted leverage ratio of 2.2 times by 2018 and to realize unit cost savings of 21% excluding the impact of foreign exchange and fuel prices by the end of 2018 when compared to 2012.

Air Canada continues to be the only international network carrier in North America with a four star ranking from Skytrax. In 2016, according to a report on Canadian brands published by UK's Brand Finance, Air Canada's brand value increased 88%, the fastest growing brand amongst large companies in the country.

Last week, on the occasion of our 80th anniversary and Canada's 150th, we unveiled a new livery for the fleet and new uniforms for our employees. I would like to take this opportunity to thank Air Canada's employees whose dedication and professionalism are responsible for the successes achieved in 2016 flying Canada's flag proudly across Canada and the world.

To reward our hard working personnel, Air Canada has a profit sharing program which allows eligible employees to share in the financial success of the airline. This will be our third consecutive year of employee profit sharing which further encourages the development of a corporate culture focused on shared values, common goals, and performance.

I will now turn the call over to Ben for a discussion of our performance for the fourth quarter.

Thank you, Calin, and good morning. I would like to take this opportunity to thank our employees for a fantastic 2016, our many returning old customers as well as our new customers for choosing to fly with us and our many shareholders for their support of our plan.

Air Canada was one of only three airlines to see both EBITDAR, margin, and revenue growth in 2016 when compared to its North American industry peers despite several geopolitical challenges and rising fuel prices which speaks of its strength of our diversified network. In 2016, we faced an economic slowdown in Western Canada and increased competition in all markets.

Our current and future models comprised of an improved culture, additional Boeing 787s, our leisure carrier Air Canada Rouge, and stronger hub in Toronto, Montreal, and Vancouver is highly competitive and better positions us to succeed giving us the confidence to launch new routes which in the past would not have been viable under our previous model. In 2016, many of the transformational investments we made over the past few years were in full deployment and we were able to successfully and profitably launch 28 new routes.

So far the results from these new routes have exceeded our expectations. Today Air Canada recorded fourth quarter EBITDAR of $455 million essentially matching the fourth quarter of 2015 despite a rising fuel price environment.

I'm pleased to report record fourth quarter passenger revenues of $3 billion, an increase of $199 million or 7% on traffic growth of 15.3%. We saw traffic increases in all of our five geographic markets.

During 2016 we became the leading carrier in all markets where we go head-to-head with our largest Canadian Transatlantic competitor Air Transat in terms of market share. Thanks in no small part to the success of our leisure carrier Air Canada Rouge.

This particularly strengthens our market position in our key home markets which we expect going forward will continue to help drive increased profitability. On a system basis, we had a yield decline of 7.2% half of which was the result of a 6.5% longer average base line.

This was expected again emphasizing our business clients' objective of profitably growing in areas in which we have sustainably profitable margin opportunities which are predominantly international markets. An increased number of seats in long-haul leisure markets, lower carrier surcharges due to government restrictions in many markets, and a higher proportional growth of international connecting traffic also affected the yield year-over-year.

Strategically deploying Air Canada Rouge in addition to increased density on reconfigured mainline aircraft with a higher proportion of economy seats continues to be a key component of our business plan which had margin expansion as its primary objective. Touching on our key markets, in the domestic market, the first half of the year was challenging, especially in Alberta, but we saw it stabilize in Q3 and Q4.

For the fourth quarter, revenues grew $26 million or 2.5% on traffic growth of 5.7%. We also saw gains in our premium traffic due to the success of recently introduced ancillary products.

As we mentioned last quarter, we're trialing and have implemented several tools to stimulate paid premium demand that are having positive results. Our domestic services are also positively affected by incremental connecting traffic due to our well performing international route network.

Domestic yield was however impacted by increased competition on regional route and lower yielding connecting traffic. On the U.S.

trans-border markets, revenues increased $65 million or 10.1% on traffic growth of 15%. We made significant inroads in 2016 launching 12 new trans-border markets and the U.S.

market continued to be strong for us surpassing our expectations. This has given us confidence to further build out our network in 2017.

We have already announced six new U.S. routes from across our three hubs.

We are pleased with the strong customer demand between Canada and the United States especially the incremental connecting traffic. Revenues on the Atlantic increased $47 million or 8.3% year-over-year on traffic growth of 19.3%.

