Air Canada

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. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, simply press star followed by the number one on your telephone keypad. And if you'd like to withdraw your question, again, press star 1. Thank you. I would now like to turn the conference over to Valerie Durand, Investor Relations. Valerie, please go ahead.

Thank you, Krista. Hello, bonjour, et bienvenue à notre revue des résultats du troisième trimestre 2025. Welcome, and thank you for attending our third quarter 2025 earnings call. Joining us this morning are Michael Russo, our President and CEO, Mark Gallardo, our Executive Vice President and Chief Commercial Officer and President of Cargo. And John Deibert, our Executive Vice President and CFO. Other Executive Vice Presidents are with us as well. Ariel Melo-Wechsler, our Chief Human Resources Officer and Public Affairs. Craig Laundrie, our Chief Innovation Officer and President of Aeroplan. Matt Barbeau, our Chief Legal Officer and Corporate Secretary, as well as Mark Nazer, 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 CDAR+. And now I'd like to turn the call over to Mike.

Well, thank you, Valerie. Hello, bonjour. 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 were acted on, and the entire company worked extremely hard to assist those whose travel was disrupted 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 policy, 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 and 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 Mike.

Thanks, Mike, and good morning, everyone. Bonjour à tous. J'aimerais d'abord remercier nos employés. 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 disruptions. We estimate it was a drag of about three points to Q3 unit revenues. Absent this, Q3 would have amounted to one of the best relative present 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 reduced demand between Canada and the U.S. In Q3, we quickly responded to Canadians' growing interest to travel domestically. The trans-border 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 and 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 aeroplane 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 Six Freedom connections. This year, we've doubled down on connectivity, which has been beneficial for our Six Freedom strategy. Demand has been strong, despite the disruptions and impact. Year-to-date, at the end of Q3 2025, six freedom revenues grew a solid 9%. Our strong brand ecosystem built customer loyalty and is a unique 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 six 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's events, Arcana's commercial foundations are solid, adaptable, and core enablers to 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 a theme we've long discussed, addressing Ericana'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 deliberately built a stronger base of bookings going into the winter, filling seats that historically would have been emptied. 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 six 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, an uplift from our expansion into Latin America, which also taps into rising Canadian travel demand and boosts six 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 books 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 through the year. Looking further into 2026, there's also a lot to be said 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 two 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 non-stop capacity to China from Toronto. We're also thrilled to be making Bangkok, year-round from Vancouver, the only non-stop 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 trans-border flights to New York-LaGuardia, Boston, Chicago, and Washington-Delvis, 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're 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. Merci, John, and au revoir.

Thanks, Mark. Good morning, everyone. Bonjour à tous. First, allow me to take a moment to recognize the resilience of our incredible employees. We know that managing the airline 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. 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. $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 one-time charge. Of this, $149 million was a non-cash, one-time, pension past service cost from plan amendments that related to the agreements reached with QP. 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 nine months of the year. Additionally, fuel consumption was 3% lower than in Q3 2024 due to the flight cancellations. Third quarter adjusted chasm was $13.99, up 15% from last year. About a third of the increase was due to cost escalation, mainly in labor, maintenance, and depreciation. Roughly another third 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, non-fuel unit costs were aligned with our full-year chasm expectation at our Q2 call. In all, We estimated disruption at a drag on adjusted chasm 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 five 8-20s 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 disruptions. We expect this ratio to increase slightly in Q4 as we process the outstanding variables from Q3. When thinking about leverage and long-term decision-making, we will look through the one-time 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 14.6 to 14.7 cent 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 optimum 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 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 a 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 52 cents U.S. per litre. approximately 73 cents Canadian 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 pre-planned 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, 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 three additional A220s and one 737 MAX by the end of 2025. Further, we expect to begin retiring old Airbus A320 family aircraft, including A319s and two 320s. In 2026, we expect to receive 18 A220s, 11 A321XLRs, four 737 MAX aircraft, and two 787-10s. While we are particularly excited about receiving our first 8321 XLRs 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 will have approximately six fewer 8220 737s and six fewer 8321 XLR7 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're 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 four 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 our CapEx pro funnel, 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 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 were purchased 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 discipline cost management are core priorities. and our executive-led roadmaps 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 sometime 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 restarted the airline in record time. We are encouraged by the speed at which booking patterns recovered and the strength that has followed. Negotiation 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's relaunch, 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 five-star rating from Apex, its excellence and 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 here. 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 and our customers, we are confident in our ability to deliver significant long-term value to all of our stakeholders. Thank you. Merci. 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.

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. And if you would like to withdraw that question, again, press star 1. Your first question comes from the line of Konark Gupta with Scotiabank. Please go ahead.

Thanks, operator. Good morning. 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 corporate, obviously, you're saying it's growing nicely, and I think Atlantic demand continues well into October and some parts of November. Is much of this resin weakness coming still from the Pacific normalization and maybe transport?

