Air Canada

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Air Canada Second Quarter 2026 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. I would now like to turn the call over to Amanda Murray, Head of the Financial Planning, Strategy, and Investor Relations. Please go ahead.

Thank you, Julianne. Hello, bonjour, et bienvenue à notre revue des résultats du deuxième trimestre 2026. Welcome to Air Canada's second quarter 2026 earnings call. Thank you for joining us today. On the call with me are Michael Rousseau, our President and Chief Executive Officer, Marc Galardo, our Chief Commercial Officer and President of Cargo, and John Di Bert, our Chief Financial Officer. Other members of our executive team are also with us and available for the Q&A portion of the call. Before we begin, I remind everybody that today's discussion may contain forward-looking information regarding Air Canada's outlook, objectives, and strategies. Actual results could differ materially due to various assumptions, risks, and uncertainties. Please refer to our Q2 2026 earnings release, our 2025 annual MDNA, and second quarter 2026 MDNA, and filings available on aircanada.com and on CDAR+. With that, I will turn the call over to Mike.

Well, thank you, Amanda. Bonjour, good morning, and thank you for joining us today. Air Canada delivered a strong second quarter with adjusted EBITDA of $719 million at the upper end of our guidance range, despite fuel prices being slightly higher than our expectations. We generated record operating revenues of $6.3 billion, up 11% from the same period in 2025 supported by a very strong total unit revenue growth and broad-based strength across our network. At the same time, our report results were negatively impacted by specific labor-related and other charges, primarily non-cash, that are not reflective of the underlying earning power of the business. John will provide more detail in a few minutes. More importantly, the quarter demonstrated the resilience of Air Canada's diversified business model, Our results reflected a strong pricing environment, resilient demand across the network, a continued focus on controllable cost execution, and strong contributions from our diversified businesses, including cargo, air canal vacations, and aeroplane. Together, these strengths helped us absorb a significant external fuel shock while still delivering adjusted EBITDA ahead of market expectations. Through our pricing actions, capacity management, and fuel hedging positions, we recovered about 50% of the incremental fuel expense in Q2. When compared to our expectations at the start of the year, we expect to recover a majority of the remaining fuel headwind in the second half of the year, with Q4 expected to be above 100%. The strong demand we experienced in Q2 has remained intact throughout the booking window and across the network. More importantly, Air Canada's diversified global reach, premium offering, loyalty platform, and cargo and Air Canada vacation businesses continue to support resilient revenue performance across varying market conditions. These strengths are central to our new Frontier strategy and remain key drivers of long-term value creation, the latest validation being the minority investment in Aeroplan establishing a $10 billion valuation. The quarter reinforced our confidence in Air Canada's strategy and the long-term value creation opportunity ahead. We continue to invest in the future of the airline. Our fleet and product initiatives remain central to our strategy, including the introduction of the Airbus 321XLR and ongoing fleet modernization. These investments are supporting our premium positioning, expanding our network opportunities, and improving the customer experience. Also, we will soon announce exciting new routes for next summer. As I mentioned, we announced yesterday a 25% equity minority investment in Aeroplan for $2.5 billion, valuing the program at $10 million. Aeroplan remains a core part of Air Canada's commercial strategy, and we continue to retain full control of the program's strategy, operations, partnerships, and member experiences. while monetizing a portion of its underlying value. There is no intention of relinquishing control of this valuable and strategically important component of Air Canada. And for greater clarity, there will be no changes to the way members earn or burn points or to any other element of the program because of this transaction. This transaction simply further strengthens our balance sheet, creates value for all stakeholders, Our people are the foundation and strength of Air Canada. We recently concluded four-year collective agreements with Unifor and the International Association of Machinists and Aerospace Workers. These agreements recognize the expertise and contributions of our employees. They reflect our commitment to constructive labor relations and to maintaining Air Canada as a competitive and attractive place to work. and the Position Air Canada to advance its New Frontiers objectives. I want to thank all our employees for their professionalism and dedication. The individual contributions and teamwork allows us to operate through volatility, care for our customers, and continue building a stronger airline and brand. As you know, I'll be retiring at the end of August after almost 19 years of realizing opportunities and managing challenges. I'm very proud of what we accomplished together. The airline has a strong and skilled leadership team in place with clear continuity in strategy and execution. I remain highly confident in its ability to continue delivering sustainable long-term value for shareholders and look forward to opportunities and successes that lie ahead for Air Canada. Before turning it over to Marc, I want to take a moment to thank the investment community for your engagement, questions, and perspectives over the years. Your interest in Air Canada has made us better, and I'm grateful for your support. Thank you, and over to you, Marc.

