Good morning, ladies and gentlemen. Welcome to Air Canada's First Quarter 2019 Conference Call. Please note that immediately following the first quarter call, Chris Isford and Kathleen Murphy will host a discussion on accounting policies related to Air Canada's acquisition of Aeroplan. If you wish to participate, please remain on the line after the Q1 call has ended. I would now like to turn the meeting over to Kathleen Murphy.
Please go ahead, Ms. Murphy.
Thank you, Valerie, and good morning, everyone, and thank you for joining us on our Q1 call. With me this morning are Caelin Robanescu, 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, Kieran will begin by highlighting our financial performance for the quarter. Lucy and Mike will then address our Q1 financial performance in more detail and turn it back to Calin before taking questions from the analyst community. Immediately following the earnings call, our Vice President and Controller, Chris Isford and I will remain on the line to hold an information session on the accounting policies related to Aeroplan.
A presentation on this topic was posted on aircanada.com earlier this morning. 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 Q1 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 am now going to turn it over to Calum Revenescu, ERCA's President and CEO.
Thank you, Kathy. Good morning, everyone, and thank you for joining us on our call today. I'm very pleased to report an excellent quarter, exceeding both last year's results and market expectations, attributable to a very strong revenue performance and better than expected Aeroplan results. We achieved these results in a quarter where we faced extremely severe weather events early in the quarter literally from coast to coast and the 1st 18 days of the Boeing 7 37 MAX grounding at the end of the quarter. To add some perspective, in the quarter we canceled 8,000 flights, over 1600 of which were on mainline, a 40% increase over mainline cancellations last Q1.
Our strong financial and operating performance is a testament to the great work of our employees in every department across the airline. We reported 1st quarter EBITDA of $583,000,000 and operating income of $127,000,000 both well above last year's Q1 results and market expectations. We generated record Q1 operating revenues of close to $4,500,000,000 Passenger revenues grew $327,000,000 or 9.4 percent on a yield improvement of 5% and traffic growth of 4.2%. Looking ahead, we're encouraged by the strong booking trends we're seeing for the Q2. On the cost side, we achieved savings in several areas of the organization, including in our regional operations as a result of our newly amended capacity purchase agreement with Jazz.
In terms of cost containment, we're pleased to report that we made significant progress in the quarter and have now realized or identified savings of $242,000,000 of our $250,000,000 CTP target by the end of 2019. We ended the quarter with record unrestricted liquidity of nearly $6,900,000,000 and lowered our leverage ratio to 1.2 ahead of our target timetable to do so. These results are further evidence that Air Canada is achieving sustainable long term profitability. Our greater financial resiliency was acknowledged during the quarter by a debt rating upgrade from Standard and Poor's, which advances us to one level below our goal of investment grade status. Fitch also recently upgraded our debt rating.
The agility of our business model, our fleet and our entire team were firmly on display in the quarter when we were forced to adjust to the grounding of our 24 Boeing 737 MAX Aircraft literally overnight. These aircraft represent about 20% of our narrow body fleet and carry about 9,000 to 12,000 passengers per day. Employees working in every part of the company rallied immediately. Our network planners and operations teams reorganized our schedule virtually overnight. Flight crews agreed to change shifts and work extra time.
Airport staff and call centers took care of impacted customers. Maintenance and other employees redoubled their efforts to keep the remaining fleet available and fleet planning secured additional aircraft. Our customer service group protected passengers on other flights, including competitors where we needed to. In the end, approximately 98% of effective flying was covered in March. It was a textbook display of the type of nimble response I have over the last decade insisted Air Canada must become capable of if it is to thrive.
More importantly, everything we did was driven by a focus on safety and providing superior customer care. Our response to this exceptional event showed very clearly there are no silos and we are winning as one team. Before turning the call to Lucie for a discussion on our revenue performance in the quarter, I'd like to thank our employees for their adaptability and commitment to taking care of our customers this past quarter, especially during the challenges created by the grounding of the MAX. They stepped up to put customers first. And I'd also, of course, like to thank our customers for their continued loyalty in choosing to fly with And with that, I'd like to turn the call over to Lucie.
Thank you, Caitlin, and good morning, everyone. I would also like to thank our employees for the passion and dedication they demonstrated in the quarter, particularly for their unwavering resolve and minimizing disruption for our customers. Teamwork and cooperation were on display across all our business units and for that we are very proud. In the quarter, passenger revenues increased 3.20 $7,000,000 or 9.4 percent on a capacity growth of 4.6%. We saw traffic increase of 4.2% and yield growth of 5%.
The impact of the 7 37 MAX grounding on our capacity for March was mitigated somewhat by our system operations control and network planning groups who developed a contingency strategy enabling us to cover approximately 98% of the plan flying in March despite removing 24 aircraft from our schedule. The yield improvement versus last year included additional revenue recorded from Aeroplan's flight redemptions, amortization revenue related to proceeds received from our credit card partners of $1,200,000,000 breakage revenues related to the Aeroplan program and ancillary fees related to Aeroplan flight redemptions. The additional Aeroplan yields favorably impacted each of our 5 key geographic markets. Given the typical estimated time lag of 3 months between redemption and air travel and given that the higher consideration from the sale of Aeroplan Miles is only applicable for Aeroplan bookings made after January 10, the yield is expected to even further improve in Q2 when we expect the recognition lag to be fully substantially eliminated. Our business class cabin performed very well in the quarter a passenger revenue increase of $90,000,000 or 12.4 percent versus last year's Q1 on traffic and yield increases of 8% and 4.1%, respectively.
This strong performance in the quarter further demonstrates the continued strength of the Air Canada brand in the premium market as well as a clear return on investment on 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. It also reaffirms why Air Canada is the preferred carrier for 92% of business travelers according to last year's Ipsosuite survey. Looking ahead to our key markets. On a slight reduction of capacity, domestic passenger revenues increased CAD 63,000,000 or 6% from the Q1 of 20 18 on yield growth of 5.3 percent and a traffic increase of 0.6%. We achieved a year over year increase in PRASM, partially attributed to the easing of market capacity growth and we were particularly pleased with the PRASM performance on our long haul TransCon and with select frequencies offering our new Air Canada signature service as of the Q2 in 2018.
In the economy cabin, yield improvements reflected the favorable impact of new fare categories and our continued effort to optimize the buy up levels between our suite of fare categories and the optimization of our ancillary offers. We achieved improvements in our domestic regional services in large part due to more favorable economics as a result of their renegotiated CPA with Chorus Aviation. As we look forward to Q2, we anticipate our year over year domestic revenue performance to be close to our original expectation. Our network planning team developed a schedule that covers a substantial amount of flying that was impacted by the grounding of the 737 MAX. Within Canada, we have consolidated several transcontinental frequencies with larger aircraft.
And beginning in May, we will be strategically leveraging Rouge on select routes and frequencies. We were pleased with our U. S. Transborder performance in the quarter with revenues up $100,000,000 or 11.7 percent on capacity growth of 8%. Traffic increased 6.4% on continued strong passenger demand between Canada and the U.
S. As well as growth in connecting Q1. The U. S. Leisure markets performed very well, while the Eastern seaboard U.
S. Business markets continue to experience competitive pressures. The launch of our new fare categories, specifically our comfort fare, contributed to the positive yield performance as did the favorable foreign exchange impact of our U. S. Dollar sales.
