Air Canada

Kathleen Murphy – IR and Corporate Reporting Calin Rovinescu – President and Chief Executive Officer Lucie Guillemette – Executive Vice President and Chief Commercial Officer Mike Rousseau – Chief Financial Officer

Konark Gupta – Macquarie Capital Walter Spracklin – RBC Chris Murray – AltaCorp Turan Quettawala – Scotiabank Cameron Doerksen – National Bank Financial Andrew Didora – Bank of America Helane Becker – Cowen Nish Mani – J.P. Morgan David Tyerman – Cormark Securities Kevin Chiang – CIBC

Thank you, Valery, and good morning, everyone, and thank you for joining us on our third quarter call. With me this morning are Calin Rovinescu, our President and Chief Executive Officer; Mike Rousseau, our Chief Financial Officer; and Lucie Guillemette, Executive Vice President and Chief Commercial Officer.

On today’s call, Calin will begin by highlighting our financial performance for the third quarter. Lucie and Mike will then address the third quarter financial performance in more detail, 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, Kathy, and good morning, everyone, and thanks for joining us on our call today. I’m very pleased to report a solid third quarter with EBITDAR of $1.265 billion.

I have analyst consensus estimates. Third quarter operating income amounted to $840 million.

These strong results were achieved in the face of increased domestic and international competition from both legacy carriers and new entrant LCCs and ULCCs underscoring both the global appeal of the Air Canada brand, as well as our effective allocation of capacity. Strong revenue and cost management substantially offset the challenges we faced in the quarter, principally the significant increase in fuel prices.

Our operating revenues exceeded $5 billion for the first time in a single quarter reaching $5.4 billion. PRASM improved 4.2% year-over-year or 4.9% on a stage length adjusted basis.

Our PRASM performance not only significantly exceeded that of our major domestic competitor. That was the best in the North American airline industry and we are encouraged by the trends we are seeing.

The economy has been strong. Our view is that this will continue leading to modest GDP growth.

Unemployment rates are at record lows and the recent settling of the U.S., Mexico, Canada trade deal removes an overhang uncertainty. We expect our year-over-year PRASM performance both in the domestic market and on a system basis to continue to improve in the fourth quarter.

For the healthy outlook for Q4 coupled with favorable pricing trends, we expect the higher revenue to fully offset the increase in fuel price in the fourth quarter. From a cost perspective, on an adjusted basis, CASM increased 1.1% versus last year’s third quarter, better than what we had projected on our Q2 call.

All in CASM increased 9.8% versus the prior year largely reflecting the added cost of fuel. From a commercial perspective, we continue to invest in our customer experience.

The introduction of high speed Gogo 2Ku satellite Wi-Fi on our wide-body aircraft provides global internet coverage to our customers with the power to stream content while flying internationally. You’ve already completed installation across Air Canada Rouge narrow-body fleet as well as our Boeing 777-300ER.

The installation process is ramping up in the fall and we are currently installing Wi-Fi across our Boeing 767 Rouge aircraft, as well as our Boeing 777-200LR. This quarter, we will also begin Wi-Fi installation in our Airbus A330 as well as our Boeing 787s and our Boeing 737 MAX-8.

Regarding our new Boeing 737s after several technical problems with the antenna experienced by our selected supplier of the Wi-Fi equipment, which precluded factory installation. We intend to have all of these aircraft fitted with a new service by next July.

The entire Air Canada and Air Canada Rouge wide-body fleet is scheduled to be completed with Wi-Fi by Q3 2019. We’re also in the early stages of transitioning the interior of our Airbus A330s to the dream cabin standard that customers value on our Boeing 777 and Boeing 787 fleet.

We plan to begin to conversions in 2019 targeting at 2020 completion for the entire fleet, thereby creating a consistent and elevated cabin standard across our entire mainline wide-body fleet. This will be complimented by the new narrow-body cabin standard experience on our Airbus A220s formerly the Bombardier C-Series, which start to arrive in Q4 2019 and on our Boeing 737 MAX 8.

Our investments in our cabin interior as well as our investments in Wi-Fi in-flight entertainment and the continued rollout of our sharp new livery underscores our focus on ensuring and updated and consistent world class experience for our customers across our mainline product. When looking to our lounge product, we continue to refine and enhance our existing lounges, while looking for opportunities to grow our lounge network.

In the third quarter, we opened up our new Maple Leaf lounge in Saskatoon and have new lounge openings in LaGuardia as well as St. John’s by the end of the year.

We’re delighted that the independent research firms Skytrax reaffirmed Air Canada’s four-star rating in the quarter, we’re proud to be the only international network carrier in North America to hold discovered and distinction. These results validate our strategy to invest in our onboard and airport product services and people.

We’re extremely pleased that Skytrax concluded that our new Air Canada’s signature suite at Toronto Pearson, a five-star dining experience for eligible international signature class customers can now be considered amongst the best, if not the best in the world for business class preflight dining. Our suite continues to elevate our premium customer experience that our primary hub in Toronto.

Before moving on, I’d like to thank our 30,000 member team for their hard work, taking care of our customers during a very busy but satisfying summer and for their contribution to a very strong quarter. This summer, we successfully read an incredibly tight operation carrying over 15 million customers from the beginning of June through the end of August.

In the quarter, we had five days where we carried a record number of passengers and on August 20, we carried over 178,000 passengers in a single day. Our team served our customers with the care and class they expect of Air Canada and on behalf of our entire executive team, thank you.

Finally, I’d like to thank our customers for their continued loyalty and for choosing to fly with us. It is our unwavering commitment to continue to provide superior award winning service as we fly them safely to their destinations.

