Air Canada

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

On today's call, Calin will begin by highlighting our financial performance for the quarter, Lucie, and Mike will then address our first quarter financial performance in more detail and turn it back to Calin before taking questions from the analyst community. Immediately following earnings call, our Vice President and Controller, Chris Isford and I will remain on the line to host an information session on the accounting policies related to Aeroplan, a presentation on this topic which is posted on aircanada.com earlier this morning.

Before we get started, I would like to point out that certain statements made on this call such as those relating to our forecasted costs, financial targets, strategic plans are forward-looking within the meaning of Applicable Securities Laws. This call also includes references to non-GAAP measures.

Please refer to our first quarter press release and MD&A for important assumptions and cautionary statements relating to forward-looking information and for reconciliations 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. Good morning everyone and thank you for joining us on our call today.

I'm very pleased to report an excellent quarter exceeding both last year's results and market expectations attributable to a very strong revenue performance and better than expected Aeroplan results. We achieved these results in a quarter where we faced extremely severe weather events early in the quarter literally from coast to coast and the first 18 days of the Boeing 737 MAX grounding at the end of the quarter.

To add some perspective, in the quarter, we canceled 8,000 flights over 1,600 of which were on mainline, a 40% increase over mainline cancellations last Q1. Our strong financial and operating performance is a testament to the great work of our employees in every department across the airline.

We reported first quarter EBITDA of $583 million and operating income of $127 million both well above last year's first quarter results and market expectations. We generated record first quarter operating revenues of close to $4.5 billion; passenger revenues grew $327 million or 9.4% on a yield improvement of 5% and traffic growth of 4.2%.

Looking ahead, we're encouraged by the strong booking trends we're seeing for the second quarter. On the cost side, we achieved savings in several areas of the organization, including in our regional operations as a result of our newly amended capacity purchase agreement with Jazz.

In terms of cost containment, we're pleased to report that we made significant progress in the quarter and have now realized or identified savings of $242 million of our $250 million CTP target by the end of 2019. We ended the quarter with record unrestricted liquidity of nearly $6.9 billion and lowered our leverage ratio to 1.2 ahead of our target timetable to do so.

These results are further evidence that Air Canada is achieving sustainable long-term profitability. Our greater financial resiliency was acknowledged during the quarter by debt rating upgrade from Standard and Poor's which advances us to one level below our goal of investment grade status.

Fitch also recently upgraded our debt rating. Agility of our business model, our fleet, and our entire team were firmly on display in the quarter when we were forced to adjust to the grounding of our 24 Boeing 737 MAX aircraft literally overnight.

These aircrafts represented about 20% of our narrow-body fleet and carry about 9,000 to 12,000 passengers per day. Employees working in every part of the company rallied immediately.

Our network planners and operations teams reorganized our schedule virtually overnight. Flight crews agreed to change shifts and work extra time.

Airport staff and call centers took care of impacted customers. Maintenance and other employees redoubled their efforts to keep the remaining fleet available and fleet planning secured additional aircraft.

Our customer service group protected passengers on other flights, including competitors where we needed to. In the end, approximately 98% of effective flying was covered in March.

It was a textbook display of the type of nimble response I have over the last decade insisted Air Canada must become capable of if it is to thrive. More importantly everything we did was driven by a focus on safety and providing superior customer care.

Our response to this exceptional event showed very clearly there are no silos at Air Canada and we are winning as one team. Before turning the call to Lucie for a discussion on our revenue performance in the quarter, I'd like to thank our employees for their adaptability and commitment to taking care of our customers this past quarter, especially during the challenges created by the grounding of the MAX.

They stepped up to put customers first and I'd also of course like to thank our customers for their continued loyalty in choosing to fly with us. And with that, I'd like to turn the call over to Lucie.

Thank you, Calin, and good morning everyone. I would also like to thank our employees for the passion and dedication they demonstrated in the quarter, particularly for their unwavering results and minimizing disruption for our customers.

Teamwork and cooperation were on display across all our business units and for that, we are very proud. In the quarter, passenger revenues increased $327 million or 9.4% on a capacity growth of 4.6%.

We saw traffic increase of 4.2% and yield growth of 5%. The impact of the 737 MAX grounding on our capacity for March was mitigated somewhat by our system operations control and network planning groups.

We developed a contingency strategy enabling us to cover approximately 98% of the trans flying in March, despite removing 24 aircraft from our schedule. The yield improvement versus last year included additional revenue recorded from Aeroplan's flight redemption, amortization revenue related to proceeds from our credit card partners of $1.2 billion, breakage revenues related to the Aeroplan program, and ancillary fees related to Aeroplan flight redemption.

The additional Aeroplan yields favorably impacted each of our five key geographic markets. Given the typical estimated time lag of three months between redemption and air travel and given that the higher consideration from the sale of Aeroplan miles is only applicable for Aeroplan bookings made after January 10th, the yield is expected to even further improve in Q2 when we expect the recognition lag to be fully substantially eliminated.

Our business class cabin performed very well in the quarter with the passenger revenue increase of $90 million or 12.4% versus last year's first quarter on traffic and yield increases of 8% and 4.1% respectively. This strong performance in the quarter further demonstrates the continued strength of the Air Canada brand in the premium market as well as a clear return on investment on our premium products over the last few years, including the introduction of our Air Canada's signature service which provides an elevated premium experience throughout the entirety of our customers' journey.

