Good morning, ladies and gentlemen. Welcome to Air Canada's Third Quarter 2019 Conference Call. I would now like to turn the meeting over to Kathleen Murphy. Please go ahead, Ms. Murphy.
Thank you, Alana, and good morning, everyone, and thank you for joining us on our Q3 call. With me this morning are Caelin Robinescu, our President and Chief Executive Officer Mike Russo, our Deputy Chief Executive Officer and Chief Financial Officer Lucie Guillemette, our Executive Vice President and Chief Commercial Officer and Craig Landry, our Executive Vice President of Operations. On today's call, Calin will begin by highlighting our financial performance for the quarter. Lucie and Mike will then address our Q3 financial performance in more detail and turn it back to Calin before taking questions from the analyst community. We'll start by taking questions from equity analysts followed by questions from fixed income analysts.
Before we get started, I will point out that certain statements made on this call, such as those relating to our forecasted costs, financial targets and strategic plans, are forward looking within the meaning of applicable securities laws. This call also includes references to non GAAP measures. Please refer to our 3rd quarter press release and MD and A for important assumptions and cautionary statements relating to forward looking information and for reconciliations of non GAAP measures to GAAP results. I will now turn the call over to Cale Navnitsky, AerCap's President and CEO.
Thank you, Kathy. Good morning, everyone, and thank you for joining us on our call today. I'm extremely pleased to report an excellent third quarter with EBITDA of $1,472,000,000 9% above last year's 3rd quarter and better than the increase of approximately 5% projected in our news release of July 30 and better than analysts' consensus estimates for EBITDA again this quarter. We reported operating income of $956,000,000 in the quarter, up $33,000,000 year over year. Record 3rd quarter operating revenue of almost $5,600,000,000 grew 3% versus the same quarter in 2018.
Unrestricted liquidity of nearly $7,400,000,000 was another record, and our leverage ratio improved to 0.8 at the end of September, half of what it was at year end. The progress made in improving our balance sheet was recognized once again with Moody's upgrading our debt rating by 1 notch and advancing us to one level below our goal of investment grade status. Also, we all know that increasingly investors look at ESG measures when making investment decisions. Therefore, I was extremely pleased by Air Canada's top ranking of 1 in all three pillars of the ISS Environmental, Social and Governance Quality Score, which we received within the last several days. We ranked in the top 1% of all companies in the ISS survey and as the top transportation company worldwide.
This indicates lower risk and better disclosure versus the industry group index or region. Back to our financial performance, I consider our Q3 results to be extremely impressive in light of the serious disruption to our overall operations
and to
our cost structure and profitability created by the Boeing 7 7 MAX grounding. We covered approximately 95% of planned flying in Q3 and were able to successfully manage through this extremely challenging and complex situation. We've now removed the aircraft from our schedule until February 14 so as to give customers certainty in their travel plans. We've also wet leased 2 Airbus A330s in addition to the 2 Boeing 767s already wet leased to ensure we have enough capacity this winter into next year. The removal of 306737 MAX Aircraft or about 24% of our narrow body fleet from our schedule during our peak summer season exacted a toll from a financial, route, product and I would say human resource perspective.
And there's no doubt that the grounding is preventing us from realizing our full potential. However, I'm confident that if regulators unground the aircraft near term, our ongoing transformation will quickly regain its former trajectory. For this reason, at this point in time, we have chosen not to adjust our longer term Investor Day targets for 2020 2021. With respect to Transat, we are very pleased to see that in Q3, Transat shareholders approved the definitive acquisition agreement with Air Canada by a vote of approximately 95%. This overwhelmingly favorable result underscores the numerous benefits for all stakeholders from the proposed merger.
The vote was followed by the approval of the plan of arrangement by the Superior Court of Quebec, and the acquisition remains subject to regulatory approvals, which we hope to receive by mid next year. Before turning it over to Lucy, I'd like to thank the entire Air Canada team for their resourcefulness, skill and dedication. They've done an incredible job, and I also applaud and thank them for their continued hard work in taking care of our customers, especially from the time the Boeing 737 MAX grounding order was issued. I also thank, of course, our customers for their continued loyalty. And with that, I'll turn the call over to Lucy.
Thank you, Caitlin, and good morning, everyone. I would also like to thank our team of 36,000 for their continued passion, dedication and consistently demonstrating strong teamwork while taking care of our customers during the busy summer peak. Turning to our revenue performance for the quarter. Passenger revenues increased $146,000,000 or 2.9 percent on a yield improvement of 4.8 percent, partly offset by a decline in traffic of 1.8%. This traffic decline was driven by a capacity reduction of 2.1%.
RASM increased 5.1% year over year on a higher yield. Consistent with the Q2, the system yield improvement versus last year reflected increases in fares and carrier surcharges and an overall improvement in fare mix. Additional yield earned on airplane redemption revenue, which impacted all 5 key markets and growth in higher yielding local traffic also contributed. The impact of the MAX grounding on our capacity in our operation was amplified during the summer peak as 36 of these aircraft were removed from our schedule for the 3rd quarter, which would have represented 9% of our planned Q3 capacity. Despite the complexity that this event created, our teams continued to mitigate the impact by executing our contingency strategy, including the deferral of non essential maintenance, extending aircraft leases, strategically leveraging Air Canada Rouge, making necessary schedule adjustments and wet leasing aircraft, which enabled us to cover approximately 95% of the planned flying schedule in the 3rd quarter, as Calin mentioned.
Although we experienced a year over year quarterly capacity decline for the first time in several years in the Q3, we anticipate that we will achieve capacity growth of approximately 3% in the 4th quarter as the summer peak ends and we continue to execute our mitigation efforts. In the business cabin, on a system basis, passenger revenue increased $33,000,000 or 3.9 percent versus last year's Q3 on a growth in yield. Looking at our key markets, despite capacity reductions in each, we achieved year over year revenue, yield and PRASM growth in all markets except for the Pacific. Turning to the domestic market. On a slight reduction in capacity, domestic passenger revenues increased $123,000,000 or 8.6 percent from the Q3 of 2018.
Yield increased 9.3% with the impact of the capacity constraints and the launch of new fare categories contributing to the yield growth year over year. Pravit improvements were recorded on all major domestic services. Looking to the Q4, we will continue our efforts to mitigate the impact of the MAX grounding, including strategically leveraging Rouge and consolidating frequencies with larger aircraft. This will allow us to maintain our domestic capacity stable despite flying fewer frequencies. On the U.
S. Transborder market, on a capacity reduction of 4%, revenues increased $54,000,000 or 5.6%. Growth in higher yielding local traffic and gains in the business cabin lifted yields in the quarter. We realized significant driving in yield improvement with gains recorded on all major U. S.
Transborder services. The Eastern Seaboard business markets continued to perform extremely well for us with strong year over year revenue growth in addition to yield and PRASM gains in the Q3. The U. S. Leisure market achieved year over year revenue growth with significant PRASM improvement despite the MAX grounding having a significant impact on our capacity of these markets, especially to Hawaii, where we were required to reduce our frequencies from Vancouver to Honolulu and Maui, which were previously flown by the MAX.