The traffic increase in the quarter was led by strong growth on our services to Delhi and Dubai which are proving very successful for us. We did see some impact due to the uncertainty posed by Brexit and terrorist attacks in Brussels, Nice, and Istanbul; however our extended services to Spain were well received by the market.

Traffic grew across all three cabins, business, premium economy, and economy highlighting the quality of our hard product and breadth of our network and the power of our schedule and associated connection banks in our key hubs. We've had a profitable entry into Africa giving us the confidence to extend our Casablanca service to daily and subject to government approval to launch service into Algiers in summer.

Turning to the Pacific, revenues increased $48 million or 12.1% on traffic growth of 23.7%. The traffic increase was largely driven by the launch in June 2016 of services to Seoul from Toronto and to Brisbane from Vancouver.

In addition, we operated larger aircraft on routes to China and Japan and increased aircraft frequencies on our Vancouver Osaka route. However we are seeing much competition on pacific routes to and from Canada and the U.S.

Vancouver sees the highest number of Chinese airlines at any airport in North America matched only by Los Angeles International. We are focusing on increasing our ancillary revenues including through branded fares and other unbundled services.

We have also recently further developed our merchandising capabilities to customize, differentiate, and combine our product offerings to respond to the more discriminating consumer and meet the expectations of our growing customer base. Business cabin revenues increased $49 million or 8.4% in the quarter.

We were also extremely pleased with the performance of our premium economy cabin which surpassed our expectations. 2016 also saw the completion of our Boeing 777 refurbishment program aligning the interiors and next-generation all aisle access business class and new premium economy class cabins with that of our Boeing 787 fleet including a best-in-class in-flight entertainment systems in all cabins.

This means that our 25 aircraft drawn fleet of Boeing 777-300 ERs and 777-200 LRs now matches 24 Boeing 787 in our fleet. We are also nearing completion of the installation of a premium economy cabin on our Airbus A330 fleet meaning that we are now in a position to offer a standard three cabin product from each of our three hubs on all intercontinental routes.

We now offer in-flight connectivity across our narrow body two cabin jet fleet of 141 aircraft at Air Canada mainline and Air Canada Express and we expect the next generation Wi-Fi service with video streaming capabilities on the 20 Airbus A319 aircraft at Air Canada Rouge to go live progressively over the coming months with the five Airbus A321 aircraft to follow later this year. As Calin mentioned, last week saw the unveiling of our new livery and with it our new brand and SaaS product.

The repainting of our aircraft is a multi-year commitment and the uniforms will be in place by 2018. These external measures represent just a few of the many ways we continue to refresh our products and invest in our employees and in our customers travel experience, complemented by our continuous focus on customer service.

We are launching a partnership with award winning Quebec-based Sommelier, Véronique Rivest to complement our premium meals crafted by British Columbia base chef David Hawksworth. And we are set to announce a second lounge in the international concourse at Toronto Pearson that will feature À la carte dining.

This is in addition to our refresh of our key existing Maple Leaf Lounges. We believe that our delivery in addition to the enhancements to our SaaS product will help Air Canada standout as a first choice brand in the minds of customers in the expanding global marketplace.

Our goal is to maintain our leadership position from a product and service perspective, from a North America perspective as we continue to transform into what we call a global champion. Looking ahead, we continue to see strong passenger demand.

In fact, I'm pleased to note that January met our aggressive traffic expectations. We continue to grow into areas where we see strength and profitable opportunities.

If there is repeating that we are not growing for growth sake, we are one of the few carriers to have secured an additional commercially viable slot of the heavily constrained Shanghai Pudong Airport and we launched our new service from Montreal yesterday. We are making further investments into the U.S.

based on the strength of the market and on the favorable currency, and we expect to see improved performance in the domestic market due in part to potentially better economic indicators coming from Alberta and a stable economy in the rest of Canada. On the Atlantic, despite a challenging Q1, we see improvement as we move into Q2 and especially Q3.

We have also seen a major stabilization in South America with the Brazilian and Peruvian markets drastically improving. The Pacific may pose a challenge.

However we are positioning ourselves to be strong in the long-term, in particular with our service from Montreal to Shanghai. We also expect meaningful growth in sixth-freedom traffic as we continue to leverage our competitive attributes and attract customers from all over the world connecting at one of our hubs between the United States and Europe or Asia.