And with that, I’ll turn the call over to Lucie will discuss our third quarter revenue performance in more detail.

Thank you, Calin, and good morning. As Calin’s comments, I would also like to thank our employees for their continued hard work and taking care of our customers, particularly during the very busy summer months.

Having Skytrax, we affirm our four-star rating is a true testament to the ongoing hard work, passion, teamwork, and dedication of our Air Canada team. Turning towards third quarter results, we achieved a very strong passenger revenue performance totaling $5 billion in the quarter, up $504 million or an efficient 11.2% from last year on capacity growth of 6.7%.

Traffic increased 7.5%, while yield improved 3.4%. When adjusting for a 1.3% longer stage length yields increased 4.1% when compared to last year.

The yield growth was largely driven by increases in fares and carrier surcharges, growth in high yielding local traffic, and an improvement in the overall fare mix. We also saw greater proportional growth of high yielding business in premium economy passengers in the quarter.

PRASM increased 4.2% year-over-year or 4.9% on a stage length adjusted basis. In the business cabin on a system basis, we successfully grew revenues by $90 million or 13% from the third quarter of 2017.

On traffic and yield increases of 8.9% and 3.7% respectively. Both traffic and yield increases in all geographical regions versus the third quarter of 2017.

The continued strong performance of our business class cabin reflects our strong position with this key segment as well as a clear return on investments from our premium products and services over the last few years. Including the introduction of our Air Canada signature service, which provides an elevated premium experience through as the entirety of our customer’s journey as well as an increased emphasis on training for our premium airport agents and in-flight service director.

We also continue to see success in our strategy to attract traffic transiting our hubs facilitated by our ongoing investments to improve the connection process at all three of our primary Canadian hub. We’ve successfully grown ancillary revenue by 14% since the beginning of the year, led by baggage fees, paid upgrades, seat selection and preferred seats.

This represents growth of 8% on a per passenger basis achieved through a combination of enhanced branding as well as unbundling of services with our new fare categories and improved merchandising of our ancillary options on aircanada.com. With that, let’s turn to our key markets.

In the domestic market, our capacity growth of 4.2%, revenue increased $59 million or 4.3%, on traffic growth of 3.4% and yield improvement of 0.9%. Traffic growth was reflected on all major domestic services and included gains in the business cabin.

We also saw growth in connecting traffic to international destinations and domestic yields improved on most major domestic services. We’re pleased with the performance of the Eastern Canada triangle of Toronto, Montreal, and Ottawa, and continue to see improvements in these markets.

However, our intellects regional market where we have our relatively small presence, you’ve seen increased competitive pressures and capacity additions. Transcontinental routes were somewhat impacted by competitive pricing activities on point-to-point markets within Canada, particularly in the month of July.

The overall domestic yield improvement versus the third quarter of 2017 reflected both gains in the business cabin in the impact of new fare categories on our domestic services. Looking ahead to the fourth quarter of 2018, we anticipate continued improvement in traffic, revenue PRASM and yield.

While undertaking a competitive review, we are seeing some easing of competitor capacity growth in Eastern Canada, where we have our strongest presence. In the U.S.

transborder market on capacity growth at 5.9%, revenue increased 9.7%, on traffic and yield growth of 5.6% and three 3.8% respectively. The launch of our new fare categories, specifically our comfort fare contributed to the positive yield performance.

PRASM improved on most U.S. transborder services in the quarter.

We were particularly pleased with our performance in California as well as our transborder leisure routes. Looking ahead to the fourth quarter, we anticipate our positive performance from a traffic revenue and yield perspective to continue.

Our U.S. short haul business market shows significant resiliency in the third quarter and the outlook for the fourth quarter in these markets is positive.

While the U.S. economy remains strong, we will continue to maximize the opportunity and we’ll explore enhancing our presence in markets where we see potential as illustrated by our recent announcement of our non-stop service from Montreal to Raleigh, North Carolina.

Now turning to the Atlantic, this market show the highest revenue growth in the quarter, and this is the first time in a quarter that an international market has surpassed the domestic market from the passenger revenue perspective. I see this as a further evidence of the success of our international expansion strategy, which we embarked on several years ago and illustrates the strong foundational market position across the Atlantic that we have built.

Now moving onto the detail, on capacity growth of 10.3%, Atlantic revenues grew $273 million or 20.3% to $1.617 billion in the quarter, driven by traffic growth of 13.1% and the yield improvement of 6.4%. We recently launched a new fare category on Atlantic services, which contributed to the overall yield improvement versus the prior year.

On a stage length adjusted basis, PRASM improved 9.9% when compared to last year with improvements on all major Atlantic services. During your busy month of June, we began operating several new trends Atlantic routes including our non-stop mainline service to Shannon from Toronto, to Dublin from Montreal, and to Zurich and Paris from Vancouver, as well as our non-stop Air Canada Rouge services to Bucharest and Lisbon from Montreal and to Bucharest, Puerto, and Zagreb from Toronto.

We’re happy to say that all of these new routes met or exceeded our expectations, and I’d also like to highlight that Athens, Rome, and Lisbon also performed very well. Looking to the fourth quarter, we’re pleased with our outlook and we are anticipating another strong quarter over the Atlantic, from a traffic, revenue and yield perspective.

The network announcements from our primary domestic competitor, represents a low level of risk for the business in the short-term. The composition and range capabilities of our modern efficient fleet gives us the flexibility and the tools to take action with routes, if they’re not achieving our internal targets, which is illustrated with our seasonal suspension of our Toronto to Mumbai service, where we are reallocating the aircraft to a much better performing Vancouver deadly market.