As of mid June, these routes are operated through a wet lease Boeing 767 aircraft. Our international transit strategy of connecting U. S. Customers to international destinations through our hubs was also negatively impacted by the MAX grounding as we consolidated frequencies to several U. S.
Markets. This strategy has yielded very strong results over the last years and has been a key component of our profitable international growth. The negative impact on our transit traffic was felt throughout our international network. Looking forward, we will continue to see the impact of the MAX grounding on the U. S.
Transborder market capacity. We do anticipate year over year revenue growth, supported by yield and private improvement. We've extended the wet lease Boeing 767, which will continue to operate our Honolulu and Maui services from Vancouver, and we've executed a wet leasing agreement for a second Boeing 767 beginning in mid December, which will assume the Vancouver to Maui service and will also operate Vancouver to Phoenix. We're looking forward to the delivery of our first Airbus 220 in December, and we recently announced our nonstop Montreal to Seattle service as well as our nonstop Toronto to San Jose, California, both of which will be operated by the A220 beginning in May of next year. Benefiting from a modern and efficient aircraft, these routes will bolster our extensive U.
S. Network and will support our strategy to attract U. S. Customers to transit over our hubs when traveling internationally. On a capacity reduction of 1.3% in the quarter, revenues in the Atlantic increased $7,000,000 or yield growth of 1%.
As projected during our Q2 call, we saw pressure on our Atlantic revenue due to the capacity constraints in our schedule and negative currency impacts created by weaker European currencies and a stronger inbales sales mix. Additionally, we continue to observe very competitive pricing over the Atlantic on all services. We also saw a slowdown in carrier surcharges vis a vis what we had observed in the 1st 6 months of the year. Krasim grew 1.8% when compared
to same quarter last year.
Due to the grounding of the MAX, the impact of several necessary adjustments to our schedule continued to be felt. This includes temporarily suspending our profitable and productive service from Halifax and St. John's to the UK. June, we began operating our Montreal to Barcelona service and one of our Montreal to Paris frequencies through a wet lease operation. For the Q4, these services will be returned to Air Canada Rouge and Air Canada Mainline operation, respectively, and will no longer be operated by wet leased aircraft.
Additionally, due to the closure of Pakistan airspace, we suspended our well performing Toronto to Delhi service as of mid June. Although this provided the flexibility to reallocate the wide body aircraft elsewhere in our network and gave certainty to our customers when booking their summer travel, This represents a key piece of our international strategy. We're pleased to have resumed our daily nonstop service to Delhi from Toronto as of October 1. And on October 27, we increased capacity by utilizing the Boeing 777 on this route. As part of our mitigation strategy in the quarter, we also reallocated capacity from the Pacific market to the Atlantic market.
And although that change had a negative impact on PRASM, the overall impact to the quarter's profitability was favorable. Looking ahead to the 4th quarter, we anticipate year over year traffic and revenue growth despite the MAX grounding, demonstrating the resilience of our fleet and diverse network when facing exceptional circumstances. As part of our mitigation strategy, we will continue to redeploy capacity from the Pacific over the Atlantic. In addition to the resumption of our Delhi to Toronto service, our full India schedule is now operational with our nonstop daily flights to Delhi from Vancouver operating since August and the return of our nonstop seasonal service to Mumbai from Toronto. We currently offer up to 18 weekly flights to India.
Recently, we announced our new year round nonstop service from Toronto to Brussels beginning next May. This service complements our service to Belgium's capital for Montreal and offers excellent connectivity for beyond Brussels traffic. Additionally, we announced our year round nonstop service from Montreal to Toulouse beginning next June. We'll be the only airline offering year round service between these cities linking 2 of the world's leading aerospace industry. Moving on to the Pacific, on a capacity reduction of 4.1%, revenues decreased $46,000,000 or 5.8 percent on a traffic decline of 4.7% and a yield decrease of 1.1%.
The geopolitical situation between Canada and China continued to negatively impact travel demand between Canada and China and Canada and Hong Kong, and we were able to mitigate the impact by reallocating capacity from these markets to elsewhere throughout our network, including to markets where capacity was constrained due to the MAX grounding. Australia continued to be negatively impacted by increased industry capacity from North America in the quarter. Looking forward to the Q4, we expect to continue our strategy to redeploy capacity from the Pacific throughout our network to mitigate the impact of the softening travel demand between China and Canada. We anticipate a slight improvement in year over year yield and PRASM, in line with our expectations. In December, we will begin our non stock seasonal service between Vancouver and Auckland and our continued effort to counter seasonality.
Revenues from other services increased $8,000,000 or 3.5 percent on yield and traffic growth of 2.3% and 1.2%, respectively. We saw double digit PRASM growth on services to South America with Air Canada having reverted to one stop service to Buenos Aires with a connection in Santiago favorably impacting yield. Yield on services to traditional sun destinations also improved with capacity declining to Mexico due to the redeployment of aircraft through our network to mitigate the impact of the MAX. We project a strong Q4 for the other services with anticipated year over year traffic and revenue improvement. In December, we will begin our seasonal nonstop Air Canada Rouge service between Toronto to Quito and our seasonal nonstop Air Canada mainline service from Montreal to Sao Paulo as part of our strategy to counter seasonality.
From a product perspective, in August, we launched curate route specific meal, which started on our Montreal to Narita flight in the Q3 and will be rolled out on our flights to Japan in all cabins in the Q4, followed by our signature class cabin from Montreal to Sao Paulo at later this year. This partnership complements our existing partnership with Chef David Oxworth and Semativien of Veronique Leve, further elevating our meal options for our customers traveling internationally. Moving on to cargo. The Q3 of 2019 saw a year over year reduction in cargo revenues of 18 0.6% with the Atlantic and Pacific being impacted by an industry wide decrease in air cargo demand. Overall, cargo yield was down 11.5%, while traffic declined 8% versus last year's Q3.
We are not projecting any improvement in the current yields or global trade trends in the Q4, but we will be focusing our cargo efforts on domestic share shift, increased tonnage and strategic initiatives focused on capacity utilization using artificial intelligence and other tools. Turning to other revenues, we saw an increase of $33,000,000 or 18% in the quarter, with the net margin recorded on the redemption and delivery of non air goods and services related to Aeroplan program being the largest contributor. We also saw an increase in ground package revenues at Air Canada Vacation. To close, in the quarter, we removed 36 aircraft from our schedule, operated multiple wet leased aircraft and experienced softening travel demand between Canada and China. I would like to once again thank our team for a strong performance in our most important quarter despite the significant obstacles and for always continuing to put our customers first.
I will now turn the call over to Mike for a discussion on our cost performance and balance sheet metrics.
