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 second quarter 2025 results 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. If you would like to withdraw your question, press star one again. 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] 2025. Welcome, and thank you for attending our second quarter 2025 earnings call. Joining us this morning are Michael Rousseau, our President and CEO, Mark Galardo, our EVP and Chief Commercial Officer 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 Innovation Officer and President of Aeroplan, Marc Barbeau, our Chief Legal Officer and Corporate Secretary, and Mark Nasr, our EVP and Chief Operations Officer. 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 caution in Air Canada's second quarter 2025 news release available on aircanada.com and on SEDAR+ . I'd like to turn the call over to Mike.
Thank you, Valerie, and good morning, [Foreign language]. Thank you all for joining us. I'd like to first thank our employees for their commitment to excellence, passion, and dedication to customer service, all of which enabled us to be named the best airline in North America and the most awarded Canadian carrier at the 2025 Skytrax World Airline Awards in June. I was so proud to see their professionalism recognized at the Paris Air Show. As a founding member of Star Alliance, we are proud that Star has yet been named again the world's best airline alliance at the same time. As we've discussed in the past, we are focused on improving the customer experience, leveraging technologies, process, and training. We have significantly improved the customer experience over the past couple of years, resulting in high NPS scores and strong on-time performance.
We have much more to do, all of which is expected to generate even greater loyalty, enhance revenue, and cost performance. For the second quarter, our revenues were CAD 5.6 billion. Operating income reached CAD 418 million, and adjusted EBITDA was CAD 909 million, with an adjusted EBITDA margin of 16.1%. We are generally pleased with our results, especially when considering 2025 has not been business as usual to date. We have effectively navigated through challenges in various geographies and demonstrated the strength and resiliency of our business and commercial strategy. We achieved these results by exercising discipline capacity management, taking quick action to capitalize on the strength of our diverse network, and capturing the demand for premium products. We carried on with the strategic expansion of our international network with new flights designed to provide easy connections for Canadians and international travelers and to take advantage of cargo opportunities.
Mark will speak more about this later. Our 2Q results were supported by Air Canada Cargo, Air Canada Vacations, and Aeroplan, all vital to our diversified business. Aeroplan received three top prestigious FREDI awards in the airline category: Best Program of the Year, Best Elite Program, and Best Promotion for Aeroplan's 40th Anniversary. Aeroplan continues to grow, with third-party gross billings increasing 7% year-over-year. It also expanded its partnerships by adding Checksy, an innovative Canadian-founded fintech platform. This will allow members to earn rewards on payments for services like rent, bills, and taxes. During the quarter, we also launched fast, free WiFi for all Aeroplan members in North America. We are a leader in this increasingly competitive space for business and premium travelers, with an offer that is reliable and more consistent than any other North American network carrier.
Acting further on our commitment to enhancing shareholder returns, we completed our CAD 500 million substantial issuer bid in the quarter, reducing some pandemic-induced share dilution. We remain deeply committed to executing on our long-term strategic plan. Our focus remains on creating lasting value for our shareholders while fostering an inclusive, forward-thinking culture that drives our collective sustainable success. We are confident in our business outlook and our ability to execute, and we are reaffirming our full-year guidance. Before I turn it over to Mark, I'd like to thank our employees for looking after and safely transporting more than 11 million customers in the second quarter. I'm grateful for our customers' loyalty as well, which we look to earn every day. Thank you, merci. Over to you, Mark.
Thanks, Mike, and good morning, everyone. [Foreign language] . Thanks to our employees for delivering these results. Before I begin, I'd like to echo Mike's comments and congratulate our employees on the Skytrax recognitions. [Foreign language] . This second quarter was not business as usual. We navigated through a period of significant economic and geopolitical uncertainty, and we contended with reduced demand for transborder travel, an evolving geopolitical landscape affecting the Middle East and India, increased competition in China, Hong Kong, and some currency fluctuations. Ultimately, we delivered solid results with our preeminent yield performance leading North American network carriers. The overall Q2 performance further validates our commercial thesis. Our network and customer diversity, in tandem with our strong foundations, enabled Air Canada to better adapt to evolving market conditions.
The main highlights of Q2 were the strong performance in the transatlantic, the growth of our sixth freedom segments, and the continued and sustained demand for our premium products. Overall, our operating revenues increased 2% year-over-year to CAD 5.6 billion. TRASM declined 0.5% year-over-year with growth in cargo and other revenues offsetting some of the decline in new passenger revenues. On the passenger side of the business, our revenues rose 1% on a 2.5% increase in capacity. We made the right early calls to match our capacity to the evolving demand landscape, and our diversified network and disciplined capacity management supported strong performance in international overall. Notably, the Atlantic and Latin American markets saw revenue growth of 5% and 11% respectively, driving a 2% unit revenue increase in these markets.
