All participants, please stand by. Your conference is ready to begin. 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. Good morning, everyone, and thank you for joining us on our third quarter call. With me this morning are Calin Rovinescu, our President and Chief Executive Officer, Mike Rousseau, 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 third quarter 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 third quarter press release and MD&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 Calin Rovinescu, our Air Canada 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 CAD 1.472 billion, 9% above last year's third 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 CAD 956 million in the quarter, up CAD 33 million year-over-year. Record third quarter operating revenue of almost CAD 5.6 billion grew 3% versus the same quarter in 2018. Unrestricted liquidity of nearly CAD 7.4 billion 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 1 level below our goal of investment-grade status. We all know that increasingly investors look at ESG measures when making investment decisions. 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 737 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 two Airbus A330s in addition to the two Boeing 767s already wet leased to ensure we have enough capacity this winter and into next year.
The removal of 36 737 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. I'm confident that if regulators unground the aircraft near term, our ongoing transformation will quickly regain its former trajectory. At this point in time, we have chosen not to adjust our longer-term investor day targets for 2020 and 2021. 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. The acquisition remains subject to regulatory approvals, which we hope to receive by mid next year. Before turning it over to Lucie, 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. With that, I'll turn the call over to Lucie.
Thank you, Calin, 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 CAD 146 million, or 2.9%, on a yield improvement of 4.8%, partly offset by a decline in traffic of 1.8%. This traffic decline was driven by a capacity reduction of 2.1%. Traffic increased 5.1% year-over-year on the higher yield. Consistent with the second quarter, 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 Aeroplan redemption revenue, which impacted all five 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 third quarter, which would have represented 9% of our planned third quarter 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 third quarter, as Calin mentioned. Although we experienced a year-over-year quarterly capacity decline for the first time in several years in the third quarter, we anticipate that we will achieve capacity growth of approximately 3% in the fourth 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 CAD 33 million, or 3.9%, versus last year's third quarter 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 to CAD 123 million, or 8.6%, from the third quarter of 2018. Yield increased 9.3% with the impact of the capacity constraint and the launch of new fare categories contributing to the yield growth year-over-year. PRASM improvements were recorded on all major domestic services. Looking to the fourth quarter, 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 CAD 54 million, or 5.6%. Growth in higher-yielding local traffic and gains in the business cabin lifted yields in the quarter. We realized significant PRASM and 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 third quarter. The U.S. leisure markets achieved year-over-year revenue growth with significant PRASM improvement, despite the MAX grounding having a significant impact on our capacity to 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-leased 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 PRASM improvement. We've extended the wet leased Boeing 767, which will continue to operate our Honolulu and Maui services from Vancouver, and we've executed a wet lease 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 A220 in December, and we recently announced our non-stop Montreal to Seattle service, as well as our non-stop 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 CAD 7 million or a yield growth of 1%. As projected during our second quarter 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 inbound 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 first six months of the year. PRASM 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 U.K. In June, we began operating our Montreal to Barcelona service and one of our Montreal to Paris frequencies through a wet lease operation. For the fourth quarter, these services will be returned to Air Canada Rouge and Air Canada Mainline operations respectively and will no longer be operated by wet leased aircraft.
Due to the closure of Pakistan airspace, we suspended our well-performing Toronto to Delhi service as of mid-June. 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 route 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 1st. On October 27th, 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. Although that change had a negative impact on PRASM, the overall impact to the quarter's profitability was favorable.
Looking ahead to the fourth 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. The service complements our service to Belgium's capital from 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 two of the world's leading aerospace industry hubs. Moving on to the Pacific, on a capacity reduction of 4.1%, revenues decreased to CAD 46 million, or 5.8%, 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. 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 fourth quarter, 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 nonstop seasonal service between Vancouver and Auckland in our continuous effort to counter seasonality. Revenues from other services increased CAD 8 million, or 3.5%, 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 fourth quarter 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 São Paulo as part of our strategy to counter seasonality. From a product perspective, in August, we launched our partnership with award-winning Canadian Chef Antonio Park, who will curate route-specific meal, which started on our Montreal to Narita flight in the third quarter and will be rolled out on our flights to Japan in all cabins in the fourth quarter, followed by our Signature Class cabin from Montreal to São Paulo later this year. This partnership complements our existing partnership with Chef David Hawksworth and Sommelier Véronique Rivest, further elevating our meal options for our customers traveling internationally. Moving on to cargo.
