RBC Dominion Securities Inc.

EQUITY RESEARCH
Walter Spracklin, CFA Derek Spronck
(Analyst) (Associate Analyst)
(416) 842-7877 (416) 842-7833
walter.spracklin@rbccm.com derek.spronck@rbccm.com

Sector: Transportation

August 12, 2015

Outperform
Air Canada Speculative Risk
Creating shareholder value: Operationally and TSX: AC; CAD 12.90; TSX:
financially stronger Price Target CAD 20.00 ↑ 18.00
Our view: AC reported strong Q2 results with significant margin expansion WHAT'S INSIDE
(+350 bp Y/Y) and robust ROIC (16.2%). The results are clear evidence that Rating/Risk Change Price Target Change
management is executing. And while low fuel prices are providing for a In-Depth Report Est. Change
financial benefit, management is utilizing the proceeds to further lower
Preview News Analysis
leverage and structurally transform its fleet and operational network -
which we see generating significant shareholder value. Scenario Analysis*
Key points: Downside Current Price Upside
Scenario Price Target Scenario
Transformation into a best-in-class global carrier moves forward. With
each passing quarter, Air Canada continues to progress on its significant 0.00 12.90 20.00 32.00
100% 55% 148%
transformation - becoming stronger both from an operational and
financial basis. Highlights include: (1) positive free cash flow; up over $1 *Implied Total Returns

per share in Q2; (2) improving debt leverage, now at a net debt of 2.3x Key Statistics
Shares O/S (MM): 286.0 Market Cap (MM): 3,689
EBITDAR (moving towards peers at 1.4x and management's 2018 target at Dividend: 0.00 Yield: 0.0%
2.2x); and (3) ROIC at 16.2% compared to 11% a year ago. As these drivers Float (MM): 186.0 Avg. Daily Volume: 2,271,248
continue to improve, we see operational and financial strength increasing,
the trading discount contracting, with significant potential share price
RBC Estimates
FY Dec 2014A 2015E 2016E 2017E
appreciation as a result. Revenue 13,272.0 13,919.0 14,227.0 14,630.0
Prev. 14,044.0 14,467.0
Ability to be flexible; willingness to adjust. Management noted that EBITDAR 1,671.0 2,375.0 2,377.0 2,511.0
the overall demand environment remains robust. And while there are Prev. 2,288.0 2,281.0
pockets of weakness and areas of higher competitive pressures (Western EPS, Ops Diluted 1.80 3.57 3.34 3.48
Canada), there are regional segments which have been coming in better Prev. 3.30 3.14
P/E 7.2x 3.6x 3.9x 3.7x
than expected (US Transborder, Trans-Atlantic). The key here is that the
flexibility afforded by AC's labour agreements and revamped fleet network Revenue Q1 Q2 Q3 Q4
(including a diverse cabin/rate offerings), allows AC to adjust appropriately 2014 3,065.0A 3,305.0A 3,798.0A 3,104.0A
2015 3,249.0A 3,414.0A 3,988.0E 3,268.0E
across its consolidated network to drive profit maximization. Prev. 3,504.0E 4,005.0E 3,286.0E
2016 3,298.0E 3,474.0E 4,103.0E 3,352.0E
There's more to yield than fares. AC reported a decline in yield of -5% Y/Y Prev. 3,314.0E 3,621.0E 4,136.0E 3,397.0E
(vs. our -3.2%). Adjusting for stage length, yield came in at -3.1% Y/Y. Also EBITDAR
included is the mix effect from strong leisure travel (success of Rouge); and 2014 147.0A 456.0A 749.0A 319.0A
2015 442.0A 591.0A 933.0E 409.0E
management further indicated on the call that yields were affected by the Prev. 559.0E 878.0E
regulatory removal of fuel surcharges on certain international routes. We 2016 462.0E 606.0E 885.0E 424.0E
highlight all this to say that negative yield is typically a proxy for pricing and Prev. 406.0E 604.0E 834.0E 437.0E
All values in CAD unless otherwise noted.
issues of over-capacity and/or under-demand; however, in this instance,
there are other moving factors at play.

Increasing target to $20 (from $18). After adjusting for Q2 actuals and
our new fuel/CAD estimates, partially offset by yield adjustments lower,
we are taking our 2016E EBITDAR up to $2,377MM (from $2,281MM)
and price target to $20 (from $18). At 3.6x EV/EBITDAR, the AC shares
are trading at a meaningful discount to peers at 4.7x, despite the
transformational change that is driving significant earnings growth. With
continued delivery of strong financial performance and positive structural
balance sheet/network changes, we see the AC shares as one of the most
compelling investment opportunities in our coverage universe today.

