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 to present fourth quarter and full year 2025 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you would like to ask a question at that time, Simply press star followed by the number 1 on your telephone keypad. And if you'd like to withdraw that question, again, press star 1. Thank you. 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. Hello.

Bonjour. Et bienvenue à notre revue des résultats du quatrième trimestre et de l'exercice 2025. 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 Gallardo, our CCO and President of Cargo, and John DeBert, 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 statement in Air Canada's fourth quarter and year-end news release available on aircanada.com and on CDAR+. And now, I'd like to turn the call over to Mike.

Great. Thank you, Amanda, and welcome. Bonjour. Before I begin, I want to give a special welcome to Amanda on her 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 Durant was promoted to another role within AirCanada. 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 transporter 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 AeroPlant 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 two months of the year. We continued 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 1.7 times, and generating $747 million in pre-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 remained 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 position. 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. The reference 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 eight 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 in 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're 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. And I'll pass it over to Mark.

Thanks, Mike, and good morning, everyone. Bonjour à tous. Je voudrais d'abord remercier nos employés. 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 our Canada's commercial strategy is sound and delivering robust results. In the fourth quarter, we leveraged our international network, our premium positioning, our six 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, imagining through uncertainty, that our account 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 lean on other businesses to drive incremental revenues with Air Canada Cargo, Air Canada Vacations, and Aeroplane 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 growth. 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 three points and representing about 30% of our total passenger revenues. An acceleration of corporate revenues 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 continued building scale in our hubs, reinforcing the competitiveness of our global network. In 2025, we added 13 new destinations in four continents. Further, with improved schedule quality, we increased six 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 counter-seasonal flows to grow our demand base outside the Canadian market and diversify our six freedom revenues. 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 colour 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 to drive and 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's global hub in Toronto will be the second largest trans-oceanic hub, Montreal, the fifth largest transatlantic hub, and Vancouver, the second largest trans-Pacific hub on the North American continent. We continue to see favorable demand trends 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 sun markets with a minimal financial impact expected from the shift. In the spring, we will start trans-border 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 seven destinations to our network. we introduced 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 A321 XLRs to unlock new destinations, such as Berlin, and to enhance our offering to existing markets like Toulouse and Manchester. The A321 XLR also has a role to play within North America. Within the year, we will unveil plans to offer a consistent year-round A321 XLR 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 eight 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 experience. and cargo payload over the current fleet. With optionality for eight 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. Bonjour à tous. Before we begin, I want to acknowledge the exceptional execution across all our 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 2021. 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 EBIT has surpassed $3.1 billion with a 14% margin, exceeding our guidance and market expectations. Full-year performance is 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 CASN 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 non-recurring impact from the August earth 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 recurrent. We're also confident that we will see multi-year structural improvements beyond 2026, driven by the cost benefits of expanding our network and operating a modern fleet, increasing both productivity and scale. Turning out the 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 our plan 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 two 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 non-binding letters of intent for up to $2 billion in sale and leasebacks. We plan to execute our sale and lease back transactions over the next 24 months. This program is expected to bring our fleet ownership levels for a 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. Earlier this year, we successfully repriced and upsized our term loan fee 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 eight firm Airbus A350-1000 aircraft with purchase rights for an additional eight aircraft. The firm aircraft are scheduled to be delivered between 2030 and 2032 and are set to replace the oldest eight 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 impacts 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 15.05 cents to 15.35 cents. 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 narrowbody and lower stage length ASMs will cause some transitory unit cost strain. 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 Invested Chasm 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 $0.90 Canadian per liter, and we're using an FX assumption of $1.36 Canadian to each U.S. dollar. Both assumptions are aligned with current market prices. As of today, approximately 70% of our expected first half fuel needs are hedged at $0.69 Canadian 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 and $800 million. Our guidance reflects the expectation of close to 100% conversion rate adjusted EBITDA to cash from operations. Our guidance also represents net capex for 2026 inclusive of $1 billion 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.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. And if you'd like to withdraw that question, again, press star 1. We also ask that you limit yourself to one question and one follow-up. For any additional questions, please re-queue. And your first question comes from the line of James McGregor with RBC Capital Markets. Please go ahead.

