Air Canada

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

Kevin Chiang - CIBC Walter Spracklin - RBC Tim James - TD Securities Cameron Doerksen - National Bank Financial Doug Taylor - Canaccord Genuity Chris Murray - AltaCorp Capital Turan Quettawala - Scotiabank David Tyerman - Cormark Securities Konark Gupta - Macquarie Capital Andrew Didora - Bank of America Merrill Lynch

Thank you, Paul, 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 second 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 second quarter press release and MD&A for important assumptions, and cautionary statements relating to forward-looking information and for reconciliations of non-GAAP measures to GAAP results.

And with that, I'm going to turn it over to Calin Rovinescu, Air Canada's President and CEO.

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

I’m pleased to report second quarter results with EBITDAR of $670 million, $65 million above last year and the highest Q2 in Air Canada’s history, exceeding analysts’ consensus estimates even after last month’s increases by many analysts. On a GAAP basis, we reported operating income of $281.

Adjusted net income amounted to $215 million, or $0.78 per diluted share in the quarter, while net income was a second quarter record at $300 million, or $1.08 per diluted share. We also delivered record second quarter operating revenues and ended the quarter with record liquidity levels.

Both our adjusted unit cost and unit revenue also performed well. In fact, on a staged length adjusted basis, PRASM increased 1.6% versus last year’s quarter on system-wide capacity growth of 13.5%.

So, we’re quite pleased with that, as this is, of course, an important driver for margin expansion. We’ve made significant progress over the last several years, and these record financial results are clear evidence of the successful execution of our business plan.

With the launch of 16 international and U.S. transborder routes in the quarter, we continue to increase international to international connecting passengers via Canada.

On June 29, we served close to 167,000 customers, setting an all-time record, which we expect to surpass during the upcoming August long weekend. Demand remains strong within a stable fuel and pricing environment as we move into what is traditionally our most important quarter.

Capacity growth will begin to slow in 2018, as we shift our focus from wide-body growth to our mainline narrow-body fleet replacement program. Given these records second quarter results, the expectation of a more robust revenue environment in the second half of the year and changes to our fuel and foreign exchange assumptions, we have improved our guidance for key financial measures, including a significant improvement in projected free cash flow for 2017.

Mike will go into more detail on this later on the call. I’ll now turn the call over to Ben for a detailed discussion of our performance for the second quarter.

Thank you, Calin, and good morning. I'd like to start out by thanking our employees for contributing towards the successful quarter, and especially our revenue teams for [property filling], our expanding network and to our operational teams for executing on our robust schedule despite challenging weather and construction work at our largest hub, Toronto.

For the second quarter on capacity growth of 13.5%, passenger revenue was very strong increasing $374 million or 11.9% to a record $3.5 billion. On a system basis, traffic increased 13.6% with growth reflected in all markets.

As Calin mentioned, we launched 16 international routes in the quarter, and as we continue to leverage the geography of our Canadian hubs, we saw continued growth in sixth freedom traffic and support of our international expansion strategy. Premium revenue performance was also an important contributor to our results.

Business cabin performance in a quarter saw passenger revenues increased $90 million or 14.6% versus last year. On traffic and yield growth of 11.2% and 3% respectively.

Our load factor increased 1.4 percentage points in this cabin, resulting in PRASM growth of 5.1% when compared to the same quarter in 2016. We saw a very strong performance in the premium economy cabin as well.

With yield load factor and PRASM all well above last year's levels. Investments in premium products such as premium economy and other services for our customers, both in-flight and in the airport environment are being recognized by customers and are increasing contributing value and a way that is providing us with a growing advantage over some of our competitors.

These investments are yielding a return and we will continue our drive to improve our products and service delivery. On a yield perspective, all markets reflected growth year-over-year with the exception and the Pacific.

In addition to the strong performance of the business and premium economy cabins, we experienced growth in higher yielding local traffic and an improvement in the overall fare mix in the quarter. [Ancillary] revenues also favorably contributed to our results with growth on the introduction of seat selection fees on certain international markets and by an increase in airport paid upgrade revenues.

Overall yield declined 1.4% when compared to the same quarter in 2016 on a stage length adjusted basis, yield improved 1.4% versus last year. A strong result that we are very pleased about and which also shows the strength of the Air Canada network.

It is also the first stage length adjusted year-over-year increase since the third quarter of 2014. Touching on our key markets, and the domestic market on capacity growth of 2.8%, revenue grew $43 million or 4% and traffic growth of 3.3% and a yield improvement of 0.8%.

The traffic increase was driven by strong demand on services within Canada, as well as incremental connecting traffic to the U.S. and international destinations by Air Canada's hubs.

We filed yield increases on short-haul business routes as well as on connecting traffic. The domestic market also reflected gains in the business cabin for both traffic and yield.

