Air Canada reports second quarter results



    
    As a result of the distribution by ACE Aviation Holdings Inc. ("ACE") of
    units of Jazz Air Income Fund on May 24, 2007, ACE's ownership interest
    in Jazz Air Income Fund was reduced from 58.8 per cent to 49.0 per cent.
    Jazz Air Income Fund holds all the outstanding units of Jazz Air LP
    ("Jazz"). This change in ownership interest gave rise to a
    reconsideration of which entity should consolidate Jazz and, as a result,
    Jazz Air Income Fund (and not Air Canada) was deemed to be the primary
    beneficiary of Jazz under Canadian GAAP Accounting Guideline No. 15 -
    Consolidation of Variable Interest Entities. As of the distribution date,
    Air Canada no longer consolidates Jazz and has one reportable segment.
    Prior to the distribution date, Air Canada had two reportable segments:
    Air Canada Services and Jazz. As a result of the deconsolidation on
    May 24, 2007, Air Canada's consolidated results for Quarter 2 2007 and
    for the first six months of 2007 are not directly comparable to Air
    Canada's consolidated results for the same periods in 2006. This press
    release highlights the performance of the "Air Canada" segment
    (previously the "Air Canada Services" segment).

    2007 SECOND QUARTER OVERVIEW

    - Net income of $155 million in the second quarter of 2007 compared to a
      net income of $152 million in the 2006 quarter.
    - Operating income of $88 million in the second quarter of 2007 compared
      to operating income of $113 million in the second quarter of 2006, a
      decline of $25 million.
    - EBITDAR(1) of $295 million in the second quarter of 2007 compared to
      EBITDAR(1) of $314 million in the second quarter of 2006, a decrease of
      $19 million.
    - Passenger revenues up $74 million or 3 per cent over the second quarter
      of 2006, mainly driven by a 3 per cent growth in traffic on a capacity
      growth of 2 per cent.
    - Passenger load factor at 82.7 per cent, a record load factor for the
      second quarter.
    - Solvency deficit of the Company's Canadian registered pension plans
      improved to $542 million at January 1, 2007 from $1,655 million a year
      earlier.
    