Recently, we announced our new non-stop service from Toronto to Vienna, as well as Montreal to Bordeaux both to begin in 2019. Our confidence to invest in Vienna, further illustrates how up to applying remains the backbone of our trans-Atlantic strategy.

Now looking to our Pacific markets, we were pleased to see significant improvements into several of our key markets. Capacity growth of 1.1%, revenue increased $70 million or 9.9% driven by traffic growth of 2.9% and a strong yield improvement of 6.8%.

The yield curve reflected increases in base fares and carrier surcharges, as well as a general improvement in the fare mix. Year-over-year present improved a very healthy 8.6% in the quarter with most major services showing increases.

We were particularly pleased with the performance of our service to Korea and Japan. In Japan, we consolidated our service from Toronto to Tokyo-Haneda and started our Tokyo-Narita service from Montreal.

Previously, we had operating to both Haneda and Narita from Toronto. This initiative to optimize our presence in Tokyo has exceeded our expectations.

So with this Australia were slightly under pressure from a PRASM perspective, mainly due to increased industry capacity from North America. However, we expect this to improve as we enter the stronger winter period.

Looking at the fourth quarter, bookings are in line with our expectation and we expect to see a favorable impact that increases to base fare in carrier surcharges to continue. They’ve also taken action to reduce specific capacity in Q4, which we feel will have a positive impact on our performance.

Revenues from the remaining services increased $18 million or 7.9% on traffic goes of 11.1%. A yield decrease of 2.8% was mainly due to a significant increase in average stage length, due to having removed the short-haul tag between Santiago and Buenos Aires as Air Canada now serves both markets on a non-stop basis.

Q3 is traditionally a softer demand period for many of these routes, which tend to ramp up in the winter. During the quarter, we saw continued competitive pressure on our Mexico services, which hurt our yield, although our traffic numbers remained strong.

We also saw some softening of demand to certain Caribbean markets. And on a stage length adjusted basis, overall yield for the other markets was unchanged from the third quarter of 2017.

For the fourth quarter, we expect to see traffic and revenue improved as we enter the stronger winter period. However, we anticipate competitive pressure as well as the average stage length increase from the removal of the Santiago and Buenos Aires tag to continue to apply downward pressure on our yields relative to Q4 last year.

We continue to believe that South America represents a growth option to deseasonalized the winter for us. And we will continue to take advantage of opportunities to counter seasonality with markets, where demand is strong in the winter.

From a system capacity perspective for the fourth quarter, the growth rate versus the previous year will decrease in this tapering trend is projected to continue through next year, as we sharpen our focus on further yield improvement. Moving on to cargo, which delivered another strong quarter.

Cargo revenue increased $24 million, or 12% year-over-year, driven by yield growth of 10.6% and higher traffic of 1.6%. Consistent with our prior quarter’s, the Atlantic and Pacific cargo markets performed particularly well.

In the quarter, Air Canada Cargo won the Platinum Air Cargo Excellence Award. This is our fourth Air Cargo Excellence Award in the third in a row in the category for airlines carrying up to 1 million ton.

This award is based on the Air Cargo Excellence survey for carriers are ranked by freight forwarders on customer service, performance and value. Looking at enter the fourth quarter, we anticipate the positive cargo performance to continue from a traffic, revenue and yield perspective.

Cargo remains an important contributor to the Air Canada family. So I will now turn the call over to Mike for discussion on our cost performance and balance sheet metrics.

Thank you, Lucie. And good morning to everyone.

I would also like to thank our employees for their role and teamwork in achieving the strong Q3 results, and for their professionalism and dedication, taking care of our customers. Our solid EBITDAR results in the quarter were also driven by a strong unit cost performance.

On an adjusted basis, CASM increased 1.1% from the third quarter last year. Better than expected on lower than forecasted regional airline expense.

The impact of cost reduction initiatives related to our cost transformation program and other operating expense reductions. Lower regional airline expense was primarily due to certain engine maintenance events being recorded as capitalize maintenance rather than operating expense in the third quarter of 2018 and the timing of maintenance activities related to the Air Canada Express fleet.

Cost control remains a central element of our strategy. As discussed in prior calls, we have a company wide cost transformation program in place, which saying that security incremental savings of $250 million by year end 2019.

At the end of the quarter, we’ve already identified or realized two-thirds of this target. Moving onto fuel, fuel expense increased $403 million or 46% in the quarter, with higher jet fuel prices accounting for $324 million of this increase.

A unfavorable currency impact accounted for $55 million, while a higher volume of litres consumed, added another $40 million. The average price of fuel is C$0.83 per liter in the quarter up 40% versus the same quarter in 2017.

With respect to fuel hedging, we’ve currently hedged approximately 38% of our anticipated fuel consumption for the fourth quarter, at an average WTI equivalent cap price of $68 per barrel. Looking ahead, our assumption is that the price of jet fuels average C$0.86 per liter, in the fourth quarter of 2018 and C$0.81 per liter for the full year of 2018.

Now to provide some additional guidance on costs. For the fourth quarter, we expect adjusted CASM to increase 1.5% to 2.5%, when compared to the fourth quarter of 2017.

For the full year 2018, we project adjusted CASM will range between no increase to an increase of 0.75% when compared to 2017. Our projections are also based on the assumption that the Canadian dollar will trade on average at C$1.30 per U.S.

dollar in the fourth quarter and C$1.29 per U.S. dollar for the full year of 2018.

