Air Canada Voting and Variable Voting Stock

Good evening, ladies and gentlemen, and thank you for standing by. Welcome to Air Canada's Third Quarter 2026 Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to Amanda Murray, Vice President of Financial Planning, Strategy & Investor Relations. Amanda, please go ahead.

Thank you, Christa. Hello. [Foreign Language] Welcome to Air Canada's Third Quarter 2026 Earnings Call. Thank you for joining us today. With me today are John Di Bert, our Chief Financial Officer; and Mark Galardo, our Chief Commercial Officer and President of Cargo. Other members of our executive team are also here for the Q&A. Rob Fyfe, who represents the Board of Directors, is with us as well.

Before we begin, a reminder that today's discussion may contain forward-looking information about Air Canada's outlook, objectives and strategy. Actual results could differ materially due to various assumptions, risks and uncertainties. Please refer to our Q3 2026 earnings release, our 2025 annual MD&A, our third quarter 2026 MD&A and other filings available on aircanada.com and on SEDAR+.

With that, I'll turn the call over to John.

Thank you, Amanda, and good evening, everyone. [Foreign Language] I'll start with the headline. This quarter showed the resilience of Air Canada. Strong commercial execution delivered solid results despite higher fuel costs. Operating revenues grew 21% to $7 billion with passenger revenues growing at the same rate.

Even taking into account last year's labor disruption in Q3, this quarter showed the strength of our commercial strategy, almost 6% more capacity and 89% load factor up nearly 3 percentage points and yields up 11% year-over-year. So more seeds, fuller planes and higher fares. That translated into adjusted EBITDA of $936 million, essentially in line with last year while absorbing a $906 million of higher fuel costs, driven by 68% higher fuel prices year-over-year.

Adjusted EBITDA margin of 13.4% declined from 16.6% last year. I want to thank our employees who delivered a safe, consistent and caring service to our customers over a very busy summer period. Their focus and professionalism are within our plans into results quarter after quarter.

Our recent recognition as the best airline in North America at the 2026 Skytrax World Airline Awards the tenth time we received this honor since 2010, reinforces the strength of our offering and our commitment to our customers.

[Foreign Language] Allow me to step back from the quarter for a moment. Over the last couple of years, we have made meaningful progress in strengthening Air Canada. We've reduced leverage, further strengthened our balance sheet and substantially lowered our share count. We have also built on our solid commercial foundations and reached new agreements with all employee groups. The skill of our hubs, the breadth of our global network, premium products and the strength of our plane give us differentiated customer proposition and support more diversified revenue streams. Together, these achievements give us resilience and financial flexibility to keep investing in our fleet, network, our customer experience and our people, while creating lasting value for our customers, employees and our shareholders.

We are building a stronger, more resilient airline, focused on structural and sustainable value creation. Mark will begin with our commercial performance, and I'll follow with our financial results and outlook before we open the lines for questions. Mark, over to you.

Thank you, John, and good evening, everyone. [Foreign Language] I'd like to start by thanking our employees for their continued focus on operational excellence, and our customers with loyalty, we greatly appreciate.

Our third quarter results represent another consecutive quarter of record revenue for Air Canada and values the continued resilience of our commercial model. They demonstrate the strength of our foundation and the importance of our diversified revenue streams, our far-reaching global network in our higher-yielding customer segments.

Q3 operating revenues and passenger revenues reached a record $7 billion and $6.3 billion, respectively, both up 21% year-over-year. Importantly, for the first time in our history, all months of the third quarter produced passenger revenues above $2 billion. Both total and passenger unit revenues increased 14% year-over-year. With more than 1/3 of our quarterly sales made before April 1, passenger unit revenues increased the most in our North America markets. And this is where a closer booking window enabled us to better reflect higher fuel prices at the time of booking.

On almost 6% more system capacity we capitalized on persistent demand strength to deliver leading load factor performance amongst North American peers in this more leisure-oriented period.

Today, our hubs are some of the best connected international gateways in North America. Leveraging the scale our Sixth Freedom revenues were up 16% year-over-year despite the longer booking window, driven by a stronger year-over-year performance on the Pacific and Lat Am corridors.

Turning to our customer segments. Air Canada remains well positioned to capture premium demand, and premium cabin revenues increased 19% year-over-year. Even in December period, corporate revenues performed well, up 22% year-over-year. A core strength of Air Canada's commercial strategy is our ability to offer a competitive product for every type of customer with a value proposition no other Canadian airline offers, the breadth of our global network, our premium products and Aeroplan.

Aeroplan continues to play an important role in our commercial ecosystem, especially in premium segments and rewards our customers for their loyalty and engagement with us and our partners. Our customers consistently engage strongly with third-party gross billings collected year-to-date totaling $1.6 billion, an 11.5% increase year-over-year. These billings represent amounts charged to Aeroplan program partners for points issued.

Lastly, Cargo revenues grew 33% year-over-year, driven by higher yields and favorable freight pricing, while other revenues increased 11% on higher Air Canada Vacation ground package revenues and higher Aeroplan non-air revenues.

Looking ahead, revenue quality continues to strengthen as our pricing actions increasingly reflect higher fuel costs. However, given the timing of the recent fuel increase in the booking curve, we do not expect to fully recover the incremental costs in the fourth quarter.

For Q4, at this point, we are seeing sustained yield strength with load factors broadly flat year-over-year. For context, this is against a very strong fourth quarter last year when we reported record profitability and Q4 PRASM growth versus 2024. Beyond that, we are actively reviewing capacity and revenue against conservative forward fuel expectations. To date, we have proactively removed more than 2 points of planned capacity from the first quarter of 2027 and and we will continue to proactively adjust capacity and fares to protect margins over the course of the year.

Winter demand remains resilient across most geographies despite some pressure in the domestic market. Air Canada Vacations bookings are an important barometer of leisure demand, and we're encouraged that early bookings for Sun markets are outpacing capacity growth and generating stronger revenues. Our new international routes are booking well and we are pleased with the initial results of our Airbus A321XLR. This aircraft has a fuel burn per ASM below comparable wide-bodies, which is a real advantage in this current fuel environment.

Supporting a better supply/demand balance in these markets, the XLR is delivering a more favorable margin profile than other aircraft types on comparable routes. As always, we retain the flexibility to allocate aircraft and capacity to areas of strength and mitigator exposure to less favorable conditions.

As we move into the shoulder months, an important part of our commercial strategy is reshaping our seasonality around less commoditized periods. This is where demand from premium and corporate customers the strongest and where our structural advantages matter most. And as that demand strength in the shoulder period, we continue to adapt our schedule and commercial strategies to capture the growing opportunities in spring and fall. More broadly, we continue to accelerate a number of core commercial priorities to support revenue generation into 2027.

We've enhanced our offering with more preferred seats on our high-density 777s and the launch of branded fares in premium cabins. In late August, we unveiled our new Summer 2027 routes generating considerable excitement amongst our customers and Aeroplan members. And earlier this month, we launched Embark, our platform for small- and medium-sized businesses, which are the bedrock of the Canadian economy.

To close, the third quarter was another quarter of solid commercial performance against a volatile backdrop and another validation of the resilience of our commercial platform. We have the agility and flexibility to manage through a volatile environment and are confident in the opportunities ahead. We remain focused on leveraging our structural advantages as we execute on our 2027 plan.

Thank you. [Foreign Language] Over to you, John.

Thank you, Mark. Third quarter adjusted EBITDA was $936 million for an adjusted EBITDA margin of 13.4%. These results demonstrate the underlying strength and the resilience of our [indiscernible]. They were achieved despite fuel prices being significantly higher than we had originally planned and reflect the actions we took throughout the year to improve fuel recovery, through pricing, capacity management.

Our new product provide some additional context. Mark already discussed our solid commercial performance, driving a 21% decrease in revenue. Operating expenses were 22% higher than in the third quarter of 2025, driven by a $906 million increase in fuel expense, which was driven by a 68% year-over-year rise in fuel price per liter. At our Q2 call, our Q3 assumption for fuel was CAD 1.38 per liter or USD 3.70 per gallon. Our actual fuel price averaged CAD 1.48 per liter in the quarter, approximately USD 4 a gallon. That's an intra-quarter $140 million headwind and it includes the benefits of fuel hedging gains of $22 million in Q3.

In all, we recovered 46% of incremental fuel expense, below our original expectation of 60%, primarily due to the significant increase in fuel prices experienced in September. We expect our recovery rate to improve to 70% in Q4.

Fuel recovery remains a question of timing, not demand. When fuel spiked in September, approximately 50% of our fourth quarter bookings had already been sold, creating a natural lag before our pricing actions could be fully reflected in fares. Our commercial actions continue to offset a meaningful portion of higher fuel costs and our recovery rate will grow as those actions work through the booking curve. Our objective remains to achieve full fuel recapture over time.

While fare increases remain the primary tool to offset a higher fuel environment, we will also pace our growth to protect unit revenues and margins through 2027.

Turning to costs. Unit cost performance was broadly in line with our expectations. Adjusted CASM increased 3.3% to $0.145. The increase mainly reflected higher labor costs, higher sales and distribution expenses and higher depreciation of the new aircraft into service. This was partially offset by the lower other operating expenses and our 6% capacity growth. With new 4-year agreements concluded with IAM and Unifor, the labor agreements reset cycle is now largely reflected in our cost structure, allowing us to focus on productivity and cost containment initiatives as we grow the airline.

Unit cost performance in the quarter was also favorably impacted by the timing of maintenance and other costs, which we expect will materialize in Q4.

Below the operating line, adjusted pretax income was $328 million. Adjusted net income attributable to shareholders of Air Canada was $214 million, and adjusted diluted EPS was $0.75.

Turning to cash generation. Third quarter free cash flow usage was $440 million, largely reflecting lower operating cash flow, including the seasonal unwind of advanced ticket sales and higher capital expenditures. Year-to-date, we have generated $1.3 billion in positive free cash flow, including approximately $500 million in proceeds from sales and leaseback transactions.

Turning to our balance sheet. We ended the quarter with net leverage of 1.3x, comfortably below our target of 2x or less. Our liquidity was $8 billion at the end of Q3, a healthy 32% of trailing 12-month revenues. Our capital allocation priorities remain unchanged, maintain financial strength and flexibility; invest in the airline; and third, return excess capital to shareholders.

Our financial flexibility is a pillar of our resilience and a true competitive advantage. That strength matters amid volatility and enables us to look through near-term pressure on earnings when assessing leverage. In August, we used the proceeds from the Aeroplan transaction to repay a USD 1.2 billion bond maturity. As a result, we have no material corporate debt maturities until April 2028.

Turning to investment in the airline. Fleet CapEx will step up through the end of 2026 and into 2027 as deliveries ramp up. New aircraft improve our customer value proposition, open network opportunities, deliver efficiencies and lower our unit costs over time.

The A321XLR is an early example. On a comparable transatlantic stage late, is burning roughly 15% to 20% less fuel per ASM than a wide-body aircraft on a comparable route. This is meaningful in any environment, but it matters even more in this current fuel environment.

Scheduled aircraft deliveries in the fourth quarter include 6 A321XLRs our first 2 787-10s; and 7 A220s. We expect these aircraft to generate attractive returns and support long-term value creation.

Finally, consistent with the commitments we made at our Investor Day, we returned capital to shareholders through the completion of an $800 million substantial issuer bid in September. The transaction reduced our shares outstanding by approximately 10%, 252.7 million shares outstanding as of September 30, 2026. It's our lowest share count since 2009 and well below our 2028 target of under 300 million shares, 2 years ahead of schedule. We do plan to renew our NCIB program in November, but we'll remain opportunistic in repurchasing shares.

Now let's turn to the Aeroplan. For the rest of 2026, our commercial trends remain strong, and we expect them to extend into the winter season. We have narrowed our capacity and our cost ranges to reflect limited variability in the fourth quarter while keeping room for fuel volatility. Fuel remains the largest variable in our outlook. At this time of the year, we anticipate about 1/2 of our Q4 fuel needs to be exposed to the fuel price volatility. We are planning for a Q4 all-in fuel price of CAD 1.72 per liter or about USD 4.60 per gallon compared to CAD 1.29 per liter or USD 350 per gallon in our August outlook.

This higher fuel assumption is the principal change for our full year outlook and is driving the adjustment to our expected profitability and cash generation. We now expect full year ASM growth of approximately 2.75%, aligned with the midpoint of our prior guidance. We expect adjusted CASM to increase 5.5% to 6% versus 2025. While the timing of certain costs that shifted from Q3 to Q4, affecting the year-over-year comparison, we continue to expect adjusted CASM growth to be lower in the second half of 2026 than in the first half.

Over time, we expect our fleet renewal and the benefits of scale to support, decelerate -- to support decelerating our unit cost trajectory.

We expect adjusted EBITDA to be between $2.4 billion and $2.7 billion, which is approximately $500 million below prior guidance at the midpoint. The change reflects our higher fuel assumptions for the fourth quarter.

We now expect breakeven free cash flow plus or minus $150 million compared with our prior guidance range of $200 million to $500 million. Year-to-date, we have generated $1.3 billion of free cash flow. Our guidance continues to assume approximately $1 billion of sale leaseback transactions in 2026, which is supported by signed definitive agreements.

Though we are not yet providing guidance for 2027, we are planning for fuel to stay elevated. On that basis, we still expect to reach pre-pandemic capacity levels, but we are carefully reviewing the pace of capacity growth to protect unit revenues, margins and returns while retaining flexibility to respond to demand.

Our diversified earnings streams, our strong balance sheet and our financial flexibility to support our long-term strategy, and they give us confidence in our ability to execute as we head into 2027. We remain well positioned to play both offense and defense.

To conclude, our priorities are clear and unchanged. One, manage their controllables, including commercial actions, capacity, cost and operational performance; two, protect our margins, returns and cash generation while maintaining the strength of our balance sheet; and third, continue advancing the value creation framework we set out in new frontiers.

With that, back to Amanda for questions.

Thank you, John. Christa, please open the line for questions from analysts.

[Operator Instructions] And your first question comes from Konark Gupta with Scotiabank.

My first question, I guess, is on the fuel here. So I mean, it's understandable that the fuel prices have run up a lot. So the fuel recovery rate has to come down in Q4. But can you help us understand some of the moving parts in that fuel absorption rates, John? I mean what kind of fares are you underwriting these days on fuel price? And are you expecting the fuel price to kind of taper off from here? Or this is an ongoing assumption for the next, call it, 6 months as well?

Yes. Good evening, Konark. I think, first and foremost, we take the world as it is, right? So you've got fuel running in the 170 to 180 range pretty constantly right now. So our posture is that, that is with us for at least the foreseeable future. We continue to price -- we had expectations of 140 to 145 kind of fuel pricing recovery as we went into the quarter. We had a spike. So we'll be looking to continue to push pricing actions in a particularly as we look into Q1.

And with respect to fuel prices, we don't -- we won't make any speculation other than the fact of of taking the world as it is today. Maybe Mark has some comments on the pricing environment.

Yes. So Karit took us several weeks not months to kind of level up with in the fall with fuel prices that were closer to $1.40, $1.50 liter. And going into Q4 had fuel state at that level, we would have covered most of the incremental fuel bills, not all However, since kind of early fall, it's run up to $1.70, $1.80 and then moved up pretty quickly. So at this point in time, certainly, we are trying to push further increases in market, but it will take some time before the market fully levels up with where the fuel price is today.

Okay. That's great color. And then maybe on the transborder side, while I have you, Mark, the market seems to be in a structural decline here for some time. Do you guys expect -- or how are you guys, I would say, building capacity again in anticipation of demand coming back potentially? Or are you just playing on a spot basis?

So Konark, if you look at our Q3 results on transborder, they were excellent. Our revenue growth was quite good. Our yields were quite solid and our [indiscernible] continues to grow. On transport, you've got a couple of structural tailwinds that are helping us on the strength of the U.S. dollar. Secondly, we've got a pretty favorable supply-demand balance and the profitability levels that we're enjoying on the U.S. market right now, the margins are slightly higher than they are on domestic. And as I look forward, I see much of the same for Q4 and for Q1. So I've got no reason right now to be concerned about the state of the transborder market.

Your next question comes from the line of Atul Maheswari with UBS.

Can you maybe double-click on the portion that you mentioned about fourth quarter bookings. Could you give us some sense of how -- what kind of trends you're seeing by various geographies? And then any color on how early 1Q bookings are taking out would be helpful.

Sure. So what you're going to see overall right now for the fourth quarter is load factors are generally flat year-over-year. As I mentioned in my script, our fuel recovery and therefore, yields are higher in North America because the booking window is much closer in, whereas the international typically books further out. So given that backdrop, we should expect that North America has the highest yields with obviously flat load factors year-over-year in international trailing a little bit.

Your next question comes from the line of Fadi Chamoun with BMO Capital Markets.

Mark, just on come back to the demand resiliency, like as you look at the progression month-to-month since the fuel started to kind of rise materially in late August and kind of into the fall period, have you not seen impact like from a load factor perspective, I guess you've called out Q4 flat load factor, but we've seen much stronger performance before that? Like are you starting to see any resistance on the demand side? I'm just trying to think if you're going to next year and your plan to grow capacity, how should we be thinking about the market's ability to kind of absorb what you have planned from a capacity perspective given where fuel prices are today?

Yes. Thanks, Fadi. So obviously, we saw a very strong end of Q3 with September and October, which I called out previously being quite strong. The demand overall to from within Canada still remains relatively stable kind of up a little bit. What we've seen is the market -- the growth rate is decelerating a little bit, whereas in prior quarters, we would have seen market demand growth between 4% or 5%. We're now seeing demand market growth between 2% and 3%. But certainly, what's helping us is how diversified our network is. Certainly, the sixth [indiscernible] portion of our network is also helping as we're tapping into new traffic sources. So that's kind of helping us offset a little bit.

Going into Q1, much of the same. Our current booking posture for Q1 has a flat load factor build so far.

Your next question comes from the line of Savi Syth with Raymond James.

I know you're not kind of ready to talk about capacity growth for next year, but if I look at your fleet plan, just overall seats are growing high single digits, and it sounds from your commentary that you might be if fuel prices stay high, maybe in that kind of low to mid-single-digit range probably capacity growth. But curious on how you achieve that and what we should think about in terms of the impact on unit costs as a result of that.

Savi, we're looking at a bunch of scenarios right now in terms of flexibility and agility of how we deploy capacity. Our focus right now is really the first half of '27 because that's where we anticipate that fuel prices will continue to be relatively high. So we removed 2 points out of Q1. We are looking at the more marginal flying reduction, so that would be midweek cancellations on certain routes. We're going to be looking at reducing utilization somewhat. And as you can see by the suspension of our Singapore route, we're also kind of reevaluating the ultra long-haul part of our business as that's a bit more exposed to the higher fuel prices.

So right now, we're still very much contemplating a variety of scenarios. What we can say definitively is for Q1, we removed 2 points of capacity and we'll leave it there.

And maybe just I'll take the back end of your question on CASM. So we have a 5.5% to 6% range for 2026 on CASM both year-over-year. Yes, for sure, had we had the higher single-digit capacity growth in 2027, we would have been expecting a very favorable impact to CASM. I still think that as we get through the plan cycle here, we'll see the benefits of newer aircraft continued scale improvement even at lower rates of growth. And that should still produce a decelerating CASM growth year-over-year. So we'll work through that as we get into '27 guide, we'll talk through it, but expectations are still that we're going to get -- start to have a curve to the downside on the year-over-year growth in CASM.

That's super helpful. And just if I might follow up on the kind of the demand question earlier. Curious what you're seeing on the corporate side? And if maybe some of that slowing, is that more leisure and being kind of low price sensitive? Just curious how corporate is doing here.

No corporate continues to evolve very favorably into Q4, it's a double digits kind of in line with Q3.

Your next question comes from the line of James McGarragle with RBC Capital Markets.

I just had one quick follow-up here on that capacity planning on 2027. So just to confirm, is that -- would you be deferring any of your new planes or potentially retiring any of the old ones. I just want to make sure I'm modeling any adjustments to potentially CapEx or free cash flow correctly into 2027?

Yes. So for '27, I think the new fleet remains an advantage in the sense that they are more cost effective, more fuel efficient, and they'll provide better service and some premiumization. So I think we'll be looking more at utilization on the older fleet. And as Mark said, reducing some of the marginal flying at the same time, utilization on older aircraft or aircraft that needs specific high-cost maintenance. So we'll try to balance all of that.

No significant change in the expectation other than as every year has been for the last couple of years it will be some movement with delivery schedules and timing, but we'll deal with that as it comes.

And just in terms of your balance sheet, obviously, it's in really good shape right now. Can you just give us an update on how you guys are thinking about capital allocation into Q4 and into 2027? And I'll turn the line over after that.

Yes. I think thank you. We've been very consistent with capital allocation. First and foremost, we work to protect the balance sheet. Work that we did in Q3 is further proof of that. We have no maturities through April 2028. So that's in good shape, high liquidity relative to last 12 months of revenue over 30%, so it gives us a lot of flexibility.

We're going into a CapEx cycle, and that's been kind of planned and telegraphed for a long time now, and that starts with quite a few deliveries in Q4 and then through 2027. That will start to normalize past that in '28, '29. But for now, I think it's -- keep the balance sheet strong. So grow responsibly with that, invest in the airline, so we can create the value -- the platform for value creation for the long term, which we're confident continues to be our main objective here.

And then thirdly, returning shareholder value. But I think on that one, we've achieved a lot, right? We're at 252 million shares outstanding. We feel very good about the share count. We've deployed now probably almost $2.5 billion of cash over the last few years. We'll be very opportunistic with the NCIB, and we'll see how '27 evolves as well with fuel and cash flow. So all those things will be considered.

Your next question comes from the line of Jamie Baker with JPMorgan.

I'm John. I got interrupted. So I'm hoping you didn't already address this, but a question on leverage. How do we think about the cadence of where leverage heads next Obviously, next year is a bit intense from a CapEx perspective. You've got the buyback plans. Just kind of curious how you're, I guess, triangulating between leverage in your IG aspirations?

Yes. And I think the math is going to be the math. We're going to have probably a couple of lighter quarters as we go through higher fuel environment if it stays as it is. We'll see as that moves through. But I think my comment would be through that, that we built the airline to be very resilient, strong liquidity from an overall strength of the balance sheet, nothing changes. The math, obviously, given the earnings and the pressure that comes from some of these spikes on fuel is going to take its toll over the next couple of quarters. We'll see some pressure on the leverage ratio.

My expectation is that we work through that. But our aspirations for investment grade were really all about converging our '28 and 2030 objectives, and I think that those remain intact. And so the work here is to get their responsibly and put ourselves in a position to have both cash generation and investment-grade opportunities as we kind of work through the next probably 12, 18 months.

Okay. That helps. And then second, for Mark and sorry to beat a dead horse here on fuel recapture and I realize the calculus might differ between airlines. But the 70% estimate for the fourth quarter is a little bit lighter than what we've heard from others. You've got factors like the pace of domestic fare increases. You mentioned the booking curve in your prepared remarks. I guess my blunt question is whether there's any elasticity component baked into the 70% assumption. Any thoughts there?

Yes, absolutely. Great question, Jamie. One of the items that differs between Air can and kind of our American peers is the composition of our network. We're almost 60-40 long-haul to short-haul. Our American peers typically 30-70. And the close-in booking window for North America allows a higher recaptures, just basic math. We have a much longer kind of tail for international long-haul bookings. And as a result, once those bookings are in, it's hard to recapture because the bookings are made and we typically have a strong base of bookings basically 2 months out. That's really a contributing factor as to why our recapture rates are a little bit lower.

Your next question comes from the line of Cameron Doerksen with National Bank.

Actually, I'll maybe follow up on that question, just based on what you just described there as far as the recapture and where the booking curves are if we assume that fuel prices kind of stay where they are into 2027, do you think you can fully recapture the price of fuel in Q1? Or is that something we should think about more as kind of Q2 or later?

It's -- Cameron, it's hard to say. Right now, like I said earlier, it took about several months to get to a place where the market fully prices in fuel closer to about $1.50 a liter. And now the market has to readjust to $1.70, arguably $1.80 a liter. And I can't say that the market is there just yet. So obviously, we are going to aspire to getting ourselves there. and have the highest possible recapture, but we've yet to see the market fully priced in the latest cost of fuel.

Okay. No, that's helpful. And just on capacity, you mentioned that you'd pulled about 2 points out of your Q1 plans. What are you seeing from competitive capacity? We've been trying to look at some of the Sun destination planned capacity for this winter and some of your competitors have got some pretty aggressive capacity plans, which seems might be a challenge given where the price of fuel is. So what are you seeing your competitors as we look into 2027 on their competitive -- on the capacity plans they have?

Yes. If you look into Q1, there's a lot of capacity in the Sun market. And obviously, with Cuba no longer being a destination that one can travel to, capacity is being redistributed on to markets where maybe we were 1 of 2 players on the market and now there's a third or fourth player. So we see a little bit of pressure on the Sun market. We're seeing a little bit of pressure on the Pacific as kind of the Chinese ramp up their post-pandemic capacity. But on the domestic market and transborder, generally speaking, we're looking at low single-digit capacity growth.

Your next question comes from the line of Daryl Young with Stifel.

Just wanted to ask on the transatlantic. Nice to see a return to growth there. Wondering how much -- or I guess, where you stand from a pricing standpoint to some of the international carriers? And hedge books roll off, is that going to be another opportunity for growth into 2017? Or how are you thinking about competition there?

Yes. On the transatlantic, again, one of the issues or one of the challenges of the transatlantic is, again, that lag between far out booking window and when fuel prices are actual. And that's led to the lower recapture rates. So typically, 2 months out, you have 70% to 75% of the bookings already on hand.

So as we go into Q4 and Q1 and more pricing increases roll in, we should see higher yields across the Atlantic. We've seen a little bit of a demand slowdown in the last 2, 3 weeks. Obviously, there's been protests in Europe. We expect that to be transitory. But overall, we see stable market demand.

Okay. And then looking out to your 2028 targets with $30 billion of revenue, it seems like you're -- from a capacity perspective, you're going to be sort of behind the curve of where you were when you originally said that, but you've maintained that. Is that a function of pricing staying higher through your forecast period? Or how should we think about sort of a hockey stick of capacity coming back in '28?

Yes. I think that the capacity management will do for 2027 will be a function of the market we're in and how we work through that. We would expect to have eventually that the full capacity of our fleet utilized appropriately. There's going to be some -- obviously, some pricing implications as well. And we'll see where that lands. It's too early to tell now, but the pricing environment will be as we kind of get into 2028. I think overall, the plan remains solid in the sense that we've executed on a lot of the expectations that we had. We need to see how the next 6 months develop. And then we'll look forward to see how 2028 kind of moves through.

Most of the differences come from the adjustment we made from the 787-10 order. And besides that, it will be a question of deliveries and should they all come in when they need to come in and we'll kind of tighten up against the ASMs for '28 as we get closer to the year.

Your next question comes from the line of Andrew Deoria with Bank of America.

So John, I was just trying to kind of understand this, the implied fourth quarter guide here. I mean, I think the CASM and fuel stuff certainly makes sense. But just on revenues, I know it's been asked in other ways, but I guess the way we are running our model, it seems like RASM for 4Q probably up high single digits, obviously, a pretty decent decel from 3q and even 2Q and kind of more in line with 1Q. Just curious like why would that be in this type of fuel and pricing environment?

And then, Mark, any color on kind of as you move into 4Q, kind of what are some of the regions, geographies or demand buckets that would drive that change?

Thanks, Andrew. I'll take the first part -- like the second part of the question. So going into Q4, we don't see RASM up high single digits. RASM won't be as strong as it was in Q3 because we're rolling over some comps where last year in Q4, we had a record Q4 in terms of PRASM performance. But certainly, you should anticipate that PRASM will be in the double-digit type environment. Again, as I stated before, the North American markets are more resilient. They've got a closer in booking market, which allows us to pass on more of the recapture than international long-haul, which typically books 60, 90, 120 days out. And typically, 60 days out, you really have 70%, 75% of the traffic already on the books. So while we see yield accelerating in Q4, PRASM will decelerate slightly from Q3 to Q4, but still be comfortably in the double digits.

Maybe Andrew, I'll just add something if it helps, it may or may not. But pricing, absolute pricing in terms of levels of pricing of -- from Q3 to Q4 are going to be pretty much where we expected them to be as we went through the conversation on our Q2 call. The difference really is we've burned probably about 1.003 billion liters of fuel in Q4. The difference between $172 and the $129 per liter that we guided is over $0.40. You kind of get a number right there. It's like in the mid-500s, if you look at the midpoint to midpoint, pretty much there. That's the number.

September was also a headwind, offset some of that. If you had another $100-plus million for September, it'd be over $600 million of fuel pressure from the last time we provided guidance. So the real issue is not necessarily on the revenue line. Yes, that's going to take some time to increase from here. But where we are is pretty much where we expected it to be where we're not is on the fuel number.

Okay. And then maybe, John, just as we think about unit costs heading into 2027, I know you don't want to guide that yet, but you clearly anniversary all kind of -- all of your labor agreements Back half of 26% is kind of up mid-single digits. Would you expect that to begin to bend down as we move into the first half of '27 given the way you think about capacity right now?

Yes. even with a little bit of a par back here in terms of just the first half of the year, particularly on capacity, we have to get through some additional work and just kind of work through the planning cycle. But expectations would still be that we would start to see some deceleration of the year-over-year increases. They've been in that 5% range for a few years now, and I'd expect to see a reduction in year-over-year CASM growth in 2027.

Your next question comes from the line of Chris Murray with ATB.

Maybe a different way to think about where the recovery is in terms of fuel, where are you in the booking curves right now as we go into -- through Q4 and into Q1? Can you give us some idea what's left to book both internationally and domestically, just I guess with the volatility feel person trying to understand what might be already in there? What you have left to kind of catch up to? And if fuel prices move in your favor, is there some recovery possible as we go further into the year?

Chris, I'll take that one. For Q4 right now, obviously, October is behind us. But in general, for Q4, we're roughly about 80-odd percent of our bookings already on hand. Going into Q1, we've got roughly 30% of our bookings on hand. Like I said, load factor year-over-year is relatively flat. I'm not going to break it down, North America International, just to give you the headlines here closer to 30%.

And like I said, we are trying to get the market to level with the actual fuel price. It will take some time for that to happen. Generally speaking, when you have a sudden fuel spike like this, carriers around the world are testing the elasticity of demand. And once they feel like certainly, we've seen some inelastic behavior. But once they feel that the elasticity is certainly on site, they will flow further increases in. And that's basically where we are in terms of trying to level closer to $1.70.

Okay. The other question I had for you was with on freight and cargo. -- with the higher fuel rates, but I was just trying to understand how much of that cargo business is tied into the passenger? How much is tied into dedicated freighter? I noticed that you've got some new routes that you're trying to work into Europe right now. I'm just trying to get a sense of the growth rate very strong in the quarter. Is that something that we should be expecting to continue for the next little while? Is even a natural offset to what's going on with fuel and how that pricing is proceeding?

Yes. I mean the cargo business is doing extremely well. Going into Q4, you should anticipate, again, much of the same, but the booking curve for cargo is so close in. And because it's so close in, the recapture rates are very, very high, almost covering 100% of the incremental fuel price. We are expecting the strongest October on record for our cargo business, much the same in November. And if you kind of break it down, wide-body to kind of freighter, you're looking almost 75% of the revenue being wide-body belly. The balance being the freighter, but of course, the widebody belly is said by the freighters that are coming in from a variety of destinations in Lat Am in the U.S.A. and now a new service to Amsterdam to help us take advantage of -- generally, there's a lot of tailwinds in the cargo market right now.

Your next question comes from the line of Tom Fitzgerald with TD Cowen.

Question on fixed freedom revenues. You mentioned earlier the new traffic sources you've been leaning into. I think a lot of that's like Latin America, APAC and EMEA. Could you just talk about what you're seeing there? How we should think about that portion of Sixfeedom growing with another -- with a year of learning under your belt and as you guys optimize that into '27?

Yes, this is an exciting part and a growth part of our business. Tom, we're really excited about what we see ahead. So for Q4, right now, revenue is closer to 20% up year-over-year on the fixed Freedom side. Much of that is the Lat Am to Europe and Lat Am to Asia business that we supplement them last year, and we were doubling down this year. And so far, that's doing quite well. And as we look into that same dynamic into Q1, we see even further acceleration. So again, it's really a new accretive source of revenue certainly helps us in preserving high load factors in the quarter.

