Air Canada Q2 2026 Earnings Call Transcript

Quartr
Provided by Quartr
August 12, 2026

Key Takeaways

  • Positive Sentiment: Strong Q2 performance: Air Canada reported record operating revenue of CAD 6.3 billion, up 11% year over year, and adjusted EBITDA of CAD 719 million, at the high end of guidance despite higher fuel costs. Passenger PRASM rose 11%, supported by an 87.5% load factor and resilient premium and corporate demand.
  • Positive Sentiment: The company expects to recover more than 60% of incremental fuel costs in Q3 and over 100% in Q4 through pricing, capacity management, and hedging. Full-year adjusted EBITDA guidance was reinstated at CAD 2.9 billion–CAD 3.2 billion, while 2026 free cash flow is expected at CAD 200 million–CAD 500 million.
  • Positive Sentiment: Air Canada agreed to sell a 25% minority stake in Aeroplan for CAD 2.5 billion, implying a CAD 10 billion valuation, while retaining operational and strategic control. Proceeds will fund repayment of a US$1.2 billion debt maturity and potentially an issuer bid of up to CAD 800 million, accelerating deleveraging and shareholder returns.
  • Positive Sentiment: Revenue diversification remained a key strength, with cargo revenue increasing 29% year over year and Aeroplan membership exceeding 10 million. Management also highlighted strong international, premium, and shoulder-season demand, as well as encouraging early results from the A321XLR.
  • Negative Sentiment: Cost pressures remain significant, with adjusted CASM up 7% in Q2 and full-year adjusted CASM expected to increase 5%–6% due to labor agreements, inflation, lower capacity growth, and a weaker Canadian dollar. Management acknowledged that the previously targeted 130 billion ASMs by 2028 now appears difficult to achieve, while CEO Michael Rousseau’s retirement creates a transition period before his successor starts in January.
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Earnings Conference Call
Air Canada Q2 2026
00:00 / 00:00

There are 16 speakers on the call.

Operator

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.

Speaker 1

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

Speaker 2

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 CAD 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 CAD 6.3 billion, up 11% from the same period in 2025, supported by a very strong total unit revenue growth and broad-based strength across our network. At the same time, our reported results were negatively impacted by 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.

Speaker 2

Our results reflected a strong pricing environment, resilient demand across the network, a continued focus on controllable cost execution, and strong contributions from our diversified businesses, including Cargo, Air Canada Vacations, and Aeroplan. Together, these strengths helped us absorb a significant external fuel shock while still delivering adjusted EBITDA ahead of market expectations. Through our pricing actions, capacity management, and fuel hedging positions, we recovered about 50% of the incremental fuel expense in Q2. When compared to our expectations at the start of the year, we expect to recover a majority of the remaining fuel headwind in the second half of the year, with Q4 expected to be above 100%. The strong demand we experienced in Q2 has remained intact throughout the booking window and across the network.

Speaker 2

More importantly, Air Canada's diversified global reach, premium offering, loyalty platform, and Cargo and Air Canada Vacations businesses continue to support resilient revenue performance across varying market conditions. These strengths are central to our New Frontiers strategy and remain key drivers of long-term value creation. The latest validation being the minority investment in Aeroplan establishing a CAD 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 A321XLR and ongoing fleet monetization. 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.

Speaker 2

As I mentioned, we announced yesterday a 25% equity minority investment in Aeroplan for CAD 2.5 billion, valuing the program at CAD 10 billion. 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 experience while monetizing a portion of its underlying value. There is no intention of relinquishing control of this valuable and strategically important component of Air Canada. For greater clarity, there will be no changes to the way members earn or burn points or to any other element of the program because of this transaction. This transaction simply further strengthens our balance sheet, creates value for all stakeholders, and is an important step on our path toward an investment-grade rating in the midterm. Our people are the foundation and strength of Air Canada.

Speaker 2

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 they position Air Canada to advance its New Frontiers objectives. I want to thank all our employees for their professionalism and dedication. The individual contributions and teamwork allows us to operate through volatility, care for our customers, and continue building a stronger airline and brand. As you know, I will be retiring at the end of August after almost 19 years of realizing opportunities and managing challenges. I am 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.

Speaker 2

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

Speaker 3

Thank you, Mike, and good morning, everyone. I would 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 help deliver a leading Q2 load factor amongst our North American peers. Q2 operating and passenger revenues both grew 11% year-over-year, reaching CAD 6.3 billion and CAD 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.