Our transborder results also reflect continued strong traffic and revenue performance related to customers transiting our hubs to and from the United States, which can be attributed to the success of our international transit strategy and the investments we have made to improve the connection process in all three of our hubs. In addition to our performance into U. S. Leisure markets, we were particularly pleased with the performance of our services between Eastern Canada and California as well as into Texas, and these markets have been key drivers of our success in the United States. Looking ahead to the 2nd quarter, we are expecting positive year over year revenue and traffic results.
Capacity on Eastern Seaboard U. S. Business services will be impacted by the MAX grounding. Our services between Vancouver and Honolulu and Vancouver and Maui, which had been operated by the 7 37 MAX, will be operated by larger aircraft with reduced frequencies in April May. In June July, these routes will flown through a wet lease operation with Omni Air International.
Recovering our Hawaii operation is another example of our commercial steam's ability and our sleep flexibility in mitigating the impact to our schedule during the 7/37 MAX grounding. On capacity growth of 7.4%, revenues on the Atlantic increased $81,000,000 or 11.8 percent versus last year's Q1 on traffic growth of 8.1 percent and a yield improvement of 3.5%. Traffic and yield increases were recorded on all major Atlantic services, and we were particularly pleased with our performance to the U. K, which saw strong gains in the business class cabin. Our strong performance in the very tangible results of our long term strategy to expand our international network, leveraging both mainline and Rouge with a focus on hub to hub flying.
Looking ahead, our 2nd quarter outlook is showing year over year revenue growth in line with expectations prior to the 7 37 grounding, again demonstrating the resilience of our fleet and diverse network despite exceptional circumstance. Due to the grounding of the MAX aircraft, we have made several necessary adjustments to our schedule, including temporarily suspending service from the Maritimes to the UK through July, delaying the start date of our new service from Montreal to Bordeaux and reducing frequencies on several Continental European Seasonal services starting in June. We will also be operating our Montreal to Barcelona service and one of our Montreal to Paris frequencies through wet lease from mid June to mid August. Additionally, due to the closure of Pakistan Airspace following regional conflicts, we had to make adjustments to our Toronto, Delhi schedule and from mid June to the end of July, we will be suspending the service, given the uncertainty around when the airspace will be reopened. We will then have the flexibility to reallocate the aircraft elsewhere in our network.
Our transit mining strategy built on hub to hub flying with a focus on premium traffic and the optimal mix of mainline and Rouge is proving to be resilient and sustainable, supporting our expectation of a continued strong performance. In line with this strategy, last week we initiated our new year round service between Vienna and Toronto with cooperation from our joint venture partner Austrian Airlines and we expect this route to perform very well for us. Turning to the Pacific, on a capacity reduction of 1.5%, revenues increased $24,000,000 or 4.7 percent on strong yield growth of 6.7%. All major Pacific services recorded yield increases with the exception of services to Australia. The yield growth reflected increases in base fares and carrier surcharges as well as a general improvement in the overall fare mix.
We were particularly pleased with the strong performance of Japan, which continues to benefit from our strategy in Tokyo, where we consolidated our service from Montreal. Previously, we had operated into both Haneda and Narita from Toronto. The geopolitical situation between Canada and China negatively impacted travel demand between Canada and China and Canada and Hong Kong in the Q1 of 2019. However, reallocating capacity from China to other markets has helped mitigate the impact and further illustrates our ability to adapt quickly to market changes. Services to Australia continued to be under a slight pressure from a PRASM and yield perspective due to increased industry capacity from North America.
Australia remains an important part of our strategy and efforts to reduce seasonality throughout our network. Looking forward to the Q2, our booking posture is in line with our expectations. Travel demand between Canada and China and Hong Kong continues to be impacted by their geopolitical situation. However, the impact will continue to be somewhat mitigated by strategically down gauging and reallocating capacity to the transatlantic In our effort to counter seasonality, we recently announced our nonstop seasonal service between Vancouver and Auckland, which will be launched in December of this year. To fully optimize the service, we have also signed an MoU with our stock partner 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, more frequencies, comprehensive benefits and an expanded transpacific network.
Revenues from our other services increased $59,000,000 or 14.8 percent on traffic growth of 9.4% and a yield improvement of 5%. All major services reported yield growth apart from South America, which saw a significant increase in stage length. Services to the Caribbean and Mexico tag between Santiago and Buenos Aires and began serving both markets on a nonstop basis. In early April, we reverted back to one stop service to Buenos Aires with a connection in Santiago, and we expect to realize yield and RASM benefits from this transition throughout the year. On stage length adjusted basis, overall yields for the other markets increased 7.3% from the Q1 of 2018.
For the Q2, in addition to the yield and PRASM benefits, we will realize from reverting Buenos Aires back to 1 stop. We expect strong revenue and traffic results in line with our expectations prior to the 7/37 grounding. On our last call, we mentioned that we were exploring seasonal growth opportunities in South America, and we recently announced our seasonal non stop Air Canada Rouge service between Toronto Quito and our seasonal nonstop Air Canada mainline service from Montreal to Sao Paulo, both beginning this December. Moving on to cargo. Cargo revenue increased $9,000,000 or 5%, reflecting traffic and yield growth of 3.4% and 2.1% respectively.
Cargo revenues were impacted by route adjustments and flight cancellations that were necessary due to the closure of Pakistan Airspace as well as the 7 37 MAX grounding. In the second quarter, our cargo revenues will continue to be impacted by the Toronto to Delhi schedule adjustments, including the route suspension in June. The impact of the 7 37 MAX groundings will be largely mitigated by fleet adjustments throughout the network in April June. In May, Lufthansa, our joint venture partner, has assumed our service between Montreal and Frankfurt, which has the benefit of protecting our customers and provides us with additional fleet flexibility. However, it does have a negative impact on our cargo revenues.
Finally, we saw a significant increase in our other revenues in the quarter, which were up $46,000,000 or 11% when compared to the same quarter in 2018. This increase was mainly due to the net margin recorded on the redemption and delivery I will now turn the I will now turn the call over to Mike for a discussion on our cost performance and balance sheet metrics.
Thank you, Lucy, and good morning to everyone. I'd like to add my thanks to all of our employees for an excellent Q1 and for their continued focus on taking care of our customers. Despite some unplanned events from a financial perspective, we had a very solid start to the year, including a strong financial performance from Aeroplan. We continue to effectively manage our costs and now have substantially achieved our CTP target. As Calum mentioned earlier, by the end of March, we had realized or identified $242,000,000 of our $250,000,000 target and we look forward to successfully attaining the rest before year end.
We are intensely focused on cost reduction and containment and this will continue into the future. Adjusted CASM, which excludes fuel expense, ground package costs at Air Canada Vacations and the operating expenses of Aeroplan increased 3.2% versus the same quarter in 2018, with flight cancellations and a lower capacity from the MAX grounding impacting us by approximately 0.5 percentage point. The impact on our unit cost is expected to increase the longer the grounding persists, particularly heading towards the busy summer season. These impacts on unit costs include the continued accounting of depreciation of our fleet of Boeing 737 MAX Aircraft, the impact of lower ASM capacity and the relatively higher unit costs of the replacement capacity. This includes wet lease costs and the lower efficiency of the aircraft leases being extended through the summer such as the Airbus.