Thank you, Mike, and good morning, everyone. Bonjour à tous. I'd like to start by thanking our employees for their continued focus on our customers and operational excellence, and our customers for their continued loyalty. Our record quarterly results continue to demonstrate that Air Canada's Strongest Ever Foundation drives our commercial performance. Our diversified revenue streams, our far-reaching global network, and the strong demand from our higher-yielding customer segments reinforced the structural advantages that underpin our results and helped deliver a leading Q2 load factor amongst our North American peers. Q2 operating and passenger revenues both grew 11% year-over-year, reaching $6.3 billion and $5.6 billion respectively. Our passenger revenues were driven by an 11% improvement in PRASM on system-wide capacity growth of 0.3%. Our capacity growth was slightly below our Q2 guidance range reflecting weather-related disruptions and our measured approach to capacity allocation. Air Canada's geographic diversity remains a strength, contributing to a 7% year-over-year increase in yields, and an industry-leading 87.5% system-wide load factor relative to major North American peers. It's important to remember that we entered the second quarter with roughly 50% of our expected traffic booked before the increases in fuel prices, with the vast majority from long-haul markets with longer booking windows. In June, Air Canada served the second largest number of non-stop intercontinental destinations among major North American carriers. The scale of our network is enabling our well-placed hubs to become important international transit points. Despite the longer international booking window, our Six Freedom franchise performed strongly, with revenues growing 9% year-over-year. More than half of this growth came from the Pacific quarter. Within our cabins, premium and higher yielding demand strength persisted through the quarter, with premium and corporate revenues increasing 11% and 19% year-over-year, respectively, Strong engagement from our higher yielding and highly loyal customers continues to differentiate Air Canada and remains a key driver of revenue quality. We're uniquely positioned to capture this demand segment. Importantly, Aeroplan enables our brand loyal customers to engage meaningfully within the Air Canada ecosystem and it's a key component of our diversified revenue base. Moving on to cargo, which is a key enabler of our long-haul performance. With shifting global trade flows and a narrower cost differential between air and ocean freight, cargo revenues rose 29% year-over-year on strong yield growth. Equally significant, our cargo business is increasingly driving Six Freedom volume, using freighters to carry shipments between the Americas into the bellies of our wide-body fleet. Looking ahead, three themes stand out that strengthen our confidence in our commercial outlook. Demand across our network remains constructive throughout the second half of the year, including in the premium segments. Our new international routes are performing very well, supported by robust commercial and operational execution. In response, we have proactively increased capacity across a number of these new markets, further validating our international growth thesis. Second, we continue to see promising demand signals in the shoulder periods. These are months where the demand is less commoditized and as a result falls within Air Canada's structural advantages. In conjunction with our growing counter seasonal six freedom franchise, we continue to expect that the fall and spring shoulders to grow in relative performance. Third, as we advance important product, network and revenue initiatives, we continue cementing Air Canada's structural advantages. For example, initial results from the A321XLR operations validate the potential of this aircraft type in our fleet, providing flexibility to serve new and existing transatlantic markets while supporting our premium strategy within North America. More recently, we released unbundled fares and premium cabins across the Atlantic, the Caribbean, and Latin American markets. And we expect these new offers to better suit the needs of leisure customers by providing more options to travel in premium cabins. With these points in mind, we continue to diligently manage revenue and capacity into the second half of the year, leveraging our network, customer, and revenue diversification to maximize revenue quality and returns. and we expect to recover the majority of the incremental fuel expense in the second half of the year. To close, Eric Kanda's strong Q2 results are a clear validation of the strength of our commercial foundation. And as we look towards 2027, we remain exceptionally well positioned to capitalize on our growing global network, our premium and loyal customer base, and our evolving Six Freedom franchise. Alongside Aeroplan, Air Canada Vacations and Cargo, our diversified commercial business drives our confidence in the long-term opportunities available for Air Canada. And before I hand it over to John, I'd like to thank you, Mike, for your leadership and partnership over the years. It's been a privilege to work with you, and I wish you the very best in your next chapter. Over to you, John.