Hi, Conor. 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. you know we're having a very strong november december into the sun uh and then you've got those other uh supporting pillars like premium demand strength and corporate demand strength that are kind of sustaining you know some fairly decent yields that we're going to have on the transport despite the demand drop so that's kind of the color in terms of what we can expect for q4 okay thanks for that um and then on the chasm side john um

I think the implied guidance for Q4 suggests a flattish chasm from last year. You know, I mean, given the inflationary environment you guys are in and obviously the labor contracts and all that, you know, what is contributing to the flattish chasm 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 and 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-focused. 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 all did that in Q3, right? I mean, there's nothing in terms of noise in Q4.

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

Okay, thanks. I appreciate the time.

Your next question comes from the line of Savvy Sight with Raymond James. Please go ahead.

Thank you. Good morning. I'm just wondering on the commentary about the fleet kind of delays in 2026 versus kind of expectations last year. I think there's visibility here. So I was kind of curious, you know, how you're thinking about 2026 capacity and if you were 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?

Yeah, I'd say first of all, I'd separate that into two answers. One, I think we've been disciplined with hiring after we kind of stabilized operations through 24. And I think this year has been, you know, 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 you know, 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, you know, everything we need to bring on those aircraft properly. And I think we have a pretty good read of what 2026 looks like. And, you know, we're going to obviously operate in accordance. But yeah, 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?

Yeah, 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 double digits. We'll hold that for the guidance. in February. Got it.

I appreciate it. And then just to follow up on that, just CAPEX came down. Wondering what the drivers were. Was just that related to the fleet order changes or anything different going on with the CAPEX view?

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

Thank you.

Your next question comes from the line of Daryl Young with Stiefel. Please go ahead.

Hey, good morning, everyone. 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 as it relates to 2026 specifically, just the timing of aircraft deliveries is such that there's going to be you know, some decent ASM growth in Q3 relative to Q2 in 2026.

Got it. And then 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 precision to timing, but we've put it in place and we do intend to use it. And I'll just give some color around our buyback program. We did announce an aggregate of 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 three or five years. So right now we stand at about $1.3 billion of shares bought back. We also did the convertible debt extinguishment, which was also anti-dilutive. So there's still room for us to continue to go. Our plan is to continue to execute as we expected. I think that 2025 positive cash is a good checkpoint here. And obviously, a little bit of an improved profile on CapEx helps as well. We'll pick the right spots, but we do intend to be active on this NCIB strategy. and we'll do that as appropriate. Got it. That's great, Collar. Thank you.

Thank you. Your next question comes from the line of Tom Fitzgerald with TD Cowan. Please go ahead.

Hi, everyone. Thanks so much for the time. I'm just curious, like, how you're thinking about, you know, 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 how you think of managing that risk.

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

Yeah, yeah, 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. So just kind of curious how that's – I know you kind of have – you've got a lot of growth on the Latin markets coming up. I'm kind of curious how that's shaping up and what we should be watching for.

Yeah, okay, good question. So for Q1, the sun market's 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 trans-border 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. leisure 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, you know, we are seeing, you know, we're definitely, I would say we call the bottom a little bit on the trans-border leisure kind of demand erosion.

Okay, that's really helpful. But just as a follow-up, I was wondering if you have any more color on six freedom between Pacific and Atlantic and just some of the deceleration and 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. Thanks again for the time.

Yeah, thanks. So the demand growth so far for six-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 six-freedom performance throughout the year.

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

Yeah, thanks, folks. Good morning. Just very quickly, thinking about the fleet changes next year. You know, 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 maybe go through what the process is going to look like moving all of the 737s into Rouge? Sure. And, you know, 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. Thank you.

For sure. Hi, good morning. It's Mark Nasser. 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 six 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 mainland configuration over the course of the year, as well as the five additional new deliveries that we're going to take. And so we expect, as we get toward 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 two activities are going to happen to be able to balance capacity between the two 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 ensure that we have the unit cost performance at Rouge that we need to be successful in the leisure market.

okay that's helpful thank you um my last question maybe for john on the ncib uh you know one of the questions i've been getting from a lot of folks is just uh when you did the last ncib i guess you went out pretty fast and burned through the allocation um which left you kind of without a the tool to use as the stock came off you know is there 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 SIP 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 once we had come out of 2024 with respect to re-stabilizing the airline, and frankly, working it down to debt, we would be anti-deliberately focused, and that's what we did. I think 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, you know, 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 up the airline on a structural basis. And so we're going to keep a strong balance unit 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.

All right, thank you very much.

Your next question comes from the line of James McGarguile with RBC Capital Markets. Please go ahead.

Hey, thanks for having me on. So I got a question on the capacity in the Canadian market. you 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?

Hi, James. So on the capacity side, we continue to see that the domestic market is obviously very competitive. Generally speaking, demand, sorry, supply is up about 4% or 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've absorbed that capacity, we should anticipate that the yield and RASM will continue to be negative all the way to 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.

