Air Canada (AC) Earnings Call Transcript

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Air Canada Second Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Amanda Murray, Head of the Financial Planning, Strategy and Investor Relations. Please go ahead.

Thank you, Julianne. [Foreign Language] Welcome to Air Canada's Second Quarter 2026 Earnings Call. Thank you for joining us today. On the call with me are Michael Rousseau, our President and Chief Executive Officer; Mark Galardo, our Chief Commercial Officer and President of Cargo; and John Di Bert, our Chief Financial Officer. Other members of our executive team are also with us and available for the Q&A portion of the call. Before we begin, I remind everybody that today's discussion may contain forward-looking information regarding Air Canada's outlook, objectives and strategies. Actual results could differ materially due to various assumptions, risks and uncertainties. Please refer to our Q2 2026 earnings release, our 2025 annual MD&A and second quarter 2026 MD&A and filings available on aircanada.com and on SEDAR+. With that, I will turn the call over to Mike.

Well, thank you, Amanda. [Foreign Language], good morning, and thank you for joining us today. Air Canada delivered a strong second quarter with adjusted EBITDA of $719 million, at the upper end of our guidance range despite fuel prices being slightly higher than our expectations. We generated record operating revenues of $6.3 billion, up 11% from the same period in 2025, supported by a very strong total unit revenue growth and broad-based strength across our network. At the same time, our reported results were negatively impacted by Pacific labor-related and other charges, primarily noncash that are not reflective of the underlying earning power of the business. John will provide more detail in a few minutes. More importantly, the quarter demonstrated the resilience of Air Canada's diversified business model. Our results reflected a strong pricing environment, resilient demand across the network a continued focus on controllable cost execution and strong contributions from our diversified businesses, including cargo, Air Canada Vacations and Aeroplan. Together, these strengths helped us absorb a significant external fuel shock while still delivering adjusted EBITDA ahead of market expectations. Through our pricing actions, capacity management and fuel hedging positions, we recovered about 50% of the incremental fuel expense in Q2. When compared to our expectations at the start of the year, we expect to recover a majority of the remaining fuel headwind in the second half of the year, with Q4 expected to be above 100%. The strong demand we experienced in Q2 has remained intact throughout the booking window and across the network. More importantly, Air Canada's diversified global reach, premium offering, loyalty platform and cargo and Air Canada Vacation businesses continue to support resilient revenue performance across varying market conditions. These strengths are central to our new care strategy and remain key drivers of long-term value creation, the latest validation being the minority investment in Aeroplan establishing a $10 billion valuation. The quarter reinforced our confidence in Air Canada's strategy and the long-term value creation opportunity ahead. We continue to invest in the future of the airline. Our fleet and product initiatives remain central to our strategy, including the introduction of the Airbus 321XLR and ongoing fleet modernization. These investments are supporting our premium positioning expanding our network opportunities and improving the customer experience. Also, we will soon announce exciting new routes for next summer. As I mentioned, we announced yesterday a 25% equity minority investment in Aeroplan for $2.5 billion, valuing the program of $10 million. Aeroplan remains a core part of Air Canada's commercial strategy, and we continue to retain full control of the program strategy, operations, partnerships and member experience while monetizing a portion of its underlying value. There is no intention of relinquishing control of this valuable and strategically important component of Air Canada. And for greater clarity, there will be no changes to the way members earn or burn points or to any other element of the program because of this transaction. This transaction simply further strengthens our balance sheet creates value for all stakeholders and is an important step in our path toward an investment-grade rating in the midterm. Our people are the foundation and strength of Air Canada. We recently concluded 4-year collective agreements with Unifor and the International Association of Machinists and Aerospace Workers. These agreements recognize the expertise and contributions of our employees. They reflect our commitment to constructive labor relations and to maintaining Air Canada as a competitive and attractive place to work, and they position Air Canada to advance its new frontiers objectives. I want to thank all our employees for their professionalism and dedication. The individual contributions and teamwork allows us to operate through volatility, care for our customers and continue building a stronger airline and brand. As you know, I'll be retiring at the end of August after almost 19 years of realizing opportunities and managing challenges. I'm very proud of what we accomplished together. The airline has a strong and skilled leadership team in place with a clear continuity and strategy and execution. I remain highly confident in his ability to continue delivering sustainable long-term value for shareholders and look forward to opportunities and successes that lie ahead for Air Canada. Before turning it over to Mark, I want to take a moment to thank the investment community for your engagement, questions and perspectives over the years. Your interest in Air Canada has made us better, and I'm grateful for your support. Thank you, and over to you, Mark.