Thank you, Mark, and good morning, everyone. Before I begin, I'd like to thank our employees. Their focus and execution are what turned our commercial momentum into financial results, and they drove real progress against our financial priorities this quarter. Second quarter adjusted EBITDA was $719 million at the upper end of our guidance range and ahead of market expectations for an adjusted EBITDA margin of 11.5%. Let me provide some additional context to our financial performance. We recovered approximately 15% of the Q2 fuel escalation from our original plan. Because much of the quarter was already booked before fuel prices increased, there was a natural lag before our pricing actions could be fully reflected in fares. Our pricing and revenue management actions supported strong yields and load factors, driving 11% PRASM growth and record operating revenues of $6.3 billion of 11% euro per year. Operating expenses were 24% higher than Q2 2025, including a total of $388 million in charges that were excluded from our reported adjusted EBITDA. These charges relate to pension plan amendments, benefits related items, and a provision for a legal matter. Excluding them, Q2 operating expenses were 17% higher year over year. This reflected a 49% or $565 million increase in fuel expense, net of $205 million in hedging gains. Let me spend a moment on fuel because it was the largest cost driver in the quarter. Our Q2 guide assumed $1.28 Canadian per litre. During the quarter, jet fuel prices remained volatile and moved modestly above our expectations, particularly in May. Our reported Q2 average fuel price was $1.33 Canadian per liter, including the benefit of our hedges. Despite peak fuel reaching more than $1.60 Canadian per liter, with strong commercial execution, we recaptured about 50% of the fuel expense increase in Q2. We expect the recapture rate to build as commercial actions fully cycle into fair mix. This gives us confidence in our expectation to reach recovery rates of over 60% in Q3 and above 100% in Q4 based on the forward curve. Returning to ex-fuel cost structure performance, adjusted chasm increased 7% year-over-year in line with our expectations. More than a third of that increase was driven by the impact of successful labor negotiations on multiple employee groups representing almost 15,000 employees. and half our unionized workforce. Capacity was up just 0.3% year over year as we stayed focused on capacity management amid fuel volatility while prioritizing unit revenues. This created a pressure of about 200 basis points versus our planned adjusted chasm performance. Despite the many moving parts in Q2, we continued to advance cost containment and efficient initiatives across the organization. We expect unit cost performance to gradually improve through the back half of 2026. Earnings performance translated into strong cash generation. We generated $651 million of operating cash flow and $174 million of free cash flow in the quarter. We also completed $218 million of sale-leaseback transactions. Bringing the first half proceeds to $501 million and keeping us on track towards our $1 billion target for 2026. Our balance sheet metrics are among the best in the industry. We ended the quarter with $8.9 billion of total liquidity, representing 38% of trailing 12-month revenues, well above our 15% to 20% long-term target. Our net leverage ratio ended the quarter at 1.7 times, one of the strongest among North American airlines and comfortably below Our long-term target of less than two times. And finally, year-to-date, we have repurchased 14.5 million shares. Recall that in May, we paused our NCIB buying. We have now deployed $1.6 billion in share buybacks since November 2024, including $270 million in 2026. This reduced our outstanding share count to 280 million units as of Q2 2026, a reduction of 22%. On to fleet. We've continued with our fleet renewal program, taking delivery of two A321XLRs and five A220s this year. We expect to receive the first two Boeing 787-10s by year end, in addition to an additional seven XLRs and 11 A220s. We're also well advanced in our 737 fleet transition to Rouge, with 21 aircraft already transferred as of June 30th. With gross capex to reach $3.6 billion in 2026, we expect gross capex to reach $3.6 billion in 2026. The $300 million decline from our prior disclosure is primarily related to the timing of deliveries and aircraft configurations. Speaking of financial strength and balanced capital allocation, let me now speak about the exciting announcement we made yesterday. A 25% minority equity investment in Aeroplan for $2.5 billion that values the program at $10 billion or at a 21 times EBITDA multiple. This transaction crystallizes the value of what we believe is one of the best and most prestigious airline loyalty programs in the world. Aeroplan is an important part of our portfolio. We believe the $10 billion valuation reflects its significant economic potential while retaining future optionality and control over the strategic