All participants, your conference is now ready to begin. Good morning, ladies and gentlemen, welcome to Air Canada's second quarter 2019 conference call. I would now like to turn the meeting over to Kathleen Murphy. Please go ahead, Ms. Murphy.
Thank you, Louise. Good morning, everyone, and thank you for joining us on our second quarter call. With me this morning is 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 address our second quarter financial performance in more detail and turn it back to Calin before taking questions from the analyst community. Before we get started, I would like to 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 second 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'm now going to turn it over to Calin Rovinescu, our 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 second quarter with EBITDA of CAD 916 million, well ahead of both last year's results and market expectations. We reported record revenue and record adjusted pre-tax income for the quarter and ended it with record levels of liquidity. These impressive results were achieved despite the 737 MAX grounding, which negatively impacted EBITDA growth year-over-year, as well as increased our overall costs. I'm very proud of our management team and all employees involved in working through the MAX mitigations, implementing creative solutions for our fleet, schedule, network, and operations to get passengers to their destinations in the quarter. They did an amazing job.
This includes managing through the challenges of sourcing replacement capacity for the now 36 MAX aircraft that would be operating some 100 flights per day in our schedule by the end of June. Lucie and Mike will have an update on the MAX situation for you in a few minutes. On a GAAP basis, we reported operating income of CAD 422 million, up CAD 114 million versus last year, or 37% better. We generated record second-quarter operating revenues of CAD 4.76 billion, reflecting an increase of CAD 424 million or 10% versus the same quarter last year. I am also pleased to report that our CAD 250 million Cost Transformation Program target has now been fully achieved. In fact, we surpassed it with aggregate cost savings of CAD 262 million by the end of June.
Although this program has ended successfully, continuous cost improvement is ingrained in our culture and remains a top priority at Air Canada.
At the end of June, we announced that we had concluded a definitive agreement to acquire Transat, which we believe, once closed, will benefit all stakeholders. This includes Transat shareholders, who will receive a significant premium from where their shares were trading before April, employees of both companies who will enjoy greater job security, and Montreal, which will serve as home to an even stronger global airline. The merger's benefits have already been recognized by key stakeholders. Among these are Unifor, Aéroports de Montréal, Tourisme Montréal, the Chamber of Commerce of Metropolitan Montreal, the Conseil du patronat du Québec, the Fédération des chambres de commerce du Québec, and numerous leading travel agencies. The 737 MAX grounding will be felt more acutely in our very busy summer period. As a result, third-quarter EBITDA is expected to increase approximately 5% versus the third quarter of 2018.
Third-quarter projected capacity is expected to decline approximately 2% compared to the third quarter of 2018, as opposed to an originally planned capacity increase of approximately 3%. Before turning the call to Lucie, I'd like to thank our employees for their adaptability, resilience, and agility, particularly during the enormous challenges brought about by the grounding of the MAX, which required intense effort and focus on their part, all a reflection of their dedication in taking care of our customers. I would also like to thank our customers for their continued loyalty, which they showed by voting Air Canada Best Airline in North America at the 2019 Skytrax World Airline Awards in Paris this past June. With that, I'll turn over the call to Lucie.
Thank you, Calin. Good morning, everyone. I'd also like to thank our employees for continuing to display the very best of Air Canada throughout the exceptional circumstances caused by the MAX grounding and for their unwavering focus on taking care of our customers and minimizing disruption. We're extremely proud of the teamwork on display across our airline. Turning to our revenue performance for the quarter. On capacity growth of 2.3%, passenger revenues were up CAD 417 million or 10.7% on a yield improvement of 6.8% and traffic growth of 3.6%. PRASM increased 8.1% year-over-year. The system yield improvement versus last year reflected increases in fares and carrier surcharges and additional yield earned on Aeroplan redemption revenues.
The additional Aeroplan yield favorably impacted each of our five geographic markets. Growth in higher yielding local traffic, an improvement in the overall fare mix, and a favorable currency impact of CAD 31 million were also contributing factors to the yield growth year-over-year. The impact of the 737 MAX grounding on our capacity for the quarter was mitigated somewhat by a well-executed contingency strategy, including deferring non-essential maintenance, extending aircraft leases, arranging for early delivery of aircraft, strategically leveraging Air Canada Rouge, making necessary schedule adjustments, and wet leasing aircraft, which enabled us to cover approximately 97% of the planned flying in the second quarter, despite the grounding of the 24 aircraft in our fleet and the 12 that we had expected to receive by the end of June.
Our business class cabin performed very well in the quarter with a passenger revenue increase of CAD 83 million or 10.2% versus last year's second quarter on traffic and yield increases of 5% each. This further demonstrates the strength of the Air Canada brand in the premium market and the continued return on investment in our premium products over the last few years, including the introduction of our Air Canada Signature Service, which provides an elevated premium experience throughout the entirety of our customers' journey. Our premium economy cabin continued to perform very well and returned positive traffic and yield growth during the quarter. Looking at our key markets, we are pleased to report year-over-year gains in yields and revenues in each major route group ahead of capacity growth. This reflects the strength of our diversified network as well as the benefits of the Aeroplan program, with each market contributing.
On a slight increase in capacity, domestic passenger revenues increased CAD 128 million or 10.7% from the second quarter of 2018 on yield growth of 8.6% and a traffic increase of 1.9%. The yield increase reflected the impact of fare increases, new fare categories on domestic services, and growth in ancillary revenue. The pricing environment was also more stable in 2019, as it was not impacted by potential WestJet strike threat. Additional yield earned on Aeroplan redemption revenues and growth in higher yielding local traffic were also contributing factors to the year increase year-over-year. Our domestic PRASM improvement of 9.9% reflected strong gains in both the business and economy cabins. In lieu of the MAX aircraft, we strategically leveraged Air Canada Rouge as well as our wide-body aircraft on several transcontinental domestic frequencies, which enabled us to consolidate frequencies without significantly impacting capacity due to the larger gauge aircraft.
As we look forward to Q3 in the domestic market, we anticipate positive year-over-year revenue results. We expect capacity to continue to be constrained as a result of the MAX grounding, with the 36 aircraft removed from our schedule during all of Q3. We will continue to deploy our contingency strategies domestically to partially mitigate the impact to our schedule, further demonstrating our commercial team's incredible ability to quickly adapt. On the US transborder market, on slight capacity growth, revenues were up CAD 94 million or 11% on yield growth of 11.1%. We achieved a year-over-year increase in PRASM of 10.7%. Significant PRASM and yield gains were realized on all major services and reflected strong gains in both our business class and economy cabins.
Yield improvements were realized from the impact of an improved traffic mix and the launch of new fare categories on U.S. transborder services, which also translated into ancillary revenue growth opportunities. Additional yield earned on Aeroplan redemption revenues, growth in higher yielding local traffic, and a favorable currency impact of CAD 14 million were also contributing factors to the yield increase year-over-year. The Eastern Seaboard business market, as well as our service between Eastern Canada and California, delivered very strong results on all fronts. Our transborder results also reflect continued strong traffic and revenue performance related to customers transiting our hubs to and from the U.S., which can be attributed to the success of our international transit strategy and the investments we've made to improve the connection process in all three of our hubs. Our U.S. leisure markets also performed well in the quarter.