As anticipated, demand continues to grow off-peak towards Southern Europe as our customers take advantage of milder temperatures and fewer crowds. The shift of Easter into the second quarter of this year also supported the growth in these markets. Across the Pacific, we continue to see increased competitive capacity, pressuring yields in the region, primarily from China and Hong Kong. This translated into lower unit revenues as overall industry supply and demand continue to normalize. We are very pleased with our sixth freedom revenues, which grew 17% with strong performance in the Atlantic and Pacific market. Sixth freedom traffic growth is core to our revenue growth strategy. In the transborder market, we continue to see less demand for trips to the U.S. Revenues declined 11% on 8% less capacity, despite stronger yields year-over-year, in part due to lower industry capacity in the market.
The year-over-year decline in bookings is consistent with our previous commentary. Ending with domestic, we observed industry capacity growth amid redeployments from the transborder market. We kept a strong and steady presence and offered more options for travelers to explore the country, increasing capacity on key leisure destinations. Passenger revenues grew 3% year-over-year with a 2% decline in unit revenues. Shifting to cabins, where demand for our premium products was quite strong, premium cabin revenues grew 5% year-over-year with robust performance in international markets. Premium revenues represented close to 31% of total passenger revenues in the second quarter, which is an expansion of more than one percentage point year-over-year. Overall, and fundamental to our passenger revenue results was our diverse network, our agility in aligning capacity to shifting demand, our leading premium and brand and fare offerings, and our revenue management capabilities.
We are pleased with the outcome of this quarter. Now over to cargo, where revenues increased 10% to CAD 253 million in the quarter as shippers continue to adjust the global trade landscape. We anticipate a more normal environment for the rest of the year. Other revenues also performed strongly in the quarter. This was due to a solid performance at Air Canada Vacations, with higher ground package revenues and increased non-air revenues related to Aeroplan. We have built a strong revenue base with ACV, on which we will expand in the second half as travelers seek out new and exciting destinations. We see strong momentum for the Sun market for the balance of the year. The excitement was evident in the second quarter as we expanded the breadth of our network towards Naples, Porto, Prague, and Manila.
Our flights between Vancouver and Manila now link Canada and the Philippines year-round, solidifying our position in North America's airlines serving the most nonstop destinations in Southeast Asia. We also restarted flights to London Heathrow from Ottawa and Osaka from Toronto, launched flights to Edinburgh from Montreal, and enhanced our rail connections in Germany with a codeshare on Lufthansa Express Rail. As we zone in on the second half of the year, there are three components that support our view. First, we continue to witness strong demand for our international network through the end of the year and into early Q1 2026. As booking trends continue to evolve, we see greater relative strength in the fall and early winter periods versus historical norms.
Secondly, we've made continuous adjustments to our hub airport schedules and operations to better favor six freedom travel, reducing elapsed travel times and improving our overall competitiveness in the market. Third, with A220s progressively returning to line operations, our upcoming schedules offer enhanced network coverage and schedule quality. This will unlock greater connecting opportunities to our international network. Further, as we discussed at our last Investor Day, we continue to implement branded fare and other revenue improvement initiatives. We are in the early innings of these enhancements, and we're seeing promising initial results. As of today and across the system, we anticipate a stable demand and yield environment for the fall. We continue to see slight pressure on the economy cabin yields, which we expect will be offset by premium cabin strength.
The fourth quarter traditionally has a shorter booking curve, so it is still relatively early to provide additional color. We will continue to use our proven playbook to manage and deliver on our plans. We are closely monitoring the state of the Canada-U.S. sector, where we see a decrease in overall market capacity. We retain ample flexibility to respond to changing market conditions. We look forward to a recently announced expansion into Latin America, returning to Rio and Lima and adding Guatemala to the network. These additions, along with the routes we've already mentioned, leverage the strength of our brand and our hubs to further diversify our revenue streams and create more six freedom opportunities. In terms of capacity, we expect capacity to increase between 3.25% and 3.75% in Q3. We reaffirmed our expectation for the full year capacity to grow between 1% and 3%.
Looking beyond 2025, we eagerly anticipate the arrival of our first Airbus A321XLR in 2026. We have exciting plans for this game-changing aircraft, which is poised to unlock new and profitable market opportunities. Stay tuned as we plan to unveil our summer 2026 XLR destination in the coming weeks. We are confident in our growth opportunities fueled by Canadian demographics, six freedom network expansion, and market-leading products and offerings. We are executing our long-term plan, rooted in Air Canada's proven commercial strategy and anchored on our diverse network, our competitive fleet, and well-positioned hubs, all of which are supported by investments and propelled by a strong team that can execute. Thank you. [Foreign language] John, and over to you.
Thanks, Mark. Good morning, everyone. Bonjour à tous. A shoutout to our employees for their commitment to delighting our customers and executing in a challenging environment in Q2. [Foreign language] . In the second quarter, we reported an operating income of CAD 418 million and an adjusted EBITDA of CAD 909 million, with an adjusted EBITDA margin of 16.1%. Operating expenses grew 3%, supporting capacity and traffic growth, absorbing the impact of a weaker Canadian dollar while benefiting from the lower jet fuel prices, which declined 16% year-over-year in Q2. This includes a hedging gain of CAD 19 million realized in the quarter.
