Thank you for joining us this morning at our 25th Annual Eastern Institutional Investor Conference. For this session, we have Air Canada with us. From Air Canada, we have John Di Bert, EVP, CFO, and Amanda Murray, Head of Financial Planning, Strategy and Investor Relations. Thank you both for joining us here today.
Good morning.
We are going to host this as a fireside chat, so if there are any questions, feel free to raise your hand and I will call on you.
Good morning, and it is good to see everybody here. We are getting off bright and early, and I am excited about that. We find ourselves here at the end of summer of 2026, a beautiful day in Montreal, a lot of sun and a little bit chilly. I just want to maybe take a quick minute and give you guys a little bit of an update overall.
First and foremost, Krista, I think for 2026, despite a lot of obviously volatility and the pressure on fuel, I think one of the things that we have highlighted at Air Canada is the resiliency of our revenues, the diversification, and the quality of our product and the flying, and really that has been the showcase of 2026 at Air Canada. We have navigated through all of the fuel volatility here quite well. Demand remains very strong.
Strong diversification of revenues, franchises, whether they be cargo, the vacations franchise, obviously Aeroplan, we can talk more about that. But also the premiumization continues. Corporate demand, very solid. Canadians continue to travel. The network strategy that we're deploying is reaping benefits. Through it all, we find ourselves well-positioned. As you know, we've done some work also on the balance sheet.
We can talk a little bit more about that. We feel good about the results. Look forward to 2027, and we're getting a lot of planes. That has been part of our strategy for a long time. There's an important part of the growth cycle. I look forward to the ability to leverage that growth and start to work on margin expansion. I think that's an important part of our story as well. We're very focused on deploying the aircraft as they come in.
We're excited about them, the best aircraft in the world in their segments. I'm sure we'll talk a little bit about the balance sheet, but it's in great shape. Leverage on a pro forma basis after the second quarter, probably down around 1.2x or so. We're completing a buyback, actually. There's an SIB, an active one, I think closes today. We've done a lot of work on the balance sheet, both for the equity holders and the debt holders. I'll turn it to you for questions, but we've been pretty busy and feel pretty good.
Absolutely. That was a great overview. Maybe we'll touch on the last point there, balance sheet, but maybe through the Aeroplan announcement that you had just a few months ago. You sold a minority stake in Aeroplan. Can you speak to how this came about, the key drivers of the decision to sell this stake in Aeroplan?
I'll start with, I think, we concluded that there was a valuation gap in the quality of the asset itself in Aeroplan. It has high-quality cash flows through the co-brand partners. Obviously, it's a critical part of our brand as well. Offers incredible optionality to customers in terms of interacting with us every single day, but also in terms of how they fly with us and improving their experience. The cash flows and the cash generation and the earnings that it creates are very valuable as well, and we wanted to showcase that.
Number one is that we saw an opportunity to showcase the value. I think that the proceeds of the transaction allowed us to really enhance the balance sheet, but also to accelerate an objective that we had, which was to return share count. We had a target of below CAD 300 million, but, in the end, we were looking for it as pre-pandemic levels, which is about CAD 260 million or so shares.
We saw the conditions in the market that were opportune, and with all of that, we decided to explore it further and concluded it. I would tell you that we didn't have to do the deal, but we saw strong benefits both for valuation, for balance sheet, from a defense point of view, and from an offense point of view in terms of share count reduction.
Right. The implied valuation on that transaction is 21x TTM EBITDA.
Correct.
Pretty impressive multiple there. Can you maybe just remind us some of the benefits of the loyalty program, and still owning part of that, and why that garners a 21x multiple?
Yeah. It's a little bit of what I just said. I think, first of all, we participate in the broad Canadian economy every single day, and we do so through the co-brand partners and their credit card usage. Those co-brands, collectively, that would be the biggest credit card in Canada. One is a constant, regular participation in the broad Canadian economy. I think I've heard numbers like 8%-10% of consumer spend flows through that program in one shape, way, or form. Two, it's a constant daily interaction with our customers, and that's very valuable.
Three, it creates a lot of value for those who travel with us, whether using our lounges, whether it's access to their premium cabin, the flexibility of the program itself, leisure travel combined with their corporate travel. We're introducing more ways of using the card also with small business. There's a ton of participation from the broad Canadian economy, and the cash flows are very reliable. I think that is what drives that valuation. It also is what drives brand loyalty for Air Canada.
Right. That makes sense. As you touched on, you're able to accelerate a lot of your capital allocation priorities here with the substantial issuer bid, repaying some debt. What are you thinking next for Air Canada in terms of capital allocation priorities?
I think we've been pretty descriptive, right? We've been very consistent with our December 2024 Investor Day.
Okay.