Okay. Okay. Great to hear. Really helpful. And just a quick accounting one on -- maybe for John, just on Aeroplan. If we just take the proceeds in the filings for this quarter, that $570 million, that is running up about like 13% year-over-year, year-to-date, up like 11.5%. Is that like low double digit a safe run rate for proceeds if we kind of model out '27 and beyond? And then just taking maybe like 10% of that for net income to then get to the minority share interest?

Yes, why don't we take that 1 off and you can you maybe with myself and Amanda give us a call and walk you through it.

Okay. Okay. Fair enough. Maybe sneak in a follow-up then just on longer term, how do you think about the mix shaking out on Sixth Freedom between U.S. fixed Freedom and then Latin America fixed freedom?

And so like from a percentage perspective, certainly, there's a lot more growth just as a function of how small the base is on Lat Am. And that's why this summer, we're extending service to Guatemala. We're extending service to Lima. We're going to be spending service to a bunch of cities in Mexico, all with the primary objective of growing the Six Freedom business to and from Lat Am year-round and consistently kind of over the years to come. We think that's a huge opportunity given our geography. We think we've got a right to win there.

And so far, the execution suggests that, that's exactly what's happening. So definitely an exciting growth part of the business.

Your next question comes from the line of Jack Ewell with Jefferies.

Is Jack on for Sheila. I thought maybe just to drill on the customer types for a second. Last quarter, I believe the main cabin RASM trailed premium by about 3 points. And I was wondering how that gap trended into Q3 and what bookings indicate for Q4? I just think the last quarter, it was encouraging to hear that Main Cabin is holding in despite the fare surge this year.

So Jack, in Q3 a bit of a tale of 2 seasons. In July and August, typically, this is a low point for premium demand travel and yields than September comes roaring back and much the same for October. So we had relative parity between premium cabin and Main Cabin in Q3. It's in Q4, we expect that to diverge.

Got it. That's very helpful. And then I guess maybe just a follow-up on Savi's question from earlier. I know corporate revenue accelerated into the 20% range this quarter is reflecting continued very strong demand. I was wondering if you could talk about the trends by region across domestic and international? And if there's any sectors specifically driving this? Maybe my last question on it is just has your introduction of the basic fare offering in premium helped boost corporate yields as we'd assume that fare option is blocked by a lot of corporate travel teams.

So Jack, on the brand of fares, we rolled it out on the North Atlantic, but we haven't scaled it throughout our system yet. And we're barely into month too. So the results are still early. So we think there's a lot of promise here.

And based on the proxy of other -- our peers have instituted similar products, we think there's a lot of potential here. But right now, too early to comment on the success of that. And from a total kind of geography split on corporate revenue, we're seeing double-digit growth, primarily in Canada and U.S. And the reason for that, again, is the same kind of phenomenon. This is a much closer booking and window where you can price in higher recovery rates on fuel. Atlantic corporate typically books a little bit further out. So those recovery rates are a little bit lower. But all 3 of those services are comfortably in the double digits in terms of increased revenue.

And that concludes our question-and-answer session. Amanda, I'd like to turn it back over to you.

Thank you very much for joining us today. Should you have any questions, please reach out to Maxell for Ivan Zarate of Investor Relations. Thank you, and have a nice evening.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.

Good afternoon, everyone, and welcome. Next up, we have Air Canada with us today. Joining us are John Di Bert, Executive Vice President and Chief Financial Officer; and Amanda Murray, Head of Financial Planning, Strategy and Investor Relations. John, Amanda, thank you for being with us.

Thank you.

Thank you.

So Air Canada has been an interesting story to follow this year, balancing a volatile fuel price environment, a volatile U.S. Canada narrative at times with what's been a strong demand, continued execution on your New Frontiers strategy and significant fleet investments. So maybe, John, let's start with the current operating environment. You reinstated full year guidance earlier and despite all the moving variables. Since then, I'm curious to get your take, what has turned out better than expected? Where do you see the greatest amount of uncertainty as it relates to fuel, other factors from what you're seeing out there?

Yes. Good afternoon to everybody, and thanks for being here. It's a beautiful outside. So I know that we're keeping some of you in the room here, but thanks, and it's great to be at the conference. So yes, so I would say that, when we reinstated guidance, we were seeing and continue to see strong demand, good traffic, the ability to significantly price through fuel, and at the time, we had disclosed about a $4 a gallon kind of expectation. And so we have been pricing fares to that $4 a gallon, and we'll talk in a minute about where we are today and kind of the surge in some of the fuel prices. But premium traffic working, strong extension of the summer season internationally. That's been very positive as well. Corporate traffic continues to be solid and continues to grow. And overall, I think we feel good about 2026 despite all of the adversity. And we see continued ability for the customer to take pricing. So we are going to continue to price through. We're sitting at about $5 a gallon now for fuel, somewhere, and it moves around every day. But that's kind of where it is. So that's a lot of work in the next short while here. There's a little bit of a lag between the time that fuel moves up and you can actually price it through. We're in that right now. I think we probably made our way halfway through the $4 gallon to the $5 current spot.

On a full year and for Q4, I think it'd be good to see some reprieve maybe as we get into October, November, December, it think It'd be nice to see that come peel back maybe somewhere in the mid-4s or less. I think that would give us even a bit more confidence. But we feel that we've managed all of the variables and the customer continues to fly. In fact, I would say, they continue to fly even more than we would have expected in this kind of environment.

Okay. And let's touch on demand in a minute. But you discussed recovering approximately up to 100% of fuel price increase in Q4. How is that progressing? How are you -- how confident are you that revenue can continue catching up if fuel price just remains or, let's say, even increases from where we are today?

Yes. So back to the comment, I would say that at $4 a gallon when we went into the second quarter, we were seeing the ability to price that through. Since then and relatively in the last 15 days or so, it's moved towards $5 a gallon, and we've continued to add pricing. I would suggest right now, we're probably halfway between the $4 and the $5 in terms of what we're currently pricing in the market. But our intention here is to continue to price our fares to the fuel environment. And hard to know how and where the numbers will go as we get to the back end of Q4 and into next year. And we're not speculating on that right now. We're just trying to bring the fares to the fuel price. And there's a lag and you always have to deal with that lag, but that's okay.

Some of your peers yesterday highlighted some capacity levers they have at their disposal. Is that...

A very good question -- very good question. We do -- we are looking at our -- I would say, at over $4, it starts to make sense to maybe look at some of the, maybe some of the sun market, leisure markets, in Q1. In Q4, the very long-haul flying, maybe we would look at Asia Pacific where it's a little bit harder to get fares fully through, and you carry a lot of fuel to burn fuel, so to speak. We would look at whether there's some capacity adjustments there. And that's under process right now. We may look at 1 or 2 points of capacity in the fourth quarter.

You mentioned demand a little earlier, so maybe double-click on a couple of things. So premium corporate, Sixth Freedom, these have remained notable areas of strength for you. What does that say about the resilience of the business? And how has that evolved over the past couple of quarters and perhaps years?

I think that we set out a plan really to bring back the full potential of the airline, the network, back in 2024. And we've been making a lot of progress. So Sixth Freedom is a great example. Year-over-year, that continues to grow mid-teens in terms of traffic. We've brought on quite a lot of A220s. We have a fleet now that's probably around 45 aircraft. It will probably get to about 65 over the next 2 years. So from the Sixth Freedom point of view, there is continued real potential for us to carry niche traffic from the U.S. internationally. In terms of premium, I think there's a lot of opportunity going forward with respect to both segmenting the cabin, which we're doing, but also as we get larger planes, wide-bodies, 787s, the 321XLRs will have an important lie-flat, J-Class. So actually improving the LOPAs on the aircraft and bringing on preferred seating, preferred economy and J-Class. Aeroplan is another great example of where we can continue to improve the yield profile of our customers. So across the airline, we're seeing opportunities to accelerate revenues and to provide even more value. And with that, we're getting pricing.

Yes. And on premium, you mentioned -- so that represents now roughly, what, like 30% of your passenger revenue and obviously continues to grow at a pretty healthy rate. To what extent do you view premium demand as structural? Or is there some cyclicality to it that we should be mindful of going forward?

I think that -- I think travelers have reprioritized travel. And also the -- we do cater to our customers, corporate, as an example, travelers who have the ability to travel later in the season and prefer a premium experience. So we're seeing a lot of so whether retirees or younger travelers who have a privileged experience. We see that through our Aeroplan program. We see that in lounge traffic. We see that in -- our load factors remain very high, so even all parts of the cabin, but business class sold out most often. The Sixth Freedom traffic also contributes to that, some higher affluent travel that actually fills up our planes as we bring in that Sixth Freedom traffic. We believe that to be a structural evolution of travel. And we have, I think, done a good job of securing that certainly on the corporate side and certainly on the premium traveler.

Yes. And earlier -- maybe switching to transborder. Earlier this year, you described that as fairly stable, albeit maybe still below levels in February of '25. As I mentioned in my opening remarks, this is one area of added volatility for you guys. What are you seeing today across Canada, U.S. travel patterns? How are you responding to that?

So it's interesting. So just to take a quick minute here. So in -- I think it was April of '25, we definitely saw a correction in Canadians going to the U.S., probably down 20%, maybe a little bit more than 20%. That stabilized. It gave us an opportunity to redeploy some capacity we did. We redeployed some of that capacity to the Caribbean. So Canadians continue to travel. The demand didn't shift, but the preference to travel to the Caribbean as well as Central Latin America. So we opened up our network further, redeploying some of the capacity. We didn't stop any destination, just frequencies [ engaged ]. And today, 12, 18 months later, we have some attributes from transborder that are very specific to Air Canada that actually have put us in a net better position. And I'll explain. Corporate travel between U.S. and Canada, we have the biggest market share, and we are corporate Canada's airline. So from that point of view, that traffic has grown and continues to be active. The biggest reduction came from leisure and specific markets, Orlando, Las Vegas, Arizona. And as a result, some of the strength from corporate adds traffic where others have retrenched and have taken out capacity. So that gives us more share. We also -- we've continued to grow our Sixth Freedom traffic. And that Sixth Freedom traffic is unique to Air Canada. We're a connecting airline. And as a result, those American travelers coming through Canada have continued to add load and has allowed us to continue to fill our planes. So by and large, today, with less capacity deployed transborder and our capacity adjusted but largely in place, we come out with some yield strength. And it hasn't moved back up, but it has not moved down either. So at this point in time, we think we have the right strategy. And net-net, I think we've done well.

One other interesting thing to add there is when we redeployed a lot of the capacity down to Lat Am, we actually saw countercyclical Sixth Freedom flows of Europeans traveling down to Lat Am in addition -- or European traveling mostly to the Caribbean and Lat Am traveling over to Europe. So it also helped us in that regard as well.

Certainly a unique feature of your business. And one thing that we repeatedly heard yesterday as part of some of the preceding conversation is that the differentiated products, unique network attributes and premium offerings are obviously, in addition to fuel, are increasingly driving pricing power, and it's not just fuel pass-through. Are you seeing some of this? And is there anything structurally different about the industry today from your perspective relative to, I don't know, previous periods?

Do you want to take that?

Well, I think if you just look at our load factors, our load factors and our traffic are at least 2 to 3 points ahead of last year, and this is after we've increased our fares 20% to offset the price of fuel. So we're really seeing gains across each and every part of the cabin. And because we have invested, to your point, in the segmentation of not only our product, but also the offerings we have, we recently launched the premium basic offering, which is basically a no-frills premium new offering that will allow really that customer to switch up into a higher-yielding product for us, but also a better product for them. So I think we're finding new and innovative ways to find incremental margins that's just outside of the cabin.

And I'm glad you mentioned the basic offering because we do hear a lot about premium demand and how premium tends to be the healthiest part of the demand environment across the industry. But is there a risk that we may be extrapolating from the effectively the strongest customer segment while maybe overlooking some potential softness with the most kind of basic fares? Are you seeing any of that? Or you see strength across the kind of booking tiers?

Well, as I mentioned, our load factors and our traffic across the cabin and across all of our services are ahead of last year after we've increased our fares, after we passed through along the price of fuel. So we haven't necessarily seen that. And because we've invested in that segmentation, it's not just sort of your basic, but we've also invested in preferred seating, which has more seat pitch in addition to the premium economy and the premium. We have been able to, I wouldn't say, match our competitors in the back of the cabin, but maintain your premium above that. And yes, we're still seeing traffic through the rest of the year.

And what's interesting is that the traffic numbers, if you think about the kind of environment that we're in, you would have thought that there would be a little bit of demand destruction, but we're seeing probably mid-single-digit traffic growth year-over-year. And that alone sort of speaks to the more broad-based demand on traffic -- on travel, I should say. And so it gives us confidence that, yes, of course, premium cabin is working well. But when load factors are close to 90% and year-over-year, you're growing 5 points or so traffic, it's obviously giving us confidence that there's room to grow still.

Yes.

And I think one more point to add is just in our 2 core markets, we really do have sort of a unique and differentiated product. So even in Canada and domestic, we are a network carrier invested in our hubs, and we have scale in our hubs. We have more than 50% of the departing seats out of Montreal, Toronto and Vancouver, and we really are a network carrier versus simply a point-to-point carrier. So we do truly offer something different to the customers that we serve.

Yes. And obviously, these hubs really underpin your Sixth Freedom strategy and revenue has posted a pretty healthy growth on Sixth Freedom. As this becomes an increasing component of the story and the business scales further, how do you balance network growth versus any potential risk of yield dilution as you plan for your network of the future and you take more aircraft deliveries, and there's obviously quite a few in years to come?

Maybe I'll take that step back. So when we laid out New Frontiers, which included those growth components, right, and we talked about 105 billion ASMs growing to 130 billion ASMs, and getting us to a $30 billion P&L top line. Behind that was actually -- it was structural demand that we're planning on. So it's not necessarily chasing market share or chasing cyclical growth. It's structural. And what I mean by that is, in very simple terms, the growth trajectory for Air Canada is built on Canadian demographics, over the last 10, 15 years, have changed significantly. 30-odd million is over 42 million people today. Distribution of immigration fits very well into our network strategy. So North Africa, Middle East, South Asia. That has India. All of that is contributing to the demographic change in Canada, and those franchises grow 3, 4x GDP on an annual basis in terms of traffic. So number one -- and this -- I talked to that in relation to kind of giving up yield. You're actually growing with something is growing as fast, if not faster than you are. Sixth Freedom is very interesting as well. When you think about it, 2/3 of U.S. outbound international traffic fly through the big 3 as they should. 1/3 is across all the other global carriers. And when you look at that and you Pareto, you see 3% to 5% share per carrier. We sit at about 1%. We believe our solution is incredible value proposition to customers in secondary U.S. cities that might travel from a secondary city to an international hub, for example, it's in Europe and land in Paris to arrive at 7 in the morning, maybe go through the terminal, take a flight at 11:30 and be at final destination at 1:20 in the afternoon rather than that same passenger taking at 2:20 from Cincinnati to Montreal and from Montreal to Athens, Lisbon, Vienna, a whole host of cities that you might be in that you need a connection for, but you can wake up where you need to be. So that flow of traffic, when you think about, our objective is to go from 1% of U.S. outbound traffic to 2%. There's 350 million Americans, 1% is about 3.5 million on a population of about 40 million Canadians. That's an expansion of addressable market of 10%, offering a better solution. So then again, not necessarily competing, but offering a better product for an easy transit at 6:00 p.m., get on a flight at 8 and you're here at 7 in the morning and you're done. And then finally, during the pandemic, we had to retrench quite a bit. So corporate, some domestic, we've restrained back to our hubs. We didn't have the aircraft and the capability to take back some of our normal market share in Canada. And with the addition of the 737, 220s, that will give us more bandwidth and the ability to kind of take back some of our domestic and corporate share there. So in all 3 of those, we actually -- and we're adding premium cabin content as we do that alongside of other segmentation strategies. So the combination of all this, we actually don't believe that our growth will compete with yield. Of course, we'll have to manage that, and we're aware of it. But we believe that rather the growth will expand the top line, contribute to absolute earnings. The growth will contribute to unit cost efficiency that should contribute to margin expansion. And the type of growth, including premiumization, including some of the corporate, including some of the Sixth Freedom and the international travel should add some revenue strength and yield as well. And then the combination of those would be the margin expansionary. So I think we're focused on the right kind of growth.

Yes. I think the mathematics behind the passenger growth that you just laid out is quite compelling, frankly. Maybe frame for us a little bit your primary competition for that type of passenger flow, and besides the more convenient slots and departures, what are the competitive advantages you're investing in to effectively appeal to that consumer better than whoever you're competing with?

Well, I think -- first of all, I think we offer sometimes the shortest route, one to the other. So lounges in all of the right places with respect to transition are -- obviously, our Canadian hubs are -- have our own Maple Leaf and Signature Lounges. It's a great experience there. The aircraft themselves, I mean, I think we're bringing in a modern fleet, 787-10s. The 321XLRs are an interesting product because the 321XLRs will allow us to go transatlantic. With a business class on a narrow-body and the fly is 180 passengers. So frequencies that are probably convenient as well relative to flights that we would otherwise only fly seasonally, we may be able to fly all year round. So if you're doing business in Lisbon and you're from Cincinnati, then you may find that all year, you have certain connectivity that was not otherwise available. So I think it's a combination of those things. We have an Aeroplan membership as well in the U.S. And while we have about 10 million members in the program, about 1 million of those are through our Chase -- JPMorgan Chase card. So that's another offering that rewards that loyalty, that rewards the repeat business, making them -- giving them status and giving them other opportunities to earn with us. So I think the collective opportunity to offer better service, a great experience and then the infrastructure that goes with, in many cases, corporate or premium travel.

Yes. Maybe switching gears a little bit to the operations side of things. The investor narrative around labor has always revolved around wage inflation and negotiation risk, and you obviously have most of your negotiations behind you now. So when do you think this narrative shifts from labor being a headwind to being like an enabler of productivity and reliability, especially as you execute on New Frontiers?

Yes, it's a great question. And we had that kind of laid out in our 2024 Investor Day, where the fleet as it expands, we're investing in technology, I think, to the tune of a couple of hundred million dollars a year of productivity type IT investments. I think the number was over $1 billion over the 5 years that we were in our plan. So from that point of view, within airports themselves as well through process and the change -- improvements and policies. The scale of the airline itself, right? So as we grow, we're confident we'll need -- we'll have productivity in overall manpower. I think that we have -- and I don't want to be self-congratulatory here, but we've come through 3 challenging years of labor negotiations. I think we reset all of our agreements to modernize agreements. There has been -- they were all 10-year agreements. So there was a period of inflation that needed to be addressed there as well. And I think now the opportunity for us to leverage that entire workforce, the talent and the goodwill of the whole organization to go and grow Air Canada to its full potential, I think it's exciting for everybody. And our folks are excited about the aircraft coming on and being able to expand the service we offer.

Yes. On the aircraft, you're executing one of the largest fleet renewal programs in your history. So maybe talk to us a little bit about the benefits you're beginning to see from these investments, specifically about the XLRs and what does this unlock for you? I mean we touched upon it a little already.

Yes. Yes. I think when you look and you take a step back, this is going to be the trajectory for the next 36 months. What you'll see is fuel efficiency from those aircraft, significant. You'll be able to probably -- I would say almost a full 100 basis points of margin expansion will come from the modernized fleet and the fuel efficiency that comes with it. Obviously, the -- there's a cargo capacity on the 787-10s that's accretive, very strong. The 321XLRs are going to be an incredible machine for transatlantic LOPA that have lie-flat seats, but at the same time are very cost efficient for 180 passengers, so allowing for frequencies and allowing us to get to more bespoke destinations. I think we're seeing -- I think the schedule next year includes -- is it Oslo?

Oslo, Basel as well as the London night day tripper.

Right. All on the 321XLR. So again, it's giving us an opportunity to do the day tripper that we would not otherwise have put in the schedule. So 787-10s come later this year. This is going to be phenomenal for long-haul traffic. It will give us a chance to be more flexible with our entire 787 fleet, -8, -9s as well. I think scale, fuel efficiency and modern fleet and better mix of flying are really the cornerstones of the margin expansion plan and what those aircraft can do.

Yes. Maybe we mentioned Aeroplan a little earlier, but maybe 1 or 2 questions on that. Obviously, a landmark transaction a little earlier this year, and it's very interesting to see -- everybody knows this is a very valuable asset, but seeing a third party put a valuation. It's quite interesting. Beyond valuation, what's the right way to think about its -- Aeroplan's role in your ecosystem over the next decade as it relates to growth execution? And I don't know if it continues to be a financing tool. Yesterday, we heard a lot about people investing in their programs and their credit card partners and trying to focus on capturing some of that premium demand through that route. I'm sure it is the same for you as well.

It definitely is. I'll give some color, and I'll turn it to you, Amanda, as well to add some more. But I think, first of all, let's just talk maybe quickly about the Aeroplan transaction. I think it's important to highlight for the folks here, $10 billion valuation on the program, and we sold a 25% stake, $2.5 billion proceeds, and we've directed those proceeds to, one, debt reduction. So we paid down a $1.7 billion maturity in August. We have an open SIB today for $800 million of share buyback, represents roughly 10% of the equity of the company that should close at the end of the month of September. And so in both cases, I think a really compelling use of proceeds. We now put ourselves in a position where we are back to pre-pandemic levels of leverage, to about 1.25 leverage, and our share count is back to pre-pandemic levels. So from a value creation opportunity, we want to showcase the value of the Aeroplan. And at the same time, we want to make sure we were very disciplined with the proceeds. I think on a longer-term basis, Aeroplan is a fundamental brand value for Air Canada. Like I said, 10 million participants, I think it participates to just under 10% of the Canadian consumer economy. So the credit card programs, if they were [ on their ] collected -- our 3 credit card partners in Canada, if they were together would actually be the largest credit card in the country. And it's tremendous stickiness value. It allows them to enhance their experience. We have continued to work with our partners as well and enhance the co-brand relationships. And you want to talk about lifestyle maybe as well?

Yes, yes. No, I think that we're working with our program partners to enhance the relationships but also the member offerings. And I think if you think about since we had reacquired Aimia at the time in 2019, there were about 5 million members. So our focus over the last 6, 7 years was really growing that membership base. And basically, we essentially doubled it really by growing the airline and growing the membership base and the source of growth within the underlying loyalty program was really membership growth. I think looking forward, we want to build further engagement within our existing members. I think we realized that we've reached not a saturation point per se, but really where we're going to drive enhanced yield is from further engagement within our members, both through enhanced co-brand offerings, but also through enhancing what we call non-air redemption. So we have over 200 partners, both air partners as well as non-air partners. We have an incredible diversity of air offerings, not just on Air Canada, but on the number of our codeshare as well as our joint venture partners. And we have the most amount of non-air redemption offerings of any other loyalty program. So if you want to use your Aeroplan points on an everyday basis, I accumulate my points on Uber Eats and use them on my Starbucks the next day. So really, it's just trying to further that engagement within the program to unlock that next vector of growth.

Maybe we open to the audience to see if there's a question or 2 we can take and can switch to couple of capital structure questions.

[indiscernible] investment is driving [indiscernible] comps -- can you hear me?

Yes.

I just wanted to check, once you achieve your investment grade, would that drive any change to your target capital structure and return on capital strategy?

Well, I think right now, we drive accretive investments. We have an internal hurdle rate that we use that -- I think that no specific change to the capital structure. I wouldn't see, no. At this point in time, I think we -- leverage is, what, 1, 1.5. I'd like to see the equity value obviously react to all of this. But no, nothing I would comment on today.

And as I think about capital allocation, right, like you're simultaneously executing on a couple of things. You've done the Aeroplan minority. You're addressing -- you address the debt maturities through that. You have the substantial issuer bid out there, and you continue to invest in the fleet renewal and you're balancing all of that today. As you think about the next couple of years, if the investment-grade objectives, fleet growth and shareholder returns ultimately come into some sort of conflict for whatever reason, how are you going to prioritize between these 3, sometimes competing objectives?

Yes. I think that we've demonstrated how we think about this, which is we've always said we're going to protect the balance sheet. We're going to protect the strength of our liquidity. And that has been the cornerstone. And if you look at this latest Aeroplan transaction, it's offense and defense. Basically, it's reducing share count because we believe value creation is coming and it's going to be significant, and that's going to leave value for smaller share count. But at the same time, it's also bolstering the balance sheet and making sure that we have strength as we go into a growth cycle. So I think we've shown that job #1 is keep a strong balance sheet, and we will always make sure that we do that first. When it comes to investing in the airline, we'll invest in the airline where there is accretive growth, where it is real return on invested capital accretive. And that's how we'll deploy capital when opportunities are right, and we have a balanced investments that achieve our hurdle rate at the right risk level. And then third has been to be sensitive to reward our shareholders. And the best way to do that is to generate cash flows. And so our view has been and will continue to be to have structural cash flow generation, that we have cash available to reward shareholders, and that can come in whatever is the appropriate form at the time. That's the way we're building the airline. We're building the airline so that in 2028, '29, '30, we are generating consistent structural cash flow. And that should allow us to protect the balance sheet, should allow us to take advantage of opportunities for growth, but also allow us to reward shareholders.

Yes. And maybe last question for me. The M&A debate flares up every once in a while in the U.S. and obviously, it's a very different market than the Canadian market. But what's your take on M&A? And how should we think about the strategic landscape kind of going forward? Again, very, very different market, but just curious to get your take.

Yes. I think that right now, we're focused on executing our strategy. I would say that's job #1. The next 24 months are going to be important. We're bringing on a lot of capacity. We have a very clear commercial strategy and network strategy. I want to make sure that we're focused on operational excellence as well as we bring on the new aircraft. And we've built our balance sheet to be able to push through this well and keep our shareholders rewarded as well. I would say that we'll let this play out. It's an evolving landscape right now. And I would say that we would probably just let that landscape evolve as the market would let it. And we can always look past once the -- once our own critical objectives are met with the airline in the next couple of years.

Yes. And it does have its own natural way of evolving.

Yes, it does. It does, well said.

Very good. John, Amanda, very much appreciate your insight. Thank you for joining us.

Thank you.

Thank you.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Air Canada Second Quarter 2026 Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to Amanda Murray, Head of the Financial Planning, Strategy and Investor Relations. Please go ahead.

Thank you, Julianne. [Foreign Language] Welcome to Air Canada's Second Quarter 2026 Earnings Call. Thank you for joining us today. On the call with me are Michael Rousseau, our President and Chief Executive Officer; Mark Galardo, our Chief Commercial Officer and President of Cargo; and John Di Bert, our Chief Financial Officer. Other members of our executive team are also with us and available for the Q&A portion of the call.

Before we begin, I remind everybody that today's discussion may contain forward-looking information regarding Air Canada's outlook, objectives and strategies. Actual results could differ materially due to various assumptions, risks and uncertainties. Please refer to our Q2 2026 earnings release, our 2025 annual MD&A and second quarter 2026 MD&A and filings available on aircanada.com and on SEDAR+.

With that, I will turn the call over to Mike.

Well, thank you, Amanda. [Foreign Language], good morning, and thank you for joining us today. Air Canada delivered a strong second quarter with adjusted EBITDA of $719 million, at the upper end of our guidance range despite fuel prices being slightly higher than our expectations. We generated record operating revenues of $6.3 billion, up 11% from the same period in 2025, supported by a very strong total unit revenue growth and broad-based strength across our network.

At the same time, our reported results were negatively impacted by Pacific labor-related and other charges, primarily noncash that are not reflective of the underlying earning power of the business. John will provide more detail in a few minutes. More importantly, the quarter demonstrated the resilience of Air Canada's diversified business model. Our results reflected a strong pricing environment, resilient demand across the network a continued focus on controllable cost execution and strong contributions from our diversified businesses, including cargo, Air Canada Vacations and Aeroplan. Together, these strengths helped us absorb a significant external fuel shock while still delivering adjusted EBITDA ahead of market expectations.

Through our pricing actions, capacity management and fuel hedging positions, we recovered about 50% of the incremental fuel expense in Q2. When compared to our expectations at the start of the year, we expect to recover a majority of the remaining fuel headwind in the second half of the year, with Q4 expected to be above 100%. The strong demand we experienced in Q2 has remained intact throughout the booking window and across the network. More importantly, Air Canada's diversified global reach, premium offering, loyalty platform and cargo and Air Canada Vacation businesses continue to support resilient revenue performance across varying market conditions. These strengths are central to our new care strategy and remain key drivers of long-term value creation, the latest validation being the minority investment in Aeroplan establishing a $10 billion valuation. The quarter reinforced our confidence in Air Canada's strategy and the long-term value creation opportunity ahead.

We continue to invest in the future of the airline. Our fleet and product initiatives remain central to our strategy, including the introduction of the Airbus 321XLR and ongoing fleet modernization. These investments are supporting our premium positioning expanding our network opportunities and improving the customer experience. Also, we will soon announce exciting new routes for next summer. As I mentioned, we announced yesterday a 25% equity minority investment in Aeroplan for $2.5 billion, valuing the program of $10 million. Aeroplan remains a core part of Air Canada's commercial strategy, and we continue to retain full control of the program strategy, operations, partnerships and member experience while monetizing a portion of its underlying value. There is no intention of relinquishing control of this valuable and strategically important component of Air Canada.

And for greater clarity, there will be no changes to the way members earn or burn points or to any other element of the program because of this transaction. This transaction simply further strengthens our balance sheet creates value for all stakeholders and is an important step in our path toward an investment-grade rating in the midterm. Our people are the foundation and strength of Air Canada. We recently concluded 4-year collective agreements with Unifor and the International Association of Machinists and Aerospace Workers. These agreements recognize the expertise and contributions of our employees. They reflect our commitment to constructive labor relations and to maintaining Air Canada as a competitive and attractive place to work, and they position Air Canada to advance its new frontiers objectives.

I want to thank all our employees for their professionalism and dedication. The individual contributions and teamwork allows us to operate through volatility, care for our customers and continue building a stronger airline and brand. As you know, I'll be retiring at the end of August after almost 19 years of realizing opportunities and managing challenges. I'm very proud of what we accomplished together. The airline has a strong and skilled leadership team in place with a clear continuity and strategy and execution. I remain highly confident in his ability to continue delivering sustainable long-term value for shareholders and look forward to opportunities and successes that lie ahead for Air Canada.

Before turning it over to Mark, I want to take a moment to thank the investment community for your engagement, questions and perspectives over the years. Your interest in Air Canada has made us better, and I'm grateful for your support. Thank you, and over to you, Mark.

Thank you, Mike, and good morning, everyone. [Foreign Language] I'd like to start by thanking our employees for their continued focus on our customers and operational excellence, and our customers for their continued look.

Our record quarterly results continue to demonstrate that Air Canada's strongest ever foundation that drives our commercial performance. Our diversified revenue streams are far-reaching global network and the strong demand from our higher-yielding customer segments reinforced the structural advantages that underpin our results and help deliver a leading Q2 load factor amongst our North American peers. Q2 operating passenger revenues both grew 11% year-over-year, reaching $6.3 billion and $5.6 billion, respectively. Our passenger revenues were driven by an 11% improvement in PRASM on system-wide capacity growth of 0.3%. Our capacity growth was slightly below our Q2 guidance range, reflecting weather-related disruptions and our measured approach to capacity allocation.

Air Canada's geographic diversity remains a strength, contributing to a 7% year-over-year increase in yield in an industry-leading 87.5% system-wide load factor relative to major North American peers. It's important to remember that we entered the second quarter with roughly 50% of our expected traffic booked before any increases in fuel prices, with the vast majority from long-haul markets with longer booking windows. In June, Air Canada served the second largest number of nonstop intercontinental destinations among major North American carriers. The scale of our network is enabling our well-placed hubs to become important international transit points. Despite the longer international booking window, our Sixth Freedom franchise performed strongly, with revenues growing at 9% year-over-year. More than half of this growth came from the Pacific quarter.

Within our cabins, premium and higher-yielding demand strength persisted through the quarter with premium and corporate revenues increasing 11% and 19% year-over-year, respectively. Strong engagement from our higher-yielding and highly loyal customers continues to differentiate Air Canada and remains a key driver of revenue quality. We're uniquely positioned to capture this demand segment. Importantly, Aeroplan enables our brand loyal customers to engage meaningfully within the Air Canada ecosystem, and it's a key component of our diversified revenue base.

Moving on to cargo, which is a key enabler of our long-haul performance. With shifting global trade flows and a narrower cost differential between air and ocean freight, cargo revenues rose 29% year-over-year on strong deal growth, equally significant. Our cargo business is increasingly driving fixed freedom volume using freighters to carry shipments between the Americas into the bellies of our wide-body fleet. Looking ahead, 3 themes stand out that strengthen our confidence in our commercial outlook. First, demand across our network remains constructive throughout the second half of the year, including in the premium segments. Our new international routes are performing very well, supported by robust commercial and operational execution. In response, we have proactively increased capacity across a number of these new markets, further validating our international growth thesis.

