Mr. Calin Rovinescu reports

AIR CANADA REPORTS RECORD SECOND QUARTER 2015 RESULTS

Air Canada had second quarter adjusted net income of $250-million, or 85 cents per diluted share, compared with adjusted net income of $139-million, or 47 cents per diluted share, in the second quarter of 2014, an improvement of $111-million, or approximately 80 per cent. EBITDAR (earnings before interest, taxes, depreciation, amortization and aircraft rent) amounted to $591-million compared with EBITDAR of $456-million in the same quarter in 2014, an increase of $135-million, or approximately 30 per cent, year over year. The airline recorded an EBITDAR margin of 17.3 per cent compared with an EBITDAR margin of 13.8 per cent in the second quarter of 2014, an improvement of 3.5 percentage points. On a generally accepted accounting principles basis, Air Canada reported record second quarter operating income of $323-million compared with operating income of $245-million, an improvement of $78-million, or approximately 32 per cent, from the second quarter of 2014. An operating margin of 9.5 per cent in the second quarter of 2015 reflected an improvement of 2.1 percentage points from the same quarter in 2014.

"I am very pleased to report that Air Canada achieved record EBITDAR results for a fifth consecutive quarter in addition to record operating income and adjusted net income results, and significant year-over-year improvements to operating margin and EBITDAR margin," said Calin Rovinescu, president and chief executive officer of Air Canada. "I would like to thank and acknowledge the efforts of our 28,000 employees who worked together to deliver yet another outstanding operational and financial performance in the quarter.

"Our record results this quarter reflect a focused execution of our business plan, which we outlined in detail at our June, 2015, investor day. With our growth this quarter, we have successfully increased passenger revenue by 3.9 per cent, expanded margins, significantly increased our adjusted net income and EBITDAR, and continued to improve our return on invested capital. We have delivered on planned cost transformation initiatives and eliminated our significant pension solvency deficit. We have strengthened our balance sheet with increased liquidity levels, improved net cash flows, reduced adjusted net debt and expect further benefits from our recent credit rating upgrade.

"We again expect to deliver record results in the third quarter, with EBITDAR margin expansion versus prior year higher than the 350-basis-point expansion recorded in the second quarter. Demand continues to be robust moving into, historically, our most important quarter given the travel demands and patterns of our North American customers. Our capacity additions for the year, which are largely in our international markets, are important contributors to our increased profits and remain consistent with our plan established in a higher fuel price environment. Our plan is not dependant or conditional on fuel prices staying at the current levels; and the transformative changes we have made over the last several years provide us with the cost structure, fleet and flexibility to respond not only to increased competition in any of our key markets, but also to weaknesses in the Canadian dollar or a downturn in the economy. If we see demand weakening, we can adjust quickly. We are building a resilient airline for the long-term, a sustainably profitable company and global industry leader."

Second quarter income statement highlights

In the second quarter of 2015, on capacity growth of 9.3 per cent, system passenger revenues of $3,082-million increased $117-million, or 3.9 per cent, from the second quarter of 2014. Traffic growth of 8.7 per cent reflected traffic increases in all of Air Canada's five geographic markets. A yield decline of 5.0 per cent, consistent with the anticipated yield impact stemming from the implementation of the airline's strategic plan, reflected an increase in average stage length of 3.4 per cent, which had the effect of reducing system yield by 1.9 percentage points, a higher proportional growth of lower-yielding international-to-international passenger flows in support of the airline's international expansion strategy, a higher proportion of seats into long-haul leisure markets and a reduction in carrier surcharges relating to lower fuel prices, particularly where carrier surcharges are regulated. The favourable impact of a weaker Canadian dollar on foreign-currency-denominated passenger revenues increased passenger revenues by approximately $61-million in the second quarter of 2015. Passenger revenue per available seat mile (PRASM) decreased 5.5 per cent from the second quarter of 2014 on the lower yield and, to a much lesser extent, a passenger load factor decline of 0.5 percentage point.

In the second quarter of 2015, operating expenses of $3,091-million increased $31-million, or 1.0 per cent, from the second quarter of 2014 on the capacity growth of 9.3 per cent. The increase in operating expenses reflected the impact of the weaker Canadian dollar and capacity-related cost increases largely offset by the impact of lower jet fuel prices. The second quarter of 2015 included impairment charges of $14-million and favourable tax-related provision adjustments of $23-million while the second quarter of 2014 included favourable tax-related provision adjustments of $41-million (the impairment charges and tax-related provision adjustments are excluded from adjusted net income and adjusted CASM results). The unfavourable impact of a weaker Canadian dollar on foreign-currency-denominated operating expenses (mainly U.S. dollars) in the second quarter of 2015, when compared with the second quarter of 2014, increased operating expenses by approximately $134-million (comprising $73-million in aircraft fuel expense and an aggregate of $61-million in non-fuel operating expenses).

