Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the Air Canada Q4 and Full Year 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. And if you would like to withdraw that question, again, press star one. Thank you. I would now like to turn the conference over to Valerie Durand, Head of Investor Relations and Corporate Sustainability. Valerie, you may begin.
Thank you, Krista. Hello, [Foreign language] . Welcome, and thank you for attending our Q4 and Year-End 2024 earnings call. Joining us this morning are Michael Rousseau, our President and CEO, Mark Galardo, our EVP of Revenue and Network Planning and President of Cargo, and John Di Bert, our EVP and CFO. Other executives are with us as well: Arielle Meloul-Wechsler, our Chief Human Resources Officer and Public Affairs, Craig Landry, our Chief Operations Officer, Marc Barbeau, our Chief Legal Officer and Corporate Secretary, and Mark Nasr, our EVP of Marketing and Digital and President of Aeroplan. After our prepared remarks, we will take questions from Equity Analysts.
I remind you that today's comments and discussion may contain forward-looking information about Air Canada's outlook, objectives, and strategies that are based on assumptions and subject to risks and uncertainties. Our actual results could differ materially from any stated expectations. Please refer to our forward-looking statement in Air Canada's Q4 and year-end news release available on aircanada.com and on SEDAR+. And now, I'd like to turn the call over to Mike. Mike?
Thank you, Valerie. Good morning [Foreign language] . Thank you for joining us a little bit earlier than usual. Last night, we reported strong Q4 Year-End results for 2024. It included a record full-year revenue of CAD 22.3 billion, increasing 2% on the 5% increase in capacity. We finished the year with CAD 3.6 billion of Adjusted EBITDA, which is just above our Adjusted EBITDA guidance communicated on December 17, 2020. We also generated Free Cash Flow of CAD 1.3 billion and an Adjusted Pre-tax Income of CAD 1.4 billion in 2024.
These results reflect a strong revenue environment. Unit revenues turned positive in November and December, having recovered from declines in Q2 and Q3. We are committed to executing on our plan. We have demonstrated our ability to adapt and make the most of the opportunities that arise. I'd like to call out four major achievements. First, we successfully delivered these strong results by recognizing and making changes when needed in the face of the challenges during the year. For instance, the world experienced geopolitical disruption, lagging impact from inflation, and lingering supply chain issues.
Where necessary, we adjusted course and acted resourcefully, shifting capacity to where it made most sense. Second, we secured a new agreement with our pilots, which averted significant disruption to our operations. This also highlights the commitment of all stakeholders to Air Canada's long-term success and dedication to customers. Third, we saw pronounced operational improvements last year, with an eight-point gain on on-time performance over 2023. Our drive for operational excellence remains continuously on display.
And finally, we bought back and canceled over 35 million shares, completing the Normal Course Issuer Bid program that we announced in November. I'm immensely proud of these results, which would not have been achieved without everyone at Air Canada working as one. Our 40,000 employees showed their dedication and professionalism by safely transporting more than 47 million passengers over the course of the year, and I commend them for their commitment and their hard work. I also thank our customers for their loyalty to Air Canada. We strive every day to provide them industry-leading products and services.
We are already the leading premium carrier in Canada, and we will continue to assert ourselves as a global champion. We are fully focused on executing our strategic plan. That includes managing through any uncertainty, pivoting when needed as we pursue our ambitious goals. At our recent Investor Day, we shared key targets for 2028.
These include CAD 30 billion in operating revenues, at least a 17% Adjusted EBITDA margin, and approximately 5% Free Cash Flow margin. We continue to be disciplined with our decisions as well as agile. Mark and John will provide more commentary on the year ahead. We have all the necessary tools and attributes to achieve our goals, and we look forward to sharing more updated data. Thank you. Mark, over to you.
Thanks. Mike, et good morning, [Foreign Language] . Thanks to all our employees for their contribution to our quarterly and year-end results. I'll begin with a quick overview of Q4. Operating revenues were more than CAD 5.4 billion, up 4% year-over-year, with growth in all revenue categories. The year ended with an improved revenue environment as PRASM turned positive in November and December, driven by our transborder and Atlantic services.
It is worth noting that Q4 2024 produced a record Q4 revenue for Air Canada, despite the impact felt in the first two weeks of October from the labor uncertainty a month earlier. Looking to the full year, passenger revenues were nearly CAD 20 billion, a 2% increase year-over-year, with significant growth coming from our expansion in the Pacific, most notably in Japan, Korea, and Hong Kong. Pacific traffic grew 25% year-over-year on a yield decline of 6%, which was within our expectations. Supply and demand balanced in the region, and this normalized environment led to pricing stabilization.