Second, we continue to see promising demand signals in the shoulder periods. These are months where the demand is less commoditized and as a result, fall within Air Canada structural advantages. In conjunction with our growing counterseasonal Sixth Freedom franchise, we continue to expect that the fall and spring shoulders to grow in relative performance. Third, as we advance important product, network and revenue initiatives, we continue cementing Air Canada's structural advantages. For example, Initial results from the A321XLR operations validate the potential of this aircraft type in our fleet, providing flexibility to serve new and existing transatlantic markets while supporting our premium strategy within North America.

More recently, we released unbundled fares and premium cabins across the Atlantic, the Caribbean and Latin American markets. And we expect the new offers to better suit the needs of leisure customers by providing more options to travel in premium cabins. With these points in mind, we continue to diligently manage revenue and capacity into the second half of the year, leveraging our network, customer and revenue diversification to maximize revenue quality and returns, and we expect to recover the majority of the incremental fuel expense in the second half of the year.

To close, Air Canada's strong Q2 results are a clear validation of the strength of our commercial foundation. And as we look towards 2027, we remain exceptionally well positioned to capitalize on our growing global network, our premium and loyal customer base in our evolving Sixth Freedom franchise. Alongside Aeroplan, Air Canada Vacations and cargo, our diversified commercial business drives our confidence in the long-term opportunities available for Air Canada. And before I hand it over to John, I'd like to thank you, Mike, for your leadership and partnership over the years. It's been a privilege to work with you, and I wish you the very best in your next chapter.

Over to you, John.

Thank you, Mark, and good morning, everyone. Before I begin, I'd like to thank our employees. Their focus and execution are what turned our commercial momentum into financial results. and they drove real progress against our financial priorities this quarter.

Second quarter adjusted EBITDA was $719 million at the upper end of our guidance range and ahead of market expectations for an adjusted EBITDA margin of 11.5%. Let me provide some additional context for our financial performance. We recovered approximately 15% of the Q2 fuel escalation from our original plan. Because as much of the quarter was already booked before fuel prices increased, there was a natural lag before our pricing actions could be fully reflected in fairs. Our pricing and revenue management actions supported strong yields and load factors, driving 11% PRASM growth and record operating revenues of $6.3 billion, up 11% year-over-year.

Operating expenses were 24% higher than Q2 2025, including a total of $388 million in charges that were excluded from our reported adjusted EBITDA. These charges relate to pension plan amendments, benefits-related items and a provision for a legal matter. Excluding them, Q2 operating expenses were 17% higher year-over-year. This reflected a 49% or $565 million increase in fuel expense, net of $205 million in hedging gains. Let me spend a moment on fuel because it was the largest cost driver in the quarter. Our Q2 guide assumes CAD 1.28 per liter. During the quarter, jet fuel prices remain volatile and moved modestly above our expectations, particularly in May. Our reported Q2 average fuel price was CAD 1.33 per liter, including the benefit of our hedges. Despite peak fuel reaching more than CAD 1.60 per liter. With strong commercial execution, we recaptured about 50% of the fuel expense increase in Q2. We expect the recapture rate to build as commercial actions fully cycled into fair mix. This gives us confidence in our expectation to reach recovery rates up over 60% in Q3 and above 100% in Q4 based on the forward curve.

Returning to ex-fuel cost structure performance. Adjusted CASM increased 7% year-over-year, in line with our expectations. More than 1/3 of that increase was driven by the impact of successful labor negotiations on multiple employee groups representing almost 15,000 employees, half our unionized workforce. Capacity was up just 0.3% year-over-year as we stay focused on capacity management amid fuel volatility while prioritizing unit revenues. This created a pressure of about 200 basis points versus our planned adjusted CASM performance. Despite the many moving parts in Q2, we continue to advance cost containment and efficient initiatives across the organization. Through these actions, along with planned capacity growth, we expect unit cost performance to gradually improve through the back half of 2026.

Turning now to our balance sheet. Earnings performance translated into strong cash generation. We generated $651 million of operating cash flow and $174 million of free cash flow in the quarter. We also completed $218 million of sale-leaseback transactions, bringing the first half proceeds to $501 million and keeping us on track towards our $1 billion target for 2026. Our balance sheet metrics are among the best in the industry. We ended the quarter with $8.9 billion of total liquidity, representing 38% of trailing 12-month revenues, well above our 15% to 20% long-term target. Our net leverage ratio ended the quarter at 1.7x, 1 of the strongest among North American airlines and comfortably below our long-term target of less than 2x. And finally, year-to-date, we have repurchased 14.5 million shares. Recall that in May, we [ paused ] our NCIB buying. We have now deployed $1.6 billion in share buybacks since November 2024, including $270 million in 2026. This reduced our outstanding share count to 280 million units as of Q2 2026, a reduction of 22%.

On to fleet. We have continued with our fleet renewal program, taking delivery of 2 A321XLRs and 5 820s this year. We expect to receive the first 2 Boeing 787-10 by year-end in addition to an additional 7 XLRs and 11 A220s. We are also well advanced in our 737 fleet transition to Rouge with 21 aircraft already transferred as of June 30. With CapEx -- with gross CapEx to reach $3.6 billion -- we expect gross CapEx to reach $3.6 billion in 2026. The $300 million decline from our prior disclosure is primarily related to the timing of deliveries and aircraft configurations.

Speaking of financial strength and balanced capital allocation. Let me now speak about the exciting announcement we made yesterday. A 25% minority equity investment in Aeroplan for $2.5 billion that values the program at $10 billion or at a 21x EBITDA multiple. This transaction crystallizes the value what we believe is one of the best and most prestigious airline loyalty programs in the world. Aeroplan is an important part of our portfolio. We believe the $10 billion valuation reflects its significant economic potential while retaining future optionality and control over the strategic and operational direction of the company. We are proud to welcome Blackstone, La Caisse and the other investors as partners, and we view this transaction as an accelerant to both our New Frontier plan and the broader value creation thesis for Air Canada shareholders, while providing financial flexibility and accelerating value realization.

Let me now highlight a few important points. Air Canada retains full management discretion on all operating decisions, program design and execution, ensuring continuity in the management and growth of the Aeroplan franchise. The investor group will own a 25% minority share and will be entitled to participate in distributions from Aeroplan based on an agreed distribution policy. Air Canada will have the right to repurchase the shares between years 5 and 8 for a purchase price that reflects a total internal rate of return of 6.5% to the investors. Proceeds will be deployed to create further value and support our balanced approach to capital allocation. First, we will pay down our August 2026, USD 1.2 billion debt maturity. We expect this to immediately improve gross and net debt leverage by 0.5 turn.

We also expect to initiate a substantial issuers bid to buy back and retire up to $800 million in Air Canada shares. Taken together, the transaction derisks the balance sheet returns capital to shareholders and accelerates our path to an investment-grade rating over the midterm. This transaction achieves many critical objectives. It surfaces and highlights the value of our world-class loyalty franchise where we believe the market underappreciated it. It strengthens the balance sheet and improves financial flexibility. It accelerates our progress towards long-term leverage objectives and it rewards shareholders as we continue to invest to grow the airline and expand margins. This transaction gives us even more confidence in our value creation strategy and our ability to execute new frontiers for our customers our employees and our investors.

Turning to our outlook. We're reinstating and updating our full year 2026 guidance. Importantly, our outlook reflects the same themes that have supported our second quarter performance. constructive demand trends across the network, resilient premium and corporate demand, continued progress on fuel recapture and disciplined cost execution. We now expect full year ASMs year-over-year growth of 2.25% to 3.25%, reflecting a focused approach to matching capacity with demand while retaining flexibility in a dynamic environment. We expect adjusted CASM to increase between 5% and 6% versus 2025, reflecting the impact of recently ratified labor agreements, ongoing inflationary pressures and a weaker Canadian dollar. We continue to expect cost performance to improve through the back half of 2026.

Our outlook assumes a fuel price of approximately CAD 1.38 per liter for the third quarter of 2026. The equivalent to USD 3.70 per gallon based on the forward curve as of July 29, 2026. That assumption incorporates our hedging portfolio, which covers 17% of anticipated third quarter jet fuel purchases at an average price of USD 0.88 per liter before interplane fees and taxes. Our fuel assumption for the fourth quarter is approximately CAD 1.29 per liter or USD 3.50 per gallon. Taken together, these assumptions support full year adjusted EBITDA guidance of $2.9 billion to $3.2 billion with the lower end, reflecting a $100 million fuel allowance to cater for some potential Q4 fuel price variability. Regardless of fuel prices, however, we remain focused on driving results through commercial execution, cost excellence and operational reliability.

Finally, we remain focused on free cash flow generation and are guiding to free cash flow of between $200 million and $500 million for full year 2026. This is consistent with our EBITDA outlook and assumes the successful execution of approximately $1 billion of sale and leaseback transactions during 2026. The quarter demonstrated the link between commercial execution and financial performance. The strength of our diversified revenue streams translated into strong earnings, strong cash generation and continued balance sheet strength. That foundation gives us confidence in both our outlook and our long-term strategy.

To conclude, our priorities are clear and unchanged. We manage the controllables, including commercial actions, capacity deployment, cost execution and operational performance, protect our cash generation and the strength of our balance sheet and continue advancing the long-term value creation strategy we have set out in new frontiers. Before I turn it back to Amanda, I'd like to take a moment to acknowledge Mike. Mike, it has been a privilege to work alongside you these past few years. You leave behind a strong Air Canada point for success, financially solid with a portfolio of incredible assets and brands, energized through talented people looking ahead towards a bright and exciting future of growth through our New Frontier Plan. Thank you for your leadership, your partnership and your support. I wish you every success and happiness in the years ahead.

With that, I'll turn it back to Amanda for questions. Thank you.

Thank you, John. Julian, please open the line for questions from analysts.

[Operator Instructions] First question comes from Atul Maheswari from UBS.

John, could you give us some of the puts and takes around the back half CASM ex expectations? It seems like it's a little higher than the original guidance provided earlier in the year. So what's driving some of the headwinds? And are some of the headwinds in the back half basically isolated to the back half? Or could they persist until 2027? So any thoughts around '27 catholics also would be helpful.

So I would say that, generally speaking, we've come through the first half where we would have expected, and we've put a lot behind us as well, as you know, with all of the labor agreements now done, and that's fully reflected in our cost structure. And I think largely as we had expected even back when we were at Investor Day in 2024. So I think we've put a lot behind us, and I feel pretty good about where we are.

Looking at the second half, we do have a little bit lower capacity expectation than we would have planned for in the year. So the second half will reflect a little bit of that as well. And so there's a little bit of pressure versus our original expectations. I would expect us to be in the 4% to 5% range for the second half of the year coming into that 5% to 6% for the full year. And alongside a little bit lower capacity, I think the sales commissions does pose a little bit of pressure, given the higher fares. And then I would say that the Canadian dollar has been a little bit weaker, and that just has a general impact on cost structure. All that being said, I feel pretty good about the opportunity here as aircraft come in and we start generating more capacity and frankly, even a better mix of capacity into 2027 that we'll start to see some of that cost pressure abate.

And too early to get into any financial metrics for next year, but I would say that we continue to focus on an adjusted CASM that would be below inflation, let's say.

Okay. Great. And then as my follow-up, the U.S. network airlines have highlighted or guided to third quarter and fourth quarter pass to be above the second quarter in part by obviously the booking cut benefit with the greater portion of the back half bookings coming in at higher fares. In case of Canada, the third quarter is pretty clear, but the question really is on the fourth quarter. Do you expect the fourth quarter TRASM to be above second quarter like the U.S. airlines guided? Or are there any puts and takes that we need to be mindful of for the fourth quarter?

I'll take that one. You should anticipate that Q4 TRASM will be higher in terms of year-over-year than Q2 because obviously, when the conflict started, we didn't have much of a base in bookings. So we've been able to fully catch up what kind of the pricing and market is kind of the jet fuel pricing. And as a result, we expect that Q4 will be higher in terms of TRASM and that our fuel recovery at the current market price puts us at 100% or just above 100% of the incremental just cost, and that will be reflected in the TRASM.

Our next question comes from Savi Syth from Raymond James.

And like, again, echo everybody's appreciation for your leadership and insights over the years and best was shows us the next chapter. Just maybe, John, in your comments, should we assume that the trailing 12-month EBITDA for Aeroplan is just north of [ $475 million ]? And also, could you talk about the what brought about the transaction and the timing, given that you have a really strong liquidity position here?

Yes. Yes. I think just by math, the $10 billion over the 21, you're very close to the number there. Yes, to the [ $475 million ] [indiscernible]. We think this is a tremendous transaction for Air Canada and for Aeroplan as well and its members. We are -- as you said, we do have a very strong balance sheet as we go into a growth cycle here over the next couple of years. We feel very confident about the value we can create with Air Canada and the expansion of the network and everything that we can bring to our customers.

We've always said we're going to take care of 3 things when we capital allocate, number one, invest in the airline, which we continue to do. Number two, keep a very strong balance sheet throughout that growth cycle, which we're doing, and we're going to further improve with this transaction. And thirdly, to reward investors as they support that growth and value creation. And I think, again, in this case, we will be able to do that. We talked about being able to restore pre-pandemic share count levels. This transaction accelerates that probably 2 years before our stated original target in 2 will be at those levels after the upcoming SIB. The ability to improve the balance sheet to the extent that investment grade would be attainable is also built into this transaction. We'll be able to extinguish USD 1.2 billion of debt without affecting the liquidity whatsoever and then pursue with great confidence in the next 24 months of growth CapEx that we've already built into the plan as we had an Investor Day.

Just to underline that, there's no new allocation of this capital. There are no new -- it was not designed for anything other than to support the execution of new frontiers and to create value for investors, both immediately with marking the value of Aeroplan as well. I think it was an underappreciated asset, and we believe this transaction also highlights that. So it achieves many, many important things. Overall, I would say it's going to help create a lot of value as we execute our New Frontier Plan.

I appreciate the color. If I might follow-up on one of Atuk's questions. But as you think about next year's unit costs, like what kind of a growth are you generally at a high level, underwriting?

Yes. I think that we have an order book. It's fairly clear. There is a little bit of movement. We continue to see it always a couple of months here and there of delays. But when it's all said and done, I think that 2027 will put us at or above 2019 levels, which I think were about [ $112 billion, $113 billion ] ASMs. So I think something at that level or higher.

Next question comes from Tom Fitzgerald from TD Cowen.

Congrats on the Aeroplan transaction. I wanted to stick with that for a question. So how should investors think about just any kind of sense of the distribution policy? Is it fixed? Is there a payout ratio? Is there a minimum with upside participation? And then just how should we think about the profit attributed to the NCI just impacting EPS? Just any color there? And then just if the -- if Aeroplan out earns that 6.5% IRR, does the excess accrete to NCI on the balance sheet and then revert to AC shareholders through equity or repurchase? Any color on that would will be really helpful.

Okay. So I have a feeling that we're going to have a call here and then probably a call later on some of the technical side of that, but we can always follow up with Amanda and Mike and myself. But let me give you just some early color upfront. Dividend distribution policy just think about based on our estimates of Aeroplan earnings and cash flows, we would expect a rather proportional distribution of cash generated at Aeroplan to the minority at 25% in ourselves at 75%. And so there is a tiering of distributions. But all in, our expectation is that it would be about 25%, 75% on any given year.

The -- and the distribution policy at the discretion of the Board, which is fully controlled by Air Canada. So we'll obviously manage that responsibly. With respect to, I think NCI and a minority interest on the P&L. The way we think about it, I guess, no simplified here is we're taking out debt, which is about CAD 1.7 billion. We would have potentially refinance that debt. So if you think about just the interest cost savings there against the minority interest, not a lot of space between the 2 minorities, maybe a little bit higher, but not that much higher than the interest cost savings. And so when it looks -- when it comes to EPS, a touch may be higher, but really the impact will be from the lower share count that comes from the buyback. So probably in the neighborhood of 8% to 10% when it's all said and done in terms of reduced share count. So we believe that's going to be EPS accretive pretty quickly.

And then in the longer term, the way that the call option is designed is that the entirety of all of the cash streams. So the dividends will give rise to an option to buy back our stake in between years 5 and 8 for a total IRR of 6.5%. So those cash flows that would have come from the distributions will count against the overall IRR. That will leave a purchase price that's established, setting that 6.5% return target. And we believe that, that can be favorable as the value of Aeroplan should grow over time. So from that point of view, accretes to the benefit of the Air Canada shareholders.

Okay. Great. That's incredibly helpful. And then just as a quick follow-up, just curious what the feedback from [indiscernible] if you haven't gotten any feedback from the credit rating agencies on the transaction? And any comments that they provided.

Thank you. And yes, I'm glad you brought it up. We had all 3 agencies rates, both the instrument and our overall rating. And we've had one improvement in outlook. So one positive outlook. So that's an improvement. The other 2 have viewed the transaction as a positive, but we'll continue given the volatility to watch Air Canada. And I'm sure that over a period of time here, we'll see improved credit ratings across the board. But obviously, we'll work through the current environment that's bigger than just Air Canada.

Our next question comes from Jamie Baker from JPMorgan.

This is James on for Jamie. Maybe I just wanted to touch on the corporate side. Revenue was up by double digits this quarter of [indiscernible] last quarter. Maybe talk about the trends there for 3Q and for what's booked through 4Q? And maybe specifically on the transport or corporate side, is that also tracking below pre-February 2025 levels? And how are you thinking about that for '27?

Thanks, James. So on the corporate side, July and August are relatively weak corporate month. Although there is the strongest month in terms of travel volume, in terms of corporate premium demand is also the weakest. So there's a little bit of upside in July and August, but it's really a September goes and return to office return to [indiscernible], that's when we're going to see corporate bounce back.

We have a constructive outlook for corporate revenue in September all the way through December. We continue to expect double-digit growth. And it's really principally coming almost like 1/3, 1/3, 1/3 between the domestic, transborder and what we see on the transatlantic. Despite the fact that Canada U.S. demand is still relatively flat year-over-year, the actual premium corporate demand continues to be higher year-over-year. And we see that constructive outlook all [indiscernible].

Got it. And then maybe on the second question, just following up from Tom's rating industry question. And maybe John, if the transaction -- the Aeroplan transaction could reduce leverage by half a turn. What else are the agencies looking for, for investment-grade rating? Is it cash flow liquidity? I know the agencies calculate leverage different than you. But I guess, what's -- can you maybe remind us of the sensible that they have for investment grade?

Yes. Thanks for the question. So I think you hit on a couple of good things there. So one, our gross leverage was about 3.7 once paid down this maturity will take us to about 3.2 so that's one, I think, getting below 3 is another important milestone. So if you look through, right, holding the liquidity that we have, which, as I mentioned in my comments, saying 38% of the last trailing 12 months of revenue, our objective to be 20% or so. it gives me more firepower to continue to take out where appropriate gross debt as it matures. So a continued trajectory through improving the gross debt leverage, I think, is part of the conversation with the agencies.

Number two is continued margin expansion. So I think that, that is the next important catalyst for us. And with that, as you know, I've often talked about the conversion of our EBITDA margin being high quality to cash from operations and getting to a sustainable 12% or better CapEx number. So the construct of that is, again, fully aligned with a path to improved ratings. And ultimately, an investment-grade rating with the agencies. We are exactly where we wanted to be when we laid that plan out in December '24. I would say, to some degree, we're ahead of that plan. And '27 is going to be an important year, obviously. We'll have aircraft, and we'll have a better mix of flying and we'll have an incredibly strong balance sheet and a stabilized share count. So we think that over the next 2 years or so, a path to investment grade is certainly impossible.

Our next question comes from Chris Murray from ATB Cormark Capital Markets.

Let me take up on that technical call later. But turning back maybe just to look at the fall, I think Mark based this question or made some comments about the but the fact the shoulder season is evolving a little bit differently. Can you maybe talk a little bit about what you're seeing as we go into Q3, Q4? Where you are in the booking curves and how those may be actually changing this year? And does that give you an additional opportunity to maybe reprice or maybe offset some more of the more fuel cost as we go deeper in the year, than you may have otherwise not have. And any early thoughts then on Q1, whether or not that's going to be maybe more the European as opposed to, say, or will be helpful.

Sure, Chris. There's a lot to unpack in that question. So what we're seeing in the shoulder really is kind of a continuation of what we've been seeing in the last couple of years. Air Canada is a bit more kind of indexed on premium travel, corporate travel. And those trends are not as robust in July and August, but they definitely come back in September and beyond.

And what we've noticed for a couple of years is that premium customers, whether for leisure or business purposes, have been traveling more in the shoulder than the typical summer peak. And that's been to our favor in terms of seasonality. So what we're seeing in September, October is quite the same. Our international demand is really, really strong. The premium demand is quite strong, booked significantly higher year-over-year in terms of load factor and yield. And obviously, that sector is much more resilient. And we're looking at a very constructive setup for the fall, probably one of the stronger that we've probably seen in our history.

As we go into late fall or early winter, it's still a bit early. Those same demand signals continue, but we start to migrate a bit more to a Sun South America network. And it's a bit early to kind of give you a point of view on that. And again for Q1 is simply too early. But always to say that on a relative basis, the spring and shoulder season show more strength. And as we think about '27, '28 and how we allocate capacity, we'll be taking more capacity risk in those seasons than the actual summer peak.

Okay. That's helpful. I guess my second question, first of all, Mike, congratulations on [indiscernible] at Air Canada and way to go out with a quite transaction. But with that being said, I know you're going to retire towards the end of the month, but you won't have a new CEO in place until it sounds like January, kind of an unusual situation, I think. So can you maybe you or maybe John or Mark talk about kind of the governance and sort of the executive role in that gap? It sounds like you've got a lot of corporate actions that will be happening about the SIP, the close of Aeroplan and of course, anything that may happen day-to-day. How do we think about governance over this sort of bridge period, that would be helpful.

Good. Thanks, Chris, for that. So there's no doubt the board and management -- executive management have talked about this transitional period. Anko, you're right, won't be joining until the -- towards the end of January. First of all, we have an incredibly strong executive group sitting around me right now, we have created new frontiers who are executing frontiers and the path is very clear over the next several months as to what we have to accomplish. The Board will coordinate with the executive group. There is a fair amount of airline experience on the board as well and they will coordinate with the executive group for that 5-month transitional period. And so the governance has been really thought through, and everyone is very, very comfortable as to the next 5 months.

Our next question comes from Daryl Young from Stifel.

With respect to Aeroplan, can you just remind us what the breakage rates are for the program? And then a much higher level question I'm wondering if you've seen any notable impacts in profitability or change in consumer behavior as it relates to AI tools and how points are being used or if there's any significant optimization of redemptions you're seeing in your program?

Craig Landry here, President of Aeroplan. Yes. So I don't believe we're talking about our breakage rate publicly. But there is a previously stated breakage rate of Aeroplan when it was a separate business, and that was in and around 10%. And so you can envision that it would still be relatively similar to that.

In terms of how we're -- the profitability drivers of the program and how we're progressing that. First and foremost, the strong membership base growth is critical. So we have between 4 million and 5 million members of this program was brought back in 2018. And we're sending over 10 million members now and that number continues to grow. So there's a very strong organic growth from the center of the program. That reflects, I think, the appeal of the program and the breadth of the partnerships we have across financial and travel and commercial partnerships. We continue to extend the partner portfolios Recently, we've announced partnerships with Hertz and with World of Hyatt as well. So as we continue to strengthen that member program, we're able to attract a broader appeal.

The question I think -- so that's driving top line revenue in terms of point of sale to third parties and third-party gross billings. In terms of managing the profitability beyond that, it's important that we have a range of redemption options available across travel and retail options. We're able to price those in a fairly diverse way. There is some use of technology behind the scenes to try to enable us to try to optimize the overall unit cost, and we balance the unit cost as a function of the quality of unit revenue that comes in the front door. And that enables us to create a stable business and to manage the profitability.

Our next question comes from Cameron Doerksen from National Bank.

Just on the Aeroplan, I mean if the investors here are -- have a 6.5% IRR, call it, over the next 5-plus years. Is your expectation that Aeroplan can outgrow its cash flows beyond that level? I guess what I'm kind of getting at here is you've pegged the value here at 21 times trailing 12-month EBITDA for the business. Is the opportunity in 5 or 6 years going to be that you buy back that stake at a more favorable valuation from Air Canada's perspective?

We just did the deal, so I won't speculate for years 5 and 8, but obviously, the belief is that in the entire kind of structure and mechanism of the transaction that we do believe that the Aeroplan will continue to create a lot of value. I think that the value that, that contributes to our investors is that it continues to improve the quality of its cash flows, grow those cash flows and further improve the caliber of their distribution over that period of time. Should we over distribute relative to that 6.5%, it effectively behaves like a reducing buyback amount relative to the original capital of $2.5 billion. So I think there are very favorable potential economics in all of this. And there's no doubt that we believe that Aeroplan will be more valuable than 5 to 8 years from now. And as a result, the opportunity to continue to generate value from even the minority stake as an option to buy back is -- will certainly be available.

Okay. That's helpful. And is your expectation that you'll be providing any more, I guess, financial information specific to Aeroplan as we move forward here, just I guess from our perspective, just trying to understand how the EBITDA evolves over that period and trying to forecast the noncontrolling interest of those sorts of things?

Yes. We'll give us some thought and we'll probably give you guys an update on the next quarter whether we do add any even color around the program. But at this point in time, not new, but to be determined.

Our next question comes from James McGarragle from RBC Capital Markets.

I just wanted to ask on the EBITDA guidance. The current reinstated EBITDA guidance versus what you initially provided in the beginning of the year, I know you talked about this a little bit in your prepared remarks, but can you quantify the bridge between the initial guys and your current guys surrounding fuel FX demand and cost? And just any color that you can provide in terms of what would need to go right or wrong to hit the top or the bottom of the reinstated EBITDA guidance range.

Okay. Thanks, James. So I'm going to take a shot at making it simple. And if you do this bottom up, you'll probably get to numbers that are right on to what I'm going to walk you through. So in simple terms, we -- when you think in simple terms, our new guide range reflects our original guide less the hit -- the headwind that we will have taken for what are effectively fares that were booked before the conflict occurred and that we've produced the flying thereafter, which means we bought fuel at prices that were higher than what the fares were sold.

In very simple terms, we're going to deliver the original 2026 plan, adjusted for the fact that when we -- when the conflict happened, we had for simple terms, and I'll just do some very quick math. We had all of March or most of March book with fares. We had obviously the impact of fuel from February '27. The second quarter was 50% booked which means we have to provide fuel against that booking at the spots that were effective at the time sold at roughly $0.90 equivalent, 25% of Q3 and 10% of Q4. If you take the aggregate of all that in very simplified terms, you have about [ 1,300 ] billion liters of fuel that were used to fund fares sold pre-conflict the average fuel price that we put in our guide is $1.25. Our plan rig was $0.90. So $1.3 billion $0.35 gets you about $500 million and change.

The math is not quite that if you do a bottom up and you wait by month, and there's rates for every month and every period, it gets closer to almost $600 million. So the bottom line is $500 million to $600 million is the headwind that from day 1 was -- to some degree, nonrecoverable. Since that period, what it means is that our commercial and fairs strategy have offset the remaining fuel exposure and which means we're selling on average into the market at the cost of the fuel that we're paying. Of course, there's some lumpiness because that's been very volatile. That's really the story.

So $3.35 billion was the bottom end of our original range. If you take out $500 million to $600 million, you're sitting at about $2.8 billion. We have a bottom end of $2.9 billion. In our new guide at $3.75 billion, you take out $500 million to $600 million, you're sitting around $3.1 billion, $3.2 billion. Our top end is $3.2 billion on in my guide and I've said so in the remarks because it continues to be volatile, and there is some expectation in the forward curve for Q4 to have slightly decreasing fuel rate. we've left a little bit of cushion. So that last $100 million at the bottom of the range is to protect the gains the fact that Q4 may not come down as it was anticipated in the forward curve. So again, we'll wait and see what happens there. We leave ourselves about $100 million, which on $1.5 billion liters is roughly $0.05 of, call it, contingency for Q4. And on any given day, that's either true or not true based on where fuel and oil prices 4are trending.

I appreciate the color there. Okay. But just a follow-up question on the CapEx and the free cash flow outlook. The presentation talked about protected capital requirements are declining. So can you just talk about what specifically you deferred whether you're thinking about making additional deferrals in the future? And then just any color you can provide on your confidence in achieving data $200 million to $500 million free cash flow guidance range for the full year. And I'll turn it over after that.

Okay. Great. So just on cash flow, recall we guided $400 million to $800 million. As I've mentioned before, we convert high EBITDA to cash from operations. I'll take out the same $500 million to $600 million from that range, and you're pretty much sitting at the $200 million to $500 million range. That's our bottom up, all things considered. So originally $400 million, $800 million comes off $500 million to $600 million for the -- we've adjusted CapEx throughout the year.

To be honest, some of that has been just some tactical decision-making. Some of it has been OEM delays. On average, I would say, if you just look across the portfolio, largely of the 2 new programs, the 321XLRs to some degree to 220s, there's been about 3 months of slippage in delivery dates. So that reflects a couple of planes moving out of the year. And then the rest of it, like I said, tactical just running the business. So reflecting the current environment and a little bit of an adjustment on overall capacity and the projects we're running. So not a lot to announce there other than the fact of we're going to have a lot of planes and they're going to have some movement, and we're going to be very agile, and we have been to manage all of that.

Our next question comes from Sheila Kahyaoglu from Jefferies.

This is [ Jack ] on for Sheila. I was just hoping to turn back to revenue for a second. Underlying Q2 PRASM growth of 11%. Can you just parse out the unit revenue contribution from both premium and Main Cabin. It's kind of be great just to understand what the spread has been between premium and May and the last several quarters and if you're seeing that gap narrow like some of the U.S. peers.

Sure. So premium basically is outpacing the economy cabin, about 3 points. So we're seeing PRASM in the premium cabin roughly closer to 12%, 13%. And a little bit lower in economy. And I think as we go through the later part of Q3, Q4, that gap might actually grow a little bit. Now relative to our U.S. peers, I can't comment, I have to look at the data, but I would suspect that it's pretty close.

Got it. That's really helpful. Maybe just to stay on premium big in the segmentation for a second. I know you added the A321 XLR this quarter. Solid results so far in the transatlantic. And I think that's further bolstered by your unbundled fare options. Are there any early stats you can share on the unbundled fare options that kind of around buy-up behavior?

No, it's way too early. We're not even a week in market with that product. We have seen initial results from our joint venture partners, United Lufthansa Radio started the unbundling process for premium cabins. The initial results are pretty interesting. However, it's still way too early to really give you proper commentary on this.

And our last question will come from Konark Gupta from Scotiabank.

I echo my congrats to you, Mike, for all the years of great work as well as congrats on the Aeroplan transaction guys. My first question on Aeroplan. So are there any performance benchmarks that you guys have to meet to support the 6.5% net IRR hurdle?

No, there's no specific performance requirements. At the end of the day, the dividend distribution will depend on the performance of Aeroplan overall as it is. And so there are no specific other performance requirements.

Okay. Thanks, John. And if I go back to your 2020 for Investor Day, the targets you've laid out for ASM and '28, I guess, was 130 billion ASMs. I mean, obviously, we are seeing some delays from OEMs, et cetera, and also the fuel environment has curtailed some capacity growth here in '26. How feasible you think is to achieve that $130 billion ASM target by '28?

Yes. I'd say that, that's going to be a tough number to make, right? If you think that I said for '27, some were probably [ 112 ], maybe [ 115 ], so call it a range above what we did in '29. And you'd probably be well into the 120s the following year. That said, overall revenue performance has been solid, and we'll see how this all shakes out, including the fuel situation. but we feel still pretty good about the overall growth to our '28 targets. We can update those as we kind of run longer term. But I feel pretty good about the overall economics in 2028. We have some work to do to get to that 17% margin. We have a lot of tailwind with respect to both mix scale overall cost improvements.

The biggest challenging part of the cost structure behind us now in the last couple of years. So we still feel confident that we have a business that can deliver on a lot of those 2028 objectives. The 130 billion ASMs, probably a stretch for now, we'll roll up those numbers and see where we end up as we roll through '27.

We have no further questions. I'd like to turn the call back over to Amanda Murray for closing remarks.

Thank you very much for joining us this afternoon. Should you have any questions, please feel free to contact us at the Investor Relations team. Thank you, and have a nice day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.

[Interpreted] Good morning, shareholders and guests. My name is Vagn Sorensen. I am the Chair of Board of Directors of Air Canada. Welcome to our Annual Meeting of Shareholders.