We're building a premier global network, and we've talked about the structural growth of where the demand is coming from. Canadian demographics, an important part of that. Population growth has been strong for the better part of the last 15 years, and that has driven also a demographic evolution. Where we fly and the traffic that we generate on our global network from Canadians, new Canadians, is important.
We talked about deploying a Sixth Freedom strategy that really caters to niche U.S. markets, offering them an option to fly directly to destinations. We have an incredible Asia and European direct network, and that becomes very available as we deploy more aircraft down through transborder. The A220 is a good example of that. Aircraft to support the growth has been an important part of the deployment. We've taken care of the balance sheet very early on.
I think that was priority number one. Concurrently, we've always said the order of priority for capital allocation is, number one, keep a very strong balance sheet for all types of reasons. It gives us flexibility and allows us to stay focused on what we do best and continue to fuel our competitive advantage. Two, has been invest in the airline, and you've seen some of it. There will be other investments in things like lounges and some of the infrastructure to support the growth. That will be important as well, but they are not as large, obviously, as aircraft programs.
Then third, we want to return value to shareholders, and we want to do that by, one, growing earnings, which we will. Number two, focused on cash generation, which allows us to continue to both invest in the airline and manage the balance sheet. Also to return value to shareholders as we've been doing with the buyback. I think we are at CAD 2.4 billion, if you include the CAD 800 million SIB, since the end of 2024, and that's a meaningful part of the share count. I think we started at CAD 317 million, and ideally, today we will be somewhere around CAD 260 million.
Right. Perfect. Maybe on the flip side, Aeroplan, very exciting announcement. 2026, though, it's been a challenging year for fuels.
Yeah.
Obviously a lot of volatility and maybe more than most of us had expected or lasted longer.
Yeah.
Can you speak to your ability to pass through some of these fuel costs and how you are handling it now several months into heightened fuel prices?
Yeah. We have talked a little bit about this, but it is kind of resurfaced here again with the surge in pricing just recently. Really, coming out of the gate, we had about, I think it was 50% of our Q2 revenues were already booked when we went into the conflict. That has been the biggest pressure point on the airline. Tickets sold at CAD 0.90 a liter fuel, and then services delivered probably somewhere closer to CAD 1.40 a liter. That happened through the spring and the summertime. Obviously, the bookings later in the year are less relative to the date of the spike in fuel.
I gave some color on our last call. That number, at the time in Q2, probably felt like CAD 500 million- CAD 600 million of headwind that you are almost locked into at the time it happens. Since then, really the work has been on matching fuel and fares, and the team has done an incredible job of revenue management, of commercially managing the fuel spike. We have fairly rapidly moved to a series of price increases that allowed us to match the fuel into the fare.
We have been doing that since probably sometime in the second quarter. As we guided in Q2, I would say that we have a pretty good feeling that when we get to Q4, we would be kind of fully offsetting our recovery rate could be 100%+ in the fourth quarter, allowing for those bookings and then the fuel price. We have had a surge just recently, in the last few weeks. That creates another little kind of a spike within a spike, if you will.
That puts a little bit of timing pressure. But again, the market has been very resilient. Demand has continued. We have seen relatively inelastic demand on travel through that. Even as we priced at around CAD 4 a gallon, that was a number I used at the Q2 call. We were pricing at the time around CAD 4 a gallon. We are probably pricing, I am going to say, between 5% and 10% more than that right now. So we are probably pricing closer to CAD 4.25, maybe CAD 4.30, CAD 4.40 a gallon.
Because of the last surge, we did see fuel prices get up to almost CAD 5 a gallon in the last few weeks. It has come off a little bit now. We will watch this. Our first priority is to continue to pass on fuel and watch demand. At the same time, we are also looking at marginal capacity and making adjustments to capacity where appropriate. We will probably have a little bit of a rationalization in Q4, maybe a point or two, and we will also look at Q1 and make sure that we stay ahead of it.
If I can just add one thing, our ability to pass on the fare and pass on the price of fuel is really a determination by our underlying commercial strategy. The fact that we have all of these different segments of the demand that are inelastic, so the premium, the corporates, the Sixth Freedom, and the cargo, has really enabled us to be in a position to do this.
Right. Certainly. And maybe if we can dive into that a bit more, are you able to give some color on how the premium and the business cabins are performing relative to the main cabin?
Yeah. Obviously, premium is some of our least elastic segments of demand. Usually, as we typically increase fares, we increase them proportionately relative to the underlying fare prices. But honestly, we are seeing strength in demand bookings across all segments of the cabin.
What about on a geographic basis? Any areas where you are seeing more strength or weakness?
We are seeing very strong trans-borders. U.S. to Canadian travel, even despite a 25% drop in bookings last year, good traffic and domestic. Where we are seeing a bit of weakness is in the Pacific, where we still have Russian overfly restrictions, which are not necessarily applicable to some of our competitors on these routes.
Mm-hmm. Maybe just on the trans-border there, obviously, we saw-
Yeah.