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. Once again we delivered a solid cost performance in the quarter.

On an adjusted basis, CASM decreased 6.1% year-over-year slightly better than the 5% to 6% decrease forecast in our third quarter news release. We did record a special item of $91 million in the quarter reflecting the estimated cost of pension increases applicable to members of the Air Canada Pilots Association who participated in a defined benefit plan.

Certain pension plan amendments are conditional on meeting defined business plan targets such as the number of operating aircraft and fleet. This past service cost expense of $91 million represents the out-of-period expenses associated with benefits granted upon signing the act of Collective Agreement in 2014.

Given the current accounting rules, any future adjustments will flow through other comprehensive income and not through the statement of operations. We also recorded a loss on debt settlements of $82 million in non-operating expense in the quarter which was related to the $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 based on calculations at closing. This transaction which wasn't very well received by the market and provides us with even greater flexibility to continue to execute on our strategic initiatives.

Turning to fuel, we reported a net increase of $80 million or 13% from last year, mainly due to a higher volume of fuel liters consumed and to a lesser extent the impact of higher base jet fuel prices year-over-year. Our assumption is that price of jet fuel will average CAD0.65 per liter in the first quarter of 2017 and CAD0.66 per liter for full-year.

We continue to hedge fuel with call options and at the end of December had hedged about 9% of our planned fuel consumption for 2017 at an average WTI equivalent cap price of U.S. $52 per barrel.

With respect to non-fuel costs, these were well managed in the quarter and came in as expected. We continue to seek and implement measures to continue to reduce unit cost and enhance our profitability.

Moving to the balance sheet and liquidity, we ended the year with $3.4 billion in unrestricted liquidity. Adjusted net debt of $7.1 billion increased $799 million from December 31, 2015 on higher long-term debt and capitalized operating lease balances, partly offset by the impact of higher cash balances year-over-year.

We expect this level of adjusted net debt to be the year-end high point over our current strategic timeframe. At year-end, our adjusted net debt to EBITDAR ratio was 2.6 compared to 2.5 at December 31, 2015, and our return on invested capital is 14.7%, 680 basis points above our weighted average cost of capital of 7.9%.

Capital expenditures were $2.9 billion in 2016 driven primarily by fleet investments. We have commitments from third-parties for the sale and leaseback of four Boeing 787 aircrafts scheduled for delivery in 2017.

We expect capital expenditures net of these sale and leaseback proceeds of approximately $1.8 billion in 2017. Moving on to pension and based on preliminary estimates as of January 1, 2017, the aggregate solvency surplus into Air Canada's domestic registered pension plans is projected to be $1.5 billion.

On a cash basis, total pension funding contributions for 2017 are now forecasted to be $90 million. Turning to our guidance, we expect to achieve our EBITDAR margin target of 15% to 18% for the full-year 2017 consistent with our 2015 Investor Day target.

On a dollar basis and just to put this in perspective, this translates to an annual EBITDAR increase of approximately $1.1 billion since 2013 assuming the mid-point of our guidance. Given the higher fuel price environment, the EBITDAR margin in the first quarter of 2017 is expected to be approximately half of the EBITDAR margin recorded in the first quarter of last year.

Return on invested capital is projected to be between 9% and 12% in 2017 and 2018. The result of lower than expected adjusted net income versus our long range plan assumptions build two years ago.

We continue to expect the leverage ratio not exceeding 2.2 by the end of 2018. We anticipate adjusted CASM to decrease between 3.25% and 4.75% in the first quarter, when compared to the same quarter in 2016, and decrease between 4% and 6% for the full-year 2017 when compared to the full-year 2016.

As Calin mentioned earlier, in this important transitional year we expect positive free cash flow in the range of $200 million to $500 million in 2017. We made certain assumptions as part of our forecast which are discussed in the news release we issued this morning.

Additional details on our results for the full-year and fourth quarter can be found in our financial statements and MD&A, which were posted on our website and filed on SEDAR this morning. And with that, I'll turn it back to Calin.

Thanks Mike. So to conclude 2016 was an exceptional year with results that we can be proud of record EBITDAR, record revenues, record liquidity.

All of this as we have repeatedly mentioned reinforces the ability of our business strategy to deliver on our target on a sustained basis. The strategy that was developed some time ago and which continues to be the right strategy for Air Canada.

