Operator: Good evening, ladies and gentlemen, and thank you for standing by. Welcome to Air Canada's Q3 2026 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. I would now like to turn the call over to Amanda Murray, Vice President of Financial Planning, Strategy, and Investor Relations. Amanda, please go ahead.
Amanda Murray: Thank you, Krista. Hello. Welcome to Air Canada's Q3 2026 Earnings Call. Thank you for joining us today. With me today are John Di Bert, our Chief Financial Officer, and Mark Galardo, our Chief Commercial Officer and President of Cargo. Other members of our executive team are also here for the Q&A. Rob Fyfe, who represents the board of directors, is with us as well.
Amanda Murray: Before we begin, a reminder that today's discussion may contain forward-looking information about Air Canada's outlook, objectives, and strategies. Actual results could differ materially due to various assumptions, risks, and uncertainties. Please refer to our Q3 2026 earnings release, our 2025 annual MD&A, our Q3 2026 MD&A, and other filings available on aircanada.com and on SEDAR+. With that, I will turn the call over to John.
John Di Bert: Thank you, Amanda, and good evening, everyone. I will start with a headline. This quarter showed the resilience of Air Canada. Strong commercial execution delivered solid results despite higher fuel costs. Operating revenues grew 21% to CAD 7 billion, with passenger revenues growing at the same rate. Even taking into account last year's labor disruption in Q3, this quarter showed the strength of our commercial strategy.
John Di Bert: Almost 6% more capacity, an 89% load factor, up nearly 3 percentage points, and yields up 11% year over year. So more seats, fuller planes, and higher fares. That translated into adjusted EBIT of CAD 936 million, essentially in line with last year, while absorbing CAD 906 million of higher fuel costs, driven by 68% higher fuel prices year over year. Adjusted EBIT margin of 13.4% declined from 16.6% last year.
John Di Bert: I want to thank our employees who delivered a safe, consistent, and caring service to our customers over a very busy summer period. Their focus and professionalism are what turn our plans into results quarter after quarter. Our recent recognition as the best airline in North America at the 2026 Skytrax World Airline Awards, the tenth time we have received this honor since 2010, reinforces the strength of our offering and our commitment to our customers.
John Di Bert: Allow me to step back from the quarter for a moment. Over the last couple of years, we have made meaningful progress in strengthening Air Canada. We have reduced leverage, further strengthened our balance sheet, and substantially lowered our share count. We have also built on our solid commercial foundations and reached new agreements with all employee groups.
John Di Bert: The scale of our hubs, the breadth of our global network, premium products, and the strength of Aeroplan give us differentiated customer proposition and support more diversified revenue streams. Together, these achievements give us resilience and financial flexibility to keep investing in our fleet, network, our customer experience, and our people while creating lasting value for our customers, employees, and our shareholders.
John Di Bert: We are building a stronger, more resilient airline focused on structural and sustainable value creation. Mark will begin with our commercial performance, and I will follow with our financial results and outlook before we open the line for questions. Mark, over to you.
Mark Galardo: Thank you, John, and good evening, everyone. Bonjour à tous. J'aimerais d'abord remercier nos employés et nos clients. I would like to start by thanking our employees for their continued focus on operational excellence and our customers whose loyalty we greatly appreciate. Our Q3 results represent another consecutive quarter of record revenue for Air Canada and validates the continued resilience of our commercial model.
Mark Galardo: They demonstrate the strength of our foundation and the importance of our diversified revenue streams, our far-reaching global network, and our higher-yielding customer segments. Q3 operating revenues and passenger revenues reached a record CAD 7 billion and CAD 6.3 billion respectively, both up 21% year over year. Importantly, for the first time in our history, all months of the Q3 produced passenger revenues above CAD 2 billion. Both total and passenger unit revenues increased 14% year over year.
Mark Galardo: With more than a third of our quarterly sales made before 1 April, passenger unit revenues increased the most in our North American markets. This is where a closer booking window enabled us to better reflect higher fuel prices at the time of booking. On almost 6% more system capacity, we capitalized on persistent demand strength to deliver leading load factor performance amongst North American peers in this more leisure-oriented period.
Mark Galardo: Today, our hubs are some of the best-connected international gateways in North America. Leveraging the scale, our sixth freedom revenues were up 16% year over year despite the longer booking window, driven by a stronger year-over-year performance on the Pacific and LatAm corridors. Turning to our customer segments, Air Canada remains well-positioned to capture premium demand and premium cabin revenues increased 19% year over year.
Mark Galardo: Even in the summer period, corporate revenues performed well, up 22% year over year. A core strength of Air Canada's commercial strategy is our ability to offer a competitive product for every type of customer with a value proposition no other Canadian airline offers: the breadth of our global network, our premium products, and Aeroplan.
Mark Galardo: Aeroplan continues to play an important role in our commercial ecosystem, especially in premium segments, and rewards our customers for their loyalty and engagement with us and our partners. Our customers consistently engage strongly with third-party gross billings collected year to date totaling CAD 1.6 billion, an 11.5% increase year over year. These billings represent amounts charged to Aeroplan program partners for points issued.