...a drop-off last year. Where are we at now in terms of getting back to a normal level of trans-border?
Yeah. After Liberation Day of last year, we basically saw 25% of traffic drop off. Your typical leisure Canadian traveler stopped traveling to Arizona, Orlando, Las Vegas, and they started going to Cancun and Punta Cana. What we did is we didn't pull out of any market. We actually kept each and every single one of our slots and gates in those airports, and basically just reduced frequencies, down-gauged, and put a lot more capacity into the sun where that leisure Canadian traveler was going. Now what we're seeing is that we still have a very healthy network supporting our corporate and our Sixth Freedom travelers, and we're catching the capacity both in the leisure as well as the trans-border.
Perfect. Just in terms of the competitive environment, are you seeing most of your competitors act rationally at this point in time, given where fuel prices are?
I would say that, generally speaking, the industry has focused on recovering fuel through fares and has been generally fairly disciplined at doing it. That's been, I think, positive in the sense that it keeps a healthy aviation industry at large. There's always going to be pockets where you have a little bit more, you may have some competitive behavior that's a little bit more aggressive. But generally speaking, I think that it's an industry challenge. Fundamentally, that is being passed through back to customers.
Right. You also touched on your cargo business.
Yeah.
Strong Q2 there. Maybe just a little bit more color on the strength that we are seeing in cargo and how you are thinking about it over the next 6-12 months.
Yeah. I think it is CAD 1 billion franchise now, and we fly six freighters, direct freighters. We connect those, really complementary service to the global belly freight network. As we add capacity, we will probably add, I do not know, in the neighborhood of, over the next few years with the planes we are bringing on, 20%-25% belly freight capacity. That is going to be important to continue to grow our business. It has done well.
One strength in cargo is that you are able to pass on fuel almost automatically through the cargo pricing on a fairly immediate basis. We continue to see opportunity for growth, and we are leveraging the freighters in a very positive way, where we sometimes, seasonally you can fly them. If you want to bring fruit or flowers from South America in the wintertime or Mother's Day, you put a freighter on the route, and then you move them throughout the world. You can bring lobster from Halifax into Toronto, and then move that throughout the world. The network really works well between the freighters and the belly freight.
Right. Now maybe just moving to the cost side of the business, thinking about adjusted CASM. How should we be thinking about CASM, and what should we keep in mind maybe for the rest of this year and into next year?
I think that you're very correct. We've been through three years now of, I would say, some latent escalation. A lot of that inflation has happened through 2021, 2022, but then really embedded contractually through labor agreements as we got 2023, 2024, 2025. Again, that was largely telegraphed when we had our December 2024 Investor Day. If you remember, you probably don't, but I know I do, we had a chart that showed, we were, I think, delivering about 16% margins at the time, and we had a chart that said our pro forma core margin's probably about 15%.
That was anticipating the inflationary hotspots and pressure that we would have. That's come to bear. If you normalized, and anybody can try to do it their own way, but if you normalized 2025 and based on our guide 2026 numbers, and you took out the impact of the labor disruption in 2025, and you adjusted for that kind of one-time fuel impact in 2026 as we went into the conflict, you probably come out around 15% margins. That's what the business core prospect is.
From there, we have a roadmap to get to 17% and then to 18% margins. In 2027, we expect on a normalized basis, obviously, this distortion of fuel can play in there, but at the core, we would expect margin expansion in 2027, and that would come from starting to roll over the CASM growth. We've been probably mid-single digits for a few years now.
We would expect, we have talked a little bit about it, but something around the neighborhood of CPI minus. Something less than CPI would be the expected continued CASM evolution. That would come fundamentally from one, as the airline gets larger, there is a scale effect. That is important. That scale productivity will bring value. The modern fleet, although it is not an adjusted CASM, the fuel benefits of modern fleet will help margins as that fleet is deployed. Typically, 20% less fuel burn on some of these aircraft.
Overall investments in people productivity technology would also bring some value. That would be, again, CASM helpful. Finally, I think the mix of flying will also be helpful to margin. We have not seen wide-body capacity in quite a while added. This starts with the 787-10s. The A321XLRs are transatlantic, a very efficient transatlantic aircraft. That would also bring some additional quality to the margins. The combination of all this starts the trajectory to margin expansion.
Mm-hmm. It sounds like you listed a number of the drivers there, and it feels pretty secure in terms of bringing in the new fleet, and that will help with a number of those items, fuel efficiency.
Correct.
What is the biggest risk, do you think, to your margin expansion story?
I think it just, we have to execute. That's where we focus time and energy, right? The execution is deploying the aircraft. There's been challenges with deliveries and so on. I think we've seen the worst of the delays on aircraft programs. We still have to plan for the introduction of these planes. So you train pilots, you train crew, deploy the aircraft, start the routes. It's just that that's transitioned to some degree so that there's a little bit of work there to be done until you mature that.