Aeroplan's operating expenses amounted to $45,000,000 in the quarter, consisting primarily of wages, salary and benefit expense, depreciation and amortization expense and IT related costs. These costs are consolidated within Air Canada's financial statements as of January 10. Turning to wages, salary and benefits. We saw an increase of $99,000,000 or 14% in these costs in the quarter, mainly driven by growth in full time equivalent employees of 11% and to a lesser degree an increase in stock based compensation given the significant increase in our share price during Q1. The increase in employees was due to the capacity growth and the inclusion of Aeroplan.
Moving on to fuel. Fuel expense increased $58,000,000 or 6% in the quarter with an unfavorable currency impact accounting for 41,000,000 dollars and a higher volume of liters consumed adding another $28,000,000 Lower jet fuel prices, which accounted for a decrease of $10,000,000 was an offsetting factor. The average price of fuel was CAD 0.755 per liter in the quarter, up 3% versus the same quarter 2018. We have not entered into any fuel hedging contracts to date for 2019. Looking ahead, our assumption is the fuel price of jet fuel will average CAD0.85 per liter in the Q2 of 2019 and CAD0.84 per liter for the full year of 2019 and that the Canadian dollar will trade on average at CAD1.34 per U.
S. Dollar in the Q2 and for the full year 2019. Air Canada's financial guidance for 2019 was suspended given the grounding of the Boeing 737 MAX Aircraft and Boeing's decision to suspend MAX deliveries to airline customers. We will reinstate guidance for 2019 once we have greater clarity on the situation. The financial guidance provided for the years 2020 2021 for annual EBITDA margin and annual ROIC and the cumulative free cash flow over the 2019 to 2021 period remains in place.
Now turning to our balance sheet and liquidity. Unrestricted liquidity amounted to a record $6,900,000,000 at the end of the quarter. The net cash impact of the Aeroplan acquisition and related agreements amounted to the increase in cash of $1,115,000,000 representing the commercial agreement consideration of $1,212,000,000 and the 400,000,000 dollars prepayment of Aeroplan Miles, less the purchase price of $497,000,000 which remains subject to certain adjustments. Excluding the one time proceeds related to the acquisition of Aeroplan, free cash flow amounted to $579,000,000 in the quarter, $261,000,000 above last year's Q1. The increase in free cash flow was due to higher cash from operating activities and to a lesser extent a lower level of capital expenditures year over year.
Air Canada acquired 1 Boeing 787 and 6 Boeing 737 MAX Aircraft in the quarter using cash. We had expected to take delivery of an additional 3 Boeing 737 MAX Aircraft in the quarter, which did not occur. So the level of free cash flow was higher than it otherwise would have been. The capital commitments table in the Q1 MD and A assumes no changes to the Boeing 737 aircraft delivery schedule for 2019 and beyond. However, Boeing's decision to suspend deliveries may change the timing of these commitments.
Net debt of $3,800,000,000 decreased $1,400,000,000 from December 31, 2018, reflecting an increase in cash and short term investment balances of almost $1,200,000,000 and to a lesser extent, a decrease in long term debt and lease liabilities. Our leverage ratio was 1.2 at the end of March. The steady improvement in our financial results, our lower risk profile and our future outlook was acknowledged during the quarter by a debt rating upgrade from Standard and Poor's, which advances us to one level below our goal of investment grade status. Fitch also upgraded our debt rating in Q1. At quarter end, our return on invested capital was 14.5%, while our weighted average cost of capital was 7.5%.
With respect to our normal course issuer bid, Air Canada repurchased for cancellation approximately 1,500,000 shares in the quarter at an aggregate cost of $51,000,000 We will continue to utilize our normal course issuer bid to buy back shares when opportunities present themselves, although these opportunities will be assessed in light of the MAX grounding and return to service. Additional information can be found in our financial statements and MD and A which was posted on our website and filed on SEDAR this morning. With that, I'll turn it back to Calin.
Thanks Mike. The Q1 is always the most demanding for Canadian Airlines. This year was no exception and it was made more so with the unexpected grounding of the 7 37 MAX. By delivering a solidly profitable quarter above last year and as I said earlier above consensus estimates, despite the MAX grounding and the challenges of extreme weather this winter, our team demonstrated the strength of our business model and the extent of our transformation. 7 37 MAX Black Swan event has stress tested us and we passed.
But more importantly for the long term, during the quarter we also maintained our focus to make significant progress on the four priorities that drove our transformation, notably revenue generation and cost control. We completed 2 highly strategic initiatives that are already contributing positively to our results: the acquisition of Aeroplan and conclusion of an improved CPA for Jazz flying. As we've said previously, we believe that having control of our own loyalty program and a more competitive cost of regional lift should narrow our valuation discount as compared to major U. S. Carriers and we are already seeing their contribution to our earnings.
As we have expressed during our successful Investor Day in February, we're confident enough in the future that we've raised the targets for our key metrics of EBITDA margin and ROIC for 2020 2021 and cumulative free cash flow over the 2019 to 2021 period. And although our 2019 guidance has been put in abeyance for the immediate term pending resolution of the MAX issue, be assured that our commitment to continue to achieve sustainable profitability remains firm. And our Q1 results and the 7 37 MAX mitigations are a great proxy for that commitment. Respecting our second priority of international expansion, while we have as we've said, the pace of growth will now temper with the maturing of our wide body fleet plans. Nonetheless, this past week, we launched yet another promising new international route between Vienna and Toronto.
During the quarter, we also announced new services next winter from Vancouver to Auckland, Toronto to Quito and Montreal to Sao Paulo. We'll continue to look for ways to optimize our network through increased connectivity. Moreover, as mentioned, the outlook for the summer travel period with its heavy international component remains very robust. During the quarter, we were also recognized as one of Montreal's top employers for the 6th consecutive year and one of Canada's best diversity employers for the 4th year. This speaks to our 3rd priority of culture change.
And culture change was most evident in the quarter with our nimble yet prudent response to the 7 37 MAX grounding. Ahead of most carriers, we announced a revised schedule and quickly found additional aircraft and other replacement flying for our customers rather than simply canceling bookings. Our response was driven by the twin concerns of safety and customer service. It also underscored how we have made teamwork a core value at Air Canada with every employee group pitching in to find solutions for our customers. Boeing has historically manufactured very capable aircraft and we're confident that working together with the independent expert review board and other regulators, they will collectively find the right solution to get the MAX flying safely again.
Our final decision on returning the MAX to service will be based on our own safety assessment following the lifting of government safety notices and approval of the software modification and training protocol by the FAA Transport Canada and other relevant regulatory authorities. Our focus on customer engagement, our 4th priority, has been broadly recognized since the start of the year. We've received accolades and awards for our services and products including prizes for our loyalty program, IFE, food service and amenity kits. There was also an award from the influential travel site TripAdvisor where we were named Best North American Business Class in its Annual Travelers Choice Awards. The excellence of our results in the Q1, including record operating revenue, a leverage ratio which we believe is at an investment grade level and record levels of liquidity position us well for the remainder of the year and beyond.
