Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome you to the Air Canada Third Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question at that time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, press star one. Thank you. I would now like to turn the conference over to Valerie Durand, Investor Relations. Valerie, please go ahead.
Thank you, Krista. Hello, bonjour et bienvenue à notre revue des résultats du troisième trimestre 2025. Welcome, and thank you for attending our third quarter 2025 earnings call. Joining us this morning are Michael Rousseau, our President and CEO, Mark Galardo, our Executive Vice President and Chief Commercial Officer and President of Cargo, and John Di Bert, our Executive Vice President and CFO. Other Executive Vice Presidents are with us as well. Arielle Meloul-Wechsler, our Chief Human Resources Officer and Public Affairs, Craig Landry, our Chief Innovation Officer and President of Aeroplan, Marc Barbeau, our Chief Legal Officer and Corporate Secretary, as well as Mark Nasr, our Chief Operations Officer. After our prepared remarks, we will take questions from equity analysts.
I remind you that today's comments and discussion may contain forward-looking information about Air Canada's outlook, objectives, and strategies that are based on assumptions and subject to risks and uncertainties. Our actual results could differ materially from any stated expectations. Please refer to our forward-looking caution in Air Canada's third quarter 2025 news release available on aircanada.com and on SEDAR+ . I would like to turn the call over to Mike.
Thank you, Valerie. Hello, bonjour. Thank you for joining us today for our third quarter results call. We delivered a solid third quarter financial and operating performance after adjusting for the impact of the labor disruption, which, of course, occurred at the peak of the summer season. During the bargaining period with QP, we developed comprehensive plans to ensure the safe, orderly wind-down and restart of the operations in the event of a labor disruption. These were acted on, and the entire company worked extremely hard to assist those whose travel was disrupted and to quickly return our operations to normal. I thank all our employees for their tireless efforts and unwavering commitment to supporting our customers during this challenging time. We also voluntarily introduced our special goodwill policies. We have received more than 150,000 claims to date, which we have been addressing diligently.
Processing these claims is complex and requires a coordinated effort. We do expect to finish in the coming weeks. We reported third quarter operating revenues of CAD 5.8 billion, down 5% from a year ago, on a 2% capacity decline. Both declines were the result of the strike-related flight cancellations. Adjusted EBITDA of CAD 961 million declined CAD 562 million from the same quarter in 2024. Excluding the labor disruption, third quarter adjusted EBITDA would have aligned with our four-year guidance shared last July and come close to pre-strike market expectations. Operational metrics such as our on-time performance and Net Promoter Score exceeded both internal targets and last year's levels for the quarter and year to date. I am very pleased with the progress we're making. Booking trends for Q4 are very strong. We expect year-over-year growth in adjusted EBITDA in the last quarter of the year.
This morning, we updated our full-year guide, which John will further detail for you. First, let me turn it over to Mark.
Thanks, Mike, and good morning, everyone. [Foreign language] . I thank our employees for their unwavering commitment to our customers and to operational excellence. I also extend my gratitude to our customers, the travel trade, and our airline partners for their patience and support. Third quarter passenger revenues of CAD 5.2 billion declined 6% from the same period last year on 2% less capacity. Starting August, our year-over-year third quarter unit revenues were trending in the right direction, but were impacted by the labor disruption. We estimate it was a drag of about three percentage points to Q3 unit revenues. Absent this, Q3 would have amounted to one of the best relative present performances amongst major North American carriers. This is driven by our revenue diversity, hub geography, and customer loyalty. Our global network gives us flexibility to quickly pivot to areas of strength.
This quarter and throughout the year, we mitigated the exposure to reduced demand between Canada and the U.S. In Q3, we quickly responded to Canadians' growing interest to travel domestically. The transborder sector remained stable, albeit at lower levels once adjusting for the strike. International markets continue to drive significant value. In the spring, we added capacity across the European continent, seeing a stronger Atlantic environment. Moving to cargo, despite a revenue decline of 6%, mostly from reduced belly capacity in August, Air Canada Cargo was adaptable, and the freighter operation continued to demonstrate its value, playing a key role in capturing the opportunity from evolving global trade flows. This was evident this quarter as our flexibility and capacity from freighters allowed us to carry more of the growing and lucrative cargo demand from Asia to Latin America, fully offsetting other declining flows.
Additionally, other revenues rose 15% from the third quarter of 2024, with higher Aeroplan on air revenues, prices for ground packages at Air Canada Vacations, and onboard sales. Next, our well-positioned hubs provided strong local demand from Canada's largest cities and facilitate sixth f reedom connections. This year, we've doubled down on connectivity, which has been beneficial for our sixth f reedom strategy. Demand has been strong despite the disruptions and impact. Year to date, at the end of Q3 2025, sixth f reedom revenues grew a solid 9%. Our strong brand ecosystem built customer loyalty and is a unique strategic attribute for Air Canada. Booking patterns rebounded soon after the disruption ended, underscoring brand strength and consistency in customer behavior. Let's focus on premium. Front cabin revenues outperformed the economy cabin by 6 percentage points. Corporate improved further with roughly 11% year-over-year revenue growth from our corporate customers in September.