Priced as of prior trading day's market close, EST (unless otherwise noted).
For Required Non-U.S. Analyst and Conflicts Disclosures, see page 10.

Target/Upside/Downside Scenarios
Exhibit 1: Air Canada
125 Weeks
21.5
11.5
6.50
1.50
60m
40m
20m
2013 2014 2015
MA M J J A S O N D J F M A M J J A S O N D J F M A M J J A
AC CN Rel. S&P/TSX COMP IDX MA 40 weeks
Source: Bloomberg and RBC Capital Markets estimates for Upside/Downside/Target
Target price/base case
On a 4.5x EV/EBITDAR applied to our 2016 estimates, we
derive our price target of $20.00. Our 4.5x EBITDAR multiple
remains at a discount to the peer legacy group average
and lower end of the historical multiple range, taking into
account Air Canada’s high balance sheet leverage. Our base
case reflects the following assumptions: (1) modest yield
declines due to changing business mix related to AC's strategic
transformation; (2) fleet expansion and strong demand to
drive traffic growth; and (3) jet fuel prices to remain relatively
range-bound at current levels.
Upside scenario
Industry growth accelerates on strong economy. Our upside
scenario includes the following key assumptions: (1) yields
remain robust on strong load factors with Y/Y yield growth
at post recession levels of 2% in FY15E and FY16E; (2) fleet
expansion and new growth opportunities lead to robust traffic
growth at 9.5% and 8% in FY15E and FY16E, respectively; and
(3) jet fuel prices remains stable. These assumptions give us
an EBITDAR of $2,525MM in 2016E. At an EV/EBITDAR of 5.2x
our 2016 estimates, we derive our upside scenario value of
$32.00.
Downside scenario
Competition pressures increase and industry headwinds
grow. Our downside scenario includes the following key
assumptions: (1) yields are significantly impaired as traffic
demand dries up with Y/Y yields at -2% in FY15E and in
FY16E; (2) traffic growth climbs a modest 2% in 2016E; and
(3) jet fuel prices are higher than current levels by 20%. These
assumptions give us an EBITDAR of $972MM in 2016E. At an
EV/EBITDAR of 4x our 2016 estimates, we derive our downside
case scenario value of $0.
August 12, 2015
Transportation
Air Canada
Investment summary
Significant upside potential. Air Canada represents the most
significant upside return potential in our coverage universe.
21MAR13 - 11AUG15
UPSIDE
We believe the cost-transformation story is in its early days,
32.00
TARGET
CURRENT
20.00
12.90
and should it be fully executed, we see a step function
re-rating in the shares, with substantial upside potential.
Furthermore, we see another stage of cost reductions that
have yet to be implemented, on top of significantly lower
jet fuel prices – which if sustained, offers investors another
valuation leg higher.
DOWNSIDE
0.00
Transformation still at the early stages. Having achieved
a groundbreaking labour deal that gave management the
Aug 2016 tools and flexibility to completely restructure operations, Air
Canada remains in the early stages of executing on this
transformation. The result is an opportunity to reduce per-
unit costs by as much as 15% or more. Our view is if
management is successful in achieving this, the share price
upside potential is considerable. Of particular interest is that
this cost realignment comes on the back of internal actions
(i.e. fleet reconfiguration) that have been made possible by
the flexibility achieved under new labour agreements. As such,
we see the risk to Air Canada in achieving its cost reduction
targets as low.
Secular re-rating still intact. The airline sector continues to go
through a positive secular re-rating, which has been aligned
with: (1) disciplined industry capacity growth and a “new
normal” in the competitive dynamic; (2) lower jet fuel prices
and a return to profitability; and (3) robust traffic growth.
However, we do not expect share price appreciation to be
linear, and we expect some share price volatility despite a
positive bias.
Walter Spracklin, CFA (416) 842-7877; walter.spracklin@rbccm.com 2
 Transportation
Air Canada

Significant progression made in transformation

Improving both financially and operationally
Stronger balance sheet on higher cash, lower capex
Air Canada continues to generate incremental cash which management is effectively
deploying to deleverage its balance sheet and structurally transform its fleet. While
management indicated that they expect certain ratio volatility in 2016-2017, the 2.2x debt to
EBITDAR target by 2018 remains well within the reach (currently at 2.3x). Unrestricted
liquidity at the end of Q2 amounted to a very healthy $3.3B comparing to $2.9B in 2014. The
company also generated solid free cash flow of $299MM (over $1 per share) and compares to
usage of -$36MM in 2014. The cash available from the reduction in the pension plan
obligation (~$200MM per year out to 2021), will further give Air Canada more flexibility to
manage its liquidity position, while structurally transforming both its balance sheet and
operational network.