From a capacity perspective, the U.S. transborder market was the market most significantly impacted by the grounding of the 737 MAX in the second quarter. Specifically, in Hawaii, we were required to reduce our frequencies from Vancouver to Honolulu and Maui, which we'd previously flown by MAX, and as of mid-June, these routes are operated through a wet leased Boeing 767 aircraft. Despite the strong booking trends on Eastern Canada to California services, we had to down gauge from the efficient 737 MAX to a less efficient A320, representing a net decline of 23 seats per flight, which will impact revenues for the quarter. However, we did retain 787 operations in support of our premium strategy. Looking ahead to the third quarter, similar to the domestic market, we're expecting further impact from the grounding of the 737 on our U.S. transborder services.
We are planning for less consolidation of frequencies in order to protect our network flow traffic, which is crucial to our international network strategy. The start dates of several seasonal routes and new services will be postponed, and our Honolulu and Maui services from Vancouver will continue to be operated by the wet leased Boeing 767. On capacity growth of 3.6%, revenues on the Atlantic increased to CAD 124 million or 12% versus last year on traffic and yield growth of 5.8%. We achieved a year-over-year increase in PRASM of 8.1%. Traffic and yield increases were recorded on all major Atlantic services. The yield growth was largely driven by increases in fares and carrier surcharges. We also saw a significant increase in ancillary revenues led by growth in revenues from baggage fees, paid upgrade, seat selection, and preferred seats.
Our new fare categories offering our customers more flexibility and choice were also expanded in the second quarter. Our enhanced merchandising efforts through our sales channels were also important contributors to our ancillary sales performance. We were once again particularly pleased with our performance to the U.K., which saw strong gains in the business class cabin. Our results demonstrated the resilience of our fleet and diverse network despite exceptional circumstances. Due to the grounding of the MAX aircraft, we made several necessary adjustments to our schedule, including temporarily suspending service from Halifax and St. John's to the U.K. through October. We delayed the start date of our new service from Montreal to Bordeaux to the start of this third quarter and reduced frequencies on several continental European seasonal services.
In June, we began operating our Montreal to Barcelona service and one of our Montreal to Paris frequencies through a wet lease operation, and we will continue to do so throughout the third quarter. Additionally, due to the closure of Pakistan airspace, we adjusted our Toronto-Delhi schedule, and as of mid-June, we suspended the service. 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 while the airspace was closed. Our transatlantic strategy built on hub-to-hub flying with a focus on premium traffic and the optimal mix of mainline and Rouge continued to demonstrate resiliency throughout the second quarter.
Looking ahead to the third quarter, the impact of the MAX grounding will continue to be felt over the Atlantic through the summer peak as we've had to cancel profitable and productive flying between Halifax and St. John's to London Heathrow, in addition to Toronto to Shannon. We expect that we will see pressures on our Atlantic revenue relative to our very strong 2018 third quarter due to the capacity constraints on our schedule, a stronger inbound sales mix impacted by currency, and a slowdown in terms of carrier surcharges revenues, which peaked in the fourth quarter of 2018. Our service from Toronto to Delhi will resume at the end of October now that the Pakistani airspace is open.
Although the impact from the MAX grounding is more significant in the third quarter due to the summer peak, we anticipate our network contingency strategy to continue to somewhat mitigate these impacts. Turning to the Pacific, on a capacity increase of 2.4%, revenues increased CAD 39 million or 6.6%, mainly on yield growth of 3.7%. We achieved a year-over-year increase in PRASM of 4%. All major Pacific services recorded yield and PRASM increases, except for the services to Australia, which continued to be impacted by increased industry capacity from North America. The yield growth reflected increases in base fares and carrier surcharges, as well as a general improvement in the overall fare mix.
The geopolitical situation between Canada and China continues to negatively impact travel demand between Canada and China and Canada and Hong Kong, and we have been proactive in our approach to reallocating capacity from these markets elsewhere throughout our network. We were pleased with the performance of our business class cabin in all markets over the Pacific, with the exception of China services, mainly due to this geopolitical issue. Looking forward to the third quarter, we expect to continue our strategy to redeploy capacity from the Pacific throughout our network due to the continued softening travel demand between China and Canada, and our schedule reflects downgauges effective in September. As mentioned last quarter, in our effort to counter seasonality, we announced our non-stop seasonal services between Vancouver and Auckland, which will be launched in December of this year.
To fully optimize this service, we've signed an MoU with our Star Alliance and co-chair partner, Air New Zealand, as we pursue a joint venture relationship in order to form a deeper, more integrated partnership that will provide greater customer choice, comprehensive benefits, and an expanded transpacific network. Revenues from other services increased CAD 32 million or 13.5% on traffic growth of 9.6% and a yield improvement of 3.6%. We achieved a year-over-year increase in PRASM of 7%. All major services reported yield and PRASM growth. In early April, we reverted back to one-stop service to Buenos Aires with a connection in Santiago. The resulting decrease in average stage length had the effect of improving yield in the other markets by 2.3 percentage points. The favorable currency impact also contributed positively to our yield.
For the third quarter, we project to see positive year-over-year revenue growth despite constrained capacity as a result of the MAX grounding. As mentioned on previous calls, we continue to explore seasonal growth opportunities in South America. We recently announced our seasonal non-stop Air Canada Rouge service between Toronto to Quito and our seasonal non-stop Air Canada mainline service from Montreal to São Paulo, both beginning this December. We're encouraged by preliminary booking indicators. This bodes well for our strategy to counter seasonality. We've also recently announced Air Canada Rouge seasonal non-stop service between Quebec City and Punta Cana, as well as Quebec City and Cancun, both starting this December. To sum up our passenger revenues in the quarter, despite the challenges of the MAX grounding, softening of demand to China, and challenges with India, we delivered record passenger revenues and are pleased with our revenue performance.
Moving on to cargo. The second quarter of 2019 saw a global slowdown in trade affecting all modes of transportation. The North American market had shown relative strength versus the rest of the globe in the first quarter, weakened considerably in the second quarter. For the second quarter, Air Canada saw a year-over-year reduction in cargo revenues of 12%. We are anticipating a continuation of the global slowdown in trade for the remainder of the year, which will continue to have a negative impact on our cargo revenues in the third and fourth quarter. Asia has shown the greatest weakness in both traffic and yield and represents 55% of the negative change versus 2018. The weakness in the region extends beyond China and affects most Asia locations.
Turning to other revenues, we saw an increase of CAD 30 million or 14% in the quarter, primarily due to the net margin recorded on the redemption and delivery of non-air goods and services related to the Aeroplan program. We also experienced an increase in ground package revenues at Air Canada Vacations. I will now turn the call over to Mike for a discussion on our cost performance and balance sheet metrics. Thank you.