Looking forward, we expect our third quarter revenues to benefit from yield and traffic improvements and a reduction in the growth of industry capacity. Consistent with what we noted on our first quarter call, we have a positive outlook on the domestic Canadian market as we continue to focus on higher yielding local and domestic Canada connecting traffic to further solidify our performance.

We were particularly pleased with our second quarter U.S. trans-border performance with revenues up $111 million or 16.3% and capacity growth of 15.2%.

Traffic grew 16.2% with increases reflected on all major U.S. trans-border services and included gains in the business cabin.

The traffic growth in the quarter was driven by strong passenger demand between Canada and United States, as well as incremental connecting traffic from the U.S. and supported by our international expansion strategy.

Yield growth of 0.3% reflected yield improvements on Air Canada Rouge operated [sun routes]. The second quarter however continue to be impacted by increased industry capacity on U.S.

long-haul such as California and short-haul seaboard routes and by growth in lower yielding connecting traffic and to the U.S. Looking to the third quarter, we are expecting strong U.S.

trans-border results with continued strength in the local Canada and U.S. market and expanding opportunities in sixth freedom markets.

We also continue to push for point of sale in United States traffic due to the still relatively strong U.S. dollar.

The Atlantic markets performed very well in the quarter on a capacity increase of 12.6%, revenues were up $108 million or 14.3% versus the same quarter in 2016. The revenue growth was driven by an increase in traffic of 13.7% and a yield improvement of 0.6%.

The traffic increase reflected growth on all major Atlantic services and included gains in both the business and premium economy cabins. Demand to and from Continental Europe was very strong with traffic growth of 20.6% slightly above our capacity increase in the quarter.

Our UK services also experienced good gains in the quarter with strong traffic and yield improvements. We saw yield increases on most major Atlantic services led by yield gains in the business and premium economy cabins.

Our new Rouge services have performed well as has India and Middle East with PRASM improvements versus the second quarter of 2017. Overall, PRASM was up 1.5% versus last year.

Looking ahead, our third and fourth quarter outlook is showing positive development. We are seeing considerable growth in the point of sale in Europe due to the increase in the tourism appeal of Canada and we are also witnessing an improving 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, Italy, France and India.

Turning to the Pacific on capacity growth of 23.2% revenues increased $58 million or 12.5%. Pacific traffic growth was very healthy at 19.7% although behind the capacity growth.

The traffic growth has driven by the June 2016 launch of services to Seoul from Toronto and to Brisbane from Vancouver. The February 2017 launch of services to Shanghai from Montreal and the June 2017 launch of services to Mongolia from Vancouver and to Taipei from Vancouver.

The environment remained very competitive throughout the second quarter with 11% growth in industry capacity from North America to Asia. A yield declines up 6% reflected the effect of launch pricing to support the introduction of new services and the impact of increased industry capacity, and competitive pricing activities on certain Pacific services.

While the yield environment was challenging in the quarter, it showed some improvements since the first quarter of 2017. Looking forward to the third quarter, we continue to expect some challenges on our Pacific service business.

To address this starting in June, we began to reduce total number of seats to China on services from Vancouver to Beijing and Shanghai and redeployed some capacity to the Atlantic where we see stronger booking in development. On capacity growth of 24.1%, other passenger revenues increased $54 million or 34.7% driven by a traffic increase of 26.4% and a yield improvement of 6.5%.

The traffic increase reflected growth on services to South America and on routes to traditional leisure destinations. We also recorded traffic gains in the business and premium economy cabins in the quarter.

South America turning a very strong performance with double-digit traffic and yield growth versus last year's quarter. We also saw yield increases on our routes to Caribbean and Mexico given the yield improvements and a 1.5 percentage development in load factor in the quarter, in the quarter overall PRASM grew 8.4% when compared to last year.

As discussed on our first quarter call, the Mexican market is quite strong due to the Canadian government's visa waiver, so we can invest in routes to assert and grow our position there. As mentioned last quarter, our South America Markets continue to perform very well are leveraging in the upcoming winter season.

Including the launch of new service between Montreal and Lima starting in December. Cargo was a strong revenue contributor in the quarter.

Cargo revenues of $154 million increased $43 million or a 38.7% on the second quarter of 2017 on traffic and yield growth of 34.7% and 3% respectively. Traffic increases were recorded in all markets.

The Pacific market reflected in particularly strong performance with growth in both traffic and yield versus the same quarter in 2016. 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.

All in CASM increased 0.5% from last year’s second quarter. On an adjusted basis CASM decreased 3.5% year-over-year.

Better than what we had projected in our May sales news release. This is largely driven by lower than anticipated Aircraft maintenance expense, mainly result of deferrals of certain activities into the remainder of the year and to improve terms of wide body aircraft to these extensions.

Fuel expense which represented our largest increase in the quarter, increased $193 million or 32% from last year. Higher jet fuel prices accounted for $100 million of this increase and higher fuel consumption accounting for $73 million.