Leveraging the network: Seeing green in Rouge

Air Canada Rouge continues to deliver for Air Canada with its lower cost structure, allowing
the carrier to grow capacity on previously unprofitable routes. As Rouge grows to a fleet of 50
aircraft by the end of this year, it further provides Air Canada with the flexibility in aircraft
utilization. As Boeing 767s are transferred to Air Canada Rouge to take advantage of Rouge’s
lower cost structure, the introduction of Boeing 787 planes into the mainline fleet is allowing
Air Canada to serve new international destinations with significantly reduced operating costs
(and improved customer experiences). While lower CAD and continued economic weakness in
Western Canada are putting downward pressure on domestic demand, management noted
on the conference call that Air Canada has a diversified network (both in fleet and fare
flexibility), which is enabling the carrier to tap into different pricing points and leverage its
geographic position in capturing new markets (and drive profit maximization).

Stronger balance sheet on higher cash, lower capex

Air Canada continues generating incremental cash, which is being used to deleverage its
balance sheet in order to reach its 2.2x target leverage ratio by 2018. While management
indicated that they expect certain ratio volatility in 2016-2017, the 2.2x target remains well
within the reach. Unrestricted liquidity at the end of Q2 amounted to a very healthy $3.3B
comparing to $2.9B in 2014. The company also generated solid free cash flow of $299MM
(over $1 per share) and compares to usage of -$36MM in 2014. The cash available from the
reduction in pension plan obligations (~$200MM per year out to 2021) will further give Air
Canada more flexibility to manage its liquidity position, while structurally transforming both
its balance sheet and operational network.

Can’t look at the CAD selectively

While the CAD has weakened, there has been a corresponding drop in USD crude prices – and
as such, the impacts have effectively netted out. This "natural hedge" between the CAD and
USD fuel price continues to work and we expect little in the way of an overall net impact
going forward from a financial perspective. And while CASM (ex. fuel) will see a relative CAD
headwind (as certain aircraft and spare parts are in USD); the corresponding drop in USD jet
fuel prices should be factored in as well (which will act as a tailwind on total CASM).
Furthermore, AC derives more than $1B in USD based revenue and the weaker CAD is set to
provide a revenue and RASM lift in the back half of 2015. This could add another $80MM in
topline growth, which would go straight to the bottom line if sustained for the full year.

There's more to yield than fares

AC reported a decline in yield of -5% Y/Y (vs. our -3.2%). Adjusting for stage length, yield came
in at -3.1% Y/Y. Also included is the mix effect from strong leisure travel (success of Rouge);
August 12, 2015 Walter Spracklin, CFA (416) 842-7877; walter.spracklin@rbccm.com 3
 Transportation
Air Canada

and management further indicated on the call that yields were affected by the regulatory
removal of fuel surcharges on certain international routes. We highlight all this to say that
negative yield is typically a proxy for pricing and issues of over-capacity and/or under-
demand; however, in this instance, there are other moving factors at play.

Q2/15 results
Solid operating results
AC reported a 30% Y/Y increase in Q2/15 EBITDAR of $591MM, which was above consensus at
$562MM and RBC at $559MM. The variance to our numbers was largely due to a better than
anticipated reduction in fuel expense, which stems from a lower crack spread on jet fuel
prices than we had assumed. Air Canada’s net results continue to deliver strong financial
performance on the back of robust demand, and continued cost control initiatives that helped
to expand Q2 EBITDAR margins by 350bps Y/Y and deliver ROIC north of 16%. Margin
expansion was driven by strong unit profit growth of 2.1% Y/Y, with unit revenue (RASM)
decline of -5.5% Y/Y, more than offset with total unit costs (CASM) decline of -7.6% Y/Y.