Thank you, Mike, and good morning, everyone. [Foreign Language] I'd like to start by thanking our employees for their continued focus on our customers and operational excellence, and our customers for their continued look. Our record quarterly results continue to demonstrate that Air Canada's strongest ever foundation that drives our commercial performance. Our diversified revenue streams are far-reaching global network and the strong demand from our higher-yielding customer segments reinforced the structural advantages that underpin our results and help deliver a leading Q2 load factor amongst our North American peers. Q2 operating passenger revenues both grew 11% year-over-year, reaching $6.3 billion and $5.6 billion, respectively. Our passenger revenues were driven by an 11% improvement in PRASM on system-wide capacity growth of 0.3%. Our capacity growth was slightly below our Q2 guidance range, reflecting weather-related disruptions and our measured approach to capacity allocation. Air Canada's geographic diversity remains a strength, contributing to a 7% year-over-year increase in yield in an industry-leading 87.5% system-wide load factor relative to major North American peers. It's important to remember that we entered the second quarter with roughly 50% of our expected traffic booked before any increases in fuel prices, with the vast majority from long-haul markets with longer booking windows. In June, Air Canada served the second largest number of nonstop intercontinental destinations among major North American carriers. The scale of our network is enabling our well-placed hubs to become important international transit points. Despite the longer international booking window, our Sixth Freedom franchise performed strongly, with revenues growing at 9% year-over-year. More than half of this growth came from the Pacific quarter. Within our cabins, premium and higher-yielding demand strength persisted through the quarter with premium and corporate revenues increasing 11% and 19% year-over-year, respectively. Strong engagement from our higher-yielding and highly loyal customers continues to differentiate Air Canada and remains a key driver of revenue quality. We're uniquely positioned to capture this demand segment. Importantly, Aeroplan enables our brand loyal customers to engage meaningfully within the Air Canada ecosystem, and it's a key component of our diversified revenue base. Moving on to cargo, which is a key enabler of our long-haul performance. With shifting global trade flows and a narrower cost differential between air and ocean freight, cargo revenues rose 29% year-over-year on strong deal growth, equally significant. Our cargo business is increasingly driving fixed freedom volume using freighters to carry shipments between the Americas into the bellies of our wide-body fleet. Looking ahead, 3 themes stand out that strengthen our confidence in our commercial outlook. First, demand across our network remains constructive throughout the second half of the year, including in the premium segments. Our new international routes are performing very well, supported by robust commercial and operational execution. In response, we have proactively increased capacity across a number of these new markets, further validating our international growth thesis. Second, we continue to see promising demand signals in the shoulder periods. These are months where the demand is less commoditized and as a result, fall within Air Canada structural advantages. In conjunction with our growing counterseasonal Sixth Freedom franchise, we continue to expect that the fall and spring shoulders to grow in relative performance. Third, as we advance important product, network and revenue initiatives, we continue cementing Air Canada's structural advantages. For example, Initial results from the A321XLR operations validate the potential of this aircraft type in our fleet, providing flexibility to serve new and existing transatlantic markets while supporting our premium strategy within North America. More recently, we released unbundled fares and premium cabins across the Atlantic, the Caribbean and Latin American markets. And we expect the new offers to better suit the needs of leisure customers by providing more options to travel in premium cabins. With these points in mind, we continue to diligently manage revenue and capacity into the second half of the year, leveraging our network, customer and revenue diversification to maximize revenue quality and returns, and we expect to recover the majority of the incremental fuel expense in the second half of the year. To close, Air Canada's strong Q2 results are a clear validation of the strength of our commercial foundation. And as we look towards 2027, we remain exceptionally well positioned to capitalize on our growing global network, our premium and loyal customer base in our evolving Sixth Freedom franchise. Alongside Aeroplan, Air Canada Vacations and cargo, our diversified commercial business drives our confidence in the long-term opportunities available for Air Canada. And before I hand it over to John, I'd like to thank you, Mike, for your leadership and partnership over the years. It's been a privilege to work with you, and I wish you the very best in your next chapter. Over to you, John.