What our Q3 results demonstrate is that looking beyond August's events, Air Canada's commercial foundations are solid, adaptable, and core enablers to strong results. Now let's focus on what's ahead. With our proven commercial playbook, we're uniquely positioned to seize favorable industry trends and are highly encouraged by what we're seeing this fall. Fundamentally, our solid booking outlook reflects step-change progress against a theme we've long discussed. Addressing Air Canada's traditional seasonality and improving revenue diversification. This enables more balanced capacity deployment, revenue generation, and profitability throughout the year. The results are tangible. Currently, our relative capacity in the fourth quarter exceeds pre-pandemic levels. As of today, we're on track for a record fourth quarter load factor and total revenue performance. We are leveraging the strength of our global network and scale of our hubs to increase our reach and access to new traffic flows.
We refined our schedule, improving the connecting ways at our hubs to increase our competitiveness for connecting flows. Finally, we've deliberately built a stronger base of bookings going into the winter, filling seats that historically would have been empty. We expect our significant progress on seasonality to drive revenues and support diversification while improving our ability to take advantage of promising industry trends. Now let's dive into network and within that international. With one of North America's leading global networks at hand, we see promising signs across the next six months. We see demand strength carrying all the way through U.S. Thanksgiving, particularly across the Atlantic.
Beyond that, Sun and Latin American markets remain solidly ahead of last year for winter, with a robust advanced booking position from Air Canada Vacations and uplift from our expansion into Latin America, which also taps into rising Canadian travel demand and boosts sixth freedom revenues on our transatlantic flights. Our presence in international markets remains a clear advantage. Next, we see a continued shift in consumer preference towards premium products. Once thought of as mainly a corporate segment, we see an opportunity for leisure travelers seeking our signature front cabin experience. Our booking posture in premium cabins is strong going to Q4 and Q1. As Canada's premium airline, we are uniquely positioned to attract, capture, and retain this growing segment of high-value customers. Lastly, we continue to see strong corporate momentum.
This is a segment that books closer in, and the latest data confirms the strength of September carries into October and is progressing throughout Q4. While North America remains the bulk of our corporate revenue, we are noticing signs of increased international corporate strength. Our comprehensive schedules, well-established and long-standing partnerships, premium loyalty program, and superior experience reinforce our position as the airline of choice for corporate travelers. In all, we are encouraged by the trends in the fourth quarter and what we're seeing for early 2026. Although we anticipate a slight decline in unit revenue in the fourth quarter, adjusting for the disruption in Q3, this is a sequential improvement throughout the year. Looking further into 2026, there's also a lot to be excited as we implement numerous strategic initiatives. Firstly, fleet additions.
Recall, we retired over 75 aircraft during the pandemic and have been anxiously awaiting for incoming aircraft to support planned growth. We will take the long-awaited delivery of two new aircraft types, the A321XLR and the 787-10. Our XLRs will initially be based in Montreal and fly to exciting destinations like Palma de Mallorca, Edinburgh, and Toulouse. Meanwhile, our first premium-focused 787-10 will be based in Toronto, reinforcing our leadership position in Canada's largest market. Speaking of possibilities, our international network will continue to expand next summer as Catania and Budapest are added to our network and we restore nonstop capacity to China from Toronto. We are also thrilled to be making Bangkok year-round from Vancouver the only nonstop service to the Thai capital from North America. Second, our transition of the 737 MAX aircraft to Rouge will get into full swing.
Longer term, this will enable a more cost-competitive platform, harmonized experience, and a new Rouge base in Vancouver to expand our offering from Canada's west coast. Third, we're looking forward to our recently announced expansion out of Billy Bishop Airport, adding transborder flights to New York LaGuardia, Boston, Chicago, and Washington Dulles, and more frequencies to Montreal and Ottawa. These routes, long requested by our customers, strengthen our position in the Toronto market. In closing, we're making and executing the right commercial moves. We're leveraging our revenue diversity, our well-positioned hubs, and customer loyalty to cement Air Canada as one of North America's leading carriers and deliver solid results. Thank you. Merci, John, and over to you.
Thanks, Mark. Good morning, everyone. Bonjour à tous. First, allow me to take a moment to recognize the resilience of our incredible employees. We know that managing the airline through the shutdown and restart was very challenging. Yet our colleagues rose to the occasion and maintained their commitment of care and class to our customers. [Foreign languag e. In the third quarter, we reported operating income of CAD 284 million and adjusted EBITDA of CAD 961 million, with an adjusted EBITDA margin of 16.6%, including the CAD 375 million impact from the labor disruption. The impact consists of the following. A CAD 430 million impact to revenues, including some book away for travel in August and early September. CAD 145 million in avoided costs due to reduced flying, partially offset by CAD 90 million of cost reimbursements to customers, for out-of-pocket expenses, and labor-related operating costs driven by the shutdown and restart activities.