It also reaffirms why Air Canada is the preferred carrier for 92% of business travelers according to last year's Ipsos Reid survey. Looking ahead to our key markets, on a slight reduction of capacity domestic passenger revenues increased $63 million or 6% from the first quarter of 2018 on yield growth of 5.3% and a traffic increase of 0.6%.

We achieved a year-over-year increase in PRASM partially attributed to the easing of market capacity growth and we were particularly pleased with the PRASM performance on our long haul transcon services. Our domestic yield and PRASM improvement reflected strong gains in the business cabin specifically on our transcontinental services with select frequencies offering our new Air Canada's signature service as of the second quarter in 2018.

In the economy cabin, yield improvements reflected the favorable impact of new fare categories and our continued effort to optimize the bias levels between our suite of fare categories and the optimization of our ancillary offers. We achieved improvements in our domestic regional services in large part due to more favorable economics as a result of their renegotiated CPA with Chorus Aviation.

As we look forward to Q2, we anticipate our year-over-year domestic revenue performance to be close to our original expectations. Our network planning team developed a schedule that covers a substantial amount of flying that was impacted by the grounding of the 737 MAX.

Within Canada, we have consolidated several transcontinental frequencies with larger aircraft, and beginning in May, we will be strategically leveraging Rouge, on select routes and frequencies. We were pleased with our U.S.

transborder performance in the quarter, with revenues up $100 million or 11.7% on capacity growth of 8%. Traffic increased 6.4% on continued strong passenger demand between Canada and the U.S.

as well as growth in connecting passenger flows from the U.S. Yield improved 5% reflecting growth on all major U.S.

transborder services for the first quarter. The U.S.

leisure markets performed very well while the Eastern Seaboard U.S. business markets continued to experience competitive pressures.

The launch of our new fare categories specifically our comfort fare contributed to the positive yield performance as did the favorable foreign exchange impact of our U.S. dollar sales.

Our transborder results also reflect continued strong traffic and revenue performance related to customers transiting our hubs to and from the United States which can be attributed to the success of our international transit strategy and the investments we have made to improve the connection process in all three of our hubs. In addition to our performance into U.S.

leisure markets, we were particularly pleased with the performance of our services between Eastern Canada and California as well as into Texas and these markets have been key drivers of our success in the United States. Looking ahead to the second quarter, we are expecting positive year-over-year revenue and traffic results.

Capacity on Eastern Seaboard U.S. business services will be impacted by the MAX grounding.

Our services between Vancouver and Honolulu and Vancouver and Mali which had been operated by the 737 MAX will be operated by larger aircraft with reduced frequencies in April and May. In June and July, these routes will be flown through a web-based operations with Omni Air International.

Recovering our Hawaii operation is another example of our commercial team's ability and our fleet flexibility in mitigating the impact to our schedule during the 737 MAX grounding. On capacity growth of 7.4%, revenues on the Atlantic increased $81 million or 11.8% versus last year's first quarter on traffic growth of 8.1% and a yield improvement of 3.5%.

Traffic and yield increases were recorded on all major Atlantic services and we were particularly pleased with our performance to the UK which saw strong gains in the business class cabin. A strong performance in the first quarter demonstrates the very tangible results of our long-term strategy to expand our international network leveraging both mainline and Rouge with a focus on hub-to-hub flying.

Looking ahead, our second quarter outlook is showing year-over-year revenue growth in line with expectations prior to the 737 grounding, again demonstrating the resilience of our fleet, and diverse network despite exceptional circumstances. Due to the grounding of the MAX aircraft, we've made several necessary adjustments to our schedule including temporarily suspending service from the Maritimes to the UK through July, delaying the start date of our new service from Montreal to Bordeaux, and reducing frequencies on several Continental European seasonal services starting in June.

We will also be operating our Montreal to Barcelona service and one of our Montreal to Paris frequencies through wet-lease towards from mid-June to mid August. Additionally, due to the closure of Pakistan Airspace following regional conflicts, we had to make adjustments to our Toronto/Delhi schedule and from mid-June to the end of July, we will be suspending the service, given the uncertainty around when the airspace will be reopened.

We will then have the flexibility to reallocate the aircraft elsewhere in our network. Our Transatlantic strategy built on hub-to-hub flying with a focus on premium traffic and the optimal mix of mainline and Rouge is proving to be resilient and sustainable supporting our expectation of a continued strong performance.

In line with this strategy, last week, we initiated our new year round service between Vienna and Toronto with cooperation from our joint venture partner, Austrian Airlines and we expect this route to perform very well for us. Turning to the Pacific, on a capacity reduction of 1.5%, revenues increased $24 million or 4.7% on strong yield growth of 6.7%.

All major Pacific services recorded yield increases, with the exception of services to Australia. The yield growth reflected increases in base fares and carrier surcharges as well as a general improvement in the overall fare mix.

We were particularly pleased with the strong performance of Japan which continues to benefit from our strategy in Tokyo, where we consolidated our service from Toronto to Haneda and started our Narita service from Montreal. Previously, we had operated into both Haneda and Narita from Toronto.

The geopolitical situation between Canada and China negatively impacted travel demand between Canada and China and Canada and Hong Kong in the first quarter of 2019. However reallocating capacity from China to other markets has helped mitigate the impact and further illustrates our ability to adapt quickly to market change.