In conclusion, I'd like to again thank our more than 33,000 employees for their hard work and dedication to our customers. I'm very proud of the results in this Q1. Additionally, I also thank our customers for their continued loyalty and for choosing to fly with Air Canada. And with that, we're pleased to take your questions.
Thank you. We will now take questions from telephone Our first question is from Rajeev Lalwani with Morgan Stanley. Please go ahead.
Hi, good morning. Thanks for the time.
Good morning.
First, a question on the RASM environment. Can you provide a little bit of color as far as what 1Q look like once you back out some of the Aeroplan benefits? And then as you look forward, given the grounding on the MAX side and the reduction in capacity that we're seeing in the market broadly, are you seeing an offset on the yield side? It seems like that's the case given the comment about hitting your revenue targets prior to the events?
Right. So it's Calin here Rajeev. I'll start and I'll turn it over to Lucy. So what we were seeing in the yield environment is an excellent demand environment in the Q1. And while Aeroplan the Aeroplan results contributed to it, it certainly was not representative of the lion's share of that.
And so I think that is sort of augur as well. I mean, before you get into the MAX analysis, but I'll just ask Lucie to give a little bit better visibility on the composition of the RASM.
Yes. Hi, it's Lucie. For sure, we did see very good performance in our premium cabins, which was very, very helpful in terms of our RASM results. And we also saw very good performance in our premium economy products on the transatlantic network. In addition to that, we were also able to grow our point of sale U.
S. Performance, which of course given the currency also provides a nice upside on the yield front. And I would say to you one other initiative that we've been focused on for quite some time and we spend a lot of effort on that is optimizing our branded fares, our branded fare products as well as our ancillary revenue. So all those items, all contributed to the yield performance in the Q1.
And on your question around the MAX, just to sort of give you a way to think of it is that so we overnight we removed these aircraft from the fleet. So we had 18 days where we were scrambling to actually take care of our customers and therefore in some cases filling seats that we otherwise would have sold continued to sell close in. So you actually in those last 18 days, you actually did lose some incremental upside, if you like, from the close end bookings that we didn't get a chance to benefit from given that we were using the available seats to take care of the passengers who were displaced by the grounding.
And how is that looking into 2Q? I'd imagine you don't see those headwinds and then maybe there may be a tailwind as simply capacity is coming in a bunch for the market?
There's no question there's an aspect of that that's accurate. And also now that Q2 we had the ability to plan a bit better as to how we were handling that. Of course, there were many bookings that were in Q2 that had been made well before Q2 that also have to be accommodated and that's why you're seeing some of the mitigation steps that we've put in place. But you're right, by definition, taking out some capacity will have a positive impact on yield.
Thank you. I'll leave it there.
Thanks very much, Rajeev.
Thank you. Our next question is from Walter Spracklin with RBC Capital Markets. Please go ahead.
Yes. Thanks very much. Good morning, everyone.
Good morning.
So I'd like to you called out 50 basis points in costs associated with MAX, but you indicated that that's going to ramp, Mike, as you go into the busier season. Can you give us a sense of what the magnitude of that ramp is and maybe an annualized number when you think the quarters where it's not as impacted like this quarter, including the quarters where it is, what an annualized number just to give us a broader context of how much of this MAX is affecting your full year cost guidance you had provided for a full year basis before?
Right, which we suspended. But on the cost side, there's no doubt just the CASM is going to be influenced primarily by the reduction in ASMs in seat miles. It was very little in Q1 honestly, and that's why it only affected us by 0.5. From our press releases, we've said that for the most part we're covering we won't be covering 3% to 4% of the capacity that we otherwise would have. And so that will obviously negatively influence the adjusted CASM results.
So that is the principal reason for the increase in adjusted CASM as we go forward. Once we get that capacity back, we'll obviously be back to where we otherwise would have been. A secondary reason, but much smaller is the incremental cost associated with wet leases and extensions of planes that are otherwise not as efficient as 737s. But I would say that's a distant second from the ASM impact.
Okay, got it. And on that ASM impact, kind of we had ballparked higher than the 3% last year, but I think below the 7%, which was indicated. But is there a broad range? Are we now back more toward flat or flat to 3 rather than 3 to 7? Is there any kind of just goalpost we can wrap around the capacity for this year, assuming that the MAX stays out for the better part of
the year?
On the capacity. Yes. Well, again, it depends on your assumption of when the MAX comes back in and what is our ability to bring them back in quickly.
Yes. I kind of prefaced it by saying it doesn't come in at all for this year,
does it? Yes. For Q2, we're I think our press releases so far have indicated capacity around 96%, 97%. So we're losing 3% to 4% of what we otherwise would have had in Q2. And for the year, our capacity growth was pretty well spread equally among all the 4 quarters.
Right. Okay. That's helpful. From a I was looking at your business cabin as a good read into the economy and saw that I think wrote down a 4.1% sorry, up 8% on yield of 4.1%. Lucie, is that a are you seeing you mentioned that the booking curve is looking in line with expectations, but were you forecasting any weakness here?
Or is the strength in the business cabin expected to continue based on the booking or the forward booking curve that you're looking at right now?
Based on what we're seeing for the premium cabins, we don't expect any major changes as we move forward. Things are looking pretty solid in the premium for us.
Okay. And just last question, I don't know if Mike you have this, you backed out Aeroplan from your CASM to give us kind of an apples to apples, but you left it in your yield if you were to kind of back out Aeroplan out of yield. Is there a good sense of what the apples to apples would have been on yield? Do you have that?
We have that. We just can't share that at this point in time because I'd be segmenting the profitability for the market.
Got it. Yes, I understand.
Okay,
thank you. That's all
my questions.
Thanks, Walter. Thank you. Our next question is from Andrew Didora with Bank of America. Please go ahead.
Hi, good morning, everyone. Walter, just asked one of my questions on the yield impact of Aeroplan. But Lucy, I wanted to clarify something in your prepared remarks. You had mentioned, I think, expect yields to further improve in 2Q. Does that mean that 2Q you just expect yields to be positive in 2Q?
Or should they be north of the 5% growth that you came in at in 1Q?
I think the comment that I was referring to was with respect to the Aeroplan adjustment. So we're expecting that it will be further improvements in the second quarter.
Further improvement just from the Aeroplan contribution?
Exactly.
Exactly. Okay,
great. And then Andrew, sorry,
it's Mike. This is more color. Again, we've talked about this and Chris will talk more about it following this, but revenue recognition is that we'll probably get them the run rate of Aeroplan will be probably fully in place in Q2. It was not in Q1 because customers that redeemed post Jan 10 somewhat didn't fly before March 31. And in Q2 that will get a full impact for the quarter.
And so we'll be at a full run rate from an Aeroplan's perspective in Q2.
Got it. Okay. That makes sense. And then, Mike, sorry if I missed this in your prepared remarks, but obviously you guys have kind of hit your leverage goal here. Did the MAX grounding change the way you're thinking about the buyback at all?
And can you maybe just remind us when you can be back in the market buying stock? Because I know you were restricted from buying there for a little bit. Thanks.
Andrew, it's Mike. So we can start buying back stock 2 days after the release of these results. So Wednesday morning, we'll be able to we'll be able to blackout period. And does the MAX grounding affect our decision process? Slightly, it's a filter that we need to walk through.