North America also performed well, with yields increasing from last year. This is remarkable given the competitive environment in the region. We managed capacity diligently by adding 28% more capacity to the Pacific and reducing our Atlantic flying in 2024. Our network diversity is a key strength of the business, and in true form, we will continue making dynamic, necessary, and timely adjustments on our network based on market conditions. A combination of factors impacted the performance across the Atlantic in 2024 at large.
Firstly, we believe that competitive capacity grew at a faster pace than the market could absorb in the peak summer period, and secondly, that the geopolitical instability and large sporting events during the European summer impacted traffic and yields in the region. However, as evidenced by our Q4 numbers, the pricing environment improved in the second half of the year. Demand for European travel has extended into the spring and fall shoulder seasons, effectively stretching the traditional seasonality of the Atlantic market. The stability in exchange rate versus the euro has also been positive for customers traveling to Europe.
Let's now turn to our Sixth Freedom strategy. It continues to yield robust results, with revenues growing 12% year-over-year. Sixth Freedom traffic is a core pillar of our commercial strategy, and our results signify the geographic advantage of our hubs and reinforce our corresponding long-term investments on these flows. Our well-established premium product yielded great results, increasing 5% from 2023 and reaching 29% of total passenger revenue. On cargo, Q4 revenues increased 20% year-over-year as market dynamics progressed through 2024. More importantly, this was driven by increased volumes and improved yields.
We are very encouraged by these results, and on a full-year basis, cargo performed solidly, recording a 7% increase in revenues to nearly CAD 1 billion in 2024. We are very pleased with the progress of our freighter operations. Air Canada Vacations celebrated its 50th anniversary this week and continued to deliver strong performance and annual revenues exceeding those of 2024. As we begin 2025, we acknowledge that there are external pressures, such as currency and uncertainty on other fronts. It is still premature to discuss the potential impact, if any, of actual or potential regulatory tariffs or possible retaliations.
We are diligently and continuously monitoring customer behavior and market dynamics. If these shift in the future, we have ample flexibility to respond by moving capacity around, as we've always done. For now, here's what we're seeing. The revenue environment experienced in Q4 2024 is continuing into 2025. January booking trends have aligned with our expectations despite some uncertainty. We see encouraging booking trends and yield signals for Q2 and into Q3. Keep in mind the shift of Easter from March 2024 to April 2025 naturally shifts revenues to Q2, which will translate into less relevant compares year-over-year Q1.
We are proactively acting in specific markets like certain U.S. leisure destinations, such as Florida, Vegas, and Arizona. As such, we are reducing our capacity exposure to these markets from March onward. We continue to see encouraging signals around Sixth Freedom demand and overall a meaningful rebound in our transatlantic market for the spring and summer seasons. Demand for some markets continues to surpass our expectations, and booking curve has shifted to a more close-in environment. As we see recovery on the Atlantic, we have and will continue to look at some capacity shifts away from Asia, where overall market capacity is up substantially.
The short-term effects from Pacific yield normalization are expected for the next few quarters. We have witnessed and continue to anticipate a more disciplined and predictable competitive environment in our core markets. Lastly, our revenue management tactics, such as branded fare adjustments, are delivering better-than-expected results. As we stated on Investor Day, we believe Air Canada has one of the strongest foundations in our history. Our hubs are geographically well-positioned. We have an efficient fleet with global reach, enabling Sixth Freedom growth and diversifying our customer base and points of sale.
Canada's demographic growth, combined with decades of past, present, and future immigration, is expected to translate into higher growth for international demand. Our diverse product range, including our well-established premium offerings, appeals to a broad range of customers globally. We are a disciplined and nimble team, proven ability to execute and deliver results. [Foreign language] thank you, John, and over to you.
Thanks, Mark. Good morning, everyone. [Foreign language]. A special thanks to our employees for their incredible energy in helping us deliver our results for Q4 and the F ull Year. It was truly a great team effort [Foreign language]. We achieved a record Adjusted EBITDA of CAD 696 million in the Q4, with a margin of 12.9%, representing a year-over-year increase of CAD 175 million and almost 3 percentage points, respectively. This result was largely driven by the strong revenue and favorable fuel environment at the end of the year. You heard it from Mark.
We're encouraged by the early positive signals for our summer schedule. In Q4, operating expenses increased 11%. This largely reflects the one-time non-cash past-service pension charge of CAD 490 million we disclosed last quarter in relation to our new pilot collective agreement. This is reflected in the salaries, wages, and benefits line. Adjusting out this non-recurring charge, Q4 expenses were higher by 1% year-over-year. Turning to the full year, we generated an Adjusted EBITDA of CAD 3.6 billion, which was slightly ahead of our guidance and mostly fueled by the solid revenue performance at the end of the year.