Hey, thanks for having me on. So I got a question on the fleet strategy and the A350. So, you know, 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, you know, are you prioritizing operational efficiency here in existing markets? Are you looking to kind of expand into new markets? Or, you know, is this something that you're looking to achieve both of those objectives simultaneously?

Hi, 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, you know, 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 two elements together, we just have a lot of flexibility with that airplane. But the number one thing, obviously, the number one variable is really the range capability of that aircraft on the passenger side and also on the cargo side.

I appreciate the call there. And then in terms of the revenue, you know, the implied revenue guide, can you just talk about, you know, how you're seeing load factors and yield 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 scenario? and some pressures that we're seeing on the yields in the Pacific. And after that, I can turn the line. Thank you.

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.

Appreciate the caller. Thank you.

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

Hi, everyone. Thanks very much for the time. I just want to dig in on fuel a little bit and 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.

Yeah, 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 from 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 to diversify its trade flows on cargo and corporate. I'm wondering if you could dig into that a little bit deeper, just how you see that timeline playing out, what kind of conversations you're having with your corporate and cargo customers. Thanks again for the time.

Yeah, 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. and 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, you know, obviously that's going to give us an opportunity to further diversify our cargo lanes as well.

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

Hey, good morning, everyone. 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 come 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 in really building out a Six Freedom franchise from Europe to Latin America via 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 wide-body 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 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 2030 and disorders from 2030 to 2032, and then as you look into the middle of that 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. That's great. Thanks.

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

Hi, this is Nate for CONARC. Thanks for taking my questions. 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 8350 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 being included into our planning horizon. But the real as the 350 order.

Okay. And how would the migration then of the Boeing 737 MAX to Rouge affect adjusted chasm 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 costs a little bit of ASS, 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 offer actually, you know, a great product to customers involved in that franchise.

Okay. Okay. Thank you very much.

Your next question comes from the line of Cameron Dorkson with National Bank Financial. Please go ahead.

Yeah, thanks. Good morning. So my question is on Aeroplan, and 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? Good morning.

It's Craig Landry, the president of Aeroplan here. Yeah, 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 AME 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 current spend. So the economics of the basic indicators of the program are 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 on the fleet and some of them are new deliveries. So they'll kind of move through the CAPEX through the year, and we'll kind of manage that with – And so that's what we'll be doing. And you can expect a 2 billion, kind of a billion this year and a billion next year.

Okay, perfect. Thanks very much.

Your next question comes from the line of Jamie Baker with JP Morgan. Please go ahead.

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

Yeah, well, I think first and foremost, right, I mean, it's a long-term planning conversation to start with, right? You don't build capacity from one 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 capacity, we plan it based on the expectation of trends, markets, where we have growth, and where we're bringing on capacity, particularly for long-term, for long-range aircraft. I mean, we've underserved the market, frankly. the opportunity for us to bring narrow bodies on into Canada and the U.S. has also been a bit underserved in the last couple of years. So in both cases, there's a bit of opportunity just to fill in some undercapacity. 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 heroic 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.

So, James, 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. Okay. And then we also kind of map out expected, you know, 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 four trends in terms of what the market will be, should be at the end of the decade. And then, of course, we layer on top, you know, the opportunity for us to take more, you know, market share here in Canada, but also that fixed freedom opportunity. And 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 trans-border assumptions for this year, just given the choppiness that we saw in 2025? Thanks in advance.

So, Jamie, we don't expect a market. We're actually expecting status quo in terms of the market conditions on trans-border. 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. probably taking note of some of the recent competitive moves that have been made. And again, that supports, you know, kind of a constructive backdrop for rebound in trans-border revenue for us this year. Okay. Thank you very much.

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

Hey, good morning. I wonder, and maybe for John, you know, could you talk about, like, you know, what you rate in deciding to do that $2 billion in salee SPACs 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 tracks.

Yeah, no, I think that, you know, the – The capital cost of the leases is going to be very competitive, number one. 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 aircraft. 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 at our balance sheet. So the instruments will stay well within our two X leverage targets. 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 to follow up on that, just what are your expectations for depreciation like this year, next year in terms of step-ups?