With fuel prices trending up in the last month, it's worth noting that we have a hedging position for approximately 17% of the anticipated purchases of jet fuel for the third quarter at levels below current spot prices. Q2 adjusted CASM-ex of CAD 0.144 increased 6.4% year-over-year, primarily due to higher unit labor costs and, to a lesser extent, higher depreciation, airport and navigation fees, and catering. This was partially offset by a 2.5% year-over-year growth in capacity and labor-related and infrastructure productivity gains. Diving into cost elements a little further, note that labor expenses increased 16% year-over-year on less than 1% headcount growth. While largely in line with our expectations and planning, year-over-year compares in overall labor costs will be challenging in Q2 and Q3.
The main reasons for this include: first, the realized and estimated impacts of achieved and anticipated new collective agreements with our pilots ratified in Q4 2024 and our flight attendants currently being negotiated. Second, the non-cash impact of the recent share price appreciation in Q2 on stock-based compensation accounting expense. Finally, we saw some year-over-year volatility in other payroll and wage accruals. As we have said in prior calls, we expect some unit cost pressures to continue as cost escalation makes its way through the system on items such as labor, airport and navigation fees, depreciation, and maintenance. When focusing on year-over-year comparisons for adjusted CASM-ex in Q3 specifically, keep in mind the favorable cost adjustments recorded in Q3 2024. We are proactively driving management's actions to limit these increases.
We are making strong progress on our CAD 150 million cost reduction program and expect to deliver most of the targeted savings in full year 2025. We're also focused on developing and implementing sustainable unit cost improvement strategies as we outlined in our December 2024 Investor Day. For full year 2025, while we do see some pressure to the upper end of the range, we maintain our full year adjusted CASM-ex guide of CAD 0.1425 to CAD 0.145. Turning to free cash flow generation, balance sheet management, and capital allocation. Cash from operations reached CAD 895 million, showing strong conversion of EBITDA to cash from operations over the past 12 months, aligning well to our long-term targets. In Q2, we generated free cash flow of CAD 183 million, CAD 268 million lower year-over-year, largely due to higher planned CapEx.
Year to date, free cash flow was CAD 1 billion at the end of the first half of 2025, giving us confidence in our free cash flow target for full year 2025. Moving on to our balance sheet, total liquidity was CAD 8.4 billion, down about CAD 1 billion from the first quarter. This was largely due to cash used for financing activities, reflecting the reduction of debt and lease liabilities and funds used to purchase shares for cancellation. Leverage ratio remained stable at 1.4, as at June 30, 2025, emphasizing the strength of our balance sheet and that it is well within our 2X or less leverage target, highlighted at our last Investor Day. In Q2, we made another very important step in our shareholder return program by launching and completing a CAD 500 million substantial issuer bid, repurchasing 26.6 million shares at CAD 18.80.
As you may recall, we have earmarked up to CAD 2 billion for share buyback initiatives from 2024 through 2028. In aggregate, the Q3 2024 NCIB and the Q2 SIB have returned CAD 1.3 billion to shareholders, and we have purchased more than 62 million shares for cancellation. At June 30, the total issued and outstanding shares were approximately 296 million. After the quarter ended, we repaid in full the balance of the convertible notes for a total amount of approximately CAD 382 million, including accrued interest. The notes were canceled, and their associated potentially issuable shares will not be a consideration in computing the diluted earnings per share for future quarters, except for the year-to-date calculation for the period to July 1, 2025.
With the progress made to date and the anti-dilutive capital deployment actions completed, we are confident in achieving our objective to have our fully diluted share count below 300 million by 2028. With our balance sheet in order, our shareholder return program progressing, let's turn to capital allocation towards investment in our fleet, enabling profitable growth. In the quarter, we added three A220s and two 737 MAX aircraft. We expect to receive another five A220s and one 737 MAX by December, with CapEx to be about CAD 3 billion for full year 2025. We have spent approximately CAD 1.4 billion year to date. Deliveries of the A321XLR will begin in 2026, totaling 11 aircraft by the end of the year. We also expect to receive our first two 787-10 aircraft and another four 737 MAXs.
There are no significant changes to our CapEx expectations for 2026, and the changes in our disclosures are mostly linked to the timing of maintenance events and favorable foreign exchange variance since Q1 2025. Our fleet strategy is financially accretive as it is closely linked to our growth strategy, benefits our customers, and drives superior aircraft economics, scale, efficiency, and network optimization benefits. These new aircraft allow us to initiate new destinations and enhance our existing service and onboard products. As Mark noted, we will be sharing exciting XLR destinations for the 2026 schedule in the coming weeks. Our entire team is enthusiastically ready to welcome this aircraft type to the fleet. As we look to the remainder of 2025 and beyond, our confidence in our business outlook remains solid. Today, we reaffirmed our guidance for the full year 2025.