Thank you, Mark, and good morning, everyone. Before I begin, I'd like to thank our employees. Their focus and execution are what turned our commercial momentum into financial results. and they drove real progress against our financial priorities this quarter. Second quarter adjusted EBITDA was $719 million at the upper end of our guidance range and ahead of market expectations for an adjusted EBITDA margin of 11.5%. Let me provide some additional context for our financial performance. We recovered approximately 15% of the Q2 fuel escalation from our original plan. Because as much of the quarter was already booked before fuel prices increased, there was a natural lag before our pricing actions could be fully reflected in fairs. Our pricing and revenue management actions supported strong yields and load factors, driving 11% PRASM growth and record operating revenues of $6.3 billion, up 11% year-over-year. Operating expenses were 24% higher than Q2 2025, including a total of $388 million in charges that were excluded from our reported adjusted EBITDA. These charges relate to pension plan amendments, benefits-related items and a provision for a legal matter. Excluding them, Q2 operating expenses were 17% higher year-over-year. This reflected a 49% or $565 million increase in fuel expense, net of $205 million in hedging gains. Let me spend a moment on fuel because it was the largest cost driver in the quarter. Our Q2 guide assumes CAD 1.28 per liter. During the quarter, jet fuel prices remain volatile and moved modestly above our expectations, particularly in May. Our reported Q2 average fuel price was CAD 1.33 per liter, including the benefit of our hedges. Despite peak fuel reaching more than CAD 1.60 per liter. With strong commercial execution, we recaptured about 50% of the fuel expense increase in Q2. We expect the recapture rate to build as commercial actions fully cycled into fair mix. This gives us confidence in our expectation to reach recovery rates up over 60% in Q3 and above 100% in Q4 based on the forward curve. Returning to ex-fuel cost structure performance. Adjusted CASM increased 7% year-over-year, in line with our expectations. More than 1/3 of that increase was driven by the impact of successful labor negotiations on multiple employee groups representing almost 15,000 employees, half our unionized workforce. Capacity was up just 0.3% year-over-year as we stay focused on capacity management amid fuel volatility while prioritizing unit revenues. This created a pressure of about 200 basis points versus our planned adjusted CASM performance. Despite the many moving parts in Q2, we continue to advance cost containment and efficient initiatives across the organization. Through these actions, along with planned capacity growth, we expect unit cost performance to gradually improve through the back half of 2026. Turning now to our balance sheet. Earnings performance translated into strong cash generation. We generated $651 million of operating cash flow and $174 million of free cash flow in the quarter. We also completed $218 million of sale-leaseback transactions, bringing the first half proceeds to $501 million and keeping us on track towards our $1 billion target for 2026. Our balance sheet metrics are among the best in the industry. We ended the quarter with $8.9 billion of total liquidity, representing 38% of trailing 12-month revenues, well above our 15% to 20% long-term target. Our net leverage ratio ended the quarter at 1.7x, 1 of the strongest among North American airlines and comfortably below our long-term target of less than 2x. And finally, year-to-date, we have repurchased 14.5 million shares. Recall that in May, we [ paused ] our NCIB buying. We have now deployed $1.6 billion in share buybacks since November 2024, including $270 million in 2026. This reduced our outstanding share count to 280 million units as of Q2 2026, a reduction of 22%. On to fleet. We have continued with our fleet renewal program, taking delivery of 2 A321XLRs and 5 820s this year. We expect to receive the first 2 Boeing 787-10 by year-end in addition to an additional 7 XLRs and 11 A220s. We are also well advanced in our 737 fleet transition to Rouge with 21 aircraft already transferred as of June 30. With CapEx -- with gross CapEx to reach $3.6 billion -- we expect gross CapEx to reach $3.6 billion in 2026. The $300 million decline from our prior disclosure is primarily related to the timing of deliveries and aircraft configurations. Speaking of financial strength and balanced capital allocation. Let me now speak about the exciting announcement we made yesterday. A 25% minority equity investment in Aeroplan for $2.5 billion that values the program at $10 billion or at a 21x EBITDA multiple. This transaction crystallizes the value what we believe is one of the best and most prestigious airline loyalty programs in the world. Aeroplan is an important part of our portfolio. We believe the $10 billion valuation reflects its significant economic potential while retaining future optionality and control over the strategic and operational direction of the company. We are proud