[indiscernible] Canada's commitment to indigenous inclusion and reconciliation. Our network crosses many treaty lands as well as unceded and traditional territories of indigenous nations and governments on Turtle Island, that is North America. In that spirit, we recognize the ancestral and traditional lands of the indigenous people we fly over.

[Interpreted] In 2025, Air Canada was honored to support the return of 62 sacred and cultural indigenous artifacts from the Vatican. We carried them back on one of our aircraft. We're meeting today only a few weeks after the tragic accident at LaGuardia Airport involving Air Canada Express Flight AC8646. On behalf of the Board of Directors, I would like to express our deepest condolences to the family, friends and colleagues of the 2 Jazz pilots who tragically lost their lives.

I also want to express our deepest condolences to the family, friends and colleagues of 2 Jazz pilots who tragically lost their lives. I also want to express our sincerest sympathies to the passengers, crew members and others who were injured or otherwise affected as well as our appreciation to everyone in our company, industry or otherwise, who helped at the time and in the days that followed.

[Interpreted] That tragedy has been felt by all of our Air Canada family. I invite you if you are able to stand and observe a moment of silence.

We're pleased for the first time since 2013 to be back here in Vancouver, home to about 7,000 employees and one of our primary hubs. We want to thank TELUS for having graciously opened TELUS Garden for us to host our meeting in this remarkable space and are grateful to the TELUS team who have supported us in doing so.

Today, our meeting includes shareholders from across Canada and around the world. We're glad you're joining us wherever you may be. Thank you for taking part in our annual dialogue.

[Interpreted] We believe in engagement with our shareholders, including at this meeting. I'm pleased to confirm that over 35% of our shares are represented here, which exceeds our quorum requirement.

The notice of meeting having been duly given and quorum being present, I call our 2026 Annual Shareholder Meeting to order. I've adopted an agenda to govern the order of business and general rules of conduct for the meeting, which you can find in the document tab of your webcast screen. Voting is now open for all items to be voted on today and will close shortly after the last item has been discussed. This means we'll not pause the meeting to collect ballots as we progress through our agenda together. This will allow everyone more time to vote if they have not already done so.

I'm joined on the podium on my immediate left by Marc Barbeau, our Executive Vice President, Chief Legal Officer and Corporate Secretary, who will act as the Secretary of this meeting. Also joined by Michael Rousseau, our President and Chief Executive Officer; and on the far left, John Di Bert, our Executive Vice President and Chief Financial Officer.

[interpreted] The other Board members as well as representatives of our independent auditor, PricewaterhouseCoopers, and many of our executives are also present in person or online. Before my opening remarks, I would like to ask Marc to remind us of some of the cautionary statements about the information and how to participate in our meeting. Marc?

[Interpreted] Thank you, Mr. Chair, and hello to all shareholders. This meeting will take place in English and in French. Participants can intervene in either of these languages and proceedings are being translated simultaneously. If you are joining us online, you may choose the channel of your choice, in doing so including a direct floor channel, if you prefer that option.

The meeting today could contain forward-looking statements about our prospects, objectives and strategies. I refer you to the cautionary statements concerning forward-looking information found in our public record, which is available on aircanada.com or SEDAR+. The record also includes an explanation of the non-GAAP measures we sometimes use as well as a reconciliation with the most directly comparable GAAP measure. As we note in those filings, aircraft fuel prices continue to be subject to high volatility as a result of the ongoing conflict in the Middle East.

[Interpreted] People can take the floor at any time. If you are in the room. There are microphones in the middle of the room. If you do that, please give us your name and indicate your status. You can also participate through the messaging tab on your webcast screen. We ask that you reserve your comments and questions on topics that may be of interest to all shareholders rather than of a personal nature.

Mr. Chairman, I would like to turn the floor back over to you for the rest of our meeting.

Following my opening remarks, we'll turn to the proposals in our information circular. Then, Mike will share some remarks about our 2025 financial year, followed by a Q&A session.

This year marks an important moment of transition for Air Canada and for our Board. In March, we announced that our President and Chief Executive Officer, Mike Rousseau will retire by the end of the third quarter of 2026.

Mike has served Air Canada for nearly 2 decades, including as CEO or CFO, Deputy CEO and President and CEO, guiding the company through significant periods of challenge and transformation. Under his leadership, Air Canada strengthened its financial position, navigated the pandemic, advanced customer-centric initiatives and captured opportunities such as the acquisition of Aeroplan and restoring the solvency of our pension plans.

On behalf of the Board, I sincerely thank Mike for his dedicated service and extraordinary contributions to Air Canada. The Board is also grateful for his continued leadership and support as the Board completes the process of selecting our new CEO. Succession planning has been a long-standing priority to the Board. Consistent with this and related specifically to CEO succession, we have a comprehensive internal executive development program that's been underway for over 2 years.

Earlier this year, we complemented that program with an external global search. Our CEO role specification includes having proven airline experience, a track record of setting enterprise strategy and for delivering results at scale. The Board's performance criteria also includes the ability to communicate to Canadians in both official languages. All these criteria are important and we will not compromise on any of them.

[Interpreted] I confirm that our next CEO will have the capacity to speak French.

That process has progressed significantly and we have a strong group of internal and external candidates. In order to preserve the integrity of our selection process, we'll not provide further details until an official announcement is made. This year, we're also making the -- marking the retirement of Mr. Gary Doer from the Board of Directors. Gary has brought strategic insight and meaningful perspective to the Board since his nomination. On behalf of the Board, I sincerely thank Gary for his dedicated service and contributions to Air Canada and its shareholders during his tenure as Director.

[Interpreted] Transition moments such as these underscore our focus on renewals. This morning, you are being asked to elect 2 new directors. Ms. Rachel Notley, the former Premier of Alberta and Mr. Eric La Fleche, President and CEO of Metro. We trust that their backgrounds and experience will contribute to Air Canada's progress in meeting its ambitions.

[indiscernible] every Board member nominee received from shareholders in the run-up to today's meeting. Together, all our Board nominees bring remarkable accumulated experience, expertise and background helping to advance Air Canada's priorities in a changing world. And indeed, in 2025, Air Canada adapted to a changing environment and delivered solid financial results capped by an exceptional fourth quarter despite significant headwinds.

Throughout this unsettled period, the company made progress on its long-range plan and on capital allocation and other priorities we know our shareholders care about. Notably, since 2024, our over 64 million shares have been repurchased, returning more than $1.5 billion to investors. We're pleased with Air Canada's strong start in 2026, including its delivery of record first quarter operating revenues.

In 2026, our Board and executive leadership will continue to work closely to execute on Air Canada's strategic plan with safety first always remaining our overarching priority and customer centricity guiding our actions. At the same time, we'll continue to act on sustainability and to remain committed to excellence, innovation, profitable and sustainable growth and disciplined capital allocation. We're immensely proud of being Canada's flag carrier. We want to share the best of Canada at home and abroad inclusive culture where everyone belongs and proudly promoting our official languages.

[Interpreted] We are very grateful to our customers for their loyalty and to you, our shareholders, for your trust and investment in Air Canada.

We are proud of how our leadership team and our over 39,000 employees have stayed true to the long-standing values and priorities that have guided us through challenging times. In closing, I want to express our thanks as a Board to all Air Canada's employees around the world for their professionalism, resilience and unwavering commitment to safety and service.

Our annual meeting has been streamlined to allow as much time as possible for our remarks and our Q&A session. I also ask those of you planning to speak or raise a question, to please keep your comments brief. A couple of minutes should be sufficient to make your point. And unless your questions or remarks relate to a specific item of business under consideration, I ask that you hold it until the question period.

[Interpreted] Marc will now speak to certain formalities. and the matters to be voted on. Marc?

[Interpreted] Yes. Thank you, Mr. Chairman. As mentioned, voting is now open for all items on the agenda submitted to you for the vote today. If you have already voted, there's nothing more that you need to do unless you want to change your vote. You will find the instructions to such effect in the documents tab, if you are joining us online. At any time, if you need assistance, you can speak to an attendant. And if you are here in person, you can speak to an attendant or you can reach out to us by e-mail, as indicated in the documents tab on your screen if you are online. Thank you for having confirmed your status as a Canadian or non-Canadian. This has allowed me to confirm that no adjustment to the variable voting rights will be necessary today.

[Interpreted] We ask shareholders send us their questions through the messaging tab on their screen. We plan to respond during the question period indicated on the agenda. This said, if you have any questions or comments that should be dealt with before the question period, please let us know clearly in advance and in a timely manner. In any case and in every case, once again, please use the messaging tab on your screen. If you are present in person, please go to the microphone in the middle of the room. In-person voting will all -- for all of the scheduled matters of business, it will be by ballot.

[Interpreted] There will be a preliminary formal scrutineers' report tabled later. Representatives of TSX Trust Company are here with us here today and have accepted our meeting Chairman's invitation to act as scrutineers. We thank you -- thank them for their assistance.

[Interpreted] The next item on the agenda is to submit Air Canada's financial statements for 2025 to the shareholders, which has been done. Our financial statements were published in February 2026 and may also be consulted in the documents tab on your screen. Mr. Chairman, the floor is yours.

Thank you, Marc, [indiscernible] this item on the agenda, either for us or for our auditor, so we'll move to the next items on the agenda.

[Interpreted] Thank you, Mr. Chairman. Five management proposals will be presented here today. All the proposals are described in the management proxy circular regarding our meeting. Based on the votes counted before the meeting was called to order and the number of votes that could be cast during the meeting. We know that all the resolutions submitted to a vote today will be approved by the necessary majority. In order to simplify our meeting proceedings, we have ensured that each of the proposals was moved or seconded in advance as the case may be by our colleagues from Air Canada, we thank them for participating in the meeting.

[Interpreted] The first item on -- put to a vote is the election of Directors. The nomination of the following 13 people was duly moved and recommended by the Board of Directors. Amee Chande, Chris Clark, Rob Fyfe, Michael Green, Jean Marc Huot, Eric La Fleche, Claudette McGowan, Rachel Notley, Madeleine Paquin, Michael Rousseau, Vagn Sorensen, Kathleen Taylor, Annette Verschuren. No other person was nominated for election as a director. Mr. Chairman, the floor is yours.

[indiscernible] for comments from our shareholders. I encourage you to vote by using the online platform or by filling your ballots as the case may be. We'll proceed with the remaining business of the meeting and the attendants will collect the ballots only once all votes are completed. Marc, would you move to the second item on the agenda.

[Interpreted] Thank you, Mr. Chairman. The Board of Directors also recommends voting for the appointment of our auditor, PricewaterhouseCoopers until the end of the next Annual Meeting of Shareholders. Mr. Chairman, the floor is once again yours.

[indiscernible] using the voting tab on your webcast screen or by filling your ballot as the case may be. Again, for those of you here in person, please keep your ballot until all votes are completed. Marc, would you move to the third item on the agenda, please?

[Interpreted] The Board also recommends that you vote in favor of the next proposal that it be resolved at on an advisory basis and not to diminish the role and responsibilities of the Board, the shareholders accept the approach to executive compensation disclosed in our management proxy circular provided in advance of today's meeting. Mr. Chairman, the floor is once again yours.

The vote is advisory and nonbinding, the Board takes it into account and consult shareholders to understand their views and ensure our executive compensation policies support Air Canada's long-term goals and shareholder value creation. To this end, we met with shareholders who in 2025, represented most of the shares voted against our approach to executive compensation and have benefited from their insights. We'll continue this practice this year.

Seeing no questions or comments. I encourage you to vote by using the voting tab on your webcast screen or by filling your ballot as the case may be. Again, for those of you here in person, please keep your ballot until all of the votes are completed.

[Interpreted] Marc, would you move to the fourth item on the agenda?

[Interpreted] Thank you, Mr. Chairman. The next item of business pertains to the adoption of our ordinary resolution improving an increase of the number of shares reserved and authorized for issuance under the long-term incentive plan of Air Canada. Mr. Chairman, the floor is yours once again.

[Foreign Language] The Board of Directors has determined it would be appropriate to increase the share reserve to provide an effective means to utilize incentive awards in future years. We're proposing to do so by replenishing the reserve by 6 million shares as described in our management proxy circular. Seeing no questions or comments, I encourage you to vote by using your webcast screen, voting tab or by filling your ballot as the case may be.

[Interpreted] Marc, would you move to the fifth item on the agenda.

[Interpreted] Thank you, Mr. Chairman. The next item of business pertains to the adoption of an ordinary resolution regarding the ratification of Air Canada's shareholders' rights plan adopted by the Board of Directors on March 21, 2023. The rights plan will continue to be effective until 2029. If this ratification is approved by a majority of the votes cast by shareholders at the meeting. Mr. Chairman, the floor is yours once again.

For questions or comments, I encourage you to vote by using the webcast screen, voting tab or by filling your ballot as the case may be.

[Interpreted] Marc, would you move to the last item on the agenda.

[Interpreted] Thank you, Mr. Chairman. As described in our circular, Air Canada received 2 proposals from the Mouvement d’e education et de defense des actionnaires, which appears in its Schedule B. Following our discussion with MEDAC and in particular, regarding our intention to hold an advisory vote on executive compensation at this meeting and provide disclosure in the circular regarding the results of a 2025 vote, MEDAC agreed to withdraw 1 of its 2 proposals, which will not be subject to a vote at this meeting. Air Canada agreed to reproduce the withdrawn proposal in its circular and to give MEDAC an opportunity to speak about it at our meeting. We will return later to the withdrawn proposal.

The MEDAC proposal entitled Increasing Participation in Annual General Meetings, particularly among small shareholders will be submitted to a vote. The floor is yours, Mr. Chairman.

Thank you, Marc. I would now ask MEDAC's representative, Mr. Willie Gagnon to present their proposal on shareholder participation, which is reproduced as proposal number one, to Schedule B of our proxy circular.

Mr. Gagnon, you have the floor.

[Interpreted] Hello, Mr. Chairman. Can hear you me clearly?

[Interpreted] Yes, we can hear you, Mr. Gagnon.

[Interpreted] My name is Willie Gagnon. And as usual, I represent MEDAC, Mouvement d’e education et de defense des actionnaires, and it's been the case for many years. MEDAC exists for now over 30 years. As you have said, we have sent 2 proposals and 1 will be submitted to a vote to strengthen shareholder participation in AGMs. The reason why we have sent this proposal to all companies with the shareholders is because last year, there was a quorum default system. And Air Canada has already thought about purchasing more shares. And this was worrisome.

[Interpreted] So we have noticed with -- and you'll see this in the graphic that we have submitted, produced by Broadridge that the participation rate of shareholders has decreased. Unlike the participation elsewhere, this is quite worrisome. So the company need to implement certain measures. The measures that we have asked for are already in place, measures 1 to 3. Now measure 4 is similar to the 1 that is with our proposal. You will see in the chart that if the shareholder increases -- participation increases or decreases, the company has refused. The information that is in this graph is available, but it's very complicated to understand. So it would be more simple for the company to produce such a graph. And if it had done so, we would not be in the situation.

[Interpreted] So whatever the results may be, we will continue to hope that the company produces this information, it would not be very expensive, and it would give important information to shareholders to see if they need to do more to maintain the participation rate. So we see that 35% of our shareholders are represented here today. And this is the quorum, but what is quorum. This is the information that we'd like to know.

[Interpreted] So we would invite all shareholders to support this proposal. And the other one that will not be subjected to a vote? Well, the reason why we sent it is because based on the preceding year, we have seen that we want companies to explain themselves. We expect that the advisory vote to be conducted and that it be supported. And when it's underneath a certain threshold, we would hope that the companies to give us the information every year.

[Interpreted] So given that Air Canada has accepted to give us this information this year, we expect not to have it voted on. And we hope not to have to send a proposal like this again. This is why we have accepted to withdraw this from a vote. Mr. Chairman, thank you very much. Thank you for the time.

[Interpreted] Thank you, Mr. Gagnon. Increasing our shareholder participation is an important objective for us, and we will continue to pursue this. However, for the reasons outlined in our proxy circular, the Board recommended that shareholders vote against proposal #1.

Seeing no further questions or comments. I encourage you to vote in respect of shareholder proposal #1 by using the webcast screen voting tab or by filling your ballot as the case may be. Given that this proposal is the last voting item on our agenda, I also encourage you to cast your votes now on this or any other prior proposal as we prepare to close the ballots shortly.

For those of you who are here in person, I now ask that when your ballot is complete, you please hand it to the nearest attendant. [indiscernible] Mike to share his annual remarks, I remind shareholders and proxy holders that they may submit their questions or comments to us at any time before the end of the question period. For those attending the meeting online, if they have not done so, they must vote or change their votes within the next minute since the voting function will be deactivated shortly, putting an end to voting on the items on the agenda.

For those attending the meeting in person, are there any more ballots to be collected? I believe everyone has now had time to complete and return their ballots. I will now ask the scrutineers to tabulate all the ballots and report back. We'll now pause the formal proceedings of our meeting to allow our CEO, Mike Rousseau to share his annual remarks. Mike?

Good morning, [Foreign Language] Thank you for taking the time to be with us today for Air Canada's 2026 Annual General Meeting. I'm very pleased to be joined in the room by some members of our senior executive team. For those of you attending in person, I encourage you to say hello to our executives. They love talking about all the great things Air Canada is doing. We, as always, are interested also to hear what's on your mind and your suggestions for ways that we can improve.

Before I begin, I would like to acknowledge the tragic incident involving Air Canada Express Flight AC8646 at LaGuardia Airport in March. I visited the scene the day of the accident. It was a humbling and powerful illustration of the importance of safety in what we do every day. On behalf of everyone at Air Canada, I extend condolences to the family and friends of the crew lost in the accident. Best wishes for the recovery of those injured and our deep regard for all involved.

I can assure you that we will learn from -- what we can from this incident and apply any lessons to making travel even safer. Air Canada delivered a strong performance in 2025. The results show the effectiveness of our business plan and the strength of our business model we have built since the end of the pandemic. In 2025, we generated record operating revenue of nearly $22.4 billion, an increase of $117 million from 2024. A particular note, premium revenues increased 2% year-over-year, outpacing the economy cabin by 3 points and representing about 30% of our total passenger revenues. But we also saw increased contributions from all segments of the business, including Aeroplan, Air Canada Cargo and Air Canada Vacations.

Adjusted EBITDA totaled $3.1 billion due to the very strong demand in the last 2 months of the year. We delivered $747 million in free cash flow. And we ended the year with total liquidity of $7.5 billion for a net leverage of 1.7x. Clearly, our results would have been much stronger, except for the labor disruption in the third quarter. However, we quickly rebounded with a very strong record fourth quarter to end the year. And yesterday, we reported another record quarter to begin this year.

Fourth quarter revenues reached $5.8 billion, up 7% year-over-year. These were driven by industry-leading passenger unit revenue performance and strong premium demand. Our Q4 adjusted EBITDA of $867 million in the quarter was 25% higher than the prior year, a record for our company for Q4. We also just announced a record Q1 2026 EBITDA performance. In the quarter, our revenue increased 11% versus Q1 of 2025.

Our adjusted EBITDA in the first 3 months increased more than 60% and free cash flow almost doubled to $1.6 billion. I believe 2 consecutive record quarters reflect the underlying strength of our plan and business model, and all stakeholders should be extremely excited as we move into the growth part of our strategic plan.

Throughout 2025, we showed financial discipline, keeping a high conversion from earnings to the operating cash flow. This enabled us to invest confidently in our future, deploying $2.9 billion in capital investments, expected to generate incremental returns going forward. Another outcome of our excellent performance was during the year, we returned more than $850 million to shareholders through share repurchases. We know this is especially important to you, and we will continue to search for ways to create and return value to investors.

Another underlying factor critical to our success is running an efficient airline. Operationally, 2025 was another year of improvement that showed the dedication and professionalism of all our teams. Our focus was on all aspects of operational improvement, led by our on-time performance and Net Promoter Score to strengthen the overall dependability of our schedule and our premium brand positioning.

In 2025, we operated more than 370,000 flights, carried over 45 million customers and achieved an average load factor close to 85%. We finished 2025 with an average arrivals of 14 or on-time performance of 73%. This is a 2-point improvement from 2024 and a 10-point improvement from 2023. Our Net Promoter Score for the year was above our target and up a healthy 7 points from the prior year. I was extremely proud of our employees when our customers recognize their hard work.

In 2025, Air Canada was voted by customers the best airline in North America at the Skytrax World Airline Awards at the Paris Air Show. We won in 9 categories of these -- at these awards, which are globally recognized as the industry benchmark. Skytrax also ranked Air Canada as the only North American carrier among its global top 20 airlines. And we were further recognized at APEX, the Passenger Experience Awards for the sixth consecutive year with a passenger rated 5-star Global Airline Award. I thank all our employees for their hard work and their dedication.

Another indicator of our success with customers is the growth of our Aeroplan loyalty program. Aeroplan passed the 10 million member milestone in 2025. It has now more than doubled its membership since the program relaunch. Fueled by a younger, more engaged demographic, Aeroplan is attracting members and partners, not normally associated with traditional airline loyalty programs. Aeroplan has a significant competitive advantage and an indicator that customers plan to continue booking with us far into the future.

An important aspect of customer service is the aircraft we operate and invest in as well as associated services we offer on board. Fleet renewal is an ongoing project, and we have plans to acquire 70 new aircraft with options to purchase another 40. This includes 35 aircraft in 2026 and 2 new aircraft types for our fleet. With the new aircraft, we are also introducing the next-generation cabin interiors. Last month, we unveiled the new long-haul cabin design, our glowing hearted standard. It features new seats, upgraded IFE systems and warm accents inspired by the textures and materials that invoke Canada's natural environment. We are especially excited about having the Airbus 321XLR join the fleet. Despite having a narrow body -- despite being a narrow-body aircraft, its long-range capability will let fly routes, we normally have to operate with larger planes. This gives us options for extending service to seasonal markets off-peak, and it will be effective in opening up new markets where we need to build traffic.

Because it is capable of long transatlantic flights, we are equipping the XLR with Lie-flat Air Canada signature seats. This is the first time we will offer live flat seats on a narrow-body aircraft, which is certain to be popular with the important premium traveler segment of our market. In a further evolution of our fleet, we are also transitioning our 737 MAX fleet to Air Canada Rouge. By replacing the older Rouge fleet, we will elevate the Air Canada leisure travel experience. For example, we will introduce seat-back entertainment and fast free Wi-Fi for Aeroplan members. It will improve the consistency and quality of the Rouge product for the benefit of our leisure customers and the entire Air Canada brand.

And finally, earlier this year, we announced our plans to acquire 8 Airbus A350-1000 wide-body aircraft to support our international network growth with rights to purchase another 8. The first delivery of the state-of-the-art aircraft is expected in 2030. To further distinguish the customer journey, we are also working to improve the airport experience. This begins with a new approach to customer service that we have launched with our frontline employees called care and class that encourages them to assist customers better on the spot in the moment.

Our program for this new approach, won a well-deserved award last year, the Customer Centricity World Series Awards. Coupled with this, we are deploying new processes, the new technology to improve important parts of the customer journey such as baggage tracking and delivery, aircraft boarding and lounge access. In terms of lounges, I hope those of you in Vancouver have already experienced our new Air Canada Cafe opened last month at Vancouver's domestic C Concourse. This is our second cafe at the airport, and it offers an expanded 84 seat premium space, inspired by West Coast design and culinary culture.

We also just opened a new 62-seat Air Canada Cafe in Montreal-Trudeau U.S. Departure pier that showcases the city's iconic coffee culture and local flavors. These investments form part of Air Canada's program to modernize its global lounge network with many more -- further openings and renovations planned for the future. Taken together, all these initiatives are converging to drive forward our New Frontiers strategic plan. The plan clearly sets out Air Canada's objectives and outlines its ambitions through 2030. A distinctive element of New Frontiers will be the expansion of our network.

As events of recent years have shown, our varied network and revenue sources play a critical role in delivering strong results despite shifting market conditions. This includes the earlier disruption to our Pacific flying due to the Russian overflight issue, events impacting the transborder market and more recently, the situation in the Middle East. Our diverse fleet and network allows us to mitigate disruptions in particular markets by quickly reallocating capacity to other markets.

Recognizing these advantages, we are building scale in our hubs and reinforcing our competitiveness of our global network. In 2025, we added 13 new destinations on 4 continents. This includes Vancouver. In 2022, we began the only nonstop flights to Bangkok, and they are becoming year round this summer. We started our service to Manila. And for this winter, we will operate the only nonstop flight linking North America to Sapporo in Japan from the city. These exciting route additions represent our commitment to Vancouver, our Pacific Gateway.

In support of this, we've also established a Rouge crew base at Vancouver, which will give travelers going to and from the city and BC additional leisure options. And a significant investment for our employees in the city, we will soon begin operating our expanded simulator training center. Back East, our hubs in Toronto and Montreal have the best geographical placement to connect Europe with Latin America.

In the last quarter of 2025, we bolstered our competitiveness to better capture the counter seasonal flows between those markets and grow our demand base outside Canada. Our strategy is also to diversify our Sixth Freedom revenues, which increased by 10% in 2025 versus 2024 to reach record levels. In Q1 of 2026, we further increased Sixth Freedom by 18% versus Q1 2025. In support of all this, we just started transborder flying from Billy Bishop Airport in downtown Toronto to major business centers in North America, reflecting our commitment to making business travel easier for our customers.

For this summer, we will add several European routes to our network. And along with the Bangkok service from Vancouver, we introduced non nonstop flights to China from Toronto. For next winter, we've already announced the addition of the Sapporo and Quito to our passenger network and last month, we announced new flights from Toronto and Montreal to Tenerife, the only nonstop service between North America and the Canary Islands. And there are also several new sun destinations coming. But more than just provide a geography lesson, New Frontiers is targeting approximately $30 billion in revenue by 2028. Equally, if not important -- more important, we intend to increase our adjusted EBITDA margin and free cash flow through the same period.

Against this backdrop, 2026 will be an important year, managing several complex external factors as well as taking delivery of the majority of our new aircraft in the back half of this year. We are confident our investments are setting the stage for improved performance and greater efficiencies in 2027 and beyond. We are building for the long term. And I'm convinced the decisions we're making today will continue to strengthen the airline for years to come. It has been a great privilege and honor for me to lead Air Canada. I thank our Board members, both current and past, with their support, their guidance and encouragement over the years.

The success we have enjoyed since the pandemic is a result of a tremendous team effort. Our recent Q4 2025 and Q1 2026, record performances and effectively dealing with a volatile fuel price and potential supply environment is just the latest example of how good this team is. I also wish to thank all of my colleagues at the airline. One of the great rewards of working at Air Canada is the opportunity to meet and work with so many incredibly talented people at all different positions here at Air Canada. I was just at the awards of excellence event last week, which recognizes our best employees as voted on by their peers and colleagues.

Another group I wish to acknowledge as our shareholders. I have met with and heard from all of you over the years.

I do believe that you will be rewarded as we execute New Frontiers. Your decision to invest in our company is a very clear expression of your confidence in all of us at Air Canada. And I can assure you of our deep commitment to repay this trust. And finally, I want to thank our customers. It is our objective and our entire focus to earn their loyalty every day. by flying everyone in comfort and safety to their destination, wherever in the world that may be. Thank you. [Foreign Language].

Thank you, Mike. [Foreign Language] At this time, received a preliminary report from our scrutineers. I will ask Marc to share the results from the tabulation completed after all proposals were presented and voting closed.

[Interpreted] Thank you, Mr. Chair. Based on the number of final votes that have been cast and the scrutineers of preliminary tabulation, we confirm that the 13 nominees for election as directors were elected. Their term of office will end at the close of the next annual meeting of shareholders or until his or her successor is duly elected or appointed. The shareholders also approved the appointment of our independent auditor, PricewaterhouseCoopers, the advisory vote on the Board's approach to executive compensation, the increase in the total number of shares reserved and authorized for issuance under the LTIP and the ratification of Air Canada shareholders' rights plan.

[Interpreted] Finally, shareholders that did not approve the shareholder proposal relating to participation in annual general meetings. The final voting results will be filed on SEDAR + after the meeting. Mr. Chairman, the floor is yours once again.

Thank you, Marc, and thank you to all our shareholders for their votes and continued support. I'm especially thrilled to officially welcome Rachel and Eric to our Board. We look forward to the insights you will bring as we continue to discuss Air Canada's future.

[Interpreted] Rachel, Eric, welcome. We look forward to working with you. I'm pleased to now welcome the Q&A portion of the meeting.

For the questions that you submitted in advance of the meeting, will start by answering one of those.

[Interpreted] For those who'd like to ask a question, please come to the mic and to confirm their status. If you are online, you can ask a question, with the messages tab on your web.

All comments as possible can be addressed. I would ask that questions remain concise, ideally not exceeding a couple of minutes. Please limit yourself to one question or comment at a time, allowing others to take their turn. If your question has already been asked by someone else, I'd kindly ask that you refrain from repeating it. We ask that you reserve your comments and questions to topics that may be of interest to all shareholders rather than other personal nature. Marc will now read the first question submitted in advance.

Thank you, Mr. Chair. The first question we received in advance reads as follows: could you clarify how the Board is weighing core leadership competencies such as safety, performance, strategic aptitude and the ability to drive shareholder and employee value, relative to language requirements in the CEO selection process? Given that the pool of candidates with top-tier aviation leadership experience may be limited, how do we balance the importance of bilingualism with the need to secure the strongest possible candidate to lead Air Canada effectively?

Thank you for the question. As I stated in my opening remarks, succession planning has been a long-standing priority of the Board and our CEO role specification includes having proven airline experience, a track record of setting enterprise strategy and for delivering results at scale. The Board's performance criteria also include the ability to communicate to Canadians in both official languages. All these criteria are important, and we will not compromise on any of them.

We will now take a question from the floor, if any. If not the case, Marc, can you please read the next question.

The next question we received in advance reads as follows: how do you explain the stagnant stock price? Compared to Delta or United, Air Canada's share price is drastically low. Given the high debt, cost pressures and geopolitical issues, what measures are you taking to derive a healthy balance sheet reduction in costs, which ultimately drives higher share price?

I'll take that question. So first of all, thank you for the question. I think that hearing Mike, we should all have a lot of positive confidence in what's going forward in terms of our plan at Air Canada. We've taken significant steps to improve the balance sheet over the last few years. We came out of the pandemic with 5x leverage. And over the last 2 to 3 years, we've been able to take that down to 1.4x leverage. So the balance sheet is very, very strong. Our liquidity actually and our leverage are peer benchmarks in the industry. And the strength of that balance sheet is allowing us to make very important investments in the future.

I think Mike outlined the New Frontiers plan, but we also did speak about it at our most recent Investor Day in December 2024. The plan that we put forward creates significant value for shareholders. It allows for margins to expand and create sustainable cash flows for the very long term. We continue to take very important steps in improving our capital allocation. So beyond the investments in the airline. We've decreased debt. As I said, we've also bought back over $1.5 billion in stock in the last 15 months, and that has been to the benefit of shareholders. And we'll also allow them to participate in future profitability and growth as the airline continues its plan.

And finally, we did announce yesterday that we do have an August 2026 maturity of USD 1.2 billion. And with the strength of our balance sheet and liquidity, we will be able to take that liquidity out and effectively extinguish the debt. So I do have a lot of great confidence in the future of Air Canada, and we're confident that it will create a lot of value for shareholders.

Thank you, John. We'll now take a question from the floor, if any. If not the case, Marc, can you please read the next question?

[Interpreted] Thank you, Mr. Chair. A question from Mr. Gagnon that I am going to read. Other -- the fact that MEDAC has asked and received the languages mastered by those involved in the company. We have always wanted for the Board to assume its responsibility on this issue. We believe that the criteria of language is part of the mandatory points for the next CEO. So the next CEO will have to master the 2 official countries -- languages rather of the country.

And if somebody does not master 1 of these 2 languages, how will you deal with that?

[Interpreted] Thank you, Mr. Gagnon, for your question. I'd like to refer you to the comments from the CEO (sic) [ Chair ] on the recruitment process for the next CEO. The criteria that are associated with the next CEO. And I'll come back to what he said that he confirmed that our next CEO will have the ability to express themselves in French. The process is evolving. There are some internal and external candidates that are quite strong. And I'd like to remind you that the Chair mentioned that there will be no other comments on the recruitment process until the announcement is made. Thank you, Mr. Gagnon. Thank you for your interest and for your question.

Thank you, Marc.