But again, our leverage ratio is where we had always talked about it getting to. And so we're going to be comfortable going back into the market. But certainly, the MAX grounding is another decision point for us to consider as we continue the NCIB.
Okay. Thank you.
Thank you. Our next question is from Fadi Chamoun with BMO. Please go ahead.
Good morning. Just one clarification. First, Lucie, I think in the prepared remarks, you talked about meeting original expectations. Is that a comment referring to RASM or meeting original expectations in terms of revenues?
Actually, I was referring to revenues.
Okay, great. Thanks. The second question quickly, maybe on the M and A side, I mean, if Canada has been associated in the media with a number of kind of M and A activity, I was wondering, Calin, if you can kind of comment on those and maybe directly or from a higher level, how should we think about kind of M and A in your capital allocation priorities?
Right. So Fadi, you'll appreciate we don't comment on any of the speculation that's in the media. We've seen speculation both in terms of domestic situations, international situations. So we're not commenting on any of the media speculation around M and A. Suffice it to say that we're going to continue down the exploitation of our business plan that has brought us this far.
And we're not making a further comment on anything that appeared in the media.
Okay. Thanks.
Thanks, Patty.
Thank you. Our next question is from Cameron Doerksen with National Bank Financial. Please go ahead.
Yes, thanks. Good morning. Just a couple of 737 MAX questions. Obviously, we don't know when the planes can be back in service here. But even if the grounding was lifted tomorrow, I mean, how long do you think it would take for Air Canada to get those aircraft operational once you've assessed that you're comfortable with the safety?
I mean presumably it will take several weeks at least before you could actually get the aircraft back in service even if the grounding was lifted right away?
Right. That's correct, Cameron. And this is operationally complicated both in terms of mitigating the consequence of the grounding as we've done over the last couple of months and complicated to put them back in service when the time comes. So we have we started to work on various plans. And indeed one of the things that we've done is put all of our MAX pilots who today are not able to fly because of the grounding and are not flying other equipment.
All those pilots are actually doing their time in the simulator to be as prepared as they can be, including having modeled some of the scenarios that occurred in the two accidents. So that has given us a leg up in terms of the readiness for the pilot group to go back into flying these aircraft. But there are of course maintenance readiness steps that need to be taken. And again those we're able some of those we're able to do in preparation for it. And then there'll be the basic rollout, but that will take several weeks.
And that's why I think as Mike has said, while we're not changing any of our expectations for the time being as to the total number of MAX that will be in the fleet by the end of the year. They certainly will not be as fully operational as they would have been had that grounding not occurred. And so all the mitigation steps that we've taken, we've taken that into account and the extension of leases and some of these wet leases have gone beyond the sort of the most optimistic view of when the MAX would be back flying. So putting them back in will take several weeks, although they will come in gradually. So you'd see if the lifting if the grounding was lifted tomorrow, you might see a couple come in at the beginning and then over the next 2 weeks a few more and then a few more and then a few more until the fleet is fully functioned.
Okay. No, that's great. And just secondly, sort of related I'm just wondering if you can talk about lessons learned from this. I mean, obviously, you've done a very good job of managing through this issue. But I wonder if there's any sort of lessons as far as the ability for Air Canada to fly a tighter schedule or perhaps operate with fewer spare aircraft?
And just anything that you've learned from this whole process that could benefit the business on a long term basis?
Well, some of the answer is, of course, any of these difficult events, especially as we call them Black Swan events, you're always going to learn something from them. We've certainly learned a great deal from this. In terms of operating a tighter schedule, Air Canada flies its airplanes as hard as any carrier certainly in North America does. And that's the wide body and the narrow body. And so in terms of flying a tighter schedule something like that, I mean there was there's nothing per se in there.
In terms of consolidation of flight, there's always a balance between consolidating several flights into larger gauge aircraft. And then of course, but you do give up frequency, you give up connections. Over the last number of years, we've been building up our strategy around the connecting traffic in our hubs and that means having more frequencies that can bring in people to connect. So I think that as we've looked at this, it has sort of sharpened the assessment of which markets are the ones that drive the most profitability, which markets are the ones that we are looking to protect, how do we look at the transcontinental markets. So all of these drivers have given us a sharper focus, but not frankly, not from the perspective of sweating the assets any harder than we already were, because that was already the case.
So I'd say that that in terms of how the company has responded as I said in my remarks, I've been very, very proud of how the company has responded in literally every nook and cranny of the organization. And that will augur well in terms of as we introduce other new equipment in. And also the respect that Air Canada has internationally with respect to the partners that have wanted to work with us. We've had access to some excellent carriers who while their competitors in many respects stepped up when we needed them.
Great. Thanks very much.
Thank you. Our next question is from Chris Murray with AltaCorp Capital. Please go ahead.
Thanks folks. Just thinking about your narrow body fleet strategy, just I think it looks like you've added some additional 321s in to the fleet and they're all going into Rouge. And just wondering a couple of things, especially with the 737 MAX still grounded. Any thoughts around other options if you did need additional lift to bring back that 3% to 4%? I'm thinking about availability of aircraft for you.
And as well, is there any chance that you could accelerate the A220 intake, just to try to take some of the pressure off your schedule?
So the we like the 321 a lot for sure. And we pilot training requirements, being able to have the pilot training requirements, being able to have the maintenance regime in place, certification and paperwork to bring aircraft in. So I think that when you look at anything in terms of we're talking about a couple of months, there's nothing more that would be done in terms of bringing incremental aircraft into the fleet like on a more permanent basis. The acceleration of the Wow airplanes, because these were the these discussions with Wow not with Wow, but with the lessors of Wow were in place well before the MAX grounding. And so all we did is we accelerated the capability to bring them into the fleet and in some cases with compromises on the onboard product until we're able to reconfigure it to be able to accommodate our passengers.
But it's not something that we can bring in overnight at this stage. So that's why we're using wet leases to buffer and to fill in the remaining gaps.
Okay, fair enough. And then Mike, if you can, there's kind of a one time tax expense recovery. Just kind of curious about just tax and NOLs with the Aeroplan transaction. Does this change your thoughts around the timing of payment of cash taxes or anything like that? Just if you can give us some color on what that actual item was and any thoughts around cash taxes?
Sure. The recovery in the quarter was a result of some tax planning on the Aeroplan transaction where normally we would have had to pay tax on the entire amount of proceeds from the banks. And we were able to structure a transaction that we did not have to pay all of that. And so that recovery represents the savings from what we otherwise would have paid in taxes. And that's a one time as you said, a one time issue.
2nd part of your question, certainly the inclusion of Aeroplan and with the higher financial results will accelerate the cash taxes that we otherwise would have paid on the timetable we would have paid them. But so it's probably going to we'll start getting some cash taxes later this year or early next year, but it will not be a full amount depending on how much money we make of course. But certainly it probably moved up the timetable by a year.
Okay. And should we think of an effective tax rate kind of in the 25%, 26% range? Yes.
I think 27% is the effective rate.
Okay. Sounds good. And then if I can, just one more. Just can we get any update, we haven't really talked about it on how the planning for the cutover for the PSS system is going and how we should expect that at the
back end of the year?
Hi, it's Lucy. Well, in fact, I would say to you that the planning of the project is going quite well and we are still on track in terms of our implementation. And we are working on the project sort of three angles. We have the new reservation system. We also have the departure control system that we're working on and also the availability side.