The third quarter of 2019 saw a year-over-year reduction in cargo revenues of 18.6%, 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 third quarter. We are not projecting any improvement in the current yield or global trade trends in the fourth quarter, 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 CAD 33 million, 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 Vacations.
To close, in the quarter, we removed 36 aircraft from our schedule, operating 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 these 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, Lucie, and good morning to everyone. I'd like to add my recognition and thanks to all our employees for an exceptional third quarter and for their commitment in taking care of our customers. With respect to our strong EBITDA results, our better-than-guided performance for the third quarter 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 tracked within 1% of our expectations during the third quarter. Looking ahead, discussions are underway with a number of new potential partners for the redesign program. 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 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. 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 cost, Air Canada Vacations, 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 CAD 151 million or 11% in the quarter on lower jet fuel prices when compared to last year. The average price of fuel was CAD 0.747 per liter in the quarter, down 10% versus the same quarter in 2018. Looking ahead, we expect the price of jet fuel to average CAD 0.77 per liter for Q4 and the full year. Air Canada has not entered into any fuel hedging contracts for Q4 or 2020. Turning to wages and salaries. We experienced an increase of CAD 46 million 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 CAD 16 million or 7% in the quarter reflected in large part timing of maintenance activity versus last year's third quarter. In order to mitigate the impact of the MAX grounding, we extended leases for Airbus A320s and Embraer 190 aircraft, which resulted in a higher volume of maintenance activity than planned. Turning to our balance sheet and liquidity. As Calin mentioned earlier, we ended the quarter with unrestricted liquidity of almost CAD 7.4 billion, another record. Free cash flow amounted to CAD 553 million in the quarter, CAD 64 million below the prior year. You may recall that in the third quarter of last year, 2018, Air Canada received proceeds of CAD 293 million from the sale and leaseback of 25 Embraer aircraft. No such proceeds were received in the third quarter of this year.
In the quarter, an increase in cash flows from operating activities of CAD 284 million was partly offset by an increase in capital expenditures of CAD 55 million. 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 CAD 1.3 billion and CAD 1.5 billion. 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 investment balances on net interest expense.
Excess cash, which Air Canada defines as total cash and investments in excess of the minimum cash required to support operations, amounted to almost CAD 2.7 billion 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 CAD 3 billion decreased CAD 2.2 billion from December 31st. This reflected an increase in cash equivalents in short and long-term investment balances of almost CAD 1.7 billion, and a decrease in long-term debt and lease liabilities of CAD 561 million. 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 not exceeding one 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% and 16%. With respect to the normal course issuer bid, we repurchased for cancellation approximately 2.1 million shares at an aggregate cost of CAD 91 million in the quarter. On a year-to-date basis to September 30th, we repurchased over 6.4 million shares for a sum of CAD 250 million. Additional information can be found in our financial statements and MD&A, which were posted on our website and filed on SEDAR this morning. With that, I'll turn it back to Calin.
Thanks, Mike. Air 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 CAD 1 billion, and ended the quarter with record liquidity in excess of CAD 7 billion. We also made significant progress on our balance sheet, reducing our net debt by more than CAD 2 billion since 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 operated 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. In 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 737 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 RED3 reservation system. The first phase next month will see the migration of our reservation inventory and ticketing functions to the Amadeus Altéa Suite. Starting early in the new year, PSS will be progressively introduced at airports for departure control functions. The importance and benefits of this two-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 CAD 100 million 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 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 two 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. 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 Transat, including its three 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 approvals 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 the customer experience, including the opening of the new Toronto cafe, our agreement with Chef Antonio Park, as Lucie mentioned, and the launch or announcement of new routes, including the new non-stop service between Montreal and Toulouse and Toronto and Brussels next year. We also maintained focus on our core priorities, such as culture change.