Minor changes to outlook and guidance, expecting a strong Q3

Management indicated in its outlook that EBITDAR margin expansion in its seasonally
strongest Q3 would exceed the Q2/15 expansion of 350bps. This is meaningfully better as it
implies EBITDAR of >$930MM as compared with our $878MM and street $920MM. The
company also announced a slight reduction in domestic capacity and added that a meaningful
portion (30%) of the 3-4% domestic capacity was due to aircraft in-service requirements.
Finally, a minor change (50bp) in CASM guidance was due to the weaker CAD and is
inconsequential in our view.

August 12, 2015 Walter Spracklin, CFA (416) 842-7877; walter.spracklin@rbccm.com 4

 Transportation
Air Canada

Exhibit 2: Actual results vs. estimates

RBC CM Y/Y chg
Q2/15A Q2/15E Var (%) (%) Notes
Revenue Drivers
Traffic: RPMs (% chg) 8.7% 8.7% 0bp -124bp
Capacity: ASMs (% chg) 9.3% 9.3% 0bp 85bp As previously reported
Occupancy: Load Factor (%pts chg) -0.5% -0.5% 0bp -160bp
Price: Yield (% chg) -5.0% -3.2% -176bp -289bp ◄ Yield of -3.1% when excluding stage
Unit Revenue: RASM (% chg) -5.5% -4.4% -108bp -323bp length adjustment of 190 bp.
Costs: CASM ex fuel (% chg) 0.7% -0.8% 151bp 74bp ◄ In line with previous guidance
Fuel: Avg. Jet Fuel Price ($CD/Ltr) $0.67 $0.69 -3.1% -27.2%

OPERATING RESULTS ($MM)

Revenue 3,414 3,504 -2.6% 3.3%
Expenses
Salaries, wages and benefits 568 589 -3.5% 6.2%
Aircraft Fuel 745 781 -4.7% -10.8%
Commissions 152 146 3.9% 6.3%
Food, beverages, supplies 80 81 -1.1% 8.1%
Aircraft maintenances 190 210 -9.5% 11.1%
Airport user fees 201 203 -1.2% 8.1%
Communications & IT 52 51 1.2% 10.6%
Other 261 263 -0.7% 24.3%
Other - CPA with Chorus Aviation 490 541 -9.4% -15.2%
Expenses 2,739 2,865 -4.4% -1.4%
EBITDAR 591 559 5.7% 31.6% ◄ Strong EBITDAR growth
EPS ex-one time items ($) 0.85 0.77 9.5% 13.6%
Source: Air Canada, RBC Capital Markets estimates

Summary
A few puts and takes: Increasing target to $20 and introducing 2017 estimates
We are adjusting our estimates to account for Q2/15 actuals; as well as updated management
guidance, the new fuel curve, and FX rates (Exhibit 3). We are also lowering our yield
assumptions due to the larger than anticipated stage length and mix adjustment. As a result,
we are taking our 2016E EBITDAR up to $2,377MM (from $2,281MM) and price target to $20
(from $18). We are also introducing our 2017 estimates, which calls for an EBITDAR of
$2,511MM (up 5% Y/Y), on the back of further low-cost/high-margin capacity introduced into
AC’s network.

Reiterate Outperform rating

In our view, the core aspect of what is driving the positive thesis in the Air Canada shares
(strong demand, meaningful lower cost and de-leveraging) remains very much intact and we
continue to see considerable upside in the shares to our $20 one-year target. Management
continues to execute very well on its plan, with 2015 set-up to deliver another year of
substantial EBITDAR margin and free cash flow improvement. Furthermore, the AC shares
remain cheap from a relative and historical valuation perspective at 3.6x 2016E EBITDAR
versus peers at 4.7x. With continued delivery of strong financial performance and positive

August 12, 2015 Walter Spracklin, CFA (416) 842-7877; walter.spracklin@rbccm.com 5

 Transportation
Air Canada

structural balance sheet/network changes, we see the AC shares as one of the most
compelling investment opportunities in our coverage universe today. Reiterate Outperform.