We continue to expect 2025 adjusted EBITDA to be between CAD 3.2 billion and CAD 3.6 billion. We assume jet fuel averaging at CAD 0.92 per liter for 2025, which is expected to represent an impact of about CAD 200 million on the full year from our prior expectation of CAD 0.88 per liter. We now anticipate the Canadian dollar will trade at an average of CAD 1.39 per U.S. dollar for the year. This is lower than the levels seen in the first five months of 2025 and should produce a small EBITDA tailwind to our prior expectations of CAD 1.40 per U.S. dollar. Our 2025 guidance update continues to assume a marginal Canadian GDP increase aligned with market expectations. As previously mentioned, we continue to expect adjusted CASM-ex to be between CAD 14.25 and CAD 14.5 and remain focused on managing controllable factors and mitigating industry-wide cost pressures.
This includes being disciplined and selective in discretionary spending, seeking and delivering on efficiency and productivity initiatives, and being agile and proactive in making rapid strategic capacity adjustments as conditions evolve. As indicated earlier, we are maintaining our 2025 free cash flow guide at breakeven CAD ±200 million. Now, perhaps a word on trade and tariffs. We are continuously assessing the evolution of these regimes. Despite some modest impacts, we expect 2025 tariff costs to remain rather contained, particularly considering our planned deliveries for the remainder of this year. We continue to work with suppliers to mitigate any potential impacts and to better understand the longer-term implications and necessary actions as more permanent and sustained policies are formalized. We have made good progress towards our longer-term goals thus far. We remain focused on our 2028 targets and energized about our 2030 ambitions.
Our strategic long-term plan will help us maximize shareholder value and secure a successful and prosperous future for Air Canada and all its stakeholders. Back to you, Mike.
Great. Thank you, John. Our focus, our commitment, and discipline are driving our long-term plan execution, managing the risk environment, and taking advantage of opportunities as they arise. We are also laser-focused on ensuring an efficient operation during the peak summer period and building on gains achieved over the last few years. Perhaps a word on our negotiations with our flight attendant union, CUPE, currently seeking a strike mandate should an agreement not be reached. Such a vote is a normal step in the negotiation process and does not mean that any disruption will take place. We remain committed to the bargaining process and available to continue negotiations towards a fair and equitable collective agreement, one that recognizes the contributions of our flight attendants and supports the competitiveness and long-term growth of the company.
We remain focused on what we can control, including managing costs diligently, disciplined capacity management to match supply with demand, running our operations effectively, and delivering a positive travel experience to our customers. Our global network and efficient fleet connecting Canada to the rest of the world, along with our diversified revenue base, product offerings, strong balance sheet, liquidity management, and cost reduction program, are key strengths that we will continue to develop and leverage. We have a very strong foundation, which continues to improve. We are executing our strategic plan to honor our long-term commitments and drive sustained positive impact for all stakeholders. Thank you, [Foreign language]. Valerie?
Thank you, Mike, and thank you all for joining us this morning. [Foreign language] . We're now ready to take your questions. Should you require further details following this call, our Investor Relations team is available for support. Back to you, Krista.
Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. We also ask that you limit yourself to one question and one follow-up. For any additional questions, please re-queue. Your first question comes from Chris Murray with ATB Capital Markets. Please go ahead.
Yeah, thanks, folks. Good morning. My first question is a little bit different. Just thinking about some of the announcements we've seen about airline alliances in the last little bit. It looks like maybe American is looking to join up with Porter. We've seen certainly some talk about WestJet and Delta and what that could mean. I'm just wondering, you know the success you've had with six freedom and how you've been able to deploy into international markets. It seems like, in a lot of ways, you've kind of done it very well, and now you're starting to get some imitators, if you will. How do you think those airline alliances as they enter Canada could impact how you guys are operating? If any color on how that could come about would be helpful.
Hi, Chris. Mark here. Excellent question. Certainly we're seeing an evolving alliance landscape. As it pertains to six freedom, I don't see much of an impact here because we've got a Porter-American alliance, which will largely be a Canada-U.S. sector. We have obviously, you know, WestJet and Delta that have had a longstanding partnership, and you've seen WestJet put a lot of capacity into Delta hubs. I don't see that really impacting our six freedom franchise. I don't really, you know, we have got a very strong relationship with United. We have a joint venture with United on transborder, which has been very, very successful. At this time, I don't really see much of a change to the way we're operating today.
Chris, let me just add a point. Star Alliance is the best alliance out there, and we are doing some things to better tie together the technology and customer experiences among all the carriers. I think we're certainly going to be raising our game as well from a Star Alliance perspective.
