Air Canada

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

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

Thank you, Valerie, and good morning, ladies and gentlemen and thank you for joining us on our call today. With me this morning are Calin Rovinescu, our President and Chief Executive Officer; Mike Rousseau, our Chief Financial Officer; and Ben Smith, President, Passenger Airlines.

On today's call, Calin will begin by highlighting our financial performance for the quarter and the progress made on our strategic initiatives. Ben and Mike will then address our third quarter financial performance and turn it back to Calin before taking questions from the analyst community.

As usual, I would like to point out that certain statements made on this call, such as those relating to our forecasted costs, financial targets, and strategic plans are forward-looking within the meaning of applicable securities laws. This call also includes references to non-GAAP measures.

Please refer to our third quarter press release and MD&A for important assumptions, and cautionary statements relating to forward-looking information and for reconciliations of non-GAAP measures to GAAP results. I'm now going to turn it over to Calin Rovinescu, Air Canada's President and CEO.

Thank you, Cathy, and good morning everyone, and thank you for joining us on our call this morning. The third quarter is historically our busiest with the Canadian summer; therefore, I'm very pleased to report today that Air Canada produced record results for this key travel period.

Our EBITDAR was almost $1.4 billion, $140 million more than last year, despite fuel expense being up 17% year-over-year in the quarter. This is the highest EBITDAR for any quarter in Air Canada's history.

In producing these results, we achieved an EBITDAR margin of 28.4%, which is also a record. On a GAAP basis, we are in record third quarter operating income of $1 billion, an increase of $108 million over last year's third quarter.

We reported record third quarter net income of $1.8 billion or $6.44 per diluted share. The net income number includes the net income tax recovery of $793 million which is excluded from adjusted net income.

Mike will discuss taxes a little later on the call. Adjusted net income amounted to $950 million or $3.43 per diluted share in the quarter, also a record.

Such strong results were achieved due to our performance on both the revenue and cost side of the ledger with a robust revenue environment and effective revenue and cost management practices. From a revenue perspective, we reported third quarter operating revenues of almost $4.9 billion, the highest in Air Canada's history, the result of taking care of almost 14 million customers, another record.

System passenger revenues alone were $4.5 billion, up 9.1% year-over-year. This exceeded the growth in our traffic which increased 8.8%.

In all major markets, we reported revenue gains and traffic growth. We're especially pleased, however, not surprised, to report the return of yield growth in the quarter.

Our yield improvement of 0.4% versus the prior year's quarter with capacity growth at 9.1%. On a stage length adjusted basis, yield improved 2.6%.

This type of yield improvement in a competitive environment and with this kind of capacity growth is exceptional and speaks to the quality of our team. Complementing this was our solid cost performance.

Adjusted CASM for the quarter decreased 2.1% from the prior year. This is the fifth consecutive year in which adjusted CASM has decreased in the third quarter; demonstrating cost reduction is now truly ingrained in our D&A.

These results have also advanced our financial and capital management programs. At the quarter's end, we had record liquidity levels of $4.5 billion.

Concurrently, we were also able to further reduce our leverage ratio to 2.1 times at the end of the third quarter. At our recent Investor Day in September, we set a new leverage ratio of 1.2 times by the end of 2020, which positions us towards investment grade.

Taken as a whole, these results testify to the successful transformation Air Canada has undergone and speaks to the effectiveness of sticking with our multiyear strategy. Our new business model is firing on all cylinders and making Air Canada not only profitable today, but positioning it to be sustainably profitable for the long-term.

As we mentioned before, including at our recent Investor Day in September, we still see many opportunities before us. We affirmed our confidence in the future by setting for ourselves more ambitious financial targets for the next three years.

One way we plan to achieve these goals is through a continued focus on our global network. In the quarter that just ended, we announced roughly a dozen new international routes or expanded services.

These will start next year from Montreal, Toronto, and Vancouver to destinations such as Shannon, Puerto, Bucharest, and Zagreb. And we continue to look for opportunities to strategically build the network including through additional sixth freedom connecting traffic.

But as we've said our capacity growth will begin to taper with the completion of our wide-body program and be replaced with the narrow-body replacement program which will further reduce unit cost. At this point, I'd like to turn the call over to Ben for a detailed discussion of our performance for the third quarter and I'll be back to you at the end of the call.

Thank you, Calin, and good morning. I'd like to start out by thanking all our employees for contributing to a very successful quarter.

Despite unfortunate weather events affecting our operations throughout the system, our teams performed extremely well under pressure and I look forward to sharing the good news related to our strong third quarter result. Revenue performance for the quarter was very strong.

On system capacity growth of 9.1%, we achieved 100% revenue efficiency with passenger revenue also up by 9.1% or $372 million to a record $4.478 billion in the third quarter. Traffic grew 8.8% with increases reflected in all markets we serve and from all global point of sale.

We were particularly pleased with the strong results for all of our new long haul routes launched in 2017 with several of these routes exceeding our initial expectations. Yield improved 0.4% despite a 3.9% longer average stage length versus last year.

While we have seen steadily improving result in 2017, this is the first time that we have reported positive absolute yield growth year-over-year in a quarter since the first quarter of 2014. Furthermore, as Calin mentioned earlier, on a stage length adjusted basis, system yield increased 2.6% year-over-year which I would like to point out is the highest stage length adjusted yield growth year-over-year since we began disclosing this figure in Q2 2014.