Services to Australia continued to be under slight pressure from a PRASM and yield perspective due to increased industry capacity from North America. Australia remains an important part of our strategy and efforts to reduce seasonality throughout our network.

Looking forward to the second quarter, our booking posture is in line with our expectations. Travel demand between Canada and China and Hong Kong continues to be impacted by their geopolitical situation.

However the impact will continue to be somewhat mitigated by strategically downgauging and reallocating capacity to the Transatlantic market. In our efforts to counter seasonality, we recently announced our non-stop seasonal service between Vancouver and Auckland which will be launched in December of this year.

To fully optimize the service, we have also signed an MoU with our staff partner and Co-Chair partner Air New Zealand, as we pursue a joint venture relationship in order to form a deeper and more integrated partnership that will provide greater customer choice, more frequencies, comprehensive benefits, and an expanded Trans-Pacific network. Revenues from our other services increased $59 million or 14.8% on traffic growth of 9.4% and a yield improvement of 5%.

All major services reported yield growth apart from South America which saw a significant increase in stage length. Services to the Caribbean and Mexico reflected particularly strong improvements.

As discussed on prior calls, in May 2018, we removed the short-halt tag between Santiago and Buenos Aires and began serving both markets on a non-stop basis. In early April, we reverted back to one stop service to Buenos Aires, the connection in Santiago and we expect to realize yield and PRASM benefits from this transition throughout the year.

On a stage length adjusted basis, overall yields for the other markets increased 7.3% from the first quarter of 2018. For the second quarter in addition to the yield and PRASM benefits, we will realize from reverting Buenos Aires back to one stop, we expect strong revenue and traffic results in line with our expectations prior to the 737 grounding.

On our last call, we mentioned that we were scoring seasonal growth opportunities in South America and we recently announced our seasonal non-stop Air Canada Rouge service between Toronto to Quito and our seasonal non-stop Air Canada mainline service from Montreal to Sao Paulo both beginning this December. Moving onto cargo.

Cargo revenue increased $9 million or 5% reflecting traffic and yield growth of 3.4% and 2.1% respectively. Cargo revenues were impacted by route adjustments and flight cancellations that were necessary due to the closure of Pakistan airspace as well as the 737 MAX grounding.

In the second quarter, our cargo revenues were continued to be impacted by the Toronto to Delhi schedule adjustments including the route suspension in June. The impact of the 737 MAX groundings will be largely mitigated by fleet adjustments throughout the network in April and June.

In May, Lufthansa our joint venture partner has resumed our service between Montreal and Frankfurt which has the benefit of protecting our customer and provides us with additional seat flexibility. However it does have a negative impact on our cargo revenues.

Finally, we saw a significant increase in our other revenues in the quarter which were up $46 million or 11% when compared to the same quarter in 2018. This increase was mainly due to the net margin recorded on the redemption and delivery in non-air goods and services related to Aeroplan program.

We also experienced an increase in ground package revenues at our Canada vacation. I will now turn the call over to Mike for a discussion on our cost performance and balance sheet metrics.

Thank you, Lucie, and good morning to everyone. I'd like to add my thanks to all of our employees for an excellent first quarter and for their continued focus on taking care of our customers.

Despite some unplanned events from a financial perspective, we had a very solid start to the year including a strong financial performance from Aeroplan. We continue to effectively manage our costs and now have substantially achieved our CTP target.

As Calin mentioned earlier, by the end of March, we had realized or identified $242 million of our $250 million target and we look forward to successfully attaining the rest before year-end. We are intensely focused on cost reduction and containment and this will continue into the future.

Adjusted CASM which excludes fuel expense, ground package costs at Air Canada Vacations, and the operating expenses of Aeroplan, increased 3.2% versus the same quarter in 2018, with flight cancellations and a lower capacity from the MAX grounding impacting us by approximately 0.5 percentage point. The impact on our unit costs is expected to increase the longer the grounding persists, particularly heading towards the busy summer season.

These impacts on unit costs include the continued accounting of depreciation of our fleet of Boeing 737 MAX aircraft, the impact of lower ASM capacity, and the relatively higher unit costs of the replacement capacity. This includes wet-lease costs and the lower efficiency of the aircraft leases being extended through the summer such as the Airbus.

Aeroplan's operating expenses amounted to $45 million in the quarter consisting primarily of wages, salary, and benefit expense, depreciation and amortization expense, and IT-related costs. These costs are consolidated within Air Canada's financial statements as of January 10.

Turning to wages, salary, benefits. We saw an increase of $99 million or 14% in these costs in the quarter mainly driven by growth in full-time equivalent employees of 11% and to a lesser degree an increase in stock-based compensation given the significant increase in our share price during Q1.

The increase in employees was due to the capacity growth and the inclusion of Aeroplan. Moving on to fuel.

Fuel expense increased $58 million or 6% in the quarter with a unfavorable currency impact accounting for $41 million and a higher volume of liters consumed adding another $28 million. Lower jet fuel prices which accounted for a decrease of $10 million was an offsetting factor.

The average price of fuel was C$0.755 per liter in the quarter, up 3% versus the same quarter 2018. We have not entered into any fuel hedging contracts to-date for 2019.