Mark Galardo: Lastly, cargo revenues grew 33% year-over-year, driven by higher yields and favorable freight pricing, while other revenues increased 11% on higher Air Canada Vacations ground package revenues and higher Aeroplan non-air revenues. Looking ahead, revenue quality continues to strengthen as our pricing actions increasingly reflect higher fuel costs. However, given the timing of the recent fuel increase in the booking curve, we do not expect to fully recover the incremental cost in Q4.
Mark Galardo: For Q4 at this point, we are seeing sustained yield strength with load factors broadly flat year-over-year. For context, this is against a very strong Q4 last year when we reported record profitability and Q4 PRASM growth versus 2024. Beyond that, we are actively reviewing capacity and revenue against conservative forward fuel expectations.
Mark Galardo: To date, we have proactively removed more than 2 points of planned capacity from Q1 2027, and we will continue to proactively adjust capacity and fares to protect margins over the course of the year. Winter demand remains resilient across most geographies, despite some pressure in the domestic market. Air Canada Vacations bookings are an important barometer of leisure demand, and we are encouraged that early bookings for some markets are outpacing capacity growth and generating stronger revenues.
Mark Galardo: Our new international routes are booking well, and we are pleased with the initial results of our Airbus A321XLR. This aircraft has a fuel burn per ASM below comparable wide bodies, which is a real advantage in this current fuel environment. Supporting a better supply-demand balance in these markets, the A321XLR is delivering a more favorable margin profile than other aircraft types on comparable routes.
Mark Galardo: As always, we retain the flexibility to allocate aircraft and capacity to areas of strength and mitigate our exposure to less favorable conditions. As we move into the shoulder months, an important part of our commercial strategy is reshaping our seasonality around less commoditized periods.
Mark Galardo: This is where demand from premium and corporate customers is strongest and where our structural advantages matter most. As that demand strengthens in the shoulder period, we continue to adapt our schedule and commercial strategies to capture the growing opportunities in spring and fall.
Mark Galardo: More broadly, we continue to accelerate a number of core commercial priorities to support revenue generation into 2027. We have enhanced our offering with more preferred seats on our high-density 777s and the launch of Branded Fares in premium cabins. In late August, we unveiled our new summer 2027 routes, generating considerable excitement amongst our customers and Aeroplan members.
Mark Galardo: Earlier this month, we launched Embarq, our platform for small and medium-sized businesses, which are the bedrock of the Canadian economy. To close, Q3 was another quarter of solid commercial performance against a volatile backdrop and another validation of the resilience of our commercial platform.
Mark Galardo: We have the agility and flexibility to manage through a volatile environment and are confident in the opportunities ahead. We remain focused on leveraging our structural advantages as we execute on our 2027 plan. Thank you. Merci. Over to you, John.
John Di Bert: Thank you, Mark. Q3 adjusted EBITDA was $936 million on an adjusted EBITDA margin of 13.4%. These results demonstrate the underlying strength and the resilience of our group. They were achieved despite fuel prices being significantly higher than we had originally planned and reflect the actions we took throughout the year to improve fuel recovery through pricing capacity management.
John Di Bert: Let me provide some additional context. Mark already discussed our solid commercial performance, driving a 21% increase in revenue. Operating expenses were 22% higher than in Q3 2025, driven by a $906 million increase in fuel expense, which was driven by a 68% year-over-year rise in fuel price per liter. At our Q2 call, our Q3 assumption for fuel was CAD 1.38 per liter, or $3.70 US per gallon. Our actual fuel price averaged CAD 1.48 per liter in the quarter, approximately $4 US a gallon.
John Di Bert: That is an intra-quarter $140 million headwind, and it includes the benefits of fuel hedging gains of $22 million in Q3. In all, we recovered 46% of incremental fuel expense below our original expectation of 60%, primarily due to the significant increase in fuel prices experienced in September. We expect our recovery rate to improve to 70% in Q4. Fuel recovery remains a question of timing, not demand.
John Di Bert: When fuel spiked in September, approximately 50% of our Q4 bookings had already been sold, creating a natural lag before our pricing actions could be fully reflected in fares. Our commercial actions continue to offset a meaningful portion of higher fuel costs, and our recovery rate will grow as those actions work through the booking curve. Our objective remains to achieve full fuel recapture over time.
John Di Bert: While fare increases remain the primary tool to offset a higher fuel environment, we will also pace our growth to protect unit revenues and margins through 2027. Turning to costs. Unit cost performance was broadly in line with our expectations. Adjusted CASM increased 3.3% to 14.45 cents. The increase mainly reflected higher labor costs, higher sales and distribution expenses, and higher depreciation as new aircraft entered service.
John Di Bert: This was partially offset by the lower other operating expenses and our 6% capacity growth. With new 4-year agreements concluded with IAM and Unifor, the labor agreement reset cycle is now largely reflected in our cost structure, allowing us to focus on productivity and cost containment initiatives as we grow the airline. Unit cost performance in the quarter was also favorably impacted by the timing of maintenance and other costs, which we expect will materialize in Q4.
