Air Canada

Kathy Murphy – Director-Investor Relations and Corporate Reporting Calin Rovinescu – President and Chief Executive Officer Benjamin Smith – President-Passenger Airlines Mike Rousseau – Chief Financial Officer

Fadi Chamoun – BMO Walter Spracklin – RBC Andrew Didora – Bank of America Konark Gupta – Macquarie Capital Helane Becker – Cowen & Company Kevin Chiang – CIBC Chris Murray – AltaCorp Capital Turan Quettawala – Scotiabank Tim James – TD Securities Cameron Doerksen – National Bank Financial David Tyerman – Cormark Securities

Thank you, Maude, 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 quarter and the progress made on our strategic initiatives. Ben and Mike will then address our first 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 first quarter press release and MD&A for important assumptions, and cautionary statements relating to forward-looking information and for reconciliations on non-GAAP measures to GAAP results. I am now going to turn it over to Calin Rovinescu, Air Canada’s President and CEO.

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

For the quarter, we reported EBITDAR of $342 million exceeding analyst consensus estimates of about $250 million. Our first quarter EBITDAR margin of 9.4% was better than what we projected in our year-end news release.

This was due to our revenue environment that was more robust than we anticipated at that time, lower aircraft maintenance expense, some of which was due to a deferral of maintenance activity and jet fuel prices rising somewhat less than projected. On a GAAP basis, Air Canada reported an operating loss of $54 million in the first quarter.

As the first quarter is traditionally one of the weakest for us, I was pleased to see system traffic up 14% and total revenue up 8.9% year-over-year, while adjusted CASM was down 6%, signalling ongoing progress in implementing our long-term strategic plan. Since 2013, we’ve achieved 13 quarters of year-over-year adjusted CASM reduction.

All-in-all CASM increased 0.4% from last year’s first quarter. We’ve a positive outlook on the year as we see improvements in the domestic Canada, U.S.

transborder and Atlantic markets with the Pacific market stabilizing towards the second half of the year. We remain on track to meet the targets of our key financial measures and continue to expect positive free cash flow in the range of $200 million to $500 million for the year as previously projected.

This year represents the third year of planned significant capacity growth as we execute our international expansion strategy with the introduction of our new wide-body fleet and the continued successful deployment of Rouge to compete effectively in leisure markets. In the first quarter, we made a significant investment with the inauguration of our Boeing 787 Dreamliner daily service from Montreal to Shanghai, our first direct flight from that city to Asia.

This week we announced our first direct flights to South America from Montreal with the introduction of Rouge service to Lima, and the expansion of Pacific services between Vancouver and Melbourne, both starting next winter. Other new international and U.S.

transborder services announced during the quarter include Montreal-Tel Aviv, Montreal and Toronto-Reykjavik, Iceland and Vancouver-Boston. Capacity growth, driven by our wide-body fleet expansion, will begin to slow in 2018 as we shift our focus from long haul wide-body induction to our mainline narrow-body fleet replacement program starting with the introduction of the Boeing 737 MAX aircraft later this year, followed by the Bombardier C-Series aircraft in late 2019.

Our team of 30,000 has worked hard to transform our culture towards becoming a global champion in all respects. I would like to thank our growing customer base for their loyalty, supporting us across the globe, and our employees, who are increasingly embracing our customer focus.

On behalf of the executive team, I would also like to express our proud with all our heart to have been ranked as one of Canada's most attractive companies to work for, one of the country's top diversity employers for the second year in a row, and one of Montreal's top employers for the fourth year running. I’ll now turn the call over to Ben, for a discussion of our performance for the quarter.

Thank you, Calin, and good morning everyone. For the first quarter, passenger revenues increased $231 million, or 8.1%, a record $3.1 billion.

On a system basis, traffic increased 14% year-over-year and reflected growth in international-to-international connecting traffic 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 were also pleased with our Business Cabin performance in the quarter where passenger revenue increased $58 million, or 10%, versus last year.

As an expected effect of the implementation of our strategic plan, system yield declined 5.1% due to a longer average stage life, which had the effect of reducing yield by 3.6 percentage points and to a customer mix weighted towards leisure traffic. Touching on our key markets.

In the domestic market, revenues grew $16 million, or 1.7%, on traffic growth of 3.6%. The traffic growth included gains in Business Cabin traffic as well as growth in domestic connecting traffic to the United States and international destination via Air Canada’s hubs.

While we were pleased with this revenue improvement, industry capacity did affect our overall Canada performance. Our long-haul transcontinental services, showed stable traffic at slightly reduced yield due to new routes and added frequencies by our competitors.

We also felt the impact of enhanced competition on intra-Ontario services. However, we were pleased to achieve positive year-over-year network results in our Western Canadian domestic routes, which is the positive results, network consolidation activities that were taken in 2016 and continued in early 2017 to address the weakness in this market.

That said, as we look forward to Q2 and Q3, we anticipate domestic performance in line with our expectations despite it increased in industry capacity and we expect our third quarter revenues to be positively affected both by increased yield in traffic as well as the reduction in the growth of industry capacity. Therefore, I’m pleased to note that we have a positive outlook on the domestic Canadian market.

We continue to focus on higher yield in local and domestic Canada connecting traffic to further solidify our performance. In the United States transborder market, we were satisfied with our performance in the quarter with revenues up $68 million, or 9.5% year-over-year.

