Transformation – Risk Management Practices

FEI Canada – Toronto Chapter

Mike Rousseau

Executive Vice President & Chief Financial Officer

October 12, 2017

Progress on our Business Plan Record Levels of EBITDAR and EBITDAR Margin

2

679

1,386 1,242 1,320 1,433 1,660

2,542 2,768 2,715

7.0

12.8

10.7 10.9 11.6

12.5

18.3 18.9

17.6

0

2

4

6

8

10

12

14

16

18

20

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

TTM-June-2017 2016 2015 2014 2013

$ Millions EBITDAR Margin %

2012 2011 2010 2009

EBITDAR (excluding special items)

EBITDAR Margin (excluding special items)

3

Strategy Increases Value Share Price Up 3,400% $7.4 Billion of Value Created

June 2/15 AC hosts Investor Day

Sept 26/16 AC announced a debt

refinancing transaction of C$1.25B

June 10/13 AC hosts Investor Day

Nov 7/16 AC reports record

Q3 2016 results

May 11/17 AC announced its intention

to launch its own loyalty program in 2020

Sept 19/17 AC hosts Investor Day

* As at October 10, 2017

Aug 1/17 AC reports record Q2

2017 results

Financial Stability

Pension and liquidity risks addressed

Record financial results

Fleet

Modern WB fleet

Seat densification

Swing capacity

NB fleet replacement

Award winning product

Network & Hubs

Extensive & expanding global network

Geographically well-positioned hubs

Air Canada Rouge

Competitive cost structure in leisure markets

Provides new growth opportunities

Labour Stability

Long-term agreements with most major unions

Increased flexibility and cost certainty

Regional Feed

Diversification

More competitive cost structure at Jazz

Loyalty

Improved customer experience

Significant financial value to Air Canada

Credit card RFP

Our Path to Global Champion

4

Solid foundation allowing Air Canada to leverage its unique competitive advantages

Managing our Risk

Key Mitigants:

• Route diversification

• Increased fleet flexibility

• Fully-funded pension plans

• Long-term labour contracts

• Fuel and foreign exchange programs

• Lower leverage and cost of debt

5

6

Route Diversification

• Broad scope of network provides for diversification

– Avoids concentration

– Mitigates risk of changes in domestic and global markets

• 90% of growth directed at U.S. and international markets

– Limited growth opportunities in domestic market

– Historically, operating margins have been the highest in international markets

• Proportion of passenger revenue has shifted

– Domestic 39% in 2012 vs 34% in 2016

– U.S./International 61% in 2012 vs 66% in 2016

7

Fleet Flexibility

• Built tremendous flexibly into our fleet to effectively react to different economic

environments

• Flexibility to adjust to shifting market conditions (swing capacity):

– Conscious decision to increase number of unencumbered aircraft

– By end of 2017 – 50 fully unencumbered aircraft in fleet (narrow-body and wide-body)

– September 11th/2008 and 2009 recession capacity was reduced through utilization

• Diverse fleet types increases flexibility to manage capacity to match demand

– Lower-cost aircraft (Rouge and higher density) improves ability to compete

• 51 aircraft with leases expiring in the next three years

• Ability to defer a portion of Boeing 737 aircraft deliveries

• Boeing 737 and C-series orders include options

8

Fully-funded Pension Plans

• Solvency surplus in domestic registered pension plans of $1.9B at January 1,

2017 versus a deficit of $4.2B deficit at January 1, 2012

• Two agreements with Canadian government to limit payments (2009 and

2014)

• $6.1B turnaround - $1B in union-negotiated benefit reductions; $1B in cash

contributions; $4.1B due to value-added investment strategy

• Risk significantly mitigated by introduction of liability-driven initiatives

- 75% of pension liabilities matched with fixed income products

- Overall risk profile lower by 50%

• All new employees in DC plan which reduces DB plan volatility

• Improved financial flexibility to fund capital expenditure programs,

lower debt levels and return value to shareholders

10-Year Labour Agreements with Most Major Unions

• Concluded long-term agreements with

most major union groups

• Employees are engaged and aligned

with long-term goals

• New agreements have binding

arbitration provisions

• Provides labour stability and long-term

cost certainty

9

Fuel and Foreign Exchange Programs

• Volatility in fuel and foreign exchange over last 10 years

– CAD-USD High $1.09 / Low $0.69

– WTI per barrel High US$145 / Low US$26

• Effective fuel hedging strategy designed to lock in booking curve profitability

– Use of call options protects against short-term price spikes while allowing to participate 100% in

fuel price declines

• Foreign exchange risk strategy is to cover 70% of net U.S. exposure on a rolling 18-

month basis using derivatives and U.S. cash reserves

– U.S. dollar revenues together with foreign currency net revenues converted to U.S. dollars

essentially cover non-fuel U.S. dollar costs

– Fuel expenses are a significant U.S. dollar requirement but the impact in Canadian dollars is

mitigated by a correlation between the Canadian dollar and the price of crude oil

– Impact of hedging benefits cash flow but hedging results reported in non-operating income

10

Lower Leverage and Cost of Debt

11

6,393

7,090

6,291

5,132

4,3514,137

4,576

4,874

5,628

2.4

2.62.5

3.13.03.1

3.73.5

8.3

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2012 2015 2011 2010 2009 2014 2013

$ Millions

2016 June-17

Adjusted net debt

Leverage ratio

• Significantly lowered cost of debt

− 4.5% at June 30, 2017 vs 6.6% in 2012

− Accessed lower-cost capital – EETC/JOLCO

− $1.25 billion dollar refinancing transaction

• Increased pool of unencumbered assets

− Total current value of US$1.7 billion

• Conscious effort to increase credit ratings

− Standard & Poor’s

BB- with stable outlook in 2017 (from CCC+ in 2010)

− Moody’s

Ba3 with stable outlook (from B3 in 2010)

12

Air Canada’s evolving risk profile:

ERM provides a balanced

approach to Risk and Performance

Preserve Value

Create Value

2008- 09

Survival

2010-13

Sustainability

2014-15

Profitability

2016+

Sustained Profitability

Enterprise Risk Management at Air Canada

The ERM Process

Risks to Air Canada’s Strategic Plan and

Operations

Air Canada’s Executive and Sr Management Team participate in the identification and rating of

enterprise-level risks to Air Canada

ERM Risk Register

Key Risk Indicators are identified for each of the top ERM risks and monitored on a quarterly basis. Emerging risks are continuously

being evaluated.

Summary

13

Stabilization of business 2009-2012

– Major risks mitigated

– Difficult decisions around capital investment

– Set foundation for growth

Establishment of strategic growth plan

– Repaired balance sheet and pension which allowed for funding

of growth opportunities

– Significant work with union groups to align vision

– Resulting in significant improvement in earnings and share price

Continued execution of Global Champion strategic vision

aircanada.com

Thank you