Okay. That's helpful. You know, John, maybe this one's for you a little bit more. Back at an Investor Day, we talked a little bit about the bridge between EBITDA and EPS, and it seems to be a little bit noisy as we go in through the year. Can you just remind us how we should be thinking about tax and tax positions as we go through the rest of the year? Anything else that might be moving stuff around? Anything in depreciation or interest to be aware of as we try to make that bridge down now that we also have a kind of a revised share count number, which I would assume will be relatively stable for the rest of the year?
Yeah. Thanks for the question, actually. I think it's good to probably continue to exchange on this as we particularly close out the year and then set up 2026. A couple of things maybe just to think about. One, from a tax point of view, really since the pandemic through last year, we had kind of an off-balance sheet tax asset, right? Every time you'd have tax expenses, they'd be offset by a recognition of the tax asset, usually in the same quarter. That tax asset was fully recognized at the back end of last year. The one thing is that starting in 2025 here, especially on the comparison to 2024, you'll see the tax expense, the accounting expense every quarter. That does create kind of a year-over-year differential in the quarter. You feel that, certainly as you look at Q2 2025 versus Q2 2024.
It's probably a significant part of the gap between one to the other. The other element that, and on the taxes, maybe just again here, things move around in terms of the rates themselves, but think effective tax or statutory tax rates somewhere around 26.5%. There are some items, for example, meals and expenses that don't get full deductibility from a tax perspective in Canada. So effective tax rate is closer to 30%, 31%, depending on other elements. Just think about that as you tax affect earnings. The other piece is depreciation. You're going to have a multi-year growth in depreciation. We talked a little bit about this at Investor Day, but that'll go year-over-year for the next few years.
There's no specifics here, but think about a couple hundred million dollars a year of depreciation and expense amortization growth as we go through between here and 2030 as we work through our CapEx cycle. That as well, non-cash, but has an EPS impact. Those are the two major kind of differentiators from, let's say, 2024. That will be now solid for taxes going forward. Comparisons will be, I think, good. For depreciation, you'll have some pressure year-over-year.
Okay, that's helpful. Thanks. I'll leave it there.
Thank you.
Your next question comes from the line of Savi Syth with Raymond James. Please go ahead.
Hey, good morning. I wonder if you could just give some color on just what you're seeing in the various regions, but any deeper color that you can provide on how we should think about the yield progression here in third quarter and into the fourth quarter just based on what you're seeing today?
Yeah. Good morning, Savi. We continue to see very strong demand for our international network at large. The Atlantic, the Pacific, and then as we look into late Q3 into Q4, we see a lot of strength in the Sun market where we have shifted some capacity away from the transborder market into the Sun market, and all of that seems to be quite strong going into late Q3 and Q4. It is too early to comment on Canada and the U.S., so the domestic and transborder right now because we're on a small booking base, but we expect those to be relatively stable.
On the yield side, we should expect yields to be relatively flat year-over-year. there will be a little bit of pressure in the Pacific as there's a lot more capacity to China and Hong Kong, which will be offset a little bit by some strength that we see in Japan and Korea and Thailand in particular. A pretty good environment overall, and our network is well adapted to that international demand that we see in Q3 and Q4. As we've noted in the remarks, we're seeing booking curves moving more into later in the quarter. We see more relative strength in September, October, and early winter than we normally do. That bodes well for us.
That's very helpful. Thank you. If I might, looking at the, you know, there were some modest changes in the fleet plan as it relates to retirements. I was wondering if you could talk a little bit about kind of what drove those decisions and if there's, if we should kind of expect any unit cost benefits or anything as maybe you avoid maintenance or anything around those.
Yeah, I think we continually look for opportunities to optimize the fleet and transition to newer aircraft. We have some older 319s in particular that, as maintenance costs get high and we get into major events, we have alternative lifts as we bring on 737s and so on. The 220s in particular as well have been coming into the fleet. It's part of the overall opportunities for us to continue to use the scale as in modern aircraft as we grow to manage unit costs. I think it's fairly consistent reflected in what we put out there on Investor Day.
John, is that like the faster regional retirements, does that give a kind of greater confidence as you get into the mainline fleet?
I think it's a factor of the A220s being deployed effectively. Overall, I think just as we optimize the network and the deployment of the aircraft, we make those decisions.
Perfect. Thank you.
Your next question comes from the line of Matthew Lee with Canaccord Genuity. Please go ahead.
Hi, guys. Thanks for taking my questions. Maybe more on ASM. You had a pretty good showing this quarter. It looks like it's going to be an improvement next quarter. Our math suggests that you kind of hit the middle end of your annual guidance, even if you had no capacity growth in Q4. Just to give you the fact that bookings sound pretty good, I guess the question I'm circling here is, is it now more likely that you'll kind of end up on the high end of that 1% to 3% range, just what you're seeing in the market? Or is it an expectation that Q4 might be flat or negative versus Q4 2024?