John Di Bert: Below the operating line, adjusted pre-tax income was $328 million. Adjusted net income attributable to shareholders of Air Canada was $214 million, and adjusted diluted EPS was 75 cents. Turning to cash generation, Q3 free cash flow usage was $440 million, largely reflecting lower operating cash flow, including the seasonal unwind of advanced ticket sales and higher capital expenditures.
John Di Bert: Year to date, we have generated $1.3 billion in positive free cash flow, including approximately $500 million in proceeds from sale and leaseback transactions. Turning to our balance sheet, we ended the quarter with net leverage of 1.3 times, comfortably below our target of 2 times or less. Our liquidity was $8 billion at the end of Q3, a healthy 32% of trailing 12-month revenues. Our capital allocation priorities remain unchanged: maintain financial strength and flexibility, invest in the airline, and third, return excess capital to shareholders.
John Di Bert: Our financial flexibility is a pillar of our resilience and a true competitive advantage. That strength matters amid volatility and enables us to look through near-term pressure on earnings when assessing leverage. In August, we used the proceeds from the Aeroplan transaction to repay a $1.2 billion US bond maturity. As a result, we have no material corporate debt maturities until April 2028.
John Di Bert: Turning to investment in the airline, fleet CapEx will step up through the end of 2026 and into 2027 as deliveries ramp up. New aircraft improve our customer value proposition, open network opportunities, deliver efficiencies, and lower our unit costs over time. The A321XLR is an early example. On a comparable transatlantic stage length, it is burning roughly 15% to 20% less fuel per ASM than a wide-body aircraft on a comparable route.
John Di Bert: This is meaningful in any environment, but it matters even more in this current fuel environment. Scheduled aircraft deliveries in Q4 include six A321XLRs, our first two 787-10s, and seven A220s. We expect these aircraft to generate attractive returns and support long-term value creation. Finally, consistent with the commitments we made at our Investor Day, we returned the capital to shareholders through the completion of an $800 million substantial issuer bid in September.
John Di Bert: The transaction reduced our shares outstanding by approximately 10%, 252.7 million shares outstanding as of 30 September 2026. It is our lowest share count since 2009 and well below our 2028 target of under 300 million shares, two years ahead of schedule. We do plan to renew our NCIB program in November but will remain opportunistic in repurchasing shares. Now let us turn to the outlook.
John Di Bert: For the rest of 2026, our commercial trends remain strong, and we expect them to extend into the winter season. We have narrowed our capacity and our cost ranges to reflect limited variability in Q4 while keeping room for fuel volatility. Fuel remains the largest variable in our outlook. At this time of year, we anticipate about one-half of our Q4 fuel needs to be exposed to the fuel price volatility.
John Di Bert: We are planning for a Q4 all-in fuel price of CAD 1.72 per liter or about $4.60 US per gallon, compared to CAD 1.29 per liter or $3.50 US per gallon in our August outlook. This higher fuel assumption is the principal change for our full-year outlook and is driving the adjustment to our expected profitability and cash generation. We now expect full-year ASM growth of approximately 2.75%, aligned with the midpoint of our prior guidance.
John Di Bert: We expect adjusted CASM to increase 5.5% to 6% versus 2025. While the timing of certain costs has shifted from Q3 to Q4, affecting the year-over-year comparison, we continue to expect adjusted CASM growth to be lower in H2 2026 than in H1. Over time, we expect our fleet renewal and the benefits of scale to support decelerating our unit cost trajectory.
John Di Bert: We expect adjusted EBITDA to be between $2.4 billion and $2.7 billion, which is approximately $500 million below prior guidance at the midpoint. The change reflects our higher fuel assumptions for Q4. We now expect breakeven free cash flow ±$150 million, compared with our prior guidance range of $200 million to $500 million. Year-to-date, we have generated $1.3 billion of free cash flows.
John Di Bert: Our guidance continues to assume approximately CAD 1 billion of sale-leaseback transactions in 2026, which is supported by signed definitive agreements. Though we are not yet providing guidance for 2027, we are planning for fuel to stay elevated. On that basis, we still expect to reach pre-pandemic capacity levels, but we are carefully reviewing the pace of capacity growth to protect unit revenues, margins, and returns while retaining flexibility to respond to demand.
John Di Bert: Our diversified earning streams, our strong balance sheet, and our financial flexibility support our long-term strategy, and they give us confidence in our ability to execute as we head into 2027. We remain well-positioned to play both offense and defense. To conclude, our priorities are clear and unchanged. One, manage the controllables, including commercial actions, capacity, cost, and operational performance. Two, protect our margins, returns, and cash generation while maintaining the strength of our balance sheet.
John Di Bert: Third, continue advancing the value creation framework we set out in New Frontiers. With that, back to you, Amanda, for questions.
Amanda Murray: Thank you, John. Krista, please open the line for questions from analysts.
Operator: Thank you. If you would like to ask a question, please press star followed by the number 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, again, press star 1. We do kindly ask that you limit yourself to one question and one follow-up. For any additional questions, please re-queue. Your first question comes from Konark Gupta with Scotiabank. Please go ahead.