Looking ahead, our assumption is that price of jet fuel will average C$0.85 per liter in the second quarter of 2019 and C$0.84 per liter for the full-year of 2019 and that the Canadian Dollar will trade on average at 1.34 per U.S. dollar in the second quarter and for the full-year 2019.

Air Canada's financial guidance for 2018 was suspended given the grounding of the Boeing 737 MAX aircraft and Boeing's decision to suspend MAX deliveries to airline customers. We will reinstate guidance for 2019 once we have greater clarity on the situation.

The financial guides provided for the years 2020 and 2021 for annual EBITDA margin and annual ROIC and the cumulative free cash flow over the 2019 to 2021 period remains in place. Now turning to our balance sheet and liquidity.

Unrestricted liquidity amounted to a record $6.9 billion at the end of the quarter. The net cash impact of the Aeroplan acquisition and related agreements amounted to the increase in cash of $1.115 billion representing the commercial agreement consideration of $1.212 billion, and the $400 million prepayment of Aeroplan miles less the purchase price of $497 million which remains subject to certain adjustments.

Excluding the one-time proceeds related to the acquisition of Aeroplan, free cash flow amounted to $579 million in the quarter, $261 million above last year's first quarter. The increase in free cash flow was due to higher cash from operating activities and to a lesser extent, a lower level of capital expenditures year-over-year.

Air Canada card one Boeing 787 and six Boeing 737 MAX aircraft in the quarter using cash. We'd expect to take delivery of an additional three Boeing 737 MAX aircraft in the quarter which did not occur.

So the level of free cash flow was higher than otherwise would have been. The capital commitments table in the Q1 MD&A assumes no changes to the Boeing 737 aircraft delivery schedule for 2019 and beyond.

However Boeing's decision to suspend deliveries may change the timing of these commitments. Net debt of $3.8 billion decreased $1.4 billion from December 31, 2018, reflecting an increase in cash and short-term investment balances of almost $1.2 billion and to a lesser extent a decrease in long-term debt and lease liabilities.

Our leverage ratio was 1.2 at the end of March. The steady improvement in our financial results, our lower risk profile, and our future outlook was acknowledged during the quarter by a debt rating upgrade from Standard & Poor's which advances us to one level below our goal than the investment grade status.

Fitch also upgraded our debt rating in Q1. At quarter-end, our return on invested capital was 14.5% while our weighted average cost of capital was 7.5%.

With respect to our normal course issuer bid, Air Canada repurchased for cancellation approximately 1.5 million shares in the quarter at an aggregate cost of $51 million. We will continue to utilize our normal course issuer bid to buy back shares when opportunities present themselves, although these opportunities will be assessed in light of the MAX grounding and return to service.

Additional information can be found on our financial statements and MD&A which was posted on our website and filed on SEDAR this morning. With that, I'll turn it back to Calin.

Thanks Mike. The first quarter is always the most demanding for Canadian Airlines.

This year was no exception and it was made more so with the unexpected grounding of the 737 MAX. By delivering a solidly profitable quarter above last year, and as I said earlier above consensus estimates, despite the MAX grounding and the challenges of extreme weather this winter, our team demonstrated the strength of our business model and the extent of our transformation.

737 MAX black swan event has stress tested us and we passed. But more importantly for the long-term during the quarter we also maintained our focus to make significant progress on the four priorities that drove our transformation notably revenue generation and cost control.

We completed two highly strategic initiatives that are already contributing positively to our results, the acquisition of Aeroplan and conclusion of an improved CPA for Jazz flying. As we've said previously, we believe that having control of our own loyalty program and a more competitive cost of regional lift should narrow our valuation discount as compared to major U.S.

carriers and we are already seeing their contribution to our earnings. As we've expressed during our successful Investor Day in February, we're confident enough in the future that we've raised the targets for our key metrics of EBITDA margin and ROIC for 2020 and 2021 and cumulative free cash flow over the 2019 to 2021 period.

And although our 2019 guidance has been put in abeyance for the immediate term pending resolution of the MAX issue, we assure that our commitment to continue to achieve sustainable profitability remains firm and our Q1 results and the 737 MAX mitigations are a great proxy for that commitment. We're expecting our second priority of international expansion, while as we have said the pace of growth will now temper with the maturing of our wide-bodied fleet plans.

Nonetheless this past week, we launched yet another promising new international route between Vienna and Toronto. During the quarter, we also announced new services next winter from Vancouver to Auckland, Toronto to Quito, and Montreal to Sao Paolo.

We'll continue to look for ways to optimize our network through increased connectivity. Moreover, as mentioned the outlook for the summer travel period with its heavy international component remains very robust.

During the quarter, we were also recognized as one of Montreal's top employers for the sixth consecutive year and one of Canada's best diversity employers for the fourth year. This speaks to our third priority of culture change.

And culture change was most evident in the quarter with our nimble yet prudent response to the 737 MAX grounding. Ahead of most carriers, we announced a revised schedule and quickly found additional aircraft and other replacement flying for our customers rather than simply canceling bookings.

Our response was driven by the twin concerns of safety and customer service. It also underscored how we have made teamwork a core value at Air Canada with every employee group pitching in to find solutions for our customers.

