Good morning, ladies and gentlemen, and 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, and good morning, everyone, and thank you for joining us on our Q2 call. With me this morning are Caelin Rovinescu, our President and Chief Executive Officer Mike Russo, our Deputy Chief Executive Officer and Chief Financial Officer Lucie Gilmette, 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. Lucy and Mike will then address our Q2 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 Q3 press release and MD and A for important assumptions and cautionary statements relating to forward looking information and for reconciliations of non GAAP measures to GAAP results. I'm now going to turn it over to Caelin Raminescu, 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 $916,000,000 well ahead of both last year's results and market expectations. We reported record revenue and record adjusted pretax income for the quarter and ended it with record levels of liquidity. These impressive results were achieved despite the 7 37 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 $422,000,000 up $114,000,000 versus last year or 37% better.
We generated record 2nd quarter operating revenues of $4,760,000,000 reflecting an increase of $424,000,000 or 10% versus the same quarter last year. I'm also pleased to report that our $250,000,000 cost transformation program target has now been fully achieved. In fact, we surpassed it with aggregate cost savings of $262,000,000 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 Uniphore, Aeropont de Montreal, Tourism Montreal, the Chamber of Commerce of Metropolitan Montreal, the Conseil du Patronade du Quebec, the Federation of Chambers of Commerce of Quebec and numerous leading travel agencies. The 7 37 MAX grounding will be felt more acutely in our very busy summer period.
As a result, 3rd quarter EBITDA is expected to increase approximately 5% versus the Q3 of 2018. 3rd quarter projected capacity is expected to decline approximately 2% compared to the Q3 of 2018 as opposed to an originally planned capacity increase of approximately 3%. Before turning the call to Lucy, 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. And 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. And with that, I'll turn over the call to Lucie.
Thank you, Caitlin, and 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. Now turning to our revenue performance for the quarter. On capacity growth of 2.3%, passenger revenues were up $417,000,000 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 fare and carrier surcharges and additional yield earned on Aeroplan redemption revenues. The additional Aeroplan yield favorably impacted each of our 5 geographic markets. Growth in higher yielding local traffic and improvement in the overall fare mix and a favorable currency impact of $31,000,000 were also contributing factors to the yield growth year over year. The impact of the 7 37 MAX grounding on our capacity for the quarter was mitigated somewhat by a well executed contingency strategy, including deferring nonessential 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 Q2 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 $83,000,000 or 10.2 percent versus last year's Q2 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 $128,000,000 or 10.7 percent from the Q2 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 Weststrike threat. Additional yields 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 cabin.
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 U.
S. Transborder market, on slight capacity growth, revenues were up $94,000,000 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. These improvements were realized from the impact of an improved traffic mix and the launch of new fare categories on U.
S. Ranked border 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 $14,000,000 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 hunt to and from the United States, 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 market 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 7 37 MAX in the second quarter. Specifically, in Hawaii, we were required to reduce our frequencies from Vancouver to Honolulu and Maui, which we 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 7 37 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 Q3, similar to the domestic market, we're expecting further impact from the grounding of the 7 37 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 date 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 percent, revenues on the Atlantic increased $124,000,000 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 upgrades, seat selection and preferred seats.
Our new fare categories offering our customers more flexibility and choice were also expanded in the Q2. 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 Q3 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 Q3. Additionally, due to the closure of Pakistan airspace, we adjusted our Toronto daily 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 Q2. Looking ahead to the Q3, 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 Q3 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 Q4 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 Q3 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 $39,000,000 or 6.6 percent, 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've 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 Q3, 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 down gauges effective in September. As mentioned last quarter, in our effort to counter seasonality, we announced our nonstop 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 $32,000,000 or 13.5 percent on traffic growth of 9.6 percent and a yield improvement of 3.6%. We achieved a year over year increase in PRASM of 7%.