Traffic increased 12% on strong passenger demand between Canada and the United States as well as growth in connecting passenger flows from the United States and support of our international expansion strategy. We saw strong performance in leisure markets where we achieved a notably strong performance year-over-year despite the rise in fuel price and the weaker Canadian dollar.

In our view, this underscores the strength of Air Canada Rouge and shows how we can utilize it as an effective and strategic tool. Most of our other United State services were stable and produced results in line with expectation.

However, we did note weakness on our California markets due to market capacity. I’m pleased to note that nearly all our new transborder routes launched in 2015 produced results accretive to network profitability.

We have the same expectations for the new United States routes launched a few days ago including Memphis, San Antonio and Savannah, Georgia from our Toronto hub. Looking ahead, we are expecting strong second quarter transborder results and our third quarter revenues look promising on account of a strength of a local Canada, United States market.

We are also making a strong push for point of sale United States traffic due to the strong U.S. dollar.

Revenues on the Atlantic increased $43 million, or 8.3%, year-over-year on traffic growth of 14.4%, with increases recorded on all major Atlantic services with the exception of the United Kingdom. A reduction in yield of 5.3% reflected an unfavorable currency impact, the impact have increased industry capacity to and from Canada and the United States resulting in a competitive pricing environment as well as a higher proportion of seats offered in to long-haul leisure markets.

As mentioned, increased industry capacity do have an effect on revenues, especially from Calgary and we redeployed capacity from Brazil to Germany as we were seeing soft demand to and from Brazil due to the economic and political environment there. We also felt the softness in our Western Canada to Europe services due to the weaker economy and increased competitive capacity.

Lastly, our shift of Easter to April had a negative effect on the quarter. Looking ahead, our second and third quarter outlook is showing positive development.

We are seeing considerable growth in point of sale Europe due to the increase in tourism appeal of Canada and we are also witnessing an improved pricing environment. We expect the Atlantic to have a positive performance rebound going forward and continue to focus our capacity growth in areas where Air Canada previously had weaker market presence, for example in Algeria, Morocco, Spain, France and India.

Turning to the Pacific, the revenue increased $50 million or 12.5% on traffic growth of 22.5%. The traffic increase was largely driven by the launch in June 2016 of services to Seoul from Toronto, and to Brisbane from Vancouver and the launch in February 2017 of services to Shanghai from Montréal.

A yield decline of 8.1% reflected a reduction of fuel related carrier surcharges, the effect of launch pricing to support our investment in new services and the impact of increased capacity and lower competitive fares on certain Pacific services. Australia remains a bright spot with Brisbane doing well and giving us the confidence perceived with a short seasonal service to Melbourne to take advantage of strategic opportunities.

Our Pacific cargo services also saw a strong turnaround. Going forward, we note that the second quarter remains challenging in all Pacific markets and steps have been taken to reduce our total number of seats in China in Q2 and Q3.

We have redeployed some capacity to the Atlantic where we see stronger booking development. However, as of Q3 we believe a situation on the Pacific will begin to stabilize for this quarter.

Other passenger revenues increased $54 million, or 18.8%, on traffic growth of 22.8%. South America turned in a particularly solid performance with strong demand and yield growth versus last year’s quarter including our Air Canada vacations on, which continues to perform well.

The Mexican market is quite strong to the Canadian government see the labor, so we invested with Air Canada Rouge to asset and grow our position there. As well due to the South American market strength, we have the confidence to launch service between Montréal and Lima.

We continue to see strength in South America going forward, particularly in rebound in Brazil and we’ll leverage it in our upcoming winter season. 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. Turning to our cost performance in the quarter.

Our all-in CASM increased 0.4% from last year’s first quarter. On an adjusted basis, CASM decreased 6% year-over-year, better than what we had projected in our February 17 news release.

Improvement was largely driven by lower than anticipated aircraft maintenance expenses and other operational expense reductions. The lower than anticipated aircraft maintenance expense was due to a deferral of certain maintenance activities into the remainder of the year as well as lower end of lease maintenance provisions on narrow-body aircraft lease extensions.

We did record a special item of $30 million in the quarter, reflecting a provision for a decade old buying that has been reinstated by the European Commission pertaining to a multiple airline cargo investigation. This is the same amount previously paid in 2011 and then reversed in 2015.

While Air Canada cannot predict with certainty the outcome of its appeal or any related proceedings, Air Canada believes that it has reasonable grounds to challenge the European Commission’s ruling. Turning to fuel, which represented our largest increase in the quarter by quite a large margin, we reported an increase of $244 million, or 48%, from last year.

This was due to the impact of higher jet fuel prices year-over-year and to a lesser extent to a higher volume of fuel litres consumed. Our assumption is that the price of jet fuel will average CAD 0.65 per litre in the second quarter and for the full year.

Moving on to fuel hedging, at March 31, we had hedged about 3% of our planned fuel consumption for the remainder of 2017 at an average WTI equivalent cap price of US$55 per barrel. Given market conditions including the relative stability in fuel prices, we have decided for Q2 at least to limit hedging activities to 9% of our projected fuel consumption.

This will allow us to reduce hedging costs. We will make a decision on our hedging plans for the second half of the year later in the second quarter.

Moving on to our guidance. We remain on track to achieve an EBITDAR margin of between 15% and 18% for the full-year 2017.

On the cost side, we expect adjusted CASM to decrease between 1.5% and 2.5% in the second quarter when compared to the same quarter in 2016. For the full-year of 2017, given the weaker Canadian dollar than what was assumed in our February 17 news release, we now expect adjusted CASM to decrease 3% to 5% when compared to the full-year 2016 as opposed to the decrease of 4% to 6%.