Thank you, Lucie, and good morning to everyone. I'd like to add my thanks to all of our employees for an impressive second quarter and for their commitment in taking care of our customers. Before turning to a discussion of our costs in the quarter, I want to take a few minutes to discuss the MAX situation from several different perspectives. First of all, we are hopeful that this is a short to medium-term issue that will not meaningfully impact our strategic direction, capital allocation practices, or any other element of our plan. It has been extremely frustrating to manage and has consumed a great deal of very valuable management time, and we commend all of our employees for managing through this so effectively and professionally. We operated the MAX on thousands of missions until the March grounding and never encountered any of the reported issues.
Until the grounding, the aircraft was meeting our expectations from a customer, operational, and financial perspective. Ideally, we are still looking forward to the return to service once all appropriate safety protocols, processes, and reviews are completed by the regulatory authorities. We were operating 24 MAX aircraft when they were grounded in March, carrying about 11,000 passengers per day. They were assigned to some of the most high-profile routes. Another 12 aircraft were to be delivered before July 1st for a total of 36 by the start of our summer peak. Another 14 aircraft were planned to be delivered in the first half of 2020, for a total of 50 aircraft by the summer of 2020. Since we do not have visibility on when the MAX will be ungrounded, the delivery schedule, and our MAX fleet plan are in a complete state of flux.
Given all of the uncertainty around timing of the return to service, we have not hired pilots and cabin crews for the 12 aircraft not delivered in Q2 of 2019, nor are we planning to hire for the additional 14 scheduled to be delivered in the first half of 2020 until we have clarity. As a result of this and other operational factors, it will take up to a year from the time when the decision is made to reintegrate them into our fleet after the ungrounding for all 50 planes to fly. With respect to our first 24, which we already have allocated crews, for present planning purposes, we believe they can be returned gradually to service within two to three months from the ungrounding of the aircraft.
For the remaining 26 still to be delivered, however, it would take longer, and as I said, progressively up to a year. Clearly, much uncertainty remains with respect to our MAX fleet. Additionally, we have now made and announced the decision to take the planes out of our schedule until at least January 8th, 2020. This will ensure our customers can plan their holiday season travel with certainty and book with full confidence. Overall, we are operating approximately 95% of our total planned schedule in the third quarter. In the current quarter, the replacement lift, which is primarily wet leases, is more expensive, and we plan to cover less than half of the 36 MAX aircraft capacity in a much higher ASM volume quarter.
In fact, for the first time since I can recall, year-over-year ASM growth in Q3 will be negative, down approximately 2% in what is historically our most profitable quarter. We will certainly be able to partially mitigate with yield like we did in Q2, but this will be reduced in Q3 given the historically higher load factors, a more comparable aircraft utilization in Q3 versus prior years versus Q2, and other impacts. Again, a main objective of the MAX program for Air Canada was to replace older, less efficient capacity, and that is still the plan as of now. Depending on how things unfold, however, we will see more of it than originally expected being completed in 2020 rather than 2019. Nevertheless, our fleet and capacity expectations for the end of 2020 remain the same as originally planned as of now, but this too depends on developments.
The grounding and deferral of all the MAX, the reduction in ASMs, and the higher cost of replacement lift will impact many short-term ratios you have come to focus on. I have been telling the market to focus on EBITDA versus the complicated math that results from this unique short-term event. Key metrics such as adjusted CASM, yield, RASM, free cash flow, and unrestricted cash will be higher than expected. ROIC and leverage will also be impacted as we manage through this unforeseen and unprecedented event and defer deliveries and capital from 2019 to 2020. For the sake of clarity, in these unique circumstances, we are providing guidance that we expect Q3 EBITDA to increase by approximately 5% when compared to the third quarter 2018 EBITDA of CAD 1.351 billion. On to our loyalty strategy. I'm very pleased to report a seamless and on-time integration of Aeroplan into Air Canada.
As a result of the transaction, we added hundreds of talented management resources from Aeroplan, particularly in the analytics, CRM, partnerships, and IT spaces, disciplines where the market for talent is particularly competitive. These teams are now operating as one with a tremendous focus on building the new Aeroplan program, which is set to relaunch later next year. That notwithstanding, we remain focused on growing customer confidence and improving the Aeroplan performance ahead of next year's relaunch. We're pleased to see stronger than expected results. Over the quarter, we improved the Aeroplan value proposition. Our co-branded credit card acquisition performance exceeded our expectations. Aeroplan observed the first positive quarterly year-over-year gross billing performance since Q4 of 2017. Member engagement is growing, redemption behavior has stabilized. We're seeing promising early results from our co-leveraging Air Canada's significantly larger digital traffic base and Aeroplan's robust data assets.
We're also seeing strong interest from the broader marketplace to deepen existing partnerships and establish new ones. Let's turn to the cost in the quarter. Adjusted CASM, which excludes fuel expense, ground pacakage costs at Air Canada Vacations, and the operating expenses of Aeroplan, increased 5.9% versus the same quarter in 2018. These increases reflected in large part the impact of the MAX aircraft grounding, which resulted in ASM growth of less than one half of what we originally had planned. The relatively higher costs associated with replacement aircraft, including wet leases, and the ongoing operating expenses, including depreciation and pilot wages being incurred in relation to the 737 aircraft, despite their grounding. As a reminder, Aeroplan's operating costs have been consolidated within Air Canada's financial statements since January the 10th.
Turning to wages and salaries, we saw an increase of CAD 70 million or 13% in the quarter, mainly driven by growth in full-time equivalent employees of 10%. The increase in employees was due to the capacity growth and the inclusion of Aeroplan. In the quarter, wages, salaries, and benefits included costs of CAD 14 million for the MAX pilots who are not currently flying. Moving on to fuel. Fuel expense increased CAD 18 million or 2% in the quarter, with a higher volume of liters consumed, accounting for CAD 32 million of the increase, and unfavorable currency impact adding another CAD 29 million. Lower jet fuel prices, which accounted for a decrease of CAD 42 million, was an offsetting factor. The average price of fuel was CAD 0.792 per liter in the quarter, down a little over 1% versus the same quarter in 2018.
Air Canada has hedged approximately 50% of its anticipated purchases of jet fuel for the third quarter of 2019 and has not currently entered into any fuel hedging contracts for Q4. Looking ahead, our assumption is that the price of jet fuel will average CAD 0.78 per liter in the third quarter and the full year 2019, and that the Canadian dollar will trade on average at 131 per U.S. dollar in the third quarter and 132 per U.S. dollar for the full year 2019. Now turning to our balance sheet and liquidity. We ended the quarter with unrestricted liquidity of CAD 6.9 billion, another record. Free cash flow amounted to CAD 537 million in the quarter, CAD 413 million above last year's second quarter.
The increase in free cash flow was mainly due to the lower level of capital expenditures, again, largely due to the deferral of the 12 MAX aircraft deliveries. As I mentioned earlier, we've assumed that the remaining MAX aircraft scheduled to be delivered in 2019 will be delivered in 2020. Both the capital commitments table and the fleet table in the Q2 MD&A reflect that assumption. Net debt of CAD 3.3 billion decreased CAD 1.9 billion from December 31st, 2018, reflecting an increase in cash equivalents, and short and long-term investment balances of almost CAD 1.5 billion, and an increase in long-term debt and lease liabilities of CAD 470 million. Our leverage ratio was 0.9. Sorry, just go back.