Now turning to our balance sheet liquidity, at the end of the quarter, unrestricted liquidity amounted to $5.3 billion, another record for Air Canada. Free cash flow of $470 million increase $146 million from last year.

The third quarter of 2018 include a proceeds of $293 million from the sale of 25 Embraer 190 aircraft. As discussed in our Q2 call, we will continue to fly these aircraft under operating leases until they gradually exit the fleet between 2018 and 2020.

Looking ahead, we now project free cash flow of $500 million to $600 million for the full year 2018, instead of the $350 million to $500 million previously forecasted. The increase in projected free cash flow is largely due to higher cash from operations, including working capital than what was previously anticipated.

Adjusted net debt of $5.6 billion at the end of September, decreased $496 million from December 31, 2017, as higher cash and short term investment balances more than offset increases the long-term debt and capitalize operating lease balances. Our leverage ratio was 2 at the end of September and we remain on track to achieve a target ratio not exceeding 1.2 by the end of 2020.

A quarter end, return on invested capital is 12.7%, while our weighted average cost of capital was 7.4%. Our weighted average cost of debt was 4.3% at the end of September.

Additional information 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. When Air Canada first began its transformation nine years ago.

Our goal was to create an airline that could be sustainably profitable over the long-term. We said that we would not rely on variable such as low fuel prices or other temporary advantages, but instead create a company that could perform under any circumstance.

The results of the third quarter headline by record revenue, amongst North American industries leading price and performance, record unrestricted liquidity, all demonstrate that our companies indeed delivering on this commitment. During the quarter, we saw fuel costs increased by nearly 46% versus the prior year.

New low-cost, domestic and foreign carriers enter the market or expand services, and general uncertainty about the economy in Canada’s major trading relationships. They also faced The Wrath of Mother Nature with several high impact hurricanes, typhoons, and storms.

Yet against this backdrop, Air Canada turned in a very solid performance well ahead of our major domestic competitor and at the forefront of major North American carriers. However, the transformation is not complete, nor will it ever be as we continually devise new strategies and adopt new technologies to remain ahead of our competition and to present an ever more appealing value proposition to our customers.

One such initiative that will provide a foundation for others is our new passenger service system. PSS is a cross functional companywide initiative that will see legacy reservation and other behind the scenes technology replace next year.

The new system will give us greater functionality and adaptability to improve all aspects of our business, including customer service. PSS will also support our new loyalty program, which will set a new standard for the industry.

When it launches in 2020, our program will further drive loyalty to Air Canada by providing customers additional earning and redemption opportunities, more personalized service, and a better digital experience. The new program is also an example of how Air Canada intends to use data and artificial intelligence to better understand our customers and meet – and even anticipate their needs.

For partnering in several AI ventures, including the Scale AI supercluster in Montreal and the Vector Institute in Toronto to position ourselves on the ground floor to participate in advances of these remarkable technologies with machine learning and intuitive algorithms. We’re also innovating commercially.

Earlier this year, we became the first North American carrier to establish a joint venture with a Chinese carrier, Air China. Hinting at the promise of this new JV with IATA’s 20-year passenger forecast – last week, describing an eastward reorientation of the global aviation market.

The Asia Pacific region is now expected to drive the biggest growth that more than half the total number of new passengers over the next 20 years. IATA expects China to displace the United States as the world’s largest aviation market in the mid-2020s.

And Air Canada is now well positioned to serve in this rebalancing after having invested in the China market for nearly 20 years. At the same time, our trans-Atlantic, A++ joint venture continues to deepen and the benefits of it is reflected in our strong performance in this market.

Combined these two JVs give us quite an important market presence over the vitally important Atlantic and Pacific markets. I’d like to conclude by once again thanking our 30,000 employees for their hard work and dedication during a busy, but rewarding summer season.

Also thank our customers for their continued loyalty and assure them of our unwavering commitment to keep delivering superior customer service. And with that, I’ll turn it over to you for some questions.

Thanks and good morning, everyone.

Good morning.

Good morning. I have two questions here Calin.

First on the liquidity, it remains quite strong here and free cash guidance was obviously raised here. Now the stock has come under pressure over the last few days or weeks, and in of your capital priorities, where do you see buybacks ranking right now?

And do see an opportunity to redeem any of your high yield that in 2019?

Yes. Mike will cover that.

I think we’ve stated in the past our objectives in terms of how we will deploy access to liquidity and we continue to opportunistically look at the market buybacks, but Mike will provide a bit more visibility.

Good morning. Our capital priorities have not changed.

Debt reduction and hitting that 1.2 target by end of 2020 remains the key priority. Opportunistic stock buybacks are still a focus for Air Canada.

And in fact, although we were in a blackout period, we have instructed our broker before the blackout period to buyback stock during the blackout period at a certain price or below certain price. And we unfortunately that price was hit in October and so we did buyback $50 million with the stock in the month of October.

And we think that’s good value and good allocation of capital and consistent with the objectives that we have established for capital allocations at this point in time. On the second issue, high yield we would love to get rid of the high yield however, it’s not callable until 2021.

And we’ve done the math and putting in any type of a fit for that would not be accretive to us at this point in time. Certainly that opportunity becomes available.

We will step into it fairly quickly. But again, it’s not a large part of our – it is not a large part of our overall capital structure at this point in time.

Okay. That’s a great color.

And then secondly, Lucie welcome to the conference calls here. You mentioned about PRASM is expected to continue to improve in Q4 in the press release.

What you are referring to the absolute PRASM number here or the growth rate versus last year? And can you also share some details on what’s driving such a strong PRASM, because some of our competitors are kind of noting competitive pressures in the market right now?