Thank you, Lucy, and good morning to everyone. I'd like to add my recognition and thanks to all our employees for an exceptional Q3 and for their commitment in taking care of our customers. With respect to our strong EBITDA results, our better than guided performance for the Q3 was mainly the result of lower jet fuel prices, partially offset by higher than expected professional fees, mainly related to the Transat arrangement agreement and related filings, as well as higher stock based compensation expense driven by the appreciation of our share price in the quarter. Moving to the full year of 2019, in our news release issued this morning, we disclosed that we expect an EBITDA margin of approximately 19%, which is within the range we established at our February Investor Day. This is quite an achievement when you consider the many challenges triggered by the MAX grounding.
This speaks to the strength of our business model and the work ethic and creativity of the Air Canada team. I'd like to now touch on Aeroplan. We continue to be extremely pleased with Aeroplan's financial results, which once again exceeded our expectations and continue to contribute meaningfully to our free cash flow. We continue to see strength from our credit card issuing partners with acquisition and retention results above expectations. Redemptions are stable, healthy and track within 1% of our expectations during the Q3.
Looking ahead, discussions are underway with a number of new potential partners for the redesign program. Additionally, we are looking to increase and diversify our Aeroplan membership base and are exploring international opportunities for growth. Our digital efforts supporting the new loyalty program, including launching our new customer data platform and creating a single customer profile across Aeroplan and Air Canada are well underway. We're also extremely excited that our new all new Air Canada mobile app is in public beta now and will be launching in November, which will enhance how our customers interact with us. And of course, we also remain on track to relaunch our loyalty program in late summer 2020.
Now turning to our costs in the quarter. Adjusted CASM, which excludes fuel expense, ground package costs, air canonifications and the operating expenses of Aeroplan increased 9.3% versus the same quarter in 2018. These increases reflected in large part the impact of the MAX grounding, which resulted in an ASM decline of 2.1% in the quarter versus a planned ASM increase of approximately 3%. The relatively higher costs associated with replacement aircraft and the ongoing MAX related operating expenses, including depreciation and pilot wages, which continued to be incurred despite the grounding. Turning to fuel.
Fuel expense decreased $151,000,000 or 11% in the quarter on lower jet fuel prices when compared to last year. The average price of fuel was 0.74 7 CAD per liter in the quarter, down 10% versus the same quarter in 2018. Looking ahead, we expect the price of jet fuel to average CAD0.77 per liter for Q4 and the full year. Air Canada has not entered into any fuel hedging contracts for Q4 of 2020. Turning to wages and salaries.
We experienced an increase of $46,000,000 or 8% in the quarter, driven by the growth in full time equivalent employees of 9.8 in part due to the addition of Aeroplan. We also recorded increases in expenses related to employee profit sharing programs and to stock based compensation. An increase in aircraft maintenance expense of $16,000,000 or 7% in the quarter reflected in large part timing of maintenance activity versus last year's Q3. In addition to in order to mitigate the impact of the MAX grounding, we extended leases for Airbus 320s and Embraer 190 aircraft, which resulted in a higher volume of maintenance activity than planned. Now turning to our balance sheet and liquidity.
As Caleb mentioned earlier, we ended the quarter with unrestricted liquidity of almost $7,400,000,000 another record. Free cash flow amounted to $553,000,000 in the quarter, dollars 64,000,000 below the prior year. You may recall that in the Q3 of last year 2018, Air Canada received proceeds of $293,000,000 from the sale and leaseback of 25 Embraer aircraft. Of course, no such proceeds were received in the Q3 of this year. In the quarter, an increase in cash flows from operating activities of 284,000,000 dollars was partly offset by an increase in capital expenditures of $55,000,000 The higher level of capital expenditures mainly reflected our ongoing investments in new technology, including our new reservation and loyalty systems.
Looking at the full year 2019, we project free cash flow of between $1,300,000,000 and 1.5 $1,000,000,000 Free cash flow in 2019 is positively impacted by a number of factors, including the deferral of MAX Aircraft deliveries from 2019 to 2020, timing of certain capital expenditures, a stronger working capital performance, the impact of aircraft lease extensions, which defers the end of lease maintenance obligations, and the favorable impact of higher cash and of the minimum cash required to support operations, amounted to almost $2,700,000,000 at the end of September. This is expected to be deployed over the next several years to purchase aircraft, make strategic investments and reduce existing gross debt levels. Shareholder buyback programs will be funded by annual free cash flows. Net debt of 3,000,000,000 dollars decreased $2,200,000,000 from December 31. This reflected an increase in cash, cash equivalents and short investment balances of almost $1,700,000,000 and a decrease in long term debt and lease liabilities of $561,000,000 Our leverage ratio was 0.8 at the end of September versus a ratio of 1.6 at the end of December.
We foresee our leverage ratio of not exceeding 1 by the end of the year. At quarter end, our return on invested capital was 15.5%, while our weighted average cost of capital was 7.2%. For the full year 2019, we project ROIC of between 15.5 percent 16%. With respect to the normal course issuer bid, we repurchased for cancellation approximately 2,100,000 shares at an aggregate cost of $91,000,000 in the quarter. On a year to date basis to September 30, we repurchased over 6,400,000 shares for a sum of $250,000,000 Additional information can be found in our financial statements and MD and A, which were posted on our website and filed on SEDAR this morning.
And with that, I'll turn it back to Cale.
Thanks, Mike. Our Canada today has reported another excellent quarter, this one covering our peak summer period. As you've heard, we generated record operating revenue, a 9% increase in EBITDA year over year, operating income of almost $1,000,000,000 and ended the quarter with record liquidity in excess of $7,000,000,000 We also made significant progress on our balance sheet, reducing our net debt by more than $2,000,000,000 at the start of the year. Even with the MAX grounding depriving us of 36 aircraft or, as I said, about 24% of our narrow body fleet, we still operate at 95% of previously planned capacity this summer. We've not allowed the MAX situation to knock us off our game plan or deter us from pursuing our long term transformational goals.
I'd like to reiterate my appreciation and once more commend our employees for how they've responded to this challenge. All parts of the company have come together to develop innovative solutions to take care of our customers and run our airline profitably for our shareholders. The face of this rapidly unfolding situation, we've been able to pivot multiple times. We've anticipated events, prepared for contingencies and acted decisively, often ahead of others similarly affected. For these reasons, the shadow cast by the MAX-seven thirty seven grounding should not be allowed to obstruct anyone's view of our company or distract anyone's attention from the progress we are making.
In addition to operating safely and consistently delivering strong financial results, we've maintained focus on a host of key activities to continue transforming and improving Air Canada. These programs and strategic initiatives, any one of which might overwhelm a less nimble company, are moving us along our path towards our goals, including investment grade status and sustainable long term profitability. Most immediately, we're preparing to roll out our new passenger service system by Amadeus to replace our legacy Res3 reservation system. The first phase next month will see the migration of our reservation inventory and ticketing functions to the Amadeus Altea suite. Then starting early in the New Year, PSS will be progressively introduced at airports for departure control functions.