Konark Gupta: Thanks, and good afternoon. My first question, I guess, is on the fuel here. It is understandable that the fuel prices have gone up a lot, so the fuel recovery rate has to come down in Q4. Can you help us understand some of the moving parts in that fuel absorption rate, John? What kind of fares are you underwriting these days on fuel price, and are you expecting the fuel price to kind of taper off from here, or this is an ongoing assumption for the next, call it, six months as well?
John Di Bert: Yeah. Good evening, Konark. I think, first and foremost, we take the world as it is, right? So you have fuel running in the CAD 1.70 to CAD 1.80 range pretty constantly right now. So our posture is that that is with us for at least the foreseeable future.
John Di Bert: We continue to price. We had expectations of CAD 1.40 to CAD 1.45 fuel pricing recovery as we went into the quarter. We had a spike, so we will be looking to continue to push pricing actions in as, particularly as we look into Q1. With respect to fuel prices, we will not make any speculation other than the fact of taking the world as it is today. Maybe Mark has some comments on the pricing environment.
Mark Galardo: Yeah. So good evening, Conor. Look, it took us several weeks, if not months, to level up in the fall with fuel prices that were closer to CAD 1.40, CAD 1.50 a liter. Going into Q4 had fuel stayed at that level, we would have covered most of the incremental fuel bills, if not all. However, since early fall, it has run up to CAD 1.70, CAD 1.80, and then moved up pretty quickly. So, at this point in time, certainly we are trying to push further increases in market, but it will take some time before the market fully levels up with where the fuel price is today.
Konark Gupta: Okay. No, that is great color. Thanks. Then, maybe on the transborder side, while I have you, Mark, the market seems to be in a structural decline here for some time. Do you guys expect, or are you guys, I would say, building capacity again in anticipation of demand coming back potentially, or are you just playing on a spot basis?
Mark Galardo: Conor, if you look at our Q3 results on transborder, they were excellent. Our revenue growth was quite good. Our yields were quite solid, and our sixth freedom continues to grow. On transborder, you have got a couple of structural tailwinds that are helping us. One, the strength of the US dollar.
Mark Galardo: Secondly, we have got a pretty favorable supply-demand balance. The profitability levels that we are enjoying on the US market right now, the margins are slightly higher than they are on domestic. As I look forward, I see much of the same for Q4 and for Q1. So I have got no reason right now to be concerned about the state of the transborder market.
Konark Gupta: Okay. Thanks for the time.
Mark Galardo: Thank you.
Operator: Your next question comes from the line of Atul Maheswari with UBS. Please go ahead.
Atul Maheswari: Good evening. Thanks a lot for taking my question. Can you maybe double-click on the portion that you mentioned about Q4 bookings? Could you give us some sense of what kind of trends you are seeing by various geographies, and any color on how early Q1 bookings are shaking out would be helpful.
Mark Galardo: Sure. What you are going to see overall right now for Q4 is load factors are generally flat year over year. As I mentioned in my script, our fuel recovery and therefore yields are higher in North America because the booking window is much closer in, whereas the international typically books further out. Given that backdrop, we should expect that North America has the highest yields, with obviously flat load factors year over year and international trailing a little bit.
Atul Maheswari: Thank you.
Operator: Your next question comes from the line of Fadi Chamoun with BMO Capital Markets. Please go ahead.
Fadi Chamoun: Yeah, thank you. Mark, I just want to come back to the demand resiliency. As you look at the progression month to month since the fuel started to rise materially in late August and into the fall period, have you not seen impact from a load factor perspective? I guess you have called out Q4 flat load factor, but we have seen much stronger performance before that.
Fadi Chamoun: Are you starting to see any resistance in the demand side? I am just trying to think as you go into next year and your plan to grow capacity, how should we be thinking about the market's ability to absorb what you have planned from a capacity perspective, given where fuel prices are today?
Mark Galardo: Yeah, thanks, Fadi. We saw a very strong end of Q3 with September and October, which I have called out previously, being quite strong. The demand overall to/from within Canada still remains relatively stable, up a little bit. What we have seen is the market, the growth rate is decelerating a little bit. Whereas in prior quarters, we would have seen market demand growth between 4% or 5%, we are now seeing demand market growth between 2% and 3%.
Mark Galardo: But certainly what is helping us is how diversified our network is. Certainly, the sixth freedom portion of our network is also helping as we are tapping into new traffic sources. So that is helping us offset a little bit. Going into Q1, much of the same. Our current booking posture for Q1 has a flat load factor build so far.
Fadi Chamoun: Okay, appreciate it.
Operator: Your next question comes from the line of Savi Syth with Raymond James. Please go ahead.
Savanthi Syth: Hey, good afternoon. I know you are not ready to talk about capacity growth for next year, but if I look at your fleet plan, just overall seats are growing high single digits, and it sounds from your commentary that you might be, if fuel prices stay high, maybe in that low- to mid-single-digit range of probably capacity growth. I am curious on how you achieve that and then what we should think about in terms of the impact on unit cost as a result of that.