Our success here, already amply displayed in our handling of the 737 MAX issue, was recognized in July when we were named one of the 50 Most Engaged Workplaces for the fourth consecutive year by Achievers. Subsequent to the quarter, our changed 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 is a company transformed. We've remade Air Canada into an airline that is flexible, durable, customer-focused, and positioned for long-term sustainable profitability. In conclusion, I thank our customers for their loyalty to Air Canada and for choosing to fly with us. Now we'll be pleased to take some questions.
Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please mute your handset prior to making your selection. If you have a question, please press star one on your telephone keypad. If at any time you wish to cancel your question, please press the pound sign. Please press star one at this time if you have a question. There will be a brief pause while the participants register. Thank you for your patience. The first question is from Konark Gupta with Scotiabank. Please go ahead.
Good morning. Thank you for taking my question.
Morning, Konark.
Morning, Calin. Congratulations on a good quarter, considering the Max impact, obviously, in Q3. Just wanted to get started on capacity here. Thanks for providing some color on Q4. 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. If the Max comes back next year as you're anticipating in February maybe, and I think you have previously 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. Do you think next year we should see the capacity growth kind of what we anticipated for 2019, like it's kind of a reversal in capacity growth next year?
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, when they will be ungrounded, obviously. We have provided some visibility that it'll take us up to a year to put all 50 back in operation. Using the original plan for 2019 is a good proxy.
Konark, Calin here. Just to add one more thing is that when, as Mike said, it could take a year to get them all in, and the first 24, of course, we have pilots that are already allocated to those aircraft. For the next wave, we actually have to hire pilots. This is a process that will be indeed gradual. This is not an overnight process. That's why we say it could take up to a year to have all 50 aircraft in operation. You would not see the incremental capacity from 50 aircraft flooding the markets in the first few months of 2020.
Okay. That's great, Calin. Thank you. With respect to pilot hiring, would you wait for the Transport Canada certification before starting the hiring process, or would you be doing something slightly before that because you have to train pilots as well?
Yeah, no, exactly. We will be doing prudent steps on hiring. Once we know that the FAA, where 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 ungrounding occurs soon, and once it occurs, at least in the U.S., we would start taking steps towards reinstating our hiring, and we're looking at potentially hiring up to 350 incremental pilots next year.
Okay, my second question is on CapEx here. Looks like there is a slight bump in CapEx for 2020, and I saw that there's, I think, three 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. You're absolutely right, there is a small increase in overall CapEx. Three different reasons. One, you are right, we were taking a couple extra A220s at the end of the year than we had originally planned. That's just moving from 2021 to 2020. Just really a timing issue from a capital perspective into 2020. Second, as you know, we were fortunate enough to pick up eight very productive WOW A321s, and so we will basically modify the interiors of those planes next year, so that's some extra capital. Not expensive, certainly that will produce a better return for us for those planes. Third, some extra technology projects that we want to put on the slate for next year as well.
Okay, that's great, Calin. Mike, thank you. Lastly on the costs. Third quarter costs came in, I think, slightly better. I'm talking about non-fuel as well, compared to what probably the market would have anticipated given the capacity decline. It seems like you probably mentioned the stock-based compensation and some other 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?
I think there's no doubt our CAD 250 million 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 will be reflected in Q4 and on a go-forward basis.
Okay. That's it for me. Thank you so much.
Thank you, Konark.
Thank you. The next question is from Fadi Chamoun with BMO. Please go ahead.
Good morning, congratulations on a very good execution here. Mike, if you can frame to us, 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 wet lease 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.
Fadi, great question. 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. Rough estimate is about 15 planes that we will be able to exit over the next 12-18 months, given the lease expiry dates of those planes.
Plus the wet leases.
Plus the wet leases. The E190s are fairly forward. The A320s, we've tried to negotiate short-term lease extensions, and so in total about 15 that we'll be able to exit within the next 12-15 months.