The importance and benefits of this 2 year project cannot be overstated, neither can its complexity to implement. It will, however, equip us with the tools to serve our customers better and more efficiently, enable us to interact more easily with our key airline partners and lay the groundwork for some improvements in the future. We also expect it to generate more than $100,000,000 in annual incremental benefits once fully implemented. With the implementation of PSS, we will also have in place the IT architecture for another transformational initiative, launch of our new loyalty program in summer 2020. With the integration of Aimia Canada now essentially complete, a significant accomplishment in itself, we've been introducing improvements to the Aeroplan program and our mobile app.
Efforts are now intensifying to refine the program's value offering, including finalizing attractive new partnerships. These changes will better secure Aeroplan's place as Canada's best travel rewards program. Another major program is the introduction of the Airbus A220. The arrival of a new aircraft type in the fleet takes years of preparation. Yet, we've been very, very ready and eager to take delivery of our first A220 this December.
The A220 promises a step change with operating characteristics that open entirely new markets for us. In the quarter, we already announced 2 such routes, Montreal, Seattle and Toronto, San Jose, California. Our network planners love this aircraft for its economics. We know our customers will love it too for its comfort and spaciousness. And from a carbon footprint and overall economic perspective, we love the aircraft as well as it averages 20% less fuel consumption per seat, emits less greenhouse gases and is significantly quieter than other aircraft in its category.
Another key strategic initiative on which we made excellent progress in the quarter is our acquisition of Transat. We were very pleased to see shareholders of TRANZACT, including its 3 largest shareholders, voting overwhelmingly in August to accept our offer and to see the Quebec Superior Court subsequently sanction it. We're now into the regulatory approval process and hope to receive the necessary approval by mid next year. We know the combination will create numerous benefits for all stakeholders, particularly those in Quebec, where travelers will have more options, employees more job security and Montreal the advantages of seeing the further development of a Quebec based transportation and leisure company. In addition to these major initiatives, we've also pursued a host of ongoing initiatives this past quarter.
Many of these were designed to improve customer experience, including the opening of the new Toronto cafe, our agreement with Chef Antonio Park, as Lucy mentioned, and the launch, or announcement of new routes, including the new nonstop service between Montreal and Toulouse and Toronto and Brussels next year. We also maintain focus on our core priorities such as culture change. Our success here, already amply displayed in our handling of the 7/37 MAX issue, was recognized in July when we were named 1 of the 50 Most Engaged Workplaces for the 4th consecutive year by Achievers. Subsequent to the quarter, our change culture was again affirmed in a 10 year labor agreement with our U. S.-based employees represented by Teamsters.
Taken together, the continuing strong financial results we achieved, while successfully managing such a range of other major issues and projects should leave no doubt that ours as a company transformed. We've remade Air Canada into an airline that is flexible, durable, customer focused and positioned for long term sustainable profitability. So in conclusion, I thank our customers for their loyalty to Air Canada and for choosing to fly with us. And now, please take some questions.
Thank you. We will now take questions from the telephone The first question is from Konark Gupta with Scotiabank. Please go ahead.
Congratulations on a good quarter considering the MAX impact obviously in Q3. So just wanted to get started on capacity here. Thanks for providing some color on Q4. So it looks like for 2019, despite the MAX grounding, you guys are tracking, I think 2% capacity growth for the full year with 3% in Q4. Now if the MAX comes back next year as you're anticipating in February maybe, And I think you have previously kind of clarified that there will be some lag effect in terms of getting those aircraft ungrounded.
And then there's another 26 deliveries coming in next year. So do you think next year we should see the capacity growth kind of what we anticipated for 2019? I'm like it's kind of a reversal in capacity growth next year.
Hi, Konark. Good morning. It's Mike. I think that's a fairly good proxy to use and good rationale for 2020. Again, it is a moving target.
It depends on how the 737s are coming when they will be on grounded, obviously. And we have provided some visibility that will take us up to a year to put all 50 back in operation. So using the original plan for 2019 is a
good proxy. And Conor, Caitlin here. Just to add one more thing is that, as Mike said, it could take a year to get them all in. And it's the first 24, of course, we have pilots that are already allocated to those aircraft. But for the next period, we actually have to hire pilots.
This is a process that will be indeed gradual. This is not an overnight process. And that's why we say it could take up to a year to have all 50 aircraft in operation. So you would not see the incremental capacity from 50 aircraft flooding the markets in the 1st few months of 2020.
Okay. That's great color. Thank you. And then with respect to pilot hiring, would you wait for the Transport Canada certification before starting the Yes, no, exactly. So we will be doing prudent steps on hiring.
Once we know that,
Yes, no, exactly. So we will be doing prudent steps on hiring. Once we know that the FAA, we've been very close in touch with our Transport Canada regulators here, of course. And so we're quite informed on the dynamics as between the regulators. And so we would hope that the on grounding occurs soon.
And once it occurs, at least in the United States, we would start taking steps towards reinstating our hiring and we're looking at potentially hiring up to 3 50 incremental pilots next year.
Okay. And my second question is on CapEx here. It looks like there is a slight bump in CapEx for 2020 and I saw that there is, I think, 3 incremental A220 or C Series aircraft that you're taking next year. And there's probably some leases on A320 and E190 that you extended. Any color on what also contributed to CapEx increase next year, Mike?
Yes. It's Mike. So you're absolutely right. There is a small increase in overall CapEx. 3 different reasons.
1, you are right. We were taking a couple of extra 220s at the end of the year than we had originally planned. That's just moving from 2021 to 2020. So just really a timing issue from a capital perspective into 2020. 2nd, as you know, we were fortunate enough to pick up 8 very, very productive Lyle 321s.
And so we will basically modify the interiors of those planes next year. So that's some extra capital. Not expensive, but certainly that will produce a better return for us for those planes. And 3rd, some extra technology projects that we want to put on the slate for next year as well.
Okay. That's great color, Mike. And then lastly on the costs. So 2nd 3rd quarter costs came in, I think, slightly better. I'm talking about non fuel as well, compared to what we would probably the market would have anticipated given the capacity decline.
It seems like you probably mentioned the stock based compensation and some of the kind of headwinds. But despite that, costs seem to be under control here. Any color on your cost transformation program, any incremental costs you recognized during the quarter as well as looks like Aeroplan also had some lower costs in Q3?
Yes. I think there's no doubt our $250,000,000 cost transformation program continues to be a strong focus for us, and we continue to look at areas of improvement. As you can appreciate, those are getting a little more difficult, but we are still realizing some areas of improvement across many different cost buckets that some of which were reflected in Q3 and some of which we reflected in Q4 and on a go forward basis.
Thank you. The next question is from Fadi Chamoun with BMO. Please go ahead.
Good morning and congratulation on a very good execution here. Mike, if you can frame to us like if you're adding those MAX in 2019, assuming the aircraft is ungrounded, you have 50 aircraft coming in, how many aircraft can leave the fleet, like between what you've what leave between the Airbus that you were planning to retire, just to help us kind of understand what you have at your disposal to manage the supply demand next year?
Betty, great question. And it's a complex project to bring in and exit planes. As you know, we extended leases for the 190s and 320s to cover a portion of the lost capacity. So a rough estimate is about 15 planes that we will be able to exit over the next 12 to 18 months given the lease expiry dates of those points. Plus the wet leases.