My name is [ Rod Holme ]. I am an independent beneficial shareholder. I have attended many of these meetings in the past, and my impetus for attending this meeting was to be able to express my thanks to Mike Rousseau for his leadership over many years, and I've mentioned to him earlier that I met him on one of his first meetings. And also to just to express my own personal, I was so worried about how the tragedy in New York was handled. And I wanted to illustrate that by a very close relative who had worked at Air Canada and had apparently been keeping in touch with many of his colleagues said that their network lit up, and it was such a tragedy because in all the years that they had worked together, nothing like that had happened.

So when you mentioned, when you asked for a moment of silence, all the other people who have been affected, it's probably a lot more than most people would have deemed to realize given the number of people who have worked with the airline. Thank you.

Thank you, [ Mr. Holme ], for these remarks. Really, really great remarks and much appreciated. Thank you so much. Are there any other questions from the floor, please?

Good morning. [ Paul Trudie ], independent shareholder. I'm wondering with ICANN opening up the second application window yesterday. Does Air Canada have any intention of applying for its own new TLD or any others.

Sorry, could you repeat the question?

Yes. ICANN, the people who run the Internet. Yesterday, they opened up the second application window for new top level domains. I'm wondering, will Air Canada be applying for its TLD.

The quick answer is no, but I'll introduce you to Mark Nasr and to Craig Landry. Craig oversees technology for the company, and Mark oversees operations. and they can provide some more details to you when the meeting is over.

Well, might I suggest you speak to PwC about it because they registered theirs back in 2012.

Are there any other questions from the floor? If not the case, there is another question that came in. So can you please read the last or the next question, Marc?

Thank you, Mr. Chair. So the third question we received in advance was for labor relations, have you concluded the arbitration process with CUPE, if so, what was the result?

I'll ask Mike to take that question, please, Mike.

Thank you for the question. Thank you, Vagn. So the quick answer is we do have a new 4-year agreement with CUPE. We signed a -- and to provide a little more detail, we signed a tentative agreement on August 19, 2025. One item went to arbitration around wages. The federal arbitrator issued their decision on February 17, 2026. And the arbitrator upheld that wages as agreed to in the tentative agreement would continue throughout the 4-year contract with the exception that wage rates for Rouge flight attendants would be increased by 1% in the first year. So again, we do have a solid 4-year agreement with our flight attendants going forward.

Marc, are there any other questions? Not coming in. Are there any other questions from the floor? No. Seeing no further questions in the meeting room or online, the discussion of matters for shareholder consideration is completed as we reconvene the formal part of our meeting.

[Interpreted] Marc, do we have any other questions that have been raised or not yet dealt with?

[Interpreted] No, Mr. Chairman, there are no other questions that we have not yet responded to.

I want to thank you all for joining today's meeting and for your questions.

[Interpreted] We are thrilled to continue to discuss with you, and we are looking forward to having conversations with you over the course of the year.

2026 Annual Meeting of Shareholders has concluded.

[Interpreted] I now declare the end of our 2026 Meeting of Shareholders. Thank you, and please enjoy the rest of your day.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]

Thank you for standing by. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Air Canada's First Quarter Earnings Call. [Operator Instructions].

It is now my pleasure to turn the call over to Amanda Murray, Head of Investor Relations. You may go ahead.

Thank you, Tina. [Foreign Language] Welcome to Air Canada's First Quarter 2026 Earnings Call. Thank you for joining us today. On the call with me are Michael Rousseau, our President and Chief Executive Officer; Mark Galardo, our Chief Commercial Officer and President of Cargo; and John Di Bert, our Chief Financial Officer. Other members of our executive team are also with us and available for the Q&A portion of the call.

Before we begin, I remind everyone that today's discussion may contain forward-looking information regarding Air Canada's outlook, objectives and strategies. Actual results could differ materially due to various assumptions, risks and uncertainties. Please refer to our Q1 2026 earnings release, our 2025 full year and 2026 first quarter MD&A and filings available on aircanada.com and on SEDAR+.

With that, I will turn the call over to Mike.

Thank you, Amanda. [Foreign Language] everyone. Thank you for joining us today. Before I begin, I'd like to acknowledge the recent incident at LaGuardia Airport. On behalf of everyone at Air Canada, I want to express my sincere condolences and sympathy to those affected. Our thoughts are with the passengers, crews, firefighters and families impacted. Safety remains the foundation of our industry and our first priority, which is why we remain engaged with the U.S. and Canadian authorities as they continue their investigation of this incident. I also want to thank the employees who helped in our emergency response by supporting the families of affected passengers and crew, taking care of our customers and keeping the operations running.

Turning to our results. In the first quarter, we delivered a year-over-year growth of 61% in adjusted EBITDA, reflecting disciplined execution in a volatile operating environment. I truly believe the last 2 consecutive quarters of record results reflects the underlying strength of our plan and business model, and all stakeholders should be extremely excited as we move into the growth phase of our long-term strategy.

We continue to make progress on our New Frontiers objectives, supported by the strength of our diversified network, premium positioning and loyal customer base. This gives us the flexibility to align capacity with demand across the year and deploy it where returns are the most attractive, a capability that was evident in the first quarter, reflected in strong passenger revenues, solid premium and corporate performances and healthy results at Air Canada Vacations.

Since late February, the situation in the Middle East and the sharp increase in global jet fuel prices have created a significant external shock for our industry. The pace of that increase is testing demand resilience across commercial aviation and reinforcing the need for discipline. This is not unique to Air Canada. It is an industry-wide challenge that affects how airlines think about capacity, pricing and risk. In this environment, our focus is on staying flexible, making deliberate decisions and managing the business to prioritize returns and protect cash flow and balance sheet strength.

With this backdrop, we suspended our full year guidance and provided Q2 guidance. The Q2 guidance reflects our expectation to offset about 50% to 60% of the incremental fuel expense through disciplined commercial and cost actions. Despite fuel-driven fare increases, we continue to see strong demand across the network and throughout the booking curve. History shows that in periods like this, airlines with scale, diversified networks, premium demand exposure, a strong brand and resilient balance sheets are better positioned to navigate turbulence and emerge stronger. Air Canada has these attributes, and we are laser-focused on disciplined execution, prioritizing returns and cash generation and continuing to strengthen the business for the long term.

Importantly, strengthening our business means taking care of our people. I'm pleased to say we successfully negotiated 2 new labor contracts agreements with Unifor for our pilot and flight attendant crew scheduling teams during the first quarter. This reflects our continued commitment to constructive direct union management relations and to fostering a workplace where collaboration drives long-term success. In the operations, this quarter was another reminder of how much progress the team has made. Q1 brought several challenges, unusually cold winter, various ice storms, disruption in certain sun destinations and as I noted, the evolving conditions in the Middle East. In each case, our operations teams responded with focus and compassion, keeping the airline moving and taking care of our customers.

I want to thank our employees. Their dedication and professionalism are at the core of the Air Canada brand and important contributors to the sequential improvements in customer sentiment. That connection between our people and our customers is fundamental to who we are as an airline. It is what will continue to strengthen Air Canada.

As we look ahead, we are entering an important phase of fleet and product advancement. We recently took delivery of our first Airbus 321XLR, which is scheduled to take its inaugural flight on June 15. With additional aircraft deliveries expected this year, along with 2 787-10s, these aircraft will strengthen our premium offering. We have completed 7 Boeing 737 MAX conversions to Air Canada Rouge and are on track for 45 by year-end. Together, our people, investments in fleet, product, digital and customer experience puts us in a solid position to take advantage of as opportunities arise and to execute on our new frontier objectives.

Before I wrap up, I announced my upcoming retirement last month after close to 2 decades with Air Canada. I look forward to supporting our company through this important transition period. I firmly believe Air Canada will continue its flight path from a position of strength with a dynamic leadership team, strong balance sheet and a clear strategy. I'm confident the company is well positioned to continue building on the progress we've made.

Thank you. Over to you, Mark.

Thank you, Mike, and good morning, everyone. [Foreign Language] I'd like to thank our employees for their dedication and our customers for their continued support and loyalty. Our consecutive quarterly record results are another clear validation point that Air Canada has the strongest commercial foundation in its history. These industry-leading results are the product of 4 key components: one, international revenue growth supported by Canada's underlying demographics; two, structurally higher-yielding and brand loyal customer segments; three, a diversified and growing Sixth Freedom franchise; and lastly, disciplined capacity management that led to a leading load factor performance amongst our peers.

Q1 operating revenues and passenger revenues both grew 11% year-over-year to $5.8 billion and $4.8 billion, respectively. These results were largely driven by an 8% increase in PRASM on 2% more capacity. Our international revenues increased 17% year-over-year, reflecting sustained intercontinental demand. Notably, the Atlantic continued to perform strongly with solid mid-teen unit revenue growth in Q1.

We continue to grow into higher-yielding segments with premium revenues growing 11% year-over-year. In fact, business class revenues outpaced the economy cabin by 2 percentage points. Corporate revenues increased 14% on strength across all geographies, which in part is supported by tailwinds from Canada's diversifying trade objective. We produced a record Sixth Freedom results on an increasingly varied mix of passenger flows. Our successful expansion into Latin America drove more than half of the 18% year-over-year increase in Sixth Freedom revenues.

Lastly, our first -- our record first quarter load factor and unit revenue performance are a testament to the strength of our commercial model and disciplined capacity management. With load factors roughly 5 percentage points above some of our North American peers, we continue to demonstrate our strong ability to execute against our strategic priorities.

Building on this momentum, cargo, an important contributor to the profitability of our long-haul franchise with revenues growing 4% year-over-year in Q1. And despite disruptions in Cuba and Mexico, increased sun capacity enabled record first quarter revenues for Air Canada vacations and was the driving force behind a 19% increase in other revenues. Taken together, our first quarter results demonstrate significant progress in reducing Air Canada seasonality and speaks to the differentiated, diversified and resilient commercial strategy that is driving continued top line growth.

Looking ahead, we are diligently managing an evolving geopolitical and macroeconomic landscape. Air Canada was one of the first airlines to implement fare increases as the crisis unfolded. Since then, we have implemented multiple rounds of passenger fare and ancillary increases, and we are ticketing forward yields at mid-teens above last year. Cargo has also taken action, including increasing spot rates and introducing a carrier surcharge to the market.

We are seeing resilient demand across most geographies and customer types. Our commercial model allows us to be competitive and attract different customer types, enabling a unique ability to tap into more resilient and loyal customer segments. We're also proactively reducing lower margin and hub overflight routes and consolidating frequencies where optimal. As of right now, our capacity outlook for the second quarter calls for a year-over-year ASM growth of between 0.5% to 1%, and we remain agile and disciplined in capacity management in the latter half of the year.

In total, we believe that our commercial and cargo actions will contribute to a recovery of the incremental fuel expense of approximately 50% to 60% in the second quarter. We continue to see strong demand across the network and throughout the booking curve into the latter half of the year. Importantly, we recognize that the situation continues to evolve, and we're ready to implement a variety of adjustments as required.

Shifting to other topics. Air Canada's network remains one of the most far-reaching in North America, and the majority of our new routes for 2026 are booking in line or above their comparable set. We will be introducing our first A321XLR to customers in a few weeks' time, marking an important milestone in Air Canada's next chapter. As the only Canadian airline to offer lie-flat seats on a narrow-body, this aircraft will be deployed shortly on transatlantic and key North American markets from Toronto and Montreal.

To close, Air Canada is using its strong commercial foundation and differentiated position to drive these results. We have proven that our commercial performance is resilient in volatile conditions and that our teams are executing on our long-term strategy.

Over to you, John.

Thank you, Mark. [Foreign Language] I thank our employees who kept operations running smoothly and continue supporting our customers with caring class. The first quarter was a continuation of the strong execution we delivered in the fourth quarter of 2025, underscoring the effectiveness of our plan and the progress we're making across the business.

Adjusted EBITDA increased 61% year-over-year to $623 million, a first quarter record, representing a margin of 10.8%. We reported adjusted loss per share of $0.05 in the quarter compared to a loss of $0.45 in the first quarter of last year. These results exceeded market expectations and demonstrated strong commercial execution, network optimization, operational resiliency and continued progress on cost management initiatives.

As anticipated, adjusted CASM increased 5.5% year-over-year. This increase was primarily driven by the expected impact of higher labor costs related to previously negotiated agreements. It was further strained by operational inefficiencies related to capacity constraints during the quarter, including cancellations to the Middle East, weather disruptions in the Northeast and localized challenges in certain sun markets. Importantly, however, total nonfuel costs in the quarter were broadly in line with our internal expectations.

Turning to fuel. Volatility increased meaningfully as the quarter progressed. Prices rose sharply in March and more than offset the benefits we saw earlier in the period. As a result, fuel expense was broadly flat year-over-year in the first quarter. Lower priced inventory and our fuel hedging gains helped moderate the impact in Q1. We do expect elevated fuel prices to be more impactful in our results beginning in the second quarter.

Cash flow performance was strong. We generated a record $1.8 billion of cash from operations in the quarter, reflecting a solid operating performance and the momentum of seasonal working capital built ahead of the peak travel season. We note that this was supported by strong advanced ticket sales and the effect of higher fares. Free cash flow delivered a record $1.6 billion, and it included $283 million in proceeds from the first in a series of sale and leaseback transactions that will restore our level of fleet ownership to our historical levels of 65% to 70% over the next 2 years.

Our operating cash flow strength, combined with the planned benefits of our sale-leaseback strategy and a sustained level of solid on-hand liquidity allow us to repurchase close to 8 million shares, deploying $142 million under our active NCIB authorization. This brings our total cumulative investment in the share repurchases to $1.5 billion since the inception of our $2 billion target buyback program. We announced at December 2024 Investor Day.

We ended Q1 with approximately 287 million shares issued and outstanding, representing a 20% reduction of our share count as at September 30, 2024. We continue to protect the strength of our balance sheet and maintain our focus on financial resilience. We ended the quarter with a net leverage ratio of 1.4x EBITDA. We will now use our financial strength to improve our gross leverage ratio, and we'll be repaying our upcoming August debt maturity using on-balance sheet liquidity while staying comfortably above our stated liquidity target of 15% of revenues.

As we complete the debt paydown, we will pause the share repurchases in the near term, but we will revisit this decision in the second half of the year. We are executing our financial strategy with discipline as we optimize capital allocation in line with our priorities, prioritize the balance sheet strength and preserve flexibility, make ROIC accretive investments in the airline and return cash to investors. We are very well positioned to play both offense and defense as we navigate the current environment.

Let's now turn to our outlook. Due to continued uncertainty and variability of outcomes for future jet fuel prices, we are suspending our full year 2026 guidance. However, we are introducing Q2 guidance to share what we are expecting in the current quarter. We anticipate Q2 adjusted EBITDA in the range of $575 million to $725 million, and we expect to grow capacity by 0.5% to 1% year-over-year in the quarter. We reflect the forward fuel curve as of April 28 in our Q2 assumptions of USD 4.15 per gallon.

Including transportation, taxes and hedging gains, our planning rate is CAD 1.28 per liter. We are ticketing forward yields at mid-teens above last year, reflecting around USD 4 per gallon in equivalents. We expect to offset about 50% to 60% of the incremental fuel expense through disciplined commercial and cost actions, including the benefits of fuel hedging. The actions to mitigate the impact of higher fuel prices will have some adverse effects on unit costs. We have made some adjustments to Q2 and the second half capacity, and we will continue to monitor the need for further reductions. Additionally, we will see some impact from increased absolute sales and distribution costs given higher fares.

We remain focused on containing costs and have initiated actions across the organization to generate variable cost savings through improved planning, optimization and operational discipline. We remain focused on execution and agility, and we will continue monitoring conditions closely and be prepared to act, taking deliberate actions to protect our results and preserve financial strength.

So to close, in the face of heightened volatility, our priorities are clear: one, stay laser-focused on managing the controllables, including commercial actions, capacity management and cost containment; two, protect cash generation and balance sheet strength; and third, preserve and advance our long-term value creation strategies. Despite the short-term challenges, we are very well positioned. We remain poised to play both offense and defense as the current environment evolves and ultimately find stability and resolution.

With that, back to you, Amanda, for questions.

Thank you, John. Tina, please open the line for questions from our analysts.

[Operator Instructions] And our first question comes from the line of Tom Fitzgerald from TD Cowen.

I was just wondering if you could maybe unpack a little bit of your -- what you're seeing in terms of revenue across the geographies and by customer segment in the second quarter?

Sure. So Tom, when you look at it, North America, obviously, is much more resilient. Going into Q2, we had fewer RPMs booked relative to our Atlantic and Pacific, where going into the quarter, we already had the majority of our baseload basically booked. So if you look at Q2, you'll see a much higher yield in North America. You'll see higher yields in the transatlantic. The Pacific is a bit more challenging in that some of the carrier surcharges are regulated by governments in Asia, particularly Korea, Japan, China, et cetera. And if you look at it by cabin, again, there's a clear trend where premium yields and demand continues to be really, really strong. And I think you'll see that carrying all the way through Q3 and the early part of Q4.

Okay, great. And that's very helpful. And then just as a follow-up, just kind of like as it sits right now, just how you're thinking about maybe like thresholds for cutting capacity in the second half of the year. I don't know if we should expect maybe second half of August or post September or beyond, that maybe is the focus, just given how strong 3Q usually is. But just any framework there? And then just in tandem with that, just how you think about managing this CASM ex close?

On the capacity side, we're really going 2, 3 months at a time here. So we've now brought July, August and the early part of September in our window. It's a little bit early to tell for Q4 because the demand signals that we're seeing for Labor Day and beyond suggest that we're really looking at a strong period of demand. And that's consistent with the last 2 Q4s, which were record Q4s for us. But definitely, for July and August, we're going to be reducing capacity trimming lower profitability flights, hub bypasses, kind of marginal frequencies on routes where we have a substantial amount of frequencies. But for Q4, it's still a little bit early to make a definitive statement on how much we're going to cut or keep in place.

Your next question comes from the line of Fadi Chamoun with BMO.

Mark, I just wanted to get your thoughts like what are you seeing in terms of bookings going into the third quarter? How are they holding up? And maybe if you can give us a sense of how much kind of demand degradation if you're seeing, if any, given the higher prices that you have kind of put in place?

So Fadi, the answer for Q3 is we are not seeing any demand degradation right now. All of our services are still above last year in terms of current bookings on hand, but also new bookings to come. We've been in the green for the better part of the last 2 months. So despite multiple increases in fares, we have not seen demand degradation right now. Going into Q3, our load factor or book load factor is about 2 points ahead of where it was last year at this time.

Okay. Just a follow-up then. So in the second quarter, you're saying the hedging and higher fares offset 50% to 60% of the higher fuel cost. I'm guessing the higher fares lag a little bit in the recovery because of the timing. Like how would you think about that coverage going into the third quarter, assuming fuel is at the forward curve basically that we're at now?

Yes. And that changes all the time, right? So if you would have asked me that question a week ago, we actually had a curve on April 22. We've updated that to 28. We would have been well into the 70s. Probably now maybe somewhere in the low 70s still attainable, and we'll watch this thing as it moves around, right? I mean the last couple of days have been very volatile, so hard to tell. But we're having pretty good recapture. And I would say that Q4, obviously, very good.

Okay. And you have no hedging, I'm guessing for like Q3 or after?

Correct. Correct. That's a straight go through on fuel, yes, in the second half.

Your next question comes from the line of Konark Gupta with Scotiabank.

I had a follow-up on the fuel side. John, if you can remind us what would have been the net impact of fuel price in March or Q1?

I missed that question. Can you repeat it to me, please?

Yes. So in Q1, I know you guys were hedged to a degree and you had some lower-priced fuel inventory as well, right? I'm just trying to get a sense of how much fuel price would have impacted the EBITDA in Q1.

Okay. Good. Sure. So we had about a $90 million headwind on fuel at a gross level and about half of that was absorbed by the hedging. So we still were left with probably about $55 million of net-net headwind.

And in terms of demand environment, Mark, it seems like the booking curve is pretty strong even in Q1 or Q2, Q3 now. Like where do you see your network on a relative basis, there's more demand elasticity. I mean, is it by cayman maybe or by region, but where do you see the elasticity starting to show up now?

It's a bit early to comment on elasticity because, again, when we look at it by geography or by point of origin, there's nothing that suggests that things are slowing down. And of course, there is a little bit more pressure in the lower segments of the market. Those might be a bit more price sensitive. But on the premium side, we see good elasticity and good willingness to pay. And obviously, we're more exposed to those segments than others might be.

Our next question comes from the line of Savi Syth with Raymond James.

I was just wondering if you could talk a little bit more about the Sixth Freedom. I know you mentioned seeing a lot of benefit from kind of LatAm as you've seen kind of much of the last year, I think. I was curious if you're seeing any benefit from perhaps the Middle East hub closures or just the fare increases from U.S. airlines, if any of that, you're seeing kind of an acceleration on that side of the business as a result of some of those events?

Yes. So Savi, a couple of ways to answer this question. So firstly, in terms of Middle East exposure, that doesn't really do much for us on the passenger side because we just have a single flight to India, and that's performing very well, obviously, with the situation in the Middle East. The benefit is more on the cargo side where spot rates have gone up and the dislocation is quite significant.

On the Sixth Freedom side, when it comes to U.S. to Europe and inbound Europe to U.S., we're looking at low single-digit growth in terms of revenue. Really where we've seen the growth is LatAm to Europe, LatAm to Asia, where we had almost half of our 18% growth in revenue in Q1 was on that sector. We think for us, that's just the beginning. We have a geographic advantage that we need to exploit. So more to come towards the latter half of this year on that.

That's helpful. And if I might just follow up on kind of Tom's first question there. Just curious how much of maybe each quarter was sold prior to the fare increases? And just trying to understand that mid-teen yield when we'll start to kind of really see that come through in the quarters.

Yes. So Savi, going into Q2, we had about 50-odd percent of our bookings already in prior to the -- obviously, the prices. And then going into Q3, it's about a quarter.

Our next question comes from the line of Daryl Young with Stifel.

I just wanted to ask a question around the seasonality comment that you made regarding Q1 and whether you're able to sort of ring-fence how much of that strength was maybe pulled forward of what you would have traditionally expected in Q2, Q3 time frame or any sort of metrics you can put there on how much of a shift in seasonality has happened?

Yes. That shift in seasonality is kind of an intended consequence of what we're trying to do here. Yes, Easter has shifted from April -- late April into the early part of April. It did give some benefit to March. But actually, we had substantial PRASM gains in January and February, led by strength on the transatlantic and strength that we're seeing on our LatAm Sun business. And those are obviously 2 intentional strategies to reduce our seasonality.

Perfect. And then just in terms of fuel management and availability heading into the peak summer season, can you maybe just give us a bit of color around how you're feeling about security of fuel in Europe?

Thanks. I'll start by saying that we're -- we feel very good about our Canadian hubs, and we have significant infrastructure and inventory, and we also have pretty good supply fluidity here. So to your point about Europe, we talk to suppliers every day. And I would say over the next 8 weeks, it looks like that remains solid, and they've done a lot of work on their end in terms of validating their supply chains and capacity to support. Of course, we'll continue to watch this like everybody else as we get deeper into some of the uncertainty here. We're also making some adjustments and able to adjust gauge and do other things to support if there were some form of rationing, we could probably also manage some of the fleet to be able to accommodate that with more fuel-efficient jets into some of the destinations that will be affected.

Your next question comes from the line of Cameron Doerksen with National Bank.

I guess I wanted to ask a bit about what you're seeing from a competitive point of view. I mean, obviously, you've raised your fares quite a bit here to offset fuel. Are you seeing some of the competition, I'm thinking particularly in domestic market doing the same thing? And have you seen, I guess, the proper capacity adjustments from some of your competitors as well as you look ahead to the summer?

Yes. So again, the market is very dynamic. So obviously, what we see today might differ in a couple of weeks' time. But generally speaking, fare increases have been adopted by the market and our competitors almost unanimously across America. And in terms of capacity reductions, I think we all have more or less the same philosophy. We're trying to go at this 2 months at a time because obviously, this could change on them. What we're seeing is competitors are taking capacity out in May and June and left their summer schedules relatively intact.

Okay. And just I guess, maybe philosophically, I mean, you've obviously increased fares as the industry, and we haven't seen a significant degradation in demand. I mean, is this a lesson learned, I guess, for -- in the future when fuel prices go down that you can probably maintain, I guess, some of these fare increases?

This can play out multiple ways, Cameron. Time will tell.

Your next question comes from the line of James McGarragle with RBC Capital.

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Just wanted to ask on the capacity that, that's being trimmed versus your original plan. So how should investors think about the adjusted CASM in Q2 and then during the rest of the year? And is that prior cost reduction program sufficient to kind of hold unit costs in line with the prior framework given the lower-than-planned capacity?

Thanks for the question, James. I'd say that -- and I mentioned this on the last call, but I think that the profile on the front end of the year, the first half is higher, quite a bit higher than the second half. Second half of the year probably feels more like an inflation type of year-over-year growth, first half of the year is higher. There'll be a little bit of pressure here, and it was planned pressure, but there's also some aggravation in Q2. You have things like a higher fare will attract a higher sales commission. And while that's a revenue driver in the sense that it's driving the higher fare, it sits in the CASM unit cost calculation. So we'll have a little bit of both there.

The other thing is we are seeing pretty high load factors as we look at the second quarter. And those load factors when they are high, they tend to have an impact on unit cost. So a little bit of capacity, sales and commission and high load factors. The mix of all that in the end does help the revenue side. And so the CASM number will be a little higher. But overall, we think we'll manage it. And the cost reduction initiatives are really to just continue to keep some flexibility here as we look at back end of the year, do we want to adjust capacity further and take off some of the sting of that.

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I appreciate that. And then just on the transborder, I mean as you kind of put through some of these capacity cuts, are you seeing load factors and yields beginning to stabilize? And would you say that right now, you have enough visibility to call it in that entity? Or do the outlook kind of remain a little bit too fluid right now to kind of commit to a recovery time line there? And I'll turn it over after that.

James, we had a really solid Q1, and we're going to have a really solid Q2 on transborder, we're seeing yield, load factor and significant PRASM gains. And part of this, obviously, is because the demand supply balance is a little bit more in our favor. But certainly, there's also been a bit of a soft rebound in the market. But generally speaking, our performance on the U.S. is quite strong.

Your next question comes from the line of Sheila Kahyaoglu with Jefferies.

Maybe if I could just start off with how do you think about your fleet from here if fuel stays at these levels or higher? How are you thinking about how that will impact fleet planning and potential retirements?

I would say that for the time being, we're focused on navigating this. We're coming with a really strong balance sheet. As we kind of work through 2026, we'll have a better view of what the longer-term impacts are. Right now, we're seeing demand being very resilient. And of course, fuel is peaking now, but I would expect that at some point, it would normalize whatever the normalized levels will be. What's important to understand about our growth plan is that it's about structural demand. And we've talked about this before, but it really has a lot to do with restoring some wide-body capacity where we are underserving and continuing to drive Sixth Freedom. So the plan for us to continue to build out that fleet -- we'll modify in the medium term, short term as necessary, but the longer term is to continue to grow.

On the retirement side, we do have 319s and some older aircraft, and we've been pretty active even in the current year. I think it's somewhere like 14 or 15 aircraft will be retired. That will continue as planned. And you know that we're also going to standardize our Rouge fleet, and that will bring one of the most fuel-efficient and purpose-built fleets for leisure travel. So we think that our whole fleet plan still works together. And in the short term, if we need to make some tweaks, we'll do that just to navigate this.

And then maybe, I guess, somewhat related to the retirement question, but more market share focused. How do you think about this environment and where you could be potentially more aggressive for market share and where you cut back if you don't see the profit levels?

We're not playing the market share game right now. What we're doing is we're in risk containment mode, especially as we think through summer. Obviously, in this situation, you're always going to have a tranche of flying that once, call it, single-digit margins now becomes unprofitable despite the fare increases. So we're optimizing as required, our network, but we don't see this as an opportunity to subsidize any flying for market share gains.

Your next question comes from the line of Chris Murray with ATB Capital Markets.

So turning back to the guidance for Q2. I mean it's a pretty wide range to start with. It sounds like you've got a lot of the fares already in the bucket or booked. But I'm just wondering, what are the kind of puts and takes kind of to take the bottom end of the range, top end of the range? Is it just fuel or what materializes in fuel? Or are there some other inputs that we can maybe keep an eye on to give us an idea how to gauge this as we go through the quarter?

First thing is I'd look at the middle of the range and start to fill out of that, and that's where we put it. But I think that the biggest variable is fuel. And we do see a lot of volatility. So that can actually turn to the better or it can get a little bit more difficult. I think right now, we feel pretty good about how the quarter has developed. A lot of the inputs, as you said, are in and fuel volatility kind of is the biggest one.

My other question, the federal government put out a couple of items that I think would impact you guys in their spring economic update. One was about the airport ownership rules and how that could evolve. But there was also some interesting commentary about maybe a different way to deal with passenger issues and something I think you guys have talked about maybe replicating a European model. Any comments or thoughts around either of those items? And would you guys be interested in looking at infrastructure down the road? And how do you think that mediation process may work in terms of just managing your costs?

Let me start and Arielle, who heads up TR will fill on the blanks. So the 2 issues that came up, which are not new are the potential airport privatization. That model exists around the world. We're very aware of it. And at this point in time, our focus is on lowering the cost for consumers. So if there is a new model out there, whatever that might look like, if that lowers the cost for consumers, then we'll be supportive.

On the APPR, we're actually running a test that was -- we brought the idea to the government to use a European-based ADR type process to speed up the whole process of getting an answer to the customer. And we think that's good from a customer-centric point of view. And so Air Canada is running that test right now. We're in the middle of that test right now with a select number of customers. We're going to see what that test looks -- what the results of that test look like. And then we'll obviously have discussions with the government of Canada about that as well.

Arielle, do you want to add anything?

I think that was complete. Thanks, Mike.

Your next question comes from the line of Krista Friesen with CIBC.

Maybe just on the fuel offset. I realize you spoke to expecting to be able to offset about 50% to 60% of the expense in Q2. But if we're in an environment where fuel stays higher for longer, how should we think about what you're targeting for the remainder of the year, say, into Q3 or Q4?

Yes. I guess we did suspend guidance because that's got a lot of variability. If you would have asked me that question, we had an April 22 curve out there. And if you would have asked me that question on that April 22 curve, I would have said somewhere in the mid- to upper 70s for the full year on recovery across the full year. So we'll see how it evolves from here. Right now, I think we're -- we have pretty good line of sight to Q2. Maybe a few puts and takes there. But altogether, I think we have pretty good line of sight. The second half of the year. Just a couple of things to keep in mind. We're pricing at around $4 a gallon equivalent in the fare. And to the extent that fuel does come below $4 a gallon, we'll start to see some recovery as well. So fourth quarter should be obviously a high recovery quarter.

Our final question comes from the line of Andrew Didora with Bank of America.

John, maybe a little bit of a random question here, but I did see in the disclosure in your release, you talked about your Canadian hubs contracting fuel 1 to 2 months ahead of time. This is a little bit different than kind of the way I've thought about it in the past. So does this mean you have decent line of sight into 2Q fuel costs right now? Or maybe to ask it another way, like how much of your 2Q capacity does not have contracted fuel right now?

Sure. Yes. So as I said, the inventory plus the procurement terms that we have for our Canadian hubs in particular, which is not all of our fuel, right? So you have to keep in mind that there's a lot of fuel purchase outside of Canada as well outside of our hubs that does have pricing benefits us because it came in some cases before the pandemic for the first -- sorry, excuse me, before the Middle East crisis for the first quarter and parts of the second quarter are protected as well. As we look into Q2, I'd say that maybe 1/3 about roughly, kind of think about that, 1/3 of our fuel, maybe just a little bit more than that is still not price. So we basically burned, I don't know, 1.5 billion -- 1.4 billion to 1.5 billion liters in Q2 and maybe say $400 million of that still out the price.

And with no further questions in queue, I will now hand the call back over to Amanda Murray for closing remarks.

Thank you very much for joining us this afternoon. Should you have any questions, feel free to contact myself, Amanda Murray or Ivan Zarate at Investor Relations. Thank you, and have a nice day.

Thank you again for joining us today. This does conclude today's conference call. You may now disconnect.

All right. Moving right along. Mark Streeter is going to join me on stage here. Mark has actually covered Air Canada on the credit side.

Longer than you.

Many years more than I have covered Air Canada on the equity side. Very happy to have John Di Bert, CFO; and Mike Rousseau, CEO, taking our stage once again. Gentlemen, welcome. Thank you for making the trip. I hope yesterday's meteorological mayhem did -- well, you got here.

We had a great Air Canada flight down here.

You don't say. good. Well, listen, I know you guys did an 8-K this morning, which is fine, but we have started most of these panels this morning with an update speaking for other airlines that have already shared the stage. At least domestically, I think everybody is very pleasantly surprised with the resilience of demand trends at this point, admittedly, not that many days in the first quarter really were exposed to elevated fuel prices.