Looking at fuel hedging, as of June 30, we had hedged 41% of our planned fuel consumption for the third quarter with call options at an average WTI equivalent cap price of U.S. $45 per barrel.

We have otherwise not entered into any fuel hedging contracts beyond the third quarter, the result of what we view as a relatively stable fuel price environment. We continue to closely monitor this area and will adjust our practice when warranted.

Aircraft maintenance decreased $17 million, or 7%, from in the same quarter in 2016, the result of a greater number of aircraft leases being extended as well as more favorable end-of-lease conditions on those extensions. Looking forward, given the expectation of a stronger Canadian dollar in the second half of the year, when compared to the U.S.

dollar, we now expect aircraft maintenance expense to increase $75 million versus 2016 as opposed to the projected increase of the $110 million stated in our May 5 news release. Looking at the other operating costs, these continue to be well-managed and increases for the most part are driven by our international expansion strategy.

Turning toward the outlook, given our strong second quarter 2017 results and our expectation of a more robust revenue environment as well as a stronger Canadian dollar and a lower fuel price per liter than what we had previously assumed, we have improved our projections for a number of financial metrics. We have now raised our expectations for EBITDAR margin, our ROIC and free cash flow.

We now expect an annual EBITDAR margin of 17% to 19% for the full year 2017 and 2018 as opposed to the 15% to 18% previously forecasted. We now expect annual ROIC of 11% and 14% in both 2017 and 2018 as opposed to the 9% to 12%, reflecting better adjusted net income than what was previously expected.

We also now project positive free cash flow in a range of $600 million to $900 million for the full year 2017 as opposed to the $200 million to $500 million previously projected. Turning to the cost guidance, we expect an adjusted CASM in the third quarter of 2017 to decrease 1.5% to 2.5% when compared to the third quarter of 2016.

For the full year of 2017, we continue to expect adjusted CASM to decrease 3% to 5% when compared to 2016. Our guidance for 2017 remains unchanged from what we had previously projected, as a favorable impact of the stronger Canadian dollar when compared to the U.S.

dollar is expected to be offset by lower than previously projected capacity growth as well as certain cost increases, including the impact of higher share price on our stock-based compensation expense, higher sales and distribution costs due to competitive pricing initiatives and higher customer inconvenience expenses. On a related note, we recently completed a thorough review of the projects which supported our very important CASM reduction target of 21% over the 2012 to 2018 period, excluding the impact of foreign exchange and fuel prices.

This target included the cumulative benefits of adding Boeing 77s and high-density Boeing 777 aircraft, the launch of Air Canada Rouge, and other fleet and strategic initiatives, such as our regional airline diversification strategy. These projects are achieving their expected contribution towards this CASM reduction target.

However, as our plans have evolved and taking into account competitive market forces, we’ve reduced our projected capacity growth from what was originally contemplated. And we have also incurred higher noncash depreciation expense than anticipated at the time.

In addition, Air Canada is investing in a number of initiatives, including improving customer service, and certain costs associated with these initiatives were not anticipated when this target was set. As such, the overall CASM reduction over the period is now estimated to be approximately 17% when compared to 2012.

This is an achievement that we are very proud of, particularly with the transformation we’ve undertaken since we set the first target in 2013. This CASM reduction objective was extremely important for the entire company and the leadership group, as it made continuous cost improvement an important component of our DNA.

Given that the contribution of these projects to CASM reduction is now fully known, our focus shifts to improving EBITDAR margins, of which CASM is one component. Therefore, our CASM reduction target is being withdrawn as a standalone measure.

So, in summary, we’re declaring victory and moving on with a continued focus on cost reduction and strategic initiatives still to be realized beyond 2018, including additional benefits related to our extended capacity purchase agreement with the Jazz, the introduction of the 737 MAX and C-Series aircraft into our mainline fleet, and other initiatives, some of which involve the introduction of new technology. These initiatives are integral to creating shareholder value over time, and with cost reduction now a permanent part of our culture, we are confident in our ability to continue to improve margins.

Moving on to our assumptions for fuel and foreign exchange, Air Canada assumes that the Canadian dollar will trade on average at CAD1.29 per U.S. dollar in the third quarter and CAD 1.31 for the U.S.

dollar for the full year. And we are assuming an average jet fuel price per liter of CAD0.59 for the third quarter and CAD0.61 per liter for the full year 2017.

Turning to our balance sheet and liquidity, we ended the quarter with understood liquidity of close to $4.5 billion, a record level for Air Canada. Free cash flow of $305 million improved $748 million in the quarter due to the lower level of net capital expenditures year-over-year and the impact of higher cash flows from operating activities versus the second quarter of 2016.

I know we will continue to be asked, perhaps even more frequently than we have been recently, what we plan to do with our excess cash. Our priority is reducing our gross debt levels and achieving the 2.2 net leverage ratio we targeted by the end of 2018.