    MONTREAL, Aug. 10 /CNW Telbec/ - Air Canada today reported net income of
$155 million for the second quarter of 2007 compared to net income of
$152 million in the second quarter of 2006. Net income for the quarter
included gains on the revaluation of foreign currency monetary items of
$160 million, compared to $108 million for the prior year's quarter.
    The airline reported operating income of $88 million, a decrease of
$25 million from the operating income of $113 million recorded in the second
quarter of 2006, mainly due to costs related to the introduction of new
aircraft and the maintenance preparation for outgoing leased and subleased
aircraft. The increase in these costs over the prior year's quarter amounted
to $21 million, which was partly offset by sublease revenues of $6 million
recorded in the second quarter of 2007. These transitional fleet costs will be
offset by lower fuel and maintenance costs driven by more efficient aircraft
being brought into the fleet, as well as increased sublease revenues in future
quarters.
    Passenger revenues increased $74 million or 3 per cent over the second
quarter of 2006 mainly due to traffic growth of 3 per cent on a capacity
increase of 2 per cent. RASM rose 1 per cent compared to the second quarter of
2006. The passenger revenue increase in the quarter was partly offset by a
$19 million reduction in cargo revenues mainly due to reduced dedicated
freighter capacity. EBITDAR(1) amounted to $295 million, a decrease of
$19 million from the same period in 2006.
    Unit cost, as measured by operating expense per ASM, increased 1 per cent
from the second quarter of 2006. Excluding fuel expense, unit cost grew 2 per
cent over the second quarter of 2006, largely driven by increases in wages and
salaries, fleet introduction and aircraft return and subleasing costs.
    The solvency deficit in Air Canada's Canadian registered pension plans
improved from $1,655 million at January 1, 2006 to $542 million at January 1,
2007 as a result of a 13.6 per cent return on pension plan assets (net of
expenses), significant company contributions to plans, and a stable interest
rate environment in 2006. This improvement will result in a reduction to Air
Canada's pension plan cash funding obligations in 2007 and is expected to do
so in 2008. The required contributions to Canadian registered plans is reduced
by approximately $115 million in 2007, and is projected to be reduced by
$150 million for 2008, based on the January 1, 2007 actuarial valuations
compared to the valuations of the previous year.
    "Our revenue performance for the quarter was encouraging mainly due to
strong domestic Canada and Asia Pacific markets," said Montie Brewer,
President and Chief Executive Officer. "We were able to effectively manage
capacity in North America to mitigate softness in the U.S. However, the U.K.
market under performed due to increased industry capacity while travellers
continued to be impacted by additional security measures and the doubling of
the U.K. departure tax. We expect these trends to continue, including a strong
domestic Canada market. The arrival of our Boeing 777 aircraft will allow us
to shift capacity from the U.K. to the Asia Pacific region in order to
maximize asset utilization. Looking forward, bookings remain strong which we
expect will result in continued unit revenue improvement.
    "The significant reduction in solvency deficit for our employee pension
plans in Canada, ahead of schedule, is excellent news for our employees and
shareholders. Past service payments will be substantially reduced this year
and we expect next year as well, while at the same time the Corporation's
carrying costs will be reduced going forward.
    "There is still much work to be done. However, we have made progress in
creating a solid foundation for sustained profitability. We accomplished a
great deal in the quarter and we are anticipating a much improved second half.
    "In the quarter, we put into service the first four Boeing 777s. As of
today we have received seven Boeing 777s of a committed 17. These aircraft
will provide capacity in the second half of 2007 with substantial fuel and
maintenance savings.
    "Second, the significant increase in salaries and wages expense reported
in the first half of 2007 is expected to ease in the second half of the year
due to lower costs associated with overtime, wage progression, training and
voluntary separation packages.
    "Third, our hedging program has locked in 52 per cent of our fuel
requirements for the remainder of the year at favourable prices. This,
together with a stronger Canadian dollar and based on today's current fuel
prices, is expected to lower our fuel bill below last year's level.
    "And lastly, while our fleet renewal is initially adding considerable
expense for training and additional maintenance costs for aircraft exiting the
fleet, we anticipate that additional sublease revenue in the second half of
the year will partially offset this cost. Due to strong demand for used
aircraft, two Airbus A340s and four Airbus A319s currently subleased to date
are at rates higher on average than the original lease rates, as is the case
for a further two Airbus A319s and eight Airbus A340s which are planned for
sub-lease over the next 12 months. Agreements have been reached for the
sublease of all Airbus A340s with high quality lessees at rates above the
original lease, with the exception of two Airbus A340s on operating leases
which will be returned to lessors in the fourth quarter of 2007.
    "The quarter ended on a very positive note as the results of the world's
largest passenger survey, an independent poll of 14 million air travelers,
ranked Air Canada as the Best Airline in North America. This most recent
honor, coupled with sustained traffic growth and record loads is testament to
the hard work of our employees who are successfully earning the loyalty of our
customers to the new Air Canada."