While our growth plan has always been margin-focused, these yield results represent an important milestone for our company and an accomplishment for our team. Our focus on premium had a direct impact on our yield improvement with our business cabin realizing a $90 million increase in revenues or 13.7% versus last year; on traffic and yield growth of 8.3% and 5% respectively.

Overall, our strong revenue results were driven by success in attracting larger volumes of higher yielding local traffic, strong performances of our premium products, and improvement in our overall fair mix, increases in base fares, continued leverage of our revenue management capabilities, and an increase in ancillary revenues. We remain confident that our plan is delivering on our strategies to leverage the geography of our Canadian hubs, our industry-leading products and services, our extensive network, and other competitive advantages.

Looking ahead, we will take the delivery of our first Boeing 737 Max 8 aircraft in the fourth quarter beginning rejuvenation and optimization of our narrow body fleet. We are looking forward to the unit cost advantages this aircraft will bring to our fleet as well as the industry leading in-flight entertainment system and satellite Wi-Fi that will be installed at the time of delivery.

The same standard of satellite Wi-Fi continues to be installed across our wide-body aircraft as well as our entire Rouge fleet. The technology will be fully operational on several of these aircrafts beginning or the end of the fourth quarter with the completion of this program on our Boeing 787 and 777 fleets as well as our Rouge Boeing 767 fleet by the end of 2018 and the completion on our Airbus A330 by March 2019.

In terms of bookings, I can also share that we are accountable with what we see for the fall and winter seasons with advance bookings trending in line with our expectations. These investments in our fleet and product are in addition to the investments we are making in our employees to enhance the overall customer experience.

Now let's turn to our key markets. In the domestic markets, on capacity growth of 1.5%, revenues grew $39 billion or 3% and traffic growth of 1% and a yield improvement of 2.2%.

Our traffic increase was driven by strong demand on services within Canada as well as incremental traffic transiting our hubs to the United States and international destinations. Our yield increase reflected growth on most major domestic services and included yield improvements on connecting traffic as well as in our business cabin.

We’re also particularly pleased with the performance of our service in the triangle between Ottawa, Montreal and Toronto. We saw a significant turnaround compared to last year.

Looking forward, we are expecting continued positive revenue performance in the Canadian market as we begin to see a moderation of industry capacity growth. On the United States trans-border market, revenues were up $63 million or 8%, on capacity growth of 10.9%.

Traffic grew 9.3% with increases reflected on all our major U.S. trans-border services.

Our traffic growth was driven by strong passenger demand between Canada and the United States, followed by growth in connecting traffic. A yield decline of 1% reflected the pricing pressures created by an increase industry capacity on U.S.

long-haul routes as well as short-haul seaboard routes. We saw an increase in lower yielding traffic transiting our hubs from the United States with the purpose of feeding our international network.

These yield declines were partly offset by yield growth on our U.S. Sun-routes such as Florida and Hawaii.

Looking to the fourth quarter. We are anticipating stable traffic from the United States business markets and strong sales out of the U.S.

We are continually looking to enhance our process for our passengers transiting our hubs to and from the U.S. and this will continue to be a strategic focus of ours as we close out the year.

The U.S. leisure markets out of Canada to destinations such as Florida, Nevada and Arizona also had a promising outlook as we look toward Q4.

Turning to the Atlantic, which performed particularly well. We saw revenues increase $202 million or 17.7% versus the same quarter in 2016.

Our revenue growth exceeded our capacity increase of 13.3% over the Atlantic. Our strong results were driven by an increase in traffic of 13.7% and yield improvement of 3.5%.

Our traffic increase reflected growth on all our major Atlantic services and included gains in both our business and premium economy cabins. We were pleased with the redeployment of capacity from the Pacific to the Atlantic, which allowed us to fully take advantage of the increased demand and strategically strengthen our position in light of growing competition in international low cost carriers.

Looking ahead, we anticipate another strong quarter over the Atlantic in Q4 from both a revenue and a yield perspective and we are particularly pleased with the outlook for our service to Delhi from both Toronto and Vancouver. Moving on to the Pacific.

On capacity growth of 10.1%, revenues increased $39 million or 5.7%. Our traffic growth were 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 then June 2017 launch of services to Taipei and Nagoya from Vancouver. A yield decline of 3.4% 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.

These added pressures were partially offset by the redeployment of capacity from the Pacific to the Atlantic. While the yield environment was challenging in the quarter, it showed improvement since the first and second quarters of 2017.

As we look ahead to the fourth quarter. The Pacific is still facing competitive pressures, particularly for the China and Hong Kong market.

However, we expect Pacific year-over-year revenue performance to continue to improve. When we look to our remaining markets on capacity growth of 8.4%, passenger revenues increased $29 million or 15.3% driven by a traffic increase of 10.1% and a yield improvement of 4.4%.

On traffic increase reflected growth on our services to South America and to traditional leisure destinations and included growth in all our cabins. Given a yield improvement on a 1.4 percentage point improvement in load factor in the quarter, overall PRASM grew 6.1% when compared to the last year.

Looking ahead to the fourth quarter, we anticipate continued strong results into South America, partially resulting from a significant turnaround in the Brazilian market. This strong outlook has given us the confidence to announce our new non-stop service to Buenos Aires out of Toronto.

Now returning to our cargo performance. To highlight very strong results revenues increased $49 million or 38% year-over-year in the quarter, driven by traffic and yield growth of 34.7% and 1.6% percent respectively.