to welcome Blackstone, La Caisse and the other investors as partners, and we view this transaction as an accelerant to both our New Frontier plan and the broader value creation thesis for Air Canada shareholders, while providing financial flexibility and accelerating value realization. Let me now highlight a few important points. Air Canada retains full management discretion on all operating decisions, program design and execution, ensuring continuity in the management and growth of the Aeroplan franchise. The investor group will own a 25% minority share and will be entitled to participate in distributions from Aeroplan based on an agreed distribution policy. Air Canada will have the right to repurchase the shares between years 5 and 8 for a purchase price that reflects a total internal rate of return of 6.5% to the investors. Proceeds will be deployed to create further value and support our balanced approach to capital allocation. First, we will pay down our August 2026, USD 1.2 billion debt maturity. We expect this to immediately improve gross and net debt leverage by 0.5 turn. We also expect to initiate a substantial issuers bid to buy back and retire up to $800 million in Air Canada shares. Taken together, the transaction derisks the balance sheet returns capital to shareholders and accelerates our path to an investment-grade rating over the midterm. This transaction achieves many critical objectives. It surfaces and highlights the value of our world-class loyalty franchise where we believe the market underappreciated it. It strengthens the balance sheet and improves financial flexibility. It accelerates our progress towards long-term leverage objectives and it rewards shareholders as we continue to invest to grow the airline and expand margins. This transaction gives us even more confidence in our value creation strategy and our ability to execute new frontiers for our customers our employees and our investors. Turning to our outlook. We're reinstating and updating our full year 2026 guidance. Importantly, our outlook reflects the same themes that have supported our second quarter performance. constructive demand trends across the network, resilient premium and corporate demand, continued progress on fuel recapture and disciplined cost execution. We now expect full year ASMs year-over-year growth of 2.25% to 3.25%, reflecting a focused approach to matching capacity with demand while retaining flexibility in a dynamic environment. We expect adjusted CASM to increase between 5% and 6% versus 2025, reflecting the impact of recently ratified labor agreements, ongoing inflationary pressures and a weaker Canadian dollar. We continue to expect cost performance to improve through the back half of 2026. Our outlook assumes a fuel price of approximately CAD 1.38 per liter for the third quarter of 2026. The equivalent to USD 3.70 per gallon based on the forward curve as of July 29, 2026. That assumption incorporates our hedging portfolio, which covers 17% of anticipated third quarter jet fuel purchases at an average price of USD 0.88 per liter before interplane fees and taxes. Our fuel assumption for the fourth quarter is approximately CAD 1.29 per liter or USD 3.50 per gallon. Taken together, these assumptions support full year adjusted EBITDA guidance of $2.9 billion to $3.2 billion with the lower end, reflecting a $100 million fuel allowance to cater for some potential Q4 fuel price variability. Regardless of fuel prices, however, we remain focused on driving results through commercial execution, cost excellence and operational reliability. Finally, we remain focused on free cash flow generation and are guiding to free cash flow of between $200 million and $500 million for full year 2026. This is consistent with our EBITDA outlook and assumes the successful execution of approximately $1 billion of sale and leaseback transactions during 2026. The quarter demonstrated the link between commercial execution and financial performance. The strength of our diversified revenue streams translated into strong earnings, strong cash generation and continued balance sheet strength. That foundation gives us confidence in both our outlook and our long-term strategy. To conclude, our priorities are clear and unchanged. We manage the controllables, including commercial actions, capacity deployment, cost execution and operational performance, protect our cash generation and the strength of our balance sheet and continue advancing the long-term value creation strategy we have set out in new frontiers. Before I turn it back to Amanda, I'd like to take a moment to acknowledge Mike. Mike, it has been a privilege to work alongside you these past few years. You leave behind a strong Air Canada point for success, financially solid with a portfolio of incredible assets and brands, energized through talented people looking ahead towards a bright and exciting future of growth through our New Frontier Plan. Thank you for your leadership, your partnership and your support. I wish you every success and happiness in the years ahead. With that, I'll turn it back to Amanda for questions. Thank you.