Hi, Matt. This is Mark. With respect to Q4, we're looking at ASM growth between 2.5% and 3%. We don't see any material changes to that right now. I would say we're still looking at kind of the middle of the guide in terms of overall annual ASM growth.
Okay. Maybe another question would be, of the geographies that you serve, where do you see the kind of biggest risk factors that exist that could potentially get you to the low end versus maybe the high end of that guidance range, just given what you've given so far?
The majority of our ASM growth is going to occur in international markets. That's, you know, transatlantic and transpacific. We've reduced the U.S. to an appropriate amount. The risk would be that, you know, there's a bit of a reduction on our international route network. At this time, given the booking posture that we see and the momentum that we have, we don't see any material change to that ASM profile, especially going into Q4.
Okay. It's not like, you know, further reductions in the U.S. or something that would be the bigger factor in international opportunities?
Not at this time. Like I said, we have a lot of flexibility. We can move capacity around the services, but overall, at this time, I think we're going to keep the plan that we've got, and the outlook certainly supports that.
Okay. I appreciate it. Thanks.
Your next question comes from the line of James McGarragle with RBC Capital Markets. Please go ahead.
Hi, this is Louis on for James. Good morning.
Morning.
Morning.
This question's for John. John, just on the CapEx guide, the schedule coming in a bit lower, just to clarify, is that just an absolute reduction in the maintenance spending from some of these new deliveries, or is that kind of a deferral? Will there be a deferral to later periods?
I'd say the bulk of the changes really affect. There's a little bit of timing there in maintenance. If you look at the end of Q1 to the end of Q2, we use the quarter-end rate to convert our U.S. dollar commitments going forward. You had like a 5% - 6% reduction from one quarter to the other, and that's the bulk of the movement down. We didn't really change any delivery expectations, and maintenance does move around a little bit, but I wouldn't overplay that.
Okay. Great. Thank you. On the OTP performance, two consecutive months, you ranked number one. Could you provide some insights into what's driving that improvement? Is this partly due to some capacity reallocation away from congested U.S. airports? Is it sustainable if we see kind of demand come back to transborder?
Hey, good morning. It's Mark Nasr. Obviously, some very good work from employees throughout the operations and the quarter. I'd call out three things. The first is a focus on getting aircraft, particularly at the beginning of the day, out on time. Our departures at zero metric, driven by GO, which is our focus on closing all the doors five minutes before departure time. Number two, we've put in a lot of new technology in the operation that is improving decision support functions. We're still at the early innings of that, and we think that there's more we can do, and we have plans to that end. Number three, during the quarter, we did have favorable weather at our hubs in Canada. I wouldn't call that any reallocation of flying, like, for example, in the U.S., as you mentioned, as being a theme there.
Okay. Great. Thanks for taking my questions.
Thank you.
Your next question comes from the line of Sheila Kahyaoglu with Jefferies. Please go ahead.
Good morning, guys, and thank you for the time. Maybe, first question on premium, if that's okay. Can we talk about premium revenues for Air Canada? I think in Q1 grew 2%, slightly less than capacity, and then in Q2 grew 5%. U.S. carriers have seen the spread between premium and main cabin widen. Can you talk about the difference in unit revenues in Q2 and how you're thinking about premium for the remainder of the year?
Morning, Sheila. On the difference between Q1 and Q2 is the composition of our network. In Q1, we have a larger presence in Sun markets, leisure markets in general. As we go into Q2 and Q3, we really ramp up our international network, and we've seen a lot of demand strengths in general for leisure destinations in Europe, etc., some strength in premium demand for Japan, Australia. It's really kind of the composition of our network that leads to those changes. I think you should anticipate that continues into Q3. Still a little bit early for Q4, but the signals that we have for Q4 is that premium strength will continue. As we get into Q4, as we've noted for Q1, the network starts to shift again a little bit more to the Sun market, but international long haul is really contributing to those results.
Got it. Thank you. Maybe one on cargo, quite strong in Q2. You've moved around some freighter aircraft in the past year. Curious if you're finding greater opportunity given global trade policies. Would that support deepening your efforts in cargo?
Interesting question. The peak that you saw in Q2, we don't anticipate that continuing at the same rate in Q3 and Q4. I think you'll see a bit of normalization in Q3 and Q4. A lot of that was driven by the strength in particular Asia, some of that uncertainty that led to a lot of yield growth, particularly out of Asia. I don't think we'll see the same relative strength into Q3 and Q4, but overall, the cargo revenue picture stays relatively stable.
Great. Thank you.
Your next question comes from the line of Cameron Doerksen with National Bank Financial. Please go ahead.
Yeah, thanks. I wanted to ask another question on the six freedom growth that you saw, which was really strong in the quarter. I'm just wondering if you can maybe talk a little bit about how that has evolved in the last several quarters. It feels to me like there's maybe more of an opportunity here for six freedom connecting Latin America to Europe Pacific versus in the past, more of the growth coming from, you know, U.S. origin passengers. Maybe you can just talk a little bit about the evolution.