Traffic increases were recorded in all markets, both the Atlantic and Pacific markets reflected traffic and yield increases versus the same quarter in 2016. Our increase in revenues can be partially attributed to the introduction of our new long-haul routes with our wide-body aircraft.

The air cargo industry has been growing steadily in 2017 and our strong network has allowed us to capitalize on this growth. Looking ahead, we will continue to identify opportunities to optimize the capacity we have deployed throughout our system.

I'll 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. I would like to add my thanks to the entire Air Canada team for their contribution in achieving the excellent third quarter with strong results in all of our key financial measures.

On the cost side, on an adjusted basis CASM declined 2.1% versus last year, in line with our 1.5% to 2.5% decrease projected in our August first news release. All in CASM decrease 0.1% from last year.

Fuel increase -- fuel expense increased $137 million or 17% from the third quarter of 2016. With higher jet fuel prices accounting for $110 million of the increase and higher fuel consumption accounting for $69 million.

Favorable currency impact of $36 million and hedging gains of $6 million for partially offsetting factors. But in the fourth quarter, Air Canada assumes an average jet fuel price per liter of CAD0.63 Post September 30th, we have hedged a portion of our anticipated fuel consumption for the month of October due to our concerns that prices could increase due to the potentially higher refinery demand as production resumes following the hurricane.

We continue to view the fuel price environment as relatively stable in the medium-term. We will continue to monitor the situation and adjust our practices when warranted.

Moving on to wages and salaries expense, these expenses were $18 million or 3% higher than last year mainly due to a 6.5% increase in fulltime of corporate employees to support the airline's international expansion strategy. The increase in stock-based compensation expense driven by a higher share price was also a distributing factor.

Sales and distribution cost increased $25 million or 14% from the same period in 2016, reflecting in large part a high volume of ticket sales and a higher proportion of purchases through international point of sale, which generally results in higher transaction costs. Our operating costs continue to be well-managed and are further discussed in our third quarter MD&A.

Turning to our cost guidance. We expect adjusted CASM in the fourth quarter of 2017 to decrease 0.5% to 1.5% when compared to the fourth quarter of 2016.

And for the full year 2017, we projected an adjusted CASM decrease of 3% to 4% when compared to 2006. Turning to our balance sheet and cash flow.

As Calin mentioned earlier, we ended the quarter with a record unrestricted liquidity of nearly $4.5 billion. With strong cash operating results of $493 million in the quarter with no new borrowings.

We repaid debt of $203 million and had capital expenditures of $169 million. We generate record positive free cash flow of $324 million in the quarter, $9 million higher than last year's third quarter.

And we continue to expect positive free cash flow in the range of $600 million to $900 million for the full year 2017. At the end of September, our adjusted net debt was $5.9 billion, a reduction of almost $1.2 billion from December 31st, 2016, which was driven by higher cash and short-term investment balances.

We ended the quarter with an adjusted net debt to EBITDAR ratio of 2.1 and within our objective achieving a leverage ratio not exceeding 2.2 by the end of 2018. We remain committed to further lowering this ratio to 1.2 by the end of 2020, which supports an investment-grade rating.

Our return on invested capital of 14.1$ was 570 basis points above our weighted average cost of capital of 8.4% and we project an annual ROIC of 13.5% to 14.5% for 2017. Moving on to CapEx in our fleet, we are forecasting capital expenditures of approximately $440 million in the fourth quarter with spending primarily related to the acquisition of one Boeing 787 and two Boeing 737 aircraft.

Given our high liquidity levels and our objective of reducing gross debt, we have made the decision to purchase these aircraft with cash and, in fact, we took delivery of the Boeing 787 last week. For the 21 aircraft delivery schedule for 2018, we continue to look at our options.

However, we are highly likely to tap into the WTC market. And finally I'll briefly discuss taxes.

In conjunction with the preparation of our third quarter financial statements, we determined that it was probable that substantially all of our deferred income tax assets which include non-capital losses would be realized. The booking of deferred tax asset represents a recognition of our off balance sheet loss carry forwards and other tax attributes and our tax rate of 27%.

Certainly this is another indication of the sustainability of our business model. Consequently, a deferred tax -- income tax asset of $610 million was recognized at September 30th, 2017, which resulted in Air Canada recording a non-cash tax recovery of $806 million on its consolidated statement of operations and non-cash tax expense of $196 million on the consolidated statement of comprehensive income.

We expect to record an income tax expense or recovery starting in the fourth quarter of 2017 as applicable. The net income tax recovery quarter recorded in third quarter 2017 was excluded from adjusted net income as it is a one-time recognition of a previously unrecognized income tax asset.

Commencing the fourth quarter 2017, on a prospective basis, adjusted net income will include the tax effect of reconciling items included in the measurement of adjusted net income. As I mentioned on Investor Day, these tax expenses will be non-cash in nature until the deferred tax asset is fully utilized.

Consistent with a discussion at that time, we currently project that cash taxes will be payable in 2021 on behalf of 2020 income. Additional detail on our results for the third quarter can be found in our financial statements in MD&A which were posted on our website and filed on SEDAR this morning.

And with that, I'll turn it over -- back over to Calin.

Thanks Mike. Today's results clearly show our strategy has utterly transformed Air Canada.

We are a revitalized company, one that is delivering on its commitments to shareholders by meeting and surpassing the ever-higher targets we set for ourselves. In this quarter alone, the company set records for EBITDAR, EBITDAR margin, operating revenues, operating income, net income, adjusted net income, free cash flow, unrestricted liquidity, and passengers carried.