This is consistent with the estimates we announced in late September. Operating expenses increased 8% year- over- year, mostly due to a CAD 173 million one-time charge. Of this, CAD 149 million was a non-cash one-time pension past service cost from plan amendments that related to the agreements reached with QP. The remaining is due to costs associated with streamlining our management structure. Fuel expense was 12% lower year- over- year for Q3. Jet fuel prices fell by 10% compared to last year, which included a CAD 29 million hedging gain for the quarter, totaling CAD 48 million in the first nine months of the year. Additionally, fuel consumption was 3% lower than in Q3 2024 due to the flight cancellations. Third quarter adjusted CASM was 13.99%, up 15% from last year. About a third of the increase was due to cost escalation, mainly in labor, maintenance, and depreciation.
Roughly another third was the effect of certain favorable contract-related adjustments we recorded in the third quarter of 2024, which made for a less meaningful year-over-year comparable in Q3 2025. Excluding the impact from the disruption, non-fuel unit costs were aligned with our full-year CASM expectation at our Q2 call. In all, we estimated the disruption had a drag on adjusted CASM of about 6 percentage points, reflecting incremental costs and lower capacity. Turning to cash flow. In the quarter, we generated CAD 813 million in cash from operations and free cash flow of CAD 211 million. We have accrued for strike-related customer compensation to be processed and paid in Q4. Additionally, in the third quarter of 2025, we implemented a new enterprise resource planning system and experienced a delay in timing of payables processing in September, equivalent to 15 days of payables.
The cumulative free cash flow of CAD 1.2 billion year to date reflects approximately CAD 600 million of favorability due to the timing of certain payments in Q3. Onto our balance sheet. In July, we fully repaid our convertible bonds for a total amount of CAD 382 million, reducing the number of potentially issuable shares by 18 million. In September, we drew CAD 231 million from our EDC loan commitment for five A220s that had been previously delivered. We ended the quarter at CAD 8.3 billion in total liquidity, including CAD 1.4 billion in an undrawn revolver. Leverage ratio ended the quarter at 1.6 turns, reflecting lower EBITDA due to the impact of the disruption. We expect this ratio to increase slightly in Q4 as we process the outstanding payables from Q3.
When thinking about leverage and long-term decision-making, we will look through the one-time impact on EBITDA when assessing our leverage objective of 2x or less. Moving along, we updated our full-year guide this morning. We now expect capacity to increase around 0.75% versus 2024. We project 2025 adjusted CASM in the CAD 0.146-CAD 0.147 range. We reached an agreement with QP except for wage terms that will be finalized through binding arbitration. Our guidance reflects the agreement and our best assumptions on the outcome of arbitration. In 2026, we will see the full effects of the new agreement flow through our labor costs, including the enhancements to ground pay and benefits. For adjusted EBITDA, we now expect CAD 2.95 billion-CAD 3.05 billion in 2025 and a strong fourth quarter, which should outperform Q4 2024.
To close on guidance, we anticipate free cash flow between break-even and CAD 200 million for the full year. We expect the free cash flow use in the fourth quarter as delayed payments are brought current, including customer reimbursement amounts accrued for but not yet paid. Q4 CapEx is anticipated to be approximately CAD 900 million, just under CAD 3 billion for full year 2025. With the recent volatility in jet fuel prices, we continue to monitor global trends. Relying on visibility we have into Q4, we have hedged 34% of the expected fuel purchases for November and December at an average price of $0.52 per liter , approximately CAD 0.73 per liter before taxes, fees, and shipping costs. Finally, we continue to progress on our CAD 150 million cost reduction program announced earlier this year, which includes the pre-planned management headcount reductions.
We are on target for year-to-date savings and expect to deliver the full CAD 150 million in 2025. Key components include operational efficiencies, initiatives, streamlining our management structure, process improvements, and third-party spend management. We expect the cost reductions to be reoccurring in 2026. In 2026, we anticipate a step change in unionized labor costs due to recent labor agreements and as we continue to work through our 10-year agreements to shorter-term collective agreements. We also see some cost pressures from airport infrastructure and user fees as airports undergo capital investments to better serve airlines and passengers. Over time, we will aim to partially offset these headwinds with ongoing productivity gains, constant cost discipline, and driving cost reduction initiatives across our business. Now, let's turn to the fleet. We expect to add three additional A220s and one 737 MAX by the end of 2025.
Further, we expect to begin retiring old Airbus A320 family aircraft, including A319s and two A320s. In 2026, we expect to receive 18 A220s, 11 A321XLRs, four 737 MAX aircraft, and two 787-10s. While we are particularly excited about receiving our first A321XLRs and 787-10s, the delivery schedule for 2026 is considerably delayed compared to our original expectations, as outlined at our last investor day. On average, we will have approximately six fewer A220s, 737s, and six fewer A321XLRs or 787-10s on any given month of 2026, which will impact our ASM production for next year. In addition to welcoming the new aircraft to our fleet, as Mark noted, we are moving ahead with plans to transfer all 737 MAX aircraft to Rouge next year. We're working toward an all 737 MAX Rouge fleet by the end of 2026.
Some A320 family aircraft are expected to move to mainline, and the rest will be retired. More details will be provided when we give 2026 guidance. Looking beyond 2026, our 787-10 order for 18 firm aircraft has been modified to 14 firm aircraft, with the first 10 scheduled for delivery by 2028 and the remaining four by 2030. While this moderates the growth pace in the near term, we remain firmly confident in the mid and long-term opportunities ahead. In addition, the changes smooth out our CapEx profile, support disciplined financial planning, and preserve flexibility to scale capacity in line with demand. These modifications are reflected in our capital commitments table included in our Q3 MD&A. Our fleet strategy remains focused on profitable growth in our right-to-win markets. We will continue evolving the fleet for greater efficiency and flexibility to meet customer demand.