But at this point, most of the managements have expressed pretty high levels of confidence as to their first quarter outcomes relative to their guides. What can you tell us about how the quarter is developing for Air Canada?

Let me start, and John can also add color.

Certainly, we would echo those comments from the U.S. airlines. We have seen -- we have put price increases in, and we've seen continued strong demand. And the way the math works, of course, is fuel is about 20%, 25% of our overall cost structure. For the back half of the year, we need 10% to 15%, given where the current spot is in price increases. That has been actioned, and that's in the box at this point in time.

On a short-term basis, we do have some hedging in place for Q2, about half the booked volume is hedged. The other half is not hedged. The other half will be subject to the price increases. So Q2 will come out fairly well as well. Q1, on top of some hedges we had in Q1, we also have a very, very efficient supply chain infrastructure that gives us a couple of weeks of inventory at the old price. And so Q1 is not going to be impacted at all.

John, anything else?

I think you covered it well. I think that's it. We feel good about the pricing increases we put in place. Demand continues to feel pretty resilient. And we got off to a generally good start absent the situation in the Middle East as well. So it gives us good momentum, feeling like we've got this in hand at this point in time. Obviously, we'll watch the next 6 to 8 weeks, it's important as well.

So -- well, go ahead.

Quickly on that on the fuel question. Very robust international franchise at Air Canada. What percentage of your international flying has fuel surcharge mechanisms already in place that sort of automate the process that we're talking about, about fuel price recovery?

Yes. It's a bit complicated. Certainly, across Europe, there are fuel surcharges and price. And so we can adjust fuel surcharges or the base fare. Fuel surcharges have been adjusted. In Asia, certain markets in Asia, as you probably know, require government approval. And so that's being actioned as we speak as well.

So just on Alaska, a different question that I was going to ask because we were talking about fuel there. But Mike and John, can you maybe just talk about how you source fuel or where you source fuel?

Alaska was just talking about the difference between Hawaii and the West Coast and actually thinking about tankering in fuel and so forth to sort of mitigate where they're paying more on the West Coast. You have exposure to Singapore where that market, I think, has been higher than what we're seeing in New York Harbor, for example. So maybe just sort of talk about your fuel footprint and how you're managing that?

Yes. So we do. We have terminals both on the East Coast and on the West Coast. And we have developed Asian supply quite well over the years. That comes into Vancouver and Fraser River. We have a terminal, we bring it in. But we -- I mean, we have a lot of flexibility in our procurement arrangements.

And just specifically to this set of circumstances, we've already started to pivot some of our purchase to U.S. Gulf Coast to be able to offset some of the potential risk of supply shortages that may or may not come from Asia. We had a couple of tankers actually just leave in the last week from Asia, still at prior conflict pricing on their way.

And we're procuring something from the U.S. West Coast in Washington, the State of Washington. I think in 3 or 4 weeks, we have tanker leaving from there. So there's been a lot of work that's done just to protect overall inventories.

Our inventory levels, I would say, by and large, on the West Coast, probably all things considered I've just mentioned through to mid-April. So protected in terms of pricing and in terms of supply. And we're well into the end of March on the East Coast. I think it's about 25% from Asia is our fuel supply, typically, normal footprint. And that has some, like I said, some flexibility.

So what I was going to ask before fuel is it's not meant to be a tongue-in-cheek question, but are Canadians still mad at the U.S.? And I don't mean over hockey and most recently baseball. I mean over politics and trade.

When you think about transborder travel and where it was at the peak down last year and where it had recovered to at the beginning of this year, is that changing at all that recovery cadence into the conflicts of the last couple of weeks and so forth? Or are they just totally separate drivers between what might be going on in the Middle East and how we think about cross-border travel?

Yes. I think they're primarily separate. This time last year, traffic, primarily leisure traffic, to the U.S. dropped. Business traffic has been strong throughout that period of time. And certainly, traffic flows from the U.S. up through Canada on Sixth Freedom have been strong as well.

We've come full circle on that leisure traffic decline, which is 10% to 15%. And so not a big impact to Air Canada at the end of the day. U.S. market is roughly 22% of our overall volume.

So 10% of 22%, 2%. We quickly -- the revenue management network team quickly redeployed those -- a few assets. We did not exit any market in the U.S. We took down frequency. And with the strength of our fleet, the breadth of our fleet, we were able to downsize some planes as well, going from a MAX to 220, for example.

And so we stabilize that market. Our competitors, for the most part, more leisure than business; have exited much greater than us. And so that has provided an opportunity for us as well, basically. So we see stability at this point in time.

Are Canadian consumers returning to U.S. sun markets this winter? Because I remember you pivoted into -- I mean, not entirely, but you shifted some capacity into non-U.S. sun markets for the winter season. Is that pendulum swinging back? Or are they kind of remain sticking with Mexico, sticking with the Caribbean?

It remains intact. I think the good news is there's been a lot of stability that's kind of established itself over the last few quarters. And I think this year was no exception.

So to Mike's point, we have the benefit of corporate traffic and some international U.S. origin traffic as well that helps because we have a network. So those two pieces have kind of helped us manage it. But with respect to further change, no and no return, if you will.

Since you mentioned Sixth Freedom, and we touched on this briefly at the JPMorgan Leveraged Finance Conference a few weeks ago, John. But I know it's obviously never going to be the majority of what you do for a living, but there's growth potential. What's unclear to me is how do you harvest that demand. Is it just sort of a build it and they will come?

I'm just surprised how often I price out itineraries that I expect Air Canada to show up as an option that it doesn't. So I don't know if it's a CRS display issue, if you need to work with travel agents. Like how do you really lean into it? Or do you think it just naturally grows as connectivity grows? Kind of like Southwest, they sort of grew into having hubs just because the connectivity naturally evolved.

Yes. There's certainly a strategy behind it. Our close relationship and partnership with United Airlines is a big part of that program. And we continue to do good things with United to make sure that's a seamless travel experience for the customer, basically. So there is a stated set of initiatives to enhance the experience.

If you can't see it on the screen, we'll come to your office, and we'll show you where it is. I'm sure you will. But there is natural growth as well as we put the 220s into more markets into the U.S. then -- and we -- our salespeople work with travel agents in the U.S. marketplace, then that growth will come as well.

And European airlines and to a lesser extent, LatAm airlines have added or are adding material capacity between South America and Europe. Is that eating into some of the flows that you had been able to capture?

We're not seeing that. We've added capacity to LatAm as well. And we're seeing some flows from Europe through Canada into LatAm as well and natural traffic. And so we're very pleased with the early results of that capacity growth.

Okay. So John, something I'd like to clear up, and I think you and I have already sorted this out, but for the sake of the people in the audience and listening today, on your recent earnings call, I asked a question poorly. You had just announced an aircraft order.

And I asked about sort of the internal metrics that you look at in terms of determining the appropriateness of allocating capital. But I asked it in a way that almost sort of sounded like more of a commercial angle. So could we clear that up?

Yes, absolutely. So I think that -- I think first and foremost -- right, we'll get into metrics in a quick second. But strategically, it has to be structural, right? So what we're looking for is where is demand and where is it going and what do we believe we have a competitive advantage in terms of delivering in terms of a network.

And so we are continuing to grow internationally. We have strong underlying structural benefits from demographics in Canada. this opportunity to continue to grow our international footprint. And with that, we design out a fleet. And our fleet was long-range 787s, 321s that helps on seasonality and continues to help us with transatlantic and other flows. And then the A220 that really is a great aircraft for all North America.

When we look at how we actually deploy the capital and once we've established where we want the growth to be, from an economics point of view, I mean, these are margin-enhancing aircraft that deliver ROIs that are superior to our current ROI. And it's -- we're talking about aircraft, especially when you look at the long-haul aircraft that are likely going to be high teens, low 20s ROI adds to our capital base.

And so it's a combination of strategic fit, number one. Number two, they have to deliver benefits from margin expansion, and then it will culminate on ROI. And for us, ultimately, what we're looking to do is drive structural cash flow.

And so when you look at the entirety of all that, we also use a little bit of a kind of a long-term planning horizon, sub-12% revenue CapEx. And basically, our model works very well when we are higher teens EBITDA and I'll say, 11%, 12% max CapEx, structurally 5% to 6% free cash flow generation. And we believe that, that's something that we can do on a very consistent sustainable level.

So it's a combination of those factors that gives us confidence when we deploy capital that it's going to return value to investors.

Perfect. And apologies again that I didn't ask on the call. It was my bad.

Can we jump in just a little bit into loyalty economics and how we should think about your run rate there for improvement? I mean maybe even just a step back to clarify some maybe misconceptions about where interchange fees are in Canada and so forth. And in the U.S., there is this sort of lingering worry about legislation that could somehow neuter credit card programs.

And is there any sort of corollary to that in Canada that you're focused on or your lobbyists are focused on? And just maybe talk a little bit about how you view the next sort of 5 or 10 years because it's such a focus for American, Delta, United, that continued ramp and trying to benchmark that to Air Canada is something we probably need to do a better job of.

Okay. Let me start. So loyalty is incredibly important to us, just not from an economic perspective, but from a customer information perspective as well and certainly from a loyalty perspective.

As you probably know, Air Canada runs one of the best programs in the world, let alone the best program in Canada. We bought it back in 2019 with 4 million members, and it currently has 10 million members. So we've 2.5x in 6 years. And we've expanded partnerships, Uber, liquor stores, and so they all add value to the program. And so certainly, from an economic perspective, the EBITDA has improved dramatically over that period of time.

Interchange rates, you're absolutely right. They form the basis of the economic sharing. They are higher in the U.S. than they are in Canada. Canada has discussed this issue with the Government of Canada. We've made some adjustments in the last couple of years. I would say we're in a relatively good place at this point in time. We certainly run the program in the U.S. as well. So we're subject somewhat to -- but a very small level from a U.S. interchange rate.

It is a key lever for us going forward and will continue to be so. We have dynamic pricing. We're enhancing the value of Aeroplan by making it a much bigger part of our vacations business. We run a small vacations business as well. So there are many, many points of leverage that we have that we have -- we will continue to explore to increase the value of Aeroplan.

John?

No. And I mean, I think Mike has covered it well. And I'd say that the other part of this is that we have three great credit card partners, a little bit of diversity there as well. We also have a fourth one in the U.S., which caters to a U.S. offering. And out of the 10 million or so members, about 10% or 1 million are Americans. And so that's very helpful.

And the overall contribution from a profitability point of view is accretive to overall margins, so typically does better than the overall airline. And of course, from a cash flow point of view, it's a powerful contributor to free cash flows. And it has some insulation to the cycle, which is helpful to us as well, right? So it carries kind of through dips because we've actually enhanced it to be even more largely tied to revenue-based accrual versus mileage-based accruals.

So those are things that continue to make the program more attractive to those who are really using their loyalty and working with the airline.

Is there any opportunity with the 3 or 4 credit card banks where any of those contracts are sort of tied to the 4 million members, not the 10 million members or legacy contracts that need -- that are open for renewal soon or where you're expecting a material step-up in economics?

Well, the contracts come due in about 5 years from now. And again, we're okay with the existing contract, and then we'll start negotiations in the next couple of years, and we'll see where that goes. But I don't want to forecast what may happen at that point in time.

And Mark, we've talked about this for years. I mean airlines are frustrated that the valuation of these incredible programs are not, for the most part, reflected in the airline valuations. And different airlines have tried different things to extract that valuation. However, there's been no success to date.

Well, and that was going to be my follow-up question. So given your experience in this regard, should that serve as a cautionary tail for U.S. airlines that occasionally -- more than occasionally are probably being pitched by investment bankers to spin off their programs or look to monetize it or something like that. And I always point north.

We did that. We did that. And certainly, that created a ton of value at that point in time.

That was born more of necessity at the time than engineering.

Possibly or both. Both. The the issue is you're trying to establish a commercial contract that can think about everything over 20 years. That's virtually impossible.

Like buying airplanes.

The market was different when we sold it than how it evolved basically. And so that's why we made the right decision to buy it back. And once it's embedded within the airline, it certainly drives a lot of value that may not -- the market may not see or the analyst community may not see, but it does drive value aside from just the economic returns.

Well, one last loyalty question for me unless Mark has another one. But probably one of my earliest lessons when I started on sell-side research working for the airline analyst at Peabody was that the industry suffered from a paucity of barriers to entry, but a lot of barriers to exit, chiefly Chapter 11 as preventing -- keeping failing carriers alive. I don't have to explain that process.

Does loyalty really represent -- notwithstanding the inability to procure aircraft at the moment, is loyalty the best barrier to entry that the industry has ever seen? Or is network scale and the heft of franchises enough to keep start-up capital out of the industry?

I don't see it as a barrier to entry. I do see it as an ability to maintain loyalty of certain of the customer base. That translates into a barrier to entry, then -- but it's not the intent of the program. The program intention is to drive loyalty.

Okay. Fair enough. Any update on corporate demand? Southwest had kind of a cool soundbite this morning. They said if they didn't sell a single corporate ticket for the rest of the month of March, they would still set corporate records for this month. How is it looking for Air Canada? And what are the principal businesses that constitute your corporate demand?

Maybe I'll take a shot at this. I think number one is we had a strong Q4, good momentum. I think it was up 10% year-over-year. We're still nowhere near the levels we were pre-COVID. So still a lot of opportunity to continue to build through there.

I think we're seeing a lot of diversification with Canadian trade, and that's playing a big role. Transatlantic, so Europe, for example, corporate is up like 30%. So significant step-changes. And that's kind of obviously in the context of geopolitical evolution of Canadian trade.

And so from our point of view, the -- there was for maybe a couple of years, a little bit of a slow build, and now it's really kind of taken off since the second half of last year. And the good news that is transborder corporate is still solid, very good, growing, but internationally, very strong as well. And I think that helps. It helps. We can see it in load factors. We can see it in yield. So it's positive.

John, one thing we talked about in Miami and maybe we can explore it here a little bit more. We talked about your percentage of revenue -- total revenue that comes from premium products. And sort of just on the corporate demand, maybe start there. I mean, right now, when you look at corporate versus premium leisure, what is more important to Air Canada right now? What is generating a better margin, if you will? Do you look at it that way?

I think corporate is strong and is the real -- I mean, it has an important contribution to the overall margin. We talked a little bit about overall revenues, right? And I checked a couple of numbers after the fact. And we're kind of already in the high 20s. We talked about 25%. We're probably around 28%, 29% now. And with this kind of strength around corporate travel, we expect that number to continue to grow.

We also are adding a lot of capacity. And with that capacity does come just by the mix of it, right? Even if the LOPA kind of our standard LOPA, the mix of the aircraft coming in will drive a lot more premium seating. And so that number will continue to grow year-over-year and over the next 5 years, hopefully, well into the 30s, and that's what we would expect.

All parts of the cabin and the passenger kind of segmentation are important. So we want to see that corporate traveler, and we have room to grow there. Small-sized business as well as an area of focus for us. So we're putting a lot of technology to be able to bring small business into the corporate stable as well.

And then from a premium, from a leisure traveler, I mean, that's where things like the loyalty program really work well, but also paid premium travel continues to grow from the leisure side.

As a follow-up to that, Delta is already at about 49% of revenue from premium channels. And of course, there's some overlap with corporate there. So you have to define it properly. And in fairness, they started before Air Canada.

Is there anything structural about the Canadian market that would prevent you -- again, you said it's going to grow over time, but is there any reason that Air Canada shouldn't be able to get to 49%...

Never say never. Yes, other than the depth of the market, there's no reason. We offer an incredible product, loyalty program, technology to help corporates. And we're redoing all our -- many of our lounges to expand them, given the growth of the premium traffic. So we're hitting all the right buttons. And so I don't -- I wouldn't want to put a cap on any...

Yes. But there's no obvious structural difference between your market...

Other than the depth of the market.

Yes. Okay. That makes sense. How would you describe your labor house at the moment? Is it in order Obviously, the last couple of years have been tumultuous and have probably taken up a lot of your time. How do we think about labor as it relates to the Air Canada narrative between, let's call it, now and the end of the decade?

Yes. I mean we're coming off 10-year agreements. And so we've got 2 behind us of pilots and flight attendants. Pilots was difficult negotiations, but we got through it. Obviously, flight attendants, we took a 3-day strike for the right reasons.

We have three negotiations going on right now, mechanics and ramps and then also call centers and airport workers and then some screw schedulers, which is a small union. Those discussions are going on well, and we're working to a solution that makes sense, frankly. And now that we have 2 deals behind us, that kind of sets somewhat of a precedent as we go forward.

John, can maybe we just talk about the balance sheet for a minute here? You have $1.2 billion of very low coupon 3 [ 7/8 ] bonds coming due in August. You've waited to refinance those. Maybe just sort of talk about that decision and sort of what your game plan is this year. Are you looking to refinance that dollar for dollar, pay it down, same collateral, do something different?

Yes. Thanks. So as you said, USD 1.2 billion. So we did a repricing of our Term Loan B just recently, and we raised an additional USD 200 million. So call that a first kind of little tranche of it. So that leaves about $1 billion. So that money is going to be deployed against paying it down. So there's $1 billion left.

We did a few things in the last 6 months, and we continue to kind of calibrate that. But 2025 strong free cash flow generation, $750 million last year, that was kind of even better than we thought we would do kind of earlier in the year.

Number two, we just did a sale-leaseback series of deals, letter of intent for about $2 billion, so $1 billion in '26, $1 billion in '27. Those all help with the additions to the fleet that are coming. And so that, in combination with still what we feel is a solid 2026 setup gives us confidence that -- and we hold about 33%, 34% liquidity right now. If you recall our Investor Day, we had a stated objective of closer to 20%.

So we probably will take -- just to answer your question, we probably we'll take some cash and deploy it against some paydown. Whether we do all of that bond, a part of it, that's still something that we'll determine over the next couple of months. We'll see how we navigate here through the first half.

But our view right now is that we can deploy some of the liquidity, take down some gross debt, manage some of the interest cost. And we've set ourselves up so we have the flexibility to be able to do that. And then we'll see if we do some kind of a smaller bond later, we just leave it at that.

So Mike and I were talking as we walked on stage that we probably get our first deal together maybe 20 years ago, something like that, when he was in the CFO seat. And I can't remember outside of a crisis where Air Canada hadn't set a balance sheet target and exceeded it in advance of whatever timeline. You've done a very good job of living up to those balance sheet goals and leverage targets and so forth.

Yes. It's sort of -- I continuously sort of scratch my head with the rating agencies. I feel like they haven't given you the respect that I think you deserve because of the way you've treated the balance sheet. So where are you right now in those discussions? Do you want to be investment grade? Is that a goal?

Yes, that's a great question. So I would say this. I'd say that we certainly want some momentum on the rating. And to just be explicit about your ask on investment grade, I think the plan that we're driving for structural free cash flow of 5%, 6% as a percentage of revenues for margins in the high teens will provide the baseline for the right conversation on investment grade, probably as we get into, I'd say, '28, right? So we're about 18, 24 months out from maybe having the right set of conditions.

In the meantime, we do know there's a bit of sensitivity to gross debt. So part of the conversation will be around some of this improvement that we feel we can make. We use some liquidity that we have on the balance sheet. And then from there, I mean, we'll look into maybe '27 or something like that, look at some unsecured if the market conditions are right.

But all that to say that I think that there is a series of steps that will continue to give us momentum on the rating. We have a BB rating now. I'd love to see a positive outlook at some point. Perhaps then from there, continue to move to a plus. And I think that within the next 2 years, we'll be in a position to have a conversation around investment grade. And so we're doing the right things now to get there.

Do you want to shift more funding to unsecured kind of like United is doing following that?

I think that the biggest value perhaps that we perceive for that would be to do it as we get closer to a real conversation on investment grade. So that would probably be a catalyst to help move that along. In the meantime, we still can favor cost efficiency. Now that being said, we do get relatively compressed comparable cost. But at this point in time, we don't have to make that move. We'll make that move probably a little bit later.

Okay. Mike, do you think there's going to be further Canadian consolidation? And does it come in the form of dealmaking or just unproductive capacity exiting the system over time?

I don't see consolidation in a traditional M&A type situation. The market is well served by the carriers that currently exist. And I think -- honestly, I think the government of Canada also wants a competitive environment, and we have a very competitive environment in Canada.

Two of the companies are -- three of the companies are private. We're the only public domestic company. So it's hard to say how the others are doing at this point in time. But they run good operations and they run a competitive business.

Yes. Okay. Last question for me. It's come up in other panels this morning. What do you think are the most interesting idiosyncratic moats around your franchise relative to your competitors?

I'll start. What I like is our diversification. The fact that Europe is 30%, domestic is 27%, U.S. is 22%, rest of the world is the other 20%. So I think...

Good point.

I think that, plus the fact that we have very, very efficient fleet types allows us a lot of flexibility to move things around. And whether the world continues to be uncertain as we go forward, let's assume it is, having that flexibility and having that diversification, I think, is a real strength of Air Canada.

Yes. I think our three hubs, West Coast, East Coast, shortest routes, transatlantic, transpacific, a real global mega hub in Toronto, I think, is another real big advantage. We talked Aeroplan for a while, so I won't say much more.

But I mean, I think that back to Mike's point about loyalty and making sure that we create value propositions for all of our customers. So I actually think that the airline has never been better set up than it is now, aircraft on the come finally after a long wait, strong balance sheet.

And the underlying demand and demographics fully in place and actually demonstrating all the leading indicators that we were expecting as we built out this plan are continue through all of the noise that may or may not have occurred in the last 24 months, continues to go through. So I think it gives us a lot of confidence that we're just going to continue to focus on execution.

And last but not least, Jamie and Mark, it's -- you'll hear this from most airlines, but we think we have an incredible leadership team and 40,000 employees. and we will get better. We're putting better technology into their hands, we're empowering them to a much greater extent to make decisions real time.

And so we're going through a bit of a cultural change. And I think that was always a strength of Air Canada. It will be even a stronger characteristic as we go forward.

All right. Excellent. Thank you very much. Really appreciate it, gentlemen.

Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome you to the Air Canada to present Fourth Quarter and Full Year 2025 Results Conference Call. [Operator Instructions]

I would now like to turn the conference over to Amanda Murray, Head of Financial Planning, Strategy and Investor Relations. Amanda, please go ahead.

Thank you, Krista. [Foreign Language] Welcome, and thank you for joining our fourth quarter and year-end 2025 earnings call. My name is Amanda Murray, and I am pleased to hold the role of Head of Financial Planning, Strategy and Investor Relations at Air Canada. I look forward to working with the capital markets and fostering strong relationships with our investment community.

Joining us on the call are Michael Rousseau, our President and CEO; Mark Galardo, our CCO and President of Cargo; and John Di Bert, our CFO. Other executives are with us and available for the Q&A portion of the call.

I remind you that today's comments and discussion may contain forward-looking information about Air Canada's outlook, objectives and strategies that are based on assumptions and subject to risks and uncertainties. Our actual results could differ materially from any stated expectations. Please refer to our forward-looking statements in Air Canada's fourth quarter and year-end news release available on aircanada.com and on SEDAR+.

And now I'd like to turn the call over to Mike.

Great. Thank you, Amanda, and welcome, Monsieur. Before I begin, I want to give a special welcome to Amanda on our first call. I know Amanda will do a great job with our analysts and shareholders. And for those of you who don't know, Valerie Durand was promoted to another role within Air Canada.

We delivered a strong 2025 with an exceptional Q4, showcasing the robustness of our business plan and the structural advantages we have built over several years. Q4 revenues reached $5.8 billion, up nearly 7% year-over-year, supported by industry-leading passenger unit revenue performance and strong premium demand. We also achieved record Q4 adjusted EBITDA of $867 million, a 25% increase from last year. Our network and revenue diversity played a critical role in delivering strong results in 2025. Key elements enabled us to mitigate the softness in transborder markets, which has remained relatively steady from a trend perspective over the past year. These include the scale of our hubs, strength of our international franchise and our continued Sixth Freedom growth.

The loyalty of our premium and corporate customers and the meaningful contributions from Aeroplan, Air Canada Cargo and Air Canada Vacations reinforce our results as well. This year marked a clear step forward in balancing out our traditional seasonality in our business. In 2025, we achieved total revenues of $22.4 billion, a 1% increase from 2024. Adjusted EBITDA totaled $3.1 billion, coming in ahead of our guidance range due to a very strong demand in the last 2 months of the year. We continue to demonstrate financial discipline, maintaining a high conversion from earnings to operating cash flow. This enabled us to invest confidently in our future, deploying $2.9 billion in capital investments. We did this while maintaining a solid balance sheet with $7.5 billion in liquidity and a net leverage of 1.7x and generating $747 million in free cash flow. At the same time, we returned more than $850 million to shareholders through share repurchases. These actions reflect a balanced approach to capital allocation and our commitment to creating long-term sustainable value.

Operationally, 2025 was another year that demonstrated the dedication and professionalism of all our teams. We remain focused on operational excellence and improved both our on-time performance and Net Promoter Score by strengthening the overall dependability of our schedule and the premium brand positioning.

Recently, our teams again rose to the challenge as Toronto and many cities in North America experienced record snowfall and extreme cold. Managing through severe weather safely and effectively while keeping our operation moving is no easy feat. These moments reflect the strength, the teamwork and the commitment of our people, and they continue to reinforce customer trust in Air Canada. I thank all of our employees for their hard work and dedication. Their efforts were recognized by our customers who voted Air Canada the best airline in North America at the 2025 Skytrax World Airline Awards, along with wins in 8 additional categories, more than any other Canadian carrier. Skytrax also named us as the only North American airline in its global top 20, a testament to the professionalism and commitment of our people. I know we are the employer of choice for aerospace in Canada. And now more than ever, as Canada needs global champions, we stand as one. We will continue to contribute meaningfully to the Canadian economy and create value for all stakeholders.

Finally, as we look ahead, we're encouraged by the momentum being carried into 2026. We will continue to drive our commercial strategy, preserve a disciplined financial framework and continuously improve the customer experience. Against this backdrop, 2026 will be a transitional year as we absorb cost pressures and receive the majority of our new fleet deliveries that are scheduled for the second half of the year. We are very confident our investments are setting the stage for improved performance and greater efficiencies in 2027 and beyond. We are building for the long term, and I'm convinced the decisions we're making today will continue to strengthen our airline for years to come.

I'll pass it over to Mark.

Thanks, Mike, and good morning, everyone. [Foreign Language] I'd like to thank our employees for their commitment to our customers and to operational excellence. I'd also like to thank our customers for their unwavering confidence in our airline. Overall, 2025 provided a clear validation point that Air Canada's commercial strategy is sound and delivering robust results. In the fourth quarter, we leveraged our international network, our premium positioning, our Sixth Freedom Advantage and our continued revenue diversity to differentiate our performance.

When combined with the strength of our foundation, namely our hubs, our far-reaching network, our modern fleet and the loyalty of our customers, the results start to compound. We proved in managing through uncertainty that Air Canada is agile and can deliver robust performance. We closed the year on a strong note and achieved record fourth quarter passenger revenues of $5 billion with an all-time high Q4 load factor of 85%. Unit revenues grew 2%, a leading result among major North American airlines, supported by our international network and solid momentum in our Sixth Freedom business. In fact, our international performance led the quarter, contributing close to 90% of our revenue uplift and validating our strategic moves across the Atlantic, Pacific and Latin America.

Turning to the full year. In 2025, we leaned on the core tenets of our new Frontiers plan to demonstrate the resilience of our commercial plan. We leveraged our diversified geographic exposure to pivot capacity to areas of strength, such as to Canada and the Atlantic in the summer months, fully mitigating the impact of reduced Canada U.S. demand. Our success was notable in the Atlantic and Latin America as each posted load factor expansion from 2024. Combined, they saw a 4% year-over-year growth in traffic with the majority of this increase being a direct result of our commercial playbook.

We also leaned on other businesses to drive incremental revenues with Air Canada Cargo, Air Canada Vacations and Aeroplan achieving solid results. In 2025, other revenues increased by 15%, while cargo revenues rose by 4% versus the previous year. Notably, Air Canada Cargo, a key player supporting our long-haul flying, surpassed $1 billion in revenues for the first time since 2022. Throughout the year, we expanded our brand affair offering and advanced innovations within our revenue management tools, delivering clear improvements to our ability to drive incremental revenues. And our positioning as Canada's premium airline is a clear differentiation. We believe that our investments in the premium space will further strengthen our base of brand loyal customers.

In 2025, premium revenues increased 2% year-over-year, outpacing the economy cabin by 3 points and representing about 30% of our total passenger revenues. An acceleration of corporate revenue in the latter part of the year was another sign of progress, increasing 8% in the fourth quarter from a year ago. We restored A220 schedules, achieved corporate growth in our long-haul flying and kept working to stay competitive while building loyalty with business travelers. Lastly, we continue building scale in our hubs, reinforcing the competitiveness of our global network. In 2025, we added 13 new destinations in 4 continents. Further, with improved schedule quality, we increased Sixth Freedom revenues by 10% from 2024, reaching record levels. Our Canadian hubs of Toronto and Montreal have enviable geographic placement to connect Europe with Latin America at large.

And in the last quarter of the year, we bolstered our competitiveness on these counterseasonal flows to grow our demand base outside the Canadian market and diversify our Sixth Freedom revenues. The initial results of this strategy were significantly above our expectations and our planned additions next winter will enable us to continue to grow this segment.

Turning to our outlook. We are very encouraged by the momentum carrying over from Q4 into the early parts of 2026, enabling us to continue balancing the seasonality of our business. We are seeing sustained velocity in bookings for Q1 and into Q2. And as Canada's flag carrier, we are uniquely positioned to capture corporate cargo traffic tailwinds from Canada's diversifying trade strategy objectives. Though it's early to provide more color for the latter half of the year, we're encouraged by the current booking trends. This year, we expect to grow capacity between 3.5% and 5.5% from 2025. We will leverage our fleet investments, network enhancements and product improvements to continue driving scale in our hubs, diversifying our revenue and reinforcing customer loyalty. In fact, this summer, by a measure of seats from North America, Air Canada Global hub in Toronto will be the second largest transoceanic hub, Montreal, the fifth largest transatlantic hub and Vancouver, the second largest transpacific hub on the North American continent.

We continue to see favorable demand trends to, from and within Canada, and we continue to monitor market conditions and retain the flexibility to allocate and balance capacity to areas of strength and mitigate our exposure to less favorable conditions. For example, following recent government advisories, we suspended our service to Cuba and moved capacity to other submarkets with a minimal financial impact expected from this shift. In the spring, we will start transborder flying from Billy Bishop Airport in downtown Toronto to major business centers in North America, reinforcing our commitment to making business travel easier for our customers.

Further ahead into the summer, we will add 7 destinations to our network, reintroduce nonstop flights to China from Toronto and extend year-round flights to Bangkok, the only nonstop service from North America. And while it's still too early to discuss next winter, we recently announced the addition of Sapporo and Quito to our passenger network to come December 2026.

Moving to fleet. In 2026, we're eager to welcome 35 aircraft to our fleet, including our first Airbus A321XLR and Boeing 787-10 aircraft. We've spoken many times about their capabilities. This year, we'll leverage our A321XLRs to unlock new destinations such as Berlin and to enhance our offering to existing markets like Toulouse and Manchester. The A321XLR also has a role to play within North America. Within the year, we will unveil plans to offer a consistent year-round A321XLR product on a set of routes to bolster our premium offering in North America. Early bookings for the XLR are performing well, proving the value proposition of this aircraft. For our 787-10s, we are planning the initial deployment out of Toronto, and we'll unveil details soon.

For Rouge, we are upgrading our customer experience and enhancing our competitiveness in the leisure market. Subject to obtaining the necessary approvals, we plan to have the MAX fleet at Rouge by the end of 2026. Wednesday, we made an important announcement for an order for 8 Airbus A350-1000 aircraft with deliveries expected to begin in 2030. These state-of-the-art aircraft will solidify our global ambitions into the next decade. As one of the best aircraft that I've studied, the A350's unique and proven capabilities will unlock new fast-growing long-haul markets. We will leverage its superior economics to fly further and carry an improved customer and cargo payload over the current fleet. With optionality for 8 more, our order offers tremendous flexibility to both adapt to marketing conditions and balance aircraft replacement and growth for the coming decades.

In closing, 2025 results underscore that our strategy focused on hub scale, revenue diversity and customer loyalty leads to concrete results. They prove that Air Canada's commercial foundations are robust, the strongest they've ever been. We remain focused on building upon them.

With that, I'll turn it to John.