Sure, Cameron. We're obviously very pleased with the numbers. What we did in Q2 is, as you know, we had some reductions on the transborder network. The one thing we did not do is we did not touch any of our six freedom connectivity at all. In fact, we reinforced it, and there was a strong commercial execution plan to really focus on that because some of the yields that we saw coming out of the U.S. were quite favorable. As we go into Q3 and Q4, and as I suggested in my remarks, we've made more tweaks to our hub airports to favor six freedoms. You saw what we're doing in Latin America, whether it be Guatemala, whether it be some things you see in Mexico, or even the things we're doing in South America between Lima and Santiago.
We've built some very competitive elapsed times that give us very favorable shelf display. In addition to that, what's new year-over-year is we had a lot of grounded fleet last year. We had a lot of fleet shortages that really kind of prevented us from building out our six freedom network in the fall and the winter. We're over that hump now as A220s come online. Overall, I think you'll continue to see very favorable progression of six freedom revenues into late Q3 and, you know, surprising numbers in Q4 at this point.
Okay. That's very helpful. Just maybe secondly for me, I know you don't want to talk about, I guess, the flight attendant talks and negotiations. Just wondering if at this point you've seen any indication of any book away from, you know, maybe consumers who might be worried about a potential strike. Just if there's any evidence of that so far.
Good morning, Cameron. Yeah, I think your first comment's the right one, and we really don't want to talk much about this given where we are in our negotiations. I made my comments in my closing remarks. I think we've, you know, given the confidentiality of discussions, that's the appropriate place we're going to end off on the topic.
Okay. Fair enough. I'll pass the line. Thanks very much.
Your next question comes from the line of Konark Gupta with Scotiabank. Please go ahead.
Thanks, and good morning, everyone. Let me begin with the question on free cash for John. I mean, you have first half, you produced a CAD 1 billion, but full year, you're saying breakeven plus minus. If I go back into history, I've never seen you guys burn a CAD 1 billion of free cash in the second half, except for obviously 2020 COVID. What gives you sort of the lack of confidence, I guess, in bumping up the free cash guidance?
I think, first of all, I think we, you know, we've managed the year well. We've made some decisions to manage capital, CapEx as kind of the year progressed. We adjusted our fuel number. We wanted to make sure we had all of that in there. I think by and large, we're targeting the upper end of that range. We'd like to post a positive cash on the full year. We'll watch the second half of the year as it evolves here, and then, you know, we'll make a call probably in Q3 to tighten up ranges across the board. You know, we are focused on generating positive cash, and that starts in 2025.
Makes sense. Thanks for that, John. For Mark, transborder capacity, I guess you took out quite a lot in the summer, right? You were talking about the low teens sort of demand declines and whatnot. When you bring back capacity to transborder, do you anticipate bringing back all at once, or is it going to be more gradual? I think the yields are holding up pretty well in transborder, right, given the industry capacity. Do you expect yield pressures as capacity comes back over the next 12 months or 24 months?
Where we've really removed capacity on the U.S. is into, you know, traditionally U.S. leisure markets. Think of, you know, markets like Florida, Vegas, Arizona, markets where there's a very heavy point of sale or point of commencement in Canada. We think we're going to restore some of that capacity gradually, but right now, we continue to plan an environment where things stay the same. There's no real improvement in the overall demand posture. Like I said, we have a lot of flexibility to move capacity around. At this time, we continue to think that the situation that we're in will continue all the way through the end of the year. Like I said, again, if things did improve, we can be very agile and move capacity, gradually or rapidly, depending on how market conditions evolve.
Thanks for that. I appreciate the time
Your next question comes from the line of Daryl Young with Stifel. Please go ahead.
Hey, good morning, everyone. I just wanted to dig in a little bit on the greater demand in the fall and winter season. I'm just curious if there's any demographics impacting that. Specifically, is it the baby boom generation with more travel flexibility into the fall? Do you see that being something that's a little bit more structural in the next couple of years?
Yeah, that's an excellent question because we're actually asking that question ourselves internally. We definitely agree that there's a shift in the booking curve, and that is supported by some demographic changes. It's a lot more pleasant to go to Europe, or travel internationally in the fall than it is in peak summer. I think that's being reflected in some of the advanced booking numbers that we see. We see greater relative strength in September, October, even early November than we usually do.
Okay. That's great. That's all for me. Thanks.
Your next question comes from the line of Tom Fitzgerald with TD Cowen. Please go ahead.
Hi. Thank you so much for the time. I was wondering if you could update us on what you're hearing from your corporate clients and what your expectations are for corporate travel, kind of as we move into the fall after the summer.
Thanks, Tom. On corporate, we had a pretty stable Q2. In fact, we were surprised by how strong we saw corporate performance overall in May and June. April was a little bit soft, but obviously, we had Easter there. Going into September and October, we have no reason to believe that will slow down. We continue to expect it to be more or less the same rate that we saw in Q2.