So we're very confident that we're going to be able to meet that or very close to that target date. And I think earlier someone asked the
question of Calin regarding lessons learned.
I'll tell you, we were extremely driven during this 7/37 MAX event to do right by our customers to reaccommodate. But and I can tell you when we do have the Amadeus product in place, it will make these types of events a lot easier for us to be able to manage. So we're excited about the new system coming online.
Okay. Thank you.
Thank you. Our next question is from Kevin Chiang with CIBC. Please go
ahead. Hi, thanks for taking my question here. Maybe just following on Cam's question around some of the logistics of when the MAX get back up in the air. Would you plan to would you put them back into the fleet once Transport Canada signs off or would you prefer for other larger jurisdictions to sign off like Europe before you put this plane up in the air? Just trying to get a sense of some of the goalposts to think about as we get through the next year.
No. Look, it's an excellent question and it's one that we're spending a lot of time discussing internally. So first of all, we're working very closely with Transport Canada. So Transport Canada knows our thinking. And as I said in our remarks, we will make our own assessment once we see what the other regulators have said.
I think that the objective here as I think this has been largely in the public domain, the objective on the Boeing side is to work with as many regulators as possible. The FAA's objective is to include this expert board or panel that will advise on both the fix and the training required for the fix. We may have training requirements that exceed what it is that Boeing and the FAA have instituted as requirements. So we may end up exceeding that, but certainly, obviously, that is the minimum entry point. And we will assess once we see the review board recommendations, the Boeing and the FAA recommendations and the Transport Canada recommendations.
So we do have the capability of doing more than what they what anybody recommends out there because of the fact that we have the simulator. We have we're the only ones in United States and Canada to have the MAX simulator. And so that gives us additional flexibility in terms of what training protocols we want to put in. And so we'll assess assess that in the fullness of time. And it may be that when it's lifted, Transport Canada certainly will be one of the main drivers of our assessment.
That's super helpful. And just maybe secondly for me, when you look at the first quarter here, despite all these challenges you had noted, you put up a positive EPS. When we think of the Q1 now, is this now a structurally positive earnings quarter for you? Is it safe to assume that now? Or is it something that we can maybe think about over time?
But when I think of the headwinds you faced to put up the numbers you put up seem pretty impressive?
Right. Well, thank you very much, Kevin. Now look, I think that that certainly is our view that we've worked hard to try to make this business less seasonal and less dependent only on Q3. And so this has been even before the MAX grounding, and as you have MAX grounding, it was 18 days at the end of the quarter. But even before the MAX grounding, we had very, very severe weather events.
That's why I called out the flexibility of the fleet, the fact that we've got all of these different aircraft that we can substitute, can make money in different markets at different times. Our attempts at this counter seasonality by operating to Australia and eventually to New Zealand in the winter months, all of these things are drivers of stability of it. And so from our perspective, it does augur quite well in terms of having a Q1 that can be profitable. Right. And then just to add to that, obviously the inclusion of Aeroplan, some portion of Aeroplan and the Jazz renegotiation obviously helped our results as well.
And those are permanent changes to our business model as we go forward. And so I agree with Calin
that Q1 is in the future will be a will continue to be a stronger quarter than it was historically.
Thank you for the color.
Thanks, Kevin.
Thank you. Our next question is from Jamie Baker with JPMorgan.
Most of my questions have been answered, but I also have a MAX related one. Given the absence of non MAX 73s in the fleet, can you quantify what the cost drag is associated with grounded pilots? And at what stage, if any, would it make sense to start retraining a portion of them on other types? And what sort of what level of expense and time might be involved with that exercise?
Right. Yes. So Jamie, we're going through that right now. We've made a decision to look at a subset of the total 400 ish, 4.20 5 I think or so MAX pilots that we have. And as I said earlier, these pilots are not just sitting around sort of doing nothing.
We're actually able to have some simulator training for them as this is going on. But we have made the decision given the ramp up back up to the earlier question that was asked that it's not going to be ramping up overnight. We have made the decision to take a subset of those pilots. And if they have operated equipment within the last year, other equipment within the last year, they it makes sense. If they haven't operated other equipment within the last year, it doesn't make sense to have them retrained on other equipment from a timing perspective.
So that is a that's kind of directionally where we're heading. That means that they could be operating the Airbus narrow body. Typically, it would be either the Airbus narrow body or the Embraer 190 which is still in the fleet. And that's kind of if they operated that equipment within the last year they can return to it. So it's a number.
We haven't publicly announced what that number of pilots is at this stage, but it's a subset of the 450, smallish subset of the 450,000,000 I would say. And in terms of the amount, Jamie what we're doing is we're categorizing and keeping all of the costs that relate to the grounding. And obviously, our discussions with Boeing will be confidential. So we're not putting out any numbers in terms of any cost mitigations at this stage.
Okay. That's still helpful color. Thank you. That will do it, Sam.
Thanks, Sam.
You bet.
Thank you. Our next question is from Tarun Krapiwala with Scotiabank. Please go ahead.
Yes, hi, good morning and thank
you for taking my questions. I guess firstly, Mike, I was wondering if you can talk a little bit about how quickly you would get delivery of the MAX aircraft that are sitting with Boeing right now, if the grounding was to get obviously removed?
Okay. Good question, Tran. Good morning. So we have 12 planes to come in. We had 24 in our fleet when it was grounded.
We were supposed to take another 12 deliveries last part of March to the last part of June. We understand roughly half of those, 6 of those are completed and parked at this point in time. The other 6 are on the production line, some level of the production line. So certainly, 6 of them could come in fairly quickly, once we did our inspections and our but the other 6 would take a little bit longer, obviously, as dependent upon where they are in the production line.
Perfect. Thank you very much. That's helpful. And I guess Boeing is not really changing the order of deliveries, right, to different airlines
presumably? We don't know what their plans are. We're really obviously focused on our plans. What they have done is as you probably know they've reduced their production rate by 15%, 20%. Yes, down to 42%.
Down to 42%. So that may influence the timing of our the 6 that are currently on the production
line. Perfect. Thank you. And then I guess the other one I was wondering was again sort of related to the MAX, but presumably a lot of the effect on capacity would be domestic and transborder, right? Does that have a follow through impact with regard to freedom traffic?
Or is that just too small and you've been able to protect most of it?
Hi, it's Lucy. So there's a couple of things there. You're correct that the transcontinental routes domestic and also some of the long haul U. S. Routes were heavily operated by the MAX.
And of course, those are key routes, not only just for 6 Freedom traffic, but also for local demand. So we were able to protect most of those either through up gauge or using strategically Rouge, for example, in July and some of the trans to protect to protect as best as we could. There is a little bit of reflow, so changes in terms of some of the connecting project as we redesign the schedule. Perfect. Thank you.
Project as we redesign the schedule.
Perfect. Thank you very much. That's all of my questions.
Thanks, Trent.
Thank you. There are no further questions registered at this time. This ends the first quarter call. For those who wish to join the
Valerie?
Yes.
You can go ahead.
Please proceed with your presentation, Ms. Murphy.