We have improved our overall flexibility and competitiveness through careful cost controls and are now well positioned to compete in an ever evolving and dynamic business environment. Our focus continues to be building the business for the long-term.

This is a long-term commitment and we are making long-term investments in aircraft, product, and routes. Our principal objective is to be among the best global airlines to continually improve customer service and employee engagement and to create value for our shareholders.

After period of significant growth largely due to our recent capital expenditures and aircraft refurbishment programs, we will continue to leverage our strategy in 2017. Along with the launch of 28 new routes in 2016, and the additional 18 on track to be launched in 2017, we remain in a great position.

We are able to grow while generating significant free cash flow this year and building a strong company for the future despite unpredictable external factors and a solid foundation being built on the recent record breaking quarters. Once again I wish to thank our exceptional people for the tremendous effort they put into bringing us to this point and the energy and perseverance it will take to keep us on the course ahead.

Thanks. We will now open it up for questions.

Good morning and congrats on the strong results guys.

Thank you, Konark.

To start with costs, Mike, looks like depreciation, employee benefits, and maintenance costs are going to be up by a similar amount in 2017 as well as in 2016. But you're expecting just CASM to improve much better this year than last year's improvement.

So is that more of a function of even stronger capacity growth this year or is that more due to less increases or perhaps declines in some other cost items?

I think the major reason is the fact in 2016, we had some foreign currency headwinds which cost us about 100 basis points to our CASM ex-fuel and in 2017; we are not expecting those type of foreign currency headwinds.

I see. And is there any other thing Mike apart from your cost savings that you expect like in perhaps in terms of yield environment or revenue environment that can get better this year?

Well we continue to work on all of those levers to improve our profitability. And I just want to mention one more thing about the cost side; just going back to the cost side, a lot maintenance for example and depreciation are more front-end loaded to Q1.

So you've seen us we are giving you guidance on a slightly lower Q1 adjusted CASM decline because maintenance about half the overall maintenance costs for next year is going to be put into Q1 and about a third of the overall depreciation expense and so that's why Q1 is slightly lower than the annual decline.

Okay, makes sense. And then on the EBITDAR and free cash flow reconciliation Mike, I know you haven't provided guidance on EBITDAR but looks like the free cash flow improvement is expected to be roughly $500 million this year versus last year.

And then like you have obviously sale leaseback transactions which would add to the free cash flow and decline in CapEx. But with the aircraft rent going up, I presume and fuel costs going up this year, what other factors other than may be operating income could be driving free cash flow improvement.

Well I think the key factors are the fact the capital -- net capital expenditures are dropping roughly $1.1 billion, so net of sale leasebacks. So we are last year we spent $2.9 billion and this year we are spending $1.8 billion net of the four sale leasebacks we are doing and so that's a primary driver.

Thanks, good morning. Two questions about the fleet plan.

You suggest the fleet plan you've just published suggest you're retiring a couple of 767s this year versus your plan a couple of months ago, I believe two. Can you walk us through that thought process behind that decision, what's changed and what theatres we expect to see that change?

Hi, it's Ben. We do have a little bit shifting month-to-month on what we are doing with our 767s but no material change.

We do have between now and mid-2018 five more 767s going to Rouge. They are all being transferred from Mainline Air Canada and we do have four retirements of 767 that are always planned and those will start in end of Q3 early Q4 of 2017 and going into 2018.

So some of the months we're actually going to retire the airplane may have shifted but that's always in the plan.

Okay. So just a shift really from one year to the next but only a couple of months is how we should think about that?

Yes, maybe the odd maybe coming with a December and move to January but the overall general period is the same.

Okay. And I just want to understand with the new 37 MAX aircraft that you're bringing in towards the end of this year and then more of them next year as I look at the fleet plan it appears that a good portion of these are going to be net new capacity whereas I saw them previously as largely replacement aircraft is that just a timing issue of when the new plans are coming in versus retirement?

Yes, they are definitely replacement aircraft. This is -- think of it as replacing fundamentally our Airbus narrow body fleet and obviously it doesn't bring the airplane into the same day that the other one comes out and so it is a timing thing that you're probably looking at in your analysis.