Air Canada's cost per available seat mile (CASM) decreased 7.6 per cent from the second quarter of 2014. The airline's adjusted CASM, which excludes fuel expense, the cost of ground packages at Air Canada Vacations and unusual items (such as the impairment charges and the tax-related provision adjustments discussed above) increased 0.7 per cent from the second quarter of 2014, in line with the 0.25- to 1.25-per-cent increase projected in Air Canada's news release dated May 12, 2015. Had the Canadian-U.S.-dollar exchange rate remained at 2014 levels, adjusted CASM would have decreased 1.8 per cent when compared with the second quarter of 2014.

Financial and capital management highlights

At June 30, 2015, unrestricted liquidity (cash, short-term investments and undrawn lines of credit) amounted to $3,283-million (June 30, 2014 -- $2,954-million).

Adjusted net debt amounted to $4,896-million at June 30, 2015, a decrease of $236-million from Dec. 31, 2014, as higher cash and short-term investments balances more than offset the increase in long-term debt and finance lease balances (including current portion). The airline's adjusted-net-debt-to-EBITDAR ratio was 2.3 at June 30, 2015, versus a ratio of 3.1 at Dec. 31, 2014.

In the second quarter of 2015, net cash flows from operating activities totalled $509-million, an improvement of $123-million from the second quarter of 2014. Free cash flow amounted to $299-million, $335-million higher than the second quarter of 2014. This increase reflected a decrease in capital expenditures of $212-million and the higher cash flows from operating activities.

For the 12 months ended June 30, 2015, return on invested capital (ROIC) was 16.2 per cent versus 11.0 per cent for the 12 months ended June 30, 2014.

Current outlook

EBITDAR margin

For the third quarter of 2015, Air Canada expects to deliver record results, with EBITDAR margin expansion versus prior year higher than the 350-basis-point expansion recorded in the second quarter of 2015.

Capacity

Air Canada expects third quarter 2015 system ASM capacity, as measured by available seat miles (ASMs), to increase 9.5 to 10.5 per cent when compared with the third quarter of 2014, and to comprise an increase in the total number of seats dispatched (system) of 6.5 to 7.5 per cent and an increase in system average stage length (measured by ASMs divided by seats dispatched) of approximately 3.0 per cent when compared with the same quarter in 2014.

Air Canada continues to expect its full year 2015 system ASM capacity to increase by 9.0 to 10.0 per cent. For the full year 2015, Air Canada continues to expect an increase in the total number of seats dispatched (system) of 6.0 to 7.0 per cent and an increase in average stage length (system) of approximately 3.0 per cent when compared with the full year 2014. Approximately 55 per cent of the 2015 forecasted capacity increase will be through the continued lower-cost growth of Air Canada rouge while approximately 38 per cent of the capacity growth will be targeted to international markets operated by the mainline carrier.

Air Canada now expects its full year 2015 domestic ASM capacity to increase by 3.0 to 4.0 per cent when compared with 2014 as opposed to the 3.5- to 4.5-per-cent increase projected in Air Canada's May 12, 2015, news release, primarily the result of minor schedule changes. The year-over-year growth in full year 2015 domestic ASM capacity is largely focused on the airline's transcontinental services, reflecting, in large part, the positioning of certain Boeing 777 and 787 aircraft at Air Canada's major hubs in Toronto and Vancouver. Furthermore, in 2015, an overlap of the aircraft brought into the fleet to replace the exiting Embraer 190 aircraft is expected to account for approximately 30 per cent of the projected domestic capacity growth in 2015. This overlap is designed to better match capacity with expected 2015 summer season demand. For the full year 2015, Air Canada now expects an increase in the total number of seats dispatched (domestic) of 2.0 to 3.0 per cent and an increase in average stage length (domestic) of approximately 1.0 per cent when compared with the full year 2014.

Adjusted CASM

For the third quarter of 2015, Air Canada expects adjusted CASM (which excludes fuel expense, the cost of ground packages at Air Canada Vacations and unusual items) to decrease by 0.5 to 1.5 per cent when compared with the third quarter of 2014.

For the full year 2015, Air Canada now expects adjusted CASM to decrease 1.0 to 2.0 per cent from the full year 2014 as opposed to the decrease of 1.5 to 2.5 per cent projected in Air Canada's May 12, 2015, news release, reflecting, in large part, the impact of a weaker Canadian dollar on U.S.-denominated operating expenses.

Major assumptions

Air Canada's outlook assumes relatively low Canadian GDP growth for 2015. Air Canada also expects that the Canadian dollar will trade, on average, at $1.30 per U.S. dollar in the third quarter of 2015 and $1.27 for the full year 2015, and that the price of jet fuel will average 62 cents per litre for the third quarter of 2015 and 64 cents per litre for the full year 2015.

