Air Canada Reports Second Quarter 2016 Results

• Record second quarter EBITDAR of $605 million
• Operating income of $277 million
• Air Canada continues to expect full year 2016 EBITDAR to increase 4 to 8 per cent from record full year 2015 EBITDAR

Air Canada today reported record second quarter 2016 EBITDAR(1) (earnings before interest, taxes, depreciation, amortization and aircraft rent) of $605 million compared to the previous record EBITDAR of $591 million in the same quarter in 2015. EBITDAR in the second quarter of 2015 included a special item which improved EBITDAR by $23 million. Air Canada recorded adjusted net income(1) of $203 million or $0.72 per diluted share compared to adjusted net income of $250 million or $0.85 per diluted share in the second quarter of 2015. On a GAAP basis, Air Canada reported net income of $186 million or $0.66 per diluted share in the second quarter of 2016 compared to net income of $296 million or $1.00 per diluted share in the second quarter of 2015.

"I am pleased to report record EBITDAR results for the quarter from both an increase in revenue and traffic, and specifically from our continued strong focus on unit cost improvement," said Calin Rovinescu, President and Chief Executive Officer. "Traffic growth in all five of our geographic markets exceeded last year's strong growth. We continued to increase our revenue base in the face of a challenging revenue environment principally in the domestic and Atlantic markets and despite a generally weak global economy. Overall revenue growth included an increase in international-to-international connecting passengers via Canada as we continue to successfully build our main hubs as attractive and efficient options for international travellers.

"Our continued focus on our strategic priorities, as well as our increased flexibility and our ability to adapt and react to an evolving business environment, unexpected macroeconomic or geopolitical threats or natural disasters, are helping us deliver on the key financial targets established at our 2015 Investor Day, namely annual EBITDAR margin, return on invested capital and leverage ratio, as well as a significant reduction in unit costs.

"In the quarter, Air Canada and Air Canada Rouge launched 10 new international routes and 11 new transborder routes marking the most intensive period of expansion in Air Canada's history. Moreover, on June 30th we served more than 160,000 customers, setting an all-time record which we expect to surpass during the upcoming August long weekend. I would like to thank our employees for their continued focus on taking care of customers and working together to help make Air Canada a global industry leader," concluded Mr. Rovinescu.

Second Quarter Income Statement Highlights

In the second quarter of 2016, record system passenger revenues of $3.143 billion increased $61 million or 2.0 per cent from the second quarter of 2015. Traffic growth of 9.3 per cent reflected traffic increases in all of Air Canada's five geographic markets. A yield decline of 6.8 per cent principally resulted from a 4.2 per cent increase in average stage length (reducing system yield by 2.4 per cent) as well as increased market capacity and competitive pricing affecting primarily domestic and European services. As previously discussed, Air Canada's network strategy for sustained profitable growth involves higher average stage lengths, an increased number of seats at, on average, lower fares in long-haul leisure markets and a higher proportional growth of international connecting traffic, all of which contributed, as expected, to a decline in yield.

In the second quarter of 2016, operating expenses of $3.181 billion increased $90 million or 3 per cent from the second quarter of 2015. This increase was due to the impact of an 11.0 per cent capacity growth and the unfavourable impact of a weaker Canadian dollar on non-fuel foreign currency denominated operating expenses which increased operating expenses by $51 million in the second quarter of 2016. These increases were partly offset by the impact of lower fuel expense of $141 million over the same period.

Air Canada's cost per available seat mile (CASM) decreased 7.3 per cent from the second quarter of 2015. The airline's adjusted CASM(1), which excludes fuel expense, the cost of ground packages at Air Canada Vacations® and special items, decreased 1.1 per cent from the second quarter of 2015, better than the 2.0 to 3.0 per cent increase forecast in Air Canada's April 29, 2016 news release. The better than forecasted adjusted CASM results were due to lower than previously expected regional airlines expense, aircraft maintenance expense and wages, salaries and benefit expense and to other operating expense reductions.

Financial and Capital Management Highlights

At June 30, 2016, unrestricted liquidity (cash, short-term investments and undrawn lines of credit) amounted to $3.449 billion (June 30, 2015 - $3.283 billion).

Capital expenditures in the first six months of 2016 were $2.568 billion compared to $635 million in the first six months of 2015. Capital expenditures for the second half of 2016 are expected to amount to $437 million.