Speaker 3

Air Canada's geographic diversity remains a strength, contributing to a 7% year-over-year increase in yield and an industry-leading 87.5% system-wide load factor relative to major North American peers. It is 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 Sixth Freedom franchise performed strongly, with revenues growing at 9% year-over-year. More than half of this growth came from the Pacific corridor.

Speaker 3

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 are uniquely positioned to capture this demand segment. Importantly, Aeroplan enables our brand loyal customers to engage meaningfully within the Air Canada ecosystem, and it is 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 Sixth Freedom volume using freighters to carry shipments between the Americas into the bellies of our wide-body fleet.

Speaker 3

Looking ahead, three themes stand out that strengthen our confidence in our commercial outlook. First, demand across our network remains constructive throughout the second half of the year, including in the premium segments. Our new international routes are performing very well, supported by robust commercial and operational execution. In response, we have proactively increased capacity across a number of these new markets, further validating our international growth thesis. Second, we continue to see promising demand signals in the shoulder periods. These are months where the demand is less commoditized and as a result, falls within Air Canada's structural advantages. In conjunction with our growing counter seasonal Sixth Freedom franchise, we continue to expect that the fall and spring shoulders to grow in relative performance. Third, as we advance important product network and revenue initiatives, we continue cementing Air Canada's structural advantages.

Speaker 3

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 in premium cabins across the Atlantic, the Caribbean, and Latin American markets, and we expect these new offerings 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. We expect to recover the majority of the incremental fuel expense in the second half of the year. To close, Air Canada's strong Q2 results are a clear validation of the strength of our commercial foundation.

Speaker 3

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 Sixth Freedom franchise. Alongside Aeroplan, Air Canada Vacations, and Cargo, our diversified commercial business drives our confidence in the long-term opportunities available for Air Canada. Before I hand it over to John, I would like to thank you, Mike, for your leadership and partnership over the years. It has been a privilege to work with you, and I wish you the very best in your next chapter. Over to you, John.

Speaker 4

Thank you, Mark, and good morning, everyone. Before I begin, I would like to thank our employees. Their focus and execution are what turn our commercial momentum into financial results, and they drove real progress against our financial priorities this quarter. Second quarter adjusted EBITDA was CAD 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 50% 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 CAD 6.3 billion, up 11% year-over-year.

Speaker 4

Operating expenses were 24% higher than Q2 2025, including a total of CAD 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 CAD 565 million increase in fuel expense, net of CAD 205 million in hedging gains. Let me spend a moment on fuel because it was the largest cost driver in the quarter. Our Q2 guide assumes a CAD 1.28 per liter. During the quarter, jet fuel prices remained volatile and moved modestly above our expectations, particularly in May. Our reported Q2 average fuel price was CAD 1.33 per liter, including the benefit of our hedges.

Speaker 4

Despite peak fuel reaching more than CAD 1.60 per liter, through a 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 fare 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 CASM 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, 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 CASM performance.

Speaker 4

Despite the many moving parts in Q2, we continued to advance cost containment and efficient initiatives across the organization. Through these actions, along with planned capacity growth, we expect unit cost performance to gradually improve through the back half of 2026. Turning now to the balance sheet. Earnings performance translated into strong cash generation. We generated CAD 651 million of operating cash flow and CAD 174 million of free cash flow in the quarter. We also completed CAD 218 million of sale leaseback transactions, bringing the first half proceeds to CAD 501 million and keeping us on track towards our CAD 1 billion target for 2026. Our balance sheet metrics are among the best in the industry. We ended the quarter with CAD 8.9 billion of total liquidity, representing 38% of trailing 12-month revenues, well above our 15%-20% long-term target.

Speaker 4

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. Finally, year-to-date, we have repurchased 14.5 million shares. Recall that in May, we paused our NCIB buying. We have now deployed CAD 1.6 billion in share buybacks since November 2024, including CAD 270 million in 2026. This reduced our outstanding share count to 280 million units as of Q2 2026, a reduction of 22%. On to fleet. We have continued with our fleet renewal program, taking delivery of 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 are also well-advanced in our 737 fleet transition to Air Canada Rouge, with 21 aircraft already transferred as of June 30th.