Exhibit 3: Estimate Revisions ($MM, unless otherwise indicated)

RBC CM 2015E RBC CM 2016E RBC CM 2017E
OLD NEW Var OLD NEW Var NEW
Traffic: RPMs (% chg) 9.1% 9.3% 19bp 5.0% 5.5% 50bp 4.5% ◄ Expecting continued strong traffic
Capacity: ASMs (% chg) 9.2% 9.2% 3bp 5.7% 5.7% 3bp 5.0% demand
Load Factor (%pts) 83.3% 83.5% 12bp 82.8% 83.3% 49bp 82.9%
Yield (% chg) -3.10% -3.93% -84bp -1.00% -2.00% -100bp -1.50% ◄ Taking yield estimates lower on
RASM (% chg) -3.6% -4.0% -39bp -2.4% -3.3% -89bp -2.0% larger than anticipated impact
Adj. CASM ex fuel+other items (% chg) -1.9% -2.0% -5bp -2.9% -2.7% 26bp -4.3% from stage length and mix.
Avg Jet Fuel Price: ($C/Ltr) $0.67 $0.63 -5.5% $0.69 $0.62 -9.7% $0.64
Revenue 14,044 13,919 -0.9% 14,467 14,227 -1.7% 14,630 2015/2016 EBITDAR higher on
Expenses 11,756 11,544 -1.8% 12,186 11,850 -2.8% 12,118 lower CAD adjusted jet fuel prices
EBITDAR 2,288 2,375 3.8% 2,281 2,377 4.2% 2,511 ◄ and strong traffic growth.
EPS ex-one time items ($) 3.31 3.57 3.15 3.34 3.48
Consensus EBITDAR 2,337 2,405 2,675

Source: Air Canada, RBC Capital Markets estimates

August 12, 2015 Walter Spracklin, CFA (416) 842-7877; walter.spracklin@rbccm.com 6

 Transportation
Air Canada

Valuation
On a 4.5x EV/EBITDAR applied to our 2016 estimates, we derive our price target of $20.00. Our
4.5x EBITDAR multiple remains at a discount to the peer legacy group average and lower end
of the historical multiple range, taking into account Air Canada’s high balance sheet leverage.
Our base case reflects the following assumptions: (1) modest yield declines due to changing
business mix related to AC's strategic transformation; (2) fleet expansion and strong demand
to drive traffic growth; and (3) jet fuel prices to remain relatively range-bound at current levels.

Price target impediments

Risks to our target include very high operating leverage given a fixed cost structure, above-
average sensitivity to the economy, exposure to volatile fuel prices and the risk of terrorism and
epidemics. This is a very competitive industry in which WestJet is capturing domestic market
share. Air Canada is only partially hedged to changes in jet fuel prices.

Company description
Air Canada was founded in 1937 as a government-owned monopoly. Over the years it was
awarded many prize international routes as Canada's flag carrier. In the late 1980s, Air Canada
became a publicly traded company when it was privatized in two stages (1988 and 1989). For
the past 20 years, it has had no government ownership. Air Canada gradually grew into one
of the world's largest airlines. It is a member of the Star Alliance. On April 1, 2003 it filed
for creditor protection and as part of ACE Aviation Holdings Inc. emerged from bankruptcy
protection on September 30, 2004. In November 2006, Air Canada became a public company.
ACE Aviation retains 11% ownership.

August 12, 2015 Walter Spracklin, CFA (416) 842-7877; walter.spracklin@rbccm.com 7

 Transportation
Air Canada

Appendix 2: Comparables

Mkt Cap EV/EBITDAR EV/Sales EBITDAR Margin Net Debt to

Symbol Price (MM) 2014 2015E 2016E 2017E 2014 2015E 2016E 2017E 2014 2015E 2016E 2017E EBITDAR
Discount Airlines
WestJet WJA-T C$ $24.76 2,657 4.8x 3.9x 3.9x 3.8x 1.1x 1.0x 1.0x 1.0x 22% 26% 26% 25% 1.8x
Southwest LUV-US US$ $38.28 25,583 7.0x 5.3x 5.2x 5.1x 1.5x 1.4x 1.3x 1.3x 21% 27% 26% 25% 0.6x
JetBlue JBLU-US US$ $22.94 7,187 8.5x 5.3x 4.9x 4.6x
###### 1.6x 1.4x 1.3x 1.2x
###### 19% 27% 27% 26%
##### 1.9x
Discount Average 7.8x 5.3x 5.1x 4.8x 1.5x 1.4x 1.3x 1.2x 20% 27% 26% 26% 1.2x