    
    Second Quarter 2007 Accomplishments
    -----------------------------------

    - Achieved a record load factor for the second quarter of 82.7 per cent.
    - Took delivery of one Boeing 777-200 aircraft and an additional three
      777-300 aircraft in the quarter. To date, Air Canada has taken delivery
      of a total of five 777-300 aircraft and two 777-200 aircraft. Air
      Canada's Boeing 777-300 aircraft is delivering a 15 per cent cost per
      seat saving as compared to the Airbus A340-300 aircraft. Air Canada's
      Boeing 777-200 aircraft is expected to deliver similar results compared
      to the Airbus A340-500.
    - Increased Boeing 787 order to 37 from original 14, with options for an
      additional 23, the largest order of any carrier in the Americas. Fuel
      and maintenance costs for the 787 are expected to be significantly less
      than those of a 767-300.
    - Introduced four Embraer E190 aircraft in the quarter. To date, Air
      Canada has taken delivery of a total of 30 E190 aircraft of 45 on
      order. Air Canada's Embraer E190 fleet is delivering a 19 per cent cost
      saving per trip as compared to its Airbus A319 fleet.
    - Introduced new non-stop services on Calgary-Seattle, Vancouver-
      Sacramento, and seasonal service on Montreal-Rome and St. John's-London
      Heathrow.
    - Reached web penetration of 63 per cent in Canada, a 13.0 percentage
      point increase from the second quarter of 2006 and a further 2.0
      percentage point increase from the first quarter of 2007. 73 per cent
      of domestic Canada sales for the second quarter were made directly with
      Air Canada, either online or through call centres.
    - In the second quarter, approximately 60 per cent of Air Canada's
      customers used self check-in kiosks some of which in Montreal and
      Vancouver also provide self-tagging of bags.
    - Expanded the availability of mobile check-in for passengers with bags
      travelling on domestic Canada, US. transborder and international
      flights.
    - Announced Olympic and Paralympic sponsorships: official airline of the
      2010 Olympic and Paralympic Winter Games, official transportation
      provider for Canadian Olympic teams to Beijing 2008, Vancouver 2010 and
      London 2012, and donated $600,000 to the Canadian Paralympic Committee.
    - Ranked "Best Airline in North America" for second time in three years
      in a passenger survey of 14 million air travellers conducted by
      Skytrax.
    - Named favourite carrier by Canadian travel agents in a survey of travel
      agents conducted by Baxter Travel Media.

    (1) Non-GAAP Measures

    EBITDAR is a non-GAAP financial measure commonly used in the airline
industry to assess earnings before interest, taxes, depreciation and aircraft
rent. EBITDAR is used to view operating results before aircraft rent,
depreciation, amortization and obsolescence as these costs can vary
significantly among airlines due to differences in the way airlines finance
their aircraft and other assets. EBITDAR is not a recognized measure for
financial statement presentation under GAAP and does not have a standardized
meaning and is therefore not comparable to similar measures presented by other
public companies.
    Readers should refer to Air Canada's Quarter 2 2007 Management's
Discussion and Analysis (MD&A), which will be filed on SEDAR, for a
reconciliation of EBITDAR to operating income (loss).
    For further information on Air Canada's public disclosure file, including
Air Canada's Initial Annual Information Form dated March 27, 2007, consult
SEDAR at www.sedar.com.

    CAUTION REGARDING FORWARD-LOOKING INFORMATION
    ---------------------------------------------

    Certain statements in this news release may contain forward-looking
statements. These forward-looking statements are identified by the use of
terms and phrases such as "anticipate", "believe", "could", "estimate",
"expect", "intend", "may", "plan", "predict", "project", "will", "would", and
similar terms and phrases, including references to assumptions. Such
statements may involve but are not limited to comments with respect to
strategies, expectations, planned operations or future actions.
Forward-looking statements, by their nature, are 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. Such
statements involve known and unknown risks, uncertainties and other factors
that may cause the actual results, performance or achievements to differ
materially from those expressed in the forward-looking statements. Results
indicated in forward-looking statements may differ materially from actual
results for a number of reasons, 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, adverse regulatory developments or proceedings,
pending and future litigation and actions by third parties as well as the
factors identified throughout Air Canada's filings with securities regulators
in Canada and, in particular, those identified in the Risk Factors section to
Air Canada's 2006 Annual Management's Discussion & Analysis dated February 14,
2007 and in section 14 of Air Canada's Quarter 2 2007 Management's Discussion
& Analysis dated August 9, 2007. The forward-looking statements contained
herein represent Air Canada's expectations as of the date they are made and
are subject to change after such date. However, Air Canada 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.