Adjusted EBITDA margin surpassed 16% in 2024. Despite a year-over-year decline of CAD 396 million in Adjusted EBITDA and a 2 percentage point margin compression from 2023, 2024 was a solid year put up against tough compares from an exceptional rebound in 2023. Our operating expenses grew 7%. Salaries, wages, and benefits were up 11% year-over-year, excluding the one-time pension charge mentioned earlier. Fuel prices were a tailwind, averaging CAD 1.01 per liter in 2024 versus CAD 1.12 in 2023. ASMs per employee increased 1.4% in 2024 year-over-year. This illustrates early-stage productivity gains in our business.
Turning to unit cost, Adjusted CASM increased 2.3% year-over-year, in line with our full-year expectations. We remain focused on managing controllable costs and delivering productivity gains as we grow. 2024 produced another solid year of Free Cash Flow generation. We delivered CAD 3.9 billion in cash from operations and CAD 1.3 billion in Free Cash Flow, effectively producing CAD 1.00 of cash for every dollar of Adjusted Net Income. As to our planned fleet, you may refer to our disclosure for details. Note that the 787-10s are shifting to the right, and we have revised our Boeing 737 MAX leases and now expect a total of seven aircraft to enter service in 2025.
During 2024, we executed our capital allocation priorities exactly as planned. We continued to improve our balance sheet, being down approximately CAD 2 billion in debt. We refinanced and repriced our Term Loan B, and we deployed CAD 473 million of excess liquidity to purchase more than 20 million shares for cancellation. Earlier this week, we completed the full repurchase of shares allowable under the NCIB we announced on our Q3 call in November 2024. We expect to further reduce our fully diluted share count by cash settling our outstanding convertible notes that mature in July 2025.
As highlighted at our recent Investor Day, we aim to reduce our diluted outstanding share count from 376 million at the end of the Q3 of 2024 to 300 million or less by 2028. Our objectives are clear. Invest in the airline to fund our future, to allow ourselves to grow revenues and expand margins, to protect our balance sheet strength by focusing on Free Cash Flow generation, to maintain net leverage below two turns, and to deploy excess liquidity to create shareholder value. Today, we maintain the 2025 guidance we provided at Investor Day.
We will continue to monitor the economic environment, including the potential impact of tariffs, if any. I remind you that our current guidance does not assume any such impact, direct or indirect. As a matter of discipline, we rely on a robust, fact-based process to make our decisions. We focus on what we know and control, while being mindful of external forces that may affect our plan throughout, so here's what we know from the current environment and the outcome of our process.
First, as Mark said, the revenue environment experienced in Q4 2024 is continuing into 2025. Demand remains stable, and we see positive booking trends and yield signals for Q2 and into Q3. Second, the fuel environment is favorable and is holding in a relatively stable range in U.S. dollars. We also have a well-established, disciplined, and agile fuel procurement process, multiple and flexible sources across the globe, allowing us to diversify supply. Third, we have a well-established foreign exchange hedging program in which we hedge approximately 70% of our U.S. dollar cash flow requirements on an 18-month rolling basis.
As at year- end, we had an outstanding FX derivatives settling in 2025 and 2026 to purchase at maturity $6.9 billion U.S. dollars at a weighted average rate of $1.35 USD. While our Adjusted EBITDA is sensitive to currency fluctuations, the cash flow hedging program does protect against Free Cash Flow volatility. We are disciplined and agile. We have fleet flexibility, a strong and resilient balance sheet, and a responsible risk profile. We are prepared to adapt promptly to tackle any potential changes or challenges. We remain committed to our plan. Thank you, and with that, over to you, Mike.
Great. Thank you, John. A clear message of our Q4 and full-year results is that Air Canada is pursuing its strategic plan and is advancing on its commitments. Many attributes for competing effectively are key to our plan and give us the agility to course correct when needed. These include our strong balance sheet, global network, modern fleet, and digital capability, strong partnerships, and leading products and services, especially in premium, as well as Aeroplan, Canada's best travel loyalty program.
In fact, our award-winning loyalty program had another record year, reaching new highs in active members, redemption volumes, and third-party gross billings, which rose 10% to CAD 1.8 billion in 2024. We're also pleased that Aeroplan continued building upon its industry-leading roster of partners, the launch of Manulife and the expanded Marriott partnership in 2024. We have other incredible attributes as well.