And I think also a bit, I mean, we will have by June of 2018 the plan is to add 18 737 MAX eights in the fleet and they will replace either one-for-one or two-for-one basis. We have five 767s flying in the North America market and we will also replace A319 or A320s that are currently in flying in North America.

So, on a shale basis, that's the replacement plan. But we are expecting the configuration of this aircraft to be more efficient and have a little bit slightly more capacity on it and that is one of the big advantages of that airplane.

Thanks for the color there. A last question on the sale and leaseback transactions you have laid out the 787 plan for this year.

I think in previous quarters you talked about potentially using that tool with other aircraft in your airplane. Can you just update us on your thinking about the sale and leaseback for other aircraft outside of the 787 fleet?

Doug, it's Mike. Good question, as you know we are taking our first 737, I think in October of this year.

So we got some time to look at the market. We haven't really explored that at this point in time given our focus on financing the 787.

On the market for Air Canada is very, very strong. We structured very, very good sale leasebacks on 787 because one there are attractive assets and two our credit quality is very strong with the lessor community.

Right now our intention is not to own all 737s. There will be a mix of owned aircraft and leased aircraft much like we have done in the 787 program and we will probably look into that this summer time.

So I could take from that that the CapEx you've provided the outlook for even 2018 and beyond probably at all come in less than that once you figure out the degree --?

That's exactly, right, Doug. The CapEx that we provided in our MD&A is will certainly be the high point.

Thank you. I will pass the line.

So Mike could you repeat your statement in your prepared remarks there, you said that your EBITDA would increase by $1.1 billion versus what timeframe?

2013.

2013 and you said that was if you assume the mid-point of your range for 2017?

Yes. And Walter the purpose behind that comment is to put things in perspective that the strategy we've employed over the last several years has delivered tremendous value.

Yes. I'll just say that kind of gives us what EBITDAR is in 2017, right?

At the mid-point.

Yes, $2.5 billion, okay. Okay that's great.

And the cadence of the capacity, I think Mike you indicated that there was some higher cost weighted in the front half and I had thought at first that perhaps your capacity would be back-end weighted but it sounds like it's really more on the maintenance and the depreciation; is there anything I know you're not giving guidance on capacity but can you give us the cadence of capacity right now, I think most are expecting it to be higher in the front half and lower in the back half or is this the capacity level you think will be even through the years just for modeling purposes quarter-to-quarter?

No, it's good question, Walter. The cadence is more front-end loaded, first half loaded, as you assumed.

I mean the -- we don't have a lot -- we have a lot of ASMs in Q1 than we do in Q3. So increases the maintenance expenses that more frontend loaded have a bigger impact in Q1 than they otherwise would in Q3.

Got it, got it. And then on Westjet has announced some fairly significant capacity just increases coming into your -- into the Quebec market.

Was that expected and if not is this a flight you're going to fly in Quebec or is international your focus. Can you give us a little bit of color on what your response is likely to be from this announcement of Westjet into Quebec?

Hey, Walter it's Calin. Look we're certainly not going to be telegraphing our competitive intentions on an analyst call.

Having said that that the main focus of our growth has been international market. We have many domestic routes which we consider to be extremely important however that provide the backbone for some of the connecting traffic that we take on internationally.

So we will access and respond in the fullness of time I mean these are markets obviously that we know well and we certainly have not ever expected that any market belongs to us and we always respond well when we see strong competition coming into the market.

Make sense. And last question here, I know Ben, you talked, you mentioned a couple times Pacific and some of the capacities, some of the challenges there are we to assume now that Pacific traffic is likely to get some yield meaningfully yield pressure going into 2017?

Well, we've been seeing for some time now a lot of yield pressure between Asia and United States. We're seeing a little bit of that into Canada.

As I mentioned Vancouver has a very large number of foreign tails already there. What we are seeing is the Vancouver, Hong Kong market becoming out more competitive with the entry of a new carryon to the route and a capacity response by Cathay Pacific.

But we feel very well positioned. We've got, a much longer based now Vancouver with increased feed.

We've got our 787's which are the best configured and the most efficient airplane to fly across the Pacific. We do have our higher density 777s on key market there as well.

And we have our Rouge product also flying across Pacific. So with those three tools as well as very well geographically placed hub of Vancouver we're in a much better position that we were in the past to deal with these types of changes in competition and we think we will be -- we'll come up on top long-term.