Boeing has historically manufactured very capable aircraft and we're confident that working together with the independent expert review board and other regulators, it will collectively find the right solution to get the MAX flying safely again. Our final decision on returning MAX to service will be based on our own safety assessment following the lifting of government safety notices and approval of the software modification and training protocol by the FAA Transport Canada and other relevant regulatory authorities.

Our focus on customer engagement, our fourth priority, has been broadly recognized since the start of the year. We've received accolades and awards for our services and products including prizes for our loyalty program, IFP, food service and amenity kit.

There was also an award from the influential travel site TripAdvisor where we were named Best North American Business Class in its Annual Travelers Choice Awards. The excellence of our results in the first quarter including record operating revenue, a leverage ratio which we believe is at an investment grade level, and record levels of liquidity position us well for the remainder of the year and beyond.

In conclusion, I'd like to again thank our more than 33,000 employees for their hard work and dedication to our customers. I'm very proud of the results in this first quarter.

Additionally, I'd also thank our customers for their continued loyalty and for choosing to fly with Air Canada. And with that, we're pleased to take your questions.

First a question on the RASM environment. Can you provide a little bit of color as far as what once you look like, once you back out some of the Aeroplan benefits and then as you look forward given the grounding on the MAX side and the reduction in capacity that we're seeing in the market broadly, are you seeing an offset on the yield side.

It seems like that's the case given the comment about hitting your revenue targets prior to the events?

Right. So it's Calin here, Rajeev.

I will start and I will turn it over to Lucie. So what we were seeing in the yield environment is an excellent demand environment in the first quarter.

And while Aeroplan -- the Aeroplan results contributed to it, it certainly was not representative of the LION's share of that. And so I think that that sort of augurs well, I mean before you get into the MAX analysis but I'll just ask Lucie to give a little bit better visibility on the composition of the RASM.

Yes. Hi, it's Lucie.

For sure, we did see very good performance in our premium cabins which was very, very helpful in terms of our RASM results. And we also saw a very good performance in our premium economy products on the Transatlantic network.

In addition to that, we were also able to grow our point-of-sale U.S. performance which of course given the currency also provides a nice upside on the on the yield front.

And I would take you one other initiative that we've been focused on for quite some time and we spend a lot of effort on that is optimizing our branded fares, our branded fare products as well as our ancillary revenues so all those items all contributed to the yield performance in the first quarter.

And on your question around the MAX just sort of give you a way to think of it, is that so overnight we removed these aircrafts from the fleet. So we had 18 days where we were scrambling to actually take care of our customers and therefore in some cases filling seats that we otherwise would have sold continued to sell close in.

So actually in those last 18 days we actually did lose some incremental upside if you like from the close end bookings that we didn't get a chance to benefit from given that we were using the available seats to take care of the passengers who were displaced by the grounding.

How is that looking in 2Q, I'd imagine you don't see those headwinds and then maybe -- there may be a tail tailwind as simply capacities coming in a bunch for the market?

There is no question it's an aspect of that that -- that's accurate. And also now that Q2 we had the ability to plan a bit better as to how we were handling that.

Of course there were many bookings that were in Q2 that had been made well before Q2 that also have to be accommodated and that's why you're seeing some of the mitigation steps that we've put in place. But you're right by definition taking out some capacity will have a positive impact on yields.

So I'd like to, you called out 50 basis points in costs associated with MAX but you indicated that that's going to ramp, Mike, as you go into the busier season. Can you give us a sense of what the magnitude of that ramp is and maybe -- maybe an annualized number when you think the quarters where it's not as impacted like this quarter including the quarters where it is what an annualized number just to give us a broader context of how much of this MAX is affecting your full-year -- your full-year, the cost guidance you had provided for a full-year basis before.

Right, which we suspended. But the cost side there is no doubt just the CASM is going to be influenced primarily by the reduction in ASMs in seat miles.

It was very little in Q1 obviously and that's why then we affected this by half a point. From our press releases, we've said that for the most part we're covering -- we won't be covering 3% to 4% of the capacity that we otherwise would have.

And so that will obviously negatively influence the adjusted CASM results. So that is the principal reason for the increase in adjusted CASM as we go-forward.

Once we get that capacity back, we'll be also be back to where we otherwise would have been. A secondary reason but much smaller is the incremental cost associated with wet-leases and extensions of planes that are otherwise not as efficient as 737s.

But I would say that's a distant second from the ASM impact.

Okay, got it. And on that ASM impact kind of we had ball parked higher than the 3% last year but I think below the 7% which was indicated.

But is there a broad range are we now back more toward flat or flat to 3% rather than 3% to 7%. Is there any kind of goal posts, we can wrap around the capacity for this year assuming that the MAX stays out for the better part of the year?

On the capacity?

Yes.

Well, again it depends on your assumption of when the MAX comes back in and what is our ability to bring them back in quickly.

Yes. I kind of preface it by saying it doesn't come in at all for this year definitely.

For Q2, we're -- I think our press releases so far have indicated capacity around 96%, 97%. So we're losing 3% to 4% what we otherwise would have had in Q2 and for the year, our capacity growth was pretty well spread equally among all the fourth quarters.

Right, okay. That’s helpful.

From a -- I was looking at your business cabin as a good read into the economy and saw that I think you wrote down a 4.1% or sorry up 8% on yield of 4.1%. Lucie is that a -- are you seeing you mentioned that the booking curve is looking in line with expectations but were you forecasting any weakness here or is the strength in the business cabin expected to continue based on the booking or the forward booking curve that you're looking at right now?