Okay. That's great. I guess between the gradual re-entry 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.
Yeah.
Okay.
As you know, Fadi, we've always tried to build in that flexibility. I think we've done a fairly good job of given the uncertainties, but given our plans to manage capacity appropriately, but still have some flexibility to ensure that we cover any potential scenario.
Okay. One question maybe to Lucie. The business cabin growth this quarter of 3.9%, I think is the lowest we've seen in at least two years. Can you offer up any kind of insight into the trend that you're seeing by market? Is this region specific or is it kind of broad-based slowdown that you're seeing in business cabins?
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 the China route, so China and Hong Kong. In those areas, we did see the closer, higher yielding traffic significantly decline. 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've been operated by the MAX, which has also caused a little bit of decline. 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 well. In particular this summer, the domestic market, U.K. was also very strong. 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.
Yeah, thanks very much. Good morning, everyone.
Morning, Walter.
On the MAX re-entry, and Calin, as you mentioned, you're going to be flexible. You'd 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 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 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. 190s not the right airplane for many of the routes. 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 re-entry. I think had all carriers had a firm date on the re-entry into service of the MAX, obviously plans could be made somewhat differently. Given that it's been a moving target, we've had to have that type of flexibility.
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'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. There's not really a desire to have inefficient airplanes flying around operating inefficient routes.
Okay.
Walter, it's Mike. Just to add to the earlier question, our 2020 capacity increase, ASM increases, somewhat in the same ballpark as what we had initially thought for 2019. I think the market can certainly absorb that fairly quickly.
Actually, another reflection point, Walter, on the question, because it is a good question. Here's some of Lucie's comments earlier on the impact that the MAX grounding has had on sixth freedom traffic. We need the MAX to operate those sixth freedom routes. There's not much advantage for us to be giving up that sixth freedom flying, that connecting traffic that we've been developing over the last number of years. I think that we would not have any particular desire to continue operating inefficient airplanes on those routes.
Even if you were to perfectly, and everyone reduced 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 your point.
Right
that can be absorbed.
No. A, it could be absorbed, and B, it cannot come in overnight. Again, as we explained, in our case, it's impossible for it to come in overnight.
Right.
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. It's not as if all of these airplanes can come back into the market overnight.
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 CAD 4 billion-CAD 4.5 billion, and then your guidance for 2019 at CAD 1 billion-CAD 1.5 billion, let's say ballpark CAD 3 billion left for 2020 and 2021. Does that mean CAD 3 billion goes into buyback?
It means the CAD 3 billion is a potential for buyback. This is what I've been talking to the market about for quite some time. The excess cash currently benefits our leverage ratio, that is parked 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. We've done that in 2019. We bought back CAD 250 million of shares after nine months. That's much greater than it was last year. That CAD 250 obviously reflects the free cash flow this year, adjusted for the deferral of the MAX capital into next year.
Okay, perfect. Last question here is just on your, I guess, your guidance strategy as we hopefully zero in on a MAX re-entry date. You've effectively, I guess, guided here for capacity for next year. You've typically obviously given some guidance for CASM and margin, et cetera. When do you think you'll dovetail the 2020 guidance into that 2020-2021 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.
Perfect. Okay. Thank you very much. That's all my questions.
Thanks, Walter.
Thank you. The next question is from Hunter Keay with Wolfe Research. Please go ahead.
Hi. Thank you, everybody. Calin, 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 Altéa system. That will be one large driver. There are a series of what I would call blocking and tackling enhancements. Lucie 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. Upgrades has been a big deal, the flexibility of upgrades, where we do upgrades, where we sell upgrades, I'm talking about. These sorts of things. There'll be a series of, I would say, two big categories, the improvements to our own dynamic with our own product, and then the airlines.
Lucie, why don't you just give two or three 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 scheduling. 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. That is obviously a huge benefit. Calin 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. In the environment we are in today, it's not optimal. Tomorrow that will be a very big benefit for us and also on the ancillary side of the business.
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. 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. I'd say, to be frank, I think that the CAD 100 million estimate is conservative.