Hi, and thank you. Well, first and foremost the indication for RASM is in terms of growth rate.

And to achieve the RASM improvements, there is a few things that we’re really focused on. The first obviously is in terms of recuperating the incremental cost of fuel.

So we’re very laser focused on obviously pricing in surcharges. But above and beyond that we have a pretty solid strategy for us to continue to improve in the premium cabins, which obviously provides some very good yield and RASM upside and also on the ancillary side of the business.

Okay. That’s a great color.

And some margin expectations that do you see margin rebounding at some point here in 2019.

Well. It’s Mike.

We’ve already – we took our guidance consistent with Q2 that margins will move back into the 17% to 20% range in beginning of 19 and certainly, our comment today – Calin’s comment today that we will cover the fuel price increase in Q4 is a strong sign of that guidance.

Okay. That’s great.

Thanks a lot.

Thanks, Konark.

Thanks very much. Good morning, everyone.

My question, I guess it starts with on capacity. You’ve given us indication before that the 7% is the level that we should expect for 2018, but I’m hearing a little bit more perhaps indications of fourth quarter might be a little tighter than back when you gave that 7% guidance.

Am I reading that into – am I reading right into that or we – you always kind of considering a fourth quarter more of a rash it back when you gave that 7% guidance?

Yes. I think that we’ve always said we’d be doing some – Walter, it’s Calin here.

We’ve always said that we’d be doing some trimming as we look at it. But I’d say it’s around the edges, you wouldn’t characterize it as being a material reduction in any fashion.

Walter, it’s Mike. We’re still targeting in around 7% for the year and that kind of backs into something a little higher than 5% in Q4.

So you’ve seen a continued decline of capacity growth as we’ve always talked about from Q1 through Q4 and that will continue somewhat in 2019.

And that was – where I was going with the next one, I mean based on your aircraft coming online and no real change in utilization on a hours per day basis. It would suggest you’re in the 3% range.

Is that something that you’d be comfortable? Is that reasonable?

Or are you going to look at more utilization per day or for 2019?

Most of that’s probably a little bit low. I was still bringing some wide-bodies in next year.

And of course, we’re bringing in the Boeing 737, which have more seats than the Airbus 320. So it’s probably on the low side, but certainly it will take a step down from where we end this year.

And again, we haven’t finalized all our business plans yet and we’ll provide all that guidance in the next couple of months few.

Okay. So less than 7%, but higher than 3%, got it.

Yes.

Okay. You got margin.

Yes.

Margin 16% guide for this year, if we’re going 7% capacity and just assuming some relative – relatively close to that on traffic. And then including your CASM and plugging in fuel, the only thing that I left to do is yield and outside of kind of a something well north of 5% is what would be required on your yield or PRASM to get up to 16% margin.

Is that reasonable to assume something north of 5% to hit the 16% margin?

If we do all that, then I’ll work for you Walter. Now, look, I think that, that is from an indicative perspective, what we’re saying here is that we expect the fourth quarter to be strong in terms of RASM and yield performance.

And so you’re kind of a, if you back into that kind of math and if you extrapolate from it, I think you could come to your conclusions.

Okay. That’s great.

I appreciate the color everyone. Thank you.

Thanks, folks. Mike, give us any more color on the Aeroplan transaction and how we should think about it?

Chris, good morning. I’d love to, but I can’t, is a short answer.

We’ve – we’re obviously in the middle of negotiations. And we’ve said that we expect to close by the end of the year.

And at this point in time, that’s all we can provide.

Okay. So once we – okay, I’ll leave it there.

And then just one other clarification if I can, on your free cash flow guidance of $500 million to $600 million, does that include the proceeds from a sale leaseback of the Embraer aircraft?

It does.

Okay. So that’s one of the reasons for the stuff, that’s fine.

And then maybe I’ll ask the question in a different way. So just to confirm, so your comment around RASM or yield into Q4 fully offsetting, so that – so with that particular, with that in place, just I’m curious about what you think about sustainability of yields then as we go into Q4.

And certainly, there’s been some concern maybe that the economy could be softening in certain places. Maybe you can turn it around, but a lot of noise as of late.

So I’m just kind of curious what you’re seeing sort of in the medium term as we get past Q4.

Yes. It’s Calin here.I thinkChris, we have seen despite the noise, we’ve heard a lot of the noise.

We’ve seen obviously media reports of the – around the trade dispute, both the softening of the economy that week, equity markets or bumpy equity market last few weeks. Despite that in our markets, we continue to see strong demand fundamentally.

And so we don’t consider the top end of the business to be a commodity business. We’ve invested very heavily in the top end of our business.

And we think that, that is something that helps sustain us. So as of right now, we see demand as continuing to be strong into the fourth quarter of this year.

And obviously we’re not going to have a full crystal ball to predict what happens in 2019, but so far so good.

Okay. Can if I can ask one other question, on sixth freedom traffic then, with capacity stepping down and it was interesting your comment about Atlantic revenue being accreting domestic revenue.

Should we start expecting that the international traffic will start balancing out year-over-year or should we continue to see more of the growth focused on sixth freedom?

Sixth freedom is one of our key objectives. So we certainly don’t intend to take our foot off the accelerator of sixth freedom traffic.

I think that on in any market like this, we will take the temperature of how well we’re doing on a given route. And I think you’ve heard Lucie identified some of the routes where we’re doing better than expected and some of the new routes that’s really were pleasant surprises.

A lot of those are fed by sixth freedom traffic. So sixth freedom is a big part of this equation and it’s the one that gives us the capability to have the confidence to compete with international carriers.