We continue to grow profitably expanding margins while further reducing costs. Adjusted net debt is down almost $1.2 billion from the start of the year, despite our having spent approximately $2 billion on capital expenditures year-to-date and our leverage ratio has improved to 2.1 from 2.6 over the same period.

As a result of the multiyear transformation of our business model, we operate a more flexible, more diversified airline that can succeed even when the chips are down. This brings me to a core element of our transformation, the employee culture change that has been fundamental to all we have achieved.

Culture change was fully on display during the quarter. For example we reached and amended mutually beneficial agreement with our pilots.

That gives us additional flexibility to grow Rouge. We also saw the full force of employee engagement when hundreds of employees came together working to operate 50 additional flights to help rescue about 8,000 people in the path of the Caribbean hurricanes.

Many others work in other ways, for example volunteering to pack humanitarian kits to ship on these flights to the affected areas. I'm very proud of our employees.

They have embraced the changes our transformation has demanded with professionalism and an unwavering focus on taking care of our customers. On behalf of the 30,000 employees of Air Canada, then, I'd like to thank our customers whose loyalty makes a quarter with record results such as these possible.

And with that, we're not ready to take some questions. Thank you.

Hi, thanks for taking my question and congratulations on good results here for the third quarter.

Thanks Kevin.

Maybe just turning to your free cash flow guidance, you stuck to the $600 million to $900 million, but year-to-date you're at $1.1 billion, so just wondering -- I guess some of the moving parts we should be seeing in the fourth quarter that could potentially drive I guess a $200 million delta here as we end the year. And is there something in working capital we should be thinking about that could be could be playing a role?

Good morning Kevin, this is Mike. No, I think on a seasonal basis, we typically draw down a little bit of cash -- net cash in Q4 and so there is nothing that is unusual that we expect in Q4.

Capital will be north of $400 -- capital expenditure will be north of $400 million. And again like I said we're using cash to turn primarily pay those capital expenditures.

By the -- 787 and the two 737s.

Right. Okay, that's helpful.

And then -- and just turning to the comments around the U.S. trans-border competition, just wondering if you're seeing that primarily from I guess your Canadian competitors or you seeing more U.S.

airlines increase the capacity into Canada here?

Yes, hi Kevin, it's Ben. We're seeing more competition on both fronts, especially in the regional markets particularly from Eastern Canada into the Northeast U.S.

And then when the Canadian dollar appreciating, we're also seeing some resumption of capacity from U.S. carriers back into Canada.

Okay. Just last one for me here.

When I look at your fleet utilization I guess in an hours per day and I look back at 2012 before -- I guess before your first Investor Day, it looked like your average call it roughly 10 hours in the shoulder quarters of Q1 and Q4 and maybe about 10.5, 11 hours in the peak seasons in between. And when I look at it today, it looks like that peak season utilization is increased, but you've actually seen a bit of a decline in those shoulder quarters.

I'm wondering with a more competitive leisure product, should we start seeing maybe a shifting of the seasonality around your asset utilization. And how does that play into the seasonality of your earnings, should we start seeing that flat note as well over time?

Kevin, its Calin, I'll start, then I'll invite Ben to add a comment or two. So, you're bang on.

I mean I think realistically what we try to do with our leisure product is try to make our business model more sustainable over the entire year not only very, very strong in the summer -- in the summer quarters. So, we used as you know these airplane, the 767s, in particular, we use them on -- the Sun destinations in the wintertime and on the European destinations in the summertime.

And as these frequencies have been filling in, you should expect to see that. Now, good news is that our third quarter has become even stronger and that is sort of a double edged sword.

But that from our perspective has been good news, which has helped us deliver these record results. But our objective with the leisure product is exactly that is to create a more balanced utilization across the entire year and to find good uses of our aircraft, especially our wide-body aircraft throughout the whole year.

Ben?

Thanks Calin. Yes, Kevin we also have we also do much more maintenance work heavy maintenance work in the winter, so more aircraft are actually out of the active fleet.

But those aircraft are reflected in the utilization. And we're -- as you know we're in the middle of a Wi-Fi installation program which also adds to aircraft that are out of service.

And then now we'll be gradually increasing the number of countersuits in our route will be operating in particular India and more service to Australia and that will help better balance to deal with that less seasonality.

Okay. That's great.

Thank you very much.

Congrats on a strong quarter.

Thank you very much, Fadi.

So just looking at the yield environment and Ben you provided some sort of high-level outlook I guess going into Q4. With only a couple of months left in the year I was wondering if you're sort of able to put a little bit more on the outlook like should we continue to see the PRASM year-on-year improvement going into the fourth quarter given what you've seen so far on the fourth quarter kind of bookings?

And if there's any color also going into the winter how do you see the demand environment behaving?

Yes, Fadi. I think we've gone as far as we're accountable with the comments we've already made and what's already been released.

Rightly so what we're feeling -- we're feeling good about what we're seeing with future bookings fall and winter and we are we don't foresee anything out side ordinary based on that.

Okay. And may be one question to Mike here.

So as we look into 2018 and the outlook for the CASM, is there any anything you can point us to in terms of the positive and the negative you should be thinking about for the cost side of the story going into 2018, the edge of CASM?

Good morning, Fadi. It’s Mike.

No, we're not seeing anything in 2018 that would be unusual in the operation. As we talked about in the past certainly, we believe our capacity increase will drop versus what we experienced over the last couple of years.