Additionally in terms of capacity, principally in the Pacific market, which play apart from the change in our full-year adjusted CASM outlook. We’ve made certain assumptions as part of our forecast, which are discussed in news release we issued this morning.

Moving on to the balance sheet and liquidity, we ended the quarter with a $4.1 billion in unrestricted liquidity, free cash flow of $470 million, improved $612 million from the first quarter of last year due to the lower level of net capital expenditures and the impact of higher cash flows from operating activities. We continue to expect positive free cash flow in the range of $200 million to $500 million for the full-year 2017.

Our adjusted net debt decreased $388 million from December 31, 2016 driven by higher cash and short-term investment balances partly offset by higher long-term debt and capitalized operating lease balances. We continue to reduce our weighted average cost of debt and this stood at a very attractive 4.5% at the end of the quarter as compared to about 6% a short three years ago.

In the first quarter of 2017, we accessed a new aircraft financing market, at a very, very attractive rate. The financings of two Boeing 787s were secured using a Japanese operating lease with a call option, known as JOLCO structure, which is treated as a finance lease with the asset and liability in the balance sheet.

Under this structure approximately 80% of the financing is funded with the U.S. dollar debt, while the remaining 20% is yen equity.

It allows us to naturally hedge, the yen currency risk by matching our yen revenues, yen payments, without the use of derivative instruments. Air Canada has a fixed purchase option to buy the aircraft in Air Canada lease.

The economics of the JOLCO structure are very attractive, as bank debt pricing is very competitive and the cost of Japanese equity is very low. The JOLCO financings are on a floating rate basis with the initial interest rate setting providing for financing payments in the low 3% range.

Two more JOLCO transactions are expected to close in the second quarter. Our adjusted net debt-to-EBITDAR ratio was 2.5 at the end of March, while our return on invested capital was 12.9%, 510 basis points above our weighted average cost of capital of 7.8%.

Moving on to pension. Actual evaluations were finalized in the quarter and as of January 1, 2017, the solvency surplus in the Air Canada’s domestic registered pension plans was at $1.9 billion.

Additional detail on our results for the first quarter can be found on our financial statements in the MD&A, which are posted on our website and filed on SEDAR this morning. And with that, I’ll turn it back to Calin.

Thank you, Mike. So by way of summary, in the first quarter of 2017, we continue to deliver on our long range plan, and what is typically one of our more challenging periods of the year.

We achieved 14% system traffic growth and record passenger revenue of $3.1 billion. Every major market we served showed an increase in traffic, underscoring the global penetration of our brand.

Our adjusted CASM reduction of 6% represents a better cost performance than all of our North American peers, including our main domestic competitor. We generated positive free cash flow and we are tracking to meet our target of $200 million to $500 million free cash flow in 2017.

Our first quarter EBITDAR margin of 9.4% exceeded what we projected in our year-end news release. Adjusted net debt fell in the quarter and our unrestricted liquidity was at an all-time high of nearly $4.1 billion.

So, with that, I’ll open it up for some questions from the analyst community. Thank you all.

Good morning.

Hi, Fadi.

So, I just wanted to talk about some of the competitive changes we’re seeing in the domestic market. So, your main competitor is looking to add some more density on some of the narrow bodies and also launch bit of ULCC or sort of even higher density planes in the domestic market?

And you so far have used some density, but ultimately avoided sort of flying Rouge leisure product within Canada. I was wondering if you can comment about whether this changes, how do you see the market and sort of reaction to these kinds of strategies we are seeing from your competitors?

Thank you, Fadi. First of all, we consider invitation to be the greatest form of flattery.

And so we’re quite familiar with densification strategies as you know that’s been the underpinning of what we’ve done with respect to building out Rouge. The densification strategies around the 777 high density product that we put into the market experimenting with brands inside the airline.

So the model is something that of course we adopted with Rouge and of course experimented on more than a decade ago. As far as the long-haul flying, the 787 flying, we’ve built a very, very powerful international franchise, so we’re familiar with that as well.

So I say the following. Look, the competition particularly where it is a reasonable competition that comes into a marketplace makes other competitor stronger.

And so we’ve always – whenever there has been a level playing field form of competition, we’ve always embraced it and we expect to continue to embrace any competition that’s thrown at us. When we look at the international market, we compete with a very, very large number of carriers on the international markets to Europe to Asia to Latin America, et cetera and so to be very, very frank the addition of incremental competition is something that at this stage is not troubling to us.

On the ULCC dynamic, look we’ll wait and see how that plays out. We certainly have with the Rouge we’ve built a very powerful tool that we didn’t have before.

But now with Rouge, we have the capability of deploying Rouge if it was appropriate domestically. We have no restrictions on deploying Rouge domestically if that’s what we decided to do.

And so, we’ll look to see how the marketplace evolved. We don’t normally comment on competitors’ plans and we’re not going to necessarily start today.

But in terms of our positioning from a competitor perspective, I might ask Ben to add any comments further to that.

Yeah, sure. Hi, Fadi.

We strongly believe that we have all the necessary tools to compete effectively in the domestic market. We already have those in place.

As Calin mentioned, we have a very competitive product in the form of Air Canada Rouge, which we have been testing out on a very selective basis over the last year or two, on routes like Toronto to Abbotsford in the summer, Toronto to Victoria and Toronto to several cities in the Maritimes and Newfoundland region. We’ve done a very careful introduction of that just to see how it may affect cannibalization of our yields on our main trunk routes.