Plus the wet leases. And so the 190s are fairly straightforward. 320s, we tried to negotiate short term lease extensions. And so in total, about 15 that we'll be able to exit within the next 12 to 15 months.
Okay. That's great. So I guess between the gradual reentry of the MAX and the planes that you can exit, you have some flexibility obviously here to kind of match the supply and demand and protect the yield. Yes.
And then we've tried as
you know, Fady, we've always tried to build in that flexibility. And I think we've done a fairly good job given the uncertainties and but given our plans to manage capacity appropriately, but still have some flexibility to ensure that we cover any potential scenario.
Okay. And one question maybe to Lucy. The business cabin growth this quarter of 3.9%, I think it's the lowest we've seen in at least 2 years. Can you offer up any kind of insight into the trend that you're seeing by market? Is this a region specific or is it kind of broad based slowdown that you're seeing in business cabin?
Hi. Well, there's a couple of things. The first is, we did see a material decline in the business cabins and business travel on China routes, so China and Hong Kong. So in those areas, we did see the closer higher yielding traffic significantly declined. The other issue is with us making adjustments to the schedule as a result of the MAX, we do have Rouge also flying on some domestic and U.
S. Routes, which normally would have been operated by the MAX, which has also caused a little bit of decline. But when you look at it, the key routes where we have really good solid J class demand, for example, Transcon, the U. K, those types of routes, California, the premium cabins continue to perform very, very well. In particular this summer, the domestic market, U.
K. Was also very, very strong. So there's nothing there that's a big surprise to us. Most of the performance we anticipated.
Okay, great. Thank you.
Thank you. The next question is from Walter Spracklin with RBC Capital Markets. Please go ahead.
Yes. Thanks very much. Good morning, everyone.
Good morning, Walter.
So on the MAX reentry and as you Kevin, as you mentioned, you're going to be flexible, you keep some redundancy. If we see all the airlines doing that next year, aren't we into a little bit of a risk here that we have excess capacity with a big flood of 737s coming back in, some extra planes that everyone will now be keeping to keep that flexibility. How do you see that playing out from a competitive dynamic where we might see a 2020 that has far too much capacity for capacity out there in the airline industry?
I don't see that, Walter. Our sense is that these somewhat inefficient aircraft will come out of the marketplace. I think that the in our case, we've extended, for example, the 190s even though we announced a long time ago that we wanted to be out of the 190s. 190 is not the right airplane for many of the routes. And so we would look to stop flying those if we had the MAX coming in, in a meaningful way and we had pilots and so on and so forth.
I think part of the dynamic is that we don't have a firm date on the reentry. I think as all carriers had a firm date on the reentry into service of the MAX, obviously, these plans could be made somewhat differently. But given that it's been a moving target, we've had to have that type of flexibility. But nobody certainly, we don't want to fly inefficient airplanes that consume more fuel than we need to, that have a higher cost per seat than we need to. We don't we're not in that game.
And I think that certainly in our case, our idea would be to do the thing that is most efficient for the routes that we need to serve using the right aircraft on those routes. And so there's not really a desire to have inefficient airplanes flying around operating inefficient routes.
Walter, it's Mike.
Just to add, I mean
to the earlier question, our 2020 capacity increase ASM increase is somewhat in the same ballpark as what we initially thought for 2019. I think the market can certainly absorb that fairly quickly.
And actually, another reflection point, Walter, on the question because it is a it's a good question. When you look at here's some of Lucy's comments earlier on the impact that the MAX grounding has had on 6 Freedom traffic. We need the MAX to operate those 6 Freedom routes. There's not much advantage for us to be giving up that 6 Freedom flying and so that connecting traffic that we've been developing over the last number of years. So I think that you would we would not have any particular desire to continue operating any efficient airplanes on those routes.
So even if you were to perfectly and everyone reduce those inefficient, just the MAX alone, everybody taking deliveries of MAX all at the same date, all at once, you don't expect that, to Mike's your point, that can be absorbed?
No, A, it could be absorbed and B, it cannot come in overnight. I mean, again, as we explained in our case, it's impossible for it to come in overnight because in our case, it's going to take us a full year to get up to 50%. Others may have their own staffing constraints and other dynamics in their union contracts or otherwise. So it's not as if all of these airplanes come back into market overnight.
Right. Okay. That makes sense. Mike, I heard in your prepared remarks something interesting there. You said you have excess cash on the balance sheet that would be there to fund CapEx and debt reduction and that free cash flow would be for buyback.
If I look at your guidance for 2019 to 2021 cumulative free cash flow of $4,000,000 to $4,500,000 And then your guidance for 2019 at $1,000,000 to $1,500,000 Let's say ballpark $3,000,000,000 left for 2020 2021, does that mean $3,000,000,000 goes into buyback?
It means the $3,000,000,000 is a potential for buyback. And all I want and this is why I've been talking to the market about for quite some time. The excess cash currently benefits our leverage ratio. And so that is part to help CapEx and reduce debt levels. As we go forward and we generate free cash flow, that gives us the greater ability to be more aggressive in buying back shares.
And we've done that in 2019. We bought back $250,000,000 of shares after 9 months. That's much, much greater than it was last year. And that $250,000,000 obviously reflects the free cash flow this year adjusted for the deferral of the MAX capital into next year.
Okay, perfect. And last question here is just on your, I guess, your guidance strategy as we hopefully zero in on a MAX reentry date. You've effectively, I guess, guided here for capacity for next year. You've typically obviously given some guidance for CASM and margin and etcetera. When do you think you'll kind of dovetail the 2020 guidance into that 2020 to 2021 longer term guidance that you have out there already?
Our plan right now, Walter, is to do that as part of our year end release in early February.
Thank you. The next question is from Hunter Keay with Wolfe Research. Please go ahead.
Hi, thank you everybody. Caitlin, the res system, you said in the prepared remarks that it's going to permit improvements in the future after it's implemented. What kind of initiatives were you teasing there?
Well, we see the ability of this system to help us with a lot of our inter airline transactions is going to be significant. We have a large number of our Star Alliance partners that are on the Altea system. That will be one large driver. But then there are a series of, I would call it, blocking and tackling enhancements. Lucy can describe some of the things that we're contemplating, things that are just in the system that we've been wanting to do for a long time, have not been able to do, which will facilitate upgrade revenue, for example.
Upgrade has been a big deal, the flexibility of upgrading, where we do upgrades, where we sell upgrades, I'm talking about. These sorts of things will be a series of, I would say, 2 big categories, the improvements to our own dynamic with our own product and then the airlines. Melissa, why don't you just give 2 or 3 examples?
Sure. There's quite a few benefits, but the ones that we're most excited about, one is around our ability to do more frequent sketching. So the way we operate today is we generally have a schedule change, which is quite massive, but we don't have the ability to adjust frequently as much as we would like to. So that is obviously a huge benefit. And Kim touched on it a little bit when he talks about other airlines, but the ability for us to have our availability better in sync with our partners and also with other airlines and to also have real time availability in all channels.
