Mr. Calin Rovinescu reports

AIR CANADA REPORTS 2017 ANNUAL RESULTS

Air Canada had record full year 2017 EBITDAR (earnings before interest, taxes, depreciation, amortization, impairment and aircraft rent) of $2,921-million compared with the previous record full year 2016 EBITDAR of $2,768-million, an increase of $153-million. Air Canada reported 2017 operating income of $1,364-million compared with 2016 operating income of $1,345-million. Adjusted pretax income amounted to $1,158-million in 2017 compared with adjusted pretax income of $1,148-million in 2016. On a generally accepted accounting principles basis, the airline reported record income before income taxes of $1,279-million in 2017 compared with income before income taxes of $877-million in 2016.

"Our strong 2017 results underscore the effectiveness of our transformation strategy, as well as the success of our global expansion and the power of our comprehensive network. We profitably expanded our global network with 30 new routes launched and carried a record 48 million customers, while maintaining our focus on cost discipline and continuing to improve margins. Our achievements were driven by the hard work and commitment of our 30,000 employees and I commend them for enthusiastically embracing positive change at Air Canada. I especially want to thank our colleagues from our various operations branches who worked through extremely challenging and disruptive winter conditions over the holiday period, for their commitment and professionalism in bringing our customers safely to their destinations," said Calin Rovinescu, president and chief executive officer.

"The extent of our transformation is evident in our continuing records for financial results. In 2017, we achieved our fifth consecutive year of record EBITDAR, passenger revenue climbed 10 per cent to a record $14.5-billion and our unrestricted liquidity amounted to $4.2-billion at year-end. Our transformation has made Air Canada profitable while reducing risk in many areas, such as level of indebtedness and pension obligations, the twin pillars of long-term sustainability.

"We remain committed to meeting the key financial targets set during our September, 2017, investor day. Beyond this, as we continue to capitalize on the momentum of our strategy and to further entrench cost discipline into our DNA, we have undertaken a new cost transformation program intended to secure an additional $250-million in savings by the end of 2019.

"In 2018, our wide-body fleet renewal will be substantially completed as our mainline narrow-body replacement program accelerates. Along with new aircraft, we will keep investing in products and services, including our new loyalty program, technology to enrich the travel experience, and enhanced airport services and amenities. In 2017, we were recognized as 'Best Airline in North America' by Skytrax and we intend to continue providing a superior product to our customers, whom I thank on behalf of all Air Canada employees for choosing to fly with us."

Full year income statement highlights

In 2017, on capacity growth of 11.6 per cent, record system passenger revenues of $14,471-million increased $1,323-million or 10.1 per cent from 2016. The increase in system passenger revenues was driven by traffic growth of 11.3 per cent partly offset by a yield decline of 1.0 per cent. An increase in average stage length of 4.8 per cent had the effect of reducing system yield by 2.7 percentage points. On a stage-length adjusted basis, system yield increased 1.7 per cent year over year.

In the business cabin, system passenger revenues increased $334-million or 13.4 per cent from 2016 on traffic and yield growth of 9.8 per cent and 3.3 per cent, respectively.

In 2017, operating expenses of $14,888-million increased $1,556-million or 12 per cent from 2016, mainly driven by the increase in capacity and higher fuel prices year over year.

Air Canada's cost per available seat mile (CASM) increased 0.1 per cent from 2016. The airline's adjusted CASM decreased 3.0 per cent from 2016, in line with the 3.0- to 4.0-per-cent decrease projected in Air Canada's Oct. 25, 2017, news release.

Air Canada recorded adjusted net income of $1,142-million or $4.11 per diluted share in 2017 compared with adjusted net income of $1,147-million or $4.06 per diluted share in 2016. Starting as of and including the fourth quarter of 2017, adjusted net income is determined net of tax and includes the income tax effect of adjustments included in the measurement of adjusted net income. Prior to the fourth quarter of 2017, there was no deferred income tax expense recorded because of significant unrecognized deferred tax assets. A tax expense of $16-million affected fourth quarter and full year 2017 adjusted net income results. On a GAAP basis, the airline reported 2017 net income of $2,038-million or $7.34 per diluted share compared with 2016 net income of $876-million or $3.10 per diluted share.

Fourth quarter income statement highlights

In the fourth quarter of 2017, on capacity growth of 9.5 per cent, record system passenger revenues of $3,381-million increased $346-million or 11.4 per cent from the previous record in the fourth quarter of 2016. The increase in system passenger revenues was driven by traffic growth of 9.9 per cent and a yield improvement of 1.4 per cent. An increase in average stage length of 4.6 per cent had the effect of reducing system yield by 2.6 percentage points. On a stage-length adjusted basis, fourth quarter system yield increased 4.0 per cent year over year.

In the business cabin, system passenger revenues increased $96-million or 15.3 per cent from the fourth quarter of 2016 on traffic and yield growth of 8.2 per cent and 6.6 per cent, respectively.

In the fourth quarter of 2017, operating expenses of $3,687-million increased $280-million or 8 per cent from the fourth quarter of 2016, mainly driven by the increase in capacity and higher fuel prices year over year.