Speaker 4

We expect gross CapEx to reach CAD 3.6 billion in 2026. The CAD 300 million decline from our prior disclosure is primarily related to the timing of deliveries and aircraft reconfigurations. 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 CAD 2.5 billion that values the program at CAD 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 CAD 10 billion valuation reflects its significant economic potential while retaining future optionality and control over the strategic and operational direction of the company.

Speaker 4

We are proud to welcome Blackstone, Lakestar, and the other investors as partners. 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 five and eight for a purchase price that reflects a total internal rate of return of 6.5% to the investors.

Speaker 4

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 the gross and net debt leverage by a half turn. We also expect to initiate a substantial issuer's bid to buy back and retire up to CAD 800 million 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.

Speaker 4

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 are 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%-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.

Speaker 4

Our outlook assumes a fuel price of approximately CAD 1.38 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 into-plane fees and taxes. Our fuel assumption for the fourth quarter is approximately CAD 1.29 per liter or $3.50 U.S. per gallon. Taken together, these assumptions support full year adjusted EBITDA guidance of $2.9 billion-$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.

Speaker 4

Finally, we remain focused on free cash flow generation and are guiding to free cash flow of between CAD 200 million and CAD 500 million for full year 2026. This is consistent with our EBITDA outlook and assumes the successful execution of approximately CAD 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.

Speaker 4

Before I turn it back to Amanda, I would 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. Financially solid with a portfolio of incredible assets and brands, energized through talented people looking ahead towards a bright and exciting future of growth through our New Frontiers plan. Thank you for your leadership, your partnership, and your support. I wish you every success and happiness in the years ahead. With that, I will turn it back to Amanda for questions. Thank you.

Speaker 1

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

Operator

Thank you. As a reminder to ask a question, please press star followed by the number 1 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.

Speaker 5

Good morning. Thanks a lot for taking my question. John, could you give us some of the puts and takes around the back half CASM ex expectation? It seems like it is a little higher than the original guidance provided earlier in the year. What is 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? Any thoughts around 2027 CASM ex also would be helpful.

Speaker 4

Okay, great. Thanks, Atul. I would say that generally speaking, we have come through the first half where we would have expected and we have put a lot behind us as well, you know, with all of the labor agreements now done, and that is fully reflected in our cost structure. I think largely, as we had expected, even back when we were in Investor Day in 2024. I think we have 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. The second half will reflect a little bit of that as well. There is a little bit of pressure versus our original expectations.

Speaker 4

I would expect us to be in the 4%-5% range for the second half of the year, coming into that 5%-6% for the full year. Alongside a little bit lower capacity, I think the sales commissions does pose a little bit of pressure given the higher fares. 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 will start to see some of that cost pressure abate.

Speaker 4

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

Speaker 5

Okay, great. Thanks for that, John. As my follow-up, the U.S. network airlines have all highlighted or guided to third quarter and fourth quarter TRASMs 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 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 TRASMs 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?

Speaker 3

Hi, Atul. I will 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 did not have much of a base of booking, so we have been able to fully catch up with kind of the pricing and market and kind of the jet fuel pricing. As a result, we expect that Q4 will be higher in terms of TRASM and that our fuel recovery at the current market price puts us at 100% or just above 100% of the incremental jet fuel cost, and that will be reflected in the TRASM.

Operator

Our next question comes from Savanthi Syth from Raymond James. Please go ahead. Your line is open.

Speaker 6

Hey, good morning, everyone. Mike, again, echo everybody's kind of appreciation for your leadership and insights over the years and best of shows 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 CAD 475? Also, can you talk about what brought about the transaction and the timing, given that you have a really strong liquidity position here?

Speaker 4

Yeah. I think, just by math, the CAD 10 billion over the 21, you are very close to the number there.

Speaker 1

To the 475.

Speaker 4

Yeah, to the 475. We think this is a tremendous transaction for Air Canada and for Aeroplan as well, and its members. 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 have always said we are 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 are doing, and we are going to further improve with this transaction. Thirdly, to reward investors as they support that growth and value creation.

Speaker 4

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. We 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 will 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 have already built into the plan as we had in Investor Day. Just to underline that, there is no new allocation of this capital.

Speaker 4

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. It achieves many important things. Overall, I would say it is going to help create a lot of value as we execute our New Frontiers plan.

Speaker 6

I appreciate that color. 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?

Speaker 4

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

Speaker 6

Appreciate it. Thank you.