    -------------------------------------------------------------------------
                                        Quarter 2   Quarter 2
    HIGHLIGHTS                               2007        2006
    -------------------------------------------------------------------------
    Air Canada(1) (Previously the
     "Air Canada Services" segment)
    -------------------------------------------------------------------------
    Financial (Canadian dollars in
     millions unless stated otherwise)                           $ Change
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Operating revenues                      2,635       2,576          59
    Operating income (loss)                    88         113         (25)
    Operating income (loss), excluding
     special charges(2)                        88         113         (25)
    Non-operating income (expense)            (33)        (46)         13
    Income (loss) before non-controlling
     interest, foreign exchange
     and income taxes                          55          67         (12)
    Income for the period                     155         152           3
    Operating margin %                        3.3%        4.4%       (1.1)pp
    Operating margin %, excluding
     special charges(2)                       3.3%        4.4%       (1.1)pp
    EBITDAR(3)                                295         314         (19)
    EBITDAR, excluding
     special charges(2)(3)                    295         314         (19)
    EBITDAR margin %                         11.2%       12.2%       (1.0)pp
    Cash, cash equivalents and
     short-term investments                 1,751       1,557         194
    Cash flows from operating
     activities                                86          78           8
    -------------------------------------------------------------------------

    Operating Statistics                                         % Change
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Revenue passenger
     miles (millions) (RPM)                12,580      12,248           3
    Available seat miles (millions) (ASM)  15,220      14,925           2
    Passenger load factor                    82.7%       82.1%        0.6 pp
    Passenger revenue yield per RPM (cents)  18.5        18.4           1
    Passenger revenue per ASM (cents)        15.3        15.1           1
    Operating revenue per ASM (cents)        17.3        17.3           0
    Operating expense per ASM (cents)        16.7        16.5           1
    Operating expense per ASM,
     excluding fuel expense (cents)          12.6        12.3           2
    Operating expense per ASM,
     excluding fuel expense
     and the special
     charge for labour
     restructuring (cents)(2)(4)             12.6        12.3           2
    Average number of full-time
     equivalent (FTE)
     employees (thousands)                   24.3        23.8           2
    Aircraft in operating fleet
     at period end(5)                         329         327           1
    Average aircraft utilization
     (hours per day)(6)(7)                   10.7        10.2           5
    Average aircraft flight
     length (miles)(7)                        855         862          (1)
    Fuel price per litre (cents)(8)          67.2        67.3           0
    Fuel litres  (millions)                   941         932           1
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
                                              YTD         YTD
                                        Quarter 2   Quarter 2
                                             2007        2006
    -------------------------------------------------------------------------
    Financial (Canadian dollars in
     millions unless stated otherwise)                           $ Change
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Operating revenues                      5,169       4,970         199
    Operating income (loss)                    10         (11)         21
    Operating income (loss), excluding
     special charges(2)                        10          17          (7)
    Non-operating income (expense)            (25)        (86)         61
    Income (loss) before non-controlling
     interest, foreign exchange
     and income taxes                         (15)        (97)         82
    Income for the period                     121          26          95
    Operating margin %                        0.2%       (0.2)%       0.4 pp
    Operating margin %, excluding
     special charges(2)                       0.2%        0.3%       (0.1)pp
    EBITDAR(3)                                418         388          30
    EBITDAR, excluding
     special charges(2)(3)                    418         416           2
    EBITDAR margin %                          8.1%        7.8%        0.3 pp
    Cash, cash equivalents and
     short-term investments                 1,751       1,557         194
    Cash flows from operating
     activities                               293         369         (76)
    -------------------------------------------------------------------------

