Air Canada Q3 Earnings Call Highlights

Key Points

• Record Q3 performance: Revenue rose 21% year over year to C$7 billion, driven by stronger passenger demand, an 89% load factor, higher fares and increased capacity. However, adjusted EBITDA was flat at C$936 million as fuel costs rose by C$906 million.
• Guidance reduced due to fuel prices: Air Canada lowered its full-year adjusted EBITDA outlook to C$2.4 billion–C$2.7 billion and now expects free cash flow to be roughly breakeven, citing higher fuel-price assumptions and limited near-term cost recovery.
• Capacity and financial actions: The airline plans to remove more than two percentage points of first-quarter 2027 capacity to protect margins, while maintaining a strong balance sheet with C$8 billion in liquidity. It also reduced its share count by about 10% through an C$800 million issuer bid.

Air Canada TSE: AC reported record third-quarter revenue as stronger passenger demand, higher fares and fuller aircraft helped offset a sharp increase in fuel costs, though the carrier lowered its full-year profitability and cash-flow outlook due to higher expected fuel prices.

Chief Financial Officer John Di Bert said third-quarter operating revenue rose 21% year over year to C$7 billion, while passenger revenue increased 21% to a record C$6.3 billion. The company added nearly 6% more capacity, reported an 89% load factor that was nearly three percentage points higher than a year earlier, and recorded an 11% increase in yields.

“More seats, fuller planes, and higher fares” supported the results, Di Bert said. However, adjusted EBITDA was essentially unchanged from the prior year at C$936 million, as Air Canada absorbed a C$906 million increase in fuel expense. Adjusted EBITDA margin declined to 13.4% from 16.6% a year earlier.

Fuel costs pressure profitability outlook

Fuel expense rose as fuel prices per litre increased 68% from the prior-year quarter. Air Canada’s actual fuel price averaged C$1.48 per litre in the third quarter, above its prior assumption of C$1.38 per litre. Di Bert said the difference represented an intra-quarter headwind of about C$140 million, including C$22 million in fuel-hedging gains.

The airline recovered 46% of its incremental fuel costs during the quarter, below its original 60% expectation, largely because fuel prices climbed sharply in September after many tickets had already been sold. Air Canada expects its recovery rate to improve to 70% in the fourth quarter, though executives said full recovery of the latest fuel-price increase would take time.

For the fourth quarter, Air Canada is planning for an all-in fuel price of C$1.72 per litre, or about US$4.60 per gallon, compared with its August outlook of C$1.29 per litre. The company said roughly half of its fourth-quarter fuel requirements remain exposed to market-price volatility.

As a result, Air Canada cut its full-year adjusted EBITDA outlook to a range of C$2.4 billion to C$2.7 billion, approximately C$500 million below the midpoint of its previous guidance. It now expects free cash flow to be around breakeven, plus or minus C$150 million, compared with previous guidance of C$200 million to C$500 million.

Commercial momentum continued across passenger segments

Chief Commercial Officer and President of Cargo Mark Galardo said total and passenger unit revenue each increased 14% year over year in the quarter. Premium-cabin revenue rose 19%, while corporate revenue increased 22%. He said corporate revenue was continuing to grow at a double-digit pace entering the fourth quarter.

North American markets delivered the strongest unit-revenue gains because their shorter booking windows allowed the company to more quickly reflect higher fuel costs in fares, Galardo said. International bookings are generally made farther in advance, slowing fuel-cost recapture on long-haul routes.

Air Canada said sixth-freedom revenue, generated from passengers connecting through its hubs between international markets, increased 16% in the quarter and was expected to rise by nearly 20% in the fourth quarter. Growth was led by Pacific and Latin America corridors, particularly traffic between Latin America and Europe or Asia.

Third-party gross billings collected by Aeroplan partners totaled C$1.6 billion year to date, up 11.5% from a year earlier. Cargo revenue increased 33% in the quarter on higher yields and favorable freight pricing. Galardo said cargo’s close-in booking profile enabled it to recover nearly all of its incremental fuel costs, and that October was expected to be the strongest October on record for the cargo business.

Capacity actions planned for 2027

Management said demand remains resilient, although market demand growth from within Canada has slowed to an estimated 2% to 3%, compared with 4% to 5% in earlier quarters. Fourth-quarter load factors were expected to be broadly flat year over year, while first-quarter 2027 bookings were also showing a flat load-factor build.

Air Canada has removed more than two percentage points of planned capacity from the first quarter of 2027 as it seeks to protect unit revenues and margins in a higher-fuel-cost environment. Galardo said potential actions include reducing midweek flying on certain routes, lowering utilization and reassessing some ultra-long-haul service. He cited the suspension of the Singapore route as one example of the review.

The company said it expects pressure in sun markets because capacity previously directed to Cuba is being redistributed to other leisure destinations. It also cited pressure on Pacific routes as Chinese carriers increase post-pandemic capacity. Domestic and transborder capacity growth, however, was described as low single digit.

Air Canada’s new Airbus A321XLR aircraft is producing a more favorable margin profile than comparable aircraft on similar routes, management said. Di Bert said the aircraft burns roughly 15% to 20% less fuel per available seat mile than a wide-body aircraft on comparable transatlantic stage lengths.

Balance sheet and fleet investment

Adjusted net income attributable to shareholders was C$214 million, or 75 cents per diluted share, in the third quarter. Year-to-date free cash flow totaled C$1.3 billion, including about C$500 million of proceeds from sale-and-leaseback transactions.

Air Canada ended the quarter with net leverage of 1.3 times and liquidity of C$8 billion, equal to 32% of trailing 12-month revenue. In August, the company used proceeds from its Aeroplan transaction to repay a US$1.2 billion bond maturity, leaving no material corporate debt maturities until April 2028.

The company also completed an C$800 million substantial issuer bid in September, reducing its share count by about 10% to 252.7 million shares outstanding as of Sept. 30. Air Canada said it expects to renew its normal course issuer bid in November but will remain opportunistic in repurchasing shares as it enters a period of higher capital spending for fleet deliveries.

About Air Canada (TSE:AC)

Air Canada is Canada's largest airline, the country's flag carrier and a founding member of Star Alliance, the world's most comprehensive air transportation network. Headquartered in Montréal, Air Canada provides scheduled service directly to more than 180 airports in Canada, the United States and Internationally on six continents. It holds a Four-Star ranking from Skytrax. Air Canada's Aeroplan program is Canada's premier travel loyalty program, with more than 10 million members worldwide. Members can earn or redeem points on the world's largest airline partner network of more than 50 airlines, plus through an extensive range of merchandise, hotel and car rental partners.

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