Based on what we're seeing for the premium cabin, we don't expect any major changes as we move forward. Things were looking pretty solid in the premium for us.

Okay. And just last question I don't know, Mike, you have this, you backed out Aeroplan from your CASM to give us kind of an apples-to-apples but you left it in your yield, if you were to kind of back out Aeroplan out of yield, is it good sense of what the apples-to-apples would have been on yield, do you have that?

We have that; we just can't share that at this point in time because I've been segmenting the profitability for the market.

Hi, good morning everyone. Walter just asked one of my questions on the yield impact of Aeroplan but Lucie I wanted to clarify something in your prepared remarks, you had mentioned I think you expect yield to further improve in 2Q.

Does that mean that 2Q, you just expect build to be positive in 2Q or should they be north of the 5% growth that you came in at 1Q?

I think the comment that I was referring to with respect to the Aeroplan adjustments, so we're expecting that it will be further improvements in the second quarter.

From just from the Aeroplan contribution?

Exactly, exactly.

Great. And then --

Andrew, sorry it's Mike. Just more color, again we've talked about this and Chris will talk more about it following this revenue recognition is that we'll probably get them, the run rate of Aeroplan will be probably fully in place in Q2, it was not in Q1 because customers that redeem post Jan 10th didn't somewhat didn't fly before March 31st.

And in Q2 that will get a full impact for the quarter and so we'll be at a full run rate from an Aeroplan's perspective in Q2.

Got it. Okay.

That makes sense and then I'm sorry if I missed this in your prepared remarks but obviously you guys have kind of hit your leverage goal here. The MAX grounding has changed the way you're thinking about the buyback at all and can you maybe just remind us when you can be back in the market buying -- buying stocks because I know you were restricted from buying there for a little bit?

Thanks.

Andrew it's Mike. So we can start buying back stock two days after the release of these results, so Wednesday morning.

We'll be able to -- we'll be out of the blackout period and does the MAX grounding effect our decision process, slightly is a filter that we need to walk through. But again our leverage ratios where we had always talked about getting to and so we're going to be comfortable going back into the market.

But certainly the MAX grounding is another decision point for us to consider as we continue the NCIB.

Good morning. Just one clarification first, Lucie, I think in the prepared remarks you talked about meeting original expectations.

Is that a comment referring to RASM or meeting original expectations in terms of revenues?

Actually, I was referring to revenues.

Okay, great, thanks. The second question quickly maybe on the M&A side, I mean it’s kind of has been associated in the media with a number of kind of M&A activity.

I was wondering, Calin, if you can kind of comment on those and maybe directly or from a higher level, how should we think about kind of M&A in your capital allocation priorities?

Great. So Fadi, appreciate, we don't comment on any of the speculation that's in the media, we've seen speculation both in terms of domestic situations, international situations.

So we're not commenting on any of the media speculation around M&A. Sufficed to say that, we're going to continue down the exploitation of our business plan that has brought us thus far and we're not making further comment on anything that appeared in the media.

Yes, thanks. Good morning.

Just a couple of 737 MAX questions. Obviously, we don't know when the planes can be back in service here but even if the grounding was lifted tomorrow, I mean how long do you think it would take for Air Canada to get those aircraft operational once you've assessed that you're comfortable with the safety.

I mean it presumably will take several weeks at least before you could actually get the aircraft back in service even if the grounding was lifted right away?

Right. That's correct, Cameron.

And this is operationally complicated both in terms of mitigating the consequence of the grounding as we've done over the last couple of months and complicated to put them back in service when the time comes. So we have -- we started to work on various plans and indeed one of the things that we've done is put all of our MAX pilots who today are not able to fly because of the grounding and are not flying other equipment.

All those pilots are actually doing their time in the simulator to be as prepared as they can be including having modeled some of the scenarios that occurred in the two accidents. So that has given us a leg up in terms of the readiness for the pilot group to go back into flying these aircraft.

But there are of course maintenance readiness steps that need to be taken and again those we're able -- some of those we're able to do in preparation for it and then there'll be the basic rollout but that will take several weeks. And that's why I think, as Mike has said, while we're not changing any of our expectations for the time being as to the total number of MAX that will be in the fleet by the end of the year they certainly will not be as fully operational as it would have been had that grounding not occurred.

And so all the mitigation steps that we've taken -- we've taken that into account and the extension of leases and some of these wet-leases have gone beyond the sort of the most optimistic view of when the MAX would be back flying. So putting them back -- putting them back in will take several, several weeks although they will come in gradually.

So you'd see the lifting, if the grounding was lifted tomorrow you might see a couple come in at the beginning and then over the next two weeks, a few more and then a few more and then a few more until the fleet is fully functional.

Okay, that's great. Just secondly sort of related, I just wonder if you can talk about lessons learned from this.

I mean obviously you've done a very good job of managing through this issue but I wonder if there's any sort of lessons as far as the ability for Air Canada to fly a tighter schedule or perhaps operate with fewer spare aircraft, just anything that you've learned from this whole process that could benefit the business on a long-term basis?