Our fleet investments support long-term sustainable value to shareholders and customers alike. Reflecting our commitment to returning value to shareholders, today we announced our renewed NCIB. Since the inception of our November 2024 NCIB, we repurchased about 62 million shares for cancellation. Further, we retired 18 million potentially issuable shares. In aggregate, we have deployed close to CAD 1.7 billion to antidilutive actions. In summary, we remain confident in our trajectory toward 2028 and our ability to manage the growth and margin expansion cycle. The strategic network expansion, premium product investment, and discipline cost management are core priorities. Our executive-led roadmaps drive execution across our portfolio. Despite a challenging Q3 environment, we delivered solid financial results, demonstrated the underlying strength of our franchise, and continued to hit important milestones for our new frontiers plan.
We'll provide a fulsome update on progress towards our long-term goals at our next investor day, which will be planned for sometime in 2026. Thank you, and I look forward to your questions. Mike, back to you.
Great. Thank you, John. We have a very strong business model that can recover quickly from unexpected setbacks and certainly take advantage of opportunities and execute extremely well. Operationally, we shut down and restarted the airline in record time. We are encouraged by the speed at which booking patterns recovered and the strength that has followed. Negotiations supporting our staff at the airports, contact centers, and maintenance facilities will begin soon. Over decades, we have consistently reached agreements that value our employees and support the airline's future. We look forward to productive discussions with our unions. Our commitment to our plan includes making very tough decisions.
In July, we announced to our management colleagues that we would be streamlining our organization. After a comprehensive evaluation, we made a difficult decision to reduce certain management positions representing approximately 1% of our total headcount. Next year, we expect to take delivery of 35 new aircraft, the most we have ever received in a single year, supporting our global growth initiatives. We will receive the first game-changing Airbus A321XLR, which will not only enable us to launch new routes, but it will help us offer some services year-round and even out our network seasonality. As Mark noted, the travel market remains robust and demand is strong. In particular, business travel continues to recover. Our recent announcement to add routes from Toronto Island next spring underscores our commitment to offer more options to our loyal travelers, including our Aeroplan members.
We are pleased that we have more than doubled our Aeroplan membership since the program's relaunch, now proudly counting more than 10 million members. Our focus on customer service resonates throughout the network. I was pleased that our Net Promoter Score rose by 10 points in the quarter and that Air Canada once again won a five-star rating from APEX. This excellence in customer experience is recognized. Finally, today, we announced the renewal of our Normal Course Issuer Bid. Our capital allocation priorities remain unchanged. Invest in growth, protect our strong balance sheet, and deploy excess liquidity strategically. As our track record shows, including in this quarter, we are executing on our plan, seizing the right opportunities. Strong operational growth and discipline execution are driving effective cost management and reinforcing our diversified commercial foundation, which are the key components of our right to win.
With prudent steps to smooth out capital expansion profile and a renewed NCIB in place, we have established a clear framework to return value to shareholders. We have exciting times ahead of us with growth plans fueled by our key strategic initiatives like our revitalized Rouge offering and new state-of-the-art efficient aircraft. As you heard today, we will also continue to improve our cost structure through productivity gains, operational efficiencies, and constant cost discipline to mitigate near-term pressures. We continue to focus on free cash flow generation in order to return value to shareholders. The hard work ahead in 2026 will position us very well for the second half of our strategic plan. With a solid foundation, an excellent balance sheet, and a very talented and dedicated team focused on execution and our customers, we are confident in our ability to deliver significant long-term value to all of our stakeholders. T hank you, Mercie. Valerie?
Thank you, Mike, and thank you all for joining us this morning. We are now ready for your questions, and I ask that you limit yourself to one question and one follow-up, please. Over to you, Krista.
Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. If you would like to withdraw that question, again, press star one. Your first question comes from the line of Connor Gupta with Scotiabank. Please go ahead.
Thanks, Operator. Good morning. Maybe this is for Mark. I think you mentioned that RASM trends are expected to be slightly down in Q4. I'm just kind of wondering what are you seeing in different markets here? I think corporate, obviously, you're saying it's growing nicely, and I think Atlantic demand continues well into October and sometimes in November. Is much of this RASM weakness coming still from the Pacific normalization and maybe transport?
Hi, Connor. So on this particular item, when we look at Q4, we are expecting somewhere between flat RASM to maybe slightly down RASM. But overall, the way you should look at this is the transatlantic is looking at overperformance. We are looking at a very strong transatlantic network all the way through Q4. We see a lot of resilience in the Sun market as well, as we have seen a little bit of shift away from transborder into the Sun. We are having a very strong November, December into the Sun. And then you have got those other supporting pillars like premium demand strength and corporate demand strength that are kind of sustaining some fairly decent yields that we are going to have on the transborder despite the demand drop. That's kind of the color in terms of what we can expect for Q4.