The net debt of CAD 3.3 billion decreased CAD 1.9 billion from December 31st, 2018, reflecting an increase in cash equivalents, and short and long-term investment balances of almost CAD 1.5 billion, and a decrease in long-term debt and lease liabilities of CAD 470 million. Our leverage ratio was 0.9 at the end of June versus a ratio of 1.6 at the end of December. At quarter end, our return on invested capital was 15.5%, while our weighted average cost of capital was 7.2%. With respect to the normal course issuer bid, Air Canada repurchased for cancellation approximately 2.8 million shares in the quarter alone at an aggregate cost of CAD 108 million. In the first six months of the year, we've repurchased over 4.3 million of our shares and have spent CAD 159 million doing so.
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.
Thank you, Mike. As with individuals, so too with companies, our true measure is not how we perform in good times, but how we respond to adversity. Despite having one of the largest Boeing 737 MAX fleets in the world. Being squarely at the heaviest phase of ramp-up, as Mike just explained, and despite its grounding, Air Canada delivered record results in the second quarter, with record adjusted pre-tax income, record revenues, and record liquidity of nearly CAD 7 billion. Our performance reveals the extent of our transformation. We knew agility was an essential attribute that we had to develop to reach our goal of long-term sustainable profitability. The MAX grounding allowed us to display both agility and efficiency, with everyone doing an incredible job devising and implementing creative solutions for our fleet, schedule, network, and operations.
We covered about 97% of the flying originally in the schedule and did so seamlessly despite missing nearly 20% of our narrow-body fleet. Importantly, the decisions we made were and will continue to be predicated on the best interests of our customers. At all times, our focus was on getting passengers to their destinations safely and securely. That said, we recognize the grounding has impacted our customers and affected their travel plans, and we certainly regret that inconvenience and look forward to return to normal operations once the regulators have completed their review. Understandably, there's a desire for more information about this matter. However, for many good reasons, at this time, we cannot provide more than what we have said today. This includes discussing the financial impact or the status of discussions with Boeing regarding compensation.
We have a strong relationship with Boeing over decades, having flown virtually every aircraft type they have manufactured, and based on that, are anticipating they will do the right thing. Our focus remains on mitigation to further minimize the disruption to our customers and on working with Boeing and Transport Canada to understand the next steps involved to safely unground the MAX as soon as possible. Another detrimental aspect of events such as the MAX grounding is their power to distract. As our quarterly results show, we maintain our eye on the ball and our focus on operating our airline safely and profitably. We're doing this by adhering to the same four corporate priorities that have guided our transformation and by doing what we said we would on each priority. The first of these priorities is financial performance and balancing strength.
Apart from strong earnings and improved results in every major market segment, we completed our CTP program and exceeded our CAD 250 million target. This is not the end of the story. Cost control is firmly ingrained in our DNA, and we will never stop seeking efficiencies. Moreover, in Q2, we reduced our overall leverage ratio to below one time, as we said we would several years ago. Our second priority is international expansion. While the MAX situation impeded our network development during the quarter, we nonetheless remain committed to this goal. For example, we launched this month the new Montreal-Bordeaux route and also announced new routes within North America to help feed our international network and notably added regional services in Atlantic and Western Canada.
During the quarter, we had the privilege of being recognized with a number of international customer service awards, confirming our progress with our third priority, that of customer engagement. Virtually every aspect of our service was recognized during the quarter. Best Business Class in North America from the influential TripAdvisor, Best in North America for Food Service and Business Class Amenity Kits in the Americas from PAX International. Aeroplan was named the fastest-trending program at the Freddie Awards for global loyalty programs. We were named the Best Premium Economy and Best Airline for Onboard Entertainment at the Global Traveler Leisure Lifestyle Awards. Additionally, we won three prizes at what are viewed as our industry's benchmark awards, the Skytrax World Airline Awards. We won Best Airline in North America for the third straight year, Best Airline Staff in North America, and World's Best Business Class Lounge Dining.
Such success would not be possible were it not for the fourth priority, that of culture change. It is only through the hard work and dedication of motivated employees that we win these awards. Subsequent to the quarter, this was explicitly recognized when we were named among the 50 most engaged workplaces by Achievers and won the Diversity and Leadership Award at the Airline Strategy Awards in London, England. An essential element of engagement is sustainability. This past quarter, we issued our 2018 corporate sustainability report, detailing our efforts in this area, including our determination to increase fuel efficiency, which is now up 44.5% since 1990. Today, Air Canada is among the lowest CO2 emitters per passenger mile and per revenue ton mile in terms of global carriers. Just last year, we were recognized as the Eco Airline of the World.
During the quarter, we announced a partnership with environmental organization 4Ocean, a company dedicated to removing waste plastics and trash from the ocean. We also continue to eliminate single-use plastics from our aircraft. Another important aspect of sustainability is supporting local communities and promoting diversity. We were extremely proud to mark National Indigenous Peoples Day by having one of our flagship Boeing 787 Dreamliners operate a transcontinental flight with a wholly indigenous crew. Beyond our established priorities, we also continued during the quarter to advance other major strategies, projects, and acquisitions to further strengthen our company and accelerate its transformation. Each of these initiatives is progressing as expected despite the 737 MAX issue, showcasing in a sense, the bandwidth we have at Air Canada and our capacity to manage complexity.
In addition to the Transat acquisition, other major programs include our new passenger service system, which for an airline is a massive undertaking, akin to a heart transplant. During the quarter, we entered a new phase of testing and training in anticipation of implementation later this year. The PSS will be transformative of our back-office operations, greatly improve efficiency, and provide a foundation for further customer service enhancements. On the loyalty front, Aeroplan exceeded our performance expectations in the first full quarter, and late in Q2, we announced customer-friendly changes to the Aeroplan program that provide a foretaste of the many improvements that customers will see when we launch our new loyalty program in 2020. This will be another transformative step for our airline, and as the Freddie Award indicates, anticipation is building for what we believe will be one of the best travel loyalty programs available anywhere.
Finally, by the end of this year, we will take delivery of our first Airbus A220, former C Series. The arrival of any new aircraft entails years of preparation and the commitment of many teams to ensure a smooth introduction. There's tremendous anticipation within our company around the A220, with people excited not only by the promise of what this state-of-the-art aircraft will do for us operationally and financially, but also for its added appeal to customers. In conclusion, I'd like to once again thank our more than 33,000 employees for their hard work and dedication to our customers. I'm very proud of the results they have delivered. Additionally, I also thank our customers for their continued loyalty and for choosing to fly with us. With that, 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 are using a speakerphone, please lift your handset before 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 hash sign. Please press star one at this time if you have a question. There will be a brief pause while participants register, and we thank you for your patience. The first question is from Konark Gupta from Scotiabank. Please go ahead.
Thanks, and good morning, everyone.
Good morning.
Congrats on a good quarter, guys, especially considering the impact of MAX in Q2, obviously. I wanted to dig in a bit on MAX here. You mentioned some of the mitigation plans that you have taken in the last few months to offset the capacity impact. I'm just wondering if some of the short-term leases and the wet leases you have taken as they come due, what do you plan to do to offset that capacity? Is there any more aircraft that you want to extend for short-term leases, or you can buy those aircraft from somewhere else, from other airlines or something to mitigate that? Is there a contingency plan in case MAX grounding extends further beyond January?
