Montie Brewer, President and CEO Joshua Koshy, Executive VP and CFO UBS Transport Conference 1 London, England September 17, 2007
Agenda Strongly positioned international airline Investment proposition Cost reduction strategy Revenue strategy Delivering financial performance 2
Strong International Airline 13 th largest carrier in the world Canada s largest, in a disciplined domestic market Extensive global network via three international gateways Leading share in all markets Strong brand Assets Cdn$11.2B, market cap Cdn$1.2B Revenue $10.3B, EBITDAR $1.0B 3
Our Investment Proposition Innovative revenue strategy Aggressive refresh of assets Strong operational performance Strong risk management to reduce volatility and operating leverage Well financed to execute strategy 4
The Deliverables Significant cost improvements Lower labour costs per ASM Higher revenues by leveraging route strength and products Improved operating margins Improved EBITDAR and EPS performance Free cash flow generation 5
Cost Reduction Strategy Lower CASM through: Well-timed investment in fleet Investment in technology Reduced controllable costs Leveraging the base Fuel hedging and import agreements 6
Cost Reduction Strategy Investing Now for the Future Embraer 190 45 firm and 23 options deliveries 2006-2008 Boeing 777 17 firm and 18 options deliveries 2007-2008 Boeing 787 37 firm and 23 options deliveries 2010-2013 7
Cost Reduction Strategy Future Savings from Fleet Renewal EMB190 cash operating costs 19% less than A319 on a per trip basis B777 additional annual EBITDAR per aircraft B777-300: $13M B777-200: $10M B787 fuel and maintenance expected to be reduced by 30% from B767-300 8
Cost Reduction Strategy Aircraft Size* and Unit Cost 150 148 CASM 20 18 Seats per Departure 146 144 142 140 138 16 14 12 10 8 6 CASM Cents 136 4 134 2 132 0 Jan. 06 Apr. 06 Jul. 06 Oct. 06 Jan. 07 Apr. 07 Jul. 07 Oct. 07 Jan. 08 Apr. 08 Jul. 08 Oct. 08 Jan. 09 Apr. 09 Jul. 09 Oct. 09 Jan. 10 Apr. 10 Jul. 10 Oct. 10 CASM stable despite decline in seats per departure Seats per departure to increase in spring 2008 9 *Mileage weighted on a 3-month rolling average
Cost Reduction Strategy Investing in IT Infrastructure Reservation system Polaris developed by ITA expected to reduce operating costs $70 million investment first phase completed in fall 2007 Operating system Netline developed by Lufthansa Systems expected to reduce operating costs better integration of current systems halfway through implementation 10
Cost Reduction Strategy Reduced Costs Through Self-Serve % of total passengers* 70% 60% 50% 40% 30% 20% 10% 0% 47% 50% 51% 54% Q1 2006 Q2 2006 Passenger check-in method Q3 2006 Q4 2006 56% 60% 58% 59% Q1 2007 Q2 2007 Jul-07 Aug-07 Self-Service (Kiosk, Web, mobile) Agent check in Benefit: 5% reduction in airport agents per departure 11 * 12-month rolling
Cost Reduction Strategy Reduced Costs Through Web Bookings % of total bookings made on the Web* 70% 60% 50% 40% 30% 20% 10% 59.4% 30.5% 0% Jan. 06 Mar. 06 May. 06 Jul. 06 Sep. 06 Nov. 06 Jan. 07 Mar. 07 May. 07 Jul. 07 Domestic Transborder 12 Benefit: reduction in commissions and variable labour * 12-month rolling
Cost Reduction Strategy Fuel Hedged position as of August 31, 2007 54% for September to December 2007 weighted average price floor US$63.54 WTI ceiling US$68.62 WTI 5% hedge position for 2008 portfolio value US$22 million Import program self-supply with jet fuel in Southern Ontario/Quebec and Vancouver 1.5 million barrels of off-airport marine storage for self-supply 13
Cost Reduction Strategy Favourable Financing Costs B777 EXIM bank financed 7 aircraft at an interest rate of LIBOR flat or approximately 5.36% based on interest rates as at June 30, 2007 EMB190 financed 18 aircraft at the 90-day USD LIBOR plus 1.9% financed 9 aircraft at the 90-day USD LIBOR plus 1.7% 14
Revenue Strategy Improved product fleet renewal customer service consistency Leveraging the network New revenue model 15
Revenue Strategy Leading Share in all Markets Domestic International Transborder Other Airlines 7% Air Canada AF 4% LH 4% Other Airlines 38% CX 4% AA 11% WestJet KL 4% Air 33% 60% Other Air BA 6% Canada Airlines 11% 41% WS 6% NW 5% US 5% DL 5% CO 5% UA 13% Canada 38% 42% of airline revenues 38% of airline revenues 20% of airline revenues 16 Source: OAG, based on available seat miles (ASMs( ASMs) ) from Oct. 1, 2006 to Sept.30, 2007; AC Revenue Split based on 12 mths July 06 - June 07
Revenue Strategy Improved Product: Replacing Every Seat 17 205 new and converted aircraft in XM specifications by end of 2008 currently 104 (51 new and 53 conversions) 80 hours of on demand video Standard power plug at every seat Benefits: standardization reduces support cost additional revenue opportunities
Revenue Strategy Industry-leading International Product Executive First cabin: New executive suite with lie-flat beds only operator in North America State of the art individual in-flight entertainment system Benefits: improved passenger yield drives loyalty of highest margin customers 18
Revenue Strategy Improving Customer Service Investing in our people In-flight and airport service training Company wide management training - Relationship Matters Enhanced channels of communications Performance incentive program - Sharing Our Success 19