Yeah, that's... 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 highlighted in the comments it's a big piece of the year-over-year cost growth. It'll be a little bit more than that in 26, 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'll be a headwind. I think, you know, the positive there, it's a non-cash item, and so we are managing through the CapEx cycles and the depreciation over time. We'll hit cost, unit cost, but I think the rest of the cost structure, I mean, we're 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 a cost structure in 2027, 2028, 2029.

Very helpful, Kyle. Thank you.

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

Yeah, thanks, folks. Maybe going back to some of the cost inflation that we're going to see, I guess, in the chasm 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, thinking kind of the 27, 28 kind of targets that And we get there. How do we think about that, call it yield cost spread as you get past this transition year? Is this something that we should start seeing, you know, chasm 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.

Yeah. Yeah, fair. So a lot on that question. We'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, 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 2025, you know, 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, including productivity. So that's 25. I'd say 2026. By and large, if you did, you know, a strike adjusted 25 compared to 26, I think you're up almost 5%. So, you know, I'd say 300 basis points of that is between the depreciation and labor components. So, put that aside, it leaves about less than 200 basis points of cost growth for the rest of the structure. It's not to excuse the 5%. It's 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, you know, get 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 a few benefits as well that's outside of cash. That should be margin expansionary. So I think, you know, as we look over the next couple of years, you know, meaningfully below inflation would be our target. Okay.

Thanks. I'll leave it there.

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

Hey there. Good morning, everyone. So, John, maybe a few finer points on Chasm here. For 2026, I guess one, can you remind us what you include from a labor perspective? I know there's some, you know, groups that you're going to be negotiating with this year. Two, do you assume any sell-leaseback gains in your CASM forecast? And then lastly on CASM, should we assume, you know, 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 one Q should be the highest growth

quarter for chasm just given the storm impact so for the okay so for late sell these backs let's just get that and get it out of the way so there would be no there'd be no no gains assume nothing into our into our chasm that would reflect any sale With respect to chasm, typically Q1 is a bit higher, so we will have a little bit of a higher chasm. 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 sorry, just labor assumptions in 26 count? Sure.

So we've been pretty, you know, 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, you know, to make our employees the best paid in their respective jobs. 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.

Thanks for that, John. 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 in a volatile industry, you know, why not be a little bit more opportunistic, you know, in the buyback and maybe take advantage of some dislocations out there in the market? Thanks.

Yeah, I mean, we had this conversation earlier, I think, you know, 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, had very specific objectives. We then went out with an SIV and that was a fairly substantial SIV in the middle of the summer. So again, very directed. I think we have a program now where at, 307 million shares. We committed to below 300 million fully leveraged shares by 2028. We're on our way. This program is going to be a tool within that objective. And I think we'll just, you know, 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, you know, we'll leave it at that. Thank you.

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

Thanks. Good morning, guys. Maybe I feel like all the cabin 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, you know, beach 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 a six-freedom opportunity between Europe and LATAM, and also on the Canadian demand. So you combine these two 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.

Got it. Great. Thank you.

Your next question comes from the line of Alexander Agramary with CIBC. Please go ahead.

Hey, thanks for taking my question. Good morning. 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, you know, 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 constructed during the year, and Mark has mentioned that, 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 agreements. 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 is to point the airline towards 27, 28, where we do see a lot of strength, both in margin of creation and frankly, another step change in capacity coming from what we believe is going to be very strong long range aircraft opportunities. So, you know, I think the commentary covers most of this, but we see 2026 is constructive and working through the peak CAPEX cycle and maintaining a strong balance sheet and still rewarding our shareholders.

Okay, great. Yeah, thanks so much.

Your next question comes from the line of Atul Meshwari with UBS. Please go ahead.

Good morning. Thanks a lot for taking my question. I have a question on Canadian domestic capacity. It does appear that some of your domestic competitors are adding pretty little capacity in the front half of this year. The question really is, what are you seeing, you know, 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?

Yeah, good question. So, as we look into the, let's say, call it the spring, the summer, we're seeing roughly about 5% domestic capacity growth. But if you were to segment that down to our three 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 root 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.

And that concludes our question and answer session. I will now turn it back to Amanda Murray for closing comments. Thank you very much. And ladies and gentlemen, that does conclude today's conference call. Thank you for your participation and you may now.