So, just I want to ask about Rouge. So the guidance range moved about 400 basis points to 9% to 12% from 15% to 16%.

Should we be thinking that this 15%, 16% was really a result of an exceptionally low oil price period? Like how should we think about a more sustainable range I've been talking over the next five years?

Well we're not going to project over the next five years we certainly might do that in our Investor Day come September. We will take you out hopefully beyond 2020.

But as we look at the next 24 months we think the 9% to 12% ROIC ranges is much more appropriate for Air Canada. And as I said in my prepared remarks we did our long range forecasting two-and-a-half years ago in an hindsight we're a little big aggressive on the numerator in that calculation, and still showed tremendous growth in EBITDAR over that period of time.

But we didn't quite get to the point where we had thought we might get to, two, two-and-a-half years ago.

Okay. Second question quickly on capacity.

So it's up 14.7% in 2016, and just looking at your fleet and your focus on international, I think you said 90% of the growth is in international market. Again I'm guessing we're going to see, again, double-digit growth, may be not as much of 2016.

I don't know if you want to comment on if we're in the right ballpark. And, two, can you tell us how much of the capacity growth is really deployed in new market and new routes?

So the first part of the question 2017 is good another growth year for us it's the third growth year. As I said to an earlier question you will see capacity starting to come off a bit in the second half of 2017 and then further declines in 2018 from our growth rate.

Because we had a three-year growth plan and this is year three of that growth plan and has been highly successful to-date and we expect it to be highly successful as we continue to execute it. But again as we get through our Rouge program and 777 program and get it more into replacement program for 737s you will see capacity growth decline from the run rate last couple years.

And then on your second question is on new routes, new destinations. We are -- it's approximately 30%.

Thanks, operator. Hi, everybody.

Thank you for the time. I just have a couple of questions.

The first question is with respect to capacity growth on the sixth-freedom. Did you update us on what percentage you think you now have?

I think your goal was 2.5% or 3%, and I'm wondering where you are mark-to-mark -- marked to that growth rate. And then United has a new management team.

I know we've talked about this on prior conference calls, but I'm wondering if they've talked to you about slowing that sixth-freedom growth from the U.S. specifically.

I'll start and then I will ask Ben to comment as well Helane.

Thanks, Calin.

So, in terms of the competitive dynamics as I think United is our partner in Star lines and we have them in the joint venture over the Atlantic. And but in terms of other markets we are two separate companies and we both make our own decisions in terms of the deploying capacity and I think that will continue.

We don't -- this is a strategy that have served Air Canada well. It is taking relatively speaking small numbers of passengers on individual routes but when you put it all together become something significant for us based on the size of our business.

So the sixth-freedom traffic has continued to grow and I have been saying each of the last year, each of the last several years it's been double--digit growth in sixth-freedom traffic. Overall for the network and in terms of how we're doing against that the target which in fact was 1.5% was what we were originally talking about which translated into the incremental $400 -- $700ish million of incremental revenue and we're still tracking and working towards that goal at this point.

Ben do you want to add anything?

Sure, I think the Helane that the better to look at is we're not adding capacity specifically for sixth-freedom traffic. The Canada U.S.

trans-border is a very large market, it continues to grow. We continue to be very pleased with demand and we're managing for the most part that market based on the OND between Canada and the U.S.

with a strong emphasis on point-of-sale Canada. And with Rouge, you see us further growing into the leisure parts of United States from a Canada point-of-sale perspective.

We already served 60 U.S. cities and most not all of those can sustain in sales without sixth-freedom.

Sixth-freedom of course then irrespective of that is a key component of our growth plan and we are not looking to take 70% of the route or 50% like some of our foreign competitors and still our aircraft with connecting customers to and from the U.S. that's not the strategy.

As Calin just mentioned it's very small numbers with the help of our new ODRM system we're able to based on currency and based on total trip revenue go after the most profitable customers that are out there. So our target for sixth-freedom and we're not putting an exact updated number out today still it's far below all three major European carriers their source of sixth-freedom traffic from the U.S.

and far below all the major Asian carriers that access the U.S. So just to repeat the first priority for us on the trans-border is the local OND.

But for sure because of our geography and our product and we are interested in the profitable components of the sixth-freedom opportunity to and from the U.S.

Okay, that's perfect. Thank you.