Good morning, Konark. It's Mike. On the first part of the question, on the A320s and E190s and the wet leases that we've extended or put in place, we have a fair amount of flexibility to extend them on a short-term basis, certainly well beyond January of 2020. We're comfortable with that situation. As you know, we also took in a number of WOW air A321s earlier this year, and some of those have already come online. Some of them will come online fairly shortly. We're comfortable that we can continue with that part of the mitigation plan for the foreseeable future. The second part of the question is a little more difficult, is whether this extends beyond 2020 or January 2020.
Again, I think we've shown tremendous creativity and work ethic to develop mitigation plans in the short term, and we'll continue to develop those mitigation plans as we go forward. Certainly, mitigation plans are a little easier to develop in Q1 and Q2 and to some degree, Q4. Q3 is more the challenge as you've seen today, as we've called out today. Certainly, we believe that the planes will be back flying well before Q3 of next year.
Okay. I think hopefully Transat deal goes through and it closes by that time.
Thanks, Konark.
Sorry. I have more questions. Can I go ahead, sorry?
Yes. Go ahead.
Thank you. Again, on free cash flow, obviously CapEx got pushed out here, which is obvious because of the MAX delays in deliveries and all that. Free cash flow is obviously looking pretty good here. How do you plan to use the incremental free cash here? Is there something you would like to keep in reserve just for contingency on MAX? You have some excess cash you think that could be deployed toward buybacks or maybe redeeming some of the high yield that you have?
Well, we certainly have excess cash. We called that out as well. Your point is well taken. The capital that's been deferred from 2019 to 2020, we have to keep that in place because we expect the planes to come back, and we expect to pay for the planes when they do come back and are delivered to Air Canada. There are future cash plans, obviously, consider us maintaining that level of cash to pay for the planes when they are delivered as soon as possible. Again, beyond that, we do have excess cash, and we have been more aggressive in buying back our shares in Q2 and Q1, and we see no reason at this point in time not to continue to do that.
Okay. That's it for me. Thank you, guys.
Thanks, Konark.
Thank you. The next question is from Walter Spracklin from RBC Capital Markets. Please go ahead.
Thanks very much. Good morning, everyone.
Morning, Walter.
Starting off, you gave us color into the third quarter in terms of capacity. A lot of interest now as to what cost impact that has. If you were to strip out the 737, what is the run rate estimate of costs in that third quarter associated with the grounding of the MAX, if you have that on hand?
Walter, what we're trying to do is not get into sort of signaling indirectly what we expect our compensation strategy to be with respect to the Boeing dynamic. The amount of incremental cost that results from the MAX grounding is something that we'll hold back on until we have settled our Boeing discussions. We really don't want to negotiate with Boeing in public.
Okay. Understood.
Walter, on adjusted CASM for Q3, we're not going to provide guides. We've provided guidance on EBITDA, and that's what our focus is, and that's what we're trying to have the market focus on. There's no doubt adjusted CASM year-over-year will be most likely higher than Q2 because our capacity's dropped more.
Sure.
In Q3 versus Q2.
Okay. Turning over to the revenue side, clearly you're getting some great yield, some good PRASM here. There's tighter capacity as a result of the MAX grounding that's working its way probably from that respect. Is this something that we should consider when we look at our PRASM forecast for next year, that assuming that the aircraft comes back in January, will you see some downward pressure on PRASM and yield as that capacity comes back online?
A lot of it has to do, of course, with the overall level of competitive capacity that's in the marketplace. I think that this is one of those that we're very well aware of all the arguments that have been made for a lot of time, especially coming out of the U.S. and some of the analysts as well here in Canada as to, what is the perfect amount of capacity that should be put into the Canadian marketplace or in the transborder U.S. Our view is we'll put the amount of capacity in that is consistent with our growth trajectory, and as we've been saying, Walter, for the last several years, once we finish that large-scale double-digit capacity growth, we did not anticipate that it would continue to be at that level. We expect to continue growing.
Therefore the third quarter now, which as Mike says, you'll see a reduction in capacity as an anomaly. Our expectations are to continue growing, to continue putting in competitive capacity levels. We would obviously expect to continue seeing good yield and RASM performance. Our expectations are for continued improvement in RASM performance over time going forward over the next number of years. That, of course, will always depend on how much competitive capacity is put in by our competitors, and over that, we have no control.
A follow-up on the buyback, Mike, clearly you talked about a strong cash position, but wanting to kind of not do much until we get clarity on the 737. Is that therefore a fair assumption that once you get clarity on the 737 coming back into your fleet, that a decision will be made at that point as to how much you're going to accelerate your buyback?
I think that's a fair statement, Walter. We are in the market almost on a daily basis right now. Obviously, the MAX situation, as we've spoken about, is uncertain. As that becomes more clear, hopefully sooner than later, we'll reevaluate how aggressive we are on the NCIB.
Okay. Last question there. I guess when you look at your markets, can you talk a bit about your pricing environment on where competition and capacity and therefore your pricing environment is strongest and where it's weakest if you were to put each of your major geographies on a relative basis, what's doing very well and what's doing relatively poor?
Hi, it's Lucie. On the North America network, keeping in mind that last year there was a very special event, when we had a risk of WestJet strike action. When we compare year-over-year, the environment certainly in the North America market is much more stable. Of course, as a result of the MAX, we're seeing some traffic reflow, which means that we are obviously doing all possible to be able to protect our highest yielding traffic. Those are the kinds of things that we're seeing on the North America front that are helping to push up the yield. On the international markets, the picture is a little bit different. The environment is a little bit different because, as you know, the carrier surcharges on the international markets are pretty significant, and obviously they follow the cost of fuel.
The surcharges really peaked in the third and fourth quarter of 2018. It's somewhat normal as we progress in the second and third quarter of this year, and even into the fourth quarter, we don't expect to see the same type of upside in terms of carrier surcharges. I would say overall, the environment is more stable. There are some markets that are quite competitive. For example, Australia, there's a fair amount of North American growth in competitive flying, which of course applies some pressure on the yield. There's also some growth in U.S. carrier flying to international stations, which impacts somewhat our sixth freedom. Overall, in the North America market, it's quite stable.
Got it. Okay. That's all my questions. Congrats on a great quarter.
Thanks, Walter.
Thank you. The next question is from Andrew Didora from Bank of America. Please go ahead.
Hi, good morning, everyone. Thank you for taking the questions. My first question, I think probably for Lucie. How should we think about the yield dynamic, or I guess more importantly, the booking curve from the 3Q summer peak to the 4Q holiday peak? How far do customers typically book out, both for summer and holiday? If taking the MAX out now through the end of the year, does this give you enough time to price peak holiday more efficiently than you were able to price peak summer?