As we add the capacity, making sure that commercially we preserve yields. We have many strategies to do that, including more segmentation of the cabin, the premiumization of those new planes. Adding premium cabin space at a faster pace than the average of the fleet will help as well. So protecting the yields in that regard. Also, we're important and selective in where we fly the planes. We've done very well in 2026 with new aircraft, new routes, for example, to Sicily.
We fly into Naples, we fly into Palma de Mallorca. These are all doing very well. The A321XLR new routes are also performing well. We'll have some new expansion coming from those, like the day tripper to London, so you can fly in the day. That should be a pretty good premium route as well. So there are many things we're doing to ensure that one, we deploy the capacity well, efficiently, and secondly, that we preserve the yields.
With that and the structural demand that we're feeding, including Sixth Freedom, including the demographic, including our domestic footprint kind of reestablishing itself a little bit. We had to retrench a little over the last few years without planes. The A220s are playing an important role in that, A321XLRs as well, perhaps. With all of that, we feel like we have both the network strategy, the structural cost benefits from growth and the ability to commercialize the increased capacity in the fleet.
Right. Maybe just on the Sixth Freedom strategy, can you give us an update there on how you're expecting that to maybe grow and expand over, let's say, the next 12 months?
Yeah. Every time we enter an aircraft into a new market, it opens up the opportunity for a new metropolitan area, 300,000, 400,000, 500,000 new potential customers. In simple terms, what Sixth Freedom really is, and I'll talk a little bit about the prospects going forward, is that the U.S. international market is largely 2/3 of it is serviced by the big three, so Delta, United, and American Airlines. About 1/3 of that capacity, so U.S. travelers internationally, originating from the U.S., are serviced by a long tail of global carriers. Air Canada has about 1% of that market share.
On a population basis, it's not true on a travel basis, but on a population, which is a good proxy, 1% of 350 million Americans is 3.5 million. We want to grow to 2%. 3.5 million potential addressable market expansion from the strategy we're deploying. What is it really? Well, if you live in St. Louis and you want to go to Athens, Lisbon, Vienna, Dublin, next year Dubrovnik, and you want to go into Montreal or Toronto and then fly directly, Air Canada's a solution. We often have the shortest distance route time between origin and destination.
As we deploy A220s, which now can carry, this is the technology enabler, because the aircraft carries about 130 passengers at the same seat cost as a Boeing 737 or an Airbus A320. So dis-economic to put an A320 or a 737 on that route because I can't fill the seats, but I can fill 120, 130 passengers at the same seat cost as a bigger aircraft. As you deploy those aircraft into those markets, you now give access to people in St. Louis or Cincinnati or Raleigh, North Carolina, to access the entire global network of Air Canada. And we have point-to-point service in the Trans-Pacific, point-to-point service Trans-Atlantic, that is very well developed, and you bring that passenger into a Canadian hub.
No bag pickup or drop-off, no security process, no customs clearance. It is frictionless. We have synchronized our banks so that U.S. inbound traffic to the Canadian hub meets an international schedule on the outbound within a couple of hours. Now you have this incredible itinerary. You have great Air Canada service, and you will be where you need to be at 7:00 in the morning in Europe or 8:00 in the morning in Europe, as opposed to running through an airport in Paris or elsewhere. And I think that is the value proposition. We have 18 A220s coming in the next, probably 12 months.
So that will add to a total fleet of about 65 A220s. That has been the strength of the growth engine for that Sixth Freedom traffic, as well as other deployment for that aircraft, but it has been an important part of it. We will continue to grow our international network, and we will continue to access important U.S. markets, and continue to synchronize the two schedules. And that should give us from 1%-2% market share. And that is like a 10% addressable market expansion for Air Canada.
Sure. We just have a minute or two left here. I did want to ask, we got an announcement from the Canadian government last week that they are looking at privatizing the four major airports in Canada. Any thoughts on that and impacts to the industry?
Yeah. I think Air Canada's position is that we want, one, continued investment in the infrastructure. It is very important. It is very important for our customers. It is important for all that connectivity I talked about. Having world-class modern airports of size, and we need the growth. There are major development projects underway right now, expansion projects in both Montreal and Toronto. We want to continue to see those accelerate, want to see the world-class infrastructure be put in place.
From that point of view, we'll support solutions that get that done fast, well, and to world-class levels. Secondly, we want it to be cost-effective for our passengers. The burden on the passenger is already elevated, and that needs to improve over time. There needs to be solutions that, one, both enable continued expansion and growth, and at the same time absorb and make the cost structure more efficient. We're willing to participate in anything that can accomplish those two things.
Perfect. That's very helpful. Unfortunately, we've run out of time here. Thank you so much for-
Thank you.
...joining us today.
Thank you.