We’re not as we’ve said over the last several years, we’re not viewing this thing as being a domestic battle only. And so this has been big driver of our success sixth freedom.

And we’ll continue to focus on it going forward. We’re still scratching in terms of the U.S.

side of the market, Chris we’re still just scratching the surface of what we think is available there as we’ve grown out our Canadian hubs.

Calin, if I can add, there’s one thing that we don’t often talk about, but when we converted our revenue management systems two years ago to a OD control system. It was really intended to help us better make those decisions in terms of which traffic flows, we should accept or reject and given the fact, for example, that some of these connecting traffic itineraries are provide better currency opportunities.

We’re well equipped to be able to make good decisions to capture that sixth freedom. So we don’t turn it off or turn it off.

On the contrary, we have the ability to optimize our network, which was the intention of this new tool.

Okay. Thank you.

Thanks, Chris.

Yes. Good morning.

Thank you for taking my question. I guess Mike, maybe I was wondering if you can talk a little bit on the cost side here going into 2019.

I know you said that you had about two-thirds of the target of the CTP already sort of in the bag, I guess, so to speak. Can you give us a sense of how much sort of on a year-over-year basis that’ll benefit your costs in 2019?

Good morning. I don’t have those numbers on top of my head right now.

We can get those numbers to you possibly a little more visibility. Again, we’re in the middle of doing our business plans right now and we’ll provide some CASM guidance probably in February, when we released the year end results.

As we talked about our capacity will take a step down next year, but our focus is still laser focused on finding cost reductions including filling the rest of the gap on the 250 CTP program.

Okay, perfect. And I guess is there a possibility maybe increase that.

I know you’re always looking at costs obviously, but…

We’re always looking at cost. When we establish one of these CTP programs Turan, it’s really with the intent of giving the organization a bit of a target that we want to shoot for and be able to measure success.

But of course, we’re in a constant CASM program. And when we look at having CASM performance like we had this quarter CASM ex-fuel.

Its a result of having that focus on cost. So once you get beyond the 250, we’ll see what else is needs to be done in terms of having specific programs, but one has to understand the CTP programs are motivators for the team to be able to have a target, we can measure success and that we can then compensate and function of achievement.

And just to add Calin’s book – closing comments about some of the technology investments we’re making over the next couple of years. I think our view is we haven’t yet determined how much, but our view is that will drive value both from the revenue side and from the cost side as well.

Perfect, okay. And I guess there’s been a bunch of I mean I guess maintenance has been a bit of a positive factor overall this year in terms of CASM performance.

Mike, is there somewhat of a catch up that maybe comes up next year or has it just been obviously much better work that you’ve done on the maintenance side?

No. There is no – I don’t think there is any carryover into next year.

Q4 will be a little bit heavier and that’s built into our CASM guidance for Q4. As we talked about some I didn’t got differed from the first half into the second half, but we don’t see anything hitting 2019.

And as you know and we’ll have to get all the market and all the analysts’ community and update early in the year IFRS 16 the new accounting standard around bringing debt on the balance sheet will also have a major impact on maintenance expense going forward as well.

Perfect. Thank you very much.

And just maybe one last one from me. I know you didn’t want to talk about the Aimia program.

But if it’s possible is to at least give us a sense of what type of guidance we should expect once the deal closes.

Not, not yet, Turan. I think that you heard me say that we are building our loyalty program as a very compelling loyalty program that will, the new program will come in place in 2020.

So once we complete the acquisition of Aeroplan assuming that that goes forward, then we’ll provide a guidance at the beginning of next year.

So we should expect something in terms of maybe margins or whatever as ones that closes, is that fair?

Yes. Our target is, we’re going to hold a fairly another hopefully very successful Investor Day in late February, which point we’ll bring full picture at that point in time, if not earlier.

Perfect. Thank you very much.

Thanks, Turan.

Yes, thanks. Good morning.

Mike, just I guess a question on fuel efficiency, I mean we know that with the Boeing 737 MAX is coming in and the existing Boeing 787 is there. Individually what kind of fuel efficiency improvement you get on those aircraft?

I wonder if you could maybe talk a bit about kind of what’s the aggregate impact is fleet wide on bringing in these aircraft. Is there anything you can sort of talk about in 2019 and what your expectation is for just kind of pure fuel efficiency improvement is on an aggregate basis?

That’s a great question. And I wish I had the answer on top of my head.

Right now with 18 Boeing 737s, we’ll have another 18 coming in next year, so 36 by next summer. And those planes are delivering 10% to 15% fuel efficiency benefit for Air Canada.

So obviously that benefit will grow, will double next year as we doubled the number of planes.

Okay. Maybe just if you could maybe talk a bit about the sun destination markets, I guess both in the Caribbean and Mexico and also maybe Florida.

And does it appear, so there is a fair amount of additional competitive capacity coming into those markets in the winter? So this way you can talk a bit about what you’re seeing in those markets in your confidence and still being able to have a good profitable business there.

Hi, it’s Lucie. I’ll start with the Caribbean market.

So we did see a little bit of softness in the third quarter, but as we look forward into our events booking, things are definitely stabilizing on the Caribbean. The Mexico stories a bit of a different one.

There was a fair amount of incremental competition. So it was a very competitive on the pricing side of the business.

But as we said earlier, our demand did hold. So we hope that going into the winter season on some of these markets will be able to push up the yield.

With respect to Florida and other Rouge markets like Vegas as well, those leisure markets are doing very well, and in terms of the advanced bookings, certainly meeting our expectations.

Okay. Thanks very much.