Yeah. Hi. That's the very reason why we made the decision to pull them out earlier. A, to make sure that customers could book with confidence, but secondly, so we can optimize the capacity. We did the same thing in the second quarter. We were one of the first to make the decision to change our schedule as a result of the grounding, and it was very helpful. Which is why we proceeded the same way in the third quarter for the peak and also for the Christmas holiday. That way, we'll have the ability to best optimize. Because on the international markets, the booking window is generally somewhere between six months to 90 days, which was the peak of the demand comes in.
Is that similar across peak summer and the peak holiday, or is the booking curve a little bit shorter heading into the end of the year?
No, it's very similar, but during the Christmas peak, obviously, there's more pressure on the Caribbean markets, on the sun destinations, but the booking window is very similar.
Got it. That's helpful. My last question for Mike, why such a long potential tail on getting the 26 or so new MAX deliveries up in the air? It's certainly a much longer timeline than I think most of the U.S. airlines are talking about. Is this your desire to maybe control capacity a little bit more? Is it any limitations that you foresee on Boeing's side, or is it just limitations on your ops team to take such a large amount of aircraft that quickly?
No, Andrew, it's Calin. I'll take that question. Let me just explain a little bit of the dynamic, because our reality is a little bit different than what you may have seen with some of the other U.S. carriers. First of all, we do not operate the NG, the 737 NG, unlike all of the other North American carriers who have the MAX. It's a good news, bad news, because good news is that as a result of that, we're the only ones in North America who have the MAX simulator, and that has given us greater visibility both from a training and a safety perspective. We think we're quite far ahead of the others when it comes to that.
Secondly, that means that our pool of pilots have not been flying the 737 NG, and therefore, any pilots that we are hiring are hired just for the MAX. In other words, right now as a result, we have some 400+ pilots that we're carrying who are waiting for the MAX to come back effectively. Obviously not exactly most efficient use of their talent and their skill because they're not flying. As Mike says, that added somewhat to our costs in the second quarter and will continue until the MAX is back flying. That means that as we go from 24 to 36 to 50, you have to go from 400 pilots to 800+ pilots once you get to the full 50.
Hiring up that number of pilots, we will want to have much better visibility as to when the aircraft will come in and how quickly it'll come in. Once we reestablish the flying, the first 24, no problem, because the pilots are there, and that'll be the same re-entry as you're seeing with some of the other carriers in the U.S., ASAP, two to three months. Once you get beyond those first 24, it is a progressive state of hiring the crews for that and then, of course, removing the aircraft from service that are otherwise covering that flying. This is based on operational exigencies, nothing to do with a capacity constraint.
That's very helpful, Calin. Thank you so much for the questions.
Okay.
Thank you. The next question is from Rajeev Lalwani from Morgan Stanley. Please go ahead.
Good morning. Mike, a question for you on the CASM side. Can you talk about 2Q trends and how you did once you take out all the noise around the MAX? It seems like you're trending well, especially given the comments of hitting your targets overall.
That's absolutely a true statement. If you take out all the noise, the incremental costs to replace the lift for the capacity we did backfill and the lower ASMs, the resulting adjusted CASM was as good or better than we expected, that we had originally planned.
Got it.
That reflects the additional cost reductions that we've implemented to partially mitigate the challenge we have.
It'd be helpful if you could quantify it possibly, and then as a follow-up, there was some comment in the release about changing your liquidity approach and how you're thinking about excess cash, et cetera. Can you clarify that and provide some color as to what that means relative to some of the comments you made at the Investor Day, excess cash and so on?
Right. Yeah. This qualification or change was really just in relationship to how we calculate return on invested capital. We've obviously freely admitted to the marketplace that we've got excess cash on the balance sheet, which is a nice problem to have. Now we've determined that excess cash is defined as anything over 20% of trailing 12-month revenues.
That is about CAD 2.5 billion as of June 30th. We deduct CAD 2.5 billion from equity on the ROIC calculation because we're going to deploy that cash over the next several years buying aircraft, paying down debt, or obviously buying back shares. It's really just to get a better comparison to others on ROIC that we reduce that excess cash from the ROIC calculations.
Okay. That means going forward, you still have that CAD 2 billion plus, I think it's CAD two and a half, is what you said, as far as excess cash that'll eventually get back to your shareholders?
Yeah. Either by way of paying down debt or NCIB. Absolutely. Now we believe an adequate level of cash is roughly 20% of our trailing 12-month revenues, which is roughly CAD 3.5 billion, CAD 3.6 billion. Anything above that is excess, and as of June 30th, that number was CAD 2.5 billion.
I'll leave it there. Thank you.
Okay. Yeah.
Thank you. Our next question is from Fadi Chamoun from BMO. Please go ahead.
Good morning. Thank you. Quick question for Lucie. Just on the Atlantic, I think you gave us a few reasons why revenue pressured year on year. Can you talk a little bit about how you're seeing the capital intensity in this market, given the growth that your competitor has in that market? It just sounds, from how you ran through all the kind of regional market, Atlantic seems to be the one that have the least capacity or the least amount of ability to offset the MAX issues. Is that a good interpretation of what you said?
Well, there's a couple things. If you look at the Atlantic overall, just if you compare what we experienced in Q2 and what we're seeing with Q3, which is one of the comments that we made a little bit earlier, the big difference is on the transatlantic, the makeup of those routes is very different from one quarter to the next. For example, when you go into the third quarter, we have a significant amount of incremental inbound sales from Europe into North America. That's one big impact or a big change in terms of the makeup of those routes. If you look at the currency factor on the transatlantic, there's further depreciation of the international currencies, which by default has the impact of impacting our yield as well on the transatlantic market.
When you look at the MAX, for sure, we've taken down some transatlantic flying that would've been operated by MAX. Those, by the way, were solid yields and also very profitable markets. The combined effect of all of that and the pressure also of ensuring that we have enough feed for the international routes, that's where the challenge lies. The other note that I wanted to mention is the carrier surcharges. On the transatlantic, it is the service where it is the largest proportion of our revenues comes from actual fuel surcharges. When you look at that over time, it's completely natural that we have to anticipate that those fuel surcharges are not going to climb over time. For sure, the transatlantic is a little bit different than other markets, but those are the big driving factors to justify the change.
Okay, great. The other quick question. Mike outlined that it would take up to a year potentially to bring the full fleet of MAX back. That's starting to get almost close to impacting your peak of next year, 2020. If you don't have visibility into this, say, before late this year, what kind of mitigating factor can you think about in terms of trying to save the peak of 2020 at this point?
Fadi, I don't think we're prepared to talk about plan B or plan C at this point in time. We are working on alternative scenarios. Obviously, from the information we have, we believe they will be ungrounded certainly before year-end, and we'll have some clarity at that point in time. I won't sit here and speculate as to what may happen under different scenarios. If and when that scenario should ever appear, we will certainly provide some guidance at that point in time as to how we're going to handle it.
Okay, great. Thanks.
Thank you. Our next question is from Doug Taylor from Canaccord Genuity. Please go ahead.
Thank you. Good morning. Obviously, a 5% capacity impact is challenging given the large fixed cost infrastructure that you have. With that said, it doesn't appear obvious to me that margins are going to be lower than your original guidance for the year. Can you help us think about that further given the puts and takes? Do you think the MAX has had a negative impact on your overall margin profile? Put another way, would EBITDA potentially be more than 5% higher in Q3 if the fleet had been as you originally intended it?