Mark Galardo: Savvy, we are looking at a bunch of scenarios right now in terms of flexibility and agility of how we deploy capacity. Our focus right now is really the H1 of 2027, because that is where we anticipate that fuel prices will continue to be relatively high. So we have removed two points out of Q1. We are looking at the more marginal flying reductions, so that would be midweek cancellations on certain routes.
Mark Galardo: We are going to be looking at reducing utilization somewhat, and as you can see by the suspension of our Singapore route, we are also kind of reevaluating the ultra-long haul part of our business, as that is a bit more exposed to the higher fuel prices. So right now, we are still very much contemplating a variety of scenarios. What we can say definitively is for Q1, we have removed two points of capacity, and we will leave it there.
John Di Bert: And maybe just I will take the back end of your question on CASM. So, we have a 5.5% to 6% range for 2026 on CASM growth year-over-year. Yes, for sure, had we had the higher single-digit capacity growth in 2027, we would have been expecting a very favorable impact to CASM.
John Di Bert: I still think that as we get through the plan cycle here, we will see the benefits of newer aircraft, continued scale improvements, even at lower rates of growth. And that should still produce a decelerating CASM growth year-over-year. So, we will work through that and as we get into 2027, guys, we will talk through it. But expectations are still that we are going to start to have a curve to the downside on the year-over-year growth in CASM.
Savanthi Syth: That is super helpful. Just if I might follow up on the demand question earlier. Curious what you are seeing on the corporate side, and if maybe some of that is slowing, is that more leisure and being more price sensitive? Just curious how corporate is doing here.
Mark Galardo: No, corporate continues to evolve very favorably. Into Q4, it is double digits, kind of in line with Q3.
Savanthi Syth: Got it. Perfect. Thank you.
Mark Galardo: Thank you.
Operator: Your next question comes from the line of James McGarragle with RBC Capital Markets. Please go ahead.
James McGarragle: Hey, thanks for having me on. I just had one quick follow-up here on that capacity planning on 2027. Just to confirm, would you be deferring any of your new planes or potentially retiring any of the old ones? I just want to make sure I am modeling any adjustments to potentially CapEx or free cash flow correctly into 2027.
John Di Bert: Yeah. For 2027, I think the new fleet remains an advantage in the sense that they are more cost-effective, more fuel efficient, and they will provide better service and even some premiumization. I think we will be looking more at utilization on the older fleet, and as Mark said, reducing some of the marginal flying.
John Di Bert: At the same time, utilization on older aircraft or aircraft that need specific high-cost maintenance. We will try to balance all of that. No significant change in the expectation, other than as every year has been for the last couple of years, there will be some movement with delivery schedules and timing, but we will deal with that as it comes.
James McGarragle: Just in terms of your balance sheet, obviously, it is in really good shape right now. Can you just give us an update on how you guys are thinking about capital allocation into Q4 and into 2027? I will turn the line over after that. Thank you.
John Di Bert: Yeah. Thank you. We have been very consistent with capital allocation. First and foremost, we have worked to protect the balance sheet. Work that we did in Q3 is further proof of that. We have no maturities through April 2028, so that is in good shape. High liquidity relative to last 12 months of revenue, over 30%, so it gives us a lot of flexibility.
John Di Bert: We are going into a CapEx cycle, and that has been kind of planned and telegraphed for a long time now, and that starts with quite a few deliveries in Q4 and then through 2027. That will start to normalize past that in 2028, 2029. But for now, I think it is keep the balance sheet strong. So grow responsibly with that. Invest in the airline so we can create the platform for value creation for the long term, which we are confident continues to be our main objective here.
John Di Bert: Thirdly, returning shareholder value. But I think on that one, we have achieved a lot, right? We are at 252 million shares outstanding. We feel very good about the share count. We have deployed now probably almost CAD 2.5 billion of cash over the last few years. We will be very opportunistic with the NCIB. We will see how 2027 evolves as well with fuel and cash flow. So all those things will be considered.
Operator: Your next question comes from the line of Jamie Baker with JP Morgan. Please go ahead.
Jimmy Baker: Hey, good evening, everyone. John, I got interrupted, so I am hoping you did not already address this, but a question on leverage. How do we think about the cadence of where leverage heads next? Obviously, next year is a bit intense from a CapEx perspective. You have got the buyback plans. Just kind of curious how you are, I guess, triangulating between leverage and your IG aspirations.
John Di Bert: Yeah. I think the math is going to be the math. We're going to have probably a couple of lighter quarters as we go through higher fuel environment if it stays as it is. We'll see as that moves through. I think my comment would be through that we built the airline to be very resilient, strong liquidity.
John Di Bert: From an overall strength of the balance sheet, nothing changes. The math, obviously, given the earnings and the pressure that comes from some of these spikes on fuel, is going to take its toll over the next couple of quarters. We'll see some pressure on the leverage ratio. My expectation is that we're through that. Our aspirations for investment grade, we're really all about converging our 2028 and 2030 objectives, and I think that those remain intact.
Jimmy Baker: Okay.