Okay. Great. That's really helpful. For my follow-up, I just wanted to make sure. Did you say, did I hear this right that you said yields flat year-over-year in the third quarter? Just so we're on the same page, how are you guys thinking about PRASM in 3Q? Thanks again for the time.
We are looking at an overall flat yield environment for Q3, and I think you should expect the same for PRASM or TRASM, maybe slightly down year-over-year.
Your next question comes from the line of Andrew Didora with Bank of America. Please go ahead.
Hi. Good morning, everyone. John, just wanted to kind of focus in on the cost side a little bit. First, in 2Q, can you quantify what the stock-based comp impact was? I would think that's more one-time related to 2Q unless the shares move meaningfully higher here throughout the course of 3Q?
Yeah, thanks for the question. It is one-time in nature relative to the movement of the stock price itself, right? The stock moves, I think, about 45% or so, end of Q1 to end of Q2. With that, just about CAD 30 million or so of expense, I think was CAD 31 million the actual number.
Got it. Thank you. Just based on your comments on 3Q, is it fair to say that when we think about 3Q adjusted CASM-ex growth year-over-year, that it's higher than 2Q, and then you see a much more meaningful deceleration in 4Q to kind of triangulate towards the higher end of the adjusted CASM-ex guide?
Exactly. That's exactly what the comments were intended to highlight. It'll gap out in Q3. Last year, we did have some favorable adjustments on a one-time basis that are going to even, you know, exaggerate the year-over-year compare on adjusted CASM-ex in Q3. To your point, mathematically, then coming back to probably a little bit, you know, towards the higher end of that 14, 14.5 range for a full year.
Got it. Thanks so much.
Thank you.
Your next question comes from the line of Kevin Chiang with CIBC. Please go ahead.
Thanks for taking my question. Maybe if I could just follow on on Connor's free cash flow question. I mean, you give us a lot of disclosure. You know, you have your back, you have your EBITDA guidance for the year. So we have your estimate for the back half. You know, you convert about 100% of that to operating cash flow before working cap. We have your CapEx. If I look back the last couple of years, your working cap drag in H2 has been about CAD 850 million. If I just sum it all up, plus the free cash flow you've generated year to date, it feels like you could even exceed the upper end of your free cash flow guide. I'm just wondering, is there something on working cap we should be thinking about?
Is it just broad conservatism because you still have six months to play out here? Just maybe framing the numbers we're seeing versus the free cash flow guide you have out there.
I think we are focused on delivering to the higher end of that range, so on, you know, to the positive. We've got just a little bit more than half of the CapEx to go in the second half of the year. There's still a little bit of volatility out there. We do still have the negotiation year to complete as well. We're just making sure that we leave ourselves some room to actually navigate this well and land where we should be for the end of the year.
That makes sense. I noticed, on the Pacific yield front, I know that about the past few quarters, you've talked about a little bit of pressure there on the yield, on the yields, but the year-over-year degradation has improved over the past three quarters, from a year-over-year degradation perspective. Just wondering if you are starting to see signs of stabilization? Should we expect that continued trend in the back half of the year? It seemed like you were seeing pockets of certain submarkets within the Pacific improving here. Just wondering if you could clarify that.
Hi, Kevin. It's a question of comparison. Last year, as we went through Q1 and then Q2, things started to normalize a little bit on the Pacific as capacity came back online. As we look into late Q3 and Q4, we start rolling that over, and we should start to see less degradation or overall RASM on the Pacific.
Perfect. That's it for me. Thank you very much.
Your next question comes from the line of Jamie Baker with JPMorgan. Please go ahead.
Good morning, everybody. Most of my issues have been addressed, but just a quick one. A theme that has emerged here in the U.S. this earnings season relates to fourth quarter capacity. Most of the airlines here are modeling for OA capacity cuts, which as of now are not reflected in filed schedules. When you think about OA capacity in the domestic market, do you view fourth quarter schedules as pretty reliable, fully baked at this point, or are you assuming some incremental level of OA capacity change as part of your full-year guide? Thanks in advance.
Hi, Jamie. I think what you see loaded for Q4 from some of the OAs that operate in the domestic market is pretty stable and reliable.
Okay.
We've seen numerous Canadian competitors move capacity away from the U.S. into the domestic market or into the Sun market.
Yep.
I think what we see for Q4, we should assume that's what's going to fly overall.
Okay. That's perfect color. That does it for me. Thank you.
That concludes our question-and-answer session. I will now turn the call back over to Valerie Durand for closing remarks.
Thank you, Krista. Thank you once again for joining us on our second quarter earnings call this morning. Once more, should you have any further questions, please don't hesitate to contact us at Investor Relations. [Foreign language] . Thank you, Krista.
This concludes today's conference call. Thank you for your participation, and you may now disconnect.