Air Canada's cost per available seat mile (CASM) decreased 1.2 per cent from the fourth quarter of 2016. The airline's adjusted CASM decreased 1.2 per cent from the fourth quarter of 2016, in line with the 0.5- to 1.5-per-cent decrease projected in Air Canada's Oct. 25, 2017, news release.

Air Canada reported record EBITDAR of $521-million in the fourth quarter of 2017 versus EBITDAR of $455-million in the fourth quarter of 2016. The airline reported a record fourth quarter EBITDAR margin of 13.6 per cent compared with an EBITDAR margin of 13.3 per cent in the fourth quarter of 2016. On a GAAP basis, the airline reported fourth quarter 2017 operating income of $133-million compared with fourth quarter 2016 operating income of $18-million.

Adjusted pretax income amounted to $77-million in the fourth quarter of 2017 compared with adjusted pretax income of $39-million in the fourth quarter of 2016. On a GAAP basis, the airline recorded income before income taxes of $20-million in the fourth quarter of 2017 compared with a loss before income taxes of $178-million in the fourth quarter of 2016.

In the fourth quarter of 2017, Air Canada recorded adjusted net income of $61-million or 22 cents per diluted share compared with adjusted net income of $38-million or 14 cents per diluted share in the same quarter in 2016. As mentioned above, starting as of and including the fourth quarter of 2017, adjusted net income is determined net of tax and includes the income tax effect of adjustments included in the measurement of adjusted net income. Prior to the fourth quarter of 2017, there was no deferred income tax expense recorded because of significant unrecognized deferred tax assets. A tax expense of $16-million affected fourth quarter and full year 2017 adjusted net income results. On a GAAP basis, Air Canada reported net income of $8-million or two cents per diluted share in the fourth quarter of 2017 compared with a net loss of $179-million or 66 cents per diluted share in the fourth quarter of 2016.

Special items

In the first quarter of 2017, Air Canada recorded a provision of $30-million relating to a fine which was reinstated by a decision of the European Commission pertaining to cargo investigations. Air Canada paid the fine in the second quarter of 2017, pending the outcome of its appeal of the decision.

In the fourth quarter of 2016, Air Canada recorded a past service cost expense of $91-million to reflect the estimated cost of pension increases applicable to ACPA-represented pilots who participate in a defined benefit plan.

Financial and capital management highlights

At Dec. 31, 2017, unrestricted liquidity (cash, short-term investments and undrawn lines of credit) amounted to a record $4,181-million (Dec. 31, 2016 -- $3,388-million).

At Dec. 31, 2017, total long-term debt and finance leases (including current portion) of $6,119-million decreased $499-million from Dec. 31, 2016. New borrowings of $733-million were more than offset by debt repayments of $808-million and the favourable impact of a stronger Canadian dollar of $402-million, as at Dec. 31, 2017, compared with Dec. 31, 2016, on Air Canada's foreign currency denominated debt (mainly U.S. dollars).

At Dec. 31, 2017, adjusted net debt of $6,116-million decreased $974-million from Dec. 31, 2016, reflecting the impact of higher cash and short-term investment balances and the benefit of a stronger Canadian dollar on U.S. dollar denominated debt balances. At Dec. 31, 2017, Air Canada's leverage ratio improved to 2.1 versus 2.6 as at Dec. 31, 2016.

Record net cash flows from operating activities of $2,738-million improved $317-million compared with 2016. Record free cash flow of $1,056-million in 2017 was above the range of $600-million to $900-million projected in Air Canada's Oct. 25, 2017, news release, mainly as a result of higher cash flows from operations. The free cash flow generated in 2017 also reflected an improvement of $1,205-million from 2016 due to higher cash flows from operating activities and a reduced level of net capital expenditures year over year.

For the 12 months ended Dec. 31, 2017, return on invested capital (ROIC) was 13.9 per cent, in line with the 13.5- to 14.5-per-cent ROIC projected in Air Canada's Oct. 25, 2017, news release, and significantly higher than Air Canada's weighted average cost of capital of 7.6 per cent.

Current outlook

In addition to reaffirming its EBITDAR margin, ROIC, free cash flow and leverage ratio targets set during its September, 2017, investor day, Air Canada is providing the following guidance.

Full year 2018 free cash flow

Air Canada expects positive free cash flow in the range of $250-million to $500-million in 2018. Air Canada is not planning any sale-leaseback transactions in 2018.

First quarter and full year 2018 adjusted CASM

For the first quarter of 2018, Air Canada expects adjusted CASM (which excludes fuel expense, the cost of ground packages at Air Canada Vacations and special items) to increase 2.0 to 3.0 per cent when compared with the first quarter of 2017.

For the full year 2018, Air Canada expects adjusted CASM to range between a decrease of 0.5 per cent to an increase of 1.5 per cent compared with the full year 2017. Approximately 0.75 percentage point of this range is driven by non-recurring costs for branding and new uniforms, customer service and technology investments, accelerated depreciation for Embraer 190 aircraft, and start-up costs of approximately $10-million related to Air Canada's new loyalty program scheduled to launch in 2020.