As a result, we are planning to initially utilize some excess cash to purchase some of our aircraft on order over the next 12 months and to reduce the gross debt levels from what they otherwise would have been. We, of course, have also renewed our normal course issuer bid which allows for share buybacks on the opportunistic basis.

Adjusted net debt decreased $697 million from December 31, 2016, reflecting the impact of higher cash and short-term investment balances, partly offset by the impact of a higher capitalized operating lease balance and higher long-term debt and finance lease balances. Our adjusted net debt-to-EBITDAR ratio was 2.4 at the end of June, and we continue to expect to achieve our target of 2.2 by the end of 2018.

Our return on invested capital was 12.3% in the quarter and 470 points above our weighted average cost of capital of 7.6%. Given the significant increase in our invested capital and the book value of Air Canada’s equity, we are reviewing the approach used in calculating a return on invested capital, including the methods used by other Airlines.

Currently, Air Canada’s invested capital is based on an asset less operating liability approach, which, from our perspective, is the most conservative methodology of several that exist. A different approach presently being analyzed is to calculate invested capital based on our outstanding debt, plus shareholder book equity, plus capitalized operating leases.

Now, we caution everyone that comparing ROIC is complex given different methodologies being employed by different airlines. We will update the market with conjunction with our upcoming September 19 Investor Day as to our direction.

As always, additional detail on our results for the second 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. And so, in summary, we continue to deliver on our long-term plan.

In the second quarter, we achieved record operating revenues, record EBITDAR and ended the quarter with record liquidity levels. We exceeded last year's financial results and analyst consensus estimates for EBITDAR.

We also improved our guidance for several key financial measures, including free cash flow. We get this, despite a 32% year-over-year increase in our fuel cost and a weaker Canadian dollar in the quarter.

And despite 13.5% growth our capacity our state length adjusted unit revenue has improved. Therefore, we have increasing confidence in our business plan can indeed deliver, but we expected to regardless of fuel prices, foreign exchange or other extraneous factors.

In the quarter, we set an all-time record for customer served in a single day which we expect to surpass this coming long week, this upcoming long weekend. And looking forward, demand remain strong.

I would like to thank our growing customer base, who are increasingly choosing Air Canada. Recently named best airline in North America in a survey of almost 20 million air travelers by Skytrax.

The global benchmark of industry excellence. We share this recognition with our 30,000 employees, who are key to our success and thank them for their dedication, professionalism and hard work as we evolve into a global champion.

Thank you, and we'll now open it up for questions.

Hi, thanks and good morning. And congrats on the good quarter here.

Maybe just turning to the free cash flow comments Mike, you had noted your priorities that which are helpful, but when I look at your increases in the target you put out there, it looks like you'd be generating more excess free cash flow then you had originally anticipated but you kept your leverage target ratio unchanged. I'm just wondering what that entails, and what I should be reading through in terms of deployment of free cash towards the buyback, another cash return initiatives such as a dividend over the medium-term?

Well, there is no assumption of the dividend over the medium-term built into our expectations. There are some expectations of share buybacks.

The -- as you know Kevin, the way we calculate the leverage ratios we net cash to adjusted debt. And so, the benefit of the extra cash is built-in to our numbers as well.

Okay, that's helpful. And then just quickly on your loyalty program, just wondering if you are seeing any change in the Aeroplan buying habits given the announcement few months ago and if you're seeing a reflection of that I guess in the seat demands from the Aeroplan Partners?

No, we're seeing fundamentally business as usual, Kevin. I think that that is one of the advantages of an early announcement as we did, we wanted to ensure that the marketplace, our customers, everyone had a sense as to what our business decision was and so having given this three-year notice basically, I think has managed to stabilize a lot of the activity.

Okay. And just last one just more of a housekeeping question.

When I look at historically, your sequential unit revenue trends are typically picked up quarter-over-quarter Q3 to Q2 and I know you don't typically provide revenue guidance, but just wondering of this anything that we should be expecting that would change that typical trend here when I look out over this summer?

As you correctly point out, we don't provide guidance for revenue performance, but there is no question, we called out our very important driver which we saw this time around and unit revenue going up. As Ben mentioned, first time since 2014, so that is obviously an important indicator and that drives our margin and your margin performance has become the key measure of our performance and so I know I'd say that it's a good indicator, but beyond that I don't think we can comment.

All right, great quarter. Thank you.

Thank you.

Yes, thanks very much. Good morning, everyone.

So, in your guidance Mike, you mentioned a change in your CASM, but you alluded to a lower than expected capacity growth, can you talk about that and whether that in whether that signaling a shift -- I don't think you gave us the capacity growth to begin with, so just trying to understand what shifted in terms of your outlook that would lead to a reduction in that capacity? So, any color there would be appreciated.