And so far we’re pleased with that. So, right now we have – as Calin mentioned, we have no expectations to increase that, but we do have it ready and we have no restrictions on if we like to go down that path.

But I think the other two things that we should mention, if you look at the United States market with our extensive ULCCs as they recall, the reaction by the three major U.S. carriers have been in the form of adding a lower fare brand.

We have that capability. We have not chosen to do that and we’ll be watching very closely how that plays out in the U.S.

domestic market and whether that ever makes sense to go down that path in Canada.

Thanks for the color. Maybe just one follow-up to Mike.

So, you’ve got some CAD headwind that you’ve reflected in the CASM guidance, but it seems like the yield environment is getting little stronger maybe, can you sort of frame sort of the EBITDAR margin you are expecting in the second quarter like you did in the first quarter or give us a little bit more additional sort of guidance on where a directionally CASM could look like in Q2 versus Q1?

Fadi, as much as I would like to do that, I can’t do that on this type of call. As Ben and Calin talked about, we like what we see going forward from a number of different perspectives.

And I think Ben articulated that very well in his comments and unfortunately that’s what all we will be able to provide at this point in time.

But I will add, Fadi, that you are correct in saying that the biggest component and the only component that there has been any adjustment on the CASM performance is really FX, and so when you look at that perspective that is a driver of the CASM dynamic. And yield, you see that large proportion of the yield decline is attributed to stage length.

And, sorry two more positive comments that I think we talked about in the past. One, we do have a natural hedge that our non-fuel U.S.

costs are offset by our U.S. revenues and so there is a natural hedge within the company.

And two, we’ve already locked in an exchange rate of roughly CAD 1.29 on our derivatives and for the rest of the year for our U.S. cash needs.

And so, there will not be a cash flow impact from a weaker Canadian dollar, and again some of the positive impact will be offset by the natural hedge that we already have in place.

Thanks, Fadi.

Okay, thanks.

Yeah. Thanks very much.

Good morning, everyone.

Good morning, Walter.

So my question is on your – Calin, on your indications with the gross to capacity in your – in the press release where you indicated that it would start to slow in 2018. I just can’t see how it doesn’t start to slow in 2017 and are you implying in that statement that it won’t start to slow in 2017?

That we’re not implying that at all.

Okay.

Basically the more macro statement saying, basically that we’ve gone through very large capacity growth perspective introducing the Boeing 787 into the fleet and obviously as that the program slows down and you then focus on the MAX coming in, which is largely a replacement of the Airbus product. It’s not – people aren’t going to see the same size growth and as you know, a lot of that growth was as a result of some very, very long haul flying.

Okay. So maybe it would continue to slow in 2018, as maybe a culture ...

Walter, it’s Mike. Good morning.

The back half would certainly be slightly lower than the first half.

Right. Okay.

Got it. Okay.

And then, moving over to the – your free cash flow guidance, you’ve indicated Mike $200 million to $500 million for the full year, you did $470 million in Q1 alone, but you’re maintaining your full-year guidance, does that the suggest now that you’re going to be free cash flow neutral or potentially negative for the rest of the year?

You’re pretty good at math, Walter.

Yeah. But I just want to make sure that, that’s not just being conservative that you’re in fact forecasting especially in the third quarter that’s a very good quarter, you’re going to be free cash flow neutral.

Walter the numbers stand. And historically as you know Q1, is our best cash flow quarter because we – a fair amount of advanced ticket sales come in, and which gives us a significant boost on the operating cash side.

And then, we essentially burn those cash advanced sales, as we – as we deliver on revenue in Q2 and Q3.

Okay, so that wasn’t really, the case last year, right? You were free cash flow neutral in the first quarter and you were free cash flow, very free cash flow positive in the back half.

Yeah. And this year it’s a little bit different, we’ve – and which is frankly is a good sign as two future bookings as our advanced ticket sales – were very strong by the end of Q1.

Okay. All right.

And just a housekeeping, thanks for the disclosure on the 360 basis point, Ben. Are we – is it safe to say that the 360 basis point mix effect will likely be the same mix effect for the rest of the year that we can use, when getting our head wrapped around what yield numbers we put into our models?

Yeah, that would – it’s in that range.

Okay.

Obviously, we’re pushing for higher, but we see trends looking very positive going forward as I mentioned. But we’re not stopping any of our efforts to try to increase that.

Perfect. Okay, that’s all my questions.

Thanks very much.

Thanks, Walter.

Hi, good morning everyone. Mike, a little bit of a follow-up on an earlier question.

But I guess, if I do flow in the midpoint of your CASM guide plus your fuel guide, there does seem to be a pretty significant PRASM uptick through about flat to just down a little bit throughout the rest of the year to get to the midpoint of your margin guide. Does that seem reasonable with the growth you still have and I guess what are you seeing that gives you confidence in that number and Ben, I think you mentioned in your prepared remarks, Atlantic a positive performance rebound, does that in positive PRASM or just improving PRASM off of 1Q?

Yes. Hi, Andrew.

If you recall last Q2, Q3 was very challenging on the Atlantic due to some geopolitical events. We’ve been on the Atlantic for more than 50 years.

So, when we factor historically based on previous year’s performance with a very challenging period for us. We moved closely in some capacity.

So we see this year so far a much better situation on the Atlantic, which should produce a much better performance, and that’s why we’re making those statements.