But other than that, we don't see any unusual type expenses coming to bear.

Okay. Thank you.

All right. Thanks very much, operator.

Hey everybody thanks for the time here. Just a couple of questions.

When we look at you mentioned I think Ben may have said this, you saw significant improvement in the Eastern Triangle, you talked about improving yields and connecting traffic. I'm kind of wondering is that economy related?

Is it maybe you could put some more comments to that? And then yields on connecting traffic, I'm assuming that's sort of a better quality of passenger more business rather than leisure and I'm wondering if you could just mention how that strength is coming about?

Helane, its Calin here. I will start first and then I'll turn over to Ben.

First of all, some of these improvements are the result of excellent work by the commercial team and the revenue management team that is determining some of the strategies. We've redesigned the approach that we take towards rapid air which has been highly successful.

And as you've seen this massive six freedom traffic growth, as we've said several times are still relatively speaking in the early innings of capturing that and so as we find some of these new markets especially as they become more mature, we're able to change our pricing strategies to capture that traffic and better yields. And so I think that the good news is that overall, you've seen the percentage of connecting traffic that we're currently getting from the United States to international markets and it's still is relatively speaking small -- big for us, but it's small in context for the overall market.

So there's some great opportunities there and we're still learning, we're still using our O&D revenue management system that we invested very heavily in. So these are all drivers that have helped improve that and I say that the context is pretty positive going forward.

Ben?

Yes, thanks for Calin. Hi, Helane.

On Eastern Triangle, what we've done recently which you may not be aware is we've centralized all of our A330s to be based out of Montreal to all pilots and all the aircraft and the maintenance is now done in Montreal. So that will enables us to reduce the number of division in flights between the two cities.

Obviously it's a big cost decrease and that's been reflected in our results and also in capacity management. And then on the connecting traffic side, both yield and unit revenue have gone up because all this traffic is incremental.

So it has given us a lot more choice in the quality of customers that we accept the bookings from.

Okay. And then can I just ask one follow-up.

I noticed you guys announced your new service like you mentioned Bucharest, Porto, Brisbane, Shanghai others. I am just kind of wondering, I noticed like a lot of new capacity going into Porto specifically which is I think is a leisure destination for the summer.

Is that kind of like I notice United announced stuff for next summer as well. Is that like an effort by the Star Alliance to ship traffic on the North Atlantic from some other connecting markets or is it just demand for that particular city?

It is not a Star Alliance strategy per se and while we do have antitrust community with United over the Atlantic we don't get to the level of detailed the market like Porto and it is a summer market primarily and I suspect that their timing is coincidental more than anything else.

Okay. Great.

Thanks for your help, guys.

Thanks, Helane.

Yes, thanks very much. So as we look in the next year and given and viewing it on capacity we're having to plug something into our models here to fine tune.

And if I look at your fleet plan and add in the aircraft that you're expected to have delivered and I assume a fairly consistent utilization. We're getting capacity levels at a growth rate that's about half the growth rate in 2018.

My question is whether there is any change in demand -- underlying demand that will prompt you to utilize more of these aircraft and therefore, we should revisit that kind of trend capacity assumption or is the historical ratios that you use in terms of utilization are going to be consistent going into 2018?

Good morning, Walter. It’s Mike.

Yes, I don't think your analysis far off, it might be a little conservative, but I don't think we obviously try to improve utilization each year and it seems to do that over last awhile. I think there is probably some additional utilization that we can improve next year.

But I don't think your analysis is as far-off.

Okay.

And where intend to be.

Perfect. And then my next question maybe for you Ben.

Is just you're looking at your forward booking curve with regard to business travel versus leisure. Do you foresee any major kind of mix shifts associated with that and what would be the underlying driver if the overall economy is stronger typically, do we see business travel ramp-up quicker or more a higher magnitude than your leisure or is it more consistent between the two?

Just curious what your forward booking curve is showing in that metric?

So on Walter, how I answer that is obviously, we're starting a lot of new destinations and the mix on the various destinations really depends on what the traffic base is. So Portugal, Italy, Spain, Greece as we increase frequency they aren’t leisure markets.

We as expected the type of traffic will be lower yielding but very, very strong. And then your other point of the economy is going up, would we expect to see higher percentages of business traffic for sure.

There has been a long history of doing that, but our network is so much better diversified now than it has been in the history of Air Canada, we have a lot of flexibility to move capacity around to ensure that it's deployed where the best opportunities are and with our more flexible pilot agreement we can do that on relatively short notice.

Okay. And then my last question is really on introductory fares on some of these new routes that you open-up.

Typically, the past experiences you do come in with an introductory fare that's significantly below what you call the mature fare, is that different? Have you been using significant introductory fares on these new routes and therefore as they mature, should that help yields or was it a case where you didn't use introductory fares as significantly as you have in the past and therefore the improvement in yield is not as significant?

If both. Walter, so some of our new routes required as I expected strong introductory or low introductory fares to ensure that our presence is well-known in the market and that we can get the adequate traffic that we're looking for.

And then in other markets which are extremely strong out of Canada in terms of demand, especially from our customer base where we didn't historically offer a service those have done quite well right -- right from the beginning, so a bit of both.

Okay. And any examples of the ones that have been particularly strong on the new routes?

The leisure routes into Europe, actually in the summer.

Okay. All right.

Thank you very much for your answers.