Okay. Thanks for that. And then on the CASM side, John. I think the implied guidance for Q4 suggests a flattish CASM from last year. I mean, given the inflationary environment you guys are in and obviously the labor contracts and all that. What is contributing to the flattish CASM here? I mean, what are the offsets? I mean, some of the cost savings, I'm sure, are coming through, but is there anything else in sort of one-timing in nature in Q4?
No, I would say it's largely—and you've seen we've been active, including keeping headcount in check. And so I would say, generally speaking, it's cost-focused. We get some ASM growth, so that helps as well. Fourth quarter actually carries the entire ASM growth for the full year. And so that's obviously helpful. Nothing really to highlight in terms of kind of big positives in the fourth quarter.
Right. I think the maintenance contract adjustments, you already lapped those in Q3, right? I mean, there's nothing in terms of noise on last year in Q4. Okay. Perfect.
Right. Q3 was noisy. I covered that in the commentary, but I think Q4 should be a bit more of a reasonable comparison.
Okay. Thanks. Appreciate the time.
Your next question comes from the line of Savanthi Syth with Raymond James. Please go ahead.
Thank you. Good morning. I'm just wondering on the commentary about the fleet kind of delays in 2026 versus kind of expectations last year. I think there's visibility here. I was kind of curious how you're thinking about 2026 capacity and if you were kind of hiring correctly to that versus in the past where maybe some of the fleet delays were somewhat surprising and therefore kind of hard to manage on the cost side.
Yeah. I'd say first, I'd separate that into two answers. One, I think we've been disciplined with hiring after we kind of stabilized operations through 2024. I think this year has been a fairly disciplined approach. We've always said we're going to be driving productivity as the airline continues to grow. I think in and of itself, we're going to continue to work that way. With respect to the capacity growth, for sure, I mean, we try to be as proactive as we can with respect to balancing everything we need to bring on those aircraft properly. I think we have a pretty good read of what 2026 looks like. We are going to obviously operate in accordance. For us, we are well into the planning cycle and have a pretty good read on what we expect for capacity growth next year.
Too early to share?
Yeah. In precision, yes. I think we are adding 35 aircraft in total, and we are going to be retiring a significant amount of aircraft as well. We will have a net balance of somewhere in the mid-teens, I think, or maybe just less than that, probably in the low double digits. We will hold that for the guide in February.
Got it. I appreciate it. Just to follow up on that, CapEx came down. Wondering what the drivers were. Was that related to the fleet order changes or anything different going on with the CapEx view?
No, it's totally correlated to the adjustment in the dash 10 order.
Thank you.
Your next question comes from the line of Daryl Young with Stifel. Please go ahead.
Hey, good morning, everyone. Just wanted to get a sense of how you're thinking about the peak Q3 in 2026 and any thoughts on just smoothing of seasonality and, I guess, some of the strength you're seeing to start this year. Is that sort of a pull forward of Q3, or how should we think about that?
Thanks. It's an excellent question and something that we're actually debating here internally. Obviously, what you can see in 2025 is that there is more relative strength in spring and fall than there actually is in the summer peak. I think that's a trend that we see consistently across the North American landscape. We're working with our operations colleagues to see how we can better allocate aircraft and maintenance activities to maybe take a little bit of the pressure off Q3 and load up a little bit more in Q2, Q4. As it relates to 2026 specifically, just the timing of aircraft deliveries is such that there's going to be some decent ASM growth in Q3 relative to Q2 in 2026.
Got it. Then follow-up just around the NCIB and your free cash flow now that the CapEx has been deferred. Is that something that we should think you're going to be active on starting in November here?
I won't give any precision to timing, but we've put it in place, and we do intend to use it. I'll just give some color around our buyback program. We did announce an aggregate of about CAD 2 billion over the next couple of years as we set that out in December of 2024, and we said that was going to be part of the midterm plan, three or five years. Right now, we stand at about CAD 1.3 billion of shares bought back. We also did the convertible debt extinguishment, which was also antidilutive. There is still room for us to continue to go. Our plan is to continue to execute as we expected. I think the 2025 positive cash is a good checkpoint here. Obviously, a little bit of an improved profile in CapEx helps as well. We will pick the right spots, but we do intend to be active on this NCIB, and we will do that as appropriate.
Got it. That is great color. Thank you.
Thank you.
Your next question comes from the line of Tom Fitzgerald with TD Cowen. Please go ahead.
Hi, everyone. Thanks so much for the time. I'm just curious how you're thinking about kind of managing the transition of Canada point of sale and transborder in the March quarter and whether you think just how Latin markets are shaping up so far and how you're thinking of managing that risk.
Tom, so just to be precise on your question, you're speaking about the upcoming spring break in March?
Yeah, yeah. Just in the broader mind. I know the Sun markets are a big demand driver in March, just on the transborder. That's a heavier portion of it. Just kind of curious how that's—I know you kind of have—you got a lot of growth in the Latin markets coming up. I'm kind of curious how that's shaping up and what we should be watching for.