And then just a follow-up question that may be completely unrelated, but do you notice when rhetoric heats up in the United States there's an increase in bookings for tourism to Canada?

I think what we notice is when the Canadian dollar is low in a relatively low versus the U.S. dollar which it is right now, we see increased interest in point-of-sale U.S.

for trips to Canada, that's not new, that's happened over the last couple of decades. And right now we're in period where that's the case.

But what we are pleased is the inverse usually hurts us where Canadians go to the U.S. less we're not seeing that as much as we've seen in past period when the dollar was low.

Canadians especially those who vacation in the winter in Florida, Arizona or Hawaii, the demand is holding up quite nicely despite the lower Canadian dollar.

But do you see like more European interest in travel to Canada?

Last year was a solid year. We did see an uptake and so far early indicators for Q3 as we mentioned in the first part of the call look very promising.

Okay. And just one follow-up unrelated question with respect to your regional operations.

Is there an opportunity domestic Canada to grow that business more than you already have contemplated for growing that business, like with your regional partners?

Well, the regional partners what we've done over the last several years is introduced two additional regional partners in addition to Jazz. We've introduced Sky Regional and Air Georgian.

Both of whom have excellent cost structures and so they collectively with Jazz are now part of our look at the strategy holistically and see what opportunities there are and well, we know we can cover all kinds of flying with the regional aircraft that we have between the three carriers. And we also know very well what our competition is doing and what approximately their cost structure can enable them to do.

And yes well we're looking at incremental opportunities all the time.

Just have may be a couple of quick questions. Just one on the 737 maxes that are coming in.

I'm just wondering if we should may be start to think about there being some, I guess, additional expenses related to those, like training costs and things like that later this year and into next year? And in association with that, I'm also wondering if all these sort of associated CapEx like spare parts and things like that is incorporated into your guidance there for CapEx over the next couple of years?

Good morning Cameron. Its Mike and so the any incremental cost and there will be some training cost starting later this year are all incorporated in our guidance for 2017 on adjusted CASM.

And any type of spare parts or spare engines that we might need are is also incorporated in our capital expenditure guidance as well for 2017.

Okay. May be just secondly I guess a question on Rouge, you're nearing the -- I guess the maximum size allowed there.

I'm just wondering if you've got any update on any further discussions about expanding the ultimate size of Rouge?

Well we will be -- we will be adding 4767 to Rouge between now and summer 2017 and the last 767 under the current agreement with our pilot association will be added before summer 2018. Any increase to that will be dependent on a potential new agreement with our pilots.

We are in early discussions with our pilots. There is definitely interest on both sides to look into that.

But it's way to speculate when we will be able to come to an agreement on that.

Yes, good morning. First question is just on fleet and the narrow bodies.

When I look at your chart, it looks like you're keeping all -- or you're putting 16 max sides in, you're getting rid of eight 319s. So it seems like it's more than just replacement here, or is it that eventually you're going to do further reductions in the fleet and so we should think in 2019, 2020 and so on that the fleet goes down some?

Dave it's Mike, so let me clarify, on schedule you're perfectly right how you read a schedule. There are two other factors one is we are getting rid of 767 and that will be replaced on a two-for-one basis.

And so you've got to incorporate that in the analysis and then the other aspect is as we spoke about earlier there is a lag of approximately three months from receiving a 737 in a narrow body or the plane that's being replaced leaves the fleet. And so that might go over year-end.

But as we talk about earlier our intention is to replace the shelves on a one-for-one basis and then the couple of 67s on a two-for-one basis.

May be David just for more clarity, we fly between five and seven 767s in the North American market today.

Okay that's great.

Really that depends on the season.

Right. And just on the MAX, how many seats are they going to have?

Not yet disclosed.

Okay. And then on the Rouge aircraft they are getting up in age, wonder what your thoughts are on what you will do with those airplanes?

No, from an age perspective the 767s that we have transferred over to Rouge are all the newer Vintage thins that were part of Mainline whether we sourced from outside and A319s are much younger than the first generation A320 that we have in our fleet. So we expect --

And we have some 321s, new 321s.

So we expect all the aircraft that we currently have at Rouge to be there for some time.

Okay. But the average age is 18.5 years for the 67s and 319.