Automation Services reported yields in 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 Q3, 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, and we recently announced our seasonal nonstop Air Canada Rouge service between Toronto to Quito and our seasonal nonstop Air Canada mainline service from Montreal to Sao Paulo, both beginning this December. We're encouraged by preliminary booking indicators, and this bodes well for our strategy to counter seasonality. We've also recently announced our Canada Rouge seasonal nonstop 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 corner, despite the challenges of MAX grounding, softening of demand to China and challenges with India, we delivered record passenger revenues and are pleased with our revenue performance. Now moving on to cargo.
The Q2 of 2019 saw global slowdown in trade affecting all modes of transportation. The North American market shown relative strength versus the rest of the world in the Q1, but weakened considerably in the Q2. For the Q2, 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 3rd Q4. 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 $30,000,000 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 Vacation.
I will
now turn the call over to Mike for a discussion on our cost performance and balance sheet metrics. Thank you.
Thank you, Lucy, 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 meaningful 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 1 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 twenty twenty 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 fourteen scheduled to be delivered in the first half of twenty twenty until we have clarity.
As a result of this and other operational factors, it will take up to a year from a 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 2 to 3 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, but 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 8, 2020.
This will ensure our customers can percent of our total planned schedule in the Q3. 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, the 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 in 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 deferral of all the MAX, the reduction in ASMs and the higher cost replacement lift will impact many short term ratios you have come to focus on. I've been telling the market to focus on EBITDA versus a 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 and ROIC and leverage will also be impacted as we manage through this unforeseen and unprecedented event and deferred 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 Q3 2018 EBITDA of $1,351,000,000 Onto 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 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 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, and 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 and Aeroplan observed the 1st positive quarterly year over year gross billing performance since Q4 of 2017. Member engagement is growing, redemption behavior has stabilized and 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. Now let's turn to the costs in the quarter. Adjusted CASM, which excludes fuel expense, ground package 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 1 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 initial statements since January 10. Turning to wages and salaries, we saw an increase of $70,000,000 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 $14,000,000 for the MAX pilots who are not currently flying. Moving on to fuel. Fuel expense increased $18,000,000 or 2% in the quarter with a higher volume of leaders consumed accounting for $32,000,000 of the increase and unfavorable currency impact adding another $29,000,000 Lower jet fuel prices, which accounted for a decrease of $42,000,000 was an offsetting factor. The average price of fuel was CAD 0.79.2 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 purchase of jet fuel for the Q3 of 2019 and has not currently entered into any fuel hedging contracts for Q4.
Looking ahead, our assumptions that the price of jet fuel will average CAD0.78 per liter in the Q3 and the full year 2019 and that the Canadian dollar will trade on average at $1.31 per U. S. Dollar in the Q3 and $1.32 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 $6,900,000,000 another record. Free cash flow amounted to $537,000,000 in the quarter, dollars 413,000,000 above last year's 2nd quarter. The increase in free cash flow was mainly due to 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 and A reflect that assumption. Net debt of $3,300,000,000 decreased 1,900,000,000 dollars from December 31, 2018, reflecting an increase in cash, cash equivalents and short and long term investment balances of almost 1,500,000,000 dollars and an increase in long term debt and lease liabilities of $470,000,000 Our leverage ratio was 0.9 sorry, just go back, the net debt of $3,300,000,000 decreased $1,900,000,000 from December 31, 2018, reflecting an increase in cash, cash equivalents and short and long term investment balances of almost $1,500,000,000 and a decrease in long term debt and lease liabilities of $470,000,000 Our leverage ratio was 0.9 at the end of the June versus a ratio of 1.6 at the end of December. At quarter end, our return on invested capital was 15 point 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 2,800,000 shares in the quarter alone at an aggregate cost of $108,000,000 In the first months of the year, we've repurchased over $4,300,000 of our shares and have spent $159,000,000 doing so. Additional information can be found in our financial statements and MD and A, which were posted on our website and filed on SEDAR this morning.
And with that, I'll turn
it back to Cale.
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 fleet in the world and being squarely at the heaviest phase of ramp up, as Mike just explained, And despite its grounding, Air Canada delivered record results in the Q2 with record adjusted pretax income, record revenues and record liquidity of nearly $7,000,000,000 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. But as our quarterly results show, we maintained 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 balance sheet strength. Apart from strong earnings and improved results in every major market segment, we completed our CTP program and exceeded our $250,000,000 target.