John Di Bert: The work here is to get there responsibly and to put ourself in a position to have both cash generation and investment grade opportunities as we kind of work through the next probably 12, 18 months.
Jimmy Baker: Okay. That helps. Then second, for Mark, I'm sorry to beat a dead horse here on fuel recapture, and I realize the calculus might differ between airlines, but the 70% estimate for the Q4 is a little bit lighter than what we've heard from others.
Jimmy Baker: You've got factors like the pace of domestic fare increases. You mentioned the booking curve in your prepared remarks. I guess my blunt question is whether there's any elasticity component baked into the 70% assumption. Any thoughts there? Thanks in advance.
Mark Galardo: Yeah, that's a great question, Jamie. One of the items that differs between Air Canada and our American peers is the composition of our network. We're almost 60/40 long haul to short haul.
Mark Galardo: Our American peers are typically 30/70. The close-in booking window for North America allows a higher recapture. It is just basic math. We have a much longer kind of tail for international long-haul bookings. As a result, once those bookings are in, it is hard to recapture, because the bookings are made, and we typically have a strong base of bookings basically 2 months out. That is really a contributing factor as to why our recapture rates are a little bit lower.
Jimmy Baker: Okay. All right. That is perfect. Thank you very much.
John Di Bert: Thanks, Jamie.
Operator: Your next question comes from the line of Cameron Doerksen with National Bank. Please go ahead.
Cameron Doerksen: Yeah, thanks. Good evening. I will maybe follow up on that question, just based on what you have just described there as far as the recapture and where the booking curves are. If we assume that fuel prices kind of stay where they are into 2027, do you think you can fully recapture the price of fuel in Q1, or is that something we should think about more as kind of Q2 or later?
Mark Galardo: Cameron, it is hard to say. Right now, like I said earlier, it took about several months to get to a place where the market fully prices in fuel closer to about CAD 1.50 a liter. Now the market has to readjust to CAD 1.70, arguably CAD 1.80 a liter. I cannot say that the market is there just yet. Obviously we are going to aspire to getting ourselves there, and have the highest possible recapture. But we have yet to see the market fully price in the latest cost of fuel.
Cameron Doerksen: Okay. No, that is helpful. Just on capacity, you mentioned that you had pulled about 2 points out of your Q1 plans. What are you seeing from competitive capacity? We have been trying to look at some of the sun destination plan capacity for this winter, and some of your competitors have got some pretty aggressive capacity plans, which seems it might be a challenge given where the price of fuel is. So what are you seeing from your competitors as they look into 2027 on the capacity plans that they have?
Mark Galardo: Yeah. If you look into Q1, there is a lot of capacity in the sun market. Obviously with Cuba no longer being a destination that one can travel to, capacity is being redistributed onto markets where maybe we were one of 2 players on the market, now there is a third or fourth player. So we see a little bit of pressure on the sun market.
Mark Galardo: We are seeing a little bit of pressure on the Pacific as kind of the Chinese ramp up their post-pandemic capacity. But on the domestic market and transborder, generally speaking, we are looking at low single-digit capacity growth.
Cameron Doerksen: Okay. That is helpful. Appreciate it.
Operator: Your next question comes from the line of Darryl Young with Stifel. Please go ahead.
Daryl Young: Hey, good evening, everyone. Just wanted to ask on the transatlantic, nice to see a return to growth there. Wondering how much, or I guess where you stand from a pricing standpoint to some of the international carriers. As hedge books roll off, is that going to be another opportunity for growth into 2027, or how are you thinking about competition there?
Mark Galardo: Yeah. On the transatlantic, again, one of the issues or one of the challenges of the transatlantic is again that lag between a far-out booking window and when fuel prices are actual. That has led to the lower recapture rates. So typically, two months out, you have 70% to 75% of the bookings already on hand.
Mark Galardo: As we go into Q4 and Q1 and more pricing increases roll in, we should see higher yields across the Atlantic. We have seen a little bit of a demand slowdown in the last two, three weeks. Obviously, there has been protests in Europe. We expect that to be transitory. But overall, we see stable market demand.
Daryl Young: Okay. Looking out to your 2028 targets with CAD 30 billion of revenue, it seems like from the capacity perspective, you are going to be behind the curve of where you were when you originally set that, but you have maintained that. Is that a function of pricing staying higher through your forecast period? Or how should we think about a hockey stick of capacity coming back in 2028?
John Di Bert: Yeah, I think that the capacity management we will do for 2027 will be a function of the market we are in and how we work through that. We would expect to have eventually the full capacity of our fleet utilized appropriately. There is going to be obviously some pricing implications as well, and we will see where that lands. It is too early to tell now what the pricing environment will be as we get into 2028.
John Di Bert: I think overall, the plan remains solid in the sense that we have executed on a lot of the expectations that we had. We need to see how the next 6 months develop, and then we will look forward to see how 2028 moves through. Most of the differences come from the adjustment we made from the 787-10 order.
John Di Bert: Besides that, it will be a question of deliveries and should they all come in when they need to come in, and we will tighten up against the ASMs for 2028 as we get closer to the year.