and operational direction of the company. We are proud to welcome Blackstone, La Caisse and the other investors as partners. And we view this transaction as an accelerant to both our new frontiers plan and the broader value creation thesis for Air Canada shareholders, while providing financial flexibility and accelerating value realization. Let me now highlight a few important points. Air Canada retains full management discretion on all operating decisions, program design and execution, ensuring continuity in the management and growth of the Aeroplan franchise. The investor group will own a 25% minority share and will be entitled to participate in distributions from Aeroplan based on an agreed distribution policy. Air Canada will have the right to repurchase the shares between years 5 and 8 for a purchase price that reflects a total internal rate of return of 6.5% to the investors. Proceeds will be deployed to create further value and support our balanced approach to capital allocation. First, we will pay down our August 2026 $1.2 billion U.S. debt maturity. We expect this to immediately improve gross and net debt leverage by a half turn. We also expect to initiate a substantial issuers bid to buy back and retire up to $800 million Canadian in Air Canada shares. Taken together, the transaction de-risks the balance sheet, returns capital to shareholders, and accelerates our path to an investment-grade rating over the midterm. This transaction achieves many critical objectives. It surfaces and highlights the value of our world-class loyalty franchise, where we believe the market underappreciated it. It strengthens the balance sheet and improves financial flexibility. It accelerates our progress towards long-term leverage objectives, and it rewards shareholders as we continue to invest to grow the airline and expand margins. This transaction gives us even more confidence in our value creation strategy and our ability to execute new frontiers for our customers, our employees, and our investors. Turning to our outlook. We're reinstating and updating our full-year 2026 guidance. Importantly, our outlook reflects the same themes that have supported our second quarter performance. Constructive demand trends across the network, resilient premium and corporate demand, continued progress on fuel recapture, and disciplined cost execution. We now expect full-year ASMs year-over-year growth of 2.25% to 3.25%. reflecting a focused approach to matching capacity with demand while retaining flexibility in a dynamic environment. We expect adjusted CASM to increase between 5% and 6% versus 2025, reflecting the impact of recently ratified labor agreements, ongoing inflationary pressures, and a weaker Canadian dollar. We continue to expect cost performance to improve through the back half of 2026. Our outlook assumes a fuel price of approximately $1.38 Canadian per liter for the third quarter of 2026, equivalent to $3.70 U.S. per gallon, based on a forward curve as of July 29, 2026. That assumption incorporates our hedging portfolio, which covers 17% of anticipated third quarter jet fuel purchases at an average price of $0.88 U.S. per liter before interplane fees and taxes. Our fuel assumption for the fourth quarter is approximately $1.29 Canadian per liter or $3.50 U.S. per gallon. Taken together, these assumptions support full-year adjusted EVA guidance of $2.9 billion to $3.2 billion, with the lower end reflecting a $100 million fuel allowance to cater for some potential Q4 fuel price variability. Regardless of fuel prices, however, we remain focused on driving results through commercial execution, cost excellence, and operational reliability. Finally, we remain focused on free cash flow generation and our guiding to free cash flow of between $200 and $500 million for full year 2026. This is consistent with our EBITDA outlook and assumes the successful execution of approximately $1 billion of sale and leaseback transactions during 2026. The quarter demonstrated the link between commercial execution and financial performance. The strength of our diversified revenue streams translated into strong earnings, strong cash generation, and continued balance sheet strength. That foundation gives us confidence in both our outlook and our long-term strategy. To conclude, our priorities are clear and unchanged. Manage the controllables, including commercial actions, capacity deployment, Cost Execution, and Operational Performance. Protect our cash generation and the strength of our balance sheet, and continue advancing the long-term value creation strategy we have set out in New Frontiers. Before I turn it back to Amanda, I'd like to take a moment to acknowledge Mike. Mike, it has been a privilege to work alongside you these past few years. You leave behind a strong Air Canada, poised for success. Thank you for your leadership, your partnership, and your support. I wish you every success and happiness in the years ahead. With that, I'll turn it back to Amanda for questions. Thank you.