Hey, thanks for the call, Andrew. 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 costs 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.

Thank you. Thanks for the question. I think all those things stay intact. I mean, when you look at the overall addition of aircraft, you're talking about 90 aircraft or so over the period of, you know, whatever it is, three, four years. 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 this, you know, we paced accordingly here. the 787s, you know, did have quite a bit of delays from the original purchase dates, so it's coming in 2026, I think this is just managing that delay scenario, so yeah, 2028, you know, you'll have four less aircraft in there, we'll work through that, see what it means, but ultimately, you know, we're bringing in 14 787s and 3321s, 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 Ajamary with CIBC. Please go ahead.

Hey, good morning. Thanks for taking my question. So, yeah, 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. Thanks.

Thanks. Good morning. 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 cap in terms of yields.

That makes sense. Thanks for taking my question.

Your next question comes from the line of Sheila Kaheglu with Jefferies. Please go ahead.

Hi, thanks for the time. This is Kyle and Chloe. 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 know, 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 know, you mentioned a bit about, you know, 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 2025 to 2026, but 2025 isn't where 2025 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, you know, call it, six long-range aircraft and six kind of continental range or shorter-range aircraft, less than we anticipated when we had the original long-term plan invested in 24. So that's a pressure point. I think, you know, 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 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, We do expect a couple of other labor agreements in 2026 to be completed. Mentioned in the comments, well, we'd have some pressure from those step changes. We're planning for them, but they will come through and kind of be most acute as we go through 2026. So I think, you know, 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 team margins and just navigating through some movements. Overall, from an airline and business model point of view, I still feel very good about generating positive cash structurally and finding a creative growth.

Thanks, John. 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. Thanks.

Yeah, I mean, it's not so, frankly, those were, you know, 18 aircraft supposed to come in in 2026 and a couple in 27. So that order would have been filled, you know, fairly rapidly. There's been delays. We've just, you know, managed with Boeing to adjust because of the impact of those delays and, you know, 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 you get to 2028.

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 can play a big part in that diversification. So strategically bringing in white bodies will will allow us to work with Canada on diversifying trade.

Your next question comes from the line of Andrew Dodoria with Bank of America. Please go ahead.

Good morning, everyone. 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, you know, How do you think about executing on the NCIB in the construct of where your leverage is gone, and how do you think about keeping that leverage in your range going forward with this plan in place?

I mentioned in the commentary that we would look through that one-time hit in Q3 when we thought about long-term decision-making and capital deployment. We you know, I mean, that's a non-recurring one time. It won't affect how we view the strength of our balance sheet or the capital deployment decisions and strategies we have to make. I think it'll fall off the calculation in three quarters or four quarters. So, you know, I still feel very good about our balance sheet, feel good about how we're allocating capital. No changes.

Okay, fair enough. And I 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 a billion. You're getting to flat to up a little bit for the year. I know 4Q is typically I see a 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 cash payouts from the strike? Anything unique there? Thanks.

Yeah, 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, and that's $600 million.

Oh, that's helpful. Thank you.

Yeah. Your next question comes from the line of Saadi Xiaomin with BMO Capital Markets. Please go ahead.

Yeah, good morning. A question maybe for John. I want to dig into the chasm picture a little bit. So, you know, you've kind of averaged about 4% adjusted chasm inflation in the last three years including 25 um going into 26 you've got a bunch of narrow body which is uh you know potentially pressure on chasm and you've got inflationary pressure in labor but you also have growth and productivity and i'm just trying to think do we start to go kind of sub four as we go to 26? Any kind of framework, how to think about the adjusted chasm as we go into next year?

You know, Fadi, fairly, I think, you know, 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 know, you're getting the ASMs, you're not getting the ASMs that, you know, come from a longer range flying in quite the mix that we would have liked. So, you know, 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'll come probably near the end of the year and into 27, 28.

Okay. And just to follow up on the CapEx and the plan for 2026, any idea of what kind of the split is for, say, lease back maybe versus... straightforward financing?

Yeah, so we mentioned right in our long-term planning in our investor day, kind of three- and five-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 lease backs 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 lease backs there for sure. Okay, thank you.

Any fuel hedges actually for 26 or it's just Q4 that you're hedged for?

Yeah, no, none for 26. Okay. You know, that's something to consider. We typically look at the booking curve and what shares we've already sold. And then, you know, I mean, it's been notwithstanding, you know, there has been some volatility. It's been a relatively, you know, range-bound fuel price specifically. I would say after the spring of 25 through the rest of the year. And we've participated, you know, 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 shares sold and we saw some breakdown in pricing.

Thank you. Thank you.

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 Investing Nations. Encore une fois, merci beaucoup pour votre attention ce matin. Si vous avez toutes questions supplémentaires, n'hésitez pas à nous contacter aux relations d'investisseurs. Merci. Bonne journée. Have a good day.

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