Daryl Young: Got it. Thanks very much.
Operator: Your next question comes from the line of Andrew Didora with Bank of America. Please go ahead.
Andrew Didora: Hey, good evening, everyone. John, I was just trying to understand the implied Q4 guide here. I think the CASM and fuel stuff certainly makes sense. Just on revenues, I know it has been asked in other ways, but based on the way we are running our model, it seems like RASM for Q4 probably up high single digits, obviously a pretty decent decel from Q3 and even Q2 and more in line with Q1.
Andrew Didora: Just curious, why would that be in this type of fuel and pricing environment? Mark, any color on as you move into Q4, what are some of the regions, geographies, or demand buckets that would drive that change?
Mark Galardo: Thanks, Andrew. I will take the first part, the second part of the question. Going into Q4, we do not see RASM up high single digits. RASM will not be as strong as it was in Q3 because we are rolling over some comps, where last year in Q4, we had a record Q4 in terms of RASM performance. But certainly, you should anticipate that RASM will be in the double digit type environment.
Mark Galardo: Again, as I stated before, the North America markets are more resilient. They have got a closer in booking market, which allows us to pass on more of the recapture than international long haul, which typically books 60, 90, 120 days out. Typically, 60 days out, you already have 70%, 75% of the traffic already on the books.
Mark Galardo: While we see yield accelerating in Q4, RASM will decelerate slightly from Q3 to Q4, but still be comfortably in the double digits.
John Di Bert: Maybe, Andrew, I will just add something if it helps. It may or may not, but absolute pricing in terms of levels of pricing from Q3 to Q4 are going to be pretty much where we expected them to be as we went through the conversation on our Q2 call. The difference really is we burn probably about 1.3 billion liters of fuel in Q4. The difference between CAD 1.72 and the CAD 1.29 per liter that we guided is over CAD 0.40.
John Di Bert: You get a number right there. It is like in the mid CAD 500 million. If you look at the midpoint to midpoint, we are pretty much there. That is the number. September was also a headwind, offset some of that. If you add another CAD 100 million plus for September, it would be over CAD 600 million of fuel pressure from the last time we provided guidance.
John Di Bert: The real issue is not necessarily on the revenue line. Yes, that is going to take some time to increase from here, but where we are is pretty much where we expect it to be. Where we are not is on the fuel number.
Andrew Didora: Okay, thank you for that. Then, maybe John, just as we think about unit costs heading into 2027, I know you do not want to guide that yet, but you clearly anniversary all of your labor agreements.
John Di Bert: Yeah.
Andrew Didora: Back H2 2026 is up mid-single digits. Would you expect that to begin to bend down as we move into H1 2027?
John Di Bert: Yeah.
Andrew Didora: Given the way you think about capacity right now?
John Di Bert: Yes. Even with a little bit of a pare back here in terms of just the H1 of the year, particularly on capacity. We have to get through some additional work and just work through the planning cycle. But expectations would still be that we would start to see some deceleration of the year-over-year increases. They have been in that 5% range for a few years now, and I would expect to see a reduction in year-over-year CASM growth in 2027.
Andrew Didora: Thank you.
Operator: Your next question comes from the line of Chris Murray with ATB. Please go ahead.
Chris Murray: Yeah. Thanks, folks. Maybe a different way to think about where the recovery is in terms of fuel. Where are you in the booking curve right now as we go into Q4 and into Q1? Can you give us some sense of idea what's left to book, both internationally and domestically, just I get to the volatility of fuel price. I am trying to understand what might be already in there, what you have left to catch up to, and if fuel prices move in your favor, is there some recovery possible as we go further into the year?
Mark Galardo: Chris, I will take that one. For Q4 right now, obviously October is behind us. But in general, for Q4, we are roughly about 80% of our bookings already on hand. Going into Q1, we have got roughly 30% of our bookings on hand. Like I said, load factor year-over-year is relatively flat. I am not going to break it down North America, international. Just give you the headlines here, closer to 30%. Like I said, we are trying to get the market to level with the actual fuel price. It will take some time for that to happen. Generally speaking, when you have a sudden fuel spike like this, carriers around the world are testing the elasticity of demand. Once they feel like, certainly we have seen some inelastic behavior, but once they feel that the elasticity is certainly on side, they will float further increases in.
Mark Galardo: That is basically where we are in terms of trying to level closer to CAD 1.70.
Chris Murray: Okay. The other question I had for you was on freight and cargo. With the higher fuel rates, I was just trying to understand how much of that cargo business is tied into the passenger, how much is tied into dedicated freighter. I have noticed that you have got some new routes that you are trying to work into Europe right now. Just trying to get a sense of the growth rate, very strong in the quarter. Is that something that we should be expecting to continue for the next little while as even a natural offset to what is going on with fuel and how that pricing is proceeding?
Mark Galardo: Yeah. The cargo business is doing extremely well. Going into Q4, you should anticipate, again, much of the same, but the booking curve for cargo is so close in. Because it is so close in, the recapture rates are very high, almost covering 100% of the incremental fuel price. We are expecting the strongest October on record for our cargo business, much the same in November.