Good morning and congrats on record results and yield momentum.

Thank you.

Thanks, Konark.

So my first question is on CASM guidance for the full year, so besides share price impact what other factors would have led to an increase in guidance and can you please remind us what is your sensitivity to share price changes?

Good morning, Konark. It’s Mike.

So we did modify our guidance. We didn't -- we went from down three to five to down three to four for the year.

So we're still in what our original expectations were to the lower end of that two-point guidance. So share price appreciation is one of the factors that we happily took as a cost increase in Q3 that was roughly I believe $17 million and that's reflective of these new accounting rules around expensing the increase in our share price for PSUs and RSUs that have yet to be -- yet to be realized.

I don't know the sensitivity--

It’s $6 per share.

Sorry, [indiscernible] for our EVP Controller has response.

Yes, each $1 increase in the share price is $6 million.

Okay. So there you go, there's a sensitivity every dollar is roughly $6 million dollar increase in compensation expense.

And again I'll take that as positive. Aside from that there are some other minor items where you were certainly making some investments in our future for training and other types of areas but those are relatively minor, but those are strategic investments that we think will further enhance the value of the company as we go forward.

But again, I think, we're very pleased with the cost performance of the company overall and certainly, I think I've called out a couple of the items that should explain the difference.

Okay, thanks. Thanks Mike for that.

And then on the fuel cost, Mike, I know you guys took a proactive step to purchase some jet fuel inventory out of the hurricane, so and the fuel cost actually came pretty much in line with your guidance, so how much of the impact this proactive purchase had? In other words, what would have been the fuel cost excluding that inventory restocking?

And do you expect some lingering benefits in Q4?

Yes, I think you're absolutely right. We’re going into the end of the quarter, we thought given share price increases subsequent to the hurricanes, our guidance might be a little bit short, may be $0.01 short.

It came in basically on guidance and I think -- certainly I think, the major issue or a major reason was the benefit that we received from buying early and taking a proactive approach to buying before the hurricane hit. So I think that and that's a fairly relatively small difference of less than $5 million, but I think that was the major reason.

And then second part of your question, I don't think that we'll have virtually any impact on Q4.

Okay, that's great. And lastly, on capacity, Ben when we look at our fleet plans, where you have more narrow-body additions next year versus wide-body.

So should we expect greater focus on domestic trans-border and sun destinations in 2018 or would that still be a 2019 story? Thanks.

We're still optimizing our plans, but the 737 Max is we bought this airplane to replace our Airbus now by the aircraft. So if demand does increase we can look to keep some of those airplanes a little longer, but that was the original business case for buying those airplanes.

Okay. Thank you.

And they weren't -- they weren't bought specifically for growth. They do have a higher passenger configuration than the airplanes that they're replacing, but that's where the efficiencies is going to come from and some of the capacity increases…

And Konark, its Mike just a follow up. The firm orders 61 of 737s believe it or not that's the level of capacity we had in 2013 when we place the order and so it provides us great deal of flexibility we build on top of that 40 different -- 40 options.

Yes and to not overstate the optionality that Konark, Calin here. You have got optionality with those 40 airplanes there and then you have the optionality with the incremental CSeries aircraft over and above the 45 that we aren’t promoted.

So we can decide on the configuration, but to the point that this is based on a 2013 capacity requirement, so they are obviously there is some pretty great opportunity there to expand that into exercise more, but we will obviously won't affect 2018 in any fashion.

Konark, the key takeaway is we haven't had this type of flexibility in terms of being able to adjust capacity this close in. I don't think ever.

Okay. Great color guys.

Thank you so much.

Thanks, guys. Just going through some of the comments from Investor Day, one of the things that I think was interesting with your discussion rather your focus on revenue optimization over the next couple of years.

Listening to kind of some of the stuff you've talked about the first time you've seen a positive yield number. How should we be thinking about this as sort of the beginning of a trend, certainly sounds like Q4 is shaping up pretty possibly?

What are the other waivers you think you have through early 2018 and 2019 that you think if they could sustain this?

So I will start and then Ben to comment as well, Chris. But think of it like this we've said repeatedly and I know that some of the analysts wanted to take a wait and see attitude, but we said repeatedly that we were going to grow and compete primarily in the international markets with international carriers and become sort of more relevant as far as it being a global carrier, that meant additional capacity and that meant that would have some impact over the period of time as we're building it up on yields.

Likewise, we introduced Rouge and we said that Rouge is going to come into these markets and have the effect of in some cases reducing the pricing and providing lower fares. They're not -- it's not an ultra-low cost carrier that we operate into Europe and into the Caribbean, but it's a leisure market which has the effect of having lower fares which of course also had some pressure on yields.

That was part of the business strategy as well. And at the same time, we're bringing in all of the 787 which added these large amounts of capacity to enable us to maintain the older airplanes and use them in Rouge.

So that strategy is largely played out and it's played out I'd say much better than expected, but we always expected there to be yield deterioration as we're playing out that strategy. That strategy has now been completed.

The growth next year is more moderate as Mike indicated and the new aircraft are coming in largely as the replacement aircraft with some optionality for growth if we like. So when you look at that just by pure math, the math there would suggest that yields will continue to be in-principle strong, that's sort of the first factor to consider.

The second factor is the early innings statement that I made earlier about the early innings of our new O&D revenue management system. This is a tremendous tool.

We invested heavily to do it; we worked over two years to put it into place. And we're starting to see some real this is artificial intelligence being exploited in terms of revenue management fundamentally.