These include our decisive management team and highly motivated employees, who are bound together by a strong corporate culture and their outstanding commitment to execution and dedication to customer service excellence. We are in a great position to build on last year's remarkable success. Our disciplined and dedicated team is well prepared to effectively manage any uncertainty and external pressures. The demand environment continues to be favorable, and we are poised to capitalize on opportunities. We'll continue to adapt and thrive in an ever-changing aviation industry. Thank you [Foreign language] and we will now be pleased to take your questions. Valerie?
Thank you, Mike. Thank you very much for joining us on our Q4 and Full-Year Results Call this morning. We remind you to please restrict yourself to one question and one follow-up, please [Foreign language]. Back to you, Krista.
Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. And if you'd like to withdraw that question, again, press star one. Your first question comes from the line of Kevin Chiang with CIBC. Please go ahead.
Hi. Thanks. Good morning, and thanks for taking my question. Maybe I can just dig into some of the demand comments you made, and maybe specifically on booking curve as we kind of look out maybe into Q2, Q3. I think you mentioned the yield environment looks good. But maybe just how booking curve is trending relative to maybe prior years.
And you did mention it sounds like you're adjusting some of the capacity into U.S. leisure markets. Is that a function of some shift in Canadian consumer behavior flying into the U.S., given all that's happened with tariffs? And is that capacity being, I guess, put into other markets? You're seeing better growth, or are you maybe just proactively adjusting that for other reasons? Any color there would be helpful.
Sure. Good morning, Kevin. For Q2, the booking outlook and booking curve looks pretty similar to last year. One notable difference is the fact that Easter shifted from March to April this year, so that changes the dynamic a little bit favorable for Q2. We are proactively looking at capacity to U.S. leisure destinations, and we feel that we've got enough opportunity elsewhere in the network to redeploy that capacity. There might be some opportunity in domestic, and we see some opportunity in some leisure markets as well. So if we do see some softness on the U.S. side, because we're not seeing it close in just yet, we can offset it with some technical changes.
Okay. That's helpful. And maybe just in terms of making a second question here, I guess with the weaker FX, how has that changed your revenue management system, whether it's point of sale out of the U.S. or Sixth Freedom traffic? Are you seeing more U.S. dollar revenue flowing through your revenue line? Is that something proactively you're doing just to adjust to the FX environment?
No, absolutely. Our revenue management systems are very sophisticated. And like we said, Investor Day, we can change our revenue management algorithms to be much more open to U.S. inbound traffic and as well U.S. Sixth Freedom traffic, which going into Q2 and Q3 look very favorable. So certainly an area of opportunity for us.
Perfect. Thank you.
Your next question comes from the line of Savi Syth with Raymond James. Please go ahead. Savi, good morning.
Hey, good morning. Thank you. Good morning. Just can I ask about what you're seeing on the corporate side? I know you had a considerable effort on expanding your SME accounts, and then you have all this kind of geopolitical noise. And curious what you've seen in the Q4 and then what you're seeing here in the Q1 in terms of corporate travel demand and how that's progressing?
Yeah, no. Thanks, Savi. Good question. For Q4, what we did witness was a stronger-than-expected bounce back in corporate travel. In some cases, it was almost double digits better year over year. Like we said, largely experienced in the transborder sector. And going into Q1, we see that continuing. And in terms of our SME, SMB program, we're above the targets right now internally. So that's favorable.
Helpful. Thank you. And if I might, just on a seasonality question, just to follow up on the ATL, your kind of forward ticket sales, historically, there's been a pretty big shift, kind of move up from the Q3 to the Q4. But last year and this year, it looks like a very, pretty flat move. And I was just wondering if there's anything different that's driving that kind of seasonality change in your Air Traffic Liability.
Savi, are you referring to Q4 2024 or Q4 2025?
Q4 2024. Just the way the line item moved in the balance sheet is quite different than it has in the past years. It's kind of the forward sale of ticket line item.
We can take a note and come back to you.
Sounds good.
Maybe you can speak to Valerie on the line. I'm not sure I fully picked up the question, but we can.
I'll follow up with you, Savi.
Sounds good. Thank you.
Your next question comes from the line of Konark Gupta with Scotiabank. Please go ahead.
Thanks and g ood morning, everyone. I just want to follow up just on the assumptions you guys have for 2025. Obviously, clearly, the Canadian dollar had weakened, and then it's kind of rebounding, so maybe it kind of matches your expectation or assumption. But on the fuel side, I'm just curious. I think you talked about diversifying supply, and I think you are hedging fuel as well. So just want to kind of pick your brain in terms of how should we think about the fuel price volatility this year, right? Clearly, the fuel price in the market that we see is running higher than your assumption. So how do you find confidence in keeping that assumption?