Full year 2018 depreciation, amortization and impairment expense

Air Canada expects depreciation, amortization and impairment expense to increase by approximately $150-million from the full year 2017.

Full year 2018 employee benefits expense

Air Canada expects employee benefits expense to increase by approximately $75-million from the full year 2017.

Full year 2018 aircraft maintenance expense

Air Canada expects aircraft maintenance expense to increase by approximately $140-million from the full year 2017.

The above outlook is not dependent on Air Canada's new cost transformation program which is targeting to generate savings of $250-million by the end of 2019.

The following table summarizes the above-mentioned outlook for the first quarter and the full year 2018 and related major assumptions.

                                       Q1 2018 versus Q1 2017                     Full year 2018 versus full year 2017

Free cash flow                                                                               $250-million-$500-million
Adjusted CASM                        Increase of 2.0% to 3.0%  Range between a decrease of 0.5% to an increase of 1.5%
Depreciation, amortization
and impairment expense                                                                        Increase by $150-million
Employee benefits expense                                                                      Increase by $75-million
Aircraft maintenance expense                                                                  Increase by $140-million
Major assumptions                          First quarter 2018                                           Full year 2018
Canadian GDP                         Relatively modest growth                                 Relatively modest growth
Canadian dollar per U.S. dollar                          1.25                                                     1.25
Jet fuel price -- cents per litre                          72                                                       70

Air Canada's 2017 audited consolidated financial statements and notes and its 2017 management's discussion and analysis of results of operations and financial condition are available on Air Canada's website and will be filed on SEDAR.

For further information on Air Canada's public disclosure file, including Air Canada's annual information form dated March 24, 2017, consult SEDAR.

Analyst conference call advisory

Air Canada will host its quarterly analyst call today, Feb. 16, 2018, at 8:30 a.m. ET. Mr. Rovinescu, Michael Rousseau, executive vice-president and chief financial officer, and Benjamin Smith, president, passenger airlines, will be available for analyst questions. Immediately following the analyst question-and-answer session, Mr. Rousseau and Pierre Houle, managing director and treasurer, will be available to answer questions from holders of Air Canada's bonds and term loan B lenders. Media and the public may access this call on a listen-in basis. Details are as follows:

• Dial 416-340-2218 or 1-800-478-9326;
• Live audio webcast: available on-line.

                                     FINANCIAL AND OPERATING HIGHLIGHTS
                                   (in millions, except where indicated)    
                     
                                                   Q4 2017       Q4 2016          2017          2016

Operating revenues                                  $3,820        $3,425       $16,252       $14,677
Operating income                                       133            18         1,364         1,345
Income (loss) before income taxes                       20          (178)        1,279           877
Net income (loss)                                        8          (179)        2,038           876
Adjusted pretax income                                  77            39         1,158         1,148
Adjusted net income                                     61            38         1,142         1,147
Operating margin                                      3.5%          0.5%          8.4%          9.2%
EBITDAR (excluding special items)                      521           455         2,921         2,768
EBITDAR margin (excluding special items)             13.6%         13.3%         18.0%         18.9%
Unrestricted liquidity                               4,181         3,388         4,181         3,388
Net cash flows from operating activities               389           351         2,738         2,421
Free cash flow                                         (43)          121         1,056          (149)
Adjusted net debt                                    6,116         7,090         6,116         7,090
Return on invested capital                           13.9%         16.7%         13.9%         16.7%
Leverage ratio                                         2.1           2.6           2.1           2.6
Diluted earnings (loss) per share                 $   0.02      $  (0.66)     $   7.34      $   3.10
Adjusted earnings per share -- diluted            $   0.22      $   0.14      $   4.11      $   4.06
Revenue passenger miles (RPM) (millions)            19,396        17,643        85,137        76,481
Available seat miles (ASM) (millions)               24,191        22,091       103,492        92,726
Passenger load factor %                              80.2%         79.9%         82.3%         82.5%
Passenger revenue per RPM (yield) (cents)             17.1          16.9          16.7          16.8
Passenger revenue per ASM (PRASM) (cents)             13.7          13.5          13.7          13.9
Operating revenue per ASM (cents)                     15.8          15.5          15.7          15.8
Operating expense per ASM (CASM) (cents)              15.2          15.4          14.4          14.4
Adjusted CASM (cents)                                 11.3          11.4          10.6          10.9
Average number of full-time
equivalent (FTE) employees (thousands)                28.3          26.2          27.8          26.1
Aircraft in operating fleet at period-end              395           381           395           381
Average fleet utilization (hours per day)              9.7           9.5          10.4          10.2
Seats dispatched (thousands)                        14,522        13,873        60,820        57,135
Aircraft frequencies (thousands)                     138.4         136.7         569.6         565.5
Average stage length (miles)                         1,666         1,592         1,702         1,623
Fuel cost per litre (cents)                           67.5          59.4          62.6          53.9
Fuel litres (thousands)                          1,254,111     1,160,404     5,331,888     4,837,159
Revenue passengers carried (thousands)              11,314        10,719        48,126        44,849

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