Good morning, and thank you for joining us on this call to further explain the accounting policies related to Air Canada's consolidation with Aeroplan and some of the acquisition related accounting items. What I will go through on this call is based on what we've provided in the notes to our Q1 financial statements and in our MD and A. I will add some context and further explanation to those disclosures. We will have a question and answer period at the end of the presentation. However, as we just talked about on the Q1 call, I will not be able to provide any specific disclosures on the actual dollar value impacts of Aeroplan in the period or going forward as Aeroplan is not a separate segment of Air Canada.
So starting on Slide 5, this slide explains the accounting policy for issuing miles associated with air travel on Air Canada. Passenger ticket sales earning Aeroplan Miles provide members with both air travel and Aeroplan Miles. For accounting under revenue standard IFRS 15, this is termed as a revenue arrangement with multiple performance obligations being the flight coupon and the aeroplan miles. As such, each performance obligation is valued and recorded on a relative standalone fair value basis. The value of the Aeroplan mile issued is determined based on the value a passenger sees by redeeming miles rather than paying cash for an Air Canada ticket.
This is referred to as equivalent ticket value or ETV. I will walk through a simple example of how ETV is calculated on the next slide. The ETV is then further adjusted for miles that are not expected to be redeemed or what is called breakage. I will further walk through an additional concepts on breakage later in the presentation. However, as it relates to miles earned with travel, the point here is that the equivalent ticket value for a mile earned with travel is further discounted for the estimate of breakage and as a result the value of the air travel is increased accordingly.
At the time miles are issued, the net ETV value is recorded in Aeroplan deferred revenue. On Slide 6, the purpose here is to provide an illustrative example of the calculation of ETV. In this example, we use one of the top Aeroplan redemption routes being Toronto to Vancouver. Assuming the reward ticket takes 20,000 miles, which compares to the average fare customer would pay in cash for an equivalent booking class of $300 the equivalent ticket value per mile would be $0.015 The actual ETV calculation looked at all Aeroplan redemptions in the period and determined a weighted average ETV for all Aeroplan redemptions. The actual ETV as adjusted for breakage is the amount recorded in Aeroplan deferred revenue per mile issued on Air Canada travel.
This ETV was used as an input into the fair value of outstanding miles at the date of acquisition, which I will speak to later. A single ETV rate is used for all miles issued for the period as the ETV is a weighted average representing all Aeroplan redemption. ETV rate is static for the life of that mile and there are no retroactive updates to the ETV rate. However, the ETV rate is updated annually or more often if there is a significant change in the value of redemption. Once a new ETV rate is determined, then that new ETV rate is used prospectively for new miles issued going forward.
I would like to mention here that the accounting policy selected by Air Canada and these approaches to calculate ATV are generally consistent with how other airlines account for their loyalty programs. Continuing on this example of ATV calculation on Slide 7, we continue with the accounting entries. Assuming a hypothetical Aeroplan miles accumulation results in and the value of and the value of the Aeroplan miles. So in this example with 1,000 miles issued, the value of the Aeroplan miles is $15 recorded in Aeroplan deferred revenue and the value of the initial flight coupon recorded in advanced ticket sales and subsequently recorded in passenger revenue $3.35 As noted on the slide, this is an illustrative example only. The example does not include all the accounting elements, including the relative selling price calculation or the impact of breakage or any ticket taxes.
On Slide 8, we move on to the accounting for miles sold to program partners. Aeroplan members can also earn Aeroplan miles based on their spending with participating companies such as credit card companies, hotels, car rental agencies and other program partners. This accounting is more straightforward than the miles earned through travel as the Aeroplan miles issued under program partner agreements are accounted for as a single performance obligation being the future delivery of redemption reward to the Aeroplan 19, From the date of acquisition on January 10 to March 31, 2019, total consideration received for the issuance of Aeroplan Miles under these agreements was $198,000,000 and is recorded as Aeroplan deferred revenue. This accounting process is consistent with how Aeroplan accumulation of miles. Starting on Slide 9, we will switch to redemption accounting.
As we all know, prior to the acquisition of Aimia Canada, Air Canada was a significant redemption partner with Aeroplan and as such Air Canada's advanced ticket sales and passenger revenue included the revenues earned from Kering Aeroplan redemption. In many respects, the accounting for Aeroplan redemptions is little changed pre and post the acquisition. The main changes from Air Canada's historical results relate to the additional margin earned by Aeroplan on the redemption and the inclusion of the breakage revenue in Air Canada's results. When Aeroplan miles are redeemed for air travel, the value of miles is the value of miles redeemed is removed from Aeroplan deferred revenue and recorded in advanced ticket sales. The revenue is then recognized in passenger revenue when the transportation is provided similar to all other passenger revenues and how Aeroplan redemptions were previously recorded.
A difference versus Aeroplan's historical results is that Aeroplan redemption revenues were formally recorded in revenue when the member made the redemption booking. At the consolidated Air Canada level, Aeroplan redemption revenues for air travel are only recorded in passenger revenue when the transportation is provided. There is an average delay of 3 months from the time of redemption to the ultimate travel date. As such, Air Canada's Q1 passenger revenues do not include a full quarter's worth of the incremental margin earned on Aeroplan redemptions as they only include the incremental margin on redemptions booked and flown subsequent to the January 10 acquisition date and before the end of the quarter. Slide 10 explains the accounting for non air redemptions.
Aeroplan miles are redeemable by customers for air travel on Air Canada and other participating airlines and also for other program awards such as hotel, car rentals, gift cards, merchandise and other non air rewards. For non air redemptions, Air Canada has determined that for accounting purposes, it is not acting as the principal in the transaction between the member and the ultimate supplier of the goods and services. When miles are redeemed for non air goods and services, the net margin, which is the revenue less the cost of award, is recorded in other revenue when the performance obligation is satisfied. As you'll see in our Q1 results, this additional margin from non air redemptions was a factor in the increase in our other revenues in the Slide 11 explains breakage accounting. Breakage represents the estimated miles that are not expected to be redeemed by members.
Breakage is estimated by management based on the terms and conditions of membership and the historical accumulation and redemption patterns. As adjusted for changes to any terms and conditions or other circumstances that may affect members' future redemption practices. The amount of revenue recognized related to breakage is based on the number of Aeroplan miles redeemed in the period in relation to the total number of Aeroplan miles expected to be redeemed. In other words, the value of miles issued that are not expected to be redeemed are taken into revenue as additional margin over time in the same proportion as actual redemptions. A change in the breakage estimate would result in a cumulative adjustment to revenue and the deferred revenue in the period of change.
For subsequent periods, the revised estimate would be reused. I will speak to breakage a little further on in the presentation, we talk about the fair value exercise completed as part of the acquisition accounting. Continuing on to Slide 12. On January 10, 2019, we completed the closing of the purchase of all of the outstanding shares of Aimia Canada, the owner and operator of the Aeroplan Loyalty Business. The aggregate purchase price for the acquisition consisted of $450,000,000 in cash, plus $47,000,000 in cash for pre closing adjustments for total purchase consideration of $497,000,000 This purchase price is subject to post closing adjustments.