Good morning, Walter. First of all, it was not major reduction, it's for the most part tweaking, Ben talked about moving some capacity from Pacific to Atlantic.

We didn't replace all of that capacity, so that a bit of tweaking that we're doing in Q3 and in Q4. But it obviously had an impact on the overall adjusted CASM numbers.

I see, okay. And then looking forward, you are lapping a very strong capacity growth last year.

Where you did 21% in the third quarter. And, Ben, you’re talking about a very healthy summer environment here that you’re experiencing.

So, we’re trying to kind of wrap those two around, and not getting any guidance, perhaps what you could do is talk about what is your flex ability? If demand goes up, how much with your existing fleet in the third quarter could you ramp up capacity?

And what would that flex range be as opposed to what you expect your capacity to be?

Walter, it’s Ben. I think the flex capacity is in the form of our load factor.

If demand does ramp up, we do still have space on our airplane. Although we’re running very high load factors, there needs to be some room there.

And just to add to Mike’s comment and to your question about slight or tweaked capacity reduction, when we moved some capacity or some gauge from the Pacific to the Atlantic, the stage lengths are shorter on the Atlantic versus the Pacific and that’s predominantly what’s driving the tweaking from a capacity perspective.

Okay. And finally, Mike, when you look at your balance sheet and you think optimal capital structure, understanding that your intention is to bring your leverage down to your stated targets, but where are you most comfortable to see Air Canada from a leverage standpoint?

Or what peer would you look at in the ranges that you see out there that you think is the proper amount of leverage for your company?

Well, I mean, as you know, we’ve stated we have an objective of 2.2 by the end of next year. That’s a significant improvement over the last couple of years.

We believe we’ll continue to improve and our capital expenditure program declines in value -- declines over the next couple of years. And we’ll, I think we’ll talk, Walter, more about this on September 19th.

Yes, exactly. Walter, Calin here.

I’d also add to that, look, obviously, people have asked about how much we aspire to investment grade. And there’s no question that as you look at these levels and the direction we’re heading and the significant improvement in our credit rating over the last couple of years and this year as well, you can say that that is, potentially, one of the things that we would be interested in.

And so, we’ll give more visibility of that at the Investor Day.

Okay. That’s great.

Congratulations on the great quarter.

Thanks, Walter.

Thank you. Good morning.

Congratulations on some tremendous results.

Thanks, Tim.

Just wondering, I just want to call out two kinds of your unique impacts in the second quarter, one being the timing of Easter being a benefit, presumably, and the impact of the runway construction at Pearson. Is it fair, Mike, to maybe look at those as just the net impact of those influences being effectively immaterial in the quarter?

Tim, it’s a good question. And we did not call out the benefit or the cost associated with those events.

But I would say, net-net-net, I would say that it’s immaterial.

Okay.

And then I think, Tim, just to -- we talked about it a little bit because, to be frank, and I think there’s a lot of listeners on this call; they’re not material in the sense of impacting our financial results in a way that could require disclosure on different things we’re involved in. However, we were not happy campers with the outcome of the runway dynamic at Pearson.

And that did take some revenue out of our performance, and that obviously inconvenienced many of our customers, which was not a good thing. And so, we’ve been vocal and very clear to both the GTA and DENAF, Canada that we certainly expect a different performance level the next time around on any kind of runway construction.

Okay. Great.

Thank you. Another question for Mike here regarding the Air Canada’s capital commitments; are there any expected -- or are the expected investments related to insourcing the loyalty program now included in the capital commitments tables that you publish each quarter?

And again, I haven’t actually looked at them yet. So, I haven’t seen any changes.

But would they be in there?

Yes, Tim. They are in there.

And they will probably continue to evolve, but there is some estimates for those capital commitments over the next couple of years built into those long-range capital commitment plans.

Okay. Thank you.

And then my last question, I’m just wondering if you can provide any kind of early thoughts, I guess, on planned financing for those aircraft that are coming in 2018. You mentioned with your strong liquidity position, obviously using some cash for some of those aircraft.

But is there any way of sort of framing what we should expect in terms of use of operating leases next year versus any on-balance sheet sources of financing or cash?

Yes. I think, as I said in my comments, we probably have 25 planes coming in in the next year or so, so fairly busy with the 737s and six more 787s.

Again, we will use excess cash to pay for a lot of those. I think the next financing option is probably WTC.

I don’t think we will use operating leases. WTC is still a very effective financing tool for us, so if we are going to raise debt for some of those aircraft, I think our first choice right now is WTC.

Great. Thank you very much.

Thank you.

Thanks. Good morning.

I guess maybe I was hoping, Ben, maybe you could expand a little bit on the outlook on the Pacific. You mentioned you had taken some capacity out of there and shifted it to the Atlantic.

I assume that’s mainly just down-gauging. And I guess maybe secondarily to that, what are you seeing from the other players on the Pacific?