And 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 3rd 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 3 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 3rd 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 4th 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 percent 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 4 Ocean, 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 People's Day by having one of our flagship Boeing 787 Dreamliners operate a transcontinental flight with a wholly indigenous crew.
Yet 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 7 37 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 1st 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 Finally, by the end of this year, we will take delivery of our first Airbus A220 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. And with that, we'll be pleased to take some questions.
Thank you. We'll now take questions from the telephone lines. First question is from Konark Gupta from Scotiabank. Please go ahead.
Thanks and good morning everyone. Congrats on a good quarter guys, especially considering the impact of MAX in Q2 obviously. So 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 kind of offset that capacity?
I mean, is there any more aircraft that you want to kind of extend for short term leases or you can plan you can buy those aircraft from somewhere else from other airlines or something to mitigate that? And 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 320s and 190s 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. And so we're comfortable with that situation. As you know, we also took in a number of Wow 321s earlier this year and some of those will have already come online, some of them will come online fairly shortly.
So 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 as whether this extends beyond 2020 or January 2020. And 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 more a little easier to develop in Q1 and Q2 and to some degree Q4.
Q3 is more the challenges as you've seen today as we called out today. And but certainly we believe that the planes will back flying well before Q3 of next year.
Okay. And I think, yes, and hopefully Transat deal goes through and closes by the time.
So
on sorry, I have more questions. Can I go ahead, sorry?
Yes, yes, go ahead.
Thank you, Kennen. So on free cash flow, obviously CapEx got pushed out here, which is obvious because of the MAX delays and deliveries and all that. So free cash flow is obviously looking pretty good here. How do you plan to use the incremental free cash here? I'm like, is there something you would like to keep in reserve just for contingency on MAX Or 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. But your point is well taken. The money that's the capital has 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 delivered to Air Canada.
So 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. But 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, Conor.
Thank you. And the next question is from Walter Spracklin from RBC Capital Markets. Please go ahead.
Thanks very much. Good morning, everyone.
Good morning, Walter.
So starting off on the you gave us color into the Q3 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 kind of estimate of costs in that Q3 associated with the grounding of the MAX if you have that on hand?
Walter, so what we're trying to do is not get into sort of signaling directly what we expect our compensation strategy to be with respect to the Boeing dynamic. And so the amount of incremental cost that results from the MAX grounding is it's 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. And then Walter, Walter, on adjusted CASM for Q3, we're not going to provide guidance. We've already 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. But there's no doubt adjusted CASM year over year will be most likely higher than Q2 because our capacities dropped more in Q3 versus Q2.
Okay. And turning over to the revenue side then, clearly you're getting some great yield, some good PRASM here, 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 pressure downward pressure on PRASM and yield as that capacity comes back online?
I mean a lot
of it has to do of course with the overall level of competitive capacity that's in the marketplace. And I think that this is one of those that we're very, 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.
And so 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. So we expect to continue growing. So therefore, the Q3 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.
And we would obviously expect to continue seeing good yield in RASM performance. Our expectations are for continued improvement in RASM performance over time going forward over the next number of years. But that of course will always depend on how much competitive capacity is put in by our competitors and over that we have no control.
Okay. 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, Poltor. We are in the market almost on a daily basis right now. And obviously, the MAX situation as we spoke about is uncertain. As that becomes more clear, hopefully sooner than later, we'll reevaluate the insight how aggressive we are in 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 Lucy. So on the North America network, so keeping in mind that last year there was a very special event when we had risk of WestJet strike action. So when we compare year over year, the environment certainly in the North America market is much more stable. And 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. So 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 market, 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. So the surcharges really peaked in the 3rd Q4 of 2018. And somewhat normal as we progress in the second and third quarter of this year and even into the Q4, we don't expect to see the same type of upside in terms of carrier surcharges. But 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, apply some pressure on the yield. And there's also some growth in U. S, U. S.
Carrier flying to international stations, which impacts somewhat our fixed freedom. But 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 DeDora from Bank of America. Please go ahead.