Yeah. Okay. Good question. For Q1, the Sun market's developing quite nicely with positive load factor and flat yields all the way through. As we think about March, one of the items that we're looking at very closely is obviously our transborder spring break capacity. Because we're noticing a better kind of equilibrium between supply and demand, I mean, obviously, you've seen a lot of competitors withdraw capacity into U.S. leisure markets. It's actually a much more favorable revenue environment going into Q1 and into March break. If there are further opportunities for us to move capacity around, we'll make those calls later on. We are seeing— We're definitely— I would say we call the bottom a little bit on the transborder leisure kind of demand erosion.
Okay. That's really helpful. Just as a follow-up, I was wondering if you have any more color on sixth f reedom between Pacific and Atlantic and just some of the deceleration on that growth. I do not know if it is just noise from the industrial action or anything of note that we should be thinking about. Thanks again for the time.
Yeah. Thanks. The demand growth so far for sixth f reedom revenue growth has mostly been on the transatlantic. There has been a little bit of Pacific growth, but it has been relatively muted this year. As we think about Q4, it is mostly the transatlantic that is driving it, a portion of it being U.S. to obviously the transatlantic, but a big growth on Latin America to Europe via Canada, which is going to sustain our sixth f reedom performance throughout the year.
Your next question comes from the line of Chris Murray with ATB Capital. Please go ahead. Yeah.
Thanks, folks. Good morning. Just very quickly, thinking about the fleet changes next year. As you said, there's a lot going on, but I guess I want to focus a little bit on Rouge. Can we just think, maybe go through what the process is going to look like moving all of the 737s into Rouge? I'm assuming you'll end up rebranding those aircraft, but if you can give us some more color on that, that would be great. How we should think about the transition over the year would be helpful. Thank you.
For sure. Hi, good morning. It's Mark Nasr. We're going to begin with our first 737 MAX that's currently operating at mainline. It's going to go in for reconfiguration in about six weeks here. The reconfiguration of those aircraft is a very efficient program. It will take about a week to do each one. We'll move through the entire fleet of the 40 aircraft that we currently have in the standard mainline configuration over the course of the year, as well as the five additional new deliveries that we're going to take. We expect, as we get towards the end of next year, the very beginning of the first quarter, that transition to be complete. Of course, we're going to be bringing over several of the Rouge aircraft into mainline. That's a little bit more of an involved process with regards to reconfiguring those aircraft to match our mainline standard. That should be completed in the early part of next year. The two activities are going to happen to be able to balance capacity between the two o perating certificates.
Of course, we'll also be bringing Rouge to the West Coast by basing several aircraft out in Vancouver. With regards to the configuration, we haven't announced the details yet. We'll do so in the coming weeks, but we will be densifying from the current LOPA that we have at mainline for the 737 MAX, and we'll be removing some of the J cabin and adding more into the economy cabin. Those details will be announced shortly, but it will ensure that we have the unit cost performance at Rouge that we need to be successful in the leisure market.
Okay. That's helpful. Thank you. My last question maybe for John on the NCIB. One of the questions I've been getting from a lot of folks is just, when you did the last NCIB, I guess you went out pretty fast and burned through the allocation w hich left you kind of w ithout the tool to use as the stock came off. Is there a bit more thought to being maybe more formulaic or balanced across the whole time period, or is it still going to be kind of an opportunistic thing? I know you put in a purchase plan for it, but just thoughts on kind of the bigger picture strategy around how to use it would be helpful.
Sure. I think there are different circumstances. Do not forget, we put out an SIB in the middle of the year last year, right? We were not without tools, and we did take advantage of that. I would argue that that was not actually what happened. The first 800 did go out more quickly, and we had telegraphed that. We said we were going to be fairly rapid once we had come out of 2024 with respect to r estabilizing the airline. And frankly, working it down the debt, we would be antidilutively focused, and that's what we did. I think. I won't telegraph exactly here when and how. I think we'll use it appropriately. We have plenty of capacity at 10% of the total float. We're running the business. It's not just one-dimensionally. We're bringing up the fleet. We're obviously focused on cost containment and cost management. We're geared towards free cash flow generation as we kind of build out the airline on a structural basis. We're going to keep a strong balance. At the same time, complete the program that we had started when we announced the CAD 2 billion over the next couple of years. No precision on the exact use, but we'll do it right through the time of the NCIB.
All right. Thank you very much. Yeah.
Your next question comes from the line of James McGarragle with RBC Capital Markets. Please go ahead.
Hey, thanks for having me on. I had a question on the capacity in the Canadian market. You kind of flagged, obviously, your lower CapEx. Can you just kind of talk about the capacity trends through the remainder of 2025 and into 2026? Any notable yield trends that are kind of emerging as a result of some of these capacity shifts?
Hi, James. On the capacity side, we continue to see that the domestic market is obviously very competitive. Generally speaking, I think demand—sorry, supply is up about 4% or 5% going into Q4 just on the domestic alone. There is a better balance of supply and demand on the transborder, which we think will help sustain yield and revenue recovery on the transborder sector.