The table summarizes Air Canada's outlook for the third quarter and full year 2015, and related major assumptions.

   
                                          2015 OUTLOOK

                                        Q3 2015 versus Q3 2014  Full year 2015 versus full year 2014
Current outlook
System
Available seat miles                    Increase 9.5% to 10.5%                Increase 9.0% to 10.0%
Seats dispatched                         Increase 6.5% to 7.5%                 Increase 6.0% to 7.0%
Average stage length               Increase approximately 3.0%           Increase approximately 3.0%
Canada
Available seat miles                                                           Increase 3.0% to 4.0%
Seats dispatched                                                               Increase 2.0% to 3.0%
Average stage length                                                     Increase approximately 1.0%
EBITDAR margin (EBITDAR as a %
of operating revenue)              Expand by more than 350 bps
Adjusted CASM                            Decrease 0.5% to 1.5%                 Decrease 1.0% to 2.0%

                                  Major assumptions -- Q3 2015   Major assumptions -- full year 2015
Major assumptions
Canadian dollar per U.S. dollar                          $1.30                                 $1.27
Jet fuel price
Cents per litre                                       62 cents                              64 cents
Canadian economy                     Relatively low GDP growth             Relatively low GDP growth

For the full year 2015, Air Canada also expects:

• Depreciation, amortization and impairment expense to increase by $125-million from the full year 2014 as opposed to the increase of $100-million projected in Air Canada's May 12, 2015, news release. The increase in projected depreciation, amortization and impairment expense is largely driven by the impairment charges recorded in the second quarter of 2015;
• Employee benefits expense to increase $30-million from the full year 2014 (as opposed to the increase of $50-million projected in Air Canada's May 12, 2015, news release). The lower expected increase in employee benefits expense is primarily driven by benefit plan amendments relating to U.S. postretirement health plans which reduced employee benefits expense by $19-million in the second quarter of 2015;
• Aircraft maintenance expense to increase $90-million as opposed to the $120-million increase projected in Air Canada's May 12, 2015, news release. The lower expected increase in aircraft maintenance expense is mainly driven by the timing of engine maintenance events when compared with 2014 and certain contract amendments.

                                      HIGHLIGHTS
                         (In millions, except where indicated)
                                                                                                                    
                                                    Q2         Q2        YTD      YTD        
                                                  2015       2014       2015     2014

Operating revenues                              $3,414     $3,305     $6,663   $6,370
Operating income                                   323        245        523      183
Non-operating expense                              (27)       (22)      (536)    (301)
Net income (loss)                                  296        223        (13)    (118)
Adjusted net income                                250        139        372        7
Operating margin %                                 9.5%       7.4%       7.8%     2.9%
EBITDAR                                            591        456      1,033      603
EBITDAR margin %                                  17.3%      13.8%      15.5%     9.5%
Unrestricted liquidity                           3,283      2,954      3,283    2,954
Net cash flows from operating activities           509        386      1,317      730
Free cash flow                                     299        (36)       682       (2)
Adjusted net debt                                4,896      4,309      4,896    4,309
Return on invested capital %                      16.2%      11.0%      16.2%    11.0%
Net income (loss) per share -- diluted            1.00       0.75      (0.06)   (0.42)
Adjusted net income per share -- diluted          0.85       0.47       1.26     0.02
Revenue passenger miles (millions) (RPM)        16,845     15,495     31,782   28,961
Available seat miles (millions) (ASM)           20,132     18,413     38,467   35,187
Passenger load factor %                           83.7%      84.2%      82.6%    82.3%
Passenger revenue per RPM (cents)                 18.0       18.9       18.1     19.0
Passenger revenue per ASM (cents)                 15.0       15.9       15.0     15.6
Operating revenue per ASM (cents)                 17.0       17.9       17.3     18.1
Operating expense per ASM (cents)                 15.4       16.6       16.0     17.6
Adjusted CASM (cents)                             11.3       11.2       11.6     11.7
Average number of full-time equivalent
(FTE) employees (thousands)                       24.8       24.5       24.7     24.4
Aircraft in operating fleet at period-end          372        360        372      360
Average fleet utilization (hours per day)         10.0        9.9        9.9      9.9
Seats dispatched (thousands)                    12,992     12,288     25,329   23,885
Aircraft frequencies (thousands)                   143        139        277      270
Average stage length (miles)                     1,550      1,498      1,519    1,473
Fuel cost per litre  (cents)                      66.9       91.8       66.1     93.0
Fuel litres  (millions)                          1,114      1,048      2,153    2,021
Revenue passengers carried (thousands)          10,229      9,620     19,716   18,358

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