Thank you, Mark, and good morning, everyone. [Foreign Language] Before we begin, I want to acknowledge the exceptional execution across all Air Canada teams during 2025. As we signaled on our last call, we did indeed have a strong finish to 2025 and delivered a record Q4 financial performance. Our Q4 adjusted EBITDA increased by $171 million versus Q4 2024 to $867 million, representing a solid 15% margin backed by a strong demand environment. These results reflect deliberate disciplined actions taken throughout the year as well as a solid commercial execution, leveraging the strength of our network and revenue management capabilities.

Full year adjusted EBITDA surpassed $3.1 billion with a 14% margin, exceeding our guidance and market expectations. Full year performance was particularly remarkable given the direct financial impact of the summer labor disruption, a challenging geopolitical backdrop and late-stage inflationary pressures on certain parts of our cost structure. Diving further into costs, 2025 full year adjusted CASM closed at $0.147, the upper end of our guidance range. This is a 6.7% year-over-year increase, including approximately 270 basis points from labor and about 140 points from depreciation, in part reflecting our fleet investments.

Further, the year-over-year increase also reflected about 150 basis points in nonrecurring impact from the August stoppages. We are fully focused on mitigating cost growth through targeted management actions across the airline. In 2025, we executed $150 million in cost reduction programs, driven by management restructuring, process improvements, operational efficiency and spend management initiatives. We expect these savings to be recurring. We're also confident that we will see multiyear structural improvements beyond 2026, driven by the cost benefits of expanding our network and operating a modern fleet, increasing both productivity and scale.

Turning now to cash flow. 2025 performance was strong, reaching $747 million in free cash flow, with cash from operations generating $3.7 billion, surpassing 100% conversion from adjusted EBITDA. We showcased the strength of our business model and the cash back quality of our earnings. In particular, Q4 cash generation was driven by very strong Q4 earnings, working capital tailwinds from growth in advanced ticket sales and the continued growth at Aeroplan, reflecting a 7% increase in third-party gross billings. In addition, we benefited from approximately $150 million in favorable cash flow timing from a number of items. With 2025 free cash flow margin at 3% of revenues, we remain confident in our trajectory toward our strategic objective of sustainable 5% free cash flow margins.

As we generate cash, we remain disciplined on value-accretive deployment by staying true to our priorities, namely executing disciplined investments in the airline, focused on margin-enhancing growth, protecting our balance sheet, maintaining solid liquidity and net leverage below 2 turns. And finally, returning cash to shareholders, allowing them to participate in our cash flow generation. In 2025, we deployed $2.9 billion in CapEx and took delivery of 14 aircraft. We expect 2026 net CapEx to be around 12%, and we view that level of net CapEx as a healthy, sustainable level for the airline.

To that end, to support our peak CapEx cycle in 2026 and 2027, we have signed nonbinding letters of intent for up to $2 billion in sale and leasebacks. We plan to execute our sale and leaseback transactions over the next 24 months. This program is expected to bring our fleet ownership levels to our target range of 65% to 70%. In addition, it will achieve various important goals, including fleet flexibility, capital efficiency and enhanced liquidity, all within net leverage targets. We ended 2025 with total liquidity of $7.5 billion, including our undrawn revolver. Net leverage ratio at year-end was 1.7 turns. During 2025, we retired a convertible bond extinguishing almost $400 million in debt and avoided the issuance of nearly 18 million shares. Early this year, we successfully repriced and upsized our Term Loan B by $200 million, further confirming our credit quality and the confidence from capital markets.

Finally, since 2024, we have generated over $2 billion in cumulative free cash flow, repurchased and retired over 64 million shares, returning more than $1.3 billion to investors, including over $850 million in 2025 alone, funded entirely through free cash flow generation. With an active NCIB, we remain on track toward our aspiration of $2 billion in share buybacks and reducing fully diluted share count to below 300 million shares by 2028, which at the end of 2025 stood at approximately 307 million shares. To recap, these actions underscore our focus on value-creating capital allocation, our commitment to a strong balance sheet and our conviction in the airline's long-term growth and profitability potential.

With these core principles in mind, we announced an order for 8 firm Airbus A350-1000 aircraft with purchase rights for an additional 8 aircraft. The firm aircraft are scheduled to be delivered between 2030 and 2032 and are set to replace the oldest 8 A330s in our fleet. We're excited about the addition of the A350 to our fleet as it will bring new capabilities that will further expand and differentiate our international network. The book of options on the A350s in addition to the ones available on the 787-10s will also provide great optionality as we look at the wide-body replacement cycle middle of the next decade. As we go through the long-term planning horizon, we will continue to ensure that this order fits nicely to our sustaining net CapEx target of 12% or less of revenues.

Let me now turn to 2026. We're very encouraged by the momentum we experienced in late 2025, which continues into 2026. We expect adjusted EBITDA growth in Q1, both in absolute dollars and margin percentage. This is supported by unit revenue expansion combined with more capacity year-over-year. Our expectations are inclusive of the estimated impact of the weather disruptions suffered in January and the recent fuel shortage in Cuba. For 2026, we expect adjusted unit costs in the range of $0.1505 to $0.1535. This reflects the anticipated impact from the completion of the major renewal cycle of 10-year agreements with the remaining half of our unionized labor force.

Additionally, while we are scheduled to receive up to 35 aircraft in 2026, ASM growth will be modestly constrained due to deliveries being back half loaded, and we will experience some ASM attrition due to the Rouge fleet transition and planned aircraft retirements. Further, the mix of higher narrow-body and lower stage length ASMs will cause some transitory unit cost strength. However, we do believe that load factors will trend higher and PRASM benefits will offset some of the adjusted CASM impacts. Our 2026 guide on adjusted CASM also reflects $150 million in new proactive cost reduction initiatives.

Areas of focus include strategic procurement savings and continued overall workforce productivity as we grow. We expect 2026 adjusted EBITDA between $3.35 billion and $3.75 billion. For planning purposes, we are using average jet fuel price assumption of CAD 0.90 per liter, and we're using an FX assumption of CAD 1.36 to each U.S. dollar. Both assumptions are aligned with current market prices. As of today, approximately 17% of our expected first half fuel needs are hedged at CAD 0.69 per liter before taxes, transportation and into plane fees.

Our approach to hedging continues to be focused on the shorter-term horizon with the objective of providing some volatility protection to booked revenues. We expect free cash flow in 2026 to be between $400 million and $800 million. Our guidance reflects the expectation of close to 100% conversion rate of adjusted EBITDA to cash from operations. Our guidance also represents net CapEx for 2026, inclusive of $1 billion in expected sale and leaseback transactions.

In summary, 2025 was a year that demonstrated once again the resilience of our team and the strength of our franchise. We navigated a complex environment, executed with discipline and delivered solid results. We enter 2026 with quiet confidence. We have a clear plan, compelling growth opportunities, supportive market trends, structural cost improvement levers, strong brand loyalty and a healthy balance sheet. Above all, we have a determined and capable management team. We remain committed to our value creation thesis grounded on profitable growth, margin expansion and cash generation to create sustained value for all stakeholders. Thank you.

And with that, I'd like to turn it back to Amanda for Q&A.

Thank you, John. Krista, please open the line for questions from our analysts.

[Operator Instructions] And your first question comes from the line of James McGarragle with RBC Capital Markets.

So I just had a question on the fleet strategy and the A350. So with that order in place, can you just walk us through the strategic rationale there again, and kind of how that fits into the strategy that you laid out at the Investor Day. So are you prioritizing operational efficiency here in existing markets? Are you looking to kind of expand into new markets? Or is it something that you're looking to achieve both of those objectives simultaneously?

James, so to answer that question is we have a lot of optionality and flexibility with that airplane. So what we like the most about that airplane, obviously, is the range capability. So that gives us options to grow into new markets, whether it be in the Indian subcontinent, whether it be in Southeast Asia, Australia, et cetera. But it also allows us to do a set of routes that we do today a lot better. So when you combine these 2 elements together, we just have a lot of flexibility with that airplane. But the #1 thing, obviously, the #1 variable is really the range capability of that aircraft on the passenger side and also on the cargo side.

I appreciate the color there. And then in terms of the revenue, the implied revenue guide, can you just talk about how you're seeing load factors and yields trend kind of early in the year, how you expect that to trend during the rest of the year, just kind of within the context of a top Canadian market and some pressures that we're seeing on the yield in the Pacific. And after that, I can turn the line.

James, we're seeing a very constructive environment for the first half of 2026. We're seeing gains, both on the load factor side and on the yield side, and we're seeing that mostly in international markets, particularly the Atlantic. On the Pacific, we're seeing load factor growth with stable yields. And I think that we expect that to continue all the way through the first half of the year.

Your next question comes from the line of Tom Fitzgerald with TD Cowen.

Just want to dig in on fuel a little bit and what -- just how much of your consumption is based off of New York Harbor. We've received some feedback from investors who think that fuel might be a little aggressive just given spot prices today.

Yes. I'll take that question. So I think, actually, we have a very strong fuel procurement strategy and it is diversified. I'd say that probably about 50% of our fuel comes in New York Harbor. The rest is distributed. We have strong procurement in Asia as well. And we also have very good infrastructure to bring that fuel to the airports, both on the East and on the West Coast. So I would say that our fuel assumption right now, if you took our index and you actually ran it against the spot is probably a shade below the $0.90 that we're using on the full year. We think we're fairly reflective. And don't forget, we also hedged almost 20% of our first half fuel, and that was done all in probably in the low 80s. So we feel like we're reflecting the environment very well.

Okay. Understood. That's really helpful. And then just as a follow-up, you've talked a few times about playing a role as Canada diversifies its trade flows on cargo and corporate. I wonder if you could dig into that a little bit deeper, just how you see that time line playing out? What kind of conversations you're having with your corporate and cargo customers?

Yes. We're seeing -- at this time, we're seeing a lot of corporate demand growth on the North Atlantic. We've seen almost a 30% increase in the amount of corporate traffic going to Europe, in the Pacific, and we attribute part of that to the fact that Canada is looking to diversify trade corridors. On the cargo side, a little bit early, but certainly, as we grow into new markets, obviously, that's going to give us an opportunity to further diversify our cargo lane as well.

Your next question comes from the line of Daryl Young with Stifel.

Just as it relates to the capacity outlook later in the year, can you just give us a bit more color on where you're seeing opportunities to place that capacity? It seems like things are going to ramp up relatively significantly from Q3 and Q4 this year?

Sure. So we continue to see really great opportunities to grow in the North Atlantic. Coming into the second half of the year, we will continue to strategically grow some counter-seasonal opportunities in Asia. And we're also taking advantage of the opportunity that we have in Latin America right now. So we've been very successful early days and really building out a Sixth Freedom franchise from Europe to Latin America by our hubs, and we're going to double down on that with the new aircraft that are coming in.

Got it. And then as it relates to the much longer-term order book and the A350s, should we think about that continuing to be filled here in the future quarters such that your CapEx is at 12% of your projected revenues in the future? Or said differently, is there more widebody orders that are going to come down the pipe here in the next year?

Well, next year, I don't think so. No. I think that you saw us make some moves in the last 12 months, right? We reshaped the 787 order. We have good smooth introduction to service on those aircraft. We've always maintained that, that was the growth vehicle that would give us the growth ASMs over the period of the next few years. The 350 is going to bring incredible capability. And as Mark described, new optionality, but it will also be part of a replacement cycle and so when you look past the 2030 and the orders from 2030 to 2032 and then as you look into the middle of the decade, we will have more replacements on the 330s and eventually on the 777s. In total, there's about 45 of those aircraft. So we'll do that all within a very responsible CapEx envelope and continue to target 12% of revenues as we do that with long-term planning, obviously, being very helpful.

Your next question comes from the line of Nathan Britto with Scotiabank.

This is Nate filling in for Konark. So foreign exchange has moved in your favor. So what's driving CapEx higher over the next several years? Is there any other factor besides the new A350 order?

No, that's really -- that's it. And I think it's just a matter of also you drop the last quarter of this year and you add a full year. So it's just -- it's math on, I think, the 2030 year be included into our planning horizon. But the real substance of the move up is the 350 order.

Okay. And how would the migration then of the Boeing 737 MAX to Rouge affect adjusted CASM and margins over time?

Well, I think in 2026, it's a bit of pressure just because we have a transition period that will take some of those aircraft temporarily out of service as we bring them on. So it cost us a little bit of ASMs. But in the long term, I mean, that's going to be a great aircraft in terms of economics, efficiency, density and that should bring margin expansion and for actually a great product to customers as well in that franchise.

Your next question comes from the line of Cameron Doerksen with National Bank Financial.

So my question is on Aeroplan. I know you don't provide a ton of financial details about it, but I'm just wondering if you could maybe discuss the progress on growth for the Aeroplan program. And also, there's been some changes to the program that obviously kicked in this year. I know it's still early days, but any, I guess, expected impact on profitability for you or growth of the program for you from those?

It's Craig Landry, the President of Aeroplan here. Yes, it was a very strong year 2025 for us at Aeroplan. We actually hit a record number of growth in terms of members over 10 million active members. Keep in mind, when we brought the program in from Aimia externally, that number was about $4 million. So we've seen significant growth over the last couple of years in terms of the size and the scope of the program. The expansion of the partners that are in there. If we look at our gross billings, if we look at the purchase volume on our credit card partners and elsewhere, we see numbers in the high single digits, 7%, for example, in gross billings, 8% in terms of card spend.

So the economics of the basic indicators of program were very strong. In terms of the new program that we put in place, the revenue-based accrual. The initial metrics we're observing are all very strong. The number of members qualifying for status on a year-over-year basis is increasing. So we continue to see strength in the program. And the activity of those customers, their average fare and their purchase volumes continue to increase. So we're very satisfied with what we're seeing so far.

Okay. That's very interesting. And just maybe a quick follow-up for John. Just on the sale-leaseback expectations for 2026. Do you have any idea on the timing of when that might happen? Like which quarter you would expect to execute on those sale-leaseback deals?

You'll see them probably throughout the year. We have a portfolio of aircraft that we have targeted and some of them are in the fleet and some of them are new deliveries. So they'll kind of -- they'll move through the CapEx through the year, and we'll kind of manage that with delivery. So the intent here is to smooth out CapEx. And so that's what we'll be doing. And you can expect a $2 billion kind of $1 billion this year and $1 billion next year.

Your next question comes from the line of Jamie Baker with JPMorgan.

So kind of a high-level question. What's your internal measure for determining whether to grow capacity? I'm just curious if it's a margin bar. Ideally, it would be ROIC in excess of WACC. Maybe it's a market share threshold you look at, maybe it's that 12% CapEx to revenue that you cited. But presumably when network or fleet pending comes into the office and says, we need more aircraft, there's some measure you look to before agreeing. Just curious what that measure or measures might be.

Yes. Well, I think first and foremost, right, I mean, you, it's a long-term planning conversation to start with, right? You don't build capacity from 1 week to the next. Now, how we deploy that capacity, one of the things that you should remark from Air Canada is we have incredible agility, and we've demonstrated that. So as we plan to pass it, we plan it based on the expectation of trends in markets where we have growth and where we're bringing on capacity, particularly for long term for long-range aircraft, I mean, we've had -- we've underserved the market, frankly.

The opportunity for us to bring narrow-bodies on into Canada and the U.S. is also been a bit underserved in the last couple of years. So in both cases, there's a bit of opportunities to fill in some under capacity.

Now the decision about routes, those are made on profitability. We study every route opening with detailed financials. And it's both profitability as well as in the long term, it's ROIC for sure. In the short term, it's about profitability and deploying the aircraft as most effective as we see. And we have several opportunities to move around our fleet when opportunities arise.

So I'll turn to Mark, if you have any additional comments.

Yes. So Jamie, we follow obviously our margin by service. And obviously, as you noted in our prepared remarks, we've got pretty strong margins on our international long-haul business actually comprises the majority of our margin today. And then we also kind of map out expected long-term demand growth. And here in Canada, as you know, is a very international country, multicultural country that's sustained a lot of immigration. So we've got 4 trends in terms of what the market will be, should be at the end of the decade. And of course, we layer on top the opportunity for us to take more market share here in Canada, but also that Sixth Freedom opportunity. You combine this all together, that's really one of the really, really key metrics that we follow.

Okay. And then second, just on the 2026 guide, any color on specific transborder assumptions for this year, just given the choppiness that we saw in 2025?

So Jamie, we don't expect the market. We're actually expecting status quo in terms of market conditions on transborder. We don't expect it to get any worse. We're not expecting for it to get any better. However, what's kind of in our favor right now is the demand capacity balance is very much in our favor. And you've probably taken note of some of the recent competitive moves that have been made. And again, that supports kind of a constructive backdrop for rebound in transborder revenue for us this year.

Your next question comes from the line of Savi Syth with Raymond James.

I wonder, and maybe for John, could you talk about like what you wait in deciding to do that $2 billion in sale-leasebacks and how that might impact unit costs and the balance sheet relative to maybe doing debt financing. Obviously, the concern here is that you kind of focus on kind of that net, keeping net CapEx and free cash flow targets, but then build in some long-term cost drags.

Yes. No, I think that the capital cost of the leases is going to be very competitive, number one. The recall, I mean, we had a stated objective. We were over-equitized on aircraft to over 80% ownership. And we've set out a strategy, which is to leave some amount of flexibility within the fleet as well, which leases bring you. So our target is 65% to 70% of the fleet owned and 30% to 35% of the fleet leased. So that's a consideration that is beyond just the pure financials of it. It offers flexibility. We've used that flexibility in the past, and we'll be able to use that in the future if necessary.

With respect to cost usually within 100 basis points of any other form of financing and to have the flexibility that I just mentioned, a price worth paying. And overall, we do keep a very close eye and are very disciplined in our balance sheet. So the instruments will stay well within our 2x leverage target. So when it's all said and done, I think it's just good capital efficiency and good capital allocation.

Makes sense. Thanks for that explanation. And maybe just a follow-up on that. Just what are your expectations for depreciation like this year and next year in terms of step-ups?

Yes, that's a headwind, and it's going to be a headwind for the next few years, frankly. We have about a $200 million annual headwind on depreciation, and that's true in '25. And we are highlighted in the comments, it's a big piece of the year-over-year cost growth. It will be a little bit more than that in 2026 and expect the same thing in '27, '28. So as we kind of converge the CapEx cycle to a depreciation over a little bit of time, that will be a headwind. I think the positive there, it's a noncash item. And so we are managing through the CapEx cycle and the depreciation over time will hit cost, unit cost. But I think the rest of the cost structure, I mean, we've, obviously dealing with a bit of a reset in the labor cycle. But once we're through that in 2026, I see a lot of positive potential for cost structure in '27, '28, '29.

Your next question comes from the line of Chris Murray with ATB Capital Markets.

Just maybe going back to some of the cost inflation that we're going to see, I guess, in the CASM, as we go into '26. I guess a couple of pieces of this question. So first of all, John, you gave us some great guidance or some color on 2025 and sort of the components that go into that. Can you maybe talk to a little bit about exactly how much is going to be labor? You mentioned depreciation over other costs just so we kind of get a flavor for it. But more importantly, I think as thinking kind of the '27, '28 kind of targets, and we get there, how do we think about that, call it, yield cost spread as you get past this transition here. Is this something that we should start seeing CASM start coming down or flattening out as you get that revenue growth from the new fleet? I'm just trying to make sure I understand how this transition is going to work out.

Yes, fair. So a lot in that question. I'll try to take some pieces of that, and then we'll continue the dialogue as we kind of progress the year. But first, just on the math that we put into the script, if you did the math that you kind of probably get down to, I don't know, 150 basis points of cost growth in the structure once adjusted for the strike, the impact of kind of the labor agreements through '25 and then depreciation so that the residual is, whatever, 150 basis points or so. It should highlight to you sort of the ability to manage the cost structure. We've done a lot of cost mitigation programs.

We will continue to see some good cost benefits from the actions we're taking and including productivity. So that's '25. I'd say 2026, by and large, if you did a strike adjusted '25 compared to '26, I think you're up almost 5%. So I'd say 300 basis points of that is between the depreciation and labor component. So put that aside, it leaves about less than 200 basis points of cost growth to the rest our structure. It's not to excuse the 5 percentage, just to give you some color about where it's coming from. I do believe that the labor piece is a reset of the cycle that's going to get by here at '26, early '27. And then from there, I think that the cost structure overall can grow below inflation meaningfully for the next few years as we bring on scale. We should see fuel benefits as well. That's outside of CASM. That should be margin expansionary. So I think, as we look over the next couple of years, meaningfully below inflation would be our target.

Your next question comes from the line of Andrew Didora with Bank of America.

So John, maybe a few finer points on CASM here. For 2026, I guess, one, can you remind us what you include from a labor perspective? I know there's some groups that you're going to be negotiating with this year. Two, do you assume any sale-leaseback gains in your CASM forecast? And then lastly on CASM, should we assume first quarter is sort of the highest growth quarter on CASM just given kind of storm impact and lower capacity?

Maybe I'll ask you to repeat the last part of your question, and then I'll go on if you could just repeat the last piece.

Sorry, I was just asking if 1Q should be the highest growth quarter for CASM just given the storm impact.

So for the sale-leasebacks, let's just get that and get it out of the way. So there'd be no gains assumed nothing into our CASM that would reflect any sale-leaseback gains where we have -- we assume that to be neutral. With respect to CASM, typically, Q1 is a bit higher. So we will have a little bit of a higher CASM. But over a full year, I think you'll hold probably the first half of the year, I'd say closer to the 4% or 5% range and then the back end of the year, probably half of that. So that kind of gives you a bit of an average of where we think we'll end up.

Got it. And then sorry, just labor assumptions in '26 CASM?

Sure. So we've been pretty clear in the past about how we manage that. I think we put our best estimates for labor into our overall cost structure as we go into the year. We don't provide any details. Obviously, we'll work through all of that through the negotiation. And we're looking for, as we always have, to make our employees the best paid in their respective roles within the industry in Canada here, and we'll continue to work and focus on that. Our best estimate for cost is reflected in our guide.

And just want to quickly ask on the buyback, just the way we've seen it in the filings. It seems much more programmatic again. I guess in a volatile industry, why not be a little bit more opportunistic in the buyback and maybe take advantage of some dislocations out there in the market?

Yes. I mean, we had this conversation earlier. I think last year, we were a little bit more aggressive and we did go out early, and we wanted to do that. We had initiated the program. We had very specific objectives. We then went out with an SIB, and that was a very substantial SIB in the middle of the summer. So again, very directed. I think we have a program now. We're at 307 million shares. We committed to below 300 million fully diluted shares by 2028, well on our way. This program is going to be a tool within that objective. And I think we'll just -- we'll continue to do it as we see best. I won't telegraph anything specific. But right now, it's a little bit more programmatic. In fact, we'll leave it at that.

Your next question comes from the line of Sheila Kahyaoglu with Jefferies.

Maybe I feel like all the CASM questions have been asked, so I'll ask about capacity, LatAm in particular. A lot of new net capacity growth this year seems to be pointed at the Caribbean and South America in spite of geopolitically what's going on there. So it still continues to be a competitive capacity environment at least from some of the U.S. carriers. Can you talk about that element of your network, what you're seeing in terms of volumes and yields, given the volatility?

Look, it's a very broad geography that comprises each destinations in Mexico and the Caribbean all the way down to South America. So there's a lot to unpack in there. On the South America piece, this is not necessarily a diversion of capacity away from the U.S. This is really to take advantage of really amazing geography we have here in Canada and take advantage of the Sixth Freedom opportunity between Europe and LatAm, and also to on the Canadian demand. So you combine these 2 together with strong cargo demand, it's actually been very favorable in terms of revenue generation.

On the Caribbean, of course, we've moved some capacity into the Caribbean and we've seen positive load factor and positive yield nearly in every destination that we fly to there. So the capacity has been very well absorbed.

Your next question comes from the line of Alexander Augimeri with CIBC.

I was hoping you can maybe talk about that EBITDA bridge for 2026 versus 2025. Maybe some of the volume recovery, pricing, cost normalization, how you think about it maybe into early look into 2027 as well?

I think we covered a lot of this in the commentary. I think we're going to see strength on revenue. We'll have capacity growth. I think loads and PRASM will be constructive during the year, and Mark has mentioned that. We've seen that in the first half. With respect to cost structure, it's really going to be pressure from the last reset of our labor units, those that are still 10-year cycles, and so that will put some pressure on the year. And then from there, depreciation will be a bit of a constant for the next couple of years as we grow into the new fleet. Beyond that, some very good cost takeout programs. We've seen another $150 million this year of cost takeout.

And then when you look at our guide 335 to 375, and we're between 14% and probably 15.5% margin. So our goal here is to point the airline towards '27, '28, where we do see a lot of strength, both in margin accretion and frankly, another step change in, I think, capacity coming from what we believe is going to be very strong long-range aircraft opportunities. So I think the commentary covers most of this, but we see 2026 as constructive and working through the peak CapEx cycle and maintaining a strong balance sheet and still rewarding our shareholders.

Your next question comes from the line of Atul Maheswari with UBS.

I had a question on Canadian domestic capacity. It does appear that some of your domestic competitors are adding pretty meaningful capacity in the front half of this year. The question really is what are you seeing with respect to domestic capacity around competitive capacity trends as we look into the spring and summer? And are there any hubs that are facing more competitive pressure than others?

Yes, good question. So as we look into the, let's say, call it the spring and the summer, we're seeing roughly about 5% domestic capacity growth. But if you were to segment that down to our 3 hubs of Montreal, Toronto, Vancouver, which is part of our stated strategy, again, I think you'd find that the demand capacity balance is pretty much in our favor. And again, we think it's pretty constructive going into spring and summer. There is a bit of pressure in other cities in Canada, but we have less exposure to those particular cities.

Got it. That's helpful. And then just as my follow-up, a very quick one on the Soccer World Cup this year. Do you think that is a net positive or a net negative? And how are you thinking of managing the network during that period?

To be honest, neither it's net neutral. We don't see any particular trends right now in June that would tell us that this is going to be positive or negative. There are some bookings that have come in from Europe for a couple of the games here in Canada. But on the whole, it's neutral at best.

That concludes our question-and-answer session. I will now turn it back to Amanda Murray for closing comments.

Thank you very much.

Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation, and you may now disconnect.

Ladies and gentlemen, thank you for standing by. My name is [ Krista ], and I will be your conference operator today. At this time, I would like to welcome you to the Air Canada's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] l would now like to turn the conference over to Valerie Durand, Investor Relations. Valerie, please go ahead.

Thank you, Krista. Hello, [Foreign Language]. Welcome, and thank you for attending our third quarter 2025 earnings call. Joining us this morning are Michael Rousseau, our President and CEO; Mark Galardo, our Executive Vice President and Chief Commercial Officer and President of Cargo; and John Di Bert, our Executive Vice President and CFO. Other Executive Vice Presidents are with us as well, Arielle Meloul-Wechsler, our Chief Human Resources Officer and Public Affairs; Craig Landry, our Chief Innovation Officer and President of Aeroplan; Marc Barbeau, our Chief Legal Officer and Corporate Secretary; as well as Mark Nasr, our Chief Operations Officer.

After our prepared remarks, we will take questions from equity analysts. I remind you that today's comments and discussion may contain forward-looking information about Air Canada's outlook, objectives and strategies that are based on assumptions and subject to risks and uncertainties. Our actual results could differ materially from any stated expectations. Please refer to our forward-looking caution in Air Canada's third quarter 2025 news release available on aircanada.com and on SEDAR+.

And now I'd like to turn the call over to Mike.

Well, thank you, Valerie. Hello, [Foreign Language]. Thank you for joining us today for our third quarter results call. We delivered a solid third quarter financial and operating performance after adjusting for the impact of the labor disruption, which, of course, occurred at the peak of the summer season.

During the bargaining period with CUPE, we developed comprehensive plans to ensure the safe, orderly wind down and restart of the operations in the event of a labor disruption. These are acted on, and the entire company worked extremely hard to assist those whose travel was disruptive and to quickly return our operations to normal.

I thank all our employees for their tireless efforts and unwavering commitment to supporting our customers during this challenging time. We also voluntarily introduced our special goodwill policies. We have received more than 150,000 claims to date, which we have been addressing diligently. Processing these claims is complex and requires a coordinated effort. We do expect to finish in the coming weeks.

We reported third quarter operating revenues of $5.8 billion, down 5% from a year ago on a 2% capacity decline. Both declines were the result of the strike-related flight cancellations. Adjusted EBITDA of $961 million declined $562 million from the same quarter in 2024.

Excluding the labor disruption, third quarter adjusted EBITDA would have aligned with our full year guidance shared last July and come close to pre-strike market expectations.

Operational metrics such as our on-time performance and Net Promoter Score exceeded both internal targets and last year's levels for the quarter and year-to-date. I am very pleased with the progress we're making.

Booking trends for Q4 are very strong. We expect year-over-year growth in adjusted EBITDA in the last quarter of the year. This morning, we updated our full year guide, which John will further detail for you. But first, let me turn it over to Mark.

Thanks, Mike, and good morning, everyone. [Foreign Language] I thank our employees for their unwavering commitment to our customers and to operational excellence. I also extend my gratitude to our customers, the travel trade and our airline partners for their patience and support.

Third quarter passenger revenues of $5.2 billion declined 6% from the same period last year on 2% less capacity. Starting August, our year-over-year third quarter unit revenues were trending in the right direction but were impacted by the labor disruption. We estimate it was a drag of about 3 points to Q3 unit revenues. Absent this, Q3 would have amounted to one of the best relative PRASM performances amongst major North American carriers. This is driven by our revenue diversity, hub geography and customer loyalty.

Our global network gives us flexibility to quickly pivot to areas of strength. This quarter and throughout the year, we mitigated the exposure to reduce demand between Canada and the U.S. In Q3, we quickly responded to Canadian's growing interest to travel domestically. The transborder sector remains stable, albeit at lower levels once adjusting for the strike. International markets continue to drive significant value. In the spring, we added capacity across the European continent, seeing a stronger Atlantic environment.

Moving to cargo. Despite a revenue decline of 6%, mostly from reduced belly capacity in August, Air Canada Cargo was adaptable, and the freighter operation continued to demonstrate its value, playing a key role in capturing the opportunity from evolving global trade flows. This was evident this quarter as our flexibility in capacity from freighters allowed us to carry more of the growing and lucrative cargo demand from Asia to Latin America, fully offsetting other declining flows.

Additionally, other revenues rose 15% from the third quarter of 2024 with higher Aeroplan non-air revenues, prices for ground packages at Air Canada Vacations and onboard sales.

Next, our well-positioned hubs provided strong local demand from Canada's largest cities and facilitate sixth freedom connections. This year, we've doubled down on connectivity, which has been beneficial for our sixth freedom strategy. Demand has been strong despite the disruptions' impact. Year-to-date, at the end of Q3 2025, sixth freedom revenues grew a solid 9%.

Our strong brand ecosystem builds customer loyalty and is a unique and strategic attribute for Air Canada. Booking patterns rebounded soon after the disruption ended, underscoring brand strength and consistency in customer behavior. Let's focus on premium. Front cabin revenues outperformed the economy cabin by 6 percentage points. Corporate improved further with roughly 11% year-over-year revenue growth from our corporate customers in September. What our Q3 results demonstrate is that looking beyond August events, Air Canada's commercial foundations are solid, adaptable and core enablers of strong results.

Now let's focus on what's ahead. With our proven commercial playbook, we're uniquely positioned to see favorable industry trends and are highly encouraged by what we're seeing this fall. Fundamentally, our solid booking outlook reflects step change progress against the theme we've long discussed, addressing Air Canada's traditional seasonality and improving revenue diversification. This enables more balanced capacity deployment, revenue generation and profitability throughout the year, and the results are tangible.

Currently, our relative capacity in the fourth quarter exceeds pre-pandemic levels. And as of today, we are on track for a record fourth quarter load factor and total revenue performance. We are leveraging the strength of our global network and scale of our hubs to increase our reach and access to new traffic flows. We refined our schedule, improving the connecting ways at our hubs to increase our competitiveness for connecting flows.

And finally, we've deliberately built a stronger base of bookings going into the winter, filling seats that historically would have been empty. We expect our significant progress on seasonality to drive revenues and support diversification while improving our ability to take advantage of promising industry trends.

Now let's dive into network and within that, international. With one of North America's leading global networks at hand, we see promising signs across the next 6 months. We see demand strength carrying all the way through U.S. Thanksgiving, particularly across the Atlantic. Beyond that, sun and Latin American markets remain solidly ahead of last year for winter with a robust advanced booking position from Air Canada Vacations and uplift from our expansion into Latin America, which also taps into rising Canadian travel demand and boost sixth freedom revenues on our transatlantic flights. Our presence in international markets remains a clear advantage.