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

Thank you. As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. In the interest of time, we ask that you please limit yourselves to one question and one follow-up question. Thank you. Our first question comes from Atul Maheswari from UBS. Please go ahead. Your line is open.

Good morning. Thanks a lot for taking my question. John, could you give us some of the puts and takes around the back half-chasm expectation? Seems like it's a little higher than the original guidance provided earlier in the year, so what's driving some of the headwinds? And are some of the headwinds in the back half basically isolated to the back half, or could they persist into 2027? So any thoughts around 2027 chasm also would be helpful.

Okay, great. Thanks. Thanks, Atul. So I would say that, generally speaking, we've We've come through the first half where we would have expected and we've put a lot behind us as well as you know with all of the labor agreements now done and that's fully reflected in our cost structure and I think largely as we had expected even back when we were in investor day in 2024. So I think we've put a lot behind us and I feel pretty good about where we are. Looking at the second half, we do have a little bit lower capacity expectation than we would have planned for in the year. So the second half will reflect a little bit of that as well, and so there's a little bit of pressure versus our original expectations. I would expect us to be in the 4% to 5% range for the second half of the year, coming into that 5% to 6% for the full year. And alongside a little bit lower capacity, I think the sales commissions does pose a little bit of pressure given the higher fares. and then I would say that the Canadian dollar has been a little bit weaker and that just has a general impact on cost structure. All that being said, I feel pretty good about the opportunity here as aircraft come in and we start generating more capacity and frankly even a better mix of capacity into 2027 that we'll start to see some of that cost pressure abate and too early to get into any financial metrics for next year but I would say that and many more. Thank you.

The U.S. network airlines have all highlighted or guided to third quarter and fourth quarter drafts to be above the second quarter in part by obviously the booking curve benefit with the greater portion of the back half bookings coming in at higher fares. In the case of Air Canada, the third quarter is pretty clear, but the question really is on the fourth quarter. Do you expect the fourth quarter trasm to be above second quarter like the U.S. Airlines guided, or are there any puts and takes that we need to be mindful of for the fourth quarter?

I'll take that one. You should anticipate that Q4 trasm will be higher in terms of year-over-year than Q2, because obviously when the conflict started, we didn't have much of a base of booking, so we've Thank you very much.

Our next question comes from Savvy Sith from Raymond James. Please go ahead. Your line is open.

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

Yeah, yeah. I think just by math, the 10 billion over to 21, you're very close to the number there. Yeah, to the 475. We think this is a tremendous transaction for Air Canada and for Airplan as well and its members. We are... As you said, we do have a very strong balance sheet. As we go into a growth cycle here over the next couple of years, we feel very confident about the value we can create with Air Canada and the expansion of the network and everything that we can bring to our customers. We've always said we're going to take care of three things when we capital allocate. Number one, invest in the airline, which we continue to do. Number two, keep a very strong balance sheet throughout that growth cycle, which we're doing and we're going to further improve with this transaction. And thirdly, to reward investors as they support that growth and value creation. And I think again, in this case, we will be able to do that. We talked about being able to restore pre-pandemic share count levels. This transaction accelerates that probably two years before our stated original target in 2028. will be at those levels after the upcoming SIB. The ability to improve the balance sheet to the extent that investment grade would be attainable is also built into this transaction. We'll be able to extinguish $1.2 billion US of debt without affecting the liquidity whatsoever and then pursue with great confidence the next 24 months of Growth CapEx that we've already built into the plan as we had in Investor Day. Just to underline that, there's no new allocation of this capital. It was not designed for anything other than to support the execution of new frontiers and to create value for investors, both immediately with marking the value of Aeroplan as well. I think it was an underappreciated asset, and we believe this transaction also highlights that. So it achieves many, many important things. Overall, I would say it's going to help create a lot of value as we execute our new Frontiers plan.

I appreciate that, Colin. If I might follow up on one of Atul's questions, as you think about next year's unit cost, what kind of a growth are you generally at a high level underwriting?

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

Appreciate it. Thank you. Our next question comes from Tom Fitzgerald from TD Cowen. Please go ahead. Your line is open.

Tom Fitzgerald Hi, everyone. Thanks for the time. And congrats on the Aeroplane transaction. Wanted to stick with that for a question. So how should investors think about just any kind of sense of the distribution policy? Is it fixed? Is there a payout ratio? Is there a minimum with upside participation? and then just how should we think about the profit attributed to the NCI just impacting EPS just any color there and then just if the if you if Airplane out earns that six and a half percent IRR does the excess accrete to NCI on the balance sheet and then revert to AC shareholders through equity at repurchase any color on that would all be really helpful.