Yeah. I spot it's running right around the mid-90s on fuel. So I mean, it ex-FX, right? So FX is its own element, but on a U.S. dollar basis, I mean, we're kind of hovering in the mid-90s. So our expectation is that it's moved around. The front end of the year was a little bit harder. So January did come in a bit heavy in terms of fuel price, but it's settled in now. I think WTI is somewhere around $71-$72. And that's kind of consistent with the way we see the year. The forward curve would suggest it's going to come down a little further.
We really haven't reflected that on the long term. So our 95 holds for the year. So I think we're reflecting more or less the current environment. And as I said, FX apart, and on the FX side, we'll watch this. It's volatile. Right now, we have a 140 expectation, trading around 142 and change. We'll see how this all plays out, but we have some ability within the range as well to absorb some of that.
Okay. And just to be clear, John, there's no active hedging in place for Q1?
Yeah. No, so I didn't comment on that. So thank you. So no, we hedged through the back end of last year. We did so kind of middle of the year last year, and we have nothing in place right now.
Okay. Perfect. Thanks. And if I can follow up on CapEx. So if I look at your total projected expenditure table in the MD&A, it's showing $3.5 billion CapEx for 2025, and then ramps up to $4.3 billion and $4.9 billion in the outer years. If you can remind us, I think at the Investor Day, I think you were looking at some $3 billion of sale-leaseback transactions. So is this projected CapEx table not reflective of those sale-leasebacks? And how should we think about the actual net CapEx number?
Yeah. Yeah. Good question. So a couple of things just as a kind of high-level point here. We had about CAD 18 billion, as we mentioned, between inclusive of 2024 through 2028, and CapEx remains largely intact. There's a few pieces that move around. We also have an FX impact in the current reporting period, and FX closed the year a little bit high. And we use that current balance sheet rate to project all of CapEx. So hopefully, in the long term, that'll be a little bit of tailwind as hopefully FX stabilizes in the longer period.
But so the numbers are kind of intact with the Investor Day. All of this kind of is bound into that plan that we talked about. The sale- leasebacks are not put into the projected table. When they're contracted, then we may look at that differently. But at this point in time, you have the gross CapEx. And so to your point, that will offer some flexibility, especially in the peak CapEx years, as is intended. And it'll also bring back some balance to our fleet in terms of leased assets, which we like because it provides flexibility for us to manage with some agility through periods or there's volatility.
Okay. Thanks for the answers. Thank you.
Your next question comes from the line of Matthew Lee with Canaccord Genuity. Please go ahead.
Hi. Thanks for taking my question. Just in terms of capital priorities, I know you talked about taking out the convert in cash, but are there other ways you might consider returning capital to shareholders, whether that's a dividend or an early renewal of the buyback?
Yeah. So I mean, I'll take both on here. So the first thing is, yeah, I think we just completed a program, CAD 800 million deployed on share buybacks over that period. So I think it's a great first step and very much aligned with what we had planned to do as we started off 2024. We do have an opportunity here with the convertible, so we'll take advantage of that. That's another around CAD 400 million that gets deployed. So it's another substantial amount of give back to anti-dilutive actions.
I guess in the kind of mid-term, so as we look through the back end of 2025, too early to say now, but our plan was clear when we presented to you in December that we expect to continually look for opportunities to return capital to shareholders, and we will. So we'll have an opportunity at the end of this year from a calendar point of view at the 12-month expiration of November of 2025 to look at another NCIB. And at this point in time, that would be our base assumption, our base plan.
So there is another set of actions. Beyond that, and things like dividend and so on, nothing is ruled out, but I don't think that that's the plan for the midterm. We're going to do what we wanted to do on the share count, make sure that we invest in the airline so we can get the growth and the margin expansion that we were looking for. And then, obviously, when we're generating consistent cash flow, we'll have a lot of optionality.
That's helpful. There's no way to do a buyback more quickly than the one-year mark in November this year?
Yeah. Nothing practical. I mean, we don't have a plan to do anything special like that at this point in time. We'll take advantage of what's coming up here in the first half on the convertible.
All right. Sounds good. Thanks.
Thank you.
Your next question comes from the line of Jamie Baker with J.P. Morgan. Please go ahead.
Hey, good morning, everybody, so just following up on some of John's prepared remarks. It's been a couple of months since Investor Day, and look, like everybody else on the call, I'm just trying to square how some of your full-year assumptions may have changed internally. You addressed fuel. There's the FX issue, tariffs, and look, the market is obviously well aware of all this.