It's machine driven and it gives us the data to be able to do pricing in a more compelling fashion and so that is the second driver of that. And then, a couple to that the usual factors such as the maturity of some of the routes where you've had the notes or the earlier comment we've had some introductory pricing which, of course, once you're into the second and third years of some of these massive new routes, we've launched something like 50 new destinations.

And so these 50 new destinations are you know become mature and they all have different pricing strength. So, put all that together, it should create -- we're not providing any guidance on yield as far as 2018 is concerned of course or anything like that.

But if you look at these drivers, they do give us some level of confidence that this quarter of yield improvement was not a one-off anomaly.

Chris I'll just answer what Calin mentioned here. We also continue to leverage our geography and our superior product and service.

And then in addition to better optimizing our O&D revenue management system. We're also putting significantly more focus on brand.

There's ancillary revenue and a much larger focus on premium.

Okay, that's helpful guys. I don't know who wants to take this one but just looking at the capacity and fleet changes as we move into 2018.

First of all, Mike you've got a number of the 737s coming in, is there any sort of granularity you give us onto when we should be expecting those aircraft to come in? Are they are they sort of spread throughout the year are they front end loaded.

And any thoughts around the transition costs even if you're keeping call it reserve aircraft around just for to protect the schedule.

Good morning Chris. This is Mike.

We as you know we're taking two 737s by the end of this year and we've taken 16 in the first half of next year. So, they'll all be in place by the end of June of next year.

So, it is a busy first half, but we're very excited getting this -- as we talked about at Investor Day, a much lower CASM plane into our fleet. Typically, we'll move out some of the 320 family, probably two or three months after the some 737 comes in.

We -- to get ready from [Indiscernible] perspective and as we talked about most of those planes are leased and so the leases have been structured to end at roughly the same time or just slightly thereafter after the 787 is delivered to us.

Okay. And then things like maintenance reserves and everything are all accrued for.

Yes.

All right. Great.

And then if I could just one quick one. Just in the quarter.

I mean I know we had a lot of impact in terms of operations from the hurricane. Anything that you want to call out in terms of either cost or lost revenue that we should be thinking about?

No, Chris its Calin. No.

So, I think that the -- well obviously the many lives were affected and you saw the numbers we rescued something like 7,000 passengers and put on 50 or so incremental flights. That did not have any material impact to our financial performance.

And I think that the interesting takeaway from this is again something else that we've been building in as part of our business plan is to have both the kind of flexibility and especially diversification to be able to count on the Pacific when the Atlantic is weak, count on the Atlantic when the Pacific weak, count on leisure when transborder is weak, count on transborder when domestic is weak, et cetera. So, while for sure rough time in the Caribbean and in the Sun destinations in the United States, Florida, et cetera, it didn't have any material impact on our results.

All right. Thank you.

Hi, good morning everyone. Minute some out there pointing to your 4Q CASM as really not seeing the benefit of the move in the Canadian dollar of late.

Mike can you maybe help us think about currency moves and its impact on the CASM ex-fuel line because I just thought that the biggest U.S. dollar cost to you were maintenance and rent which is directionally 10% of your OpEx excluding fuel.

So, any color you can provide around that would I think would be helpful.

Good morning Andrew, it's Mike. You're absolutely right, our two largest non-fuel expenses that we primarily incur in U.S.

dollars are maintenance and leases, some terminal handling as well. And so as a percentage overall expenses it's in that 10% or 12% range.

We roughly have -- on an annual basis roughly $3 billion of non-fuel U.S. denominated expenses.

And so every pennies is roughly $30 million. So, on a quarter basis divide by 4 $7.5 million.

And so again -- and I think we've also told this market, we have -- the other side of that coin is that we also have roughly $3 billion of U.S. revenue coming in.

And so there's a natural hedge within the company on the non-fuel side which we obviously take as a benefit.

Great. Thank you for the color there.

And then the last one for Ben. I guess more of our revenue question here.

Obviously 3Q here you eked out your kind of first quarter of positive PRASM I think since 2013. Not looking for you to guide to revenue, but as your capacity comes down over the next four quarters and you're taking more narrow-body aircraft which I think should be a little bit more PRASM accretive.

Can you maybe help us think about any of the potential headwinds that you see heading into 2013 that might prevent further momentum on the unit revenue front?

I think one thing to focus on is we've had some very big increases quickly on the [Indiscernible] side of the fleet. We're now at 49 aircraft after three or four years.

And all those aircraft especially on the Atlantic do not have our business class cabin. So, the ability to get unit revenues similar to what we get on mainline, obviously not possible.

And now that we're capped the 24, 25 767s, the additional capacity is coming in does have -- give us the ability to bring in a higher unit revenue. So, that that's a big something to really note.

And then on the Transcon, we're doing a better job in North America of optimizing the revenue on wide-body aircraft flying between the main trunk routes. So, that's something that we look forward to seeing some positive results, which will -- such big routes for us that overall should help.

Okay. Thank you very much.

Thank you. Good morning.

I'll start with the question for Ben. There's been a lot of disruption in the European market with some of the short haul carriers there Ryanair and others.

There's a potential for Air Canada to -- or are you looking at it as an opportunity to grab any sixth freedom traffic through any of this through Toronto that may have gone through London or Frankfurt. Does that kind of disruption provide an opportunity there for you?