Doug, it's Calin here. Yes, the signal that we wanted to make sure the market understood is that our expectations for Q3, because of the grounding and because of the impact, will be more severely felt in Q3 than it was in Q2. While we certainly expect Q3 to be good, it's not as good as it otherwise would have been. I think that sort of is the very direct message we're giving the market here. In Q3, as you say, the puts and the takes of it all is such that we have more limited capability to bring in replacement aircraft. We're operating at full capacity normally. There are no aircraft in maintenance typically in Q3 because we've scheduled it in such a way to make our fleet the most efficient.
Things that we were able to do in Q2, where you were able to delay Wi-Fi and delay paint in some cases, and bring in the WOW airplanes on a more accelerated basis, those sorts of alternatives aren't open to you in Q3. As we look at Q3, already we're operating at using our fleet as efficiently as is possible with the maximum number of hours per day. The incremental things we can do, which we can, we still will have wet leases in Q3. We still extended some of the Airbus and the Embraer aircraft for Q3, as Mike mentioned earlier. We've used all of the mitigation steps that we used in Q2, but because of the amount of capacity we are otherwise flying in Q3, it'll be more challenging.
All that to say that, were it not for the grounding of the MAX, our expectation for Q3 would have indeed been better than what we've just outlined in the release.
Okay. The Aeroplan program hasn't gotten a lot of attention given the 737 MAX issues. You did say that acquisition has performed stronger than expected, or the loyalty program is performing stronger than expected. Can you confirm whether that program, and its impact on the financials is now stabilized as you expected it would be in Q2, are there incremental profitability improvements still to come as you ramp up the new program or perhaps remove duplicate spending on running two programs or starting another program at the same time?
Doug, good morning. It's Mike. I can confirm, like I did in my notes, that the program has stabilized. Even better than that, it's starting to grow. We had a very successful credit card acquisition program, where TD ran a very successful credit card acquisition program, where we exceeded our expectations for new sign-ups, which is a positive sign for us for future profitability and future cash flow. Again, the teams have been integrated. They're working well together. They're looking for new opportunities. They're speaking to many different parties out there about partnerships. We believe not only has it stabilized, but we do have a path to grow probably faster than we thought, even before the relaunch in basically this time next year.
I appreciate the added color. Thank you.
Thanks, Doug.
Thank you. Next question is from Chris Murray from AltaCorp Capital. Please go ahead.
Thanks, folks. Just turning back to fleet planning, I guess a couple of quick questions on this. There's a lot of aircraft I think we've talked about coming in next year. I guess the question I've got is two parts. One, do you know how many of your aircraft right now are in a, call it a semi-finished state with Boeing? I guess two parts again, what's your confidence in actually being able to take deliveries of those aircraft? The other piece is, I know you've talked about extending a lot of the leases for the 320s, anything like that. Is there anything that we should be thinking of in terms of life or maintenance events for those aircraft or your ability to continue to operate those over the next, call it year?
Good morning, Chris. On the fleet plan, we've got 24 parked on our properties right now. Boeing has 12 parked basically on their property. We could take delivery of those when it's ungrounded. Obviously, we'll take delivery when it best fits us, frankly. The 14, which are to be delivered next year, I don't think are even on the production line. We don't know the current status, most of those would not be on the production line at this point in time. As you know, Boeing is still producing the plane, although at a lower rate. Our latest view is if they were ungrounded quickly, some of those 14 could be available, obviously, in the first half of next year.
On the mitigation, again, there's no doubt as we push the A320s and E190s, maintenance costs will probably go up, but they do have life left in them to some degree. Not obviously indefinite, but they do have life left in them. Certainly the maintenance costs would tend to escalate over the next little while.
Okay. Fair enough. Is it fair to think that that'll be part of your discussion with Boeing in terms of compensation?
Absolutely.
Okay. Just turning back to, you did mention the new PSS coming in and the opportunities it gives you. Just I guess a couple of things because we always sort of worry about these things. First of all, just any more color you can provide us on how the testing has been going, any issues you may be finding? I think at the Investor Day, you talked about kind of a late November kind of cut over. Any updates that you can give us on how we should be thinking about that and any impact it might have, you think, on your financials as we go into 2020 would be appreciated.
It's Calin here, Chris. We're still on target. Our teams have been working very hard to stay on target for that enormous amount of testing with frontline employees. Teams have been built of trainers and different functionality capability depending on the frontline employee involved, because obviously it affects everything from airports to call centers, etc., the entire booking process. All of that very extensive training is underway. We literally are talking about many, many thousands of employees that need to be trained on this. This is, as I said in my remarks, a big deal. Right now it's on target. We're slowing down non-essential technology changes to our systems to avoid having unnecessary complexity as we get into the final stages here. We certainly are not expecting any form of disruption or financial impact on us.
Obviously, working with a lot of partners who've had a lot of experience with other PSS systems for other leading airlines in the world. We hope to learn from some of their mistakes. We know that these things don't always go seamlessly. We get that. We understand that. Our people are doing a tremendous amount of contingency planning to try to ready for November.
Okay, great. Any thoughts around any financial benefits you might see as it gets launched into 2020?
We've told the market that once fully mature, we think we'll deliver an additional CAD 100 million, a combination of additional revenue and costs. That's going to take some time post-implementation, because the implementation will take several months, because it's a two-stage implementation.
Okay. Sounds good. Thanks, folks.
Thanks.
Thank you. Our next question is from Helane Becker from Cowen. Please go ahead.
Hey, everyone. It's actually Conor Cunningham in for Helane. You guys have provided a lot of detail on the MAX, I'll probably stay away from that. Just on Air Transat, I believe the expectation is to keep the brand. I'm just curious on what you think about how the value is of having two separate brands, and also maybe you can comment at a high level how you might view capital allocation between Rouge or Air Transat. Is the thought that Air Transat needs more investment to drive profitability going forward? Thank you.
Right, Conor. Yeah. Okay, good question. It's Calin here. We have made the decision to keep the Transat brand and the head office of Transat. Transat has built a very good brand in the leisure market. Recently recognized as the leading leisure airline in the world at Skytrax. We respect their brand, we respect what they've done in the leisure segment, and we think that that is value accretive for overall Air Canada. As we look at the Rouge dynamic, Rouge of course is also in the leisure business and Rouge has built its own brand and its own operation, and it's sort of helped us segment the market between the mainline product and Rouge.
As we go forward, we'll continue to look at separate opportunities for each of them, at least in the early stages, and then take it from there as we further evolve our thinking on the overall brand value of the two. As far as capital allocation, at this stage it's too early to say. We're very familiar with the Transat fleet through due diligence, and we will look for opportunities to optimize the fleet, taking account of the overall Air Canada picture.
So, like the overall thought is that Rouge and Air Transat will kind of complement one another, depending on what the market kind of dictates?
Correct.
Okay. Perfect. Thank you.
Thank you. Next question is from Kevin Chiang from CIBC. Please go ahead.