At June 30, 2016, total long-term debt and finance leases (including current portion) of $6.950 billion increased $556 million from December 31, 2015. In the first six months of 2016, new borrowings of $1.308 billion, which were all related to aircraft financings, were partly offset by debt repayments of $381 million and the favourable impact of a stronger Canadian dollar of $357 million, as at June 30, 2016 compared to December 31, 2015, on Air Canada's foreign currency denominated debt (mainly U.S. dollars).

Adjusted net debt amounted to $6.840 billion at June 30, 2016, an increase of $549 million from December 31, 2015. This increase in adjusted net debt reflected higher long-term debt and financial lease balances as discussed above. The impact of higher capitalized operating lease balances, largely driven by additional aircraft leases in the first six months of 2016 and an unfavourable currency impact on aircraft rent expense, was mostly offset by higher cash and short-term investment balances. The airline's adjusted net debt to EBITDAR ratio was 2.7 at June 30, 2016 versus a ratio of 2.5 at December 31, 2015.

Net cash flows from operating activities of $657 million improved $145 million when compared to the same quarter in 2015. Negative free cash flow of $444 million in the second quarter of 2016 decreased $746 million from the second quarter of 2015 due to a higher level of capital expenditures year-over-year, partly offset by proceeds of $351 million from the sale and leaseback of two Boeing 787 aircraft and by the impact of the higher cash flows from operating activities.

For the 12 months ended June 30, 2016, return on invested capital (ROIC(1)) was 16.2 per cent, unchanged from the 12 months ended June 30, 2015, and better than Air Canada's year-over-year ROIC target of 13-16 per cent, discussed below.

Current Outlook

EBITDAR

For the full year 2016, Air Canada continues to expect EBITDAR to increase 4 to 8 per cent from record full year 2015 EBITDAR.

Adjusted CASM

For the third quarter of 2016, Air Canada expects adjusted CASM (which excludes fuel expense and the cost of ground packages at Air Canada Vacations) to decrease between 5.5 to 6.5 per cent when compared to the third quarter of 2015.

For the full year 2016, Air Canada now expects adjusted CASM to decrease between 2.75 to 3.75 per cent compared to the full year 2015, as opposed to the 1.75 to 2.75 decrease projected in Air Canada's April 29, 2016 news release, reflecting, in large part, the better than expected adjusted CASM performance in the second quarter of 2016 and, to a lesser extent, the benefit of lower regional airlines expense continuing into the second half of 2016. If the value of the Canadian dollar during 2016 were to remain at 2015 levels, adjusted CASM for the full year 2016 versus the full year 2015 would be projected to decrease 3.75 to 4.75 per cent.

Investor Day Targets

Air Canada is confirming that it remains on track to meet or exceed the following key financial targets:

• Annual EBITDAR margin (EBITDAR as a percentage of operating revenue) of 15-18 per cent over the term of 2016-2018 (following on the achievement of 18.3 per cent EBITDAR margins for each of the 12 months ending December 31, 2015, March 31, 2016 and June 30, 2016)
• Year-over-year ROIC of 13-16 per cent over the term of 2016-2018 (following on the achievement of year-over-year 18.3 per cent ROIC for the 12 months ending December 31, 2015, 17.4 per cent ROIC for the 12 months ending March 31, 2016, and 16.2 per cent ROIC for the 12 months ending June 30, 2016)
• A leverage ratio(1) not exceeding 2.2 by 2018 (measured by adjusted net debt over normalized EBITDAR)

Air Canada also remains committed and on track to reducing CASM by 21 per cent, excluding the impact of foreign exchange and fuel prices, by the end of 2018 when compared to 2012.

Additional Guidance

For the full year 2016:

• Air Canada continues to expect depreciation, amortization and impairment expense to increase by $150 million from the full year 2015. This expected year-over-year increase is mainly due to new deliveries of Boeing 787 and 777 aircraft and to the Boeing 777 fleet reconfiguration program.
• Air Canada now expects employee benefits expense to increase by $20 million from the full year 2015, as opposed to the increase of $30 million projected in Air Canada's April 29, 2016 news release. The lower than expected increase in employee benefits expense is driven by the impact of a gain on post-employment liabilities which reduced employee benefits expense by $10 million in the second quarter of 2016.
• Air Canada now expects aircraft maintenance expense to increase by $165 million from the full year 2015, as opposed to the increase of $190 million projected in Air Canada's April 29, 2016 news release. This improvement is largely driven by the lower than expected aircraft maintenance expense in the second quarter of 2016, as well as to various related expense reductions.

Refer to full documentation in attachments box, located at the top left, below the headline.