Hi, good morning everyone. Thank you for taking the questions. My first question, I think probably for Lucy. 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?
And 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?
Yes. Hi. So 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. And we did the same thing in the Q2. We were one of the first to make the decision to change our schedule as a result of the grounding.
And it was very, very helpful, which is why we proceeded the same way in the Q3 for the peak and also for the Christmas holiday. So that way we'll have the ability to best optimize. Because on the international markets, the booking window is generally somewhere between 6 months to 90 days. It's where the peak of the demand comes in.
And 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, very similar. But during the Christmas peak, obviously, there's more pressure on the Caribbean markets, on the Sun destination. But the booking window is very, very similar.
Got it. That's helpful. And then 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 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. So 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.
So first of all, we do not operate the NG, the 737 NG, unlike all of the other North American carriers who have the MAX. And so what that 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 and from a both from a training and a safety perspective, we think we're quite far ahead of the others when it comes to that. But secondly, that means that our pool of pilots have not been flying the 737NG. And therefore, any pilots that we are hiring are hired just for the MAX. So in other words, right now as a result, we have some 400 plus 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. And as Mike says, that added somewhat to our costs in the Q2 and will continue until the MAX is back flying. But that means that as we go from 24 to 36 to 50, you have to going from 400 pilots to 800 plus pilots once you get to the full 50. And hiring up that number of pilots, we want to have much, much better visibility as to when the aircraft will come in and how quickly it will come in. So once we reestablish the flying, the first 24, no problem because the pilots are there and that will be the same reentry as you're seeing with some of the other carriers in the U.
S. ASAP, 2 to 3 months. Once you get beyond those first 24, then 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. So this is based on operational exigencies, nothing to do with the capacity constraint.
That's very helpful. 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, incremental cost replacement 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. And that reflects 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, etcetera. 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?
Yes. 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 in the balance sheet, which is a nice problem to have. And so now we've determined that excess cash is defined as anything over 20% of trailing 12 month revenues. So that is about $2,500,000,000 as of June 30. And so we deduct $2,500,000,000 from equity on the ROIC calculation because we're going to deploy that cash over the next several years buying aircraft, buying paying down debt or obviously buying back shares.
So it's really just to get a better comparison to others on ROIC that we reduce that excess cash from the ROIC valuation.
Okay. And so that means going forward, you still have that $2,000,000,000 plus, at least $2,500,000,000 is what you said as far as excess cash that will eventually get back to your shareholders?
Yes. Either by way of paying down debt or NCIB, absolutely. So right now we believe an adequate level of cash is roughly 20% of our trailing 12 month revenues, which is roughly $3,500,000,000 $3,600,000,000 Anything above that is excess and as of June 30, that number was 2,500,000,000
dollars I'll leave it there. Thank you.
Okay. Yes.
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. But 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?
And it just sounds from how you ran through all the kind of regional market, Atlantic seems to be the one that has the least kind of capacity or the least amount of ability to offset the MAX issues. Is that instead of a good interpretation of what you said?
Well, there's a couple of things. So 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 1 quarter to the next. So for example, when you go into the 3rd quarter, we have a significant amount of incremental inbound sales from Europe into North America. And so 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.
So when you look at the MAX, for sure we've taken down some transatlantic flying that would have been operated by MAX. And those by the way were solid yields and also very profitable market. So 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.
So 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. So 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, you outlined that would take up to a year potentially to bring the full fleet of MAX back. I mean, 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 kind of 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? I
mean, Fady, 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. So I want to sit here and speculate as what may happen under different scenarios. As that 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? And put another way, would EBITDA potentially be more than 5% higher in Q3 if the fleet had been as you originally intended it? Yes.