And on the PRASM, Andrew, it – certainly based on Ben’s comments and based on our view through the booking curve, there is no doubt that we think that will improve as the year goes on. I’m not going to get into the exact details as to where that’s going to be, but certainly versus Q1, we expect to see improvement.

Maybe one more bit of color is we’ve with the bulk of our reconfiguration work done with more Boeing 787s having been delivered additional 767 at Rouge, we have much better capacity allocation that reflects each individual market which should drive the right amount of low factor at the right yields, which obviously has a big impact on PRASM.

Great. And then, one for Calin, I guess.

Calin, with your experience in the Canadian market, do you feel like Canadian ULCC industry could grow to be about 5-ish percent of the market like here – like [indiscernible] does?

I think Canada has its own unique dynamic which also involved the infrastructure costs that we have in this country which we’ve been fighting for a longtime to reduce. That creates an impediment in any event for this ULCC.

I think it’s one of the reasons why we haven’t seen more ULCCs coming to market earlier and we haven’t seen transborder traffic by some of the U.S. ULCC.

So I think that you have a built-in differentiator in the Canadian dynamic that you don’t have in the U.S. So, I’m not prepared to predict that Canada evolves exactly as the U.S.

at this stage.

And one other thing to note, unlike in United States, here in Canada, we have limited secondary airports which are usually very attractive to ULCCs. You see that throughout Europe.

We have the close by Abbotsford and in Vancouver, and Hamilton and Toronto but that’s yet amongst the eight major domestic markets.

And you have this very, very close by border airports and so by definition have some ULCC competition if you like built-in to the border dynamic because the U.S. border airports pick up a lot of ULCC aircraft.

That’s right. Great.

Thank you, everyone.

Thanks.

Thanks, Andrew.

Thanks and good morning, everyone.

Hi, Konark.

Just starting off with the CASM first, Mike. It looks like you deferred some maintenance cost and realized lower end of lease provisions in Q1.

So my math suggests you beat your cost guidance by about $50 million. Is that how much you’d deferred in maintenance cost to future periods?

No. We deferred closer to CAD 25 million and...

And the rest?

The end of lease benefit was roughly CAD 10 million.

Okay. That’s great.

Thanks. And for the full year guidance Mike, so 100 basis points increase in the CASM guidance.

It sounds like it’s more than what you noted for employee benefits and from maintenance expense increase. So where is the remaining cost increase coming from?

Is it mostly FX impact on the U.S. dollar costs outside of maintenance or is there any other non-FX factor?

No, principally at the foreign currency impact on our U.S. denominated costs.

So that would be maintenance as well as airport costs and other?

Yeah. Exactly.

Leases and some other costs that are incurred in U.S. dollars.

Mike, thanks. Okay, and, finally, Mike, on the creative financing, you’ve talked about if you recall.

So there were two transactions on Boeing 787, it looks like with this financing and you’re expecting two more in Q2. So for the 737 MAXs, have you decided on the financing and the form of financing you’d like to see and it’s [indiscernible] call and option for that?

call certainly an option for it. We have not yet decided where we want to start with the Boeing 737.

We’re financing opportunities. Certainly the WDC market is still very, very attractive market and we might step into that market first with the Boeing 737 or combination package, Boeing 787, Boeing 737 package.

Okay. And is this – JOLCO call, Mike, like I see, leaseback transaction?

It’s – there are characteristics. It’ a 100% funded.

So there is no cash down from the company in this case, very different leaseback from the balance sheet because there is more – it’s more likely than not, we’ll exercise the option at the end of 10 years and take ownership of the plane.

Okay. That’s great.

Thank you.

Thanks, Konark.

Thanks, operator. Hi, guys.

Thank you very much for the time.

Hi, Helane.

Hi. So, just a couple of questions.

A follow-up question on your comments regarding the WestJet launch of their ULCC. Would you consider doing a basic economy ahead of that launch to kind to get ahead of the market, and be aggressive rather than waiting until you see how they do, and then respond to that?

But – Helane, we said obviously, we will not share that on the call like this to [indiscernible] our competitors what we are doing. But let me put it this way, in an environment where we have new tools in the marketplace, as we do now and a long-term relationship with our main labor groups, we certainly have more cards that are disposable than we would have had in the past.

So, it’s – we can add any more color, Ben, do you want to add any more color to that. We obviously had comments specifically on what we may or may not do.

But the fact is that we have the capabilities that we didn’t have in the past. And we’ll look to respond in the appropriate timeframe.

Okay. That’s fair.

And then ...

Hi, Helane. It’s Ben.

Maybe I’ll just add ...

Hi, Ben.

Yeah. I’ll add a bit color to that.

If you look back at the Canadian domestic market over the last 20 years, 25 years, you can see that many attempts for low cost barriers to make a mark and to create a sizeable share for themselves. What I am comfortable with now I think the whole team is with Rouge, with the unbundled fare environment and all of the – in all the fare brands that we have, we are very well positioned to react to whatever takes place in the marketplace.

This is unlike where we were 10 years,15 years ago. So we actually have many more tools at our disposal, which gives us much better feeling and confidence that we are well positioned to respond to whatever gets put in front of us.

Okay. And then the other question I had is in the Atlantic, you were talking about specific strength.

Is that because you are annualizing growth from last year or is there something else that you’re seeing in that market that had added to that strength?

I think the key year-over-year compare is last – as I mentioned earlier, last year was very tough relative to other years because of the geopolitical events that took place. And also the fact that we made the decision to reallocate some capacity close in because of the weakened booking environment.