Okay so I have a feeling that we're going to have you know a call here and then probably a call later on some of the technical Thank you very much. There is a tiering of distributions, but all in our expectation is that it would be about 25-75 on any given year. And the distribution policy at the discretion of the board, which is fully controlled by Air Canada. So we'll obviously manage that responsibly. With respect to... I think left NCI and the minority interest on the P&L. The way we think about it, I guess, you know, simplified here is we're taking out debt, which is about 1.7 billion Canadian. We would have potentially refinanced that debt. So if you think about just the interest cost savings there against the minority interest, not a lot of space between the two. The minority interest may be a little bit higher, but not that much higher than the interest cost savings. and so when it comes to EPS, a touch maybe higher, but really the impact will be from the lower share count that comes from the buyback, so probably in the neighborhood of eight to 10% when it's all said and done in terms of reduced share count. So we believe that's gonna be EPS accretive pretty quickly. And then in the longer term, the way that the call option is designed is that The entirety of all of the cash streams, so the dividends will give rise to an option to buy back our stake in between years 5 and 8 for a total IRR of 6.5%. So those cash flows that would have come from the distributions will count against the overall IRR. That will leave a purchase price that's established setting that 6.5% return target. and we believe that, you know, that can be favorable as the value of Aeroplan should grow over time. So, you know, from that point of view, accretes to the benefit of the Air Canada shareholders.

Okay, great. That's incredibly helpful. And then just as a quick follow-up, just curious what the feedback from or if you haven't gotten any feedback from the credit rating agencies on the transaction and any comments that they provided. Thanks again and congrats, guys.

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

Our next question comes from Jamie Baker from JP Morgan. Please go ahead, Delana Joseph.

Hey, good morning. This is James on for Jamie. Maybe just want to touch on the corporate side. Revenue was up by double digits. Thanks, James. So on the corporate side, July and August are relatively weak corporate months.

You know, although they're the strongest months in terms of travel volume, in terms of corporate premium demand, it's also the weakest. So there's a little bit of upside in July and August, but it's really as September goes and return to office, return to school, that's when we're going to see corporate bounce back. We have a constructive outlook for corporate revenue in September all the way through December. We continue to expect double-digit growth. And it's really principally coming almost like a third, a third, a third between the domestic Transborder, and what we see on the transatlantic. Despite the fact that Canada-U.S. demand is still relatively flat year-over-year, the actual premium corporate demand continues to be higher year-over-year. And we see that constructive outlook all the way through the year.

All right, thanks. And then maybe on the second question, just following up from Tom's rating industry's question, and maybe John, if the airplane transaction is going to Thanks for the question. So I think you hit on a couple of good things there. So one, our gross leverage was about 3.7%. Once paid down, this maturity will take us to about 3.2. So that's one. I think getting below 3 is another important milestone. So if you look through holding the liquidity that we have, which as I mentioned in my comments, 38% of the last trailing 12 months of revenue, our objective to be 20% or so. It gives me more firepower to continue to take out where appropriate gross debt as it matures. So a continued trajectory through improving the gross debt leverage, I think, is part of the conversation with the agencies. Number two is continued margin expansion. So I think that that is the next important catalyst for us. And with that, as you know, I've often talked about the conversion of our EBITDA margin being high quality to cash from operations and getting to a sustainable 12% or better capex number. So the construct of that is again fully aligned with a path to improved ratings and ultimately an investment grade rating with the agencies. We are exactly where we wanted to be when we laid that plan out in December of 24. I would say to some degree we're ahead of that plan and 27 is going to be an important year obviously. We'll have aircraft and we'll have a better mix of flying and we'll have an incredibly strong balance sheet and a stabilized share count so we think that over the next two years or so a path to investment grade is certainly possible. That makes sense. Thanks John. Thank you.

Our next question comes from Chris Murray from ATE Cormark Capital Market. Please go ahead. Your line is open.

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

Sure, Chris. There's a lot to unpack in that question. So what we're seeing in the shoulder really is kind of a continuation of what we've been seeing in the last couple of years. You know, Air Canada is a bit more kind of indexed on premium travel, corporate travel. And, you know, those trends are not as robust in July and August, but they definitely come back in September and beyond. And what we've noticed for a couple of years is that premium customers, whether for leisure or business purposes, have been traveling more on the shoulder than the typical summer peak. And that's been, you know, to our favor in terms of seasonality. So what we're seeing in September, October is quite the same. Our international demand is really, really strong. The premium demand is quite strong, booked significantly higher year over year in terms of load factor and in yield, and obviously that sector is much more resilient. And we're looking at a very constructive setup for the fall, probably one of the stronger that we've probably seen in our history. As we go into late fall, early winter, it's still a bit early. Those same demand signals continue, but we start to migrate a bit more to a sun South America network. And it's a bit early to kind of give you a point of view on that. And again, for Q1, just simply too early. But all this to say that, you know, on a relative basis, the spring and shoulder seasons show more strength. And as we think about 2720 and how we allocate capacity, we'll be taking more capacity risk in those seasons than the actual summer peak.