Next, we see a continued shift in consumer preference towards premium products. Once thought of as mainly a corporate segment, we see an opportunity for leisure travelers seeking our signature front cabin experience. Our booking posture in premium cabins is strong going to Q4 and Q1. As Canada's premium airline, we are uniquely positioned to attract, capture and retain this growing segment of high-value customers.

Lastly, we continue to see strong corporate momentum. This is a segment that looks closer in, and then the latest data confirms the strength of September carries into October and is progressing throughout Q4. While North America remains the bulk of our corporate revenue, we are noticing signs of increased international corporate strength.

Our comprehensive schedules, well-established and long-standing partnerships, premier loyalty program and superior experience reinforce our position as the airline of choice for corporate travelers. In all, we are encouraged by the trends in the fourth quarter and what we're seeing for early 2026. Although we anticipate a slight decline in unit revenue in the fourth quarter, adjusting for the disruption in Q3, this is a sequential improvement throughout the year -- through the year.

Looking further into 2026, there's also a lot to be excited as we implement numerous strategic initiatives. Firstly, fleet additions. Recall, we retired over 75 aircraft during the pandemic and have been anxiously awaiting for incoming aircraft to support planned growth. We will take the long-awaited delivery of 2 new aircraft types, the A321XLR and the 787-10. Our XLRs will initially be based in Montreal and fly to exciting destinations like Palma de Mallorca, Edinburgh and Toulouse. Meanwhile, our first premium focused 787-10 will be based in Toronto, reinforcing our leadership position in Canada's largest market.

And speaking of possibilities, our international network will continue to expand next summer as Catania and Budapest are added to our network, and we restore nonstop capacity to China from Toronto. We're also thrilled to be making Bangkok year-round from Vancouver, the only nonstop service to the Thai capital from North America.

Second, our transition of the 737 MAX aircraft to Rouge will get into full swing. Longer term, this will enable a more cost-competitive platform, harmonized experience in a new Rouge base in Vancouver to expand our offering from Canada's West Coast. And third, we're looking forward to our recently announced expansion out of Billy Bishop Airport, adding transborder flights to New York LaGuardia, Boston, Chicago and Washington Dulles and more frequencies to Montreal and Ottawa. These routes long requested by our customers, strengthen our position in the Toronto market.

In closing, we're making and executing the right commercial moves. We are leveraging our revenue diversity, our well-positioned hubs and customer loyalty to cement Air Canada as one of North America's leading carriers and deliver solid results. Thank you. [Foreign Language] John, and over to you.

Thanks, Mark. Good morning, everyone. [Foreign Language]. First, allow me to take a moment to recognize the resilience of our incredible employees. We know that managing the airlines through the shutdown and restart was very challenging. Yet our colleagues rose to the occasion and maintained their commitment of care and class to our customers. [Foreign Language]

In the third quarter, we reported operating income of $284 million and adjusted EBITDA of $961 million, with an adjusted EBITDA margin of 16.6%, including the $375 million impact from the labor disruption. The impact consists of the following: a $430 million impact to revenues, including [ some book away ] for travel in August and early September, $145 million in avoided costs due to reduced flying, partially offset by $90 million of cost reimbursements to customers for out-of-pocket expenses and labor-related operating costs driven by the shutdown and restart activities. This is consistent with the estimates we announced in late September.

Operating expenses increased 8% year-over-year, mostly due to a $173 million onetime charge. Of this, $149 million was a noncash onetime pension past service costs from plan amendments that are related to the agreements reached with CUPE. The remaining is due to costs associated with streamlining our management structure.

Fuel expense was 12% lower year-over-year for Q3. Jet fuel prices fell by 10% compared to last year, which included a $29 million hedging gain for the quarter, totaling $48 million in the first 9 months of the year. Additionally, fuel consumption was 3% lower than in Q3 2024 due to the flight cancellations.

Third quarter adjusted CASM was $0.1399, up 15% from last year. About 1/3 of the increase was due to cost escalation mainly in labor, maintenance and depreciation. Roughly another 1/3 was the effect of certain favorable contract-related adjustments we recorded in the third quarter of 2024, which made for a less meaningful year-over-year comparable in Q3 '25.

Excluding the impact from the disruption, nonfuel unit costs were aligned with our full year CASM expectation at our Q2 call. In all, we estimated the disruption had a drag on adjusted CASM of about 6 percentage points, reflecting incremental costs and lower capacity.

Turning to cash flow. In the quarter, we generated $813 million in cash from operations and free cash flow of $211 million. We have accrued for strike-related customer compensation to be processed and paid in Q4. Additionally, in the third quarter of 2025, we implemented a new enterprise resource planning system and experienced a delay in timing of payables processing in September, equivalent to 15 days of payables.

The cumulative free cash flow of $1.2 billion year-to-date reflects approximately $600 million of favorability due to the timing of certain payments in Q3.

On to our balance sheet. In July, we fully repaid our convertible bonds for a total amount of $382 million, reducing the number of potentially issuable shares by $18 million. In September, we drew $231 million from our EDC loan commitment for 5 A220s that had been previously delivered. We ended the quarter at $8.3 billion in total liquidity, including $1.4 billion in an undrawn revolver. Leverage ratio ended the quarter at 1.6 turns, reflecting lower EBITDA due to the impact of the disruption. We expect this ratio to increase slightly in Q4 as we process the outstanding payables from Q3.

When thinking about leverage and long-term decision-making, we will look through the onetime impact on EBITDA when assessing our leverage objective of 2x or less.

Moving along, we updated our full year guide this morning. We now expect capacity to increase around 0.75% versus 2024. We project 2025 adjusted CASM in the $0.146 to $0.147 range. We reached an agreement with CUPE, except for wage terms that will be finalized through binding arbitration. Our guidance reflects the agreement and our best assumptions on the outcome of arbitration. In 2026, we will see the full effects of the new agreement flow through our labor costs, including the enhancements to ground pay and benefits.

For adjusted EBITDA, we now expect $2.95 billion to $3.05 billion in 2025 and a strong fourth quarter, which should outperform Q4 2024.

To close on guidance, we anticipate free cash flow between breakeven and $200 million for the full year. We expect the free cash flow use in the fourth quarter as delayed payments are brought current, including customer reimbursement amounts accrued for but not yet paid.

Q4 CapEx is anticipated to be approximately $900 million, just under $3 billion for full year 2025. With the recent volatility in jet fuel prices, we continue to monitor global trends.

Relying on visibility we have into Q4, we have hedged 34% of the expected fuel purchases for November and December at an average price of USD 0.52 per liter, approximately CAD 0.73 per liter before taxes, fees and shipping costs.

Finally, we continue to progress on our $150 million cost reduction program announced earlier this year, which includes the preplanned management headcount reductions. We are on target for year-to-date savings and expect to deliver the full $150 million in 2025. Key components include operational efficiencies and -- operational efficiency initiatives, streamlining our management structure, process improvements and third-party spend management. We expect the cost reductions to be reoccurring in 2026.

In 2026, we anticipate a step change in unionized labor costs due to recent labor agreements and as we continue to work through our 10-year agreements to shorter-term collective agreements. We also see some cost pressures from airport infrastructure and user fees as airports undergo capital investments to better serve airlines and passengers.

Over time, we will aim to partially offset these headwinds with ongoing productivity gains, constant cost discipline and driving cost reduction initiatives across our business.

Now let's turn to the fleet. We expect to add 3 additional A220s and 1 737 MAX by the end of 2025. Further, we expect to begin retiring old Airbus A320 family aircraft, including [ 8 319s ] and 2 320s. In 2026, we expect to receive 18 A220s, 11 A321XLRs, 4 737 MAX aircraft and 2 787-10s.

While we are particularly excited about receiving our first A321XLRs and 787-10s, the delivery schedule for 2026 is considerably delayed compared to our original expectations as outlined at our last Investor Day.

On average, we'll have approximately 6 fewer A220, 737s and 6 fewer A321XLR or 787-10s on any given month of 2026, which will impact our ASM production for next year.

In addition to welcoming the new aircraft to our fleet, as Mark noted, we are moving ahead with plans to transfer all 737 MAX aircraft to Rouge next year. We're working toward an all-737 MAX Rouge fleet by the end of 2026. Some A320 family aircraft are expected to move to mainline, and the rest will be retired. More details will be provided when we give 2026 guidance.

Looking beyond 2026, our 787-10 order for 18 firm aircraft has been modified to 14 firm aircraft with the first 10 scheduled for delivery by 2028 and the remaining 4 by 2030. While this moderates the growth pace in the near term, we remain firmly confident in the mid- and long-term opportunities ahead.

In addition, the changes smooth out CapEx profile, support disciplined financial planning and preserve flexibility to scale capacity in line with demand. These modifications are reflected in our capital commitments table included in our Q3 MD&A. Our fleet strategy remains focused on profitable growth in our right to win end markets.

We will continue evolving the fleet for greater efficiency and flexibility to meet customer demand. Our fleet investments support long-term sustainable value to shareholders and customers alike. Reflecting our commitment to returning value to shareholders, today, we announced our renewed NCIB. Since the inception of our November 2024 NCIB, we repurchased about 62 million shares for cancellation.

Further, we retired 18 million potentially issuable shares. In aggregate, we have deployed close to $1.7 billion to anti-dilutive actions. In summary, we remain confident in our trajectory toward 2028 and our ability to manage through growth and margin expansion cycle. The strategic network expansion, premium product investment and disciplined cost management are core priorities, and our executive-led road maps drive execution across our portfolio. Despite a challenging Q3 environment, we delivered solid financial results, demonstrated the underlying strength of our franchise and continue to hit important milestones for our new frontiers plan.

We'll provide a fulsome update on progress towards our long-term goals at our next Investor Day, which will be planned for some time in 2026. Thank you, and I look forward to your questions. Mike, back to you.

Great. Thank you, John. We have a very strong business model that can recover quickly from unexpected setbacks and certainly take advantage of opportunities and execute extremely well.

Operationally, we shut down and restart the airline in record time. We are encouraged by the speed at which booking patterns recovered and the strength that has followed. Negotiations supporting our staff at the airports, contact centers and maintenance facilities will begin soon. Over decades, we have consistently reached agreements that value our employees and support the airline's future. And we look forward to productive discussions with our unions.

Our commitment to our plan includes making very tough decisions. In July, we announced to our management colleagues that we would be streamlining our organization. After a comprehensive evaluation, we made a difficult decision to reduce certain management positions, representing approximately 1% of our total headcount.

Next year, we expect to take delivery of 35 new aircraft, the most we have ever received in a single year, supporting our global growth initiatives. We will receive the first game-changing Airbus 321XLR, which will not only enable us to launch new routes, but it will help us offer some services year-round and even out our network seasonality.

As Mark noted, the travel market remains robust, and demand is strong. In particular, business travel continues to recover. Our recent announcement to add routes from Toronto Island next spring underscores our commitment to offer more options to our loyal travelers, including our Aeroplan members. We are pleased that we have more than doubled our Aeroplan membership since the program is relaunched, now proudly counting more than 10 million members.

Our focus on customer service resonates throughout the network. I was pleased that our Net Promoter Score rose by 10 points in the quarter and that Air Canada once again won a 5-Star rating from APEX is excellence in customer experience recognized.

And finally, today, we announced the renewal of our normal course issuer bid. Our capital allocation priorities remain unchanged: invest in growth, protect our strong balance sheet and deploy excess liquidity strategically.

As our track record shows, including in this quarter, we are executing on our plan, seizing the right opportunities. Strong operational growth and disciplined execution are driving effective cost management and reinforcing our diversified commercial foundation, which are the key components of our right to win.

With prudent steps to smooth out capital expenditure profile and a renewed NCIB in place, we've established a clear framework to return value to shareholders. And we have exciting times ahead of us with growth plans fueled by our key strategic initiatives like our revitalized Rouge offering and new state-of-the-art efficient aircraft. As you heard today, we will also continue to improve our cost structure through productivity gains, operational efficiencies and constant cost discipline to mitigate near-term pressures.

We continue to focus on free cash flow generation in order to return value to shareholders. The hard work ahead in 2026 will position us very well for the second half of our strategic plan. With a solid foundation, an excellent balance sheet and a very talented and dedicated team focused on execution in our customers, we are confident in our ability to deliver significant long-term value to all of our stakeholders. Thank you. [Foreign Language] Valerie?

Thank you, Mike, and thank you all for joining us this morning. We are now ready for your questions and ask that you limit yourself to one question and one follow-up, please. Over to you, Krista.

[Operator Instructions] Your first question comes from the line of Konark Gupta with Scotiabank.

Maybe this is for Mark. I think you mentioned that RASM trends are expected to be slightly down in Q4. I'm just kind of wondering what are you seeing in different markets here. I think in corporate, obviously, you're saying it's growing nicely, and I think Atlantic demand continues into -- well into October and some parts of November. Is much of this RASM weakness coming still from the Pacific normalization and maybe transborder?

Konark, so on this particular item, when we look at Q4, we are expecting somewhere between flat RASM to maybe slightly down RASM. But overall, the way you should look at this is the transatlantic is looking at overperformance. We're looking at a very strong transatlantic network all the way through Q4.

We see a lot of resilience in the sun market as well as we've seen a little bit of shift away from transborder into the sun. We're having a very strong November, December into the sun. And then you've got those other supporting pillars like premium demand strength and corporate demand strength that are kind of sustaining some fairly decent yields that we're going to have on the transborder despite the demand drop. So that's kind of the color in terms of what you can expect for Q4.

And then on the CASM side, John, I think the implied guidance for Q4 suggests a flattish CASM from last year. I mean given the inflationary environment you guys are in and obviously, the labor contracts and all that, what is contributing to the flattish CASM here? I mean what are the offsets? I mean some of the cost savings, I'm sure like are coming through, but is there anything else like in sort of one-timing -- one-timer in nature in Q4?

No, I would say it's largely -- and you've seen we've been active, including keeping headcount in check. And so I would say, generally speaking, it's cost focus. We get some ASM growth, so that helps as well. Fourth quarter actually carries the entire ASM growth for the full year. And -- so that's obviously helpful. Nothing really to highlight in terms of kind of big positives in the fourth quarter.

Right. And I think the maintenance contract adjustments, you already lapped those in Q3, right? I mean there's nothing in terms of noise from last year and Q4. Okay. Perfect.

Right. Q3 was [ noise and ] I covered that in the commentary, but I think Q4 should be a bit more of a reasonable compare.

Your next question comes from the line of Savi Syth with Raymond James.

I was just wondering on the commentary about the fleet kind of delays in 2026 versus kind of expectations last year. I think the visibility here. So I was kind of curious how you're thinking about 2026 capacity? And if you're kind of hiring correctly to that versus kind of in the past where maybe some of the fleet delays were somewhat surprising and therefore, kind of hard to manage on the cost side.

Yes. I'd say, first, I'd separate that into 2 answers. One, I think we've been disciplined with hiring after we kind of stabilized the operations through '24. And I think this year has been a fairly disciplined approach. And we've always said we're going to be driving productivity as the airline continues to grow.

So I think in and of itself, we're going to continue to work that way. With respect to the capacity growth, for sure, I mean, we try to be as proactive as we can with respect to balancing everything we need to bring on those aircraft properly. And I think we have a pretty good read of what 2026 looks like. And we're going to obviously operate in accordance. But yes, for us, we're well into the planning cycle and have a pretty good read on what we expect for capacity growth next year.

That's too early to share?

Yes, in precision, yes. But I think we're adding 35 aircraft in total. We're going to be retiring a significant amount of aircraft as well. So we'll have a net balance of somewhere in the mid-teens, I think, or maybe just less than that, probably in the low double digits. We'll hold that for the guide in February.

Got it. I appreciate it. And then just a follow-up on that. Just CapEx came down. I'm wondering what the drivers were. Was it just that related to the fleet order changes or anything different going on with the CapEx for you?

No, it's totally correlated to the adjustment in the -10 order.

Your next question comes from the line of Daryl Young with Stifel.

Just wanted to get a sense of how you're thinking about the peak Q3 in 2026? And any thoughts on just smoothing of seasonality and I guess, some of the strength you're seeing to start this year. Is that sort of a pull forward of Q3? Or how should we think about that?

Thanks. It's an excellent question. It's something that we're actually debating here internally. Obviously, what you can see in 2025 is that there is more relative strength in spring and fall than there actually is in the summer peak. I think that's a trend that we see consistently across the North American landscape. So we're working with our operations colleagues to see how we can better allocate aircraft and maintenance activities to maybe take a little bit of the pressure off Q3 and load up a little bit more in Q2, Q4. But with -- as it relates to 2026 specifically, just the timing of aircraft deliveries is such that there's going to be some decent ASM growth in Q3 relative to Q2 in 2026.

Got it. And then a follow-up just around the NCIB and your free cash flow now that the CapEx has been deferred. Is that something that we should think you're going to be active on starting in November here?

I won't give any position to timing, but we've put it in place and we intend to use it. And I'll just give some color around our buyback program. We did announce in aggregate about $2 billion over the next couple of years as we set that out in December of '24, and we said that was going to be part of the midterm plan, 3 to 5 years.

So right now, we stand at about $1.3 billion of shares bought back. We also did the convertible debt extinguishment, which is anti-dilutive. So there's still room for us to continue to go. Our plan is continuing to execute as we expected. I think the 2025 positive cash is a good checkpoint here. And obviously, a little bit of an improved profile in CapEx helps as well. We'll pick the right spots, but we do intend to be active on this NCIB, and we'll do that as appropriate.

Your next question comes from the line of Tom Fitzgerald with TD Cowen.

I'm just curious like how you're thinking about kind of managing the transition of Canada point of sale and transborder in the March quarter and whether you think just -- how Latin markets are shaping up so far and just how you're thinking of managing that risk?

Tom, just to be precise on your question, you're speaking about the upcoming spring break in March?

Yes, yes. Just the broader -- I know the sun markets are a big demand driver in the March just in the transborder, that's a heavier portion of it. I'm just kind of curious how that's -- I know you kind of have -- you got a lot of growth in the Latin markets coming up. Kind of curious how that's shaping up and what we should be watching for?

Yes. Okay. Good question. So for Q1, the sun market is developing quite nicely with positive load factor and flat yields all the way through. So as we think about March, one of the items that we're looking at very closely is obviously our transborder spring break capacity. And because we're noticing a better kind of equilibrium between supply and demand, I mean, obviously, you've seen a lot of competitors withdraw capacity into U.S. leader markets, it's actually a much more favorable revenue environment going into Q1 and into March break. And if there are further opportunities for us to move capacity around, we'll make those calls later on. But we are seeing -- we're definitely -- I'd say we called the bottom a little bit on the transborder leisure kind of demand erosion.

Okay. That's really helpful. And then just as a follow-up, I was wondering if you have any more color on sixth freedom between Pacific and Atlantic and just some of the deceleration in that growth. I don't know if it's just noise from the industrial action or anything of note that we should be thinking about?

Yes. Thanks. So the demand growth so far for sixth freedom revenue growth has mostly been on the transatlantic. There's been a little bit of Pacific growth, but it's been relatively muted this year. And as we think about Q4, it's mostly the transatlantic that's driving it. A portion of it being U.S. to obviously the transatlantic, but a big growth on Latin America to Europe via Canada, which is going to sustain our sixth freedom performance throughout the year.

Your next question comes from the line of Chris Murray with ATB Capital.

Just very quickly, thinking about the fleet changes next year. As you said, there's a lot going on. But I guess I want to focus a little bit on Rouge. So can we just think -- maybe go through what the process is going to look like moving all of the 737s into Rouge. And I'm assuming you'll end up rebranding those aircraft, but if you can give us some more color on that, that would be great. And how we should think about the transition over the year would be helpful.

For sure. It's Mark Nasr. So we're going to begin with our first 737 MAX that's currently operating at mainline. It's going to go in for reconfiguration in about 6 weeks here. The reconfiguration of those aircraft is a very efficient program. It will take about a week to do each one, and we'll move through the entire fleet of the 40 aircraft that we currently have in the standard mainline configuration over the course of the year as well as the 5 additional new deliveries that we're going to take.

And so we expect, as we get towards the end of next year, the very beginning of the first quarter, that transition to be complete. Of course, we're going to be bringing over several of the Rouge aircraft into mainline. That's a little bit more of an involved process with regards to reconfiguring those aircraft to match our mainline standard, and that should be completed in the early part of next year. And the 2 activities are going to happen to be able to balance capacity between the 2 operating certificates.

Of course, we'll also be bringing Rouge to the West Coast by basing several aircraft out in Vancouver. With regards to the configuration, we haven't announced the details yet. We'll do so in the coming weeks. But we will be densifying from the current LOPAs that we have at mainline for the 737 MAX, and we'll be removing some of the J cabin and adding more into the economy cabin. Those details will be announced shortly, but it will be -- it will ensure that we have the cost -- the unit cost performance at Rouge that we need to be successful in the leisure market.

Okay. That's helpful. My last question, maybe for John on the NCIB. One of the questions I've been getting from a lot of folks is just when you did the last NCIB, I guess it went out pretty fast and burned through the allocation, which left you kind of without the tool to use as the stock came off. Is there a bit more thought to being maybe more formulaic or balanced across the whole time period? Or is it still going to be kind of an opportunistic thing? I know you put in a purchase plan for it. But just thoughts on kind of the bigger picture strategy around how to use it would be helpful.

Sure. Well, I think there's different circumstances. And don't forget, we put out an SIB in the middle of the year last year, right? So we were not without tools, and we did take advantage of that. So I would argue that, that wasn't actually what happened. So the first [ 800 ] did go out more quickly, and we had telegraphed that. We said we were going to be fairly rapid on once we had come out of 2024 with respect to restabilizing the airline and frankly, working down the debt, we would be anti-dilutively focused, and that's what we did.

I think we'll -- I won't telegraph exactly here when and how. I think we'll use it appropriately. We have plenty of capacity at 10% of the total float. So we're running the business, and it's not just one dimensionally. We're bringing up the fleet.

We're obviously focused on cost containment and cost management. We're geared towards free cash flow generation as we kind of build out the airline on a structural basis. And so we're going to keep a strong balance sheet, at the same time, complete the program that we had started when we announced the $2 billion over the next couple of years. So no precision on the exact use, but we'll do it right through the time of the NCIB.

Your next question comes from the line of James McGarragle with RBC Capital Markets.

So I had a question on the capacity in the Canadian market. You've kind of flagged, obviously, your lower CapEx. So can you just kind of talk about the capacity trends through the remainder of 2025 and into '26? And any notable yield trends that are kind of emerging as a result of some of these capacity shifts?

James, so on the capacity side, we continue to see that the domestic market is obviously very competitive. Generally speaking, I think demand -- sorry, supply is up about 4%, 5% going into Q4 just on the domestic alone. There's a better balance of supply and demand on the transborder, which we think will help sustain yield and revenue recovery on the transborder sector. The transatlantic is fairly stable with low single-digit capacity growth, which is going to obviously provide some stability on the yield and load factor side on the Atlantic.

Of course, as you know, and we discussed on the Pacific, there's been a sizable growth in demand from China -- sorry, in supply from China, Hong Kong, Korea. There is yield pressure on Asia and especially as we've added more capacity to China and we absorbed that capacity, we should anticipate that the yield and RASM will continue to be negative all the way until probably Q1 or Q2 next year.

And then the sun market, the capacity growth is up double digits, but our revenue load factor and yield performance are all in the green. So overall, a pretty balanced market, and we've got, of course, the ability to move capacity around as market conditions evolve.

And just for my follow-up on the lower CapEx. So how should we be thinking about the trade-off here longer term? Obviously, positive for free cash flow, but does this kind of pose any risk to your longer-term plans that you highlighted at the Investor Day? And kind of how should we be thinking this in the context of cost and margins as the newer fleet was expected to be a driver of increased efficiency? And I'll turn the line over after that.

Thank you. Thanks for the question. I think all those things stay intact. I mean the -- when you look at the overall addition of aircraft, you're talking about 90 aircraft or so over the period of whatever it is, 3, 4 years. We -- this adjustment affects -- for sure, I mean, if you look at 2025 in terms of ASM growth, it was a bit of a stall. So I think just we pace accordingly here. The 787s did have quite a bit of delays from the original purchase date versus coming in 2026. I think this is just managing that delay scenario.

So yes, 2028, you'll have 4 less aircraft in there. We'll work through that, see what it means. But ultimately, we're bringing in 14 787s and 30 321s, and there'll be plenty of good aircraft and plenty of good capacity. And we think that we're in good shape to deliver on our longer-term objectives.

Your next question comes from the line of Alexander Augimeri with CIBC.

So, yes, just looking at your strong results within premium and in corporate, I was just wondering if you can provide any additional color on this as we look forward into the end of the year in 2026.

A little bit early to talk about 2026 because it's such a low base of bookings. But as we kind of dive into Q4, I think what you should anticipate is continued double-digit increase in overall corporate revenue and basically across all geographies, in particular, a nice growth on the transatlantic. And on the premium side, we continue to see a lot of strength in the business and premium economy cabins with both positive load factor and yields. As we all know, there's a little bit of pressure in the economy cabin in terms of yields.

Your next question comes from the line of Sheila Kahyaoglu with Jefferies.

This is Kyle Wenclawiak on for Sheila. I was hoping, I know it's early, but if we could talk a little bit about the puts and takes in terms of the profitability walk for 2026. You have the 17-plus percent margins out in 2028, but it sounds like a lot of the fleet benefit is now kind of moving right again. And you mentioned a bit about the labor contracts and the work rules kind of run rating next year. So can you kind of help us frame what 2026 profitability is? And what are sort of the moving pieces to keep in mind?

I think you covered some of it, right? So in terms of absolute ASM production, I think we'll still have solid year-over-year growth from '25 to '26, but '25 isn't where '25 was originally intended to be. So in absolute, you'll get a little bit of pressure there.

Again, we also had -- I mentioned in my comments, what amounts to, call it, 6 long-range aircraft and 6 kind of continental range or shorter-range aircraft less than we anticipated when we had the original long-term plan at Investor Day in '24. So that's a pressure point. I think when it's all said and done, we'll still see very nice growth, but we will not see all of the benefits of the modern aircraft and some of that long-range flying that we would have liked to see in '26. That doesn't go away. It just gets pushed out a little bit. So I think '27 and certainly in '28, we'll have a lot of that fleet in place and a lot of the margin benefits that we're expecting.

With respect to puts and takes, I think we've been very focused on cost reduction and driving productivity. And I think those will continue to deliver value. We do have a step change in labor. We've started that cycle in '24 with the pilot agreement, '25 with flight attendants. And we do expect a couple of other labor agreements in 2026 to be completed. I mentioned in the comments as well, we have some pressure from those step changes. We're planned for them, but they will come through and kind of be most acute as we go through 2026.

So I think for all intents and purposes, looking out probably past '26, '27, '28, we talked about a 17% plus margin. I think that's still well in play. We'll continue to work through and see where we end up as we complete our planning cycle, both the '26 and the longer term. But we're still very focused on those high-teen margins and just navigating through some movements overall from an airline and business model point of view, still feel very good about generating positive cash structurally and finding accretive growth.

If I could just follow up quickly on the 787-10s. I know you mentioned it's just related to delays and maybe it's just kind of normal case negotiations. But is that a signal of what you think the network is going to shape up to be in a few years' time because those are your long-haul, most premium type aircraft. And I assume there's a bit more underpinning why you guys made that decision.

Yes. I mean, it's not. So frankly, those were 18 aircraft to come in, in 2026 and a couple in '27. So that order would have been filled fairly rapidly. There's been delays. We've just managed with Boeing to adjust because of the impact of those delays in how we take those aircraft.

Longer term, no changes in our expectations. And when you look at it, right, I mean, all in, you can do the math on an envelope, but you're talking about maybe 2% of total capacity by the time we get to 2028.

And just -- it's Mike Rousseau, just to follow on that. We think our timing is very, very positive. As you know, Canada is diversifying trade around the world, and we think we play a big part in that diversification. So strategically, bringing in widebodies will allow us to work with Canada on diversifying trade.

Your next question comes from the line of Andrew Didora with Bank of America.

A question for John. I guess with the strike and the way it kind of has influenced near-term EBITDA and cash flow, net leverage is probably a little bit different than you were initially planning for 2025. But I guess when you think about executing on the NCIB, I guess, how do you think about executing on the NCIB in the construct of kind of where your leverage has gone? And how do you think about that keeping that leverage in your range going forward with this plan in place?

Yes. I mentioned it in the commentary, right, that we would look through that onetime hit in Q3 when we thought about long-term decision-making and capital deployment. So we -- I mean, that's a nonrecurring onetime. It won't affect how we view the strength of our balance sheet or the capital deployment decisions and strategy we have to make. I think it will fall off the calculation in 3 quarters and 4 quarters. So -- and still feel very good about our balance sheet. We feel good about how we're allocating capital. No changes.

Okay. Fair enough. And kind of more of a kind of focused question here. Just in terms of free cash flow, right, I think year-to-date, a little bit over $1 billion. You're guiding to flat to up a little bit for the year. I know 4Q is typically seasonally weaker. Just curious what brings that -- it seems like 4Q will be much worse than normal seasonally from a free cash flow perspective. Is that because of the strike -- the cash payouts from the strike? Anything unique there?

Yes. Thanks for asking the question. So we highlighted in the commentary that we have about $600 million, including some of the comp that is accrued and will be paid, but mostly from a delay in vendor payments in the third quarter. We went to an SAP implementation. We had planning for transition. In there, you have about 15 days' worth of payables that would have otherwise been paid in Q3 that will be paid in Q4.

So when you take that $600 million out and you adjust for what I mentioned was roughly $900 million of CapEx, you get a pretty normal free cash flow when you consolidate Q3 and Q4 together. So really, at the end of the day, it's working capital restoration of the payables that were not out the door in Q3 that will catch up in Q4 in that $600 million.

Your next question comes from the line of Fadi Chamoun with BMO Capital Markets.

A question maybe for John. I want to dig into the CASM picture a little bit. So you've kind of averaged about 4% adjusted CASM inflation in the last 3 years, including '25. Going into '26, you've got a bunch of narrow-body, which is potentially pressure on CASM, and you've got some inflationary pressure in labor, but you also have growth and productivity. I'm just trying to think, do we start to go kind of sub-4% as we go to '26? Any kind of framework how to think about the adjusted CASM as we go into next year?

Fadi, fairly, I think we'll address that a little bit more when we get to our guide in February. We're working through that now. I think that '26 will have a bit of pressure, right? I mentioned it before. You're not -- you're getting the ASMs, you're not getting the ASMs that come from a longer-range flying in quite the mix that we would have liked. So that typically is a little bit helpful. The impact of modern fleet as well that we had kind of originally anticipated for '26 is going to be a little bit stalled.

So I'm not concerned about our ability to generate those cost savings and cost reductions. They will just come a little bit later than we had planned for. So I think in 2026, probably not the year where you have the kind of flattening out of cost on a unit basis, but still very confident that will come probably near the end of the year and into '27, '28.

Okay. And just a follow-up on the CapEx and the plan for 2026. Any idea of what kind of the split is for sale leaseback maybe versus straightforward financing?

Yes. So we mentioned, right, in our long-term planning in our Investor Day kind of 3- and 5-year look that we would be active with sale leasebacks. We had earmarked roughly $3 billion on, call it, I don't know, maybe whatever it is, $8 billion of aircraft acquisitions over the same period. And we talked about bringing our owned-to-leased ratio down from 80% owned, 20% leased to something like 60%, 65% owned and, call it, 35% leased. We will continue to do that. We want to do that in the years where we're peaking in terms of CapEx because kind of this logjam of delays and we haven't had a lot in the last couple of years and now finally coming into the peak of our growth cycle. So we will be deploying sale leasebacks in '26, '27, and we'll work through all of that and probably give you a little bit more color as we set those things up for 2026 when we guide. But yes, there will be components of sale leasebacks there for sure.

Okay. Any fuel hedges actually for '26 or it's just Q4 that you're hedged for?

Yes. No, none for '26. That's something to consider. We typically look at the booking curve and what fares we've already sold. And then I mean it's been -- notwithstanding, there has been some volatility. It's been a relatively range-bound fuel price, specifically, I would say, after the spring of '25 through the rest of the year. And we've participated through the year on a couple of occasions, probably around 20% total year fuel hedged when you aggregate all of it. And we did so mostly within the 90-day booking curve once we had fares sold and we saw some breakdown in pricing.

And that concludes our question-and-answer session. I will now turn the call back over to Valerie Durand for closing comments.

Once again, thank you very much for joining us on our call this morning. Should you have any additional questions, don't hesitate to contact us at Investor Relations. [Foreign Language] Have a good day.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.