This year, so far, we are not seeing that, we are seeing a return to regular booking demand and we also have a much better, I guess array of airplanes that can serve the market in a more effective way than we’ve had in the past. So those two combinations will hopefully drive better PRASM.

And then my last question is with respect to cargo. You had a very strong cargo performance as well in the [indiscernible].

And is that bigger aircraft, is there something – because it said in the MD&A that, your yields were down, but your volume was up really quite a lot, so I’m trying to sort out the reason for that?

Sure. Very good question.

Last year, we had our biggest cargo carrying cable airplanes. Many of them were undergoing the identity reconfiguration project that was completed last Q2.

So, we have the advantage of having all of our 777s and our disposal, which of course have great cargo capability. Plus we have additional 787s replacing lower cargo capable 767.

Okay. So, that you’ll continue then until you kind of lock the growth from the 777s?

Correct.

Okay. Perfect.

Thank you.

Thanks, Helane.

Hi. Thanks for taking my question here.

If I may just follow up on the cargo question. Actually, I’m just wondering if your partnership with Cargojet had a material impact on that year-over-year increase or would that be additive to the print you’ve put up in the first quarter here?

Cargojet is for sure an important contributor, this is revenue that we would otherwise not get because we are not in – or and we’ll not get into the dedicated freighter business. So this is a opportunity for us to build incremental revenue for the organization through the Cargojet partnership.

So, it is – it does represents some incremental revenue to us. If not, I would say at this stage material in the sense of having distorted any of the numbers we put up.

Thank you. That’s helpful.

And just secondly, when you looked at – when you look down the road, and your cost structure is much lower, and your fleet’s been fully reinvested in, I wonder how you think about the seasonality of your operations with Rouge and this lower cost structure? Do you think that the seasonality at Air Canada from a demand or earnings perspective changes so that it’s more muted through the quarters, or do you think that this lower cost structure doesn’t necessarily impact the long-term seasonality of your business?

Yeah. That’s a great question, Kevin.

So, basically, one of the reasons, as you know, there are many, many reasons we’ve built Rouge. One of the reasons is to improve our performance in the shoulder seasons and the seasons which are historically tougher quarters in the Canadian context.

For us, obviously, we know you’ve followed us long enough to know that the second and third quarters, and third quarter in particular are the strongest quarters. The one we will be able to have opportunities to deploy aircraft in other markets and this – what we’ve done with the Rouge for example, as you know, as we use the Boeing 767s in sun destinations in the winter, and we use them in the European destinations in the summer.

And this kind of gives us better overall profitability from those airplanes. Are we completed, are we 100% satisfied that we have achieved that, no.

I think we still have more to go. Obviously, our third quarter continues to be our strongest quarter, but one of the things that we’re seeking and we’re on the path to getting at is, is getting better utilization from these aircraft in the shoulder season, giving us that type of flexibility to be able to move airplanes around.

That’s help ...

I’ll just ask Ben to add one more comment as well.

Thank you.

Sure. Yeah.

Hi, Kevin. The Boeing 787 is definitely helping us smooth out our --our revenue profile throughout the year.

The 767 had limited capabilities to some of the counties and the markets, so you can see us expanding into India, Mumbai and Delhi and big expansion into Australia, Brisbane and Melbourne as well as South America. So all these carrier cyclical markets will help boost our revenue performance in the Canadian winter and along with Rouge that combination we are pushing hard to better bounce at the year.

That’s helpful. And maybe just more of a housekeeping question from Mike, I think this is the second time, correct me if I’m wrong, I think the first quarter last year as well you deferred some expected maintenance costs through the remainder of the year.

I’m just wondering – again given some of the changes in the fleet, has the seasonality of the maintenance expense maybe changed a little bit here or maybe these are just kind of two unique examples that aren’t related?

Good morning, Kevin. I think the more two unique examples of situations where we probably planned too much in Q1 and we moved a couple of the activities into the rest of the year.

That’s it from me. Thank you very much.

Okay. Thank you.

Thank you good morning folks. I guess my first question is just thinking about the Pacific joint ventures and what you’ve been working with Air China, can you provide us for any sort of status update on that and thoughts around expansion of any sort of partnerships in the Pacific market?

Yeah. No, so we continue to work on our joint venture with Air China.

In fact I was in China two weeks ago to advance discussion to establish a more firm timeline on implementation which we now have established with them. Yeah, there are many issues involved in putting a complex JV like that together, took us a while to put the Atlantic joint venture in place.

And so, we’re absolutely on track to complete something with Air China, they continue to be interested and we continue to be interested in doing that. And we think we really need to have that joint venture in place as a cornerstone, before we pursue others.

There are certainly other opportunities for us in Asia, we have co-chair arrangements with several carriers inside Star and outside Star. And we look to continue to establish deeper relationships with the passage of time.

Any sort of timeline you can share with us on when you think you may have that in place?

No, not yet, Chris. But as soon as we have confirmation hopefully in the next few months, we would be able to maybe come up with an indication of that timeline.

Okay. I guess in the category of imitation being the sincerest form of flattery, you’ve also lost your COO, so a couple of questions on this.

One, thoughts on filling that role, whether it be a internal or external kind of what are the short-term effects. And then one operational question, just there has been a lot of disruption at Pearson over the last couple of while; some of your competitors have called out some unusual [indiscernible] cost.

Anything that we should be concerned about as we move into Q2 in terms of the cost profile?