Okay, that's helpful.

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

Good. Thanks, Chris, for that. So there's no doubt the board and management, executive management, have talked about this transitional period. Anko, you're right, won't be joining until towards the end of January. First of all, we have an incredibly strong executive group that's sitting around me right now who have created new frontiers, who are executing new frontiers, and the path is very clear over the next several months as to what we have to accomplish. The board will Okay, I'll leave it there. Thanks folks.

Our next question comes from Darrell Young from Stifel. Please go ahead. Your line is open.

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

Good morning, Craig Landry here, President of Aeroplan. Yeah, so I don't believe we're talking about our breakage rate publicly, but there is a previously stated breakage rate of Aeroplan when it was a separate business, and that was in and around 10%, and so you can envision that it would still be relatively similar to that. In terms of how we're the profitability drivers of the program and how we're progressing that, First and foremost, the strong membership-based growth is critical. We have between 4 and 5 million members when this program was brought back in 2018, and we're sitting over 10 million members now, and that number continues to grow. So there's a very strong organic growth from the center of the program that reflects, I think, the appeal of the program and the breadth of the partnerships we have across financial and travel and commercial partnerships. We continue to extend the partner portfolios. Recently we've announced partnerships with Hertz and with World of Hyatt as well. So as we continue to strengthen that member program, we're able to attract broader appeal. So that's driving top-line revenue in terms of point sale to third parties and third-party gross billings. In terms of managing the profitability beyond that, it's important that we have a range of redemption options available across travel and retail options. We're able to price those in a fairly diverse way. There is some use of technology behind the scenes to try to enable us to try to optimize the overall unit cost, and we balance the unit cost as a function of the quality of unit revenue that comes in the front door, and that enables us to create a stable business and to manage the profitability.

Got it. Okay. That's it for me. Thanks.

Our next question comes from Cameron Dirksen from National Bank. Please go ahead. Your line is open.

Yeah, thanks very much. Good morning. Just on the arrow plan, I mean, if the investors here have a 6.5% IRR call over the next five-plus years, Is your expectation that Aeroplane can outgrow its cash flows beyond that level? I guess what I'm kind of getting at here is you've pegged a value here at 21 times trillion 12-month EBITDA for the business. Is the opportunity in five or six years going to be that you buy back that stake at a more favorable valuation from Air Canada's perspective?

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

Okay, that's helpful. Is your expectation that you'll be providing any more financial information specific to Aeroplan as we move forward here? Thanks very much. Thank you so much.

Our next question comes from James McGarrigle from RBC Capital Markets. Please go ahead, your line is open.

Hey, good morning and thanks for having me on. I just wanted to ask on the EBITDA guidance. You know, the current reinstated EBITDA guidance versus what you initially provided in the beginning of the year. I know you talked about this a little bit in your prepared remarks, but can you quantify the bridge between the initial guide and your current guide Thank you, James. So, I'm going to take a shot at making it simple. And if you do this bottom up, you'll probably get to numbers that are right on to what I'm going to walk you through. So,