Mainline Airlines
Air Canada AC-T C$ $12.09 3,470 5.1x 3.6x 3.6x 3.4x 0.6x 0.6x 0.6x 0.6x 13% 17% 17% 17% 2.3x
Delta Air Lines DAL-US US$ $45.91 37,476 6.0x 5.2x 4.8x 4.8x 1.1x 1.1x 1.1x 1.0x 18% 21% 22% 22% 0.8x
United Continental UAL-US US$ $56.69 21,656 6.4x 4.5x 4.4x 4.6x 0.9x 0.9x 0.9x 0.9x 14% 21% 20% 19% 1.7x
American Airlines AAL-US US$ $41.75 28,924 6.2x 4.8x 5.0x 5.1x 1.0x 1.1x 1.0x 1.0x
###### 17% 23% 21% 20%
##### 1.7x
Mainline Average 6.2x 4.8x 4.7x 4.8x 1.0x 1.0x 1.0x 1.0x 16% 21% 21% 20% 1.4x

Regional Airlines
Chorus Aviation CHR'B-T C$ $6.10 704 5.5x 5.6x 5.1x 4.7x 1.0x 1.1x 1.2x 1.2x 18% 19% 24% 25% 3.1x
Republic Airways RJET-US US$ $4.00 203 4.9x 5.2x 4.6x n/a 2.3x 2.3x 2.1x 1.8x 47% 45% 46% n/a 4.6x
SkyWest Inc. SKYW-US US$ $17.03 880 2.7x 2.7x 2.4x n/a 0.8x 0.9x 0.9x n/a 30% 33% 37% n/a 1.8x
######
Regional Average 4.4x 4.5x 4.1x 4.7x 1.4x 1.4x 1.4x 1.5x 32% 32% 35% 25% 3.2x

Airline Average 5.7x 4.6x 4.4x 4.5x 1.2x 1.2x 1.1x 1.1x 22% 26% 26% 22% 2.0x

Sources: Company reports, Thomson One Analytics, and RBC Capital Markets estimates for Air Canada, Chorus Aviation, and WestJet. Priced at 1:10pm on August 12, 2015.

August 12, 2015 Walter Spracklin, CFA (416) 842-7877; walter.spracklin@rbccm.com 8

 Transportation
Air Canada

AIR CANADA (TSX: AC/B, TSX: AC/A)