My question is whether you can point to any specific offsetting improvements that have taken place that we might have missed, maybe some even more incremental corporate demand resilience above and beyond what you spoke to Savi about just now, anything like that, any specific positives in the last two months that you can make us aware of? Because it just seems like the year's off to a rocky start.
Yeah. I wouldn't say it's off to a rocky start. I'd say that by and large, yeah, a lot of, of course, a lot of drama, and so all those things matter, but in simple terms, I think we're seeing solid demand and solid yield, particularly into Q2 and early signals for Q3, and I think that those things are giving us a relative amount of confidence on molding our guide for the year, so that all things considered, I think we feel relatively good about where we stand today, and we can foresee the things that we won't speculate on tariffs and other things. You all mentioned macroeconomically, but that's our view. I don't know if Mark wants to add anything here, but.
No, Jamie, just maybe the rebound on the Atlantic performance for Q2, Q3 might be a bit more favorable than we initially anticipated. Yield environment is pretty robust. And of course, our focus on the issue is to get as much Sixth Freedom traffic as possible.
Okay. Very helpful. And then just quickly on the share count, I was a bit surprised that the year-end share count was not a little bit lower. Could just be that I goofed on my internal calculations. But I don't know, was there any stock-based compensation that might have sort of figured into the final count? And apologies in advance if I missed this in the notes. Thanks.
Yeah. No, I think maybe it's the weighted average that you're looking at, and that would have had a very little effect because you're looking at 11 months that would have been pretty static, and then you would have had one month. So I looked at the same thing. I think it's a weighted average impact that really is throwing it off. That should be better, obviously, in 2025 as a lot of those shares were bought, like I think 20 million versus the 50 in the Q1 here. So that should get better quickly.
Okay. Perfect. Thanks, gentlemen.
Thank you.
Your next question comes from the line of Stephen Trent with Citi. Please go ahead.
Thank you, everybody, and appreciate you taking my questions. Just wanted to follow up a little bit on the jet fuel and currency net look. I think if I heard you correctly, in terms of your FX exposure, you're hedging 70% of your FX exposure 18 months forward. So am I correct in thinking that this exposure is at least somewhat giving you some protection on your refueling expenses outside of Canada? Wasn't sure if I'm chasing my tail on this one, but just wanted to understand a bit more. Thank you.
Yeah. Thanks for the question, Stephen. So I'll maybe take a minute just to give maybe some simple color on the hedging program. We look at 18 months. We look for the net. We have a net U.S. outflow, obviously. So we do have some inflows, but obviously, fuel is U.S. dollar denominated, a lot of maintenances as well, and some station costs in the U.S. So we look at the net-net basis, and for every penny, that's worth about a $4 billion outflow net. So it's about 40 million per penny of movement on FX. The way to think about this is that the hedging program really is an economic hedge.
The cost in Canadian dollars does, on the cost line, particularly, for example, if you look at Adjusted CASM, will absorb and will have to reflect that weaker Canadian dollar. So we take some pain on the P&L on an adjusted basis because the gains on our derivatives will fall below the line. So they get adjusted out. Now, what I need you to understand that is most important is that the economic hedges, the cash flow hedges, do protect cash flows. As I settle into a market at $1.42 or $41 or $43 on hedges that are, call it, $1.38 or something on average, we are going to get the cash flow benefit of that.
And that does protect the Free Cash Flow for the business. And in the short to medium term, of course, right? It's an 18-month program. If you look through the next three months, we're probably 90% plus hedged. As you go further out on the curve, it comes down, and the overall is 70%. So as you go out a year, year and a half, you're getting below that 70 average. But the point here is that it protects the business, it protects cash flows, it allows us time to adjust, make decisions. But at the same time, you will see it in the earnings numbers, especially on the adjusted side. And so just pay attention to that.
Appreciate that, John. That's super helpful. And for my follow-up, just really quickly, sort of when we think about the unit revenue environment for the Q1, any high-level view on what that looks like if you sort of normalize the year-on-year trend for the Easter calendar shift and for 29 days last February versus 28 this year? Thank you.
Hi, Stephen. This is Mark. Just on the unit revenue side, I think we should expect a positive unit revenue Q1. But again, the calendarization of Q1 this year versus last year makes the compare a little bit challenging. But as we go into Q2, Q3, that's where I think you should expect a bit more opportunity.
Okay. Appreciate that. Thank you.
Your next question comes from the line of Chris Murray with ATB Capital Markets. Please go ahead.