The acquisition of Aeroplan was accounted for using the acquisition method of accounting. Under this method, the estimated fair value of the acquired company's assets and assumed liabilities are added to the consolidated statement of financial position as of the acquisition date. On Slide 13, one of the significant judgment areas in the fair value accounting exercise is the value of Aeroplan Miles deferred revenue. As noted on acquisition, Air Canada assumed the obligation for all outstanding Aeroplan miles. The fair value of the liability was recorded based on the estimated fair value to service the miles outstanding that are expected to be redeemed in the future, which is very consistent with the ETV calculation as we discussed above.
On a fair value basis, the value of the Aeroplan deferred revenue incorporated the estimate of miles to be redeemed in the future. What this means is that the existing deferred breakage from the acquired company was not equivalent to its fair value. However, the fair value reflects the updated breakage assumptions of Air Canada going forward. Consistent with fair value measurement guidance, the breakage assumptions built into the fair value of deferred revenue incorporate market participant based fair value assumptions, which are also consistent with the assumptions regarding the new loyalty program features going forward. We do not plan to disclose the breakage percentage assumption going forward.
However, as part of our critical accounting estimates, we will disclose a sensitivity analysis on a hypothetical change in the breakage assumption. On Slide 14, as part of the Aeroplan purchase, Air Canada, TD, CIBC and Visa finalized various commercial agreements relating to and in support of the acquisition, including credit card loyalty program and network agreements for future participation in the Aeroplan program. Similarly, in the first quarter of 2019, Air Canada and Amex concluded similar agreements enabling Amex's participation in the Aeroplan program. We received total payments from TD, CIBC, Visa and Amex in the amount of $1,212,000,000 This consideration has been accounted $26,000,000 per quarter out to the year 2,030. To $26,000,000 per quarter out to the year 2030.
In addition, TD and CIBC made payments to Air Canada in the aggregate amount of 400,000,000 dollars as prepayments to be applied towards future monthly payments in respective Aeroplan miles. This consideration is also accounted for as contract liability within deferred revenue. The card agreement proceeds and miles prepayment totaled $1,612,000,000 in the Q1 of 2019, which was reported in cash from operating activities. We excluded these one time proceeds from the calculation of free cash flow quarter. On Slide 15 is a summary of the components of Aeroplan and other deferred revenue.
As noted above, obligation for Aeroplan Mile, the unamortized component of the deferred partner agreement proceeds and the remaining amount of the Aeroplan Mile's prepayment. The current portion reflects the component of the obligation, which is expected to be settled within 1 year. On Slide 16 is the purchase price allocation table or the summary of the fair value of assets and liabilities assumed as part of the acquisition. There are accounts receivable and accounts payable between Air Canada and Aeroplan for the purchase and redemption of Aeroplan Miles. The balances as reported include the balances payable and receivable between Air Canada and Aeroplan, which are then subsequently eliminated on consolidation.
Intangible assets for systems, contract and marketing based intangibles amounts to $359,000,000 on the acquisition, and I'll speak to these items on the next slide. The fair value of the deferred revenue amounted to 2,700,000,000 dollars on the acquisition date. And as we saw on the previous slide, this value excludes the partner contributions and prepayment, which were not accounted for as part of the business combination accounting. Goodwill on the acquisition date amounted to $2,900,000,000 which is a non amortizing asset. Slide 17 is a further breakdown of the intangible assets recorded on the acquisition date.
The contract based intangible asset of CAD225 1,000,000 relates to the value of the card agreements and other third party contracts together with the value of the member database. This contract based asset is subject to amortization over the term of the related commercial agreements with the program partners, which equates to an annual amortization of $19,000,000 The marketing based trade name is considered to have an indefinite life and therefore is non amortizing. Slide 18 summarizes the main litigation provisions assumed as part of the acquisition. Aimia Canada had, amongst other proceedings, 3 class action proceedings outstanding related to claims by Aeroplan members residing in Quebec for fuel and other passenger charges as described in the report and in our Q1 2019 financial statements. Under the share purchase agreement with Aimia, Aimia will bear 50 percent of the liability and costs, if any, associated with these class action proceedings against Aimia Canada, up to a cap of $25,000,000 for Aimia and after which Air Canada is solely responsible.
The net liability to Air Canada in these actions, if any, is not expected to be material. On Slide 19, there are no changes to the corporation's segment reporting policy as the corporation's financial results will continue to be reviewed at the consolidated level. Air Canada is managed as one reporting segment based on how financial information is produced internally for purposes of making operating decisions. The operations of Aeroplan are an integral component of the passenger airline business and the nature of the customer and the services provided are consistent between the loyalty program and the passenger airline business. This segment reporting policy is generally consistent with all North American Airlines.
And as a result of this segment reporting policy, the goodwill recorded on the acquisition will be tested for impairment at the consolidated level. On Slide 20, I wanted to highlight the passenger revenue discussion related to Aeroplan in the Q1, and this was also discussed in general on our Q1 call. Consistent with what we have disclosed above, the acquisition of Aeroplan results in revenue yield improvement as it relates to the additional revenue from Aeroplan flight redemptions subsequent to the Aeroplan acquisition date on January 10. It also includes amortization revenue related to the card agreement proceeds of $26,000,000 a quarter, breakage revenues related to the Aeroplan program and ancillary fees related to Aeroplan flight redemptions. As explained above, there's an average delay of 3 months from the time of redemption to the ultimate travel date.
As such, the first quarter's passenger revenue does not include a full quarter's worth of the incremental margin earned on Aeroplan redemption. Slide 21 shows the adjusted CASM metric for the Q1. Adjusted CASM excludes the operating expenses of Aeroplan since the date of acquisition in order to improve the comparability of unit cost as no equivalent amounts are recorded in the prior period. Further explanation of this non GAAP measure is provided in our Q1 MD and A. This adjustment is only applicable for the 2019 period.
When we move into 2020 and results are further integrated into the airline operations and comparable year over year, 2020 adjusted CASM will not be adjusted to remove the Aeroplan expenses.
So before I open
it up for questions, I would like to thank the Aeroplan and Air Canada finance teams who have worked very hard together to successfully complete the acquisition accounting and integrate the financial results of Aeroplan into Air Canada. As a reminder, and given our segment reporting policy, other than the amounts provided in our Q1 financial reports and in this presentation, we cannot provide any additional specific Aeroplan financial disclosures. And with that, I will open it up for questions.
Thank you. First question is from Chris Murray with AltaCorp Capital. Please go ahead.
Hey, thanks. Just if we can, can we just talk a little bit about the sort of the cash flow impact? So if I understand this correctly, there's going to be the $26,000,000 call it depreciation charge that runs through revenue. And then I guess the only other piece will be on a go forward basis, just the changes between the deferred liability and timing, as that moves into the advanced ticket sales and then back out of revenue. Is that
the right way to think about it?
Yes. I think, Chris, you're right. The $26,000,000 is a non cash amortization of the initial proceeds we received. So that's correct. As I mentioned, we have the intangible assets that we recorded on acquisition.
That will be an amortization of expense of $19,000,000 going forward. One of the disclosure items we plan to continue, as I mentioned, is the value of the gross billings from the 3rd party program partners. So we have the gross billings disclosed and that is different than the timing of the revenue recognition. So that will impact the sort of the working capital going forward and we plan to continue to disclose the 3rd party gross billings. Okay, great.
Thanks.
Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to you, Ms. Murphy.
Thank you, Valerie, and thank you, everyone, for joining us on our call today. Thank you very much.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.