FY Dec 31 2014 Q1/15 Q2/15 Q3/15E Q4/15E 2015E Q1/16E Q2/16E Q3/16E Q4/16E 2016E Q1/17E Q2/17E Q3/17E Q4/17E 2017E
Traffic / RPM (MMs) 61,616 14,937 16,845 20,328 15,217 67,327 15,757 17,771 21,446 16,054 71,029 16,467 18,571 22,411 16,777 74,225
% change 8.5% 10.9% 8.7% 9.5% 8.0% 9.3% 5.5% 5.5% 5.5% 5.5% 5.5% 4.5% 4.5% 4.5% 4.5% 4.5%
Capacity / ASM (MMs) 73,889 18,335 20,132 23,321 18,882 80,671 19,380 21,281 24,651 19,959 85,270 20,349 22,345 25,883 20,956 89,533
% change 7.8% 9.3% 9.3% 9.5% 8.5% 9.2% 5.7% 5.7% 5.7% 5.7% 5.7% 5.0% 5.0% 5.0% 5.0% 5.0%
Load Factor (%) 83.4% 81.5% 83.7% 87.2% 80.6% 83.5% 81.3% 83.5% 87.0% 80.4% 83.3% 80.9% 83.1% 86.6% 80.1% 82.9%
change (% pts) 0.6% 1.2% -0.5% 0.0% -0.4% 0.1% -0.2% -0.2% -0.2% -0.2% -0.2% -0.4% -0.4% -0.4% -0.4% -0.4%
Yield ($) 0.190 0.183 0.180 0.178 0.188 0.182 0.179 0.176 0.174 0.184 0.178 0.177 0.174 0.171 0.181 0.176
% change -1.1% -4.3% -5.0% -4.2% -2.5% -3.9% -2.0% -2.0% -2.0% -2.0% -2.0% -1.5% -1.5% -1.5% -1.5% -1.5%
RASM (Rev per unit of capacity, cents) 16.0 15.2 15.0 15.5 15.2 15.3 14.6 14.7 15.1 14.8 14.8 14.3 14.4 14.8 14.5 14.5
CASM (excl. fuel) (cents) 12.3 12.9 11.7 10.8 13.1 12.0 12.6 11.3 10.9 12.4 11.7 12.0 10.8 10.5 11.9 11.2
Air Canada Income Statement ($MM) 2014 Q1/15 Q2/15 Q3/15E Q4/15E 2015E Q1/16E Q2/16E Q3/16E Q4/16E 2016E Q1/17E Q2/17E Q3/17E Q4/17E 2017E
Passenger Revenue 11,804 2,786 3,082 3,625 2,875 12,368 2,826 3,135 3,733 2,951 12,645 2,909 3,227 3,842 3,038 13,016
Cargo 502 129 123 138 143 533 132 125 141 146 544 134 128 144 149 555
Other 966 334 209 225 250 1,018 341 213 230 255 1,038 347 217 234 260 1,059
Total Revenues 13,272 3,249 3,414 3,988 3,268 13,919 3,298 3,474 4,103 3,352 14,227 3,391 3,572 4,220 3,447 14,630
Wages, salaries and benefits 2231 568 568 592 635 2363 578 578 582 625 2362 595 594 598 643 2429
% Sales 16.8% 17.5% 16.6% 14.8% 19.4% 17.0% 17.5% 16.6% 14.2% 18.6% 16.6% 17.5% 16.6% 14.2% 18.6% 16.6%
Aircraft Fuel - total 3372 678 745 808 622 2853 655 732 854 708 2949 731 797 915 749 3192
% Sales 25.4% 20.9% 21.8% 20.3% 19.0% 20.5% 19.8% 21.1% 20.8% 21.1% 20.7% 21.6% 22.3% 21.7% 21.7% 21.8%
Sales and distribution costs 560 154 152 142 133 582 143 139 126 121 530 110 102 80 85 377
% Sales 4.2% 4.7% 4.5% 3.6% 4.1% 4.2% 4.3% 4.0% 3.1% 3.6% 3.7% 3.2% 2.8% 1.9% 2.5% 2.6%
Food, beverages, supplies 294 62 80 92 76 310 62 80 92 76 311 65 84 97 80 327
% Sales 2.2% 1.9% 2.3% 2.3% 2.3% 2.2% 1.9% 2.3% 2.3% 2.3% 2.2% 1.9% 2.4% 2.3% 2.3% 2.2%
Aircraft maintenance, materials and supplies 678 188 190 195 195 768 194 196 201 201 791 199 202 207 207 815
% Sales 5.1% 5.8% 5.6% 4.9% 6.0% 5.5% 5.9% 5.6% 4.9% 6.0% 5.6% 5.9% 5.6% 4.9% 6.0% 5.6%
Airport and navigation fees 755 185 201 233 227 846 194 210 244 237 885 203 221 256 249 929
% Sales 5.7% 5.7% 5.9% 5.8% 6.9% 6.1% 5.9% 6.1% 5.9% 7.1% 6.2% 6.0% 6.2% 6.1% 7.2% 6.4%
Communications and information technology 199 57 52 54 55 218 58 53 54 56 222 59 53 54 57 224
% Sales 1.5% 1.8% 1.5% 1.3% 1.7% 1.6% 1.8% 1.5% 1.3% 1.7% 1.6% 1.7% 1.5% 1.3% 1.7% 1.5%
Other 3142 734 751 881 840 3206 766 792 1006 824 3388 760 790 1026 825 3402
% Sales 23.7% 22.6% 22.0% 22.1% 25.7% 23.0% 23.2% 22.8% 24.5% 24.6% 23.8% 22.4% 22.1% 24.3% 23.9% 23.3%
Regional airline expense (ex fuel and D&A) 2178 459 490 618 529 2097 453 485 620 510 2067 459 491 629 517 2096
% Sales 16.4% 14.1% 14.4% 15.5% 16.2% 15.1% 13.7% 14.0% 15.1% 15.2% 14.5% 13.5% 13.8% 14.9% 15.0% 14.3%
Total Operating Costs 11,231 2,626 2,739 2,998 2,783 11,146 2,650 2,781 3,159 2,849 11,439 2,723 2,843 3,234 2,895 11,695
EBITDAR 1,664 442 591 933 409 2,375 462 606 885 424 2,377 475 640 925 471 2,511
% of sales 12.5% 13.6% 17.3% 23.4% 12.5% 17.1% 14.0% 17.5% 21.6% 12.7% 16.7% 14.0% 17.9% 21.9% 13.7% 17.2%
EPS (F.D) ($) (Exc. Special charges) $ 1.80 $ 0.43 $ 0.85 $ 2.00 $ 0.27 $ 3.57 $ 0.44 $ 0.91 $ 1.70 $ 0.29 $ 3.34 $ 0.42 $ 0.94 $ 1.75 $ 0.37 $ 3.48
Source: RBC CM estimates, Company reports