The transatlantic is fairly stable with low single-digit capacity growth, which is going to obviously provide some stability on the yield and load factor side on the Atlantic. Of course, as you know, and we've discussed on the Pacific, there's been a sizable growth in demand from China—sorry, in supply from China, Hong Kong, Korea. There is yield pressure on Asia, and especially as we've added more capacity to China and we absorb that capacity, we should anticipate that the yield and RASM will continue to be negative all the way until probably Q1 or Q2 next year. The Sun market. The capacity growth is up double digits, but our revenue, load factor, and yield performance are all in the green. Overall, a pretty balanced market, and we've got, of course, the ability to move capacity around as market conditions evolve.
Hey, thanks for the call. Just for my follow-up on the lower CapEx, how should we be thinking about the trade-off here longer term? Obviously, positive for free cash flow, but does this kind of pose any risk to your longer-term plans that you highlighted at the investor day? How should we be thinking about this in the context of costs and margins as the newer fleet was expected to be a driver of increased efficiency? I'l l turn the line over after that. Thank you.
Thank you. Thanks for the question. I think all those things stay intact. I mean, when you look at the overall addition of aircraft, you're talking about 90 aircraft or so over the period of whatever it is, three, four years. This adjustment affects for sure. I mean, if you look at 2025 in terms of ASM growth, it was a bit of a stall. I think just, we pace accordingly here. The 787s did have quite a bit of delays from the original purchase dates or so coming in 2026. I think this is just managing that delay scenario. Yeah, 2028, you'll have four less aircraft in there. We'll work through that, see what it means. Ultimately, we're bringing in 14 787s and 33 21s, and there'll be plenty of good aircraft and plenty of good capacity. We think that we're in good shape to deliver on our longer-term objectives.
Your next question comes from the line of Alexander Augimeri with CIBC. Please go ahead.
Hey, good morning. Thanks for taking my question. Yeah, just looking at your strong results within premium and in corporate. I was just wondering if you can provide any additional color on this as we look forward into the end of the year in 2026.
Thanks. Good morning. A little bit early to talk about 2026 because such a low base of bookings. As we kind of dive into Q4, I think what you should anticipate is continued double-digit increase in overall corporate revenue and basically across all geographies, in particular a nice growth on the transatlantic. On the premium side, we continue to see a lot of strength in the business and premium economy cabins with both positive load factor and yields. As we all know, there's a little bit of pressure in the economy cabin in terms of yields.
Yeah. Makes sense. Yeah. Thanks for taking my question.
Your next question comes from the line of Sheila Kahyaoglu with Jefferies. Please go ahead.
Hi, thanks for the time. This is Kyle Wenclawiak for Sheila. I was hoping, I know it's early, but if we could talk a little bit about the puts and takes in terms of the profitability walk for 2026. You have the 17%+ margin down in 2028, but it sounds like a lot of the fleet benefit is now kind of moving right again. You mentioned a bit about the labor contracts and the work rules kind of run rating next year. Can you kind of help us frame what 2026 profitability is and what are sort of the moving pieces to keep in mind?
I think you've covered some of it, right? In terms of absolute ASM production, I think we'll still have solid year-over-year growth from 2025 to 2026, but 2025 isn't where 2025 was originally intended to be. In absolute, you'll get a little bit of pressure there. Again, we also had, and I mentioned in my comments, what amounts to, call it, six long-range aircraft and six kind of continental range or shorter-range aircraft less than we anticipated when we had the original long-term plan and invested in 2024. That is a pressure point. I think when it is all said and done, we will still see very nice growth, but we will not see all of the benefits of the modern aircraft and some of that long-range flying that we would have liked to see in 2026. That does not go away. It just gets pushed out a little bit. Think 2027, and certainly in 2028, we will have a lot of that fleet in place and a lot of the margin benefits that we are expecting.
With respect to puts and takes, I think we've been very focused on cost reduction and driving productivity, and I think those will continue to deliver value. We do have step change in labor. We've started that cycle in 2024 with the pilot agreement, 2025 with flight attendants. We do expect a couple of other labor agreements in 2026 to be completed. Mentioned in the comments as well, we'd have some pressure from those step changes. We're planning for them, but they will come through and kind of be most acute as we go through 2026. I think for all intents and purposes, looking out probably past 2026, 2027, 2028, we talked about a 17%+ margin. I think that's still well in play.
We'll continue to work through and see where we end up as we complete our planning cycle, both the 2026 and the longer term, but we're still very focused on those high-teen margins and just navigating through some movements overall from an airline and business model point of view. Still feel very good about generating positive cash structurally and finding accretive growth.
Thanks, John. If I could just follow up quickly on the 787-10s, I know you mentioned it's just related to delays, and maybe it's just kind of normal case negotiations, but is that a signal of what you think the network is going to shape up to be in a few years' time? Because those are your long-haul, most premium type aircraft, and I assume there's a bit more underpinning why you guys made that decision. Thanks.
Yeah. I mean, it's not. So f rankly, those were 18 aircraft. Those are to come in in 2026 and a couple in 2027. So that order would have been filled fairly rapidly. There's been delays. We've just managed with Boeing to adjust because of the impact of those delays and how we take those aircraft to longer-term, no changes in our expectations. When you look at it, right, I mean, all in, do the math on an envelope, but you're talking about maybe 2% of total capacity by the time you get to 2028.