Operator

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

Speaker 7

Hi, everyone. Thanks for the time. Congrats on the Aeroplan transaction. I wanted to stick with that for a question. 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? Then just how should we think about the profit attributed to the NCI, just impacting EPS, just any color there. Then just, if Aeroplan out earns that 6.5% IRR, does the excess accrete to NCI on the balance sheet and then revert to Air Canada shareholders through equity at repurchase? Any color on that would all be really helpful.

Speaker 4

Okay. I have a feeling that we're going to have a call here and then probably a call later on some of the technical side of that, but we can always follow up with Amanda and myself. Let me give you just some early color up front. The distribution policy, just think about based on our estimates of Aeroplan earnings and cash flows, we would expect a rather proportional distribution of cash generated at Aeroplan to the minority at 25% and ourselves at 75%. There is a tiering of distributions. All in, our expectation is that it would be about 25/75 on any given year. The distribution policy at the discretion of the board, which is fully controlled by Air Canada. We'll obviously manage that responsibly. With respect to, I think NCI and the minority interest on the P&L.

Speaker 4

The way we think about it, I guess, simplified here is we're taking out debt, which is about CAD 1.7 billion. We would have potentially refinanced that debt. 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. 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. Probably in the neighborhood of 8% to 10% when it's all said and done in terms of reduced share count. We believe that's going to be EPS accretive pretty quickly.

Speaker 4

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 is established, setting that 6.5% return target. We believe that can be favorable as the value of Aeroplan should grow over time. So, from that point of view, accretes to the benefit of the Air Canada shareholders.

Speaker 7

Okay, great. That is incredibly helpful. Then just as a quick follow-up, just curious what the feedback from, or have you gotten any feedback from the credit rating agencies on the transaction, and any comments that they provided? Thanks again, and congrats, guys.

Speaker 4

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

Operator

Our next question comes from Jamie Baker from JPMorgan. Please go ahead. Your line is open.

Speaker 8

Hey, good morning. This is James on for Jamie. Maybe just want to touch on the corporate side. Revenue was up high double digits this quarter, up double digits last quarter. Can you maybe talk about the trends there for 3Q and for what's spoke through 4Q, and maybe specifically on the transborder corporate side. Is that also tracking below pre-February 2025 levels, and how are you thinking about that for 2027?

Speaker 3

Thanks, James. On the corporate side, July and August are relatively weak corporate months. Although they are the strongest months in terms of travel volume, in terms of corporate premium demand, it is also the weakest. There is a little bit of upside in July and August, but it is really as September goes and return to office, return to school, that is when we are 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. It is 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. We see that constructive outlook all the way through the year.

Speaker 8

Got it, thanks. Then maybe on the second question, just following up from Tom's rating agencies question, and maybe John, if the Aeroplan transaction is going to reduce leverage by half a turn, what else are the agencies looking for investment grade rating? Is it cash flow? Is it liquidity? I know the agencies calculate leverage different than you, but I guess, maybe remind us the sensitivity that they have for investment grade.

Speaker 4

Yeah, thanks for the question. I think you hit on a couple of good things there. One, our gross leverage was about 3.7. Once paid down, this maturity will take us to about 3.2. So that is one. I think getting below 3 is another important milestone. If you look through holding the liquidity that we have, which as I mentioned in my comments, I think 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. 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. I think that that is the next important catalyst for us.

Speaker 4

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. 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 2024. I would say to some degree, we're ahead of that plan and 2027 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. We think that over the next two years or so, a path to investment grade is certainly possible.

Speaker 8

That makes sense. Thanks, John.

Speaker 4

Thank you.

Operator

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

Speaker 9

Yeah, thanks, folks. John, we may take you up on that technical call later. But turning back maybe just to look at the fall, I think Mark 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 are 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 of the fuel costs as we go deeper in the year, that you may have otherwise not have? Any early thoughts then on Q1, whether or not that is going to be maybe more European as opposed to, say, north, south, would be helpful.

Speaker 3

Sure, Chris. There is a lot to unpack in that question. What we are seeing in the shoulder really is kind of a continuation of what we have been seeing in the last couple of years. Air Canada is a bit more kind of indexed on premium travel, corporate travel. And those trends are not as robust in July and August, but they definitely come back in September and beyond. And what we have noticed for a couple of years is that premium customers, whether for leisure or business purposes, have been traveling more in the shoulder than the typical summer peak. And that has been to our favor in terms of seasonality. So what we are seeing in September, October is quite the same. Our international demand is really, really strong.