So in the environment we are in today, it's not optimal. So tomorrow that will be a very big benefit for us And also on the ancillary side of the business. So today, we have the ability to sell ancillaries, but tomorrow we'll have the ability to, a, introduce more of them, but also to optimize the revenue that we generate from the sale of ancillaries. And that's just really from a revenue perspective. But when you look at it from a customer service point of view, the benefits, our ability to better serve the customer in the airport environment and in contact centers will also be meaningful.
Which will obviously, of course, Hunter, result in revenue. So I'd say to be frank, I think that the $100,000,000 estimate is conservative.
Okay, great. Thank you. And then, interesting to see the domestic yields up so much with domestic loads down. That's not how every airline that operates the MAX is seeing that go down. It's more of sometimes more of a load factor benefit.
So I'm wondering for you guys, is this a function of mix where you're just basically cutting service in lower yielding markets? Or are you actually able to take some of this supply reduction and push incremental price sort of across the system? Thanks.
Yes. Hi, it's Lucie. There's actually three things that are most important on the domestic network. The first is we can't neglect the comparables to last year. If you recall in the Q3 of 2018, our competitor was facing strike threats.
So basically, there were a lot of very, very significant pricing activities last summer that we didn't observe this year. So that's one thing for sure that gives us good yield comparisons. In addition to that, we also pursued a lot of opportunities on the branded fares side of the business and also basically fare increases. So where we have the opportunity, strong demand, we did actually push up the fare. So those three things are really the biggest drivers for the domestic performance.
Thank you.
Thanks, Hunter.
Thank you. The next question is from Andrew Didora with Bank of America. Please go ahead.
Hi, good morning, everyone. My first question I think is for Lucy. Can you talk about your ability to manage fares in 4Q considering that it is a lower load pack load factor period relative to 3Q. Is this something we should think about 4Q as having maybe a few more tailwinds given no longer lead time on bookings and a little bit more flexibility on loads? Just would be great to get your thoughts on that.
There's one thing for sure, particularly on the international networks, and that's our ability to collect incremental fuel surcharge revenues. So the fuel surcharges really peaked in the Q3 of 'eighteen for obvious reasons. So when we look at our ability to push international thirds up, it's a little bit more difficult because we don't have the ability to push the surcharges up so much. The environment is very competitive, as we know, particularly on the international front. But on the U.
S. Transborder market and even on the domestic market, to a large extent, I think that the pricing environment is going to be far more stable in the
Q4. That's helpful. Thank you. And then my second question for Mike. On your 2019 free cash flow guide of the $1,300,000,000 to $1,500,000,000 you outlined in your release today, it looks like you already have over $1,600,000,000 year to date.
And if I do my math correctly, it seems like 4Q implied EBITDA should cover the remainder of CapEx for the year. So what's the disconnect here? Is there some change in kind of working capital seasonality or something? Just want to see what I'm missing on the free cash flow guide. Thank you.
Yes, I don't have the exact answer to that question, but I think it's got to be working capital seasonality that drops off in Q4.
Okay. Maybe we can follow-up afterwards. Thank you.
Thank you. The next question is from Doug Taylor with Canaccord Genuity.
A lot of questions on what happens when the MAX comes back online as we inch closer to that. I just wanted to flip it around and in the off chance that the delays extend further than you anticipate, can you talk about whether any of the remedies you've used to replace that capacity or would reach end of life anytime soon? Are there any measures or is it possible that you might extend the 737s coming back online if you were given the option?
So first of all, yes, I mean, we obviously are continuously looking at alternative scenarios, Doug. And we do have a series of airplanes that we've done the maintenance work to ensure that they continue operating for us well into next year even though we were otherwise planning to exit them. And so we have done that work. Several of the airplanes that we extended their useful life on the engines until the end of those will we know the time the exact timing of that. And so those will not have flexibility if it extends indefinitely.
But we have a large number of our contingency aircraft available with maintenance work being done with MRO facilities having been secured and steps being taken. As well, we've also as you know, we've worked very, very well with really 4 different operators of wet lease arrangements at this point. And we have arrangements that are available and flexible to go on into a longer period of time should that be necessary.
And does the cost of that replacement lift as you exit peak summer travel season change at all? Is it lower? Is it less competitive for people fighting for that scarce resource right
now? No, there's no question that the for example, the wet lease market, which is a short term tool, the wet lease market increases based on demand much as any other supply and demand dynamic would. But we were able to like for example, the very useful Qatar airplanes that helped us through the summer, that wet lease arrangement is over. So we are not paying for that in the Q4, for example. And so we mentioned that into next year, we've secured 2 other 330s that will help us at a lower cost, at a substantially lower cost than the Qatar one, for example.
And so as we go forward and based on seasonality, the wet lease costs do in fact differ. On the other hand, we do want to maintain the flexibility until we have full visibility on the return to service.
That's helpful. Last question for me. I think most people agree that there's a pretty significant pilot shortage globally. I mean, I understand you're not wanting to hire too soon for 737 MAX, but can you talk to your ability or what risks there are in your ability to hire the pilots you need as quickly as
you need them, given that
you uniquely don't have the NG aircraft to pull pilots up from and things like that?
Right. So first of all, we have, as we've said a few times, we have the 400 or so pilots operating the 24. So that issue is covered already. The pilots have continued to do simulator training. And as you know, we're the only ones in North America who have the simulator.
So they've done simulator training over this period of time. They're going to be ready to go fairly and be deployed fairly quickly upon reentry into service. That's the initial 400. Beyond that, we have a very detailed program with each of our 2 largest regional partners, Jazz and Sky Regional. And we have pilot flow agreements that provide for pilots to apply to Air Canada.
We already have a detailed approval process, and we know which pilots have been approved. They in turn have got arrangements with flight training schools and other capabilities that create a system. So think of it as a farm system. And the farm system is working. We've been developing it for a number of years now.
We've invested in it. It's actually helped us reduce our costs and given them greater stability and greater and given their pilots greater visibility on career opportunities Air Canada. So we actually know where a lot of them that doesn't mean that 100% of our pilots will come from these 2 operators, but that provides a good base for future pilot flow. We've also had given that Air Canada's recent success, we've also had success in attracting and will continue to attract pilots from our competitor other competitor carriers in Canada. And so we're feeling confident that we will be able to fill the pilot requirements for next year and going forward, 1 next year.
Appreciate it. Thank you.
Thank you. The next question is from Chris Murray with Alcorp Capital. Please go ahead.
Thanks folks. Good morning. Lucy, maybe this is more of a question for you. Looking at the cargo performance over the last few quarters, it certainly has been breaking down. And I know we've talked a little bit about international trade.
But one of the things about cargo is it's also been a fairly decent leading indicator of your business program and business travel. I know in an earlier question, you talked a little bit about it. But is there anything that we should be thinking about different this time about how you should be thinking about business travel into 2020 given where the metrics are on cargo? Or is there a bit of a disconnect that we may be missing on this one?