Mark Galardo: If you break it down wide body to freighter, you are looking almost 75% of the revenue being wide body belly, the balance being the freighter. Of course, the wide body belly is fed by the freighters that are coming in from a variety of destinations in LATAM, the USA, and now, a new service to Amsterdam to help us take advantage of. Generally, there are a lot of tailwinds in the cargo market right now.
Chris Murray: Okay. That is helpful. Thanks, Boris.
Operator: Your next question comes from the line of Tom Fitzgerald with TD Cowen. Please go ahead.
Tom Fitzgerald: Hi. Thanks very much for the time. Question on sixth freedom revenues. You mentioned earlier the new traffic sources you have been leaning into. I think a lot of that is Latin America to APAC and EMEA. Could you just talk about what you are seeing there, how we should think about that portion of sixth freedom growing, just with a year of learning under your belt, and as you guys optimize that into 2027?
Mark Galardo: Yeah. This is an exciting part and a growth part of our business, Tom. We are really excited about what we see ahead. For Q4 right now, revenue is closer to 20% up year-over-year on the sixth freedom side. Much of that is the LATAM to Europe and LATAM to Asia business that we saw momentum last year, and we were doubling down this year, and so far, that is doing quite well.
Mark Galardo: As we look into that same dynamic into Q1, we see even further acceleration. Again, it is really a new accretive source of revenue. It certainly helps us in preserving high load factors in the quarter.
Tom Fitzgerald: Okay. Great to hear. Really helpful. Just a quick accounting one, maybe for John, on Aeroplan. If we just take the proceeds in the filings for this quarter, that CAD 570 million, that is running up about 13% year-over-year, year-to-date up like 11.5%. Is that low double digits a safe run rate for proceeds if we model out 2027 and beyond, and then just taking maybe 10% of that for net income to then get to the minority share interest? Thanks again for the time.
John Di Bert: Yeah. Why don't we take that one off, and you can, maybe with myself and Amanda, give us a call and walk you through it.
Tom Fitzgerald: Okay. Fair enough. Thanks. Maybe I was thinking of a follow-up then just on longer term, how do you think about the mix shaking out on sixth freedom between US sixth freedom and then Latin America sixth freedom? Thanks again for the time.
John Di Bert: Yeah.
Mark Galardo: From a percentage perspective, certainly there is a lot more growth just as a function of how small the base is on LATAM. That is why this summer we are extending service to Guatemala. We are extending service to Lima. We are going to be extending service to a bunch of cities in Mexico, all with the primary objective of growing the sixth freedom business to and from LATAM year-round and consistently over the years to come.
Mark Galardo: We think that is a huge opportunity given our geography. We think we have got a right to win there. So far, the execution suggests that that is exactly what is happening. So definitely an exciting growth part of the business.
Operator: Your next question comes from the line of Jack Ewels with Jefferies. Please go ahead.
Jack Ewell: This is Jack on for Sheila. I thought maybe just to drill on the customer types for a second. Last quarter, I believe the main cabin RASM trailed premium by about 3 points, and I was wondering how that gap trended into Q3 and what bookings indicate for Q4. I just think the last quarter it was encouraging to hear that main cabin was holding in despite the fare surge this year.
Mark Galardo: Jack, in Q3, it is a bit of a tale of two seasons. In July and August, typically, this is a low point for premium demand travel and yields. Then in September, it comes roaring back, and much the same for October. So we had relative parity between premium cabin and main cabin in Q3. It is in Q4 where we expect that to diverge.
Jack Ewell: Got it. That is very helpful. I guess maybe just to follow up on Savi's question from earlier, I know corporate revenue accelerated into the 20% range this quarter. It is reflecting continued very strong demand.
Jack Ewell: I was wondering if you could talk about the trends by region across domestic and international, and if there are any sectors specifically driving this. Maybe my last question on it is just, has your introduction of the Basic Fare offering and Premium helped boost corporate yields, as we would assume that fare option is blocked by a lot of corporate travel teams?
Mark Galardo: Jack, on the Branded Fares, we have rolled it out on the North Atlantic, but we have not fully scaled it throughout our system yet. We are barely into month 2, so the results are still early. We think there is a lot of promise here. Based on the proxy of our peers who have instituted similar products, we think there is a lot of potential here. But right now, it is too early to comment on the success of that.
Mark Galardo: From a total geography split on corporate revenue, we are seeing double digit growth primarily in Canada and US. The reason for that, again, is the same kind of phenomenon. This is a much closer booking in window where you can price in higher recovery rates on fuel. Atlantic corporate typically books a little bit further out, so those recovery rates are a little bit lower.
Mark Galardo: But all three of those services are comfortably in the double digits in terms of increased revenue.
Jack Ewell: Got it. Thank you for the thoughts.
Operator: And that concludes our question-and-answer session. Amanda, I'd like to turn it back over to you.
Amanda Murray: Thank you very much for joining us today. Should you have any questions, please reach out to myself or Ivan Zarate at Investor Relations. Thank you, and have a nice evening.
Operator: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.