Are they making some adjustments to capacity as well?

Thanks, Cameron. Yes, it was.

We didn’t reduce any frequencies or drop any routes on the Pacific. The reduction all came in the form of down-gauge.

And what we saw was a very large increase in capacity between Asia and the United States, plus an increased capacity between Asia and Canada, and that’s what was the main driver of the depressed yield environment. And as I mentioned, the traffic was very strong, but pressures on the yield side.

And do you see that sort of pressure continuing beyond Q3 into Q4? I mean, have there been any adjustments to capacity from the competitors?

We do see a leveling out of any capacity increase between Asia and Canada. We do believe that between the United States and Asia that that will continue.

Okay. Maybe the second question for Mike, just on the foreign exchange impact on non-fuel unit costs.

I’m just wondering about your assumption for Q3. I assume it probably holds for Q4 as well of $1.29.

The spot rate today is about $1.25. So, I’m just wondering if that $1.29 is being conservative, or is that something that’s just reflecting where you’re hedged with on foreign exchange?

No, I think it’s conservative, but it also offset maybe the fuel side, where today, our assumption might be a little light on the fuel side.

Okay. That’s all from me.

Thanks. Thanks very much.

Yes, thank you. Good morning.

Just following up on the previous questions on the Pacific market, I think you spoke on some previous calls about the potential for some regulatory or structural capacity constraints in terms of bilateral agreements that would limit the impact at some point. Can you update us on where we are with these?

There are -- no. In terms of the -- we have constant requests out there for a level playing field, Doug.

And we look at places like China where, while there are still a certain amount of availability in the bilateral, there are slot constraints and it makes it challenging for the markets that we want to fly to. So, we’ll continue to look to have those agreements applied on a level playing field which goes well beyond just the international route rights, but actually effect capacity constraints, and that continues to be a challenge in some of these capacity-constrained environments.

There’s been no development in that front since last quarter.

Okay. Shifting gears a bit to the U.S.

transborder market, I think we understand the currency benefit on costs pretty well here. Is it too soon to see any change in the demand profile to the U.S.

from the stronger Canadian dollar? I know you said the U.S.

point-of-sale demand to Canada is still strong, but when would you expect to see a stronger point of sale Canada into to the U.S. because of the improving purchasing power?

We’re seeing a strong demand point-of-sale Canada to the United States. Two reasons, one, with the expanded route product we had to key leisure destinations, that seems to be working very well; Florida, Las Vegas, Hawaii.

And then also, not necessarily new customers flying with us but existing customers flying more times or more trips to the same destinations, stimulating more trips because of the pricing that we have in place. We do expect some increase in demand with the higher Canadian dollar, but based on the traffic levels we’ve seen over the last few years and the demand levels with the Canadian dollar dropping and then rising, we expect minimal or, slightly up because of the Canadian dollar.

Okay. I appreciate the color.

I’ll pass it along. Thank you.

Thanks, Doug.

Hi, guys. This is actually [Connor] in for Helane.

Can you, just a housekeeping item, so the U.S., there’s some regulatory changes on the accounting side in terms of revenue recognition. Do you guys have to make an adjustment there as well?

The revenue recognition new standard does apply up here in Canada as well. It doesn’t really affect us on a material basis.

I think we’ll disclose that either this -- I think in Q3 as to the impact. The bigger accounting standard that’s going to affect all airlines, probably in 2019, is bringing all the leases onto the balance sheet, and that will be a much more substantial impact to all airlines.

Great. Thanks.

And then, on the competitive environment in the domestic market, you had mentioned that the competitive capacity landscape has improved. Can you just talk more broadly about just how that competitive environment has been in terms of pricing and just how rational it’s been in the near term?

Thanks.

Can you repeat? Sorry, can you repeat the question?

Yes. So, the overall competitive environment has been, in the domestic market, it appears to have been a little bit better and it seems like the competitive outlook for capacity has also improved quite dramatically.

So, can you just talk a little bit more broadly about how pricing has been domestically and what you expect for the second half of the year?

Yep. I’ll ask Ben to comment.

Then I might add something at the end. Go ahead.

Sure. No, we’re seeing very healthy demand environment in domestic Canada.

And as I mentioned, with our expanding international network we do see additional flow traffic, speed traffic onto those international routes, and that’s supporting a higher PRASM and performance on our part.

And also, if you look at the economic indicators, I’m sure you would have seen over the last couple of weeks the perspective on the Canadian economy continues to be quite strong and both in terms of business travel as well as inbound vacation travel. So, if we’re at an inflection point where despite gloom and doom that may have come in respect of other markets, this -- Canada looks pretty good right now.

Thank you.

Thanks. Good morning, gentlemen and Kathy.

Ben, could you maybe give us some more color on Cargo? It’s always an interesting indicator, and it really did step up.