Speaker 3

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 are looking at a very constructive setup for the fall. Probably one of the stronger that we have probably seen in our history. As we go into late fall, early winter, 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 is a bit early to kind of give you a point of view on that. And again, for Q1, just simply too early.

Speaker 3

But all is to say that on a relative basis, the spring and shoulder seasons show more strength. And as we think about 2027, 2020 and how we allocate capacity, we will be taking more capacity risk in those seasons than the actual summer peak.

Speaker 9

Okay. That's helpful. I guess my second question, first of all, Mike, congratulations on a really strong career at Air Canada, and way to go out with quite a transaction. 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. Can you maybe, you or maybe John or Mark talk about the governance and sort of the executive role in that gap? It sounds like you've got a lot of corporate actions will be happening about the SIB, the close of Aeroplan, and of course, anything that may happen day to day. How do we think about governance over this sort of bridge period? That would be helpful. Thank you.

Speaker 2

Good. Thanks, Chris, for that. There's no doubt the board and 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 coordinate with the executive group. There is a fair amount of airline experience on the board as well, and they will coordinate with the executive group for that five-month transitional period. The governance has been really thought through, and everyone's very comfortable as to the next five months.

Speaker 9

Okay. I'll leave it there. Thanks, folks.

Operator

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

Speaker 10

Hi. Good morning, everyone. With respect to Aeroplan, can you just remind us what the breakage rates are for the program? Then a much higher level question, I am wondering if you have 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 is any significant optimization of redemptions you are seeing in your program.

Speaker 11

Good morning. Craig Landry here, President of Aeroplan. Yeah. I do not believe we are 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%. You can envision that it would still be relatively similar to that. In terms of how the profitability drivers of the program and how we are progressing that, first and foremost, the strong membership base growth is critical. We had between 4 and 5 million members when this program was brought back in 2018, and we are sitting over 10 million members now, and that number continues to grow. There is 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.

Speaker 11

We continue to extend the partner portfolios. Recently, we have announced partnerships with Hertz and with World of Hyatt as well. As we continue to strengthen that member program, we are able to attract a broader appeal. That is 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 is important that we have a range of redemption options available across travel and retail options. We are 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.

Speaker 10

Got it. Okay. That is it from me. Thanks.

Operator

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

Speaker 12

Yeah. Thanks very much. Good morning. On the Aeroplan, if the investors here have a 6.5% IRR call over the next five plus years, is your expectation that Aeroplan can outgrow its cash flows beyond that level? I guess what I am kind of getting at here is you have pegged a value here at 21 times trailing 12 months 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?

Speaker 4

We just did the deal, so I will not 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 Aeroplan will continue to create a lot of value. I think that the value that that contributes to our investors is that it continues to improve the quality of its cash flows, 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 CAD 2.5 billion. So I think there are very favorable potential economics in all of this.

Speaker 4

There is no doubt that we believe that Aeroplan will be more valuable five to eight years from now, and as a result, the opportunity to continue to generate value from even the minority stake as an option to buy back will certainly be available.

Speaker 12

Okay. No, that is helpful. Is your expectation that you will be providing any more, I guess, financial information specific to Aeroplan as we move forward here? Just, I guess, from our perspective, just trying to understand how the EBITDA evolves over that period and trying to forecast the non-controlling interest, those sorts of things.

Speaker 4

Yeah, we will give it some thought, and we will probably give you guys an update on the next quarter, whether we do add any even color around the program. At this point in time, none new, but to be determined.

Speaker 12

Okay. Thanks very much.

Speaker 4

Thank you so much.

Operator

Our next question comes from James McGarragle from RBC Capital Markets. Please go ahead. Your line is open.

Speaker 13

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

Speaker 4

Okay. Thanks, James. I am going to take a shot at making it simple. If you do this bottom up, you will probably get to numbers that are right on to what I am going to walk you through. 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 have 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 are going to deliver the original 2026 plan, adjusted for the fact that when the conflict happened, we had for simple terms, and I will just do some very quick math, we had all of March or most of March booked with fares.