So do you -- what should we expect that you would do with the Rouge-type airplane can it run 25 years, I know it can but it will impact the life span or --

Look we've got much older 767s in the mainline fleet that are performing very well, still very reliable. So long as they are reliable and can be profitable we will keep them in the fleet there.

767s are great airplane for us, has been for many, many years and we expect them to continue to perform well into the early part of the next decade.

David it's Calin here. For analysis purposes if you're looking at 25-year number as a rule of thumb that would not be wrong way to look at it.

Thanks, guys. Good morning.

Just Mike, if you could just maybe return a little bit to the ROIC number, that 9% to 12%. I guess in your earlier comments into a question, you talked about the fact that there were some items that you were maybe a little too aggressive on.

Can you may be give us some more color on where you think those numbers are, or if it's just a simple fuel thing that you can't absorb again through revenue increases?

Chris I'll avoid going into kind of a reconciliation of our long range plan to what we think today it's the key from a different areas including fuel and the buying impact resulted in adjusting our ROIC to range that we feel more comfortable with.

Okay. But is there any particular item or something that shifted in the market or in the strategy that's do you think you need to back off of?

No.

Okay. Okay, great.

Then just a couple quick ones, just to double-check. If we go back to your original guidance for 2017 for CapEx, it was originally around CAD2.5 billion.

Now you're talking about CAD1.8 billion net, so about CAD700 million on the sale and lease-back would be about the right magnitude?

That's correct.

Okay. And just for timing kind of Q2, Q3?

They all will be first half of the year. All four planes will be operating by the summer.

So the transactions we have done in the first half of the year.

Okay, perfect. And then just thinking about your NCIB, you guys originally last year you talked about doing about 10% of the float.

You've been opportunistic through the year, but you still sort of slowed down on purchases. Should we be thinking that you're actually going to target to hit the 10% by the time you get to the end of the bid?

Well we still have several months left before it expires. It maybe a little difficult to get to the 10% but we still feel that's a very, very effective tool for us and we will see how the market reacts over the next little while.

Yes there is no question Chris, Calin here. There is no question that we in discussions with some of our larger shareholders, we know that they like the fact that we have instituted it.

Now we intend to continue looking at it opportunistically. And I would say that we're confident long range strategy here and we know that this NCIB is a good tool to express that confidence.

All right, great. And if I can just sneak one more in, just in terms of stage line should we expect kind of the 5% to 6% to 7% type stage line increase that we've been seeing through 2016 that would probably the right pattern to think about for 2017.

Yes, directionally Chris, I think that's correct. We can probably provide little better clarity on that offline but certainly given our fleet plan back we're bringing in nine 787s flying international routes stage length increases in 2017 will be approximate same as 2016.

Hey, thanks for taking my question. Just one from me.

If I look at your EBITDAR margin of 15% to 18%, I know it's just for 2017, but if I look at it longer-term, do you think that's a good kind of cycle average margin reflecting a more normalized fuel price environment, so that's kind of where you should be batting in most years? Or do you think there's an opportunity to move above that as may be fares catch up to the rising fuel price environment, you have a number of cost-cutting initiatives that are multi-year here?

Just wondering how I should think about 15% to 18% longer-term as fuel is normalized in 2017.

So, Kevin good morning this is Mike. So 15% to 18% is a range that we're quite comfortable with for 2017 and 2018 based on Investor Day target back in 2015.

And we again confirmed that today for 2017. And we feel again comfortable for 2018.

And we're going to save some exciting stuff for the Investor Day in 2017 and again we will take the market out hopefully beyond 2020 at that point of time and update our targets at that point in time.

And maybe if I ask it another way then, and I appreciate that I know you don't want to be front-running your Investor Day. You've accomplished a lot over the past few years, whether it's renegotiating your Chorus contract and a number of other initiatives.

When you look out, are there other big buckets you see? I know you have your loyalty program coming due in 2020, but are there other buckets we should be thinking about that could drive improved profitability and improved ROIC structurally?

Absolutely. And we have laid our game plan probably to the market over the next five, six years with 737 for example coming in or going to give us a 10% CASM improvement.

The CCRE is good to give us at least 10% CASM improvement. And then the third bucket is one you mentioned the renegotiation of our relationship with Aeroplan/EMEA coming due in mid-2020 which also will drive value to Air Canada.

So those are three potentially large opportunities for Air Canada to expand its margins.

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