Thank you, John. Julian, please open the line for questions from analysts.

[Operator Instructions] First question comes from Atul Maheswari from UBS.

John, could you give us some of the puts and takes around the back half CASM ex expectations? It seems like it's a little higher than the original guidance provided earlier in the year. So what's driving some of the headwinds? And are some of the headwinds in the back half basically isolated to the back half? Or could they persist until 2027? So any thoughts around '27 catholics also would be helpful.

So I would say that, generally speaking, we've come through the first half where we would have expected, and we've put a lot behind us as well, as you know, with all of the labor agreements now done, and that's fully reflected in our cost structure. And I think largely as we had expected even back when we were at Investor Day in 2024. So I think we've put a lot behind us, and I feel pretty good about where we are. Looking at the second half, we do have a little bit lower capacity expectation than we would have planned for in the year. So the second half will reflect a little bit of that as well. And so there's a little bit of pressure versus our original expectations. I would expect us to be in the 4% to 5% range for the second half of the year coming into that 5% to 6% for the full year. And alongside a little bit lower capacity, I think the sales commissions does pose a little bit of pressure, given the higher fares. And then I would say that the Canadian dollar has been a little bit weaker, and that just has a general impact on cost structure. All that being said, I feel pretty good about the opportunity here as aircraft come in and we start generating more capacity and frankly, even a better mix of capacity into 2027 that we'll start to see some of that cost pressure abate. And too early to get into any financial metrics for next year, but I would say that we continue to focus on an adjusted CASM that would be below inflation, let's say.

Okay. Great. And then as my follow-up, the U.S. network airlines have highlighted or guided to third quarter and fourth quarter pass to be above the second quarter in part by obviously the booking cut benefit with the greater portion of the back half bookings coming in at higher fares. In case of Canada, the third quarter is pretty clear, but the question really is on the fourth quarter. Do you expect the fourth quarter TRASM to be above second quarter like the U.S. airlines guided? Or are there any puts and takes that we need to be mindful of for the fourth quarter?

I'll take that one. You should anticipate that Q4 TRASM will be higher in terms of year-over-year than Q2 because obviously, when the conflict started, we didn't have much of a base in bookings. So we've been able to fully catch up what kind of the pricing and market is kind of the jet fuel pricing. And as a result, we expect that Q4 will be higher in terms of TRASM and that our fuel recovery at the current market price puts us at 100% or just above 100% of the incremental just cost, and that will be reflected in the TRASM.

Our next question comes from Savi Syth from Raymond James.

And like, again, echo everybody's appreciation for your leadership and insights over the years and best was shows us the next chapter. Just maybe, John, in your comments, should we assume that the trailing 12-month EBITDA for Aeroplan is just north of [ $475 million ]? And also, could you talk about the what brought about the transaction and the timing, given that you have a really strong liquidity position here?

Yes. Yes. I think just by math, the $10 billion over the 21, you're very close to the number there. Yes, to the [ $475 million ] [indiscernible]. We think this is a tremendous transaction for Air Canada and for Aeroplan as well and its members. We are -- as you said, we do have a very strong balance sheet as we go into a growth cycle here over the next couple of years. We feel very confident about the value we can create with Air Canada and the expansion of the network and everything that we can bring to our customers. We've always said we're going to take care of 3 things when we capital allocate, number one, invest in the airline, which we continue to do. Number two, keep a very strong balance sheet throughout that growth cycle, which we're doing, and we're going to further improve with this transaction. And thirdly, to reward investors as they support that growth and value creation. And I think, again, in this case, we will be able to do that. We talked about being able to restore pre-pandemic share count levels. This transaction accelerates that probably 2 years before our stated original target in 2 will be at those levels after the upcoming SIB. The ability to improve the balance sheet to the extent that investment grade would be attainable is also built into this transaction. We'll be able to extinguish USD 1.2 billion of debt without affecting the liquidity whatsoever and then pursue with great confidence in the next 24 months of growth CapEx that we've already built into the plan as we had an Investor Day. Just to underline that, there's no new allocation of this capital. There are no new -- it was not designed for anything other than to support the execution of new frontiers and to create value for investors, both immediately with marking the value of Aeroplan as well. I think it was an underappreciated asset, and we believe this transaction also highlights that. So it achieves many, many important things. Overall, I would say it's going to help create a lot of value as we execute our New Frontier Plan.