So, Doug, it's Galen here. Yes, I mean 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 wouldn't it's not as good as it otherwise would have been. And 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. And so things that we were able to do in Q2 where you were able to kind of delay Wi Fi and delay paint in some cases and bring in the Wow airplanes in a more accelerated basis, Those sorts of alternatives aren't open to you in Q3. So as we look at Q3, we already were operating at using our fleet as efficiently as possible with the maximum number of hours per day. And therefore, the incremental things we can do, which we can, we still 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 the mitigation steps that we used in Q2, but because of the amount of capacity we are otherwise flying in Q3, it will be more challenging. So 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, you it hasn't gotten a lot of attention given the 737 MAX issues, but you did say that that acquisition has performed stronger than expected or the loyalty program is performing stronger than expected. And can you confirm whether that program and its impact on the financials is now stabilized as you expected it would be in Q2? Or are there incremental profitability improvements still to come as you ramp up the new program or perhaps remove duplicate spending on running 2 programs or starting another program at the same time?
Doug, good morning. It's Mike. So I can confirm like I did in my notes that the program 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 Allstate 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. And so 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. And so I guess the question I've got is 2 parts. 1,
do you know how many
of your aircraft right now are kind of in a, call it, a semi finished state with Boeing? And I guess 2 parts again. What's your confidence in actually being able to take deliveries of those aircraft? And then 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. So on the fleet plan, so we've got 24 parked on our properties right now. Boeing has 12 parked basically on their property. And so we can take delivery of those when it's ungrounded. And 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, but most of those would not be on the production line at this point in time. And but as you know, Boeing is still producing the plane, OBO at a lower rate. And our latest view is if they were underground quickly, some of those 14 could be available obviously in the first half of next year. And then on the mitigation, again, there's no doubt as we push the 320s and 190s, 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.
But certainly, the maintenance costs would tend to escalate over the next little while.
Okay. Fair enough. And is it fair to think that that will be part of your discussion with Boeing in terms of compensation?
Absolutely.
Okay.
And then just turning back to, you did mention that the 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. So first of all, just any more color you can provide us on how the testing has been going? Any issues you may be finding? And I think at the Investor Day, you talked about kind of a late November kind of kick cut over.
Any updates that you can give us on how we should be thinking about that and any impact you might have thinking your financials as you go into 2020 would be appreciated.
Well, it's Calin here, Chris. So we're still on target. Our teams have been working very, 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 etcetera, the entire booking process.
So all of that very extensive training is underway. We literally are talking about many, many thousands of employees that need to be trained on it. This is, as I said in my remarks, a big deal. But 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. And obviously, we're working with a lot of partners who've had a lot of experience with other PSS systems for other leading airlines in the world. So 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. And our people are doing tremendous amount of contingency planning to try to ready for November.
Okay, great. And any thoughts around any financial benefits you might see as it gets launched in the 2020?
We've told the market that once fully mature, we think we'll deliver an additional $100,000,000 combination of additional revenue and costs. But that's going to take some time post implementation, because the implementation will take several months, because it's a 2 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. If you guys would provide a lot of detail on the MAX, I'll probably stick stay away from that. But just on Air Transat, so I believe the expectation is to keep the brand. I'm just curious on what you think about how the value is of having 2 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, Connor. Yes. Okay, good question. So it's Calin here. So we have made the decision to keep the Transat brand and the head office of Transat.
Transat has built a very, very good brand in the leisure market, recently recognized as the leading leisure airline in the world at Skytrax. And so 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 its own brand and its own operation and it's sort of helped us segment the market between the mainline product and Rouge. And so 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 2.
As far as capital allocation, we at this stage, we're 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. Correct.
Okay. 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 a seasonality perspective?
Right. Kevin, our view is that's an excellent question. Our view is that the seasonality will improve fairly dramatically. One of the reasons that 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. And so by our operating domestic or transborder network that effectively will we expect that will significantly improve the results of that Transat operation.
Plus in some cases as a result of the combination of the 2, 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. And so 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 strength of the Air Canada network to improve that operation.
That's super helpful. And just one on your fleet, not on the MAX specifically, but when I look back over the past 5 years or so, you've kind of shifted from an maybe a more Airbus biased fleet to 1 when we look out to 2020 more Boeing biased. Like when you look at what's happened recently with the MAX and I know you don't have any refleeting requirements in the near term, but maybe when you look over the next 5, 10 years, does that change or your recent experience change how you think about that split between the 2 OEMs or maybe not?