Okay, great. Thank you. 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 into sometimes more of a load factor benefit. I'm wondering, for you guys, is this a function of mix, where you're just basically cutting service in lower yielding markets? 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 third quarter of 2018, our competitor was facing strike threats. Basically, there were a lot of very significant pricing activities last summer that we didn't observe this year. 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. Where we had the opportunity, strong demand, we did actually push up the fares. Those three things are really the biggest drivers for the domestic performance.
Thank you.
Thanks, Hunter.
Thank you.
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 Lucie. Can you talk about your ability to manage fares in 4Q, considering that it is sort of a lower load factor period relative to 3Q? Is this something we should think about 4Q as having maybe a few more tailwinds given the 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. The fuel surcharges really peaked in the third quarter of 2018 for obvious reasons. When we look at our ability to push international fares 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. 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 fourth quarter.
That's helpful. Thank you. My second question for Mike. On your 2019 free cash flow guide of the CAD 1.3 billion-CAD 1.5 billion you outlined in your release today, it looks like you already have over CAD 1.6 billion year to date. If I do my math correctly, it seems like 4Q implied EBITDA should cover the remainder of CapEx for the year. 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.
Yeah, 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.
Thanks.
The next question is from Doug Taylor with Canaccord Genuity. Please go ahead.
Yeah, thank you, and good morning. 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. 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 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?
First of all, yes. We obviously are continuously looking at alternative scenarios, Doug. 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. We have done that work. Several of the airplanes that we extended their useful life on the engines until the end of those, we know the exact timing of that, those will not have flexibility if it extends indefinitely. 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 well with really four different operators of wet lease arrangements at this point.
We have arrangements that are available and flexible to go on into a longer period of time should that be necessary.
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?
There's no question that, 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. We were able to, for example, the very useful Qatar airplanes that helped us through the summer, that wet lease arrangement is over, we are not paying for that in the fourth quarter, for example. We mentioned that into next year, we've secured two other 330s that'll help us at a lower cost, at a substantially lower cost than the Qatar one, for example. 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 from me. I think most people agree that there's a pretty significant pilot shortage globally. I understand you're not wanting to hire too soon for the 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. First of all, as we've said a few times, we have the 400 or so pilots operating the 24. 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, they've done the simulator training over this period of time. They're going to be ready to go and be deployed fairly quickly upon re-entry into service. That's the initial 400. Beyond that, we have a very detailed program with each of our two largest regional partners, Jazz and Sky Regional. 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.
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 cost and given them greater stability and given their pilots greater visibility on career opportunities at Air Canada. We actually know where a lot of them are. That doesn't mean that 100% of our pilots will come from these two operators, but that provides a good base for future pilot flow. Given Air Canada's recent success, we've also had success in attracting and will continue to attract pilots from other competitor carriers in Canada. We're feeling confident that we will be able to fill the pilot requirements for next year and going forward beyond next year.
Appreciate it. Thank you.
Thank you. The next question is from Chris Murray with AltaCorp Capital. Please go ahead.
Thanks, folks. Good morning. Lucie, maybe this is more of a question for you. Looking at the cargo performance over the last few quarters, it certainly been breaking down. 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 we 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?
Yeah, actually, maybe I'll take that, Chris. It's Calin here. When we look at trends, you're absolutely right. Cargo has tended to be a good barometer of economic activity globally and 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 Lucie pointed out, which include pockets of instability like in China and Hong Kong. Those were, of course, influenced by other factors. We have seen this year a disconnect between demand on the cargo side and demand on the passenger side other than in those pockets. 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.
In particular in the business cabin?
That includes the business cabin. Yeah. That is true as far as the business cabin is concerned as well. Correct.
All right. Fair enough. Then Mike, just a quick question. 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've expected. I think at the Investor Day, you talked about Q4, we'd start seeing some tax impacts. I appreciate with the integration of Aeroplan, there's probably been some changes in your tax thinking. Just a couple questions. This is we think about setting up the estimates for Q4 and 2020. How do we think about tax rates? I think the last time we talked about it, you thought that you would be cash tax paying sometime in the 2021 timeframe, just any update you can give us would be great.