Revenue Strategy Customer and Market Recognition 2007 20
Revenue Strategy Leveraging the Network: International In service Toronto expansion Other Canadian cities expansion 21
Revenue Strategy Leveraging the Network: North America Pacific Atlantic Current Routes New Opportunities 22
23 Revenue Strategy 777 and XM Routes by Q1 2008
Revenue Strategy New Revenue Model Update Buy-up from Tango in H1 2007 was 47%, up from 46% H1 2006 Pass take-up in H1 2007: 7.7% domestic revenues 3.9% transborder revenues 6.3% North America revenues (up 2% YOY) Pass holder increase in travel on Air Canada: 30% Pass holder repurchase: 90% 24
Revenue Strategy Sustaining a Revenue Premium Higher average fare Buy-up for additional features Business class International feed Superior network & schedule Aeroplan loyalty program Maple Leaf Lounges Higher load factor International feed More appropriate aircraft size per route Transborder feed 25
Revenue Strategy New Revenue Model Improving RASM Cents per ASM Domestic passenger RASM 20.0 16.0 18.7 17.2 17.2 New Model Introduction 15.2 16.1 18.1 18.6 12.0 10.2 9.0 8.5 8.7 8.6 9.1 10.3 8.0 4.0 0.0 2000 2001 2002 2003 2004 2005 2006 Air Canada & Jazz U.S. Markets (DOT) CDN U.S. 26
Delivering Financial Performance Innovation Driving Margin 1 Performance Cents per ASM 18 16 14 12 11% 29% 10 8 6 4 2 0 Sep. 03 Dec. 03 Mar. 04 Jun. 04 RASM Sep. 04 Dec. 04 Mar. 05 Jun. 05 CASM Sep. 05 Dec. 05 Mar. 06 Jun. 06 Sep. 06 Dec. 06 Mar. 07 CASM excluding fuel Jun. 07 27 (1) Excludes special charges which occurred in the 12 months ended Dec. 31, 2006 Trailing 12 Months
Delivering Financial Performance Strong Financial Position Jun 30 Dec 31 ($billions ) 2007 2006 ASSETS Cash and Short-term investments 1.8 2.1 Property and Equipment 6.6 5.7 Other Assets 2.8 3.6 LIABILITIES AND SHAREHOLDERS' EQUITY 11.2 11.4 Long-term Debt and Capital Leases 3.6 3.4 Other Liabilities 5.5 6.1 Shareholders' Equity 2.1 1.9 11.2 11.4 28
Delivering Financial Performance Well Financed to Execute Strategy ($billions) 2007E 2008E 2009E Projected Debt and Capital Lease Obligations 4.1 4.1 3.8 Projected Capitalized Aircraft Rent (7.5x) 2.0 2.3 2.7 Total 6.1 6.4 6.5 Cash and Short-term Investments 1 1.8 Net Debt 2 4.3 Projected Capital Expenditures 2.3 0.8 0.3 Capital Employed 3 6.6 Return on Capital Employed 4 4% (1) Cash and short-term investments as at June 30, 2007 (2) Includes off-balance sheet debt (3) Total assets less cash and non-interest bearing current liabilities (4) Operating income over average capital employed 29
Delivering Financial Performance Pension Plan Funding Alleviated Cash Pension Funding* ($millions) 2007 2008 2009 2010 2011 5 Year Total Projected as of June 30, 2007 384 343 328 338 348 1,741 Projected as of December 31, 2006 489 488 475 485 495 2,432 Reduction in Cash Pension Funding (105) (145) (147) (147) (147) (691) 30 * As reported in the MD&A of August 10th, 2007
Delivering Financial Performance Benefits in H2 2007 Lower cost B777s with capacity at 10% vs 1.5% in H1 More moderate salary and wage growth expected slower employee build-up due to new fleet training costs ease voluntary separation and vacation credits expected to sharply reduce Flat unit maintenance cost expected Aircraft sublease revenues to exceed rent by $4 million $5.4 million reduction in Navcan fees 54% of fuel hedged at favourable prices Anticipated favourable FX 31
Delivering on the Strategy Strong international airline Innovative revenue strategy Aggressive asset refresh Strong risk management Focused on cost reduction and efficiencies Focused on customer satisfaction Focused on financial performance 32
Caution Concerning Forward-looking Information: Certain statements made in this document are forward-looking statements, which are, by their nature, based on assumptions and are subject to important risks and uncertainties. Any forecasts or forward-looking predictions or statements cannot be relied upon due to, amongst other things, changing external events and general uncertainties of the business. Results indicated in forwardlooking statements may differ materially from actual results due to a number of factors, including without limitation, energy prices, general industry, market and economic conditions, war, terrorist attacks, changes in demand due to the seasonal nature of the business, the ability to reduce operating costs and employee counts, employee relations, labour negotiations or disputes, pension issues, currency exchange and interest rates, changes in laws, regulatory developments or proceedings, pending and future litigation and actions by third parties as well as the factors identified throughout this document and, in particular, those identified in the "Risk Factors" section of Air Canada s 2006 annual MD&A dated February 14, 2007 and updated August 10, 2007. The forward-looking statements contained in this document represent the Corporation s expectations as of September 17th, 2007 and are subject to change after such date. However, the Corporation disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required under applicable securities regulations. 33