Well, some of the answer is of course, any of these difficult events especially as we call them black swan events, you're always going to learn something from them, we've certainly learned a great deal from this. In terms of operating a tighter schedule, Air Canada flies its airplanes as hard as any carriers certainly in North America does.

And that's the wide-body and the narrow-body, and so in terms of flying a tighter schedule something like that, I mean there was say, no, just there's nothing or say in there. In terms of consolidation of flight, there is always a balance between consolidating several flights into a larger gauge aircraft and then of course but you do give up frequency, you give up connections we know over the last number of years, we've been building up our strategy around the connecting traffic in our hubs.

And that means having more frequencies that can bring in people to connect. So I think that as we've looked at this, it has sort of sharpened the assessment of which markets are the ones that drive the most profitability, which markets are the ones that we are looking to protect.

How do we look at the Transcontinental market? So all of these drivers have given us a sharper focus but not for frankly, not from the perspective of sweating the assets any harder than we already were because that was already the case.

So I'd say that. In terms of how the company has responded as I said in my remarks, I've been very, very proud of how the company has responded in literally every nook and cranny of the organization.

And that will augur well in terms of as we introduce other -- other new equipment in. And also the respect that Air Canada has internationally with respect to the partners that have wanted to work with us, we've had access to some excellent carriers who while their competitors in many respects stepped up when we needed them.

Thanks folks. Just thinking about your narrow-body fleet strategy, just I think it looks like you've added some additional 321s into the fleet.

And they're all going into Rouge. And just wondering a couple of things especially with the 737 MAX still grounded.

Any thoughts around other options if you did need additional lift to bring back that 3% to 4%. I'm thinking about availability of a aircraft for you and as well is there any chance that you could accelerate the 80:20 intake just to try to take some of the pressure off your schedule?

So the -- we like the 321 a lot for sure and we expect to like the 220 a lot as well. But the reality of accelerating, it's just not practical beyond what we've already done just based on the pilot training requirements being able to have the maintenance regime in place, certification, and paperwork to bring aircraft in.

So I think that when you look at anything in terms of talking about a couple of months, there's nothing more that would be done in terms of bringing incremental aircraft into the fleet like on a more permanent basis. The acceleration of the WOW airplanes, because these were -- these discussions with WOW, not with WOW but with the lessors of WOW were in place well before the MAX grounding.

And so all we did is we accelerated the capability to bring them into the fleet and in some cases with compromises on the onboard product until we're able to reconfigure it to be able to accommodate our passengers. But it's not something that we can bring in overnight at this stage.

So that's why we're using wet-leases to buffer and to fill in the remaining gaps.

Okay, fair enough. And then, Mike, if you can there's couple of one-time tax expense recovery, just kind of curious about just tax and NOLs with the Aeroplan transaction.

Does this change your thoughts around the timing of payment to cash taxes or anything like that? Just if you can give us some color on what that actual item was and any thoughts around cash taxes?

Sure. The recovery in the quarter was a result of some tax planning on the Aeroplan transaction where normally we would have had to pay tax on the entire amount of proceeds from the banks and we were able to structure a transaction that we did not to pay all that.

And so that recovery represents the savings from what we otherwise would have paid in taxes. And that's also a one-time, as you said one-time issue.

Second part of your question, certainly the inclusion of Aeroplan and with a higher financial results will accelerate the cash taxes that we otherwise would have paid on a timetable we would paid them. So probably we will start getting some cash taxes later this year, early -- early next year but will not be a full amount depending on how much money we make of course but certainly, it probably moved up the timetable by a year.

Okay. And should we think of an effective tax rate kind of in the 25%, 26% range?

I think 27% is the effective rate.

Okay, sounds good. And then if I can just one more just can we get any update, we haven't really talked about it all, how the planning for the cut route for the PSS system is going and how we should expect that at the back end of the year?

Hi, it's Lucie. Well in fact I think the planning of the project is going quite well and we are still on track in terms of our implementation and we are working on the project sort of three angles.

We have the reservation system, the new reservation system; we also have the departure control system that we are -- that we're working on and also the availability side. So we're very confident that we're going to be able to meet that or very close to that target date.

And I think earlier someone asked the question to Calin regarding lessons learned. I'll tell you we were extremely driven during the 737 MAX to do right by our customers to reaccommodate.

And I can tell you when we do have the Aimia's product in place; it will make these types of events a lot easier for us to be able to manage. So we're excited about the new system coming online.

Hi, thanks for taking my question here. Maybe just following on Cam's question around some of the logistics of when the MAX get back up in the year, would you plan to -- would you put them back into the fleet once Transport Canada signs off or would you prefer for other larger jurisdictions to signoff like Europe before you put this plan up in the air.

Just trying to get a sense of some of the goalpost to think about as we get through the next year?

No. Look, it's an excellent question and it's one that we're spending a lot of time discussing internally.

So first of all we're working very closely with Transport Canada. So Transport Canada knows our thinking.

And as I said in our remarks, we will make our own assessment once we see what the other regulators have said. I think that the objective here as I think this is in largely in the public domain, the objective on Boeing site is to work with as many regulators as possible.

The FAA's objective is to include this expert board or panel that will advise on the -- both the fix and the training required for the fix. We may have training requirements that exceed what it is that Boeing and the FAA have instituted as requirements.