Sure. Good morning, Chris. I still think the market should use the 27% corporate tax rate on a go-forward basis. I think that's the best proxy to use.
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. The cash impact would be a little bit less on a go-forward basis.
All right. You're thinking as 27%, which should be kind of a 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 Rajiv Sobti with Morgan Stanley. Please go ahead.
Hi. Good morning.
Good morning.
Michael, you had talked about your ability to support yields, RASM, et cetera, so a healthy top line, if you will, going into next year. 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. We're still working through those issues, given the uncertainty of the MAX situation and the overlap of fleets from a mitigation perspective. There'll be probably some leakage next year from a cost perspective. I would consider that risk insurance for the most part. Aside from that, there are a couple structural issues next year, but we think we can absorb those issues. Again, as I said to an earlier question, we'll have clearer guidance in early February as to where CASM ex will end up in 2020.
Okay. 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 0.5 times leverage or something like that so we can start to put some numbers around the ability to buy back stock and so on?
No, that's a very fair question. I think we believe where we are today, 0.7-1.2 range is investment-grade level. There are other metrics obviously involved in Moody's or S&P's analysis of giving us investment grade. 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. That range will be plus or minus 20-30 points from where we are at, let's say, year-end.
It's Calin here. As you probably know, the consistency that you maintain those levels is also a factor that they look at.
Right.
I think that it's not just doing it for one or two quarters, making sure that it's sort of the message is that it's a sustained leverage ratio.
Thank you.
Thank you. The next question is from Helane Becker with Cowen. Please go ahead.
Thanks very much, operator. Hi, everybody, and thanks 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 MAX and 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? Am I reading too much into that statement?
No. I would say you're probably reading more into it because I have no visibility myself on that topic. I think that we know that the FAA needs to be the regulator of first resort here, if you like. 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. We're hopeful that other regulators would act in tandem. We have no visibility that they won't. 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.
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 this is, as I said several times, this is not an overnight feat.
Right. Gotcha. Okay. Thanks for that. 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 the second quarter on and assume that sometime in the first quarter the aircraft gets back into service. How much deferred maintenance should we think about you guys having to do in the last nine 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've deferred on Wi-Fi on many planes, that's more of a capital item than it is an operating expense item. It's obviously a customer service item. We pull planes out of Wi-Fi conversion and as you know, we're changing the paint as well on many of our planes. We've taken those two programs and basically deferred those into next year until we have certainty around the MAX situation.
Yet at the same time, we've been putting dual HUDs.
On our 737 MAX this year while the airplanes have been sitting. We've been putting the Wi-Fi on while they've been sitting. 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 been done this year, given that the airplanes were sitting. It's a little bit of a trade-off that you're seeing there, Helane.
Okay, great. My last question is just on, a while back, maybe 2 years, you guys renegotiated the agreements with your regional partners, I'm just kind of wondering if those renegotiated agreements are working as you anticipated, if you can somehow quantify the revenue benefits of those for, I guess the second half of this year maybe into 2020. Thanks.
Sure. Well, I'll try and answer that question. The biggest contract we have, the biggest partner we have, of course, is Jazz. We renegotiated and extended that contract earlier this year in February. Certainly, the biggest short-term impact is a reduction of approximately CAD 50 million 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. We expect a much better impact next year on the network side regarding the Jazz fleet.
To give you an example, Helane, is that one of the things you may remember, as a result of the changes to the contract, we were able to introduce Rouge aircraft on some of the regional routes, which obviously has a much lower CASM dynamic, cost per available seat mile dynamic, than the Jazz airplanes would. 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. That's what Michael proves. That's an additional benefit that we'll get next year and the following year once the MAX returns to service.
Got you. Okay. Okay, great. That's all very helpful. Thank you very much.
Thanks, Helane.
Thank you. The next question is from Kevin Chiang with CIBC. Please go ahead.
Hi, 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, I think up about two and a half points quarter-over-quarter. Just wonder 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 hedging?
The hedging?