August 12, 2015 Walter Spracklin, CFA (416) 842-7877; walter.spracklin@rbccm.com 9

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Required disclosures
Non-U.S. analyst disclosure
Walter Spracklin and Derek Spronck (i) are not registered/qualified as research analysts with the NYSE and/or FINRA and (ii) may
not be associated persons of the RBC Capital Markets, LLC and therefore may not be subject to FINRA Rule 2711 and NYSE Rule
472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst
account.

Conflicts disclosures
The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including
total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated
by investment banking activities of the member companies of RBC Capital Markets and its affiliates.

Please note that current conflicts disclosures may differ from those as of the publication date on, and as set forth in,
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29th Floor, South Tower, Toronto, Ontario M5J 2W7.

RBC Dominion Securities Inc. makes a market in the securities of Air Canada.

Royal Bank of Canada, together with its affiliates, beneficially owns 1 percent or more of a class of common equity securities of
Air Canada.

A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other than
investment banking services from Air Canada during the past 12 months. During this time, a member company of RBC Capital
Markets or one of its affiliates provided non-securities services to Air Canada.

RBC Capital Markets has provided Air Canada with non-securities services in the past 12 months.

The Class A shares of Air Canada are variable voting shares.

Explanation of RBC Capital Markets Equity rating system

An analyst's 'sector' is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assigned
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the analyst's sector average. Although RBC Capital Markets' ratings of Top Pick (TP)/Outperform (O), Sector Perform (SP), and
Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same because
our ratings are determined on a relative basis.
Ratings
Top Pick (TP): Represents analyst's best idea in the sector; expected to provide significant absolute total return over 12 months
with a favorable risk-reward ratio.
Outperform (O): Expected to materially outperform sector average over 12 months.
Sector Perform (SP): Returns expected to be in line with sector average over 12 months.
Underperform (U): Returns expected to be materially below sector average over 12 months.
Risk Rating
As of March 31, 2013, RBC Capital Markets suspends its Average and Above Average risk ratings. The Speculative risk rating reflects
a security's lower level of financial or operating predictability, illiquid share trading volumes, high balance sheet leverage, or limited
operating history that result in a higher expectation of financial and/or stock price volatility.

August 12, 2015 Walter Spracklin, CFA (416) 842-7877; walter.spracklin@rbccm.com 10

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Distribution of ratings
For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories
- Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick(TP)/
Outperform (O), Sector Perform (SP), and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively,
the meanings are not the same because our ratings are determined on a relative basis (as described below).
Distribution of ratings
RBC Capital Markets, Equity Research
As of 30-Jun-2015
Investment Banking
Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY [Top Pick & Outperform] 935 53.15 293 31.34
HOLD [Sector Perform] 707 40.19 124 17.54
SELL [Underperform] 117 6.65 6 5.13

References to a Recommended List in the recommendation history chart may include one or more recommended lists or model
portfolios maintained by RBC Wealth Management or one of its affiliates. RBC Wealth Management recommended lists include
the Guided Portfolio: Prime Income (RL 6), the Guided Portfolio: Large Cap (RL 7), the Guided Portfolio: Dividend Growth (RL 8),
the Guided Portfolio: Midcap 111 (RL 9), the Guided Portfolio: ADR (RL 10), and the Guided Portfolio: Global Equity (U.S.) (RL 11).
RBC Capital Markets recommended lists include the Strategy Focus List and the Fundamental Equity Weightings (FEW) portfolios.
The abbreviation 'RL On' means the date a security was placed on a Recommended List. The abbreviation 'RL Off' means the date
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RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request.
To access our current policy, clients should refer to
August 12, 2015 Walter Spracklin, CFA (416) 842-7877; walter.spracklin@rbccm.com 11
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https://www.rbccm.com/global/file-414164.pdf
or send a request to RBC Capital Markets Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South
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August 12, 2015 Walter Spracklin, CFA (416) 842-7877; walter.spracklin@rbccm.com 12

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August 12, 2015 Walter Spracklin, CFA (416) 842-7877; walter.spracklin@rbccm.com 13