Yeah. Thanks, guys. Good morning. Just maybe thinking of other parts of the operating revenue, cargo and other. So a couple of quick questions. One, we have seen a lot of movement around trade flows and tariffs. Just any commentary you guys may have on how to think about the cargo business, even near-term or as we go into 2025. And then you did mention that you were pulling down some leisure capacity into the U.S. South destinations. Is that getting redeployed into other vacations destinations, or should we be thinking that vacations may be slowing as we go through the year?
Hi, Chris. Just firstly, on the cargo side, as you know, 2024 was a banner year for a non-COVID year. And as we go into 2025 Q1, we see that continuing. The cargo market is so close in that it's tough to say exactly what Q2, Q3 will look like, but observing any potential shifts in trade or geography. And right now, at this time, there's nothing to comment on.
And on the capacity question, we do have a redeployment opportunity if required in some markets where we see a lot of demand interest right now, and booking curve is much more close in than we have seen the last couple of years. And there could be an opportunity for us in some Canadian leisure markets as well to move some gauge around.
Okay. I'll leave that one alone. And then just maybe turning to operating expenses, I guess there's a couple of pieces of this. One, we talked a little bit about you are starting to see some improvement in some of the metrics. Now that the pilot agreement is in place, how are you finding some of the cost buckets moving around? And are you seeing the advantages you thought you would get that you kind of laid out at the Investor Day?
Yeah. I think we had some productivity already demonstrated in 2024, and I think we're going to continue to gain the productivity as we grow some scale in the airline, and the next couple of years, I mean, I think 2025, and we went through some of this in detail, but we're bringing in a lot of narrow-body, and that's going to help our Sixth Freedom business as well as just bring back some capacity, but you get more cost-effective scale when you bring in the larger aircraft, so 321s and especially the 787s, that'll be more of a 2026, 2027 ramp.
The technology continues to need to progress well on deploying technology through the business, and we're making investments that we feel very confident about with respect to giving our employees tools and capability to work more effectively. So we feel good about our ability to generate both productivity and unit cost gains. We still have some inflationary impacts, and 2025 is one of the years where we're going to kind of still have some pressure, particularly a couple of we have the labor agreement to complete, and we have the impacts of just the year-over-year on the pilot agreement that will kind of be fully affected this year.
Beyond that, maintenance has always been a bit of a tough environment and continues to be that right now. And the long term, as we get a modern fleet, we expect that to be alleviated a little bit as well. So we're managing all parts of the business, and I think we remain focused on keeping costs in check. And that will certainly be an important part of our margin expansion. 2025 is going to be a bit of compression, but I feel good about 2026, 2027.
Okay. We'll leave it there. Thanks, folks.
Your next question comes from the line of Andrew Didora with Bank of America. Please go ahead.
Hey, good morning, everyone. So I understand the current environment is fluid. But if we were to see you continue to cut more capacity, then maybe, John, can you give us some guideposts on how we should think about a CASM impact from those cuts? Say is one point of capacity one point of CASM, or is the relationship different? Just curious on how to think about that.
It's a bit of tough math to do on the phone with you right now. I've probably done it enough times, but I won't give you a translation here and now. I think we're going to stay agile, and we also keep an eye on both, right? I mean, we can manage both. We have shown that. Last year is a good example of that. We took some capacity out, and we were very proactive in how we managed costs, and we delivered on all of our expectations. I'd say condense some. You can't foresee all the environments, so I'm not going to give you a blind guarantee across the board. What I am going to tell you is that we put 14 and a quarter, 14 and a half.
For sure, if you take out some ASMs, that's going to get a little bit of pressure. At the same time, we're going to stay very focused on pushing the agility in the business and making responsible decisions so that we can keep costs well managed. And we can talk about some kind of a conversion maybe. I'll give some thought, and we can always talk offline on that.
Okay. Great. I'll follow up offline on that one. And then just a question just philosophically on the buyback. I certainly know the team's view on the valuation of the stock, but just curious if there was any management conversation about maybe not buying the max amount in any given day, just given how volatile the macro environment was to start the year. Just curious on your thoughts there. Thank you.
Well, it's done, right? So I'm not going to speculate on what I mean, we did what we felt was the right thing to do. And I think that in the long term, I feel that's going to pay off being a smart decision. Discipline matters, and second-guessing, I guess, is easy. But this is volatility that will work its way through the system. I think the bigger picture is that we feel very confident about creating value for shareholders, and that includes deploying capital when it's available and making sure that we grow the revenue and the earnings, and the rest will take care of itself.
Thank you.
Your next question comes from the line of Cameron Doerksen with National Bank Financial. Please go ahead.