The pension funding. Sorry, your pension funding.
Okay, yeah. 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. Again, we may step it up over time, but currently 85%, we're very comfortable on the immunization process.
That's helpful. You had commented on the sixth 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? If the Pacific's weaker and maybe a little bit more competition on the Atlantic, do you throttle back your long-term outlook for that sixth freedom growth strategy, or do you look at them independently?
We view the sixth freedom opportunity as a long-term opportunity as we've been building out our three hubs. We expect the good portion of our business model kind of in perpetuity to be in and around this connecting traffic. It's not something that we're going to go in and out of. What we will do, as Lucie mentioned, is that we will allocate capacity where we see weaknesses, but we don't exit the sixth freedom market to the Pacific just because the Pacific is a bit tougher or China's a little bit tougher. You will see movement in and out between Atlantic and Pacific. We certainly have big aspirations, and we'll continue to have big aspirations for sixth freedom traffic in each of our three hubs.
Certainly, we're not getting out of the sixth freedom business in Vancouver, for example. This is a big, big part of our strategy. It's going extremely well. We had a bit of a slowdown because of the 737 MAX grounding. We're still not anywhere near our fair share of what we consider this sixth freedom business to be. We'll continue to be moderating. I think if you've seen the third quarter, we sort of took a bit of a pause with it. It certainly is not based on demand, but it's based on the lack of the right aircraft to take passengers over the hubs.
Okay.
Just add a comment on that. If you look at our transatlantic performance, basically in the third quarter, we operated at 88 or 89%. In essence, our job is to try and capture the highest yielding traffic, which in many cases would have been the local passengers. As a result of the MAX grounding, there comes a point where we have to optimize the revenue. 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 transfer time, 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. It's really a question of optimizing all the flows that we have at our disposal.
That's helpful color. Thanks, congrats on the good quarter there.
Thank you very much, Kevin.
Thank you. The next question is from Jamie Baker with J.P. Morgan. Please go ahead.
Hey, good morning, everybody. Thank you. 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. It does seem like you're going to be in a situation where MAX 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 would address what is clearly growing concern over supply 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. Yeah. Jamie, Calin here. First of all, thanks for the question and thanks for being on the call. I'd say two things. One is that these wet leases are very short-term leases.
Okay.
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. This is not something that's going to go on into all of next year unless there's a further extension to the grounding. A, they're 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.
Okay.
It's not the sort of thing that you separate the crew from the aircraft. It really is not a major part of our overall cost dynamic here from the MAX. We have many other costs that have come up as a result of the MAX. This is part of it, but this is not the major factor. We only have four wet leases in any event going into next year, the two new 330s, which is very short-term, and then the two 767s that we operate at Hawaii, which we've extended because of the extension of the grounding, but which will also end at the end of the first quarter.
Okay.
It's not a full year problem. We might choose to extend them further if the grounding extends, but this is not a big cost dynamic for us.
Got it. I appreciate it and thanks for walking me through that. That's it for me.
Thanks, Jamie.
Thank you. As a reminder, you may press star one to ask a question. The next question is from Tim James with TD Securities. Please go ahead.
Thanks. Good morning. Question for Mike. Wonder if you can help me reconcile the fleet change table, which shows 38 removals, I think, in 2020 between 767s, the 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 do have specific plans to exit some of these planes because of maintenance issues post-summer of 2020. The ones that are actually planned because of maintenance issues or have run end of life are in the fleet table. There's a couple of those 15 that allow a little more flexibility depending on what happens with the MAX situation.
Okay. Some of the 15 are aircraft.
Built in.
That are 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. 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, as we continue to grow, as you know, advanced ticket sales continue to grow, which is a good leading indicator to the booking curves. You've seen growth in Q3 as well. I think the majority of that is sustainable as we continue to grow.
Okay. Just my final question, I guess, for Lucie here. I'm just wondering with the new daytime slots that are being provided to U.S. Airlines at 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. I would like to turn the meeting back over to Ms. Murphy.
Ms. Murphy.
Thank you, Alana, 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.