It seems like a major step change in the growth rate. Can you give us a little more color?

And then maybe talk a little bit about your outlook for Cargo for the remainder of the year, please?

We’re very pleased with the Cargo performance. One thing to note is with the introduction of more 787s into our fleet, the capacity, the cargo capacity, on those airplanes much higher than the 767s they’re replacing, so that did contribute to more capacity and greater ability to carry cargo.

And on top of that, these airplanes have greater range, so any payload restriction we would have had with different aircraft types has also been reduced. So those two factors definitely contributed to the performance and as we introduce more 787s we expect to see a similar result.

Do you think that you can maintain this pace through the back half of the year? Because I guess what I’m also trying to figure out is, is it a function of activity?

Or are you seeing other competitors pulling back cargo capacity?

No, we don’t see a pull back by other competitors. I think if we continue to deploy our airplanes on routes where we see the best opportunities, both from a passenger revenue perspective and a cargo perspective, if the optimization of that takes place, yes, you should see similar trends going forward.

All right. Great.

Just, I don’t know who wants to take this one, but I guess there’s a couple pieces to this question. Mike, you alluded to the fact that one of the things that you will be looking at over the coming years is maybe some additional investment in technology.

I’m wondering, is that part of building a new loyalty program? Or what kind of opportunities might be there?

And then I’m just wondering out of curiosity, you had talked about introducing a new revenue management system that was supposed to have added, call it, $100 million in revenue a year. How is the performance of that program actually working with the [increased heavily] in traffic?

Okay, Chris. Good morning.

It’s Mike. I’ll take the first stab at that question.

So, to answer the last part, we did introduce a new revenue management system about two years ago, and it has performed to expectations. It’s much more functional, much more sophisticated than what we had before, and it was a big change to management for our people, but our revenue management team is now utilizing that and they can even learn on it.

And so, it is a very effective tool for our type of network business. Going into the future, we do have some significant technology investments, which we’ll probably talk more -- a bit about on September 19 as well.

But they -- we will be putting in a new passenger sales and service system. That is a significant system.

That will give us some additional benefits. We are also putting in a new HR system to help our people better, and that is also a significant investment.

And then third but not least, we are also -- we’ll be putting in a new loyalty system as well. So, over the next three, four years, we have some very exciting new technologies, and that’s on top of -- on some digital technologies and digital apps that we are putting in place to better increase our customer service levels.

Okay. Any early thoughts on any cost benefits at this particular point?

Or is this just a function of being able to run the operation more effectively?

I don’t want to provide that right now. We may provide some visibility on September 19th.

We’ve got to keep some ammunition for September 19th, and so ...

No, but think of it like this ...

But we’ll talk about it in six weeks.

Yes. But think of it like this, Chris -- it’s Calin here.

Any of these initiatives have to meet a -- our internal hurdles for a business case, and obviously, in all cases, you either have an important cost reduction or a revenue generation component. And as Mike said, we’ll give some visibility where we can.

But each one of these three initiatives absolutely has got one component of either cost reduction or revenue generation. And frankly, on the case of the PSS system in particular, this was something that is long overdue as far as our company is concerned.

And I think there will be some amazing benefits in many, many, many different areas once we’re able to discuss hopefully on the September meeting.

Okay. Great.

One last one, if I may. Just looking at capacity, we have a pretty rough idea of the fleet plan, the whole bit.

Is it fair to think -- and when we look where the aircraft are coming in, that we should see stage length start to kind of flatten out, as we get into the back half of the year as the last of the wide bodies come in and we move into the narrow body replacement cycle. Is that a good way to think about that?

Chris, this is Mike. Absolutely.

I mean, there will still be pause of stage length in Q3 and Q4. But it will be lower than the 5% that we encourage in Q2.

Okay. So basically, we should also be expecting that the additional effect on yields should also start improving and that’s probably part of your guidance as well?

Yes, I think-yes, that’s a logical assumption. Absolutely.

Okay. Great.

Thanks folks.

Thanks, Chris.

Yes, good morning. Thank you for taking my question.

I guess just one on the Atlantic side; obviously, very strong here. You referenced improvement in the Premium Cabin, Ben.

I was just wondering, are you also being able to pick up some better pricing here, I guess, on some of the routes that you introduced last year?

Hi, Turan. Yes, most definitely.

And the new revenue management system that we have in place is definitely contributing to that. And we’ll continue to leverage our joint venture with United and Lufthansa.

Those are the two things that are driving the performance. And also, some of the new routes that we launched last year with one year under our belt, we certainly have learned where the strengths are and that allowed us to tweak some of our assumptions in the way we manage those routes.

Great. Thank you very much.

And I guess just one more for Mike, if I may. I’m just wondering on the CASM numbers that you referenced, the 17% versus the 21%, I just want to clarify that couldn’t be all the capacity change in the second half, could it?