So we may end up exceeding that but certainly and obviously that is the minimum entry point and we will assess once we see the review board recommendations, the Boeing, and the FAA recommendations and the Transport Canada recommendations. So we do have the capability of doing more than what anybody recommends out there because of the fact that we have the simulator, we're the only ones in United States and Canada to have the MAX simulator and so that gives us additional flexibility in terms of what training protocols we want to put in.

And so we'll assess that in the fullness of time and it may be that when the -- when it's lifted, Transport Canada certainly will be one of the main drivers of our assessment.

That's super helpful. And just maybe secondly for me, when you look at the first quarter here despite all these challenges you had noted, you put up a positive EPS, when we think of the first quarter now, is this now a structurally positive earnings quarter for you.

Is it safe to assume that now or is it something that we can maybe think about over time. But when I think of the headwinds you faced to put up the numbers you put up seem pretty, pretty impressive.

Great, well thank you very much Kevin. Now look I think that that certainly is our view that we've worked hard to try to make this business less seasonal and less dependent only on Q3.

And so this has been even before the MAX grounding, and as yet MAX grounding was 18 days at the end of the quarter. But even before the MAX grounding, we had very, very severe weather events.

That's why I called out the number of cancellations and so on. And I think that our model, the flexibility of the fleet, the fact that we've got all of these different aircrafts that we can substitute can make money in different markets at different times, our attempt at this counter seasonality by operating to Australia and eventually to New Zealand in the winter months, all of these things are drivers of the stability of it.

And the -- and so from our perspective, it does augur quite well in terms of having a first quarter that can be profitable.

Great. And then just add to that obviously the inclusion of Aeroplan, some portion of Aeroplan and the Jazz renegotiation obviously helped our results as well.

Those are permanent changes to our business model as we go-forward. And so I agree with Calin that Q1 is in the future will be -- will continue to be a stronger quarter than it was historically.

Yes, good morning everybody. Most of my questions have been answered but I also have a MAX related one given the absence of non-MAX 73s in the fleet.

Can you quantify what the cost drag is associated with grounded pilots and at what stage, if any would it make sense to start retraining a portion of them on other types. And what sort of level of expensive time might be involved with that exercise?

Right. Yes.

So Jamie, we're going through that right now. We've made a decision to look at a subset of the total 400ish, 425 I think or so MAX pilots that we have.

And as I said earlier, these pilots are not just sitting around sort of doing nothing we're actually able to have some simulator training for them as this is going on. But we have made the decision given the ramp up back up to the earlier question I was asked that's not going to be ramping up overnight.

We have made the decision to take a subset of those pilots and if they have operated equipment within the last year, other equipment within the last year, they make sense. If they haven't operated other equipment within the last year, it doesn't make sense to have them retrained on other equipment from a timing perspective.

So that is a -- that's kind of directionally where we're heading. That means that they could be operating the Airbus narrow-body typically the Airbus narrow-body or the Embraer 190 which is still in the fleet and that's kind of if they operated that equipment within the last year, they can return to it.

So it's a number we haven't publicly announced what that number of pilots is at this stage but it's a subset of the 450 small ish subset of the 450, I would say. And in terms of the amount, Jamie what we're doing is we're categorizing and keeping all of the costs that relates to the grounding and obviously our discussions with Boeing will be confidential.

So we're not putting out any numbers in terms of any costs of mitigations at this stage.

Okay, that's still helpful color. Thank you.

That'll do for me.

Thanks, Jamie.

You bet.

Yes, hi good morning. And thank you for taking my questions.

I guess firstly, Mike, I was wondering if you can talk a little bit about how quickly you would get delivery of the MAX Aircraft but obviously with Boeing right now, if the grounding was to get obviously removed?

Okay, good question, Turan. Good morning.

So we have 12 planes to come in. We had 24 in our fleet and that was grounded.

We were supposed to take another 12 deliveries last part of March to the last part of June. We understand roughly half of those six of those are completed and apart this point in time, the other six are on the production lines, some level of the production line.

So certainly six of them could come in fairly quickly, once we did our inspections and our -- but the other six would take a little bit longer obviously it's dependent upon where they are in the production line.

Perfect. Thank you very much.

That's helpful. And I guess Boeing is not really changing the order of the deliveries right to different airlines --?

That's -- we don’t know what their plans are, we are really obviously focused on our plans, what they have done is as you probably know they have reduced their production rate by 15% to 20% --

Yes, down to 42%.

So that may influence the timing of our -- the six that are currently on the production line.

Perfect, thank you. And then I guess the other one I was wondering was again sort of related to MAX but presumably a lot of the effect on capacity would be domestic and transborder, right?

Does that have an follow-through impact with regard to sixth freedom traffic or is that just too small and you've been able to protect most of it?

Hi, it's Lucie. There is sort of a couple of things there.

You're correct that the Transcontinental routes, domestic and also some of the long-haul U.S. routes were heavily operated by the MAX.

And of course those are key routes not only just for sixth freedom traffic platform but also for local demand. So we were able to protect both of those either through upgauge or using strategically Rouge for example in July in some of the Transcontinental routes.

So they were in fact high 737 markets. But those were the ones that we aim to protect as best as we could.

There is a little bit of reflows of changes in terms of some of the connecting traffic as a result of the schedule change but no significant impact to our sixth freedom strategy. Those are the kinds of things that we would aim to protect as we redesign this schedule.