Speaker 4

We had obviously the impact of fuel from February 27. The second quarter was 50% booked, which means we had to provide fuel against that booking at the spots that were in effect at the time, sold at roughly CAD 0.90 equivalent. 25% of Q3 and 10% of Q4. If you take the aggregate of all that in very simplified terms, you have about 1.3 billion liters of fuel that were used to fund fares sold pre-conflict. The average fuel price that we have put in our guide is CAD 1.25. Our plan rate was CAD 0.90. So 1.3 billion times CAD 0.35 gets you about CAD 500 million and change. The math is not quite that if you do it bottom up and you weight by month and there is rates for every month and every period, it gets closer to almost CAD 600 million.

Speaker 4

But the bottom line is CAD 500 million to CAD 600 million is the headwind that from day one was what to some degree, non-recoverable. Since that period, what it means is that our commercial and fares strategy have offset the remaining fuel exposure, and which means we are selling on average into the market at the cost of the fuel that we are paying. Of course, there is some lumpiness because it has been very volatile. That is really the story. So CAD 3.35 billion was the bottom end of our original range. If you take out CAD 500 million to CAD 600 million, you are sitting at about CAD 2.8 billion. We have a bottom end of CAD 2.9 billion. In our new guide at CAD 3.75 billion, you take out CAD 500 million to CAD 600 million, you are sitting around CAD 3.1 billion, CAD 3.2 billion. Our top end is CAD 3.2 billion.

Speaker 4

In my guide, and I have 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 have left a little bit of cushion, so that last CAD 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 will wait and see what happens there. We leave ourself about CAD 100 million, which on 1.5 billion liters is roughly CAD 0.05 of call it contingency for Q4. And on any given day, that is either true or not true based on where fuel and oil prices are trending.

Speaker 13

I appreciate the color there.

Speaker 4

Okay.

Speaker 13

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

Speaker 4

Okay, great. Just on cash flow, recall we guided CAD 400 million-CAD 800 million. As I've mentioned before, we convert high EBITDA to cash from operations, so take out the same CAD 500 million-CAD 600 million from that range, and you're pretty much sitting at the CAD 200 million-CAD 500 million range. That's our bottom up, all things considered. Originally, CAD 400 million-CAD 800 million comes off CAD 500 million-CAD 600 million for the. We've adjusted CapEx throughout the year. To be honest, some of that has been just some tactical decision making. Some of it has been OEM delays. On average, I would say if you just took across the portfolio, largely of the two new programs, the A321XLRs, to some degree, the A220s, there's been about three months of slippage in delivery dates. So that reflects a couple of planes moving out of the year.

Speaker 4

The rest of it, like I said, tactical, just running the business. So reflecting the current environment and a little bit of an adjustment on overall capacity and the projects we're running. 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.

Speaker 13

Thank you.

Speaker 4

Thank you.

Operator

Our next question comes from Sheila Kahyaoglu from Jefferies. Please go ahead. Your line is open.

Speaker 14

Hi, this is Jack on for Sheila. I am 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 are seeing that gap narrow like some of the U.S. peers.

Speaker 3

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

Speaker 14

Got it. No, that is really helpful. Maybe just to stay on premium and dig into segmentation for a second. I know you added the A321XLR this quarter and solid results so far in the transatlantic. I think that is further bolstered by your unbundled fare options. Are there any early stats you can share on the unbundled fare options that is kind of around buy-up behavior?

Speaker 3

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

Speaker 14

Got it. Thank you very much.

Operator

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

Speaker 15

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

Speaker 4

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. There are no specific other performance requirements.

Speaker 15

Okay. Thanks, John. If I go back to your 2024 Investor Day, the targets you laid out for ASM in 2028, I guess, was 130 billion ASMs. I mean, obviously, we are seeing some delays from OEMs, et cetera, and also the fuel environment has curtailed some capacity growth here in 2026. How feasible you think it is to achieve that 130 billion ASM target by 2028?

Speaker 4

Yeah. I'd say that that's going to be a tough number to make, right? If you think that I said for 2027, somewhere probably 112, maybe 115. So call it a range above what we did in 2019, 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 toward 2028 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 us now in the last couple of years.

Speaker 4

We still feel confident that we have a business that can deliver on a lot of those 2028 objectives. The 130 billion ASMs, probably a stretch for now. We'll roll up those numbers and see where we end up as we roll through 2027.

Speaker 15

Yeah, that is great. Thanks. I appreciate the time.

Speaker 4

Thank you.

Operator

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

Speaker 1

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.

Operator

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

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