In simple terms, our new guide range reflects our original guide less the hit, the headwind that we will have taken for what are effectively fares that were booked before the conflict occurred and that we've produced the flying thereafter, which means we bought fuel at prices that were higher than what the fares were sold. In very simple terms, we're going to deliver the original 2026 plan adjusted for the fact that when the conflict happened, we had, for simple terms, and I'll just do some very quick math, we had all of March or most of March booked with fares. We had, obviously, the impact of fuel from February 27th. The second quarter was 50% booked. which means we had to provide fuel against that booking at the spots that weren't effective at the time sold at roughly 90 cent equivalent. 25% of Q3 and 10% of Q4. If you take the aggregate of all that in very simplified terms you have about a billion three million a billion three hundred million liters of fuel that were used to fund fares sold pre-conflict. The average The average fuel price that we put in our guide is $1.25. Our plan rate was $0.90. So $1.3 billion times $0.35 gets you about $500 million and change. The math is not quite that. If you do it bottom up and you wait by month and there's rates for every month and every period, it gets closer to almost $600 million. But the bottom line is $500 to $600 million is the headwind that from day one was to some degree non-recoverable. Since that period, what it means is that our commercial and fares strategy have offset the remaining fuel exposure, which means we're selling on average into the market at the cost of the fuel that we're paying. Of course, there's some lumpiness because it's been very volatile. That's really the story. So $3.35 billion was the bottom end of our original range. If you take out 5 to 600 million, you're sitting at about 2.8. We have a bottom end of 2.9 in our new guide. At 3.75 billion, you take out 5 to 600, you're sitting around 3.1, 3.2. Our top end is 3.2. In my guide, and I've said so in the remarks, because it continues to be volatile, and there is some expectation in the forward curve for Q4 to have slightly decreasing fuel rates. We've left a little bit of cushion so that last $100 million at the bottom of the range is to protect against the fact that Q4 may not come down as it was anticipated in the forward curve. So again, we'll wait and see what happens there. We leave ourselves about $100 million which on a billion and a half liters is roughly five cents of call it contingency for Q4. And on any given day, that's either true or not true based on where fuel and oil prices are trending. I appreciate the color there.

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

Okay, great. So just on cash flow, recall we guided $400 to $800 million. as I've mentioned before we convert high EBITDA to cash from operations so take out the same five to six hundred million from that range and you're pretty much sitting at the two to five hundred million range that's our bottom up all things considered so originally four to eight hundred million comes off five to six hundred million dollars for the we've adjusted capex throughout the year To be honest, some of that has been just some tactical decision making. Some of it has been OEM delays. On average, I would say, if you just took across the portfolio largely of the two new programs, the 321XLRs, to some degree the 220s, there's been about three months of slippage in delivery dates. So, you know, that reflects a couple of planes moving out of the year. and then the rest of it, like I said, tactical, just running the business. So, you know, reflecting the current environment and a little bit of an adjustment on overall capacity and the projects we're running. So not a lot to announce there other than the fact of we're going to have a lot of planes and they're going to have some movement and we're going to be very agile and we have been to manage all of that. Thank you. Thank you.

Our next question comes from Sheila Kayoglu from Jefferies. Please go ahead, your line is open.

This is Jack on for Sheila. I'm just hoping to turn back to revenue for a second. Underlying the Q2 RASM growth of 11%, can you just parse out the unit revenue contribution from both premium and main cabin? It would kind of be great just to understand what the spread has been between premium and main the last several quarters, and if you're seeing that gap narrow like some of the U.S. peers.

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

Got it. That's really helpful. Maybe just to stay on premium, dig into segmentation for a second. I know you added the A321XLR this quarter, and it's a solid result so far in the transatlantic, and I think that's further bolstered by your unbundled fare options. Are there any early stats you can share on the unbundled fare options that are kind of around buy-up behavior?

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

Got it. Thank you very much.

And our last question will come from Konark Gupta from Scotiabank. Please go ahead. Your line is open.

Thanks for squeezing me in, and I put my congrats to you, Mike, for all the years of great work, as well as congrats on the Airplane transaction, guys. My first question on Airplane itself, are there any performance benchmarks that you guys have to meet to support the 6.5% net IRR hurdle?

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

Thanks, Sean. And if I go back to your 2020 for Invest Today, the targets you laid out for ASM in 2008, I guess, was... 130 billion ASMs. I mean, obviously, we are seeing some delays from OEMs, et cetera, and also, you know, the fuel environment has curtailed some capacity growth here in 26. How feasible do you think it is to achieve that 130 billion ASM target by 28?

Yeah, I'd say that that's going to be a tough number to make, right, if you think that I said for 27 somewhere. probably 112, you know, maybe 115, so call it a range above what we did in 19, and you'll probably be well into the 120s the following year. That said, overall revenue performance has been solid, and we'll see how this all shakes out, including the fuel situation, but we feel still pretty good about the overall growth to our 28 targets. We can update those as we kind of run longer term, but I still feel pretty good about The overall economics in 2028. We have some work to do to get to that 17% margin. We have a lot of tailwind with respect to both mix, scale, overall cost improvements. But the biggest challenging part of the cost structure behind this now in the last couple of years. So we still feel confident that we have a business that can deliver on a lot of those 2028 objectives. 130 billion ASMs. Thank you very much for joining us this afternoon. Should you have any questions, please feel free to contact us at the Investor Relations Team.

Thank you and have a nice day.

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