    Operating Statistics                                         % Change
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Revenue passenger
     miles (millions) (RPM)                24,394      23,488           4
    Available seat miles (millions) (ASM)  29,955      29,212           3
    Passenger load factor                    81.4%       80.4%        1.0 pp
    Passenger revenue yield per RPM (cents)  18.3        18.1           1
    Passenger revenue per ASM (cents)        14.9        14.6           2
    Operating revenue per ASM (cents)        17.3        17.0           1
    Operating expense per ASM (cents)        17.2        17.1           1
    Operating expense per ASM,
     excluding fuel expense (cents)          13.1        12.9           2
    Operating expense per ASM,
     excluding fuel expense
     and the special
     charge for labour
     restructuring (cents)(2)(4)             13.1        12.9           2
    Average number of full-time
     equivalent (FTE)
     employees (thousands)                   23.8        23.9           0
    Aircraft in operating fleet
     at period end(5)                         329         327           1
    Average aircraft utilization
     (hours per day)(6)(7)                   10.8        10.2           6
    Average aircraft flight
     length (miles)(7)                        865         861           0
    Fuel price per litre (cents)(8)          65.1        65.5          (1)
    Fuel litres  (millions)                 1,866       1,822           2
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (1) As a result of ACE's special distribution of Jazz Air Income Fund
        units on May 24, 2007, ACE's ownership interest in the Jazz Air
        Income Fund was reduced from 58.8% to 49.0%.
        Jazz Air Income Fund holds all the outstanding units of Jazz Air LP.
        As of the distribution date, Air Canada no longer consolidates Jazz
        LP into its financial statements based on a reassessment that Air
        Canada is no longer the primary beneficiary of Jazz Air LP under
        Canadian GAAP Accounting Guideline No.15 "Consolidation of Variable
        Interest Entities" ("AcG-15").
        Refer to section 1 of Air Canada's Quarter 2 2007 Management
        Discussion and Analysis of Results and Financial Condition ("MD&A")
        for additional information.
        Effective May 24, 2007, Air Canada has only one business segment: Air
        Canada. Prior to that date, Air Canada had two business segments: Air
        Canada Services and Jazz.

    (2) A special charge for labour restructuring of $28 million was
        recorded in Quarter 1 2006. In Quarter 4 2006, the charge was
        reduced by $8 million to $20 million due to the favourable impact of
        attrition and other factors.

    (3) EBITDAR (earnings before interest, taxes, depreciation,
        amortization, obsolescence and aircraft rent) is a non-GAAP
        financial measure commonly used in the airline industry to view
        operating results before aircraft rent and depreciation,
        amortization and obsolescence as these costs can vary significantly
        among airlines due to differences in the way airlines finance their
        aircraft and other assets. EBITDAR is not a recognized measure for
        financial statement presentation under GAAP and does not have a
        standardized meaning and is therefore not likely to be comparable
        to similar measures presented by other public companies.


        EBITDAR is reconciled to operating income as follows:
        ($millions)

                                                           YTD        YTD
                             Quarter 2  Quarter 2    Quarter 2  Quarter 2
                                  2007       2006         2007       2006
        ------------------------------------------  -------------------------
        Operating income            88        113           10        (11)
        Add back:
          Aircraft rent             71         83          144        166
          Depreciation,
           amortization &
           obsolescence            136        118          264        233
        ------------------------------------------  ------------------------
        EBITDAR                    295        314          418        388
        ------------------------------------------  ------------------------
        Add back:
          Special charge for
           labour
           restructuring(3)          -          -            -         28
        ------------------------------------------  ------------------------
        EBITDAR, excluding
         special charges           295        314          418        416
        ------------------------------------------  ------------------------
        ------------------------------------------  ------------------------

    (4) Operating expense per available seat mile, before fuel expense and
        the special charge for labour restructuring, is calculated by
        removing fuel expense and the special charge for labour
        restructuring from total operating expense and dividing the no. by
        ASMs.  Refer to section 15 "Non-GAAP Financial Measures" of Air
        Canada's Quarter 2 2007 MD&A for additional information.

    (5) Operating fleet excludes chartered freighters in 2007 and 2006.

    (6) Excludes maintenance down-time.

    (7) Excludes third party carriers (other than Jazz) operating under
        capacity purchase arrangements.

    (8) Includes fuel handling and fuel hedging expenses.
    
    %SEDAR: 00024384EF




For further information:

For further information: Isabelle Arthur (Montréal), (514) 422-5788;
Peter Fitzpatrick (Toronto), (416) 263-5576; Angela Mah (Vancouver), (604)
270-5741; aircanada.com


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