I appreciate the color. If I might follow-up on one of Atuk's questions. But as you think about next year's unit costs, like what kind of a growth are you generally at a high level, underwriting?

Yes. I think that we have an order book. It's fairly clear. There is a little bit of movement. We continue to see it always a couple of months here and there of delays. But when it's all said and done, I think that 2027 will put us at or above 2019 levels, which I think were about [ $112 billion, $113 billion ] ASMs. So I think something at that level or higher.

Next question comes from Tom Fitzgerald from TD Cowen.

Congrats on the Aeroplan transaction. I wanted to stick with that for a question. So how should investors think about just any kind of sense of the distribution policy? Is it fixed? Is there a payout ratio? Is there a minimum with upside participation? And then just how should we think about the profit attributed to the NCI just impacting EPS? Just any color there? And then just if the -- if Aeroplan out earns that 6.5% IRR, does the excess accrete to NCI on the balance sheet and then revert to AC shareholders through equity or repurchase? Any color on that would will be really helpful.

Okay. So I have a feeling that we're going to have a call here and then probably a call later on some of the technical side of that, but we can always follow up with Amanda and Mike and myself. But let me give you just some early color upfront. Dividend distribution policy just think about based on our estimates of Aeroplan earnings and cash flows, we would expect a rather proportional distribution of cash generated at Aeroplan to the minority at 25% in ourselves at 75%. And so there is a tiering of distributions. But all in, our expectation is that it would be about 25%, 75% on any given year. The -- and the distribution policy at the discretion of the Board, which is fully controlled by Air Canada. So we'll obviously manage that responsibly. With respect to, I think NCI and a minority interest on the P&L. The way we think about it, I guess, no simplified here is we're taking out debt, which is about CAD 1.7 billion. We would have potentially refinance that debt. So if you think about just the interest cost savings there against the minority interest, not a lot of space between the 2 minorities, maybe a little bit higher, but not that much higher than the interest cost savings. And so when it looks -- when it comes to EPS, a touch may be higher, but really the impact will be from the lower share count that comes from the buyback. So probably in the neighborhood of 8% to 10% when it's all said and done in terms of reduced share count. So we believe that's going to be EPS accretive pretty quickly. And then in the longer term, the way that the call option is designed is that the entirety of all of the cash streams. So the dividends will give rise to an option to buy back our stake in between years 5 and 8 for a total IRR of 6.5%. So those cash flows that would have come from the distributions will count against the overall IRR. That will leave a purchase price that's established, setting that 6.5% return target. And we believe that, that can be favorable as the value of Aeroplan should grow over time. So from that point of view, accretes to the benefit of the Air Canada shareholders.

Okay. Great. That's incredibly helpful. And then just as a quick follow-up, just curious what the feedback from [indiscernible] if you haven't gotten any feedback from the credit rating agencies on the transaction? And any comments that they provided.

Thank you. And yes, I'm glad you brought it up. We had all 3 agencies rates, both the instrument and our overall rating. And we've had one improvement in outlook. So one positive outlook. So that's an improvement. The other 2 have viewed the transaction as a positive, but we'll continue given the volatility to watch Air Canada. And I'm sure that over a period of time here, we'll see improved credit ratings across the board. But obviously, we'll work through the current environment that's bigger than just Air Canada.

Our next question comes from Jamie Baker from JPMorgan.

This is James on for Jamie. Maybe I just wanted to touch on the corporate side. Revenue was up by double digits this quarter of [indiscernible] last quarter. Maybe talk about the trends there for 3Q and for what's booked through 4Q? And maybe specifically on the transport or corporate side, is that also tracking below pre-February 2025 levels? And how are you thinking about that for '27?