Yeah. Thanks. Good morning. Just maybe to start, just a clarification just around, I guess, your comments around pulling back some capacity on some of the U.S. leisure destinations in March. I'm just wondering if that is something that is kind of in anticipation of weaker demand, or is that a reaction to anything you're seeing in the very near term here as a result of people booking away from U.S. for whatever reasons? I'm just trying to understand if that's an anticipatory thing, or is that something, a reaction to what you're seeing in the market?
Hi, Cameron. It's Mark. It is. We are anticipating proactively that there could be a slowdown. We don't see it right now. In our near-term bookings to the U.S., we don't see any major slowdown or anything substantial that would change our view of the market. That being said, if we could de-risk this a little bit and be a bit proactive and move capacity into other sectors where we see strength, I think that's the right move right now in this context.
Okay. No, that's great, and maybe second question just on, I guess, aircraft availability. I know there's obviously been these engine-related issues that have grounded aircraft. Just wondering in the last few months if anything has improved or gotten worse on that front, just your thoughts on what we should expect for the year on aircraft availability?
Yeah. I mean, particularly the A2 20 was the biggest challenge, I would say, with respect to aircraft availability. And we're working closely with Pratt, and we speak very often. We track a plan together. And we believe we're going to see some improvement through the year, and we expect the summer to be a better summer than it was last year, for sure. We've made a couple of investments as well on spare engines across the fleet where we thought we had some exposure just to try to improve the availability of aircraft. So we're trying to do some self-help as well. But it's a combination of things.
One, our maintenance organization just tracks us very tightly. We do have senior-level meetings with Pratt on a regular basis to make sure that all parts of that system are supporting us directly. And then we did deploy a little bit of capital to make sure that we help ourselves as well. So there's no promises, but I feel pretty good about how we're approaching it. And 2025, I think, should be better in the summer than it was.
Okay. That sounds good. Appreciate the time. Thanks.
Your next question comes from the line of Tom Fitzgerald with TD Cowen. Please go ahead.
Hi everyone. Thanks for the time. How would you characterize the domestic competitive capacity environment right now? Do you view it as mainly rational, or are there any pockets of oversupply?
Hi, Tom. Interesting question. In the near term, as we look into March and April, it is our view that the domestic market is over capacity. We see some of our competitors adding capacity levels that might be beyond what the market can absorb short-term. But as we go into later Q2 into Q3, right now, it looks like a pretty balanced market, and there could be an opportunity in that market, especially if we move some capacity from U.S. leisure destinations. But in the near term, I find the supply-demand imbalance to be a little bit less optimal.
Okay. Thanks. That's a really helpful color. And then I'm going to apologize if I missed this on one of your earlier responses, but did you confirm if your CASM-ex guidance includes an assumption for a flight attendant deal?
Yeah. Similar to what we did last year, right? We make an assumption, and we've embedded that in our full-year earnings guide as well as by default, the CASM guide. So it's included as we did last year.
Okay. Thank you so much. That's really helpful. Appreciate the time.
Thank you.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Your next question comes from the line of Greg Konrad with Jefferies. Please go ahead.
Good morning. Maybe just to follow up, I mean, you mentioned some of the capacity redeployment with a potential redeployment to the Canadian leisure market. Can you maybe just talk a little bit more about what you're seeing competitively and some of the opportunities in the Canadian market?
Sure, so in the short term, as I just answered the question, I think in the domestic Canadian market for late Q1, early Q2, we see substantial market capacity increase, which is maybe above what the market can absorb short-term, but as we go into later Q2 and early Q3, the supply-demand balance seems to be a bit more optimal, and we think there's an opportunity in Canadian leisure markets to move a little bit of capacity, and as well, the Sun market looks very strong all the way through booking curve, and there could be an opportunity as well for us to move a little bit of capacity there. Again, these are tweaks to our potential offset of the U.S. leisure situation.
And then maybe just given all the pieces you kind of talked about, corporate and some of the different pieces, I know you had pretty good premium growth in 2024. Just given some of the moving pieces, I mean, how are you thinking about premium in 2025 and maybe how that's embedded in the numbers?
No, we think it continues to be strong. I think we have a good opportunity to further capitalize on that. And as well, not only with the premium segment, but as well with some of our brand and fare initiatives to drive and manufacture some revenue here. So that combination, I think, gives us some tailwinds.
Thank you.
That concludes our question-and-answer session. I will now turn the conference back over to Valerie for closing comments.
Thank you, Krista. Thank you once again for joining us on our call this morning. Should you have any follow-up questions, please don't hesitate to contact us at Investor Relations [Foreign language]. Thank you and have a great day. [Foreign language] .
Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now.