Hey, thanks for taking my question. Just two quick ones for me. Maybe just following up on the Transat conversation. Just wondering how you think this impacts your seasonality. Do you think this improves the seasonal profile through the year, or do you think it exacerbates it given what we've seen out of their results over the past decade or so? Just wondering what your thoughts are there from a seasonality perspective.
Right. Now, Kevin, excellent question. Our view is that the seasonality will improve fairly dramatically here. One of the advantages of our combination with Transat is that we are able to provide connecting lift on the Transat product that they cannot provide themselves because they do not operate a domestic or a transborder network. By our operating domestic or transborder network, we expect that will significantly improve the results of that Transat operation. Plus, in some cases, as a result of the combination of the two, it will enable us to extend some services to year-round where it's only a seasonal operation, and we're already thinking about some of those routes.
This is one of those interesting opportunities where it can truly be a win-win, both dealing with the seasonality challenge as well as extending some seasonal routes to a full year-round operation and really benefiting from the strength of the Air Canada network to improve that operation.
That's super helpful. This just one on your fleet, not on the MAX specifically, but when I look back over the past five years or so, you've kind of shifted from maybe a more Airbus-biased fleet to one when we look out to 2020, more Boeing-biased. When you look at what's happened recently with the MAX, I know you don't have any refleeting requirements in the near term, but maybe when you look out over the next five, 10 years, does that change or your recent experience change how you think about that split between the two OEMs or maybe not?
No, look, at this stage, we've said many, many times, Kevin, I think a very strong relationship and have had a strong relationship with all four major aircraft manufacturers over the last 25 years. When I say four, I include not only Airbus and Boeing, but Bombardier and Embraer. That means that we've found opportunities to, at different points in time, optimize the use of different aircraft manufacturers. Certainly, as we looked at the 787, that became a very compelling aircraft for us, and it's done phenomenally well. When we looked at the competitive dynamics at the time, when we were looking at the MAX compared to the alternatives, we liked the MAX economics and the scale of what it can bring us. We certainly have got a great relationship with Airbus. We continue to have a lot of Airbus product in our Rouge fleet.
We really like the A330s. We've brought in some more Airbus A330s. We still operate the A330, the A320, the A321, and even the A319 still. We still have a fairly substantial commitment to Airbus, and then the A220, of course, is our next exciting chapter. I think it's a fairly good split, and we'll continue to support both the manufacturers.
Thank you for that, and congrats on a good quarter.
Thanks very much.
Thank you. Our next question is from Tim James from TD Securities. Please go ahead.
Thank you. Good morning. Just one question, probably for Mike here. You mentioned you covered 97% of the planned flying in Q2 related to the MAX issues. There was an indication about, I think it was about a 500-basis-point impact on growth in the third quarter, related to the MAX issues. Is it possible, and forgive me if you've already indicated this, but that 97% figure for Q2, do you have a comparable number for Q3 of how much of the flying is being replaced?
95%.
95% in the third quarter?
Yeah.
Even though you're replacing 95% of the planned flying, the capacity growth is still going to be 500 basis points lower than original plan?
Right. It was supposed to be up plus three.
Okay.
Q2 was going to grow more than that. Q2 was going to grow at +5. It grew at +2, so we lost 300 basis points. Q3, we had originally planned to grow ±3, and now it's going to be -2, so we're down 500 basis points.
Okay. Thank you. Just thinking forward to 2020 and the impact of the MAX, and under the assumption that January 8th proves to be the right date, and they start going back into service, and you take deliveries. Am I correct in assuming that there will still be somewhat material kind of non-recurring costs that occur in 2020 then that will not be repeating themselves in 2020, whether it's related to training or I guess some ongoing costs before the aircraft are actually in service? There should be a bit of a headwind to your expenses again in 2020. Is that correct?
It really depends on how long we keep the replacement aircraft. That's the largest incremental expense that we're incurring, the wet leases and the extensions of 320s and 190s. Again, as I said earlier, we have fairly good flexibility that we can extend those on a short-term basis, so I don't think there'll be material headwinds on cost going in post grounding. There's also, Tim, another way to think of it is that once we establish what the final incremental cost that is allocated to this problem, to the problem of the grounding, we will let the market know what that incremental cost was because obviously it should be characterized as somewhat of a one-time dynamic.
Okay.
Obviously, we would not be extending these leases were it not for the grounding. We would not be incurring the additional maintenance were it not for the grounding. We would not be incurring the additional costs on the pilots who are not doing productive flying right now were it not for the grounding. As I say, today, we're not getting into all of that until we complete our discussions with Boeing. After the fact, certainly, we'd give you visibility on what impact that had to 2019 and 2020 accounting.
Okay. That's helpful. That's great. Thank you. Just one very quick question. The Q3 guidance that you provided for EBITDA, the 5% year-over-year growth, should we think about that as kind of a one-time guidance that you're putting out there because of where consensus expectations were, or is it possible you may do the same thing when we get to the fourth quarter?
We talked about that internally. Consider it a gift from the management team here at Air Canada. We'll consider Q4 as we get closer to Q4.
Okay.
We are in unique times, Tim, and so we took the extra step to provide some more clarity to the marketplace. We'll go through that same decision process leading up to Q4.
Okay. That's fair. That's great. Thank you very much.
Thanks, Tim.
Thank you. Our last question is from Konark Gupta from Scotiabank. Please go ahead.
Thank you. Just a very quick follow-up. On Aeroplan, you pointed out that it had a positive impact on all the segments. When you look at sequentially, your RASM numbers accelerated from Q1 to Q2. Is there any sense you can provide us if the magnitude was pretty significant between Q1 and Q2, and should we expect the Aeroplan contribution in Q3 to be somewhat similar to what we see in Q2?
Konark, Mike, on the second part of the question, for the most part, we've got in Q2 a full quarter of redemption.
That means, unless redemptions increase, we will have a similar run rate in Q3. There was some improvement, obviously, from Q2 from Q1, because we didn't get a full quarter redemptions in Q1. I wouldn't say that was material to us, basically. There was a small improvement in the overall impact to yield.
And do you-
Going forward, like I said, we're stabilized right now, so I think, Q3 going forward, we're not going to have sequentially large increases.
Is that the same thing for cost as well, Mike, from Aeroplan?
Yes.
Like the margin tailwind was higher than-
Yes.
Yeah. Okay. Okay, secondly, on Boeing's compensation that was disclosed by Boeing. If that comes and when that comes, How would you treat it? Would that be a cost offset to your numbers, or would that be?
Right. Yeah
A one-time revenue item?
Well, we haven't even began to have those discussions with Boeing yet. They will take some time and once it's all finalized, we'll make a decision as to how to disclose that information.
Okay. Thank you.
We can't speculate today as to how that may come, what form that may come in.
Perfect. I appreciate it. Thank you.
Thanks. Take care.
Thank you. Ms. Murphy, there are no further questions. I will return the meeting back over to you.
Thanks, Louise. Before ending the call, we would like to wish Taran Patowala, who is retiring from Scotiabank, all the best in his future endeavors. Taran, it was a pleasure working with you over the past several years. I'd like to thank everyone for joining us on our call today.
Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.