Okay. So first of all, on the – moving on of our head of operations, what situations like that permits you is give you the opportunity to have other members of your team step up.

And in our case, we have very, very strong people, who are heading up flight operation, system operation, control, airports, in-flight service, customer service, et cetera, and all of these folks are now having opportunity to take more responsibility and so that’s what they’re currently looking at doing and giving them the opportunity to further step up and take assumed responsibility for their areas. As far as Pearson is concerned, we’re very disappointed to be very blunt.

We’re very disappointed as to the finding around that exercise. It has resulted in much disruption for our passengers, much disruption to our operation and of course, it has – cost us something incremental.

At this stage, we chose not to provide any particular number or guidance as to what that cost is. We don’t expect it in the overall scheme of our second quarter to be immaterial number that would otherwise disrupt our cost performance.

But for sure from a logistical perspective and operational perspective, it is something that is not making us happy.

Okay. Thanks, folks.

Thanks.

Thank you. Good morning.

I wanted to go back to the question about identifying aircraft here. I guess, could you help me understand, is there more ability to do that on the Rouge side or will that really be more in the mainline side because obviously you’ve already done a fair amount of identification on the Rouge side already?

Hi, Turan. It’s Ben.

What we have on the Rouge side is because of the way we integrated Rouge with mainline for customers with the ability to make connections and interline bags and the fact that we have quite a premium customer base, we do have a premium cabin on all of our Rouge Rouge cabins in the form of Premium Rouge. We do have the ability to remove that and make any of those aircrafts all economy, which would match the densification of the ULCC, so that is one of the options, it’ a very easy option does not require any change in monuments on the airplanes.

When we first started Rouge, we did have several of our airplanes in an all-economy all-coach configuration, but based on the positive demand for more premium services to the leader markets we’ve elected to put in the Premium Cabin. So, that’s the densification option on Rouge.

And our mainline it’s a similar opportunity there. Right now, we have the cabin set up for our optimum mix, but if the marketplace were to change, we could do something similar there as well.

Got it. And Ben, can you remind me what is the pitch on the mainline on the economy side?

It matches all of our main competitors, so British Airways, Air France, Lufthansa as well as the three big U.S. carriers American, Delta, United as well as Cathay Pacific, it is 31 inches.

Thank you. That’s great.

And I guess, just on the stage length, Ben, I think you mentioned that it was – it’s going to be a similar impact on a year-over-year basis as we go forward into the year. I guess, I would have thought it would actually improve as we go through the year here, because you had a lot of long-haul capacity last year as well.

Am I incorrect in my thinking there?

What you’re seeing, especially in the Canadian winter is a continued increase in long-haul flying and less so in the Canadian summer based on relative year-over-year. So, as we increase frequencies and add new destinations on these longer haul missions you are still seeing the effects of increased stage length.

Okay. Fair enough.

Thank you. And I guess, if I may ask one more on this new LCC capacity, I guess that’s hitting U.S., Europe market.

I think, we’ve noticed that it’s actually been some of those cities that you are targeting for your sixth freedom. I am wondering if you’re seeing any impact there at all and is there any way to compete differently against these new entrants?

I mean, lot of people forget that we’ve been competing against a low cost carrier across the Atlantic for the almost three decades and that’s Air Transat. So, we’re very comfortable and we’re very – have lot of experience and already doing this and if you look at the number of international competitors flying into Canada, it’s well over 50.

So, we do not have a majority share of any of our three main markets. We’re under 50% in all three.

We still see plenty of opportunity from point of sale Canada and if that is the better yield opportunity for us, that’s what we’re going to take, but with the strong U.S. dollar, the U.S.

continues to be an attractive point of sale opportunity for us.

Okay. Great.

Thank you very much. Thanks for your help.

Thank you. Good morning, everyone.

Hey, Tim.

I was just wondering if you could comment on any noteworthy capacity changes or competitive responses that you’re seeing from non-Canadian international carriers that you compete against, you guys are obviously having a lot of success in the international market? I’m just wondering if you’re seeing any one kind of change there in their approach to dealing with Air Canada?

Yeah, I don’t think we see anybody changing their approach dealing with us, but we do see some activity both across the Atlantic and the Pacific, which is different to last year, so in particular the Hong Kong market, there is a new operator that’s flying into Vancouver and we see some competitive reaction by Cathay Pacific to that, which you know is targeted to that carrier and we have to deal with the fallout. And then on the Atlantic, there is – we’ve always dealt with one carrier based in Iceland and last year we saw the introduction of a second carrier that is using Reykjavík as a connecting point and taking advantage of a rare geographical strategic position.

So that is just – that’s a competitive reaction to the whole market, not necessarily targeting us. And as I said and as I mentioned in the previous question, we do have Air Transat that is having a deal with our increased Rouge presence.

Lastly, we did see the introduction of a service to London Gatwick by WestJet. We do the appropriate measures to deal with that, but anything new that’s targeting Air Canada, we haven’t seen that yet.

Okay. And maybe along to that same topic, I’m just wondering if you see any impact in the Asian market with the new slots – the more favorable slots that the U.S.

carriers now have at Haneda?

Yeah. We think some shift.

It also would be – I think the bigger change is the big decrease we’ve seen by U.S. carriers out of Tokyo Narita, which has not been fully replicated at Haneda.