Like, it’s probably just the fact that your capacity is coming-has been lower than you were expecting over the last few years? Am I right in my assumptions there?

Or am I missing something?

Yes, the difference between the 17% and 21% is really broken down into little three buckets, capacity, non-cash depreciation charges higher than we expected and then cost primarily what we invested in customer service and other types of costs. And those three distinct buckets comprise roughly equal contribution to that 4% difference.

Okay. Great.

Thank you very much.

Yes. Good morning.

And congratulations on a very good result.

Thank you, David.

My question is on the buybacks. I was wondering if you could help us think about how we should be modeling those?

Is there a certain amount of money you’re thinking of setting aside or any other way we should think about this when we’re wanting to incorporate those into our models?

Good morning, David. It’s Mike.

That’s a very fair question. Unfortunately, we’ve always used the NCIB as an opportunistic basis and, so therefore, we have not allocated or budgeted a certain amount to that point, to the NCIB.

So again, it will continue to be on an opportunistic basis.

Okay. So, when you say opportunistic, Mike, I assume then it’s really share price dependent.

There are a number of factors, but certainly share price dependent is one of those factors.

Okay. So, should we be thinking when you’re at $22 that’s considered okay, or?

Again, fair question, David. But I can’t respond to that.

I can’t give you indications as to what I think is a fair price and what’s not a fair price.

Okay. Okay.

Thank you. And again, congratulations, very good numbers.

Thanks, David.

Thanks, and thanks for squeezing me in. Just a question on guidance, Mike.

So, the free cash flow guidance is up $400 million. Should we assume a similar increase in your EBITDAR expectations for the full year?

Or is there any CapEx reduction associated with the free cash flow?

There is no CapEx reduction. We might have a small benefit from the foreign currency with the Canadian dollar being a little stronger than we anticipated.

Most of our expenditures on the capital side are U.S. denominated expenditures.

But other than that, the majority would be consistent with our increase with EBITDAR guidance.

Okay. That’s great, Mike.

Thanks. And then on the cost side, it looks like the cost came in below what you were guided- what you were guiding by $25 million to $50 million by my math.

Would that be entirely maintenance? And do you think rising Canadian dollar basically played into some of the deferral of maintenance costs?

It was primarily maintenance that drove the Q2 lower CASM ex-fuel. Part of it was currency, but the majority by far was some deferrals as well as lease extensions on wide-bodies where we got a release from the maintenance provision.

Okay. So, I wanted to be clear, Mike, actually.

The maintenance cost deferral, was that decided based on the Canadian dollar movement as well? Or you wanted to be more opportunistic?

No.

No? Okay.

And can you give us a stance on how much you deferred in the second half?

Frankly, I’ll go one further and I’ll give you a sense. In Q3, our maintenance costs are expected to be up roughly $10 million to $15 million versus last year.

Most of that maintenance in Q2 was deferred to Q4, so our maintenance costs in Q4 will probably be up in the area of $70 million versus last year.

Okay. That’s very helpful.

And lastly, on yield, Mike, what would you say was a key driver for positive yield in second quarter? Was this negative over the past several quarters?

Then you ex out FX and stage length. And do you think that positive yield is sustainable on that basis in the second half?

Konark, it’s Ben. As I mentioned previously, many of these routes that we operated in Q2 were into the second season.

So last year, we had to put in a lot of stimulation or introduction pricing that is no longer there. And then having the flexibility to move some capacity to better performing market definitely helped as well.

And the greater attraction of Canada is also helping us. We do see that continuing going forward.

Okay. That’s helpful, Ben.

Hi. Good morning, everyone, and congratulations on the very nice Q2 results.

Ben, just wanted to ask a question with regards to business and the premium class cabins. I know again you guys, U.S.

Airlines, other airlines globally have had success in driving yields in sort of in front of the cabin. What do you think has contributed to this?

And can you maybe provide us with some stats around paid first and business class load factors today versus say, two to three years ago.

There are a number of events that are contributing to our strong performance in this area. I think the optimization, the further optimization of our schedule and network around our three hubs, the ability to penetrate business traffic to and from the United States, previously not carried by us, that is driving further demand in the Business Cabins.

And then the competitive products that we now have rolled out consistently on our 777s and 787s is very competitive with the marketplace and being well received in the marketplace, and that is also driving increased demand.

Great. And any color around paid load factor up front?

Yes. With that increased demand, that’s what’s driving the better load factor.

And the demand is in paid premium traffic.

Okay. Thank you.

Thank you, Paul. I’d just like to mention I will be hosting our Investor Day in Toronto on September 19th.

While attendance is limited to investors and analysts, the media, shareholders, and interested parties are welcome to listen via a live audio webcast. Links to both the live audio webcast and an archive of the Investor Day presentations will be also be made available on our website.

So, with that, I’d like to thank all of you for joining us on our call today. Thank you very much.