Thanks, James. So on the corporate side, July and August are relatively weak corporate month. Although there is the strongest month in terms of travel volume, in terms of corporate premium demand is also the weakest. So there's a little bit of upside in July and August, but it's really a September goes and return to office return to [indiscernible], that's when we're going to see corporate bounce back. We have a constructive outlook for corporate revenue in September all the way through December. We continue to expect double-digit growth. And it's really principally coming almost like 1/3, 1/3, 1/3 between the domestic, transborder and what we see on the transatlantic. Despite the fact that Canada U.S. demand is still relatively flat year-over-year, the actual premium corporate demand continues to be higher year-over-year. And we see that constructive outlook all [indiscernible].

Got it. And then maybe on the second question, just following up from Tom's rating industry question. And maybe John, if the transaction -- the Aeroplan transaction could reduce leverage by half a turn. What else are the agencies looking for, for investment-grade rating? Is it cash flow liquidity? I know the agencies calculate leverage different than you. But I guess, what's -- can you maybe remind us of the sensible that they have for investment grade?

Yes. Thanks for the question. So I think you hit on a couple of good things there. So one, our gross leverage was about 3.7 once paid down this maturity will take us to about 3.2 so that's one, I think, getting below 3 is another important milestone. So if you look through, right, holding the liquidity that we have, which, as I mentioned in my comments, saying 38% of the last trailing 12 months of revenue, our objective to be 20% or so. it gives me more firepower to continue to take out where appropriate gross debt as it matures. So a continued trajectory through improving the gross debt leverage, I think, is part of the conversation with the agencies. Number two is continued margin expansion. So I think that, that is the next important catalyst for us. And with that, as you know, I've often talked about the conversion of our EBITDA margin being high quality to cash from operations and getting to a sustainable 12% or better CapEx number. So the construct of that is, again, fully aligned with a path to improved ratings. And ultimately, an investment-grade rating with the agencies. We are exactly where we wanted to be when we laid that plan out in December '24. I would say, to some degree, we're ahead of that plan. And '27 is going to be an important year, obviously. We'll have aircraft, and we'll have a better mix of flying and we'll have an incredibly strong balance sheet and a stabilized share count. So we think that over the next 2 years or so, a path to investment grade is certainly impossible.

Our next question comes from Chris Murray from ATB Cormark Capital Markets.

Let me take up on that technical call later. But turning back maybe just to look at the fall, I think Mark based this question or made some comments about the but the fact the shoulder season is evolving a little bit differently. Can you maybe talk a little bit about what you're seeing as we go into Q3, Q4? Where you are in the booking curves and how those may be actually changing this year? And does that give you an additional opportunity to maybe reprice or maybe offset some more of the more fuel cost as we go deeper in the year, than you may have otherwise not have. And any early thoughts then on Q1, whether or not that's going to be maybe more the European as opposed to, say, or will be helpful.

Sure, Chris. There's a lot to unpack in that question. So what we're seeing in the shoulder really is kind of a continuation of what we've been seeing in the last couple of years. Air Canada is a bit more kind of indexed on premium travel, corporate travel. And those trends are not as robust in July and August, but they definitely come back in September and beyond. And what we've noticed for a couple of years is that premium customers, whether for leisure or business purposes, have been traveling more in the shoulder than the typical summer peak. And that's been to our favor in terms of seasonality. So what we're seeing in September, October is quite the same. Our international demand is really, really strong. The premium demand is quite strong, booked significantly higher year-over-year in terms of load factor and yield. And obviously, that sector is much more resilient. And we're looking at a very constructive setup for the fall, probably one of the stronger that we've probably seen in our history. As we go into late fall or early winter, it's still a bit early. Those same demand signals continue, but we start to migrate a bit more to a Sun South America network. And it's a bit early to kind of give you a point of view on that. And again for Q1 is simply too early. But always to say that on a relative basis, the spring and shoulder season show more strength. And as we think about '27, '28 and how we allocate capacity, we'll be taking more capacity risk in those seasons than the actual summer peak.