Thanks, Cameron.

Hi, good morning everyone. Thanks for the questions.

I just ask the 4Q RASM question a different way. Can you be give us some color on how the domestic entity overall unfolded over the course of 3Q to maybe help give us a sense of how big of improvement we could see into 4Q.

And then outside of domestic, I would think, would be the vast majority of the sequential improvement, should we expect international to improve as well or does that some side a little bit.

On the domestic network, the majority of the impact that we felt in the third quarter was definitely in July. And that’s where the yield was – most pressure.

But we did see a very competitive environmental summer with the low cost carriers and the ultra-low-cost carriers as well. So that’s really what impacted us most on the domestic network.

Looking forward, we obviously are looking at what kind of capacity changes are occurring in the market based on what we’re seeing. We feel also that there is some opportunity for some upside there as well.

The good thing is on domestic, we feel that we’re well equipped to compete with a different tariff categories that we have. So I think we have the right leavers to be able to perform better in the fourth quarter on the domestic network.

Great. Appreciate that color.

And then Mike, just to clarify the updated free cash flow number, your prior free cash flow guidance included the $295 million gain from the Embraer. Is that correct?

And so the update this morning was purely from an operations perspective. Do I have that right?

That’s exactly correct. I should have mentioned that earlier – the earlier question, the $350 million to $500 million, we had previously included the $290 million plus or minus from the Embraer sale.

And so we’re comparing apples with apples here.

Okay, great. Thank you.

Thanks very much, operator. Hi, everybody.

Thank you very much for the time. So I just have – I think two questions.

One is, are you noticing at all a change in seasonality that is accounting for the strong markets that you’ve been seeing over the last few months. And I just mean by that is, are you thinking that the – are you noticing in a longer leisure travel season, or longer business travel season that would account for the strong premium yelled that you saw in the last quarter?

Yes. No, that’s a good question, Helane.

And the answer is, yes. In fact, you may have seen, we’ve extended in some cases, some of our European destinations we’ve extended the summer season to longer to the end of September, end of October.

So you’re absolutely correct. We’ve made a big effort, as you know over the last number of years of trying to balance the seasonality differences that we’ve seen here.

And I think that you’re starting to see the – some impact of that this year. So your question is bang on and we hope to see more of that as things evolve.

We’ve seen it markets like the Central European markets, we’ve seen it Athens. So it’s been a good – directionally a good sign

And south America could be opportunities for us to further DCs in life.

Okay. And then my other question actually with respect to that is, do you – I don’t know, if you survey your passengers, I mean, I know you probably ask until service wasn’t stuff like that.

But I’m wondering if you asked them also, especially leisure passengers, did you choose Canada versus the U.S. or another market.

So that Canada, as a country is actually winning business from maybe the United States or other countries?

No. I think that – the thing that has helped us is the investment we’ve made in our domestic comp.

I mean, I think that people have not chosen Canada as a destination, because of political reasons or for supporting the principles espoused by Canada. But the thing that has driven our traffic has really been the facilitation efforts that we’ve made both in terms of our network, the strength of that network and the connecting capabilities as well as the improvements that we’ve made in our main hub airports, where we’ve sought to make the experience equivalent if not better to connecting in any U.S.

market. And so I think people are happy to do that.

There maybe in some instances, where someone wants to avoid the United States or something like that, but we certainly have not built our business model around that.

Great, okay. Thank you.

Thank you very much. I appreciate you comments.

Thanks, Halene.

Hey, good morning, guys. Thank you for the time.

I wanted to ask about kind of how to think about 2019 cost maybe in a different way. If I take a look at the 2018 growth forecasts on a capacity basis, you guys are decelerating versus 2017 at about 4.5% or so, right, kind of a close to 7% growth rate in 2018 verses 11.5% in 2017.

Consequently, CASM mix fuel also swung about 3 points unfavorably in 2018. If I think about that relationship going into 2019 and your guys is kind of targeted growth for 2019 capacity.

Is that relationship broadly stay constant or should we expect some change to how you guys leveraged fixed costs in 2019 and perhaps the implementation of strategic cost program, but offset some of that slower growth?

It’s an interesting question. And I hate rules of thumb in this business.

Because there are so many other factors that we can influence. Certainly the CPP programs, one of those areas.

This accounting standards coming in on Jan 1 will also impact CASM ex as well, given capitalization of maintenance versus historically expensing, so maintenance expense. So there are a number of different factors that will go into the CASM guidance a lot.

Certainly the rule that you put in place can be used as a proxy, but then you’ve got to adjusted for all the other elements that exist and there’s no doubt that we can continue to leverage our overhead better as we go forward.

Okay, that’s helpful. Thank you very much.

And then perhaps a roundabout way of asking about Aeroplan, I know you guys don’t want us comment on it specifically. But my understanding, your 17% and 20% margin targets for 2019 and 2020, or x, any kind of impact from Aeroplan.

Is that correct? And then…

That is correct. That is correct.

Yes. So the 17% to 20%, our drivers that we identified as you know the last Investor Day and we – that was of course prior to the Aeroplan transaction.

Okay, great. That’s what I thought.

And then, I guess a way of roundabout asking my Aeroplan is, should we expect at your 2019 Investor Day in February showed the Aeroplan transaction close on time by year end on a refresh to the long-term margin targets or…

That is correct. That’s correct.

So you can breathlessly wait for February 2019 and hopefully, if the transaction does closer, of course, as you know, whenever you’re in a transaction, there’s always the closing risk. But to the extent that the transaction disclosed, we intend to provide full visibility at the February Investor Day.