So if you look at the capacity from Tokyo into the United States, it is significantly down, so even though we have more completion out of Haneda Airport as you mentioned – as you just said more favorable departure and arrival times, the overall impact on our Tokyo service is not as strong as we would have expected if the Narita capacity would stayed the same.

Okay. That’s helpful.

Thank you very much.

Thanks. Good morning.

I guess just first question for Mike. I just want a mixture I’m modeling the maintenance expense properly here.

I’m just wondering if there’s going to be any lumpiness by quarter for the remainder of the year or is it going to be fairly smoothly spread out through the last three quarters?

Right now, you should model kind of even spread throughout the remaining three quarters.

Okay.

I see that with the caveat because this is the one expense bucket that can move around and if one or two of the activities move around, it does make a significant difference.

Right. Now understood.

And maybe second question for Calin. We’ve had quite a lot of negative PR, I guess, for the airline industry, primarily in the U.S.

in the last number of weeks. The Canadian government, I guess, is shortly going to rule out a passenger bill of rights.

I’m just wondering if you comment on your – whether you’re concerned that we might get an overreaction on some of these new, I guess, rules you want to call them that for passengers and airlines?

Yeah. Maybe I’ll start with and Ben will start with response and then we’d like to Calin follow up.

Yes, we do expect some reaction by the Canadian government to all this activity in the United States and also some of the negative PR that’s taken place around that. We take it very seriously.

We carry close to 45 million customers a year and we’re always driving to put our customers first and to ensure that we put our brand best put forward, but in terms of open reaction on the part of the Canadian government, you know the Canadian government usually responds I think, appropriately to changes. We think there will definitely be some type of response, but I don’t think it will have a material impact, on any of the ways, that we are currently operating.

Yeah. No.

And I’d just add to that is that my expectation is that, legislation is not made based on yesterday’s headlines in the United States. And so, I would expect and I’m fairly confident that, legislators take into account, a perspective that includes operating history and the reality of the marketplace that the individual companies operating in.

And so, our sense is that, this has been in the works for some time, there has been a lot of discussion about it, including by the previous government to the current government. So, we knew this was something that’s coming for a period of time there were some discussions around it following the Emerson report as well.

And so, all-in-all we expect to have a reasonable and measured dynamic, which should not materially impact our operation.

Okay, very good. Thanks very much.

For the long-term...

Hi, David.

Good morning. A bit of a longer term question.

Just wonder what your thoughts are on the 767s and they’re getting up there in age. I think, the increase are around 18.5% according to your MD&A and your – and then the mainline there 26.5%.

And particularly in light of the 787s that are coming into the Canadian on top of yours. Do you think, that the 767 stay in your fleet or do you need to replace them sometime in the next five years or so?

Hi, David it’s Ben. We actually really like the 767.

This aircraft has worked extremely well for Air Canada since 1982, 1983, when we first brought them in. We’ve had over 50 of these airplanes in our fleet, many of them have been retired.

So, we’re very comfortable with when is the right time to retire an aircraft, when does it make sense from maintenance and engine perspective and an over-haul perspective. The size of the Boeing 767 and the particular range there isn’t a great replacement for that type of aircraft at this time.

Boeing 787 is a great airplane, you know how much we like it, obviously it’s optimized over much longer stage lengths. We are using the Boeing 767 predominantly on Eastern Canada to European markets.

And the fact that the airplane is the way we have it configured 280 seats, it’s wingspan, we can fly this airplane very effectively to Florida and the Caribbean. In terms of the age, the oldest airplane 25 years plus will retire and due course but the ones that are 25 years and younger definitely still have a very attractive place in our fleet.

When you look at the combination of the cap – low capital cost and how they have a unique fit in our network, we still really like this airplane.

And I’d also add, David, that we consider ourselves to have an outstanding maintenance team led by an outstanding maintenance leader. And when you have an airplane like that it’s only as good as the maintenance team we have in place.

And so, when we take in airplanes from other carriers, we’ve often found things that we didn’t like about that and so for example, our last airplane that we’re going to bring into the Rouge fleet will come from mainline exactly for that very reason. But when you have an airplane like that you have to be able to have an outstanding maintenance team and you’ve seen examples of other carriers with Boeing 767s, and they have struggled with their operation not necessarily being fully prepared for the – for the outbound.

Right. So, is the idea then the 767 as they go out of the fleet get replaced by when do you source in the market?

I think we have a lot of flexibility with that, the bulk of the Rouge 767, we see potential use for like well into the decade, many of them were hoping to keep 2023, 2024, and we have the option to do that, and also within the contracts that we negotiate our 10-year deal with our pilots, we do have already built in the flexibility replaced those airplanes with several different types of light bodies. So, we have, we have lots of options going forward and then of course there are many newer 767s in the market that there is nothing, in the forms of different type of aircraft that makes sense for us, we could always choose to bring in or swap out the ones we had for newer second hand aircraft.

Okay, fair enough. And then my other question is on the Rouge.

So, any further thoughts on further expansion of Rouge?

Well, we’re always looking at new markets, not something we want to talk about on this call, but there are still plenty of opportunities for that model as you’re seeing it – we’ve – I’d say the bulk, but not all of the routes that we’ve chosen for Rouge have performed at or above expectation and we continue to expand the seasons or the length of the season, which we operate on many of them and we continue to see more and more opportunity, both across the Atlantic and the Pacific. And you’ll see next winter based on our performance this winter, we’ve already loaded the schedule into reservation system.

You’ll see – you’ll be able to figure out where it’s working, when we go out.

Okay. Thank you.

Great. Thanks everyone