The Ryanair disruption has not provided much of an opportunity in a material way for us but Rouge definitely for that type of traffic has worked out beyond our expectations in not only allowing us to participate in a profitable way on O&D kind of markets to Europe, but also offering a full array of destinations not well-served by any carrier in North America via Toronto in Montreal. So, to your question has Ryanair given us an additional opportunity?

No. But I think the better we continue to improve where we deploy, how we deploy the capacity across the Atlantic, just get better and better with this O&D revenue management system.

What we are seeing now is the reduction in some of the weaker carrier or elimination of service from the weaker carrier such as Berlin and Alitalia into North America which definitely providing opportunities for us.

Okay. That's helpful.

And then for Calin or Mike, I can't let you escape without some question about the loyalty program and the process so far. Can you comment on what you're seeing so far from in terms of securing banking partners or just -- even just to tell us or update us on what the timeline is for making those initial decisions?

Okay, thank you Doug. So, as you I think would imagine and perhaps expect there's been a tremendous amount of interest from the financial community in terms of our RFP that we have put out into the marketplace.

The perspective -- and I think the gratification from our perspective is that that the value of our product and the value of our loyalty program is seen generally speaking by the entire financial community. So, there's been a lot of interest in the RFP and in the credit card debt contract from a bank and non-bank financial institutions.

And -- so we have a timeline. It's one that is intended to ensure that people have a lot of experience with us and with loyalty have a chance to put their best foot forward and people who have less experience with us also have an opportunity to learn and put their best foot forward.

So, it's not a cramped process. We are expecting to have a solid presence of interest coming up before the end of the year and we will as soon as the process matures, we'll let the marketplace have more of a sense.

We wanted to give everyone three years notice to make sure that everyone had the time to do both plan and moderate and have as little or no negative impact for anyone involved. Our number one concern is our customers -- our frequent flyer customers who we -- for sure will continue to take great care of as we build this new program out.

So, I'd say there's a lot of interest. We're also going to put the technology RFP out early in 2018.

Several technology companies have approached us now with respect to that and I think that there will be good interest in that as well. So, the two RFPs will come will together early in 2018.

So, that's helpful and useful detail. Just to put a finer point on that.

You expect to receive all the initial expressions of interest by the end of this year. But in terms of making decisions, that's still a couple quarters away would you say?

That's correct.

Okay. Thank you.

And thanks for squeezing me in.

Okay. Thanks Doug.

Yes, thanks. Good morning.

Just really one clarification question from me to Mike. Just on the taxes, I understand the no cash taxes until 2021, but if I heard you correctly, I think you mentioned that starting in Q4 this year you're going to start to record income tax on the income statement and just -- I think you said the statutory rate was around 28%.

Is that what we should expect starting in Q4?

Good morning Cameron. It's Mike.

Yes, the stat rate is 27%. So, you should see that -- it will start in Q4.

Okay. Okay.

That's actually all I had. Thanks very much.

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

I just had one -- well actually I think if you could comment a little bit on the margin guidance for the full rear as obviously at end of the year, is it possible to maybe tighten that up a little bit further in the 17% to 19% range?

Good morning. Turan, its Mike.

No, again, we continue to be comfortable. I mean certainly we have -- obviously a much greater confidence on what the margin will be given that we were through our biggest quarters.

But we left the 17% to 19% in the market for good purposes. So, we're not going to provide any additional color on whether that's going to be the top end or the middle or the bottom end.

Right now our -- certainly our strong confidence is that it will between 17% and 19%. And so we'll just leave it as is.

Okay. Thank you.

And Mike maybe I'll ask one more quickly here on deferral or the maintenance provision. I think that you reference in the MD&A I guess the lease extensions.

I'm wondering if you can comment a little bit on whether these deferrals will impact results in 2018 or is it going to be further down the road?

We'll have to go back and look at the MD&A and see what we said. I don't remember off top my head.

As we -- as you do know that for lease expense -- lease planes we have a maintenance provision and then if we do extend leases then that does provide potentially some benefit as we push out the cost of the return conditions on the plane. There was no impact in Q3 from that perspective.

We did not expect any impact in Q4. This is just a normal course situation as we extend leases as we go forward.

I don't see it having much impact in 2018, but certainly when we do provide more detailed guidance in February for our 2018 CASM ex-fuel results, we'll call that out if that's fact an issue.

Okay, that's great. Thank you very much.

Yes, good morning. A quick question for Ben.

The fuel -- sorry the oil price has gone up, I was just wondering if you could comment on what's going on and what's in Canada from the demand standpoint, it's going up but not a lot. So, I'm just wondering has demand rebounded or is it -- what's it doing?

Yes, David we're seeing slight positive improvement in demand to all of Western Canada from Eastern Canada, but nothing that is sticking out in any material way. It's very slight.

How about out of Western Canada?

Same thing.

Same thing? Okay, fair enough.

And then Mike on the pension side any thoughts on what the current rates would do on the pension expense for next year you're running around 300 million this year?

Right now I mean as we have to wait for the year end rate to determine that and assuming interest rates don't move from where they are today, I don't think is going to be materially different. It should be favorable to some -- it should drop a little bit from the $300 million run rate this year.

Again that's assuming interest rates stay where they are today.

Sure, but it doesn't sound like a lot from what you're saying.

No. And again we'll provide that guidance as we normally do when once we lock in the year end interest rate.

Okay. Good enough.

Thank you.

Thanks David.

Thank you Valerie and thank you everyone for joining us on the call today.