No. Look at this stage, we've said many, many times, Kevin, we have a, I think a very, very strong relationship and have had a strong relationship with all 4 major aircraft manufacturers over the last 25 years. And when I say 4, I include not only Airbus and Boeing, but Bombardier and Embraer. And that means that we 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 look at the MAX compared to the alternatives, we like the MAX economics and the scale of what it can bring us. But we certainly have got a great relationship with Airbus. We continue to have a lot of Airbus product in our Rouge fleet. And we really like the 330s. We brought in some more 330s, Airbus 330s.
So we operate the still operate the 330 to 320 to 321 and even 319 still. So we still have a fairly substantial commitment to Airbus. And then the 220, of course, is our next exciting chapter. So 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 want to question probably for Mike here. You mentioned you covered 97% of the plan flying in Q2 related to the MAX issues. And there was an indication about I think it was about a 500 basis point impact on growth in the Q3 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 Q3?
Yes.
So 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, right.
It was supposed to be up plus 3. And Q2 is going to grow more than that. Q2 is going to grow at plus 5. It grew at plus 2. So we lost 300 basis points.
Q3, we had originally planned to grow plus or minus plus 3 and now it's going to be minus 2. So we're down 500 basis points.
Okay. Okay. Thank you. And then just thinking forward to 2020 and the impact of the MAX and under the assumption that January 8 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.
Like 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 320 to 190. So again, as I said earlier, we have fairly good flexibility that we can extend those on a short term basis. So there I don't think there'll be material headwinds on cost going in post grounding. Post
grounding. But also, Tim, another way to think of it is that once we establish what the final incremental cost that is allocated to this problem, the problem of the grounding, we will let the market know what that cost incremental cost was because obviously it should be characterized as somewhat of a onetime dynamic. Obviously, we would not be extending these leases were it not for the grounding. We would not be incurring additional maintenance were it not for the grounding. We would not be incurring additional costs on the pilots who are not productive doing productive flying right now, work not for the grounding.
So as I say, today, we don't we're not getting into all of that until we complete our discussions with Boeing. But after the fact, certainly, we'd give you visibility on what impact that had to 2019 2020, calendar.
Okay. That's helpful. That's great. Thank you. And then 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 Q4?
Yes, we talked about that internally. Consider the gift from the management team here in Canada. We'll consider Q4 as we get closer Q4. We are in unique times, Tim, and so we took the extra step to provide some more clarity for the marketplace. And we'll go through that same decision process leading up to Q4.
Okay. That's fair. That's great. Thank you very much.
Thanks, Stuart.
Thank you. And our last question is from Konark Gupta from Scotiabank. Please go ahead.
Thank you. And a quick follow-up. So on Aeroplan, you pointed out that it had a positive impact on all these segments. So 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 do we should we expect the Aeroplan contribution in Q3 to be somewhat similar to what we see in Q2?
Conor, it's Mike. So the second part of the question, for the most part, we've got in Q2 a full quarter of redemptions. And so that means unless redemptions increase, we will have a similar run rate in Q3. There was some improvement obviously from Q2 to from Q1 because we didn't get a full quarter redemptions in Q1. But I wouldn't say that was material to us basically, but there was a small improvement in the overall impact to yield.
And going forward, I think we're like I said, we're stabilized right now. So I think Q3 going forward, we're going to have we're not going to have sequentially large increases.
And is that the same thing for cost as well, Mike, from Aeroplan? Like the margin tailwind was higher than yes. Okay. Okay. And then secondly on Boeing's compensation that was disclosed by Boeing.
If that comes and when that comes, do you expect that to be like how would you treat it? Would that be a cost offset to your numbers or would that be a one time revenue?
We haven't even began to have those discussions with Boeing yet. And so 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.
But we can't speculate today as to how that may come, what form that may come in.
Perfect. Appreciate it. Thank you.
Thanks.
Thank you. So 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 Turan Khadawala, who is retiring for Scotiabank, all of us in his future endeavors. Duran, it was a pleasure working with you over the past several years. With that, 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.