Got it. So we should expect 2019 ex-fuel CASM, a broader framework for capacity growth as well as updating margin targets.

Yes, correct.

Great. Thank you very much for the time guys in the clarification.

I really appreciate it.

Yes. So, good morning.

I have two questions. First one is on the international side, your fleet – according to your fleet plan for 2017 to 2019, widebodies is going to be pretty stable up to planes.

Just wondering if you could talk about longer term, what kind of – whether this can be a growth area, because if you don’t have planes obviously to get hard to grow with you seem to have done pretty well. So I would think it could be.

Way to think of it, David is that, we have not grown, Air Canada had basically not grown in well over a decade, really people go way back to the acquisition of Canadian airlines have not really been any wide body growth, that was a function of the – the events that occurred over that decade from 9/11 to the restructuring of the entire airline industry, et cetera, et cetera, to the combination of the two companies and then the downsizing. So our – fairly significant growth that occurred with 787 and then with the Rouge rollout, we’re really a reset of the growth that we thought should have really occurred.

And we did it fairly, fairly quickly. And we also did it as a – I think now the proof is in the pudding fairly efficiently.

So I think that as we look to the future, we certainly expect to continue growing. Airlines cannot deliver greater profitability by stagnating.

So we certainly intend to continue growing, but the growth will be measured. We certainly have opportunities to add wide body aircraft, as you know, we still have some options, 787 options at excellent pricing.

And so we will continue to look for opportunities like that at some stage. We’ll have to look at a repleting around these 767 that still is in the Rouge fleet.

And so there’ll be some other decisions in and around that. So I think that you should view wide body growth going forward as a tactical more measured approach, because we have had a great portion of that to catch up so far.

And then of course, we’ll monitor how we’re doing on the sixth freedom progression that I discussed earlier. That could also help drive incremental widebody growth.

Okay, that’s helpful. Thank you, Calin.

And then the other question I have is on IFRS 16. So Mike broadly, should we be thinking in terms of depreciation and amortization expense and maintenance expense, increasing offset by lease expense decreasing with relatively not a lot of impact overall or how should we think about that.

Okay. So why would maintenance go down?

Because, starkly for least planes, we expensed maintenance. Now that they’re on the balance sheet, their owned planes and therefore we capitalize maintenance.

Okay, got it. Okay.

And you’ve been using a times rent expense as a proxy for the capitalization process. IFRS 16, does it result in a materially different number than that?

No.

Okay. That’s perfect.

Thank you.

Hi, thanks for taking my question. Maybe just a follow-ups, I think you spoke earlier about DC analyzing your business and talked about flying south as one of those initiatives.

I’m just wondering, are there other locations or other geographies that can help bring up earnings in the shoulder quarters. And I guess how important is the loyalty program to maybe having a step function improvement in that seasonality to reduce the volatility between, let’s say, Q1, Q4 versus what you put up in Q2 and Q3.

Right? So, this is something that we have identified as one of our objectives when we launched Rouge, for example.

And Rouge is intended to address in part of that challenge by using some of the wide body airplanes in the summer to Europe and in the winter wide body airplanes to large – larger sun destination markets, Las Vegas is it a world as well as Florida, et cetera. And that has worked reasonably well, but not – has not fully solved our problem to be very direct.

So we continue to look for opportunities, Lucie mentioned, South America, as one alternative. So we continue to look for opportunities to do that.

Question that Helane Becker asked about the extension of that summer season helps a little bit as well. But there is no question that for us, Q2, Q3 are such a dramatically important quarters that we will always look weaker in the Q4 and Q1.

But I think that the picture is a lot better than it was in the past and we will continue to find these opportunities. We don’t want to fly a large airplanes into markets with really deteriorating yields.

And so, we’re not going to give the seats away to fill the airplanes. That’s definitely not part of our strategy, but we will look to find strategic opportunities to deploy, they will be in and around some markets, South America and extension of sun, the leisure markets for longer periods of time.

Perhaps other than South America, there’s markets, for example, like Australia that present those types of opportunities. India was another one that’s highly seasonal.

So we continue to look at those opportunities to capture opportunities in the offshore leisure periods.

And just the loyalty program as you, as you bring that cash flow in house is that something that you see us materially changing the seasonality within Air Canada.

No, look, there’s no question that the loyalty coming in house and that’s controlling the inventory will definitely give us some additional tools, for those quarters where, which are weaker for sure, that’ll give us one additional tool that we don’t have today to fully deploy.

Thank you for that. And just, maybe just following Cameron’s question on fuel efficiency.

If I were to ask it a different way, if I look at the last, let’s say a seven to eight quarters, you look like your fuel consumption for ASM is falling, roughly lets’ call it 2% on a year-over-year basis. Is that kind of a good run rate to assume, as you continue to add these newer planes over the next three to four years here.

Kevin, good morning it is Mike. Certainly that’s a I would says that’s the floor.

As we add the remaining 737s, and then of course the A220s starting late next year you’ll see probably that improve.

Okay. That’s it for me.

Thank you very much.

Alright thanks. Just a quick follow-up, on the CASM side so the 250 under cost initiative I think you guys noted about two thirds is identified or realized.

I’m just wondering what’s realized versus identified, I mean like how much do you expect to realize in 2018 versus 2019?

The majority – certainly more than half will be in 2019. Give the ramp up that we’ve had, so I don’t have the exact number for 2018 realization but it’s going to be the smaller component of that two thirds.

Okay, so more than half is 2019 of that two thirds.

Yes

Okay, that makes sense. Fair, thank you Mike.

Thank you.

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