Just, it's Mike Rousseau , just to pile on that. We think our timing is very, very positive. As you know, Canada is diversifying trade around the world, and we think we can play a big part in that diversification. Strategically, bringing in wide bodies will allow us to work with Canada on diversifying trade.
Your next question comes from the line of Andrew Didora with Bank of America. Please go ahead.
Hi, good morning, everyone. Question for John, I guess. With the strike and the way it kind of has influenced near-term EBITDA and cash flow, net leverage is probably a little bit different than you were initially planning for 2025. I guess when you think about executing on the NCIB, how do you think about executing on the NCIB in the construct of where your leverage has gone? How do you think about that, keeping that leverage in your range going forward with this plan in place?
Yeah. I mentioned it in the commentary, right, that we would look through that one-time hit in Q3 when we thought about long-term decision-making and capital deployment. I mean, that's a non-recurring one-time. It will not affect how we view the strength of our balance sheet or the capital deployment decisions and strategies we have to make. I think it will fall off the calculation in three quarters and four quarters. Still feel very good about our balance sheet, feel good about how we are allocating capital. No changes.
Okay. Fair enough. Kind of more of a focused question here, just in terms of free cash flow, right? I think year-to-date, a little bit over CAD 1 billion. You are getting to flat to up a little bit for the year. I know 4Q is typically, obviously, a seasonally weaker. Just curious what brings that. It seems like 4Q will be much worse than normal seasonally from a free cash flow perspective. Is that because of the strike, the cash payouts from the strike? Anything unique there? Thanks.
Yeah. Thanks for asking the question. We highlighted in the commentary that we have about CAD 600 million, including some of the comp that is accrued and will be paid, but mostly from a delay in vendor payments in the third quarter. We went to an SAP implementation. We had planning for transition. In there, you have about 15 days' worth of payables that would have otherwise been paid in Q3 that will be paid in Q4. When you take that CAD 600 million out and you adjust for what I mentioned was roughly CAD 900 million of CapEx, you get a pretty normal free cash flow when you consolidate Q3 and Q4 together. Really, at the end of the day, it is working capital restoration of the payables that were not out the door in Q3 that will catch up in Q4, that CAD 600 million.
Oh, that's helpful. Thank you.
Yeah.
Your next question comes from the line of Fadi Chamoun with BMO Capital Markets. Please go ahead.
Yeah. Good morning. A question maybe for John. I want to dig into the CASM picture a little bit. So, you've kind of averaged about 4% adjusted CASM inflation in the last three years, including 2025. Going into 2026, you've got a bunch of narrow body, which is potentially pressure on CASM, and you've got inflationary pressure in labor. But you also have growth and productivity. And I'm just trying to think, do we start to go kind of sub-4 as we go into 2026? Any kind of framework how to think about the adjusted CASM as we go into next year?
Fairly, I think. We'll address that a little bit more when we get to our guide in February. We're working through that now. I think that 2026 will have a bit of pressure, right? I mentioned it before. You're getting the ASMs. You're not getting the ASMs that come from a longer-range flying and quite the mix that we would have liked. That typically is a little bit helpful. The impact of modern fleet as well that we had kind of originally anticipated for 2026 is going to be a little bit stalled. I'm not concerned about our ability to generate those cost savings and cost reductions. They will just come a little bit later than we had planned for. I think in 2026, probably not the year where you have the kind of flattening out of cost on a unit basis, but still very confident that'll come probably near the end of the year and into 2027, 2028.
Okay. Just to follow up on the CapEx and the plan for 2026, any idea of what kind of the split is for, say, leaseback maybe versus straightforward financing?
Yeah. We mentioned, right, in our long-term planning, in our investor day, kind of three and five-year look that we would be active with sale leasebacks. We had earmarked roughly CAD 3 billion on, call it, I do not know, maybe whatever it is, CAD 8 billion of aircraft acquisitions over the same period. We talked about bringing our owned-to-leased ratio down from 80% owned, 20% leased to something like 60%-65% owned, and call it 35% leased. We will continue to do that. We want to do that in the years where we are peaking in terms of CapEx because kind of this log jam of delays, and we have not had a lot in the last couple of years and now finally coming into the peak of our growth cycle. We will be deploying sale leasebacks in 2026, 2027, and we will work through all of that and probably give you a little bit more color as we set those things up for 2026 when we guide. Yes, there will be components of sale leasebacks there, for sure.
Okay. Thank you. Any fuel hedges actually for 2026, or it is just Q4 that you are hedged for?
Yeah. No, none for 2026. That is something to consider. We typically look at the booking curve and what fares we have already sold. I mean, it has been, notwithstanding, there has been some volatility. It has been a relatively range-bound fuel price, specifically, I would say, after t he spring of 2025 through the rest of the year. We have participated through the year on a couple of occasions, probably around 20% total year. Fuel hedged when you aggregate all of it. We did so mostly within the 90-day booking curve. Once we had fares sold, then we saw some breakdown in pricing.
Okay. Thank you.
Thank you.
That concludes our question and answer session. I will now turn the call back over to Valerie Durand for closing comments.
Once again, thank you very much for joining us on our call this morning. Should you have any additional questions, do not hesitate to contact us at Investor Relations.