Actually, maybe I'll take that, Chris. It's Calin here. When we look at you're absolutely right. Cargo has tended to be a good barometer of economic activity globally and sort of macroeconomic trends are often influenced by what we see in cargo. However, in our particular case, we've seen extremely attractive and bullish passenger market other than in the areas that Lucy pointed out, which include pockets of instability like in China and Hong Kong.
And those were, of course, influenced by other factors. So we have seen this year a disconnect between demand on the cargo side and demand on the passenger side other than in those pockets. So we're not reading into if your question is, should we be reading the indicators coming out of the cargo business as being indicators of a coming recession, we're not reading that into our demand curve for 2020.
And in particular, in the business cabin?
And that includes the business cabin. Yes, and that is true as far as the business cabin is concerned as well, correct.
All right. Fair enough. And then Mike, just a quick question. One of the some of the early headline numbers this morning just talked about your EPS number maybe missing some consensus numbers. I think tax rates in the quarter were a little higher than maybe we would have expected.
I think at the Investor Day, you talked about Q4, we'd start seeing some tax impacts. Just now I appreciate with the integration of Aeroplan, there's probably been some changes in your tax thinking. Just a couple of questions, just as we think about setting up the estimates for Q4 in 2020, how do we think about tax rates? And I think the last time we talked about it, you thought that you would be cash tax paying sometime in the 2021 timeframe, but just any update you can give us would be great.
Sure. Good morning, Chris. So I still think we should the market should use the 27% corporate tax rate on a go forward basis. I think that's the best proxy to use. On the cash taxes, we did actually say that there'll probably be some leakage this year in 2019 and more in 2020 and then potentially fully taxable in 2021 as our loss carry forwards run out.
We've been able to structure some things that would allow us to defer that a bit. So the cash impact will be a little bit less on a go forward basis.
All right. So just your thinking is $27,000,000 should be kind of our baseline number we should assume at this point?
Absolutely.
Okay. Thank you. That's all my questions guys.
Thanks, Chris.
Thank you. The next question is from Rajeev Lalwani with Morgan Stanley. Please go ahead.
Hi, good morning. Mike, you had talked about your ability to support yields, RASM, etcetera, so a healthy top line, if you will, going into next year. But what about the unit cost side? Is there going to be any material lingering effects from the MAX? Just general color on puts and takes and maybe your ability to get down unit costs next year, just given all the inflation next year and so on?
It's a great question. And we're still working through those issues given the uncertainty of the MAX situation and the overlap of fleets from a mitigation perspective. So there'll be probably some leakage next year from a cost perspective to and I would consider that risk insurance for the most part. Aside from that, there are a couple of structural issues next year, but we think we can absorb those issues. And again, as I said to an earlier question, we'll have clear guidance in early February as to where CASM X will end up in 2020.
As a follow-up, you talked about leverage a bit and buybacks. Is there a way that we can approach maybe what a lower bound is on what the leverage metric would be? Meaning, are you willing to go to 0.5x leverage or something like that so we can start to put some numbers around the ability to buy back stock and so on?
No, it's a very fair question. I think we believe where we are today, 0.7 to 1.2 range is investment grade level. There are other metrics obviously involved in Moody's or S and P's analysis of giving us investment grade. But as a proxy for the leverage ratio, I don't see us going much lower than we were in Q3 at 0.8. Frankly, I don't think that's efficient from a capital allocation point of view.
But that range will be plus or minus 20, 30 points from where we are, let's say, at year end.
It's Caleb here. And as you probably know, the consistency that you maintain those levels is also a factor that they look at. And so I think that it's not just doing it for 1 or 2 quarters, making sure that it's sort of the message is that it's a sustained leverage ratio.
The next question is from Helane Becker with Cowen.
For your time. Calin, I think you made a comment, I don't want to read too much into it, but you talked about the maximum when the grounding in the U. S. Is lifted. Did you mean to imply that the U.
S. Would lift the grounding before the Canadian market or am I reading too much into that statement?
I would say probably reading more into it because I have no visibility myself on that topic. But I think that we know that the FAA needs to be the regulator of first resort here, if you like. And so whether or not Transport Canada or other regulators go at the same time, we really are looking to the regulator of first resort, the FAA, and its initial step as being an indicator as to the return to service. And so we're hopeful that other regulators will act in tandem. We have no visibility that they won't.
But we would certainly view that as a step to start taking constructive actions ourselves in terms of pilot hiring. We have, of course, we know the dynamic with EASA that was somewhat disconnected in the past, and we hope that EASA would act at the same time. So we don't know where all the regulators are going to be. But we would start taking some steps towards reestablishing the return to service because as I said several times, this is not an overnight fee.
Right. Got you. Okay. And then my other question is with respect to the deferred maintenance that you guys were doing to keep as many aircraft in the air as possible. As we think about that for, say, 2020 and let's think about it from like the Q2 on and assume that sometime in the Q1 the aircraft gets back into service, How much deferred maintenance should we think about you guys having to do in the last 9 months of next year for catch up purposes?
Let's separate maintenance into regular maintenance, which is being done on an ongoing basis per schedule. For example, we have deferred on Wi Fi on many planes. And so that's more of a capital item than it is a operating expense item. It's obviously a customer service item. But that we pull planes out of Wi Fi conversion and out of as you know, we're changing the paint as well on many of our planes.
So we've taken those 2 programs and basically deferred those into next year until we have certainty around the MAX situation.
But yes, at the same time, we've been putting dual HUDs on our 737 MAX this year while the airplanes have been sitting, putting the Wi Fi on while they've been sitting. So you do have a little bit of that trade off where we've been doing some of the work this year that would otherwise not have done this year, given that the airplanes were sitting. So it's a little bit of a trade off that you're seeing there, Helane.
Okay, great. And then my last question is just on, so a while back, maybe 2 years, you guys renegotiated the agreements with your regional partners. And I'm just kind of wondering if those, renegotiated agreements are working as you anticipated and if you can somehow quantify the revenue benefits of those for, I guess, the second half of this year maybe into 2020? Thanks.
Sure. I'll try and answer that question. So the biggest contract we have, the biggest partner we have, of course, is Jazz. And we renegotiated and extended that contract earlier this year in February. Certainly, the biggest short term impact is a reduction of approximately $50,000,000 in fees that we would pay Jazz to operate those planes on our behalf.
That is obviously being realized as we speak. There were other network benefits associated with more flexibility around their fleet, which we're getting some benefit now, but of course, the MAX situation has also caused that to be deferred a bit. So we expect a much better impact next year on the network side regarding the Jazz fleet.
And give you an example, Helane, is that one of the things you may remember, we talked about the fact that we were able to as a result of the changes to the contract, we're able to introduce Rouge aircraft on some of the regional routes, which obviously has a much lower CASM dynamic, cost per hill, a seatbelt dynamic than the Jazz airplanes would. That in some cases, that had to be suspended because of the fact that we needed to use the Rouge airplane to fly other missions that were otherwise flown by mainline and therefore the regional carrier was continuing to operate the regional route. So that's like what Mike referred, that's an additional benefit that we'll get next year and the following year once the MAX return to service.
Thank you. The next question is from Kevin Chiang with CIBC. Please go ahead.
Thanks for taking my questions. Just a couple of quick ones for me. Just one on pension funding. I see your 85% matched on liabilities up about 2.5 points quarter over quarter. Just wondering if there's a timeframe to get this to 100% or if that's even a target of yours over the near term here?
The hedges?
The pension funding, sorry, your pension funding.
Okay. Yes. We're currently sorry, Kevin, we're currently at 85%. We'll look to step it up over time, but we think we're fairly risk adjusted at this point in time, 85%. We look at risk measure, which is less than half of where it was when we started this journey.
And we're comfortable with that risk profile at this point in time. So again, we may step it up over time, but currently 85%, we're very comfortable on the immunization process.
That's helpful. And then you had commented on the 6 Freedom strategy in some of your earlier comments. I'm just wondering, how does the end market outlook for the Atlantic or the Pacific impact that strategy? So if the Pacific is weaker and maybe a little bit more competition on the Atlantic, do you throttle back your long term outlook for that 6 Freedom growth strategy or do you look at them independently?
Maayan, what we've done on the when we look at the 6 Freedom as we view the 6 Freedom opportunity as a long term opportunity as we've been building out our 3 hubs. So we expect the good portion of our business model kind of in perpetuity to be in and around this connecting traffic. So it's not something that we're going to go in and out of. But what we will do, as Lucie mentioned, is that we will allocate capacity where we see weaknesses, but we're not
we don't exit the
fixed fleet of market, 6 Freedom market to the Pacific just because the Pacific is a bit tougher, China is a little bit tougher. So you will see movement in it as between Atlantic and Pacific. But we certainly have big aspirations and we'll continue to have big aspirations for 6 Freedom traffic in each of our 3 hubs. And certainly, we're not getting out of the 6 Freedom business in Vancouver, for example. So this is a big, big part of our strategy.
It's going extremely well. And we had a bit of a slowdown because of the 7 37 MAX grounding. We're still not anywhere near our fair share of what we consider this 6 Freedom business to be and will continue to be moderating. So I think if you see in the Q3, we sort of took a bit of a pause with it. And certainly, it's not based on demand, but it's based on the lack of the right aircraft to take passengers over the hubs.
And just to add a comment on that, if you look at our transatlantic performance, basically in the Q3, we operated at 88% or 89%. So in essence, our job to try and capture the highest yielding traffic, which in many cases would have been the local passengers. So as a result of the MAX grounding, there comes a point where we have to optimize the revenue. So we didn't lose any load factor on the transatlantic. It's just that a connecting passenger would have given us less revenue potential.
That's why you see a little bit of decline. If we had the transborder line, we could have redeployed some of the U. S. Connections to maybe some of the softer transatlantic markets or a little bit more on the Asia Pacific. But it's really a question of optimizing all the flows that's setting up at our
The next question is from Jamie Baker with JPMorgan. Please go ahead.
Hey, good morning, everybody. Thank you. And most of my questions have been answered, but I also have a follow-up on wet leasing. And pardon my ignorance here, but I don't have much experience on this topic since scope clauses here in the States generally don't allow for it. So it does seem like you're going to be in a situation where MAXs and wet leased aircraft simultaneously overlap one another.
It sounds like the plan is to operate both. My question, is there any contractual ability to switch from a wet lease to a dry lease, in which case it might make sense to just sit the leased aircraft? It seems that that would address what is clearly growing concern oversupply next year. And I apologize if that's a dumb question, but if there's a situation where you'd only be on the hook for the cost of the shell, it seems that that might prove economically preferable.
Right. Yes. So, it's Jamie. Calin here. First of all, thanks for the question.
Thanks for being on the call. I'd say 2 things. One is that these wet leases are very, very short term leases. So we I think we put the expiry dates in our comments. I think that the new wet leases will expire at the end of the first quarter.
And so we're not this is not something that's going to go on into all of next year unless there's a further extension to the grounding. So, a, they're very, very short term leases. Secondly, the operators of these wet leases are in the wet lease business, so to speak, that they're not conventional lessors of aircraft. They actually do this as a business. So it's not the sort of thing that you separate the crew from the aircraft.
But it's not it really is not a major part of our overall cost dynamic here from the MAX. This is a we have many other costs that come up as a result of the MAX. This is part of it, but this is not the major factor. Now we and we only have 4 West leases in any event going into next year, the 2 new 330s, which is very, very short term. And then the 2 767s that we operate at Hawaii, which also which we've extended because of the extension of the grounding, but which will also end at the end of the Q1.
So it's not a full year problem. I mean, we might choose to extend them further if the grounding extends, but this is not a big cost dynamic for us.
The next question is from Tim James with TD Securities. Please go ahead.
Thanks. Good morning. Question for Mike. If you can help me reconcile the fleet change table, which shows 38 removals, I think, in 2020 between 767s, 320s and the 190s combined with your comment about the 15 kind of flex aircraft that you have, is that ability to remove 15, I believe it was that you mentioned earlier in the call, is that in addition to the plans that we see in the
table? It's a great question, Tim. It is in addition, we well, some of them are we do have specific plans to exit some of these planes because of maintenance issues post summer of 2020. So the ones that are actually planned because of maintenance issues or that run end of life are in the fleet table. And then again, there's a couple of those 15 that allow a little more flexibility depending on what happens with the MAX situation.
Okay. So the 15 some of the 15 are aircraft.
Built in. Ones that we know will exit the fleet for valid reasons.
Okay. Next question, Mike, the stronger working capital performance that you mentioned in reference to 2019, I'm just wondering if those are kind of sustainable changes in the model in terms of cash coming from working capital or should those influences reverse or kind of moderate in 2020?
No, I think, Tim, the majority of that is sustainable. Again, I think we're still learning on the economics of Aeroplan. I think we were probably conservative when we issued our initial guidance that we suspended on free cash flow for the year. We tend to take a more conservative view of working capital, but as we continue to grow, as you know, advanced ticket sales continue to grow, which is a good leading indicator to the booking curves. And you've seen growth in Q3 as well.
And so I think the majority of that is sustainable as we continue to grow.
Okay. And then just my final question, I guess, for Lucy here. I'm just wondering if with the new daytime slots that are being provided to U. S. Airlines and Haneda, I think, services starting in March of 2020.
I'm just wondering if you're seeing any or your thoughts on the potential impact on pricing into that kind of key market for Air Canada?
Well, certainly, we haven't seen any of that impact yet. But I think given the type of market that Haneda is, my feeling is that we would probably see very marginal impact on price.
Okay, great. Thank you very much.
Thank you. There are no further questions registered at this time. So I would like to turn the meeting back over to Ms. Murphy.
Ms. Murphy?
Thank you, Elena